P.O. Box 1231
Madison, WI 53701-1231
2016 ANNUAL REPORT
Partnerships
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Learn more at mgeenergy.com
MGE is committed to environmental stewardship. This report is printed on recycled paper.
2016 annual report
Corporate profile
Table of Contents
1. 2016 Highlights
MGE Energy, Inc.
MGE Energy is an investor-owned public utility
2. Letter to our shareholders
holding company headquartered in the state
6. Partnering for sustainability
capital of Madison, Wis. MGE Energy is the
8. Partnering for a dynamic, integrated grid
parent company of Madison Gas and Electric
10. Partnering to innovate
Co. The utility provides natural gas and electric
12. Partnering for a strong community
service in south-central and western Wisconsin.
14. Corporate leadership
Assets total approximately $1.8 billion. In 2016,
16. Shareholder information
revenue was approximately $545 million. See
Financials: Form 10-K
the Corporate Profile on the inside back cover.
Partnerships
About the cover
Partnering with our customers and communities is key to how we
move forward. New opportunities, technologies and investments
are opening the doors to a more sustainable future. It’s the power
of working together.
Madison Gas and
Electric Company
MGE Transco
Investment LLC
MGEE Transco, LLC
MGE Power LLC
MAGAEL, LLC
Central Wisconsin
Development
Corporation
MGE 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 holds an
ownership interest in ATC LLC, which
invests in transmission assets, primarily
within Wisconsin.
MGEE Transco LLC holds an ownership
interest in ATC Holdco, which invests in
transmission assets outside ATC LLC
service territory.
MGE Electric Services
Generation and Distribution
Customers: 149,000
Population: 319,500
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 Power
West Campus, LLC
MGE Power
Elm Road, LLC
North Mendota
Energy & Technology
Park, LLC
NGV Fueling
Services, LLC
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 Natural Gas Services
Purchase and Distribution
Customers: 154,000
Population: 443,200
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)
2016
2015
Increase/(Decrease) % Change
Total Market Value (Dec. 31)
$ 2,263,845
$ 1,608,612
$ 655,232
Market Price Per Share (Dec. 31)
Book Value Per Share
$
$
65.30
20.89
$
$
46.40
19.92
$ 18.90
$
0.97
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
$
$
$
$
544,745
75,560
2.18
1.21
$
$
$
$
564,028
$ (19,283)
71,343
$ 4,217
2.06
1.16
$
$
0.12
0.05
(0.8) %
Dividend Payout Ratio
55.5%
56.3%
Total Assets
$ 1,801,060
$ 1,726,403
$ 74,657
Total Retail Electric Sales (kWh)
3,323,438
3,288,623
34,815
Total Gas Deliveries (therms)
251,354
257,031
(5,677)
For detailed financial information, see the 2016 MGE Energy Form 10-K.
40.7
40.7
4.9
0.0
0.0
-3.4
5.9
5.8
4.3
-1.4
4.3
1.1
-2.2
Cumulative Total Return Comparison
Cumulative Total Return Comparison
(assumes $1,000 investment on 12/31/11
(assumes $1,000 investment on 12/31/11
with dividends reinvested)
with dividends reinvested)
$2,500
$2,500
MGEE $2,414
MGEE $2,414
Earnings Per Share
(2012 – 2016)
Earnings Per Share
(2012 – 2016)
$1.86
$1.86
$2.16
$2.16
$2.32
$2.32
$2.06
$2.06
$2.18
$2.18
$1,000
investment
$1,000
investment
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
MGE Energy
19.28%
MGE Energy
19.28%
EEI Investor-Owned Electrics
10.91%
EEI Investor-Owned Electrics
10.91%
Russell 2000
14.46%
Russell 2000
14.46%
S&P 500
14.66%
S&P 500
14.66%
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
1
To our shareholders
“ We are embracing
the opportunities of an
evolving energy world to
produce long-term value
for our shareholders.”
— Gary J. Wolter,
MGE Energy Chairman
Gary J. Wolter, MGE Energy Chairman, with new MGE President and CEO, Jeffrey M. Keebler
We are partnering to create
a stronger tomorrow.
Madison Gas and Electric (MGE) partners with our
customers and our communities to provide critical services,
to create more sustainable communities and to foster a
vibrant local economy. These partnerships will continue
to guide our commitment to reliability, sustainability and
shareholder value.
We are proud to be a local company for more than 150
years. MGE is building upon its rich history as a community
and industry leader to succeed in a rapidly changing energy
world. By working together, we can accomplish our goals.
Consistent financial performance
Building shareholder loyalty is part of our mission. In
2016, MGE Energy continued to deliver solid financial
performance for our shareholders in both stock price
appreciation and dividend increases.
MGE Energy is among a select group of U.S. companies
dedicated to investor dividends. Compared to combination
utility holding companies nationwide, MGE Energy is one of
only four to increase its dividend for 41 or more consecutive
years. No other Wisconsin utility or utility holding company
can match our history of dividend increases.
Your Board of Directors increased the dividend by 4.2%
to $1.21 paid per share in 2016. The financial publisher
Mergent consistently ranks us as a “Dividend Achiever”
for our annual dividend increases.
2
MGE Energy shareholders also saw an increase in the
stock price in 2016—building on a long-term trend. In
the last decade, our stock price has more than doubled,
outperforming both the Dow Jones Industrial Average
and the S&P 500.
Strong total return
Stock price appreciation is one part of shareholders’ total
return, which combines both stock price and reinvested
dividends. Many shareholders choose to reinvest their
dividends to grow their investment.
Taking a five-year view of our annual total return, a $1,000
investment at the end of 2011 grew to $2,414 by the close
of 2016 with reinvested dividends.
Earnings
In 2016, we reported earnings of $2.18 per share, compared
to $2.06 per share in 2015, resulting from increased electric
consumption due to a warmer summer in 2016 versus 2015
and due to an increase in the number of electric and gas
residential customers.
Capital expenditures
Our investments have been driven by our high standards
for energy reliability, by new technologies and by our goals
for a more sustainable energy future. Under our long-range
Energy 2030 framework, we project an increase in our
capital expenditures.
These projected investments include emission control
technologies, electric distribution and metering
expenditures and continued customer additions in MGE’s
gas service area. We also anticipate increased expenditures
on renewable energy resources and natural gas generation.
In addition, we expect to invest a significant amount of
capital in information technology infrastructure for a more
dynamic, integrated electric grid. Also, investments in a
new customer information system, smart meters and other
systems will help enhance the grid and provide customers
more information about their energy use.
National recognition
MGE Energy continues to earn recognition nationwide for
its prudent approach to financial management. MGE, the
main regulated subsidiary of MGE Energy, maintains the
highest credit rating of any combination utility in the nation
from both Standard and Poor’s (S&P) and Moody’s.
Value Line, Inc., also gives MGE Energy top ratings
for financial strength and investment safety. We have
maintained these top ratings for more than a decade.
National recognition from these leading organizations
reflects our commitment to our shareholders and to
strategic investments for MGE’s long-term growth.
MGE Top Credit Quality
S&P
Corporate Credit: AA-
Outlook: Stable
Moody’s
Secured: Aa2
Unsecured: A1
Outlook: Stable
MGEE Value Line Ratings
Safe Investment
No. 1
Financial Strength
A
Dividends Per Share
(rounded)
$0.36
$1.21
1975
2016
Capital Expenditures
(in $000’s)
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
0
2014
actual
2015
actual
2016
actual
2017
forecast
3
To our shareholders
Energy 2030: partnering for our future
Through unparalleled engagement with our customers,
communities, other stakeholders and industry experts, MGE
is advancing Energy 2030, our ambitious framework for
our future. Energy 2030 continues our long-term direction
of reducing carbon emissions, greater use of renewables,
innovative products and services and ongoing partnerships.
By listening to and working with our customers, we are
developing programs, products and services responsive to
their needs. As we invest in new technologies, we also are
building shareholder value in a changing energy world.
Our Energy 2030 framework includes two high-level goals:
• To transition toward supplying 30% of retail electric sales
with renewable resources by 2030; and, 25% of retail
electric sales with renewable resources by 2025.
• To work with customers to reduce carbon dioxide
emissions by 40% from 2005 levels by 2030.
In 2016, as part of our ongoing commitment to invest
further in cleaner energy, MGE reached an agreement to
reduce our ownership in the Columbia Energy Center near
Portage, Wis. MGE is a minority owner in the coal-fired
power plant. Once finalized, this agreement reduces MGE’s
capacity from Columbia by about 33 megawatts (MW).
Renewable energy investments
Under Energy 2030, we also are building on our history of
renewable energy investments.
• MGE is proposing to construct, own and operate its
largest wind farm to date. MGE began site selection in
2015 for this 66-MW wind farm about 200 miles west of
Madison near Saratoga, Iowa. MGE secured the rights to
the construction-ready site in 2016 from the site’s initial
developer. The site is well situated due to its strong winds
and proximity to transmission infrastructure. In February
2017, MGE filed with state regulators its intent to seek
approval to build the wind farm. If it receives regulatory
approval, construction on the approximately $107 million
project could begin in 2018.
4
MGE’s Shared Solar installation is on top of the City of
Middleton’s new operations center. The roof is larger than a
football field and now holds more than 1,700 photovoltaic
panels that feed electricity to the grid.
• We also completed construction of MGE’s Shared Solar
pilot project in the City of Middleton on the roof of the
Municipal Operations Center. MGE owns and maintains
the 500-kilowatt (kW) solar installation, which delivers
locally generated solar power to the electric grid. Our
innovative model for community-sourced solar is one
example of how we’re partnering to grow investments
in renewable energy.
Innovation
Innovative products offer new opportunities to partner
with customers. Our Smart Thermostat Demand Response
pilot program for residential customers will explore the
use of smart technology to manage peak power demands.
With customers’ consent, MGE will be able to use smart
thermostats to manage the electricity use of residential air
conditioners to reduce peak in the summer.
In 2016, MGE launched Charge@Home. This electric
vehicle charging pilot program offers drivers a faster way
to charge at their homes. MGE installs and maintains the
chargers. Customers enjoy faster, more convenient charging
that can be controlled remotely with a smartphone. Such
opportunities to work together with customers allow MGE
to research new technologies while learning more about
how electric vehicle charging impacts the grid.
Sustainability
MGE partners to help create healthier communities for
generations to come. As part of our partnership with the
City of Middleton to build the Shared Solar project, MGE
also installed a 100-kW solar array on the roof of the city’s
police department. The electricity from this array helps to
fulfill the city’s sustainability goal of 25% renewable energy
by 2025.
In addition, MGE is collaborating with the City of Madison,
which also has sustainability goals. MGE and the city
continue to discuss how to move forward areas of mutual
interest, including solar, electric vehicles and efficiency.
MGE’s commitment to sustainable practices extends
throughout our daily operations. For the third consecutive
year, MGE has received the Green Master designation from
the Wisconsin Sustainable Business Council. The statewide
program evaluates applicants on their sustainable practices
and results in nine operational areas to be considered for
the designation. The top 20% of the companies achieve
the highest-ranking category as a Green Master.
Reliability
Our obligation to provide safe, reliable energy remains a top
priority. We invest in new technologies, in infrastructure and
in our people to ensure that MGE is an industry leader in
electric service reliability. In 2015, we were ranked
number one in a nationwide industry survey for the fewest
number of outages. In this yearly survey of more than 90
electric utilities, MGE has ranked in the top four utilities in
the country for both the fewest number of outages and the
shortest duration of outages in each of the last nine years.
MGE also scores at the top when called upon to respond to
natural gas leaks. Our crews recorded the second-fastest
average response times, according to a 2015 nationwide
survey of more than 80 utilities. MGE averaged a response
time of 16 minutes compared to a national average of
26 minutes.
We continue to expand our natural gas service to more
customers through our gas expansion model, or GEM,
program. Since the program’s pilot in 2012, MGE has
completed 14 GEM projects totaling 182 miles of gas main
with additional projects planned for 2017. Through our
GEM program, we’re able to work with new customers and
grow our investment in safe, dependable natural gas service.
Continuity for the future
On March 1, 2017, Jeffrey Keebler succeeded Gary Wolter
as President and CEO. Gary continues to serve the company
as Chairman. Jeff also has been appointed to our Board
of Directors. Since joining MGE in 1995, Jeff has served
in various executive positions including Energy Supply
and Planning, Customer Services, Information Technology
and Human Resources. All of our talented employees will
continue to serve with vision, ingenuity and a commitment
to being a strong community energy company, building both
customer and shareholder value.
We wish to thank our employees, our customers and you,
our shareholders, for your contributions to our success.
With deep pride and gratitude, we look forward to the
future of MGE Energy.
Gary J. Wolter
Chairman
Jeffrey M. Keebler
President and
Chief Executive Officer
MGE continues to expand its gas service into more rural zones
bordering the growing Madison area.
5
Partnering
for sustainability
A more sustainable future is at the heart
of our Energy 2030 framework, which
sets goals for increasing investments
in renewable energy and for reducing
carbon emissions by 40% from 2005
levels by 2030. Working with customers
and stakeholders, we can reach those
goals. MGE is offering innovative
programs and services, encouraging
energy efficiency and taking advantage
of new technologies. In a changing
energy world, we are finding ways to add
value for our stakeholders—investors,
customers and communities.
MOVING
FORWARD
TOGETHER FOR
A CLEANER, MORE
SUSTAINABLE
FUTURE
6
Partnerships lead to new, large
solar installation
MGE owns and operates a new 1,728-panel solar
installation built with community support and collaboration.
Our Shared Solar project is on the roof of the City of
Middleton’s new operations center. Customers have signed
up to purchase this clean energy through an innovative
new program for community solar. Working together, we
are increasing our investment in renewable resources as we
advance Energy 2030 and give customers new options to
support clean energy.
Partnering with Middleton made our Shared Solar project a
reality. Meeting during the solar construction on top of the
Middleton Operations Center are (left to right) MGE Assistant
Vice President Don Peterson, MGE Finance Director Scott
Schmitt, Middleton Director of Community Development
Abby Attoun and Middleton City Administrator Mike Davis.
New wind farm proposal advances
renewable energy goals
Innovative efficiency program
serves local businesses
MGE is proposing to construct, own and operate a new
66-megawatt wind farm. This opportunity continues
the progress the company has made in reducing carbon
emissions and increasing renewable energy. The project
represents a long-term, cost-effective strategy for MGE
to meet its Energy 2030 commitments to cleaner energy.
MGE secured the rights to the construction-ready site in
2016 from the site’s initial developer. In February 2017,
MGE filed with state regulators its intent to seek approval to
build the wind farm. With regulatory approval, construction
could begin in 2018.
The project’s 33 wind turbines would stand nearly 500 feet
tall. Wind turbine technology has improved with larger
turbines producing energy more efficiently.
The Saratoga project builds upon MGE’s history of reducing
carbon emissions and growing renewable resources. Under
our now completed Energy 2015 framework, MGE increased
energy from renewable resources by almost 12 times and
reduced carbon emissions 20% between 2005 and 2015.
Working with customers to be more energy efficient is
key to meeting our Energy 2030 goals.
We are partnering with Wisconsin’s Focus on Energy in
a pilot program called On Demand Savings. This program
encourages businesses to better manage their energy use
when electric use peaks across the region. As part of the
program, MGE electric meters interface with customers’
own energy management systems—providing businesses
real-time data on their energy use. This allows the businesses
that participate in On Demand Savings to take action and
control their energy use during high demand periods and
helps control costs for all customers in the long run.
MGE is tracking the program’s results as part of its
partnership with Focus on Energy and the National
Governors Association. Results from this pilot will be
shared with the Governors Association, and similar
programs could be replicated across the country.
The Saratoga wind project is located in northern Iowa, about
45 miles east of MGE’s Top of Iowa 3 wind farm (pictured
above). The site is well situated due to its strong winds and
access to transmission infrastructure. This project would be
MGE’s largest wind farm to date.
At Spectrum Brands, Facility Engineering Manager Bill Wheeler
(left) talks to MGE’s Senior Account Representative Chris Favia
about our On Demand Savings pilot program. Spectrum Brands
effectively used the program to further reduce summertime
energy demand in its energy-efficient headquarters.
7
Partnering
for a dynamic, integrated grid
A dynamic, integrated grid accommodates
two-way electric flow from various
power sources, such as customer-owned
solar and biogas installations along with
traditional power plants. MGE is building
an advanced grid that can integrate
new technologies while maintaining our
national leadership in electric reliability.
No. 1 in electric reliability in national survey
MGE once again has been recognized as the most reliable
electric utility in the United States based on the results of a
national industry survey. In 2016, MGE was ranked number
one in reliability with the fewest power interruptions based
on average customer outages in 2015. This reliability is
core to our service and is the foundation on which we are
building a utility grid for the future.
MGE’s reliability ratings
Rated No. 1
in the nation with
fewest number
of outages1
Rated No. 2
in the nation with
shortest outage
duration2
IMPROVING OUR
GRID AND SERVICE
TO MEET FUTURE
NEEDS
8
We invested in a state-of-the-art distribution management
system to help us operate, maintain and optimize the
function of the electric grid. MGE’s Distribution Systems
Operations Supervisor Ross Hewitt monitors the grid in our
operations center.
Connecting new energy sources to the grid
A more advanced electric grid can handle the growth of
distributed electric generation, such as customer-owned
solar arrays. MGE works with customers who need help in
determining how to move forward with solar and also need
the reliability of grid-connected service.
Steep & Brew Coffee is a local business with nationwide
coffee distribution. MGE worked with Steep & Brew to
connect its 315-panel solar array to our electric grid.
MGE specialists helped to evaluate the electricity usage
at the facility and provided insight into customer-owned
generation. This thriving coffee business uses the electricity
generated by the solar panels but still needs additional
energy from MGE. On days when the panels generate
excess electricity, MGE purchases the excess power and
feeds it into the grid to help serve all customers.
Projects like these support our Energy 2030 objective to
create a more advanced grid that supports and enables
new technologies.
Ensuring energy reliability for a
growing economy
MGE plans ahead to meet growing customer needs. A
building boom in a former factory district along Madison’s
East Washington Avenue is a prime example. Overall, more
than $350 million in redevelopment is projected by 2020.
In addition to high-rise apartments, a new $60 million
redevelopment project includes a center for entrepreneurs,
office and commercial space and a 2,500-seat music venue.
MGE is extending its underground electric network
system to accommodate this significant, future growth.
Underground electric network systems are more reliable by
design. MGE’s system has redundant energy feeds to help
ensure dependable energy—so if one circuit is out of service,
the other takes over automatically to keep the power
flowing without interruption.
Careful strategic planning and our investment in robust
infrastructure will provide the energy needed for today
and tomorrow.
Mark Ballering, owner and founder of Steep & Brew Coffee,
installed an 80-kilowatt photovoltaic system atop the roof of
his office, roasting facility and distribution center.
MGE crews unload a large electric transformer to help power
a new high-rise development with 244 apartments. Madison’s
East Washington Avenue is a growing hot spot for high-end
housing and commercial space.
9
Partnering
to innovate
MGE partners with customers and
experts to harness the power of new
technologies. The way we use energy is
changing—from plugging in our electric
vehicles to remotely setting our home
thermostats. Under our Energy 2030
framework, we are introducing new
innovative products and services that
offer customers more control and value.
Working with customers, we research
new technologies to capture benefits
and provide new value.
Working together to grow
the electric vehicle market
We’re helping customers plug in to make a difference.
MGE is working to grow the use of electric vehicles in
our community. We built an extensive network of public
charging stations. We also offer electric vehicle services,
such as our workplace charging program for employers. In
2016, MGE partnered with Nissan and Wisconsin Clean
Cities on Drive Electric—a successful promotion that
offered discounted Nissan electric vehicles.
ADVANCING
LEADING-EDGE
TECHNOLOGY
TO SERVE IN AN
EVOLVING ENERGY
WORLD
10
Acumium, a local software development and digital marketing
company, took advantage of discounted all-electric Nissan
LEAF® vehicles. Acumium employee Sara Peck, MGE’s
Debbie Branson and Acumium CEO Dan Costello meet
at the company’s headquarters. MGE also worked with
Acumium to implement a workplace charging program.
Project taps smart thermostat technology
When temperatures climb, demand for electricity goes
up too. MGE is launching a Smart Thermostat Demand
Response pilot program to test a new method of controlling
peaks in energy demand.
During electric peaks, utilities must use their maximum
capacity of electric generation, transmission facilities and
distribution lines.
Our new pilot program will test using smart thermostats
to manage residential air conditioners’ operations to
reduce the demand for electricity while maintaining
comfort. Smart thermostats can be controlled remotely
through communication technologies. We are recruiting
approximately 500 residential customers to participate
in research with us to better understand the potential for
reducing electric peaks.
MGE will, with customers’ permission, use their smart
thermostats’ communications to set parameters, send
control signals and report on air conditioner responses.
Solar overhead lighting offers
a new green option to customers
MGE is expanding its Outdoor Overhead Lighting program
to include a new solar option. Solar structures gather the
energy of the sun during the day, store that energy in
batteries and then illuminate parking lots and other outdoor
areas at night.
Customers can choose to have MGE install and maintain
solar overhead lighting structures—especially for remote
areas where access to power lines may make outdoor
lighting cost prohibitive. MGE prepares a customized
lighting plan and provides fixtures, poles and regular
maintenance for a low monthly charge.
Adding the solar option allows MGE to offer customers
more choices in how they source their energy and could
potentially lead to new service options. MGE has its own
outdoor solar lighting projects including a bike path near
the University of Wisconsin-
Madison campus and a
local park.
A photovoltaic
panel captures
the sun’s
energy and
stores it in a
battery to power
the overhead light
at night. MGE will
offer customers the
option of installing solar
outdoor overhead lighting.
Customers can save energy almost effortlessly with smart
thermostats. MGE will partner with customers in a pilot program
that allows us to control their smart thermostats during summer
energy demand peaks.
11
Partnering
for a strong community
MGE partners with nonprofits, educators,
customers, students, businesses,
municipalities and others to meet the
needs of the areas we serve. Under
Energy 2030, we commit to further
deepen our community engagement.
MGE’s student outreach
Helping the next generation learn
in and out of the classroom
Educating the next generation is a responsibility we all
share, which is why MGE partners with local schools and
academic organizations on a wide range of programs.
Energy efficiency is a key part of our student outreach,
which includes an interactive program and energy
curriculum materials. However, learning doesn’t stop with
the final school bell. Every day, local nonprofits work with
children to learn by doing. MGE supports these efforts. For
example, at Simpson Street Free Press students in grades
3 through 12 produce and publish news stories on various
media platforms, participate in book clubs and write book
reviews to expand their literacy competencies.
30+
years of providing a
popular classroom
safety presentation
10+
years of publishing an
Earth Day classroom
activity booklet
WORKING
WITH OUR
COMMUNITIES
TO CREATE A
BRIGHTER FUTURE
12
When the school day is over, Simpson Street Free Press begins
to fill up with students who work on articles that will be
published in print and online. This 25-year-old nonprofit has
won dozens of awards for its curriculum and student success.
Venture fund spurs local business growth
To help local businesses grow, MGE works with the
nonprofit Madison Development Corp. MGE and other
partners formed the Venture Debt Fund, which provides
loans to high-tech, start-up companies with the potential
of long-term success and job creation. MGE also supports
growth in the local technology sector with business
incubators and by partnering with business, education
and government leaders.
Since it began in 2004, the Venture Debt Fund has
invested in 39 companies in the Madison area. The fund
allows our economy to reap the dividend of future jobs
and growing companies.
TrafficCast is a prime example. This growing company
monitors traffic across North America, including all cities in
the U.S. Based on advanced digital traffic data, TrafficCast
provides travel time forecasting, road speed monitoring
and route choices. The Venture Debt Fund has provided
two rounds of financing to TrafficCast as it has continued
to expand its services and to create jobs.
MGE Foundation partners throughout
the community
From behind the scenes, the MGE Foundation helps
support a variety of nonprofit organizations that help
keep our community strong. In the last five years, the MGE
Foundation has given more than $4.6 million to more than
350 community organizations ranging from the Boys and
Girls Club to the United Way of Dane County.
We understand the importance of being a true community
partner—whether it’s through financial donations or giving
of our time and talent. For example, in 2016, we launched
our Career Ambassador program so high school students
could get hands-on learning at MGE. Outside of work,
many of our employees volunteer their time with local
nonprofits—ranging from chambers of commerce to Big
Brothers Big Sisters. Being a good, local partner is part of
our mission to serve as a community energy company.
TrafficCast’s operations center monitors cities across the
nation. Meeting are (left to right) Nick Kiernan, TrafficCast
Executive Vice President of Sales/Business Development; John
Drury, MGE’s Senior Business Development Manager; and
Lorrie Heinemann, President of Madison Development Corp.
Karla Thennes, Executive Director of Porchlight, stands in
front of a new development with 16 efficiency apartments to
provide people with supportive, permanent housing. The
MGE Foundation donated to the capital campaign and to
help Porchlight fulfill its mission to decrease the
homeless population.
13
Corporate leadership
Directors of MGE Energy and MGE
Mark D. Bugher
Retired Director of University Research Park,
University of Wisconsin-Madison
Age 68
Londa J. Dewey
President of QTI Management Services, Inc.,
a human resources and staffing company
Age 56
MGEE Director since 2010
MGEE Director since 2008
F. Curtis Hastings
Retired Chairman of J. H. Findorff
& Son, Inc., commercial and
industrial general contractors
Age 71
MGEE Director since 1999
Jeffrey M. Keebler1
President and Chief Executive Officer of
MGE Energy, Inc. and Madison Gas and
Electric Co.
Age 45
MGEE Director as of March 1, 2017
Regina M. Millner
Retired President of RMM Enterprises Inc.
Attorney, analyst and broker
Age 72
MGEE Director since 1996
John R. Nevin
Grainger Professor and Executive
Director of Grainger Center for
Supply Chain Management at the
School of Business, UW-Madison
Age 73
MGEE Director since 1998
James L. Possin
Certified Public Accountant and tax
consultant with James L. Possin CPA, LLC.
Former partner at Grant Thornton LLP
Thomas R. Stolper
Executive Vice President and a Director of
ProActive Solutions USA LLC, a cleaning and
sanitizing products manufacturer
Age 65
Age 68
MGEE Director since 2009
MGEE Director since 2008
Gary J. Wolter1
Chairman of MGE Energy, Inc.
and Madison Gas and Electric Co.
Age 62
MGEE Director since 2000
1. As of March 1, 2017, Gary Wolter retired as President and CEO of MGE Energy and MGE. Jeffrey Keebler
assumed the roles of President and CEO of both companies and joined the Board of Directors.
14
Note: Ages as of Dec. 31, 2016.
For detailed information on board members, see the MGE Energy Proxy Statement.
Officers of MGE Energy and MGE
Jeffrey M. Keebler1,2
President and Chief
Executive Officer
Age 45
Years of Service, 21
Jeffrey C. Newman1
Executive Vice President, Chief
Financial Officer, Secretary
and Treasurer
Age 54
Years of Service, 32
Craig A. Fenrick
Executive Vice President –
Energy Operations
Lynn K. Hobbie
Executive Vice President –
Marketing and Communications
Cari Anne Renlund
Vice President and
General Counsel
Gregory A. Bollom
Assistant Vice President –
Energy Planning
Age 57
Age 58
Age 43
Age 56
Years of Service, 34
Years of Service, 31
Years of Service, 2
Years of Service, 34
Jared J. Bushek
Assistant Vice President and
Chief Information Officer
Marshall Heyworth
Assistant Vice President –
Human Resources
Age 36
Age 60
Tamara J. Johnson
Assistant Vice President
and Controller
Age 52
Donald D. Peterson
Assistant Vice President –
Strategic Products and Services
Age 57
Years of Service, 6
Years of Service, 3
Years of Service, 23
Years of Service, 34
1. Officers of MGE Energy and MGE. All others are MGE officers.
2. As of March 1, 2017, Jeffrey Keebler (formerly Senior Vice President - Energy Supply and Planning) was promoted to President
and CEO of MGE Energy and MGE. Gary Wolter retired as President and CEO of both companies and continues to serve as
Chairman of the Board of Directors.
Note: Ages and years of service as of Dec. 31, 2016.
15
Shareholder information
2017 Annual Shareholder Meeting
Tuesday, May 16, 2017
Marriott Madison West
1313 John Q. Hammons Drive
Greenway Center
Middleton, Wis.
Stock Listing
• MGE Energy common stock trades on
The Nasdaq Stock Market®
• Stock symbol: MGEE
• Listed in newspaper stock tables as MGE
Shareholder Services
We welcome inquiries from shareholders.
Please notify us promptly if:
• A stock certificate is lost or stolen.
• A dividend check or statement is not received within
10 days of the scheduled payment date.
• Your name or address changes.
Direct Stock Purchase and Dividend Reinvestment Plan
MGE Energy’s Direct Stock Purchase and Dividend
Reinvestment Plan allows investors to:
• Buy common stock directly through the company.
• Reinvest dividends.
• Deposit certificates for safekeeping.
Materials Available
More financial information is available upon request or on our
website including the Direct Stock Purchase and Dividend
Reinvestment Plan.
National Association of Investors Corp.
MGE Energy is a corporate sponsor of the NAIC, which is a
nonprofit, volunteer-based group providing investment
information, education and support to help create successful
lifetime investors. Web address: betterinvesting.org
2017 Expected Record and Dividend Payment Dates
MGEE Common Stock
Record Dates
March 1
June 1
Sept. 1
Dec. 1
Payment Dates
March 15
June 15
Sept. 15
Dec. 15
16
investor@mgeenergy.com
Contact MGE Energy Shareholder Services
Email:
Web Address: mgeenergy.com
(608) 252-4744
Madison Area:
Continental U.S.: 1-800-356-6423
Business Hours:
8:00 a.m. to 4:30 p.m. (Central Time)
Monday through Friday
Mailing Address: MGE Energy Shareholder Services
Location:
PO Box 1231, Madison WI 53701-1231
133 S. Blair St., Madison WI 53788-0001
Online Account Access
Registered shareholders can access their account information
online. Visit MGE Energy’s website to log on through the secure
My Shareholder Account link.
Contact Shareholder Services for a security code to help you set
up private access to your account.
Go to the home page at mgeenergy.com and click the
My Shareholder Account link.
Eliminate Duplicate Proxy Mailings
If you receive more than one proxy mailing from MGE Energy,
you can reduce the mailbox clutter.
• Registered shareholders: call or email MGE Energy
• Brokerage shareholders: contact your broker
Sign Up For Electronic Delivery
You may choose to receive email alerts when annual meeting
invitations, proxy materials, the annual report and newsletters
are available on our website. Registered shareholders can sign
up by visiting mgeenergy.com/paperless. If your MGEE shares
are held in a brokerage account, contact your broker.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
MGE Energy Shareholder
Services (left to right)
Kari Foster, Ken Frassetto,
Jill Olson, 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, 2016
[ ] 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, 2016, was as follows:
MGE Energy, Inc. ........................................
Madison Gas and Electric Company ...........
$1,954,670,687
$0
The number of shares outstanding of each registrant's common stock as of February 1, 2017, were as follows:
MGE Energy, Inc. ........................................ 34,668,370
Madison Gas and Electric Company ........... 17,347,894
DOCUMENTS INCORPORATED BY REFERENCE
Portions of MGE Energy, Inc.'s definitive proxy statement to be filed on or before March 27, 2017, 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. ........................................................................................... 51
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ................... 105
Item 9A. Controls and Procedures. ........................................................................................................................ 105
Item 9B. Other Information. ................................................................................................................................... 105
PART III. ................................................................................................................................................................... 106
Item 10. Directors, Executive Officers, and Corporate Governance. ..................................................................... 106
Item 11. Executive Compensation. ........................................................................................................................ 106
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 106
Item 13. Certain Relationships and Related Transactions, and Director Independence. ........................................ 106
Item 14. Principal Accounting Fees and Services. ................................................................................................. 106
PART IV. ................................................................................................................................................................... 108
Item 15. Exhibits and Financial Statement Schedules............................................................................................ 108
Item 16. Form 10-K Summary. .............................................................................................................................. 112
Signatures - MGE Energy, Inc. .............................................................................................................................. 117
Signatures - Madison Gas and Electric Company .................................................................................................. 118
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 17. Commitments and Contingencies, and (b) other factors discussed herein and in other filings made
by that registrant with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the
date of this report. MGE Energy and MGE undertake no obligation to release publicly any revision to these forward-
looking statements to reflect events or circumstances after the date of this report, except as required by law.
Where to Find More Information
The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the
SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents also are
available to the public from commercial document retrieval services, the website maintained by the SEC at sec.gov,
MGE Energy's website at mgeenergy.com, and MGE's website at mge.com. Copies may be obtained from our
websites free of charge. Information contained on MGE Energy's and MGE's websites shall not be deemed
incorporated into, or to be a part of, this report.
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
MGEE Transco
NGV Fueling Services
Other Defined Terms:
AFUDC
AICPA
ANR
ARO
ATC
ATC Holdco
BART
Blount
CAA
CAVR
CCR
CIAC
CO2
Codification
Columbia
Cooling degree days
COSO
CPP
CSAPR
CWA
Dth
EEI
EGUs
ELG
Elm Road Units
EPA
FASB
FERC
FTR
GAAP
GHG
Heating degree days (HDD)
ICF
IRS
kVA
kWh
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
MGEE Transco, LLC
NGV Fueling Services, LLC
Allowance for Funds Used During Construction
American Institute of Certified Public Accountants
ANR Pipeline Company
Asset Retirement Obligation
American Transmission Company LLC
ATC Holdco, LLC
Best Available Retrofit Technology
Blount Station
Clean Air Act
Clean Air Visibility Rule
Coal Combustion Residual
Contributions in Aid of Construction
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
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
Kilovolt Ampere
Kilowatt-hour
5
MISO
MRO
MW
MWh
NAAQS
Nasdaq
NERC
NNG
NO2
NOV
NOx
NYSE
PCBs
PGA
PJM
PM
PPA
ppb
PSCW
REC
Riverside
ROE
RTO
SCR
SEC
SIP
SO2
the State
Stock Plan
UW
VIE
WCCF
WDNR
WEPCO
Working capital
WPDES
WPL
WPSC
WRERA
XBRL
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
Nitrogen Dioxide
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
Riverside Energy Center in Beloit, Wisconsin
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, and our investment
in ATC Holdco, a company created to facilitate out-of-state electric transmission development and investments.
All other – investing in companies and property that relate to the regulated operations and financing the
regulated operations, through its wholly owned subsidiaries CWDC, MAGAEL, MGE State Energy Services,
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, 2016, MGE supplied electric service to approximately 149,000 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 2016, 2015, and 2014 were comprised of the following:
Year Ended December 31,
2015
2014
2016
Residential ............................................................
Commercial ...........................................................
Industrial ...............................................................
Public authorities (including the UW) ......................
Total .....................................................................
33.9%
52.9%
4.4%
8.8%
100.0%
32.6%
53.2%
4.8%
9.4%
100.0%
33.3%
52.8%
4.8%
9.1%
100.0%
Electric operations accounted for approximately 75.2%, 74.2%, and 64.0% of MGE's total 2016, 2015, and 2014
regulated revenues, respectively.
7
See Item 2. Properties, for a description of MGE's electric utility plant.
MGE is registered with North American Electric Reliability Corporation (NERC) and one regional entity, the
Midwest Reliability Organization (MRO). The essential purposes of these entities are the development and
implementation of regional and NERC reliability standards; and determining compliance with those standards,
including enforcement mechanisms.
Transmission
American Transmission Company LLC (ATC) was formed by utilities who were required by Wisconsin law to
contribute their transmission facilities to it in 2001, and is owned by those utilities and their affiliates. ATC's
purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC
plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and
reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service, is regulated
by the PSCW as to some aspects of its governance and is a transmission-owning member of the MISO.
Regional Transmission Organizations (RTO)
MISO
MGE is a nontransmission owning member of the MISO. MISO, a FERC approved RTO, is responsible for
monitoring the electric transmission system that delivers power from generating plants to wholesale power
transmitters. MISO's role is to ensure equal access to the transmission system and to maintain or improve electric
system reliability in the Midwest.
MISO maintains a bid-based energy market. MGE offers substantially all of its generation on the MISO market and
purchases much of its load requirement from the MISO market in accordance with the MISO Tariff. MGE
participates in the ancillary services market operated by MISO. That market is an extension of the existing energy
market in which MISO assumes the responsibility of maintaining sufficient generation reserves. In the ancillary
services market, MISO provides the reserves for MGE's load, and MGE may offer to sell reserves from its
generating units.
MGE participates in the voluntary capacity auction, which provides an optional monthly forum for buyers and
sellers of aggregate planning resource credits to interact. Load serving entities, such as MGE, may participate in the
voluntary capacity auction potentially to obtain the necessary aggregate planning resource credits needed to meet
their planning reserve margin requirement established by the PSCW. Generator owners may participate to sell any
excess aggregate planning resource credits that are not needed by them.
PJM
MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the
operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity
market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
Fuel supply and generation
MGE satisfies its customers' electric demand with internal generation and purchased power. Sources used depend on
market prices, generating unit availability, weather, and customer demand. During 2016, 2015, and 2014, MGE's
electric energy delivery requirements were satisfied from the following fuel sources:
Year Ended December 31,
2015
2014
2016
Coal .......................................
Natural gas(a) ...........................
Fuel oil ...................................
Renewable sources ..................
Purchased power
Renewable ..........................
Other ..................................
Total ......................................
48.2%
18.6%
0.1%
2.8%
8.0%
22.3%
100.0%
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%
(a) MGE's electric operations burn natural gas in several of its peaking power plants. The market price
of natural gas decreased in 2016, which improved the economics of natural gas-fueled generation
over other types of generation.
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, 2016, with unaffiliated parties for the next five years.
(Megawatts)
Purchase power commitments ...........
2017
152.5
2018
102.5
2019
98.5
2020
98.5
2021
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, 2016, MGE supplied natural gas service to approximately 154,000 customers in the cities of Elroy,
Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 25 villages; and all or parts
of 48 townships. Of the total number of customers, approximately 90% were residential and 10% were commercial
or industrial. Gas revenues for 2016, 2015, and 2014 were comprised of the following:
Year Ended December 31,
2015
2014
2016
Residential ............................................................
Commercial ...........................................................
Industrial(a) ............................................................
Transportation service and other(a) ...........................
Total .....................................................................
60.2%
34.9%
1.1%
3.8%
100.0%
59.4%
35.7%
1.3%
3.6%
100.0%
53.0%
34.3%
11.0%
1.7%
100.0%
(a) During 2015, a large interruptible industrial customer decided to purchase gas from a third party supplier
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 24.8%, 25.8%, and 36.0% of MGE's total 2016, 2015, and 2014
regulated revenues, respectively.
MGE can curtail gas deliveries to its interruptible customers. Approximately 3% of retail gas deliveries in 2016 and
2015 were to interruptible customers.
Gas supply
MGE has physical interconnections with ANR Pipeline Company (ANR) and Northern Natural Gas Company
(NNG). MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at
one NNG and four ANR gate stations. MGE's outlying territory receives deliveries at NNG gate stations located in
Elroy, Prairie du Chien, Viroqua, and Crawford County. Interconnections with two major pipelines provide
competition in interstate 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 5,936,318 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.
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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.
65,828 Dth on NNG.
Nonregulated Energy Operations
MGE Energy, through its subsidiaries, has developed generation sources that assist MGE in meeting the electricity
needs of its customers. These sources consist of the Elm Road Units and the WCCF, which are leased by MGE
Power Elm Road and MGE Power West Campus, respectively, to MGE. See Item 2. Properties for a description of
these facilities, their joint owners, and the related lease arrangements.
Transmission Investments
ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC
when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by
Wisconsin law. That interest is presently held by MGE Transco, which is owned by MGE Energy. At December 31,
2016, 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.
In 2016, ATC Holdco was formed by several of the members of ATC, including MGE Energy, to facilitate electric
transmission development and investments outside of Wisconsin. MGE Energy's ownership interest in ATC Holdco
is held by MGEE Transco, a wholly-owned subsidiary. At December 31, 2016, MGEE Transco held a 4.0%
ownership interest in ATC Holdco. In the near term, it is expected that ATC Holdco will be pursuing transmission
development opportunities that typically have long development and investment lead times before becoming
operational.
Environmental
MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air
quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste
disposal. These regulations affect the manner in which they conduct their operations, the costs of those operations,
as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted
rules, have the potential to have a material effect on our capital expenditures and operating costs. In addition to the
regulations discussed below, MGE continues to track state and federal initiatives such as potential changes to
regulations governing polychlorinated biphenyl (PCB), potential changes to air and water standards, and potential
climate change legislation.
Water Quality
EPA's Effluent Limitations Guidelines (ELG) and Standards for Steam Electric Power Generating Point Source
Category
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 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 be applied to
Wisconsin-based power plants as they renew their WPDES permits, beginning in 2018 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 Wisconsin Department of Natural
Resources is currently developing guidance and rules to implement the EPA 316(b) rule.
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Both our Blount plant and our Columbia plant have WPDES permits that are up for renewal in 2017 and will need to
comply with the 316(b) requirements, Blount has conducted historical studies that will show that it will likely be in
compliance with this rule. The operator of our Columbia plant is conducting an intake study to demonstrate
compliance 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 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 10% of the state's electricity be generated from
renewable sources. MGE is in compliance with the requirement. The costs to comply with the Act and its
accompanying regulations are being recovered in rates.
Air Quality
Air quality regulations promulgated by the EPA and Wisconsin Department of Natural Resources (WDNR) in
accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on
emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), hazardous air pollutants and other pollutants,
and require permits for operation of emission sources. These permits must be renewed periodically. Various newly
enacted and/or proposed federal and state initiatives may result in additional operating and capital expenditure costs
for fossil-fueled electric generating units.
Ozone NAAQS
In 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. 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.
The State of Wisconsin has joined a lawsuit filed by several states challenging the EPA's new ozone standard. Oral
arguments in this case are scheduled to begin in April 2017. MGE will continue to monitor the EPA's progress on
attainment designations and related litigation to assess potential impacts at our facilities, particularly our Elm Road
Units.
Nitrogen Dioxide (NO2) NAAQS
The WDNR has revised its state rules to incorporate the EPA's one hour NO2 NAAQS rule that was finalized in
2010. The effective date of the state rule was August 1, 2016. The WDNR is currently seeking input from the public
on ideas for implementing this one-hour standard. Wisconsin's NO2 NAAQS rule will affect our stationary fossil-
fuel generation sources by requiring that we demonstrate consistency with the NAAQS when applying for certain air
permits. Sources that cannot demonstrate compliance with the NAAQS may be required to install emission controls
or restrict operations. MGE will continue to monitor developments while the WDNR implements guidance for
compliance with the one-hour NAAQS.
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. This is accomplished in the CSAPR through a reduction in SO2 and NOx from
qualifying fossil-fuel fired power plants in upwind or "contributing" states. NOx and SO2 contribute to fine
particulate pollution, and NOx contributes to ozone formation. Reductions are achieved through a cap and trade
system. Individual plants can meet their caps through modifications and/or buying allowances on the market.
In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone NAAQS
levels into the rule (the original CSAPR is based on 1997 Ozone NAAQS levels). The update affects 22 states,
including Wisconsin, by further limiting statewide NOx allowances in each of those states. The rule also includes
revisions to CSAPR that are designed to address issues remaining from the D.C. Circuit remand of CSAPR,
including Wisconsin's inclusion in the NOx ozone season portion of the rule. The State of Wisconsin filed a legal
challenge to the CSAPR update rule asserting, among other things, that the rule over-controls NOx emissions in
Wisconsin.
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The CSAPR Update rule will further reduce summertime (or Ozone Season) NOx emissions allocations from power
plants starting in 2017. MGE intends to meet the rule requirements through a combination of allocations owned,
received, or purchased. Depending on the number of allocations MGE receives for ozone season, the number of
allocations that MGE must purchase, and the cost of allocations, this requirement could be material for MGE.
Clean Air Visibility Rule (CAVR)
Columbia is 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 existing pollution control
upgrades, and the EPA's stance that compliance with the CSAPR equals compliance with BART, should mean that
Columbia will not need to do additional work to meet BART requirements. At this time, however, the BART
regulatory obligations, compliance strategies, and costs remain uncertain due to the continued legal challenges
surrounding CSAPR and CAVR.
In December 2016, the EPA introduced a final rule (posted online but not yet scheduled for publication in the
Federal Register) extending state implementation plan deadlines by three years from 2018 to 2021 for the next
implementation phase of the CAVR, which goes beyond BART and may affect utilities. This extension would allow
for states to coordinate their CAVR compliance with other compliance efforts, which should lessen the burden to
comply. It is too early to determine if the rule will affect MGE. MGE will continue to monitor developments.
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 implemented its Energy
2015 Plan, which committed to ensuring a balanced, economic energy supply with reduced environmental
emissions. The Plan emphasized increased renewable energy, energy efficiency, and new cleaner generation – three
strategies that reduced GHG emissions. Under the Plan and other actions, our CO2 emissions declined from 2005 to
2015 by approximately 20% even though total system energy increased. In 2015, MGE announced its Energy 2030
framework that continues steps to reduce CO2 emissions. Subject to regulatory approvals and other conditions, MGE
aims to increase renewable energy to 25% of retail electric sales by 2025 and to 30% by 2030. Under our Energy
2030 framework, we will also work to reduce CO2 emissions by 40% from 2005 levels by 2030.
Climate Change Legislation
It is not anticipated that U.S. Congress will enact broad GHG reduction legislation in 2017.
It is not expected that the Wisconsin Legislature will enact broad GHG regulation in 2017.
Greenhouse Gas Regulation
EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111d Rule
The EPA's Clean Power Plan (CPP) rule became effective in December 2015, setting guidelines for states to use in
developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. When fully
implemented in 2030, the 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 goals 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. 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 be implemented until the courts ultimately resolve the underlying legality of the rule, which is expected in
2017.
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Given the pending legal proceedings 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. This portion of the rule is accomplished in phases to allow for sites with onsite
storage and/or disposal to evaluate their compliance with the rule's design criteria. Landfills and impoundments that
cannot meet design criteria will need to close formally within defined timeframes.
The Columbia and Elm Road Units co-owners and plant operators are working through the phased requirements to
plan and implement changes necessary at those facilities to meet design criteria. Review of our Elm Road Units has
indicated that the costs to comply with this rule are not expected to be significant. Columbia's operator has
developed a preliminary implementation schedule for meeting the various deadlines spelled out in the rule. Costs at
Columbia will be dependent on what is determined during the evaluation stage. 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 the co-owners, including MGE. The
NOV alleged that WPL and the Columbia co-owners failed to comply with appropriate pre-construction review and
permitting requirements and, as a result, violated the Prevention of Significant Deterioration program requirements,
Title V Operating Permit requirements of the CAA, and the Wisconsin SIP. In June 2013, the court approved and
entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia. One of the requirements
of the consent decree requires installation of an SCR system at Columbia Unit 2 by December 31, 2018. Installation
of the SCR has been approved by the PSCW and is currently under construction. MGE's share of the projected cost
for the SCR system is estimated to be $22-$24 million, with expected completion in 2018.
Employees
As of December 31, 2016, MGE had 704 employees. MGE employs 227 employees who are covered by a collective
bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 84
employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and
Professional Employees International Union. 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 20 of the Notes to the Consolidated Financial Statements for financial information relating to
MGE Energy's and MGE's business segments.
13
Executive Officers of the Registrants
As of December 31, 2016, the executive officers of the registrants were as follows:
Executive
Gary J. Wolter(a)
Age: 62
Jeffrey M. Keebler(b)
Age: 45
Craig A. Fenrick(b)
Age: 57
Lynn K. Hobbie(b)
Age: 58
Jeffrey C. Newman(a)
Age: 54
Cari Anne Renlund(b)
Age: 43
Title
Chairman of the Board, President and Chief Executive Officer
Senior Vice President - Energy Supply and Planning
Assistant VP - Energy Supply and Customer Service
Senior Vice President - Energy Operations
Vice President - Energy Delivery
Vice President - Electric Transmission and Distribution
Senior Vice President - Marketing and Communications
Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Vice President, Chief Financial Officer, Secretary and Treasurer
Vice President and General Counsel
Dewitt Ross & Stevens S.C. (law firm) - Partner
Effective
Date
02/01/2002
07/23/2015
01/01/2012
07/23/2015
02/10/2015
01/01/2012
02/01/2000
07/23/2015
01/01/2009
11/02/2015
06/11 – 10/15
Service
Years as
an Officer
27
5
10
22
19
1
Note: Ages, years of service, and positions as of December 31, 2016.
(a) Executive officer of MGE Energy and MGE.
(b) Executive officer of MGE.
Item 1A. Risk Factors.
MGE Energy and its subsidiaries, including MGE, operate in a market environment that involves significant risks,
many of which are beyond their control. The following risk factors may adversely affect their results of operations,
cash flows and market price for their publicly traded securities. While MGE Energy and MGE believe they have
identified and discussed below the key risk factors affecting their business, there may be additional risks and
uncertainties that are not presently known or that are not currently believed to be significant that may adversely
affect their performance or financial condition in the future.
Regulatory Risk
We are subject to extensive government regulation in our business, which affects our costs and responsiveness to
changing events and circumstances.
Our business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding
company by the PSCW. MGE is regulated by the PSCW as to its rates, terms and conditions of service; various
business practices and transactions; financing; and transactions between it and its affiliates, including MGE Energy.
MGE is also subject to regulation by the FERC, which regulates certain aspects of its business. The regulations
adopted by the State and Federal agencies affect the manner in which we do business, our ability to undertake
specified actions since pre-approval or authorization may be required, the costs of operations, and the level of rates
charged to recover such costs. Our ability to attract capital is also dependent, in part, upon our ability to obtain a fair
return from the PSCW.
We could be subject to higher costs and potential penalties resulting from mandatory reliability standards.
MGE must adhere to mandatory reliability standards for its electric distribution system established by NERC. These
standards cover areas such as critical infrastructure protection, emergency preparedness, facility design, and
transmission operations, among others. The critical infrastructure protection standards focus on physical and access
security of cyber assets, as well as incident response and recovery planning. MGE could be subject to higher
operating costs in order to maintain compliance with the mandatory reliability standards, and any noncompliance
could result in sanctions including monetary penalties.
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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 October 2016, the EPA finalized rulemaking for an update to CSAPR that
incorporated 2008 Ozone NAAQS levels into the rule (the original CSAPR is based on 1997 Ozone NAAQS levels).
The update affects 22 states, including Wisconsin, by further limiting statewide NOx allowances in each of those
states. Depending on the number of allocations MGE receives for ozone season, the number of allocations that MGE
must purchase, and the cost of allocations, this requirement could be material for MGE.
In October 2015, the EPA finalized its Clean Power Plan (CPP) rule with an effective date of December 2015,
setting guidelines and approval criteria for states to use in developing plans to control GHG emissions from existing
fossil fuel-fired electric generating units (EGUs) and systems. 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. Given the pending legal proceedings, 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.
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 is required to defer electric fuel-related
costs that fall outside a symmetrical cost tolerance band that is currently plus or minus 2% around the amount
approved in its most recent rate order. Any over/under recovery of the actual costs in a year is determined in the
following year and is then reflected in future billings to electric retail customers. Under the electric fuel rules, MGE
is required to defer the benefit of lower costs, if its actual fuel costs fall outside the lower end of the range, and is
required to defer costs, less any excess revenues, if its actual fuel costs exceed the upper end of the range. Excess
revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity
than authorized by the PSCW in MGE's latest rate order. MGE assumes the risks and benefits of variances that are
within the cost tolerance band.
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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, storage, and use technology.
Our revenues and the timing of the recovery of our costs could be adversely affected by improvements in power
generation, storage, and use technology.
Advancements in power generation technology, including commercial and residential solar generation installations
and commercial micro turbine installations, are improving the cost-effectiveness of customer self-supply of
electricity. Improvements in energy storage technology, including batteries and fuel cells, could also better position
customers to meet their around-the-clock electricity requirements. Improvements in the energy efficiency of
lighting, appliances, and equipment will also affect energy consumption by customers. Such developments could
reduce customer purchases of electricity, but may not necessarily reduce our investment and operating requirements
due to our obligation to serve customers, including those self-supply customers whose equipment has failed for any
reason to provide the power they need whether due to inadequate on-site resources, restricted operating hours, or
equipment failure. In addition, since a portion of our costs are recovered through charges based upon the volume of
power delivered, 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, storage, and use 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 through voluntary changes in energy use and through the use of more energy efficient
lighting, appliances, and equipment. They could also change their consumption of electricity from us through the
installation of alternative energy sources, such as roof top solar panels and micro turbines for self-supply. Customer
energy conservation could adversely affect our results of operations by reducing our revenues without necessarily
changing our operating costs due to our obligation to serve.
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.
A significant portion of our electric generating capacity is dependent on coal. Demand for coal has been impacted by
prevailing prices for natural gas and may affect mine performance. Consequently, we are exposed to the risk that
counterparties to these contracts will not be able to fulfill their obligations. Disruption in the delivery of fuel,
including disruptions as a result of transportation delays, weather, labor relations, force majeure events, or
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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.
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.
17
We rely on the performance of our information technology systems, the failure of which could have an adverse
effect on our business and performance.
We operate in a highly engineered industry that requires the continued operation of sophisticated information
technology systems and network infrastructure to manage our finances, to operate our control facilities, to provide
electric and gas service to our customers, and to enable compliance with applicable regulatory requirements. Our
computer-based systems are vulnerable to interruption or failure due to the age of certain systems, the introduction
of viruses, malware, security breaches, fire, power loss, system malfunction, network outages and other events,
which may be beyond our control. System interruptions or failures, whether isolated or more widespread, could
impact our ability to provide service to our customers, which could have a material adverse effect on our operations
and financial performance.
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.
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, oil, and
environmental 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.
Interest rate movements and market performance affects our employee benefit plan costs.
Prevailing interest rates affect our assessment and determination of discount rates that are a key assumption in the
determination of the costs and funding of our defined benefit pension plans and may impact the amount of expense
and timing of contributions to those plans. The performance of the capital markets affects the values of the assets
that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have
significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of
those assets may increase our current and longer-term funding requirements for these obligations. Changes in the
value of trust fund assets may affect the level of required contributions to these trusts to meet benefit obligations.
Reduced benefit plan assets could result in increased benefit costs in future years and may increase the amount and
accelerate the timing of required future funding contributions.
We are exposed to 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.
18
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, 2016, was as follows:
Plants
Location
Commercial
Operation Date
Fuel
Net Summer
Rated Capacity
(MW)(a)
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
225(b,c)
103(g)
120(d)
106(b,e)
151(f)
49(g)
1(g,h)
4(g,i)
759
2
2
2
2
6
54
17
18
(a) Net summer rated capacity is determined by annual testing and may vary from year to year due to, among other
things, the operating and physical conditions of the units.
(b) Baseload generation.
(c) MGE's share. See "Columbia" below.
(d) Facility is jointly owned. Based on the terms of the joint plant agreement between MGE and the UW, the UW
has the ability to reduce net capability of these units by approximately 17 MW in the summer. The net summer
rated capacity shown reflects this decrease. See "WCCF" below.
(e) MGE's share. See "Elm Road" below.
(f) Three facilities are owned by MGE, and three facilities are leased.
(g) These facilities are owned by MGE.
(h) Nameplate capacity rating is 11 MW.
(i) 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, at December 31, 2016, accounts for 30% of MGE's net summer rated capacity. Power from this facility is
shared in proportion to each owner's ownership interest. At December 31, 2016, MGE had 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 decreased from approximately 88 days on December 31, 2015, to approximately 65 days on
December 31, 2016. See "Executive Overview" under Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, for a discussion of the reduction in MGE's ownership share in Columbia
commencing January 2017 and continuing through June 2020.
20
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, at December 31, 2016, account for 14% of MGE's net summer rated capacity. Power from
these units is shared in proportion to each owner's ownership interest. MGE Power Elm Road owns an 8.33%
ownership interest in the Elm Road Units, and its interest in the Elm Road Units is leased to MGE. The other owners
are Wisconsin Energy Corporation, which operates the Units, and WPPI Energy, Inc. The Elm Road Units burn
bituminous coal obtained from northern West Virginia and southwestern Pennsylvania, and Powder River Basin coal
from Wyoming. MGE's share of the coal inventory supply for the Elm Road Units increased from approximately 50
days on December 31, 2015, to approximately 51 days on December 31, 2016.
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 plant is reflected in property, plant, and equipment on MGE Energy's
and MGE's consolidated balance sheets.
MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the
entire facility. The financial terms of the facility lease include a capital structure of 53% equity and 47% long-term
debt, return on equity of 12.1%, and a lease term of 30 years. At the end of the lease term in 2035, MGE may, at its
option, renew the facility lease for an additional term, purchase the generating facility at fair market value, or allow
the lease contract to end.
Electric and Gas Distribution Facilities
At December 31, 2016, MGE owned 872 miles of overhead electric distribution line and 1,236 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 1,190,500 kVA. MGE's gas facilities include 2,765
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, 2016, 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 $62.6 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.
21
MGE Power West Campus has collaterally assigned its right to lease payments from MGE for the WCCF in order to
secure the repayment of $45.1 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.
Item 3. Legal Proceedings.
MGE Energy and MGE
MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that
are handled and defended in the ordinary course of business.
See "Environmental" under Item 1. Business and Footnote 17.c. of the Notes to Consolidated Financial Statements
for a description of several environmental proceedings involving MGE. See Footnote 17.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, 2017, there were
approximately 38,688 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
2016
High
66.85
59.49
56.54
53.48
$
$
$
$
Low
53.48
53.78
47.90
44.83
$
$
$
$
2015
High
47.23
41.97
45.33
47.97
$
$
$
$
Low
39.18
36.75
36.46
40.66
$
$
$
$
Fourth quarter
Third quarter
Second quarter
First quarter
MGE
As of February 1, 2017, 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 2016 and 2015:
(Per share)
Fourth quarter
Third quarter
Second quarter
First quarter
2016
2015
0.308 $
0.308 $
0.295 $
0.295 $
0.295
0.295
0.283
0.283
$
$
$
$
MGE
The following table sets forth MGE's quarterly cash dividends declared during 2016 and 2015:
(In thousands)
Fourth quarter
Third quarter
Second quarter
First quarter
2016
10,000 $
15,000 $
15,000 $
10,000 $
2015
10,000
10,000
10,000
-
$
$
$
$
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,
2016, is 60.2%, as determined under the calculation used in the rate proceeding. This restriction did not impact
23
MGE's payment of dividends in 2016. Cash dividends of $50.0 million and $30.0 million were paid by MGE to
MGE Energy in 2016 and 2015, respectively. In 2016, MGE also transferred its ownership interest in MGE Transco
to MGE Energy in the form of a dividend in kind of $15.8 million. 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, 2016, approximately $338.5 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
21,025
15,905
55,400
92,330
Average Price
Paid per Share
55.21
60.17
64.86
61.85
$
$
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, 2016
November 1-30, 2016
December 1-31, 2016
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 2011 through 2016. 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 12/31/2011 with dividends reinvested)
Value of Investment at December 31,
MGEE
Russell 2000
EEI Index
2013
2012
2011
2016
$ 1,000 $ 1,126 $ 1,315 $ 1,602 $ 1,677 $ 2,414
1,965
1,678
1,000
1,000
1,163
1,021
1,615
1,154
1,694
1,487
1,619
1,429
2015
2014
25
Item 6. Selected Financial Data.
MGE Energy, Inc.
(In thousands, except per share amounts)
Summary of Operations
Operating revenues:
Electric ....................................................... $
Gas .............................................................
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(a,b) ...........................................
Short-term debt ................................................
Total capitalization and short-term debt .......... $
2016
For the Years Ended December 31,
2013
2014
2015
410,202 $
134,543
544,745
396,455
20,062
128,228
9,711
(19,866)
118,073
(42,513)
75,560 $
34,668
2.18 $
1.21 $
420,291 $
143,737
564,028
419,894
19,879
124,255
8,613
(20,162)
112,706
(41,363)
71,343 $
34,668
2.06 $
1.16 $
398,132 $
221,720
619,852
462,102
19,652
138,098
10,079
(19,673)
128,504
(48,185)
80,319 $
34,668
2.32 $
1.11 $
409,425 $
181,462
590,887
444,293
18,607
127,987
10,701
(18,924)
119,764
(44,859)
74,905 $
34,668
2.16 $
1.07 $
2012
401,596
139,727
541,323
410,200
18,360
112,763
10,069
(19,467)
103,365
(38,919)
64,446
34,668
1.86
1.04
1,021,905 $
318,603
27,338
271,277
74,535
465,202
(377,800)
1,801,060 $
974,235 $
298,435
49,753
277,858
69,470
434,868
(378,216)
1,726,403 $
889,889
896,864 $
945,790 $
282,815
264,099
306,106
18,549
19,853
41,124
290,889
287,042
280,542
61,064
64,504
67,697
412,840
431,436
438,898
(390,636)
(397,372)
(389,800)
1,689,521 $ 1,573,998 $ 1,558,674
724,088 $
387,124
-
690,458 $
391,010
-
659,401 $
394,775
7,000
617,510 $
398,454
-
1,111,212 $
1,081,468 $
1,061,176 $ 1,015,964 $
579,429
356,737
-
936,166
(a) Reflects retrospective application of new accounting pronouncement related to debt issuance costs. See Footnote 19 of the
Notes to the Consolidated Financial Statements for additional information.
(b) Includes long-term debt due within one year, debt issuance costs, and unamortized discount.
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 ATC Holdco, and
All other, which includes corporate operations and services.
Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and
represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes
electricity to approximately 149,000 customers in Dane County, Wisconsin, including the city of Madison, and
purchases and distributes natural gas to approximately 154,000 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, 2016, MGE Energy's earnings were $75.6 million or $2.18 per share compared to
$71.3 million or $2.06 per share for the same period in the prior year. MGE's earnings for the year ended
December 31, 2016, were $51.2 million compared to $45.4 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 Others ..................................
Net Income ................................ $
Year Ended December 31,
2015
2014
2016
40.6 $
10.6
19.1
5.6
(0.3)
75.6 $
36.4 $
10.4
20.1
4.6
(0.2)
71.3 $
41.4
15.8
19.3
5.5
(1.7)
80.3
Our net income during 2016 compared to 2015 primarily reflects the effects of the following factors:
Electric net income increased due to a 5.4% increase in residential electric retail sales as the result of more
favorable weather conditions in 2016 compared to 2015. Electric utility operations experienced an increase in
operating and maintenance costs partially offsetting the increase in net income compared to the same period in
the prior year.
Carrying costs incurred during construction of the Elm Road Units and WCCF were recognized by MGE Power
Elm Road and MGE Power West Campus over the period allowed for recovery in rates. The recovery period
ended in 2015, contributing to a reduction in nonregulated earnings in 2016. The reduction in earnings was
partially offset by an increase in lease revenue.
Transmission investment income reflects our share of ATC's earnings. ATC's earnings for 2015 reflected a
charge representing its estimate of its refund liability covering 2015, 2014, and a portion of 2013 associated
with the return on equity complaint filed with FERC. See "Other Matters" below for additional information
concerning ATC.
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 2014.
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
2014. The average temperature in January 2015 was 20.1 degrees compared to 11.5 degrees in 2014.
ATC's earnings for 2015 reflected a charge representing its estimate of its refund liability covering 2015, 2014,
and a portion of 2013 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.
During 2016, the following events occurred:
2016 Rates: 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 allows 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 that began on
September 1, 2015, and continued throughout 2016. The fuel credit established a mechanism to return $10.9 million
of fuel savings to electric customers as a bill credit. MGE returned $8.3 million of electric fuel-related savings to
customers through bill credits during the year ended December 31, 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. Also, in March 2016, MGE filed its 2015 fuel plan reconciliation
application showing an overcollection of 2015 fuel rules monitored costs. In July 2016, the PSCW issued a final
28
order stating that MGE shall refund the additional fuel savings incurred during 2015 and 2016 for a total of
$15.7 million to its retail electric customers over a one-month period. In September 2016, MGE returned
$15.5 million to customers through bill credits.
As of December 31, 2016, MGE has deferred $5.6 million of 2016 fuel savings that were in excess of the fuel
savings included within the fuel credits referenced above. These costs will be subject to the PSCW's annual review
of 2016 fuel costs, expected to be completed in 2017.
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. For the years ended December 31, 2016 and 2015, this customer contributed approximately
$3.4 million and $3.8 million, respectively, of pre-tax earnings. Our rate case filing for 2017 addressed the effects of
the closure.
ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the base return on
equity (ROE) used by MISO transmission owners, including ATC. In June 2016, an administrative law judge issued
an initial decision regarding a second filed complaint for the period February 2015 through May 2015 that would
reduce the transmission owners' base ROE to 9.7%. ATC recorded an estimated refund liability with respect to the
administrative law judge's order, which was reflected within our share of ATC earnings. On September 28, 2016,
FERC issued an order on the first complaint, for the period November 2013 through February 2015, reducing the
base ROE to 10.32%. This base ROE also became effective September 28, 2016, and will apply to future periods
until FERC rules in the second complaint, at which time the base ROE ordered by FERC in the second complaint
will prospectively become the authorized base ROE. See "Other Matters" below for additional information
concerning ATC.
During 2017, several items may affect us, including:
2017 Rate Case Filing: On December 15, 2016, the PSCW authorized MGE to decrease 2017 rates for retail electric
customers by 0.8% or $3.3 million and to increase rates for retail gas customers by 1.9% or $3.1 million. The
decrease in retail electric rates reflects declining fuel and purchased power costs. The increase in retail gas rates
covers costs associated with MGE's natural gas system infrastructure improvements. The authorized return on
common stock equity for 2017 is 9.8% on 57.2% common equity. The PSCW also approved MGE's request to
extend the current accounting treatment for transmission related costs through 2018.
ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the ROE used by
MISO transmission owners, including ATC. Any change to ATC's ROE could result in lower equity earnings and
distributions from ATC in the future. We derived approximately 6.8% and 6.4% of our net income for the years
ended December 31, 2016 and 2015, respectively, from our investment in ATC. See "Other Matters" below for
additional information concerning ATC.
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. At present, it is unclear how the changes in
the Presidential and EPA administration may affect pending or new legislative or rulemaking proposals or regulatory
initiatives. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled
generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 43% of our
electric generating capacity as of December 31, 2016. We would expect to seek and receive recovery of any such
costs in rates; however, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and
form of the legislation and rules, and the scope and time of the recovery of costs in rates, which may lag the
incurrence of those costs.
EPA's Clean Power Plan: In October 2015, the EPA finalized its Clean Power Plan (CPP) rule with an effective date
of December 2015, setting guidelines and approval criteria for states to use in developing plans to control GHG
emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. 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. Given the pending legal proceedings, 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.
29
Future Generation: During the first quarter of 2016, MGE entered into an agreement with WPL under which MGE
may acquire up to 50 MW of capacity in a gas-fired generating plant to be constructed by WPL at its Riverside
Energy Center in Beloit, Wisconsin, during the five-year period following the in-service date of the plant. The plant
is expected to be completed by early 2020. MGE and WPL have negotiated an amendment to the existing Columbia
joint operating agreement, effective January 1, 2017, under which MGE will reduce its obligation to pay certain
capital expenditures (other than SCR-related expenditures) at Columbia prior to the expected in-service date of the
Riverside gas-fired generating plant in exchange for a proportional reduction in MGE's ownership in Columbia. On
January 1 of each year, beginning in 2017 and ending June 1, 2020, the ownership percentage will be adjusted,
through a partial sale, based on the amount of capital expenditures foregone. During 2016, MGE accrued
$14.8 million of 2016 capital expenditures that MGE has forgone as part of the ownership transfer agreement with
WPL. As of December 31, 2016, MGE classified $14.8 million of Columbia assets as held-for-sale on the
consolidated balance sheets. In January 2017, MGE reduced its ownership interest in Columbia from 22.0% to
20.4% through the partial sale of plant assets to WPL. By June 2020, MGE's ownership in Columbia is forecasted to
be approximately 19%.
Saratoga Wind Farm: On February 21, 2017, MGE filed with the PSCW a letter notifying the commission of MGE's
intent to seek approval to construct, own and operate a 66MW wind farm, consisting of 33 turbines, located near
Saratoga, Iowa. MGE anticipates filing its formal application with the PSCW in March. If approved, construction of
the project is expected to begin in early 2018, with an estimated capital cost of $107 million.
Financing Plans: In January 2017, MGE issued $40 million of new long-term unsecured debt carrying an interest
rate of 3.76% per annum over its 35-year term. The proceeds of this debt financing were used to refinance the
maturing $30 million medium-term notes and, assist with the financing of additional capital expenditures. The
covenants of this debt are substantially consistent with MGE's existing unsecured long-term debt. In accordance
with applicable accounting guidance, MGE has classified the $30 million of maturing medium-term notes as long-
term debt on the consolidated balance sheets for 2016. MGE also plans to issue an additional $30 million of new
long-term debt during 2017 to cover capital expenditures and other corporate obligations.
The following discussion is based on the business segments as discussed in Footnote 20 of the Notes to
Consolidated Financial Statements.
Results of Operations
Year Ended December 31, 2016, Versus the Year Ended December 31, 2015
Electric Utility Operations - MGE Energy and MGE
Electric sales and revenues
The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the
years indicated:
(In thousands, except cooling
degree days)
Residential .................................... $
Commercial ...................................
Industrial ......................................
Other-retail/municipal ....................
Total retail .................................
Sales to the market .........................
Return of fuel savings .....................
Adjustments to revenues .................
Total ......................................... $
Cooling degree days (normal 647) ...
Revenues
Sales (kWh)
2016
136,792 $
213,101
17,589
35,559
403,041
6,135
(423)
253
409,006 $
2015
135,201
220,745
20,283
38,824
415,053
2,154
-
(4,679)
412,528
% Change
1.2 %
(3.5)%
(13.3)%
(8.4)%
(2.9)%
N/A%
-%
(105.4)%
(0.9)%
2016
828,887
1,866,035
232,854
395,662
3,323,438
183,195
-
-
3,506,633
2015
786,741
1,831,251
248,443
422,188
3,288,623
68,886
-
-
3,357,509
% Change
5.4 %
1.9 %
(6.3)%
(6.3)%
1.1 %
N/A%
-%
-%
4.4 %
780
666
17.1 %
30
Electric operating revenues decreased $3.5 million or 0.9% during 2016, due to the following:
(In millions)
Deferral of fuel savings/fuel credit.................. $
Volume ........................................................
Adjustments to revenues................................
Sales to the market........................................
Other ...........................................................
Total ........................................................... $
(21.5)
6.7
4.9
4.0
2.4
(3.5)
In July 2015, the PSCW authorized MGE to freeze 2016 rates at 2015 levels for retail electric customers.
Deferral of fuel savings/fuel credit. During 2016, customers received a fuel credit on their bill related to the fuel
savings of $21.1 million, which decreased electric revenues when compared to 2015. This amount was partially
offset by the 2016 deferred fuel rules monitored costs. In January 2016, the PSCW lowered MGE's 2016 fuel
rules monitored costs as a result of continued lower projected fuel costs in 2016.
Volume. During 2016, there was a 5.4% increase in total residential sales volumes compared to the same period
in the prior year driven by increased customer demand due, at least in part, to more favorable weather
conditions, as evidenced by the higher number of cooling degree days.
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 ending in 2015, which were recognized as
operating revenues in our Nonregulated Energy Operations segment.
MGE leases electric generating capacity from MGE Power Elm Road. MGE collects in rates the lease payments
associated with the electric generating capacity as authorized by the PSCW. Any differential between estimated
lease payments collected in rates and actual lease payments paid to MGE Power Elm Road are included in
adjustments to revenues.
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 2016, market volumes increased
compared to the same period in the prior year, reflecting increased opportunities for sales, and those sales were
made at higher market prices. The revenue generated from these sales is included in fuel rules monitored costs.
See fuel rules discussion in Footnote 16.b. of the Notes to Consolidated Financial Statements.
Other. During 2016, other items affecting electric operating revenues increased $2.4 million. MGE experienced
an increase in residential and small commercial customers contributing to the increase in other electric revenue.
Higher monthly on-peak sales also attributed to the increase.
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 year. Adjustments related to the regulatory
recovery for fuel costs, known as fuel rules, decreased purchased power expense. These items are explained below.
Fuel for electric generation
The expense for fuel for internal electric generation increased $6.9 million during 2016 compared to 2015 due to the
following:
(In millions)
Increase in volume........................................... $
Decrease in per-unit cost ..................................
Total .............................................................. $
10.5
(3.6)
6.9
31
This increase in expense reflects a 21.0% increase in internal generation volume delivered to the system primarily as
a result of increased generation at WCCF based on market prices, partially offset by a 6.8% decrease in per-unit cost
of internal electric generation, reflective of lower natural gas prices.
Purchased power
Purchased power expense decreased $24.9 million during 2016 compared to 2015 due to the following:
(In millions)
Decrease in volume .................................................. $ (15.2)
Increase in per-unit cost............................................
3.0
Change in fuel rule adjustments, net of recoveries .......
(12.7)
Total ....................................................................... $ (24.9)
The decrease in expense (before fuel rules adjustments) reflects a 21.1% decrease in the volume of power purchased
from third parties primarily as a result of the increased internal generation, partially offset by a 5.2% increase in the
per-unit cost of purchased power.
Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band
around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased
power expense.
Electric operating and maintenance expenses
Electric operating and maintenance expenses increased $2.5 million during 2016 compared to 2015. The following
changes contributed to the net change:
(In millions)
Increased customer accounts costs .................................. $
Increased production costs .............................................
Increased distribution costs ............................................
Increased other costs......................................................
Total ............................................................................ $
0.9
0.7
0.5
0.4
2.5
For 2016, increased customer accounts costs are primarily related to higher customer billing expenses.
Electric depreciation expense
Electric depreciation expense decreased $0.8 million for 2016, compared to the prior year. A new depreciation study
approved by the PSCW, effective January 1, 2016, resulted in a decrease in expense.
Gas Utility Operations - MGE Energy and MGE
Gas deliveries and revenues
The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the
years indicated:
Revenues
Therms Delivered
(In thousands, except HDD and average
rate per therm of retail customer)
Residential ............................................ $
Commercial/Industrial ............................
Total retail .........................................
Gas transportation ..................................
Other revenues ......................................
Total ................................................. $
2016
81,014 $
48,497
129,511
4,635
397
134,543 $
2015
85,438
53,161
138,599
4,652
486
143,737
% Change
(5.2)%
(8.8)%
(6.6)%
(0.4)%
(18.3)%
(6.4)%
2016
91,791
86,641
178,432
72,922
-
251,354
2015
92,970
88,489
181,459
75,572
-
257,031
% Change
(1.3)%
(2.1)%
(1.7)%
(3.5)%
-%
(2.2)%
Heating degree days (normal 7,083) .........
6,417
6,395
0.3 %
Average rate per therm of retail customer . $
0.726 $
0.764
(5.0)%
32
Gas revenues decreased $9.2 million or 6.4% during 2016. These changes are related to the following factors:
(In millions)
Rate/PGA changes .......................................... $
Volume ..........................................................
Transportation and other effects .......................
Total ............................................................. $
(5.6)
(3.5)
(0.1)
(9.2)
Rate/PGA changes. 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 2016, decreased 5.0% compared to 2015, reflecting a $6.3 million decrease
in natural gas commodity costs (recovered through the PGA), partially offset by an increase in fixed rate
charges.
• Volume. For 2016, retail gas deliveries decreased 1.7% compared to the prior year.
Cost of gas sold
For 2016, cost of gas sold decreased by $9.3 million, compared to the prior year. The cost per therm of natural gas
decreased 10.3%, which resulted in $7.6 million of decreased expense. The volume of gas purchased decreased
2.2%, which resulted in $1.7 million of decreased expense.
Gas operating and maintenance expenses
Gas operating and maintenance expenses increased $1.0 million for 2016 compared to 2015. The following changes
contributed to the net change.
(In millions)
Increased customer accounts costs .................................. $
Increased administrative and general costs .......................
Decreased distribution costs ...........................................
Total ............................................................................ $
0.8
0.5
(0.3)
1.0
For 2016, increased customer accounts costs are due to higher customer billing expenses.
Gas depreciation expense
Gas depreciation expense increased $1.4 million for 2016, compared to the prior year. This increase is primarily
driven by an increase in gas utility plant in-service in 2016 and a new depreciation study approved by the PSCW,
effective January 1, 2016.
Nonregulated Energy Operations - MGE Energy and MGE
For 2016 and 2015, net income at the nonregulated energy operations segment was $19.1 million and $20.1 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. Carrying costs incurred during construction of the Elm Road Units and
WCCF were recognized by MGE Power Elm Road and MGE Power West Campus over the period allowed for
recovery in rates. The recovery period ended in 2015, contributing to a reduction in nonregulated earnings in 2016.
The reduction in earnings was partially offset by an increase in lease revenue.
Transmission Investment Operations - MGE Energy and MGE
Transmission investment other income
For 2016 and 2015, other income at the transmission investment segment was $8.4 million and $7.7 million,
respectively. The transmission investment segment holds our interest in ATC and ATC Holdco, and its income
reflects our equity in the earnings of ATC. ATC Holdco was formed in 2016. In the near term, it is expected that
ATC Holdco will be pursuing transmission development opportunities that typically have long development and
33
investment lead times before becoming operational. See Footnote 4.b. of the Notes to Consolidated Financial
Statements and "Other Matters" below for additional information concerning the transmission investments and
summarized financial information regarding ATC.
Consolidated Income Taxes - MGE Energy and MGE
MGE Energy's effective income tax rate for 2016 and 2015 was 36.0% and 36.7%, respectively. MGE's effective
income tax rate for 2016 and 2015 was 35.9% and 36.7%, respectively. The decrease in the effective tax rate is due
in part to a combination of individually insignificant fluctuations. See Footnote 12 of the Notes to Consolidated
Financial Statements for details of effective income tax rates for continuing operations.
Noncontrolling Interest, Net of Tax - MGE
The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power
Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power
Elm Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE,
the entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the
primary beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, 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) ....................................... $
2016
14.8
7.2
1.4
$
$
$
2015
16.6
7.3
2.2
(a) MGE Transco holds an ownership interest in ATC. In July 2016, MGE's ownership interest in MGE
Transco declined below a majority, resulting in MGE Energy's investment in MGE Transco being
deconsolidated from MGE's consolidated financial statements. See Footnote 8 of the Notes to Consolidated
Financial Statements for further discussion of noncontrolling interest. In December 2016, MGE's
ownership interest in MGE Transco was transferred to MGE Energy, see Footnote 4 of the Notes to
Consolidated Financial Statements for additional information.
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
years indicated:
(In thousands, except cooling
degree days)
Residential .................................... $
Commercial ...................................
Industrial ......................................
Other-retail/municipal ....................
Total retail .................................
Sales to the market .........................
Other revenues ..............................
Adjustments to revenues .................
Total ......................................... $
Cooling degree days (normal 665) ...
Revenues
Sales (kWh)
2015
135,201 $
220,745
20,283
38,824
415,053
2,154
1,705
(6,384)
412,528 $
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
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)%
666
620
7.4 %
34
Electric operating revenues increased $17.7 million or 4.5% during 2015 compared to 2014 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
Rate changes. Rates charged to retail customers for 2015 were $14.4 million or 3.6% higher than those charged
during 2014.
In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by
$15.4 million or 3.8%.
Fuel Credit. During 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 2014.
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 2015, there was a 0.3% decrease in total retail sales volumes compared to 2014 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 2015, market volumes increased
compared to 2014, reflecting increased opportunities for sales. In addition, market settlement resulted in lower
revenue per kWh for 2015, reflecting lower market prices. The revenue generated from these sales is included
in fuel rules monitored costs. See fuel rules discussion in Footnote 16.b. of the Notes to Consolidated Financial
Statements.
Electric fuel and purchased power
Electric fuel and purchased power costs reflect an increase in internal generation volumes during 2015 partially
offset by a decrease in the volume of purchased power when compared to 2014. 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 2015 compared to 2014 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.
35
Purchased power
Purchased power expense increased $8.0 million during 2015 compared to 2014 due to the following:
(In millions)
Decrease in volume .................................................. $ (11.0)
Decrease in per-unit cost...........................................
(2.8)
Change in fuel rule adjustments, net of recoveries .......
21.8
Total ....................................................................... $
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.
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.
Electric operating and maintenance expenses
Electric operating and maintenance expenses increased $4.0 million during 2015 compared to 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 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 2015 compared to 2014. 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.
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
years indicated:
Revenues
Therms Delivered
(In thousands, except HDD and average
rate per therm of retail customer)
Residential ............................................ $
Commercial/Industrial ............................
Total retail .........................................
Gas transportation ..................................
Other revenues ......................................
Total ................................................. $
2015
85,438 $
53,161
138,599
4,652
486
143,737 $
2014
117,523
100,338
217,861
3,373
486
221,720
% Change
(27.3)%
(47.0)%
(36.4)%
37.9 %
-%
(35.2)%
2015
92,970
88,489
181,459
75,572
-
257,031
2014
110,422
138,151
248,573
46,905
-
295,478
% Change
(15.8)%
(35.9)%
(27.0)%
61.1 %
-%
(13.0)%
Heating degree days (normal 7,080) .........
6,395
7,887
(18.9)%
Average rate per therm of retail customer . $
0.764 $
0.876
(12.8)%
Gas revenues decreased $78.0 million or 35.2% for 2015 compared to 2014. 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 2015, retail gas deliveries decreased 27.0% compared to 2014, 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 2015 decreased 12.8% compared to 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 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.
37
Cost of gas sold
For 2015, cost of gas sold decreased by $67.5 million compared to 2014. 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 2015 compared to 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 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.
Nonregulated Energy Operations - MGE Energy and MGE
For 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 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 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. See Footnote 12 of the Notes to Consolidated Financial Statements for
details of effective income tax rates for continuing operations.
Noncontrolling Interest, Net of Tax - MGE
The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in MGE Power
Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF). MGE Energy owns 100% of MGE Power
Elm Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE,
the entities are considered VIEs with respect to MGE and their results are consolidated with those of MGE, the
primary beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, is MGE Energy's interest in
38
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 ......................................... $
2015
16.6
7.3
2.2
$
$
$
2014
16.2
7.7
2.4
Liquidity and Capital Resources
MGE Energy and MGE have adequate liquidity to fund operations and capital expenditures over the next twelve
months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing
capacity under revolving credit facilities, and access to equity and debt capital markets.
Cash Flows
The following summarizes cash flows for MGE Energy and MGE during 2016, 2015, and 2014:
(In thousands)
Cash provided by/(used for):
2016
MGE Energy
2015
2014
2016
MGE
2015
2014
Operating activities ................. $
Investing activities ..................
Financing activities .................
147,513 $
(86,826)
(46,112)
141,185 $
(73,313)
(52,243)
128,762
(96,158)
(35,662)
$
146,501 $
(85,648)
(76,845)
148,460 $
(72,920)
(53,342)
128,538
(95,597)
(43,187)
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.
2016 vs. 2015
Cash provided by operating activities for 2016 was $147.5 million, an increase of $6.3 million when compared to
the prior year.
MGE Energy's net income increased $4.2 million for 2016 when compared to the prior year.
In both 2016 and 2015, MGE received a $10.0 million refund from the IRS for the 2015 and 2014 tax years,
respectively. Excluding the 2016 and 2015 refund, MGE Energy's federal and state taxes paid decreased
$1.8 million during 2016, when compared to the prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $5.2 million in cash provided by
operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased
receivable margin, partially offset by increased unbilled revenues, increased receivables, and decreased current
liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that
customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million
that customers received on their bill in September 2016.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $5.0 million in cash provided by
operating activities for 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.
39
2015 vs. 2014
Cash provided by operating activities for 2015 was $141.2 million, an increase of $12.4 million when compared to
2014.
MGE Energy's net income decreased $9.0 million for 2015 when compared to 2014.
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 2015 when compared to 2014. In
December 2014, bonus depreciation was extended for 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 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 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
2015 when compared to 2014. Pension contributions reflect amounts required by law and discretionary amounts. See
Footnote 13 of the Notes to Consolidated Financial Statements for further discussion of MGE Energy's pension and
other postretirement benefits.
MGE
2016 vs. 2015
Cash provided by operating activities for 2016 was $146.5 million, a decrease of $2.0 million when compared to the
prior year.
Net income increased $3.1 million for 2016, when compared to the prior year.
In both 2016 and 2015, MGE received a $10.0 million refund from the IRS for the 2015 and 2014 tax years,
respectively. Excluding the 2016 and 2015 refund, MGE's federal and state taxes paid to MGE Energy increased
$4.2 million during 2016, when compared to the prior year.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.4 million in cash provided by
operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased
receivable margin, partially offset by increased receivables, increased unbilled revenues, and decreased current
liabilities. The decrease in current liabilities includes a fuel credit, that was approved in August 2015, of
$8.3 million that customers received on their bill throughout 2016 and $15.5 million of deferred fuel related cost
savings to be returned to customers.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.0 million in cash provided by
operating activities for 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.
2015 vs. 2014
Cash provided by operating activities for 2015 was $148.5 million, an increase of $19.9 million when compared to
2014.
40
Net income decreased $10.5 million for 2015 when compared to 2014.
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 2015, when compared to the prior
year. In December 2014, bonus depreciation was extended for 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 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 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
2015 when compared to 2014. These contributions reflect amounts required by law and discretionary amounts. See
Footnote 13 of the Notes to Consolidated Financial Statements for further discussion of MGE's pension and other
postretirement benefits.
Capital Requirements and Investing Activities
MGE Energy
2016 vs. 2015
MGE Energy's cash used for investing activities increased $13.5 million for 2016 when compared to the prior year.
Capital expenditures for 2016 were $83.7 million. This amount represents an increase of $11.6 million from the
expenditures made in the prior year. This increase primarily reflects increased expenditures on electric and gas
distribution assets.
There was a $1.9 million increase in the capital contributions to investments for 2016 when compared to the prior
year.
2015 vs. 2014
MGE Energy's cash used for investing activities decreased $22.8 million for 2015 when compared to 2014.
Capital expenditures for 2015 were $72.0 million. This amount represents a decrease of $20.6 million from the
expenditures made in 2014. 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.
MGE
2016 vs. 2015
MGE's cash used for investing activities increased $12.7 million for 2016 when compared to the prior year.
Capital expenditures for 2016 were $83.7 million. This amount represents an increase of $11.6 million from the
expenditures made in the prior year. This increase primarily reflects increased expenditures on electric and gas
distribution assets.
There was a $0.9 million increase in the capital contributions to investments for 2016 when compared to the prior
year.
41
2015 vs. 2014
MGE's cash used for investing activities decreased $22.7 million for 2015 when compared to 2014.
Capital expenditures for 2015 were $72.0 million. This amount represents a decrease of $20.6 million from the
expenditures made in 2014. 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.
Capital expenditures
The following table shows MGE Energy's actual capital expenditures for both 2016 and 2015, forecasted capital
expenditures for 2017, and annual average forecasted capital expenditures for the years 2018 through 2020:
(In thousands)
For the years ended December 31,
Electric ............................................ $
Gas .................................................
Utility plant total ...........................
Nonregulated ...................................
MGE Energy total ......................... $
Actual
Forecasted
2015
2016
2017
(Annual Average)
2018-2020
49,370 $
18,787
68,157
3,873
72,030 $
50,699
29,136
79,835
3,824
83,659
$
$
72,603 $
34,197
106,800
7,362
114,162 $
78,768
35,475
114,243
4,959
119,202
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 2016 capital requirements and cash
obligations, including dividend payments. External financing included short-term financing under existing lines of
credit.
Financing Activities
MGE Energy
2016 vs. 2015
Cash used for MGE Energy's financing activities was $46.1 million for 2016, compared to $52.2 million of cash
used for 2015.
For 2016, cash dividends paid were $41.8 million compared to $40.0 million in the prior year. This increase was a
result of a higher dividend per share ($1.21 vs. $1.16).
For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2016.
2015 vs. 2014
Cash used for MGE Energy's financing activities was $52.2 million for 2015, compared to $35.7 million of cash
used for 2014.
For 2015, cash dividends paid were $40.0 million compared to $38.4 million in 2014. This increase was a result of a
higher dividend per share ($1.16 vs. $1.11).
For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2014.
42
MGE
2016 vs. 2015
During 2016, cash used for MGE's financing activities was $76.8 million, compared to $53.3 million of cash used
for MGE's financing activities in the prior year.
Cash dividends paid from MGE to MGE Energy were $50.0 million for 2016, compared to $30.0 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 $24.1 million for 2016, compared to $14.7 million in the prior year.
For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2016.
2015 vs. 2014
During 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 2014.
Cash dividends paid from MGE to MGE Energy were $30.0 million for 2015, compared to $26.5 million in 2014.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and
MGE Power West Campus, were $14.7 million for 2015, compared to $21.4 million in 2014.
For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2014.
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,
2016, is 60.2%, as determined under the calculation used in the rate proceeding. This restriction did not impact
MGE's payment of dividends in 2016. Cash dividends of $50.0 million and $30.0 million were paid by MGE to
MGE Energy in 2016 and 2015, respectively. In 2016, MGE also transferred its ownership interest in MGE Transco
to MGE Energy in the form of a dividend in kind of $15.8 million. 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, 2016, approximately $338.5 million was available for the payment of dividends under this covenant.
Credit Facilities
At December 31, 2016, MGE Energy and MGE had the following aggregate bank commitments and available
capacity under their credit agreements:
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
43
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, 2016, the ratio of consolidated debt to consolidated total capitalization for each of
MGE Energy and MGE, as calculated under the credit agreements' covenant, were 34.8% and 36.5%, respectively.
See Footnote 10 of the Notes to Consolidated Financial Statements for additional information regarding the credit
facilities.
Capitalization Ratios
MGE Energy's capitalization ratios were as follows:
MGE Energy
2016
2015
Common shareholders' equity................
Long-term debt* ..................................
*Includes the current portion of long-term debt.
65.2 %
34.8 %
63.8 %
36.2 %
Credit Ratings
MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper
market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is
accessing the capital markets.
None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of
credit ratings, although a downgrading of MGE's credit ratings could increase fees and interest charges under both
MGE Energy's and MGE's credit agreements.
Contractual Obligations and Commercial Commitments for MGE Energy and MGE
MGE Energy's and MGE's contractual obligations as of December 31, 2016, 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
4,358 $
559
17,659
1,331
122,846
20,569
167,322 $
4,358 $
559
17,659
1,331
122,846
8,737
155,490 $
29,005 $
1,215
33,052
1,400
142,872
2,835
210,379 $
29,005 $
1,215
33,052
1,400
142,872
2,835
210,379 $
24,430 $
1,000
30,803
588
89,512
1,395
147,728 $
24,430 $
1,000
30,803
588
89,512
1,395
147,728 $
333,449
1,121
176,650
8,020
89,562
5,646
614,448
333,449
1,121
176,650
8,020
89,562
5,646
614,448
391,242 $
3,895
258,164
11,339
444,792
30,445
1,139,877 $
391,242 $
3,895
258,164
11,339
444,792
18,613
1,128,045 $
44
(a) Long-term debt consisting of secured first mortgage bonds, unsecured medium-term notes, and Industrial
Development Revenue Bonds issued by MGE, and private placement debt issued by MGE, MGE Power Elm
Road, and MGE Power West Campus.
(b) Chattel paper agreements. See Footnote 1.g. 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, 2016.
(d) Operating leases. See Footnote 17.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 17.a. of the Notes to Consolidated Financial Statements.
(f) Other obligations are primarily related to investment commitments, easements, environmental projects, fuel
credit, and uncertain tax positions.
The above amounts do not include any contributions for MGE's pension and postretirement plans. Voluntary
contributions to the qualified plans for 2017 were $6.0 million, which were paid in January 2017. MGE does not
expect to make contributions to the plans for 2018. The contributions for years after 2018 are not yet currently
estimated. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key
assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary
contributions to the plans.
The above amounts do not include future capital calls by ATC and ATC Holdco. On January 31, 2017, MGE
Transco made a $1.4 million capital contribution to ATC, and on January 10, 2017, MGEE Transco made a
$0.2 million capital contribution to ATC Holdco. The amount and timing of future capital calls is uncertain and
primarily dependent on the operations and expansion of ATC and ATC Holdco.
MGE Energy's and MGE's commercial commitments as of December 31, 2016, representing commitments triggered
by future events and including financing arrangements to secure obligations of MGE Energy and MGE, are as
follows:
Total
1 Year
Expiration Within:
2-3 Years
4-5 Years
Due After
5 Years
(In thousands)
MGE Energy
Available lines of credit(a) .................$
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,
2016, 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, 2016, MGE had no
borrowings outstanding under these facilities, and MGE had no commercial paper outstanding.
Other Matters
ATC
In 2013, several parties filed the first complaint with the FERC seeking to reduce the base return on equity (ROE)
used by MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint alleged
that the MISO ROE should not exceed 9.15%, the equity components of hypothetical capital structures should be
restricted to 50%, and the relevant incentive ROE adders should be discontinued. At the time, MISO's base ROE
was 12.38% and ATC's base ROE was 12.2%. In February 2015, a second complaint was filed for the period
February 2015 through May 2015 with the FERC requesting a reduction in the base ROE used by MISO
45
transmission owners, including ATC, to 8.67%, with a refund effective date retroactive to the filing date of the
complaint. In June 2016, an administrative law judge issued an initial decision for the second complaint that would
reduce the transmission owner's base ROE to 9.7%. The initial decision will be reviewed by FERC. It is anticipated
FERC will issue an order on this issue by mid-2017. On September 28, 2016, FERC issued an order on the first
complaint, for the period November 2013 through February 2015, reducing the base ROE to 10.32%. This base ROE
also became effective September 28, 2016, and will apply to future periods until FERC rules in the second
complaint, at which time the base ROE ordered by FERC in the second complaint will prospectively become the
authorized base ROE.
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 reflects a pre-tax charge of $1.9 million and $2.3 million for 2016 and 2015, respectively,
recorded by ATC for this matter representing its estimate of its refund liability. We derived approximately 6.8% and
6.4% of our net income for 2016 and 2015, respectively, from our investment in ATC.
Critical Accounting Estimates - MGE Energy and MGE
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to unbilled revenues, allowance for doubtful accounts, pension
obligations, income taxes, derivatives, and regulatory assets and liabilities. We base our estimates on historical
experience and on various assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Those values may differ from these estimates under different assumptions or
conditions. We believe the following critical accounting estimates affect our more significant judgments used in the
preparation of our consolidated financial statements.
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.
46
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.
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 2016, MGE used an assumed return on assets of 7.65% for pension and 6.96%
for other postretirement benefits. In 2017, the pension asset assumption will decrease from 7.65% to 7.40%.
MGE will decrease the postretirement benefit assumption from 6.96% to 6.78% in 2017. 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.
Holding other assumptions constant, a 0.5% reduction in the discount rate on the obligation balance at
December 31, 2016, 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 2016, the Society of Actuaries released new mortality
tables and projection scales. At December 31, 2016, 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
47
is not more likely than not, we establish a valuation allowance. We record an allowance reducing the asset to a value
we believe will be recoverable based on our expectation of future taxable income. We believe the accounting
estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change
from period to period as it requires management to make assumptions about our future income over the lives of the
deferred tax assets, and the impact of increasing or decreasing the valuation allowance is potentially material to our
results of operations.
Accounting for uncertainty in income taxes applies to all tax positions and requires a recognition threshold and
measurement standard for the financial statement recognition and measurement of a tax position taken, or expected
to be taken, in an income tax return. The threshold is defined for recognizing tax return positions in the financial
statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition,
derecognition, and measurement is based on management's best judgment given the facts, circumstances and
information available at the reporting date.
Accounting for Derivative Instruments
MGE accounts for derivative financial instruments, except those qualifying for the normal purchase normal sale
exception, at their fair value on the balance sheet. Fair value is determined using current quoted market prices,
except for the 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 19 of the Notes to Consolidated Financial Statements for discussion of new accounting
pronouncements.
48
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
MGE Energy and MGE are potentially exposed to market risk associated with interest rates, commodity prices, and
equity returns. MGE currently has no exposure to foreign currency risk. MGE manages some risk exposure through
risk management policies and the use of derivative instruments. MGE's risk management policy prohibits
speculative trading transactions.
Commodity Price Risk
MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits,
and oil. MGE's electric operations burn natural gas in several of its peaking power plants and, in many cases, the
cost of purchased power is tied to the cost of natural gas. MGE employs established policies and procedures to
reduce the market risks associated with changing commodity prices. MGE's commodity risks are somewhat
mitigated by the current ratemaking process in place for recovering electric fuel cost, purchased energy costs, and
the cost of natural gas.
MGE's electric fuel costs are subject to fuel rules established by the PSCW. The fuel rules require the PSCW and
Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any
over/under recovery of the actual costs in a year is determined in the following year and is then reflected in future
billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs
if the actual electric fuel costs fall outside the lower end of the range and is required to defer costs, less any excess
revenues, if the actual electric fuel costs exceed the upper end of the range. Excess revenues are defined as revenues
in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in
MGE's latest rate order. The range is defined by the PSCW and has been modified throughout the years based on
market conditions and other relevant factors. Currently, MGE is subject to a plus or minus 2% range. MGE assumes
the risks and benefits of variances that are within the cost tolerance band. For 2017, fuel and purchased power costs
included in MGE's base fuel rates are $101.9 million. See Footnote 16 of the Notes to Consolidated Financial
Statements for additional information.
MGE recovers the cost of natural gas in its gas utility segment through the purchased gas adjustment clause (PGA).
Under the PGA, MGE is able to pass through to its gas customers the cost of gas.
MGE also reduces price risk caused by market fluctuations via physical contracts and financial derivative contracts,
including futures, swaps, options, forwards, and other contractual commitments. The maximum length of time over
which cash flows related to energy commodities can be hedged under applicable PSCW approvals is four years.
MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric utility
segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds
FTRs, which are used to hedge the risk of increased transmission congestion charges. At December 31, 2016, the
fair value of these instruments exceeded their cost basis by $1.3 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, 2016, reflects a loss position of $50.6 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.
49
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 8.36%
and 1.39% during the years ended December 31, 2016, and 2015, 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, 2016, no
counterparties have defaulted.
MGE is obligated to provide service to all electric and gas customers within its respective franchised territories.
MGE's franchised electric territory includes a 316 square-mile area in Dane County, Wisconsin, and MGE's
franchised gas territory includes a service area covering 1,682 square miles in Wisconsin. Based on results for
December 31, 2016, 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.
50
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, 2016.
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, 2016, has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report
which appears herein.
February 24, 2017
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, 2016.
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 24, 2017
51
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, 2016 and
2015, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2016, 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, 2016, based on criteria established in 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 24, 2017
52
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 as of
December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2016, 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 financial
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 24, 2017
53
MGE Energy, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
For the Years Ended December 31,
2015
2014
2016
Operating Revenues:
Electric revenues ........................................................................... $
Gas revenues ................................................................................
Total Operating Revenues ..........................................................
410,202 $
134,543
544,745
420,291 $
143,737
564,028
398,132
221,720
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 ..................................................................................... $
Earnings Per Share of Common Stock
(basic and diluted) ............................................................................ $
Dividends per share of common stock ................................................. $
60,736
56,313
66,771
167,989
44,646
20,062
416,517
128,228
9,711
(19,866)
118,073
(42,513)
75,560 $
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
2.18 $
1.21 $
2.06 $
1.16 $
2.32
1.11
Weighted Average Shares Outstanding
(basic and diluted) ...........................................................................
34,668
34,668
34,668
The accompanying notes are an integral part of the above consolidated financial statements.
MGE Energy, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended December 31,
2015
2014
2016
Net Income ...................................................................................... $
Other comprehensive income, net of tax:
Unrealized (loss) gain on available-for-sale securities, net of
tax ($104, $67, and ($54)) ..............................................................
Comprehensive Income ................................................................... $
75,560 $
71,343 $
80,319
(155)
75,405 $
(101)
71,242 $
81
80,400
The accompanying notes are an integral part of the above consolidated financial statements.
54
MGE Energy, Inc.
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended December 31,
2015
2014
2016
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................
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 on common stock ...............................................
Repayment 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 .........................................................$
75,560 $
71,343 $
80,319
44,646
22,421
1,196
295
(8,428)
1,426
(5,666)
7,273
(4,838)
8,616
700
9,881
(1,738)
7,926
(14,452)
2,695
147,513
(83,659)
(2,958)
(209)
(86,826)
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)
(41,775)
(4,267)
-
(70)
(46,112)
14,575
81,384
95,959 $
(40,043)
(4,182)
(7,000)
(1,018)
(52,243)
15,629
65,755
81,384 $
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
19,415 $
21,831 $
(10,000) $
19,636 $
23,800 $
(10,130) $
20,478
19,579
(644)
16,376 $
3,963 $
1,569
The accompanying notes are an integral part of the above consolidated financial statements.
55
MGE Energy, Inc.
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents .......................................................................................... $
Accounts receivable, less reserves of $3,017 and $3,052, respectively ............................
Other accounts receivable, less reserves of $426 and $642, respectively..........................
Unbilled revenues .....................................................................................................
Materials and supplies, at average cost ........................................................................
Fossil fuel, at average cost .........................................................................................
Stored natural gas, at average cost ...............................................................................
Prepaid taxes ............................................................................................................
Regulatory assets - current .........................................................................................
Assets held for sale ...................................................................................................
Other current assets ...................................................................................................
Total Current Assets ..............................................................................................
Other long-term receivables ...........................................................................................
Regulatory assets ..........................................................................................................
Pension and other postretirement benefit asset .................................................................
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 ............................................................................ $
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 17) ..........................................................
Total Liabilities and Capitalization ...................................................................... $
At December 31,
2016
2015
95,959 $
39,887
8,530
29,846
18,561
9,757
12,819
26,636
6,414
14,813
12,293
275,515
5,603
158,485
2,020
1,088
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
-
1,332
1,245,269
36,790
1,282,059
76,290
1,801,060 $
1,217,094
26,351
1,243,445
73,631
1,726,403
4,333 $
47,799
5,495
11,892
6,910
7,620
19,456
103,505
383,813
947
22,173
74,347
42,970
66,426
590,676
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
34,668
316,268
372,950
202
724,088
382,791
1,106,879
-
1,801,060 $
34,668
316,268
339,165
357
690,458
386,744
1,077,202
-
1,726,403
The accompanying notes are an integral part of the above consolidated financial statements.
56
MGE Energy, Inc.
Consolidated Statements of Common Equity
(In thousands, except per share amounts)
2014
Beginning balance - December 31, 2013 ..................
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 ...........
Beginning balance - Adjusted ..............................
Net income ..................................................
Other comprehensive loss ..................................
Common stock dividends declared
($1.16 per share) .........................................
Ending balance - December 31, 2015 ......................
2016
Net income ..................................................
Other comprehensive loss ..................................
Common stock dividends declared
($1.21 per share) .........................................
Ending balance - December 31, 2016 ......................
Common Stock
Shares
Value
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income/(Loss)
Retained
Earnings
Total
34,668 $
34,668 $
316,268 $
266,197 $
377 $
80,319
(38,429)
(80)
81
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 $
75,560
(41,775)
(155)
34,668 $
34,668 $
316,268 $
372,950 $
202 $
(142)
659,259
71,343
(101)
(40,043)
690,458
75,560
(155)
(41,775)
724,088
The accompanying notes are an integral part of the above consolidated financial statements.
57
Madison Gas and Electric Company
Consolidated Statements of Income
(In thousands)
For the Years Ended December 31,
2015
2014
2016
Operating Revenues:
Electric revenues ........................................................................... $
Gas revenues ................................................................................
Total Operating Revenues ..........................................................
410,226 $
134,572
544,798
420,313 $
143,752
564,065
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 earnings in MGE Transco ....................................................
Income tax provision .....................................................................
Other deductions, net .....................................................................
Total Other Income and Deductions ............................................
Income before interest expense .......................................................
60,745
56,327
66,800
167,077
44,622
20,062
39,616
455,249
89,549
1,207
6,366
(2,175)
(217)
5,181
94,730
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
Interest Expense:
Interest on long-term debt ..............................................................
Other interest, net ..........................................................................
AFUDC - borrowed funds ..............................................................
Net Interest Expense ..................................................................
Net Income ..................................................................................... $
Less Net Income Attributable to Noncontrolling Interest, net of tax .......
Net Income Attributable to MGE .................................................... $
20,351
182
(395)
20,138
74,592 $
(23,358)
51,234 $
20,520
94
(231)
20,383
71,465 $
(26,097)
45,368 $
The accompanying notes are an integral part of the above consolidated financial statements.
398,154
221,741
619,895
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
20,927
62
(1,142)
19,847
81,938
(26,310)
55,628
Madison Gas and Electric Company
Consolidated Statements of Comprehensive Income
(In thousands)
For the Years Ended December 31,
2015
2014
2016
Net Income ...................................................................................... $
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale securities, net of
tax ($2, $81, and $33) ....................................................................
Comprehensive Income ................................................................... $
Less: Comprehensive Income Attributable to Noncontrolling
Interest, net of tax .........................................................................
Comprehensive Income Attributable to MGE.................................. $
74,592 $
71,465 $
81,938
(4)
74,588 $
(121)
71,344 $
(23,358)
51,230 $
(26,097)
45,247 $
(48)
81,890
(26,310)
55,580
The accompanying notes are an integral part of the above consolidated financial statements.
58
Madison Gas and Electric Company
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended December 31,
2015
2014
2016
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 MGE Transco ..................................................
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 MGE Transco ................................................
Cash contributions to pension and other postretirement plans...............
Other noncurrent items, net ..............................................................
Cash Provided by Operating Activities .......................................
Investing Activities:
Capital expenditures ........................................................................
Capital contributions to MGE Transco ..............................................
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 ...........................................................
(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 ........................................................$
Dividend in kind to parent ............................................................$
74,592 $
71,465 $
81,938
44,622
20,876
1,196
295
(6,366)
1,954
(3,583)
7,273
(4,838)
8,481
699
9,941
419
(2,137)
5,032
(14,452)
2,497
146,501
(83,659)
(1,598)
(391)
(85,648)
(50,000)
(24,113)
1,598
(4,267)
-
(63)
(76,845)
(15,992)
26,760
10,768 $
19,415 $
29 $
- $
16,376 $
15,822 $
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 $
- $
3,963 $
- $
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)
1,569
-
The accompanying notes are an integral part of the above consolidated financial statements.
59
Madison Gas and Electric Company
Consolidated Balance Sheets
(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents .................................................................................................... $
Accounts receivable, less reserves of $3,017 and $3,052, respectively ......................................
Affiliate receivables ............................................................................................................
Other accounts receivable, less reserves of $426 and $642, respectively....................................
Unbilled revenues ...............................................................................................................
Materials and supplies, at average cost ..................................................................................
Fossil fuel, at average cost ...................................................................................................
Stored natural gas, at average cost .........................................................................................
Prepaid taxes ......................................................................................................................
Regulatory assets - current ...................................................................................................
Assets held for sale .............................................................................................................
Other current assets .............................................................................................................
Total Current Assets ........................................................................................................
Affiliate receivable long-term ..................................................................................................
Regulatory assets ....................................................................................................................
Pension and other postretirement benefit asset ...........................................................................
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 ...................................................................................... $
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 17) ....................................................................
Total Liabilities and Capitalization ................................................................................ $
At December 31,
2016
2015
10,768 $
39,887
539
6,363
29,846
18,561
9,757
12,819
25,798
6,414
14,813
12,268
187,833
4,236
158,485
2,020
4,353
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
-
4,216
1,244,648
36,790
1,281,438
487
1,638,852 $
1,216,415
26,351
1,242,766
69,984
1,669,514
4,333 $
47,790
5,440
11,892
6,910
7,620
19,347
103,332
343,117
947
22,173
74,347
42,970
66,426
549,980
17,348
192,417
277,300
19
487,084
115,665
602,749
382,791
985,540
-
1,638,852 $
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
17,348
192,417
291,888
23
501,676
140,308
641,984
386,744
1,028,728
-
1,669,514
The accompanying notes are an integral part of the above consolidated financial statements.
60
Madison Gas and Electric Company
Consolidated Statements of Common Equity
(In thousands)
2014
Beginning balance - December 31, 2013 ...........
Net income ...........................................
Other comprehensive loss ...........................
Cash dividends paid to parent by MGE ............
Equity contribution received by
noncontrolling interest ...........................
Distributions to parent from
noncontrolling interest ...........................
Ending balance - December 31, 2014 ..............
2015
Beginning balance - January 1, 2015 ...............
Cumulative effect of new accounting principle ....
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 ...........................
Ending balance - December 31, 2015 ..............
2016
Net income ...........................................
Other comprehensive loss ...........................
Cash dividends paid to parent by MGE ............
Dividend in kind to parent ..........................
Equity contribution received by
noncontrolling interest ...........................
Distributions to parent from
noncontrolling interest ...........................
Deconsolidation of noncontrolling interest .........
Ending balance - December 31, 2016 ..............
Additional
Common Stock
Shares
Value
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Non-
Controlling
Interest
Total
17,348 $
17,348 $
192,417 $
247,534 $
192 $
118,963 $
576,454
55,628
(26,500)
26,310
(48)
81,938
(48)
(26,500)
1,775
1,775
17,348 $
17,348 $
192,417 $
276,662 $
144 $
125,689 $
(21,359)
(21,359)
612,260
17,348 $
17,348 $
192,417 $
276,662 $
144 $
125,689 $
612,260
(142)
276,520
45,368
(30,000)
26,097
(121)
(142)
612,118
71,465
(121)
(30,000)
3,230
3,230
17,348 $
17,348 $
192,417 $
291,888 $
23 $
140,308 $
(14,708)
51,234
(50,000)
(15,822)
23,358
(4)
(14,708)
641,984
74,592
(4)
(50,000)
(15,822)
17,348 $
17,348 $
192,417 $
277,300 $
19 $
115,665 $
(24,113)
(25,486)
(24,113)
(25,486)
602,749
1,598
1,598
The accompanying notes are an integral part of the above consolidated financial statements.
61
Notes to Consolidated Financial Statements
December 31, 2016, 2015, and 2014
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.
Additional wholly owned subsidiaries of MGE Energy include CWDC, MAGAEL, MGE Power, MGE
State Energy Services, MGE Services, MGE Transco, MGEE Transco, 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 Transco and MGEE Transco are nonregulated
entities formed to manage the investments in ATC and ATC Holdco, respectively. On December 1, 2016,
MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 4 for further
discussion of the transfer of MGE's investment in MGE Transco.
MGE Energy and MGE consolidate variable interest entities (VIEs) for which it is the primary
beneficiary. Variable interest entities are legal entities that possess any of the following characteristics:
equity investors who have an insufficient amount of equity at risk to finance their activities, equity
owners who do not have the power to direct the significant activities of the entity (or have voting rights
that are disproportionate to their ownership interest), or equity holders who do not receive expected
losses or returns significant to the VIE. If MGE Energy or MGE is not the primary beneficiary and an
ownership interest is held, the VIE is accounted for under the equity method of accounting. When
assessing the determination of the primary beneficiary, all relevant facts and circumstances are
considered, including: the power, through voting or similar rights, to direct the activities of the VIE that
most significantly impact the VIE's economic performance and the obligation to absorb the expected
losses and/or the right to receive the expected returns of the VIE. Ongoing reassessments of all VIEs are
performed to determine if the primary beneficiary status has changed. MGE has consolidated MGE
Power Elm Road and MGE Power West Campus. Both entities are VIEs. MGE is considered the primary
beneficiary of these entities as a result of contractual agreements. See Footnote 2 for more discussion of
these entities.
Prior to December 1, 2016, MGE Transco was jointly owned by MGE Energy and MGE. MGE's
ownership interest in MGE Transco declined below a majority in July 2016. As a result of the change in
majority ownership, MGE deconsolidated MGE Energy's proportionate share of the equity in MGE
Transco. See Footnote 8 for further discussion regarding the deconsolidation of noncontrolling interest.
The consolidated financial statements reflect the application of certain accounting policies described in
this note. All 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.
62
d. Cash Equivalents and Restricted Cash - MGE Energy and MGE.
Cash Equivalents
MGE Energy and MGE consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Restricted Cash
MGE has certain cash accounts that are restricted to uses other than current operations and designated for
a specific purpose. MGE's restricted cash accounts include cash held by trustees for certain employee
benefits and cash deposits held by third parties. As of December 31, 2016 and 2015, there was
$3.7 million and $2.9 million, respectively, of cash deposits held by third parties. These are included in
"Other current assets" on the consolidated balance sheets.
Receivable – Margin Account
Cash amounts held by counterparties as margin for certain financial transactions are recorded as
receivable – margin account in "Other current assets" on the consolidated balance sheets. As of
December 31, 2016 and 2015, the receivable – margin account balance of $1.3 million and $2.3 million,
respectively, is shown net of any collateral posted against derivative positions. As of December 31, 2016,
no cash collateral was posted against derivative positions. As of December 31, 2015, there was
$1.0 million 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.
e. Trade Receivables, Allowance for Doubtful Accounts, and Concentration Risk - MGE Energy and
MGE.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. However, a 1%
late payment charge is recorded on all receivables unpaid after the due date. The allowance for doubtful
accounts associated with these receivables represents our best estimate of the amount of probable credit
losses in our existing accounts receivable. We determine our allowance for doubtful accounts based on
historical write-off experience, regional economic data, and review of the accounts receivable aging.
MGE manages this concentration and the related credit risk through its credit and collection policies,
which are consistent with state regulatory requirements.
f.
Inventories - MGE Energy and MGE.
Inventories consist of natural gas in storage, 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 balance as of December 31, 2016 and 2015, was
$0.3 million.
g. Chattel Paper Agreements - MGE Energy and MGE.
MGE makes available to qualifying customers a financing program for the purchase and installation of
energy-related equipment that will provide more efficient use of utility service at the customer's property.
The energy-related equipment installed at the customer sites is used to secure the customer loans. MGE is
a party to a chattel paper purchase agreement with a financial institution under which it can sell or
finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables,
until July 31, 2017. The length of the MGE guarantee to the financial institution varies from one to ten
years depending on the term of the underlying customer loan. The loan balances outstanding at
December 31, 2016, approximate the fair value of the energy-related equipment acting as collateral.
MGE accounts for these agreements as secured borrowings.
63
As of December 31, 2016, the remaining contractual maturities of the chattel paper agreements were as
follows:
(In thousands)
Repurchase-to-Maturity Transactions:
Loans ...................................................$
2017
2018
2019
2020
2021
Thereafter
559 $
620 $
595 $
568 $
432 $
1,121
h. Regulatory Assets and Liabilities - MGE Energy and MGE.
Regulatory assets and regulatory liabilities are recorded consistent with regulatory treatment. Regulatory
assets represent costs which are deferred due to the probable future recovery from customers through
regulated rates. Regulatory liabilities represent the excess recovery of costs or accrued credits which
were deferred because MGE believes it is probable such amounts will be returned to customers through
future regulated rates. Regulatory assets and liabilities are amortized in the consolidated statements of
income consistent with the recovery or refund included in customer rates. MGE believes that it is
probable that its recorded regulatory assets and liabilities will be recovered and refunded, respectively, in
future rates. See Footnote 6 for further information.
i. Debt Issuance Costs - MGE Energy and MGE.
Premiums, discounts, and expenses incurred with the issuance of outstanding long-term debt are
amortized over the life of the debt issue. Any call premiums or unamortized expenses associated with
refinancing higher-cost debt obligations used to finance utility-regulated assets and operations are
amortized consistent with regulatory treatment of those items. These costs are included as a direct
deduction to the related debt liability on the consolidated balance sheets.
j. Property, Plant, and Equipment - MGE Energy and MGE.
Property, plant, and equipment is recorded at original cost. Cost includes indirect costs consisting of
payroll taxes, pensions, postretirement benefits, other fringe benefits, and administrative and general
costs. Also, included in the cost is AFUDC for utility property and capitalized interest for nonregulated
property. Additions for significant replacements of property are charged to property, plant, and
equipment at cost; and minor items are charged to maintenance expense. Depreciation rates on utility
property are approved by the PSCW, based on the estimated economic lives of property, and include
estimates for salvage value and removal costs. Removal costs of utility property, less any salvage value,
are adjusted through regulatory liabilities. Depreciation rates on nonregulated property are based on the
estimated economic lives of the property. See Footnote 3 for further information.
Provisions at composite straight-line depreciation rates approximate the following percentages for the
cost of depreciable property:
Electric(a)
Gas(a)
Nonregulated
2016
2.5 %
2.1 %
2.3 %
2015
2.6 %
1.7 %
2.4 %
2014
2.6 %
1.7 %
2.4 %
(a) In December 2015, the PSCW approved new depreciation rates, which were implemented and
became effective as of January 1, 2016.
k. Asset Retirement Obligations - MGE Energy and MGE.
MGE Energy and MGE are required to record a liability for the fair value of an ARO to be recognized in
the period in which it is incurred if it can be reasonably estimated. The offsetting associated asset
retirement costs are capitalized as a long-lived asset and depreciated over the asset's useful life. The
expected present value technique used to calculate the fair value of ARO liabilities includes assumptions
about costs, probabilities, settlement dates, interest accretion, and inflation. Revisions to the assumptions,
including the timing or amount of expected asset retirement costs, could result in increases or decreases
to the AROs. All asset retirement obligations are recorded as "Other long-term liabilities" on the
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 18 for further information.
64
l. Repairs and Maintenance Expense - MGE Energy and MGE.
MGE utilizes the direct expensing method for planned major maintenance projects. Under this method,
MGE expenses all costs associated with major planned maintenance activities as incurred.
m. Purchased Gas Adjustment Clause - MGE Energy and MGE.
MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the
difference between the actual cost of purchased gas and the amount included in rates. Differences
between the amounts billed to customers and the actual costs recoverable are deferred and recovered or
refunded in future periods by means of prospective monthly adjustments to rates. At December 31, 2016
and 2015, MGE had over collected $0.9 million and $0.8 million, respectively. These amounts are
included in "Regulatory liabilities - current" on the consolidated balance sheets.
n. Revenue Recognition - MGE Energy and MGE.
Operating revenues are recorded as service is rendered or energy is delivered to customers. Meters are
read on a systematic basis throughout the month based on established meter-reading schedules. At the
end of the month, MGE accrues an estimate for the unbilled amount of energy delivered to customers.
The unbilled revenue estimate is based on daily system demand volumes, weather factors, estimated line
losses, estimated customer usage by class, and applicable customer rates.
o. Utility Cost Recovery - MGE Energy and MGE.
MGE's rates include a provision for fuel costs. The PSCW allows Wisconsin utilities to defer electric
fuel-related costs, less excess revenues, that fall outside a symmetrical cost tolerance band. Any
over/under recovery of the actual costs in a year is determined in the following year and is then reflected
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 16.b. for further information regarding the regulatory rules applicable
to the recovery of electric fuel costs.
p. Regional Transmission Organizations - MGE Energy and MGE.
MGE reports on a net basis transactions on the MISO markets in which it buys and sells power within the
same hour to meet electric energy delivery requirements. This treatment resulted in a $77.2 million, a
$68.6 million, and a $91.1 million reduction to sales to the market and purchase power expense for
MISO markets for the years ended December 31, 2016, 2015, and 2014, respectively.
q. Allowance for Funds Used During Construction - MGE Energy and MGE.
Allowance for funds used during construction is included in utility plant accounts and represents the cost
of borrowed funds used during plant construction and a return on shareholder's capital used for
construction purposes. In the consolidated income statements, the cost of borrowed funds (AFUDC-debt)
is presented as an offset to "Interest expense" and the return on shareholder's capital (AFUDC-equity
funds) is shown as an item within "Other income." For both 2016 and 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 2014, MGE capitalized AFUDC-debt and equity on 50% of applicable average construction
work in progress at 8.21%. For 2016, 2015, and 2014, MGE received specific approval to recover 100%
AFUDC on certain environmental costs for Columbia. These amounts are recovered under the
ratemaking process over the service lives of the related properties.
r.
Investments - MGE Energy and MGE.
Investments in limited liability companies that have specific ownership accounts in which MGE Energy
or MGE's ownership interest is more than minor and are considered to have significant influence are
accounted for using the equity method. All other investments are carried at fair value or at cost, as
appropriate. See Footnote 4 for further information.
65
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 $12.3 million and $12.0 million at December 31, 2016 and 2015, respectively. During 2016,
2015, and 2014, MGE recorded $3.0 million, $2.2 million, and $1.6 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, 2016, 2015, and 2014.
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 $14.5 million, $14.7 million, and $14.6 million for the years
ended December 31, 2016, 2015, and 2014, 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
66
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.
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 ..................
Deferred income taxes .............................
Long-term debt .......................................
Noncontrolling interest ............................
2016
175,502 $
3,241
42,525
62,021
80,362
2015
177,904
2,400
40,865
64,622
79,113
Long-term debt excluding debt issuance costs consists of $62.6 million at December 31, 2016, 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, 2016, MGE Power Elm Road is in compliance with the covenant requirements.
67
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 collected 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 $45.5 million represents the equity portion
and was recognized over the period allowed for recovery in rates which ended in 2015.
b. MGE Power West Campus.
MGE Power West Campus is not a subsidiary of MGE; however, it has been consolidated in the financial
statements of MGE. MGE Power West Campus was created for the purpose of owning new generating
assets. Its sole principal asset is the WCCF, which it leases to MGE pursuant to a long-term lease. MGE
is responsible for operation of the plant during the term of the lease. Based on the nature and terms of
these contractual relationships, MGE absorbs a majority of the expected losses, residual value, or both,
associated with the ownership and operation of the WCCF and therefore holds a variable interest in MGE
Power West Campus, even though it has no equity interest in MGE Power West Campus. MGE has the
power to direct the activities that most significantly impact WCCF's economic performance and is also
the party most closely associated with MGE Power West Campus. As a result, MGE is the primary
beneficiary. At December 31, MGE has included the following significant accounts on its consolidated
balance sheets related to its interest in this VIE:
(In thousands)
Property, plant, and equipment, net ............$
Affiliate receivables .................................
Deferred income taxes ..............................
Long-term debt ........................................
Noncontrolling interest .............................
2016
2015
81,588 $
4,769
19,912
44,932
35,303
84,403
5,295
19,612
46,510
37,603
Long-term debt excluding debt issuance costs consists of $45.1 million at December 31, 2016, 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, 2016,
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 covered by the agreements. As of December 31, 2016 and 2015, MGE had 51
megawatts and 61 megawatts, respectively, of capacity available under these agreements. MGE evaluated
the variable interest entities for possible consolidation. The interest holder is considered the primary
beneficiary of the entity and is required to consolidate the entity if the interest holder has the power to
direct the activities that most significantly impact the economics of the variable interest entity. MGE
examined qualitative factors such as the length of the remaining term of the contracts compared with the
remaining lives of the plants, who has the power to direct the operations and maintenance of the
facilities, and other factors, and determined MGE is not the primary beneficiary of the variable interest
entities. There is not a significant potential exposure to loss as a result of involvement with these variable
interest entities.
68
3.
Property, Plant, and Equipment - MGE Energy and MGE.
Property, plant, and equipment consisted of the following at December 31:
(In thousands)
Utility:
Electric(a) .................................................................... $
Gas ............................................................................
Total utility plant ........................................................
Less: Accumulated depreciation and amortization(a)........
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(a) ..........................
Nonregulated construction work in progress ...................
Total property, plant, and equipment ............................. $
MGE Energy
MGE
2016
2015
2016
2015
$
1,171,004 $
395,790
1,566,794
579,965
986,829
1,147,701
384,163
1,531,864
578,410
953,454
1,171,021 $
395,801
1,566,822
579,965
986,857
1,147,718
384,175
1,531,893
578,410
953,483
317,810
59,370
258,440
315,589
51,949
263,640
317,014
59,223
257,791
314,750
51,818
262,932
31,356
5,434
1,282,059 $
23,837
2,514
1,243,445
$
31,356
5,434
1,281,438 $
23,837
2,514
1,242,766
(a) As of December 31, 2016, MGE has classified $14.8 million of Columbia assets as held-for-sale on the
consolidated balance sheets related to the partial sale of plant assets to WPL. See Footnote 5.a. for further
discussion.
MGE's utility plant is subject to the lien of its Indenture of Mortgage and Deed of Trust. As of December 31,
2016 and 2015, there was $1.2 million of bonds outstanding under that indenture. See Footnote 9 for further
discussion of the mortgage indenture.
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 and ATC Holdco(a) .........................
Other ....................................................
Total equity method investments .................
Other investments .....................................
Total ........................................................ $
MGE Energy
MGE
2016
2015
2016
2015
2,216 $
346
(8)
2,554
72,458
1,158
73,616
120
76,290 $
2,225
599
(2)
2,822
69,466
1,184
70,650
159
73,631
$
$
455 $
40
(8)
487
-
-
-
-
487 $
480
40
(2)
518
69,466
-
69,466
-
69,984
(a) MGE Transco holds an ownership interest in ATC, and MGEE Transco holds an ownership interest
in ATC Holdco. In July 2016, MGE's ownership interest in MGE Transco declined below a
majority, resulting in MGE Energy's investment in MGE Transco being deconsolidated from MGE's
consolidated financial statements. See Footnote 8 for further discussion of noncontrolling interest. In
December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy, see
"ATC and ATC Holdco" below for additional information.
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.
69
During the years ended December 31, 2016, 2015, and 2014, 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 ........
2016
MGE Energy
2015
408 $
121
19 $
10
2014
2016
MGE
2015
38 $
21
16 $
(8)
19 $
10
2014
-
-
b. ATC and ATC Holdco.
ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest
in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to
ATC as required by Wisconsin law. That interest is presently held by MGE Transco, which, as of
December 1, 2016, is owned by MGE Energy. ATC Holdco was formed by several members of ATC,
including MGE Energy, to pursue electric transmission development and investments outside of
Wisconsin. The ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned
subsidiary of MGE Energy.
MGE Transco and MGEE Transco have accounted for their investment in ATC and ATC Holdco,
respectively, under the equity method of accounting. For the years ended December 31, 2016, 2015, and
2014, MGE Transco recorded the following:
(In thousands)
Equity earnings from investment in ATC ........................$
Dividends received from ATC(a) .....................................
Capital contributions to ATC .........................................
2016
2015
2014
8,670 $
7,926
2,486
7,728 $
6,645
710
9,150
7,740
1,775
(a) As of December 31, 2016, MGE Transco recorded a $2.1 million receivable from ATC for a cash
dividend received in January 2017.
ATC Holdco's activities commenced in late December 2016 and had an immaterial impact on results of
operations, cash flows, and financial condition.
At December 31, 2016 and 2015, MGE Transco held a 3.6% ownership interest in ATC. At
December 31, 2016, MGEE Transco held a 4.0% ownership interest in ATC Holdco. On January 31,
2017, MGE Transco made a $1.4 million capital contribution to ATC, and on January 10, 2017, MGEE
Transco made a $0.2 million capital contribution to ATC Holdco.
In June 2016, the PSCW required MGE to transfer its interest in ATC to MGE Energy, which was to be
completed by December 31, 2022. The requirement arose in the context of requests for regulatory
approvals by several owners of ATC in connection with a reorganization of ATC. MGE's ownership
interest in ATC, held through MGE Transco, was transferred net of deferred tax liabilities to
MGE Energy by way of a dividend in kind of $15.8 million as of December 1, 2016. As a result of the
transfer, MGE's ownership interest in MGE Transco was completely eliminated in favor of MGE Energy.
See Footnote 12 for further discussion of the transfer of deferred tax liabilities. The change had no effect
on MGE Energy's consolidated financial statements.
70
ATC's summarized financial data for the years ended December 31, 2016, 2015, and 2014 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 ................................. $
2016
2015
650,806 $
(322,517)
3,225
(98,758)
232,756 $
615,836 $
(319,321)
1,176
(97,250)
200,441 $
2014
635,033
(307,451)
117
(88,970)
238,729
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 ........................................ $
2016
75,790 $
4,312,893
4,388,683 $
495,126 $
1,865,302
271,495
1,756,760
4,388,683 $
2015
80,520
3,948,265
4,028,785
330,248
1,790,718
244,991
1,662,828
4,028,785
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, at December 31, 2016, accounts for 30% (225 MW) of MGE's net summer rated
capacity. Power from this facility is shared in proportion to each company's ownership interest. At
December 31, 2016, MGE had a 22.0% 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 $39.5 million, $38.2 million, and $28.1 million for the years ended December 31, 2016,
2015, and 2014, respectively.
Each owner provides its own financing and reflects its respective portion of facilities and operating costs
in its financial statements. MGE's interest in Columbia's gross utility plant in service, and the related
accumulated depreciation reserves at December 31 were as follows:
(In thousands)
Utility plant .....................................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2016
2015
270,898 $
(81,935)
188,963
21,120
210,083 $
273,762
(84,864)
188,898
17,110
206,008
In 2016, MGE and WPL negotiated an amendment to the existing Columbia joint operating agreement,
that has been approved by the PSCW, under which MGE will have the option to reduce its obligation to
pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a
proportional reduction in MGE's ownership in Columbia. On January 1 of each year, beginning in 2017
and ending June 1, 2020, the ownership percentage will be adjusted, through a partial sale, based on the
amount of capital expenditures foregone. In December 2016, MGE jointly filed a request with the co-
owners of Columbia for FERC approval of the amendment to the Columbia joint operating agreement,
effective January 1, 2017. MGE currently expects to receive FERC's decision on the amendment in 2017.
During 2016, MGE accrued $14.8 million of 2016 capital expenditures that MGE has forgone as part of
the ownership transfer agreement with WPL. As of December 31, 2016, MGE classified $14.8 million of
Columbia assets as held-for-sale on the consolidated balance sheets. In January 2017, MGE reduced its
ownership interest in Columbia from 22.0% to 20.4% through the partial sale of plant assets to WPL.
71
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, at December 31, 2016, 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 $21.2 million, $20.9 million, and $20.3 million for the
years ended December 31, 2016, 2015, and 2014, respectively. MGE Power Elm Road's interest in the
portion of the Elm Road Units in-service and the related accumulated depreciation reserves at
December 31 were as follows:
(In thousands)
Nonregulated plant ...........................................$
Accumulated depreciation.................................
Property, plant, and equipment, net ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2016
2015
204,292 $
(28,790)
175,502
3,241
178,743 $
202,326
(24,422)
177,904
2,400
180,304
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 ....................
Construction work in progress ...........................
Total property, plant, and equipment ..................$
2016
2015
111,330 $
(29,742)
81,588
1,009
82,597 $
111,141
(26,738)
84,403
113
84,516
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, 2016, 2015, and 2014, the UW
allocated share of fuel and operating costs was $5.5 million, $3.7 million, and $2.8 million, respectively.
72
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)
2016
2015
Regulatory Assets
Asset retirement obligation ..................................................... $
Conservation costs ................................................................
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 ................................................ $
5,563
444
10,211
49,281
55
9,403
86,475
3,467
164,899
-
6,016
3,473
1,302
16,415
339
1,538
29,083
$
$
$
$
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
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 18 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.
Debt Related Costs
This balance includes debt issuance costs of extinguished debt and other debt related expenses, including
make-whole premiums. The PSCW has allowed rate recovery on unamortized issuance costs for extinguished
debt facilities. When the facility replacing the old facility is deemed by the PSCW to be more favorable for
the ratepayers, the PSCW will allow rate recovery of any unamortized issuance costs related to the old
facility. These amounts are recovered over the term of the new facility.
Derivatives
MGE has physical and financial contracts that are 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 15 for further discussion.
73
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 17.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 or liability. The
unfunded status represents future expenses that are expected to be recovered in rates. See Footnote 13 for
further discussion.
Deferred Fuel Savings
The fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a
symmetrical cost tolerance band. Any over/under recovery of the actual costs is determined on an annual
basis and is adjusted in future billings to electric retail customers. See Footnote 16.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.
74
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, 2016 and 2015, 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, 2016 and 2015, MGE Energy paid $41.8 million (or $1.21 per
share) and $40.0 million (or $1.16 per share), respectively, in cash dividends on its common stock.
Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order
and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the
PSCW authorized amount that MGE may pay MGE Energy if its common equity ratio, calculated in the
manner used in the rate proceeding, is less than 55%. See Footnote 9 for further discussion of the
mortgage indenture covenants. During the years ended December 31, 2016 and 2015, MGE paid
$50.0 million and $30.0 million, respectively, in cash dividends to MGE Energy. In 2016, MGE also
transferred its ownership interest in MGE Transco to MGE Energy in the form of a dividend in kind of
$15.8 million. See Footnote 4 for further information.
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 ..................................................... $
2016
80,362 $
35,303
-
115,665 $
2015
79,113
37,603
23,592
140,308
The net income attributable to noncontrolling interest, net of tax, for the years ended December 31, 2016,
2015, and 2014 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.....$
2016
2015
2014
14,748 $
7,200
1,410
23,358 $
16,577 $
7,348
2,172
26,097 $
16,160
7,666
2,484
26,310
(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, 2016, MGE Energy is the owner of MGE Transco. In July 2016, MGE's ownership
interest in MGE Transco declined below a majority as a result of continued funding of ATC capital
contributions by MGE Energy. As a result of the change in majority ownership in MGE Transco, MGE
deconsolidated MGE Energy's proportionate share of the equity in MGE Transco. The change in
consolidation was applied prospectively by reducing its investment and noncontrolling interest on MGE's
consolidated financial statements. The change had no effect on MGE Energy's consolidated financial
75
statements; however, MGE Energy's proportionate share of the equity and net income of MGE Transco
classified as noncontrolling interest was deconsolidated from MGE's financial statements. No gain or
loss was recognized in July 2016 due to MGE ceasing to have a controlling financial interest.
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(c) ...............................................
6.12%, due 2028 .................................................
7.12%, due 2032 .................................................
6.247%, due 2037 ...............................................
Total Medium-Term Notes ................................
Other Long-Term Debt:(d)
5.59%, due 2018(e) ...............................................
3.38%, due 2020(e) ...............................................
3.09%, due 2023(e) ...............................................
3.29%, due 2026(e) ...............................................
5.68%, due 2033(f) ...............................................
5.19%, due 2033(f) ...............................................
5.26%, due 2040(e) ...............................................
5.04%, due 2040(g) ..............................................
4.74%, due 2041(g) ..............................................
4.38%, due 2042(e) ...............................................
4.42%, due 2043(e) ...............................................
4.47%, due 2048(e) ...............................................
Total Other Long-Term Debt ............................
Long-term debt due within one year ......................
Unamortized discount and debt issuance costs........
Total Long-Term Debt...................................... $
2016
MGE
Energy
MGE
2015
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
27,120
17,983
15,000
38,472
24,167
28,000
20,000
20,000
270,742
(4,333)
(4,118)
382,791 $
30,000
20,000
25,000
25,000
100,000
20,000
15,000
30,000
15,000
27,120
17,983
15,000
38,472
24,167
28,000
20,000
20,000
270,742
(4,333)
(4,118)
382,791
$
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)
(4,498)
386,744 $
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)
(4,498)
386,744
(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, 2016, approximately $338.5 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) MGE had $30 million of medium-term notes mature in January 2017. MGE issued $40 million of
new long-term unsecured debt on January 13, 2017, to refinance the maturing $30 million medium-
term notes and assist with the financing of additional capital expenditures. The new debt carries an
interest rate of 3.76% per annum over its 35-year term. The covenants of this debt are substantially
consistent with MGE's existing unsecured long-term debt. In accordance with applicable accounting
guidance, MGE has classified the $30 million of maturing medium-term notes as long-term debt on
the consolidated balance sheets for the year ended December 31, 2016.
76
(d) Unsecured notes issued pursuant to various Note Purchase Agreements with one or more purchasers.
The notes are not issued under, or governed by, MGE's Indenture dated as of September 1, 1998,
which governs MGE's Medium-Term Notes.
(e) Issued by MGE. Under that Note Purchase Agreement: (i) note holders have the right to require
MGE to repurchase their notes at par in the event of an acquisition of beneficial ownership of 30%
or more of the outstanding voting stock of MGE Energy, (ii) MGE must maintain a ratio of its
consolidated indebtedness to consolidated total capitalization not to exceed a maximum of 65%, and
(iii) MGE cannot issue "Priority Debt" in an amount exceeding 20% of its consolidated assets.
Priority Debt is defined as any indebtedness of MGE secured by liens other than specified liens
permitted by the Note Purchase Agreement and certain unsecured indebtedness of certain
subsidiaries. As of December 31, 2016, MGE was in compliance with the covenant requirements.
(f) Issued by MGE Power West Campus. The Note Purchase Agreements require it to maintain a
projected debt service coverage ratio of not less than 1.25 to 1.00, and debt to total capitalization
ratio of not more than 0.65 to 1.00. The notes are secured by a collateral assignment of lease
payments that MGE is making to MGE Power West Campus for use of its ownership interest in the
WCCF pursuant to a long-term lease. As of December 31, 2016, MGE Power West Campus was in
compliance with the covenant requirements.
(g) Issued by MGE Power Elm Road. The Note Purchase Agreement requires MGE Power Elm Road to
maintain a projected and actual debt service coverage ratio at the end of any calendar quarter of not
less than 1.25 to 1.00 for the trailing 12-month period. The notes are secured by a collateral
assignment of lease payments that MGE is making to MGE Power Elm Road for use of its
ownership interest in the Elm Road Units pursuant to long-term leases. As of December 31, 2016,
MGE Power Elm Road was in compliance with the covenant requirements.
b. Long-Term Debt Maturities.
Below is MGE Energy's and MGE's aggregate maturities for all long-term debt for years following
December 31, 2016.
(In thousands)
2017 .......................... $
2018 ..........................
2019 ..........................
2020 ..........................
2021 ..........................
Future years ...............
Total.......................... $
MGE
Energy
4,358
24,452
4,553
19,659
4,771
333,449
391,242 $
MGE *
4,358
24,452
4,553
19,659
4,771
333,449
391,242
*Includes $45.1 million for MGE Power West Campus and $62.6 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, 2016, MGE Energy had an unsecured, committed revolving line of credit of
$50 million expiring June 1, 2020. At December 31, 2016, 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, 2016, MGE Energy was in compliance with the covenant requirements.
77
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, 2016, MGE had two unsecured, committed revolving lines of credit for a total of
$100 million expiring June 1, 2020. At December 31, 2016, 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
agreements. Change in control events are defined as (i) a failure by MGE Energy to hold 100% of the
outstanding voting equity interest in MGE or (ii) the acquisition of beneficial ownership of 30% or more
of the outstanding voting stock of MGE Energy by one person or two or more persons acting in concert.
As of December 31, 2016, MGE was in compliance with the covenant requirements.
c. MGE Energy and MGE.
Information concerning short-term borrowings for the past two 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,
2016
2015
150,000 $
- $
-%
- $
- $
-%
100,000 $
- $
-%
- $
- $
-%
150,000
-
-%
17,500
1,511
0.17%
100,000
-
-%
17,500
1,511
0.17%
(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.
78
a. Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.
At December 31, 2016 and 2015, 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. The estimated fair market value of financial instruments
are as follows:
(In thousands)
MGE Energy
Assets:
Cash and cash equivalents ........................ $
Liabilities:
Long-term debt(a) .....................................
MGE
Assets:
Cash and cash equivalents ........................ $
Liabilities:
Long-term debt(a) .....................................
2016
2015
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
95,959 $
95,959
$
81,384 $
81,384
391,242
430,122
395,508
435,767
10,768 $
10,768
$
26,760 $
26,760
391,242
430,122
395,508
435,767
(a) Includes long-term debt due within one year. Excludes debt issuance costs and unamortized
discount of $4.1 million and $4.5 million at December 31, 2016 and 2015, respectively.
b. Recurring Fair Value Measurements.
The following table presents the balances of assets and liabilities measured at fair value on a recurring
basis.
(In thousands)
MGE Energy
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net ........................................$
Deferred compensation .............................
Total Liabilities ........................................$
MGE
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net ........................................$
Deferred compensation .............................
Total Liabilities ........................................$
Fair Value as of December 31, 2016
Total
Level 1
Level 2
Level 3
1,527 $
500
2,027 $
50,808 $
3,039
53,847 $
1,527 $
143
1,670 $
50,808 $
3,039
53,847 $
1,041 $
500
1,541 $
16 $
-
16 $
1,041 $
143
1,184 $
16 $
-
16 $
- $
-
- $
486
-
486
- $
3,039
3,039 $
50,792
-
50,792
- $
-
- $
486
-
486
- $
3,039
3,039 $
50,792
-
50,792
79
(In thousands)
MGE Energy
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net(b) .....................................$
Deferred compensation .............................
Total Liabilities ........................................$
MGE
Assets:
Derivatives, net ........................................$
Exchange-traded investments .....................
Total Assets .............................................$
Liabilities:
Derivatives, net(b) .....................................$
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 $
- $
-
- $
234
-
234
- $
3,145
3,145 $
53,735
-
53,735
- $
-
- $
234
-
234
- $
3,145
3,145 $
53,735
-
53,735
(b) These amounts are shown gross and exclude $1.0 million of collateral that was posted against
derivative positions with counterparties as of December 31, 2015.
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2016.
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 15) was valued using an internally-developed pricing
model and therefore is classified as Level 3. The model projects future market energy prices and
compares those prices to the projected power costs to be incurred under the contract. Inputs to the model
require significant management judgment and estimation. Future energy prices are based on a forward
power pricing curve using exchange-traded contracts in the electric futures market, where such
exchange-traded contracts exist, and upon calculations based on forward gas prices, where such
exchange-traded contracts do not exist. A basis adjustment is applied to the market energy price to reflect
the price differential between the market price delivery point and the counterparty delivery point. The
historical relationship between the delivery points is reviewed and a discount (below 100%) or premium
(above 100%) is derived. This comparison is done for both peak times when demand is high and off peak
times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease,
and if the basis adjustment is increased, the fair value measurement will increase.
The projected power costs anticipated to be incurred under the purchased power agreement are
determined using many factors, including historical generating costs, future prices, and expected fuel mix
of the counterparty. An increase in the projected fuel costs would result in a decrease in the fair value
measurement of the purchased power agreement. A significant input that MGE estimates is the
counterparty's fuel mix in determining the projected power cost. MGE also considers the assumptions
that market participants would use in valuing the asset or liability. This consideration includes
assumptions about market risk such as liquidity, volatility, and contract duration. The fair value model
uses a discount rate that incorporates discounting, credit, and model risks.
80
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
2016
91.9%
93.4%
2015
96.9%
95.1%
55%-75%
45%-25%
60%-75%
40%-25%
The deferred compensation plan allows participants to defer certain cash compensation into a notional
investment account. These amounts are included within other deferred liabilities in the consolidated
balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the
semiannual rate of U.S. Treasury Bills having a 26 week maturity increased by 1% compounded monthly
with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon
observable market data, however since the deferred compensation obligations themselves are not
exchanged in an active market they are classified as Level 2.
The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a
recurring basis.
(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,(c) ...............................................$
2016
(53,501) $
2015
(53,986) $
2014
(64,628)
3,195
-
(5,347)
(142)
23,346
-
-
(17,857)
-
484
-
(6,635)
-
23,052
-
-
(16,416)
-
(50,306) $
(53,501) $
10,642
-
5,129
-
26,382
-
-
(31,511)
-
(53,986)
- $
- $
-
The following table presents total realized and unrealized gains (losses) included in income for Level 3
assets and liabilities measured at fair value on a recurring basis (c).
(In thousands)
Year Ended December 31,
Purchased power expense ............................$
Cost of gas sold expense .............................
Total .........................................................$
2016
2015
2014
(5,262) $
(85)
(5,347) $
(6,663) $
28
(6,635) $
5,137
(8)
5,129
(c) MGE's exchange-traded derivative contracts, over-the-counter party transactions, purchased power
agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair
value and are offset in the financial statements with a corresponding regulatory asset or liability.
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, the 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 ............. $
2016
MGE Energy
2015
2014
2016
MGE
2015
16,908 $
3,287
16,837 $
2,774
(891) $
(589)
17,521 $
3,497
19,295 $
3,443
17,571
4,850
(103)
42,513 $
15,951
5,976
(175)
41,363 $
39,284
10,600
(219)
48,185 $
16,391
4,485
(103)
41,791 $
13,538
5,305
(175)
41,406 $
2014
637
(451)
38,553
10,625
(219)
49,145
The consolidated income tax provision differs from the amount computed by applying the statutory
federal income tax rate to income before income taxes, as follows:
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 ...........................
2016
35.0 %
5.1 %
(0.1)%
(1.6)%
(1.3)%
(0.2)%
(0.9)%
36.0 %
MGE Energy
2015
35.0 %
5.2 %
(0.2)%
(1.8)%
(1.4)%
(0.1)%
-%
36.7 %
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
-%
(0.8)%
0.1 %
37.5 %
2016
35.0 %
5.1 %
(0.1)%
(1.7)%
(1.3)%
(0.2)%
(0.9)%
35.9 %
MGE
2015
35.0 %
5.2 %
(0.2)%
(1.8)%
(1.4)%
(0.1)%
-%
36.7 %
2014
35.0 %
5.1 %
(0.2)%
(1.7)%
-%
(0.8)%
0.1 %
37.5 %
The significant components of deferred tax liabilities (assets) that appear on the consolidated balance
sheets as of December 31 are as follows:
(In thousands)
Property-related .................................................$
Investment in ATC(a) ..........................................
Bond transactions ...............................................
Pension and other postretirement benefits .............
Derivatives ........................................................
Tax deductible prepayments ................................
Other ................................................................
Gross deferred income tax liabilities .................
Investment in ATC(a) ..........................................
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 ....................................$
MGE Energy
MGE
2016
344,721 $
71,898
1,324
63,516
20,304
8,404
16,606
526,773
(31,212)
(22,410)
(48,860)
(903)
(20,304)
(19,340)
(143,029)
69
(142,960)
383,813 $
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 $
2016
344,630 $
-
1,324
63,516
20,304
8,404
16,571
454,749
-
(22,410)
(48,860)
(903)
(20,304)
(19,224)
(111,701)
69
(111,632)
343,117 $
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
(a) As of December 1, 2016, MGE transferred its ownership interest in ATC to MGE Energy, resulting
in a deferred intercompany gain and a corresponding step-up in tax basis.
82
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, 2016, both MGE Energy and MGE
had approximately $1.4 million of state tax net operating loss deductions subject to a valuation allowance
that expire between 2020 and 2023 if unused.
b. Accounting for Uncertainty in Income Taxes - MGE Energy and MGE.
MGE Energy and MGE account for the difference between the tax benefit amount taken on prior year tax
returns, or expected to be taken on a current year tax return, and the tax benefit amount recognized in the
financial statements as an unrecognized tax benefit.
A tabular reconciliation of unrecognized tax benefits and interest from January 1, 2014, to December 31,
2016, 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 prior years .................
Unrecognized tax benefits, December 31, .......................................... $
2016
2015
2014
2,528 $
452
39
(532)
2,487 $
2,365 $
488
520
(845)
2,528 $
2,363
610
618
(1,226)
2,365
(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, .............. $
2016
2015
2014
311 $
(27)
104
388 $
92 $
(102)
321
311 $
101
(97)
88
92
Unrecognized tax benefits are liabilities shown with "Other deferred liabilities" on the consolidated
balance sheets. The interest component is offset by a regulatory asset.
At December 31, 2016, 2015, and 2014, MGE Energy and MGE had unrecognized tax benefits primarily
related to temporary tax differences associated with the change in income tax method of accounting for
electric generation and electric and gas distribution repairs. In addition, at December 31, 2016,
MGE Energy and MGE had unrecognized tax benefits relating to permanent differences and tax credits
of less than $0.1 million. There were no unrecognized tax benefits at December 31, 2015 or 2014, related
to federal permanent differences and tax credits.
The unrecognized tax benefits at December 31, 2016, 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 .......................... 2013 through 2016
MGE Energy Wisconsin combined reporting corporation return ..................... 2012 through 2016
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
$3.1 million, $2.8 million, and $2.5 million in 2016, 2015, and 2014, 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.
83
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 loss (gain)(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
2016
332,565
5,365
12,393
-
11,412
(12,179)
-
349,556
290,716
24,181
9,215
-
(12,179)
311,933
(37,623)
$
$
$
$
$
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)
$
$
$
$
$
(a) In 2016, lower discount rates were the main driver of the actuarial loss.
Other Postretirement
Benefits
2016
2015
74,935
1,271
2,681
767
2,638
(3,637)
187
78,842
40,170
3,236
2,641
767
(3,637)
43,177
(35,665)
$
$
$
$
$
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)
(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, 2016 and 2015, the subsidy due to MGE was $0.2 million.
The accumulated benefit obligation for the defined benefit pension plans at the end of 2016 and 2015
was $319.9 million and $302.5 million, respectively.
The amounts recognized in the consolidated balance sheets to reflect the funded status of the plans at
December 31 are as follows:
Pension Benefits
Other Postretirement
Benefits
(In thousands)
Long-term asset ................................................... $
Current liability ...................................................
Long-term liability ...............................................
Net liability ......................................................... $
2016
2,020
(972)
(38,671)
(37,623)
$
$
2015
-
(966)
(40,883)
(41,849)
$
$
2016
-
-
(35,665)
(35,665)
$
$
2015
-
(52)
(34,713)
(34,765)
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
2016
2015
84,656
(446)
-
84,210
$
$
80,660
(436)
-
80,224
$
$
Other Postretirement
Benefits
2016
14,728
(12,489)
26
2,265
$
$
2015
13,086
(15,158)
29
(2,043)
84
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
2016
227,739
188,096
$
2015
332,565
290,716
The accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated
benefit obligation in excess of plan assets were as follows:
(In thousands)
Accumulated Benefit Obligation in Excess of Plan Assets
Accumulated benefit obligation, end of year ..................................
Fair value of plan assets, end of year.............................................
$
Pension Benefits
2016
26,927
-
$
2015
24,606
-
b. Net Periodic Cost.
(In thousands)
Components of Net Periodic Cost (Benefit):
Service cost ................................................... $
Interest cost ...................................................
Expected return on assets ................................
Amortization of:
Pension Benefits
2015
7,263 $
13,766
(22,682)
2016
5,365 $
12,393
(22,365)
2014
6,179 $
13,574
(22,051)
Other Postretirement Benefits
2014
2015
2016
1,339
1,559 $
1,271 $
3,166
3,075
2,681
(2,615)
(2,812)
(2,829)
Transition obligation ...................................
Prior service cost (benefit) ...........................
Actuarial loss .............................................
Net periodic cost (benefit) ............................... $
-
10
5,600
1,003 $
-
23
5,395
3,765 $
-
204
703
(1,391) $
3
(2,669)
589
(954) $
3
(2,669)
953
109 $
3
(2,669)
252
(524)
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
2016
2015
4.29%
3.71%
4.51%
3.78%
N/A
N/A
N/A
N/A
N/A
N/A
Other Postretirement
Benefits
2016
2015
4.11%
N/A
6.25%
5.0%
2022
4.32%
N/A
6.5%
5.0%
2022
(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 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
2015
4.11%
7.80%
3.84%
2016
4.51%
7.65%
3.76%
2014
4.88%
8.10%
3.93%
Other Postretirement Benefits
2014
2015
2016
4.69%
3.96%
4.32%
7.07%
7.06%
6.96%
N/A
N/A
N/A
85
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 2016 dollars:
(In thousands)
Effect on other postretirement benefit obligation
Effect on total service and interest cost components
$
1% Increase 1% Decrease
(1,479)
(67)
1,175 $
54
MGE employs a building-block approach in determining the expected long-term rate of return for asset
classes. Historical markets are studied and long-term historical relationships among asset classes are
analyzed, consistent with the widely accepted capital market principle that assets with higher volatility
generate a greater return over the long run. Current market factors, such as interest rates and dividend
yields, are evaluated before long-term capital market assumptions are determined.
The expected long-term nominal rate of return for plan assets is primarily a function of expected long-
term real rates of return for component asset classes and the plan's target asset allocation in conjunction
with an inflation assumption. Peer data and historical returns are reviewed to check for appropriateness.
d. Investment Strategy.
MGE employs a total return investment approach whereby a mix of equities, fixed income, and real
estate investments are used to maximize the expected long-term return of plan assets for a prudent level
of risk. Risk tolerance is established through careful consideration of plan liabilities, plan-funded status,
and corporate financial condition. The investment portfolio contains a diversified blend of equity, fixed
income, and real estate investments. Investment risk is measured and monitored on an ongoing basis
through periodic investment portfolio reviews and liability measurements.
The asset allocation for MGE's pension plans at the end of 2016 and 2015, and the target allocation for
2017, 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
2016
2015
65.0 %
27.0 %
8.0 %
100.0 %
63.0 %
29.0 %
8.0 %
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 $43.2 million and $40.2 million at the
end of 2016 and 2015, respectively. Of this amount, $37.0 million and $34.1 million at the end of 2016
and 2015, respectively, were held in the master pension trust and are allocable to postretirement health
expenses. The target asset allocation and investment strategy for the portion of assets held in the master
pension trust are the same as that explained for MGE's pension plans. The remainder of postretirement
benefit assets are held either in an insurance continuance fund for the payment of retiree life benefits or
health benefit trusts for payment of retiree health premiums. The asset allocation for the insurance
continuance fund is determined by the life insurer. The target asset allocation for the health benefit trusts
are established based on a similar investment strategy as assets held in the master pension trust, with
consideration for liquidity needs in the health benefit trusts.
e. Concentrations of Credit Risk.
MGE evaluated its pension and other postretirement benefit plans' asset portfolios for the existence of
significant concentrations of credit risk as of December 31, 2016. 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, 2016, there were no significant concentrations (defined as
greater than 10 percent of plan assets) of risk in MGE pension and postretirement benefit plan assets.
86
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 descriptions are the categories of underlying plan assets held within the pension and other
postretirement benefit plans as of December 31, 2016:
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 ICF is a supplemental retirement plan that includes assets that
have been segregated and restricted to pay retiree term life insurance premiums.
Fixed Rate Fund – The Fixed Rate fund is supported by an underlying portfolio of fixed income
securities, including public bonds, commercial mortgages, and private placement bonds. Public market
data and GAAP reported market values are used when available to determine fair value.
All of the fair values of MGE's plan assets are measured using net asset value, except for cash and cash
equivalents which are considered level 1 investments. The fair values of MGE's plan assets by asset
category 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 ............................................................................. $
2016
2015
284 $
300
107,406
25,966
33,836
59,054
4,318
17,978
71,512
29,441
1,514
3,801
355,110 $
98,949
22,446
27,561
55,948
3,388
16,225
73,112
27,231
1,518
4,208
330,886
g. Expected Cash Flows.
Contributions to the qualified plans for 2017 were $6.0 million, which was paid in January 2017. MGE
does not expect to make contributions to the plans for 2018. The contributions for years after 2018 are
not yet currently estimated. MGE has adopted the asset smoothing as permitted in accordance with the
Pension Protection Act of 2006, including modifications made by WRERA.
Due to uncertainties in the future economic performance of plan assets, discount rates, and other key
assumptions, estimated contributions are subject to change. MGE may also elect to make additional
discretionary contributions.
In 2016, MGE made $14.5 million in employer contributions to its pension and postretirement plans.
87
h. Benefit Payments.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be
paid as follows:
$
Pension
Pension
Benefits
13,468 $
14,618
15,632
16,429
17,263
99,725
(In thousands)
2017
2018
2019
2020
2021
2022 - 2026
Gross
Postretirement
Benefits
Other Postretirement Benefits
Expected
Medicare
Part D Subsidy
Net
Postretirement
Benefits
3,623 $
3,998
4,442
4,932
5,442
31,065
(232) $
(252)
(274)
(302)
(326)
(2,122)
3,391
3,746
4,168
4,630
5,116
28,943
14.
Share-Based Compensation - MGE Energy and MGE.
Under MGE Energy's Director Incentive Plan and Performance Unit Plan, non-employee directors and
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 plans' provisions, these
awards are subject to prescribed vesting schedules and must be settled in cash. Accordingly, no shares of
common stock will be issued in connection with the plans.
On the grant date, MGE Energy and MGE measure the cost of the director or 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, 2016, 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 granted under the Director Incentive Plan are subject to a three-year vesting schedule. The most recent
three years of units granted under this plan are as follows:
Grant Date
January 20, 2017 ............................
January 15, 2016 ............................
January 16, 2015 ............................
MGE Energy
Units Granted
4,032
3,773
3,794
Units granted under the Performance Unit Plan are subject to a five-year vesting schedule. The most recent
units granted under this plan are as follows:
Grant Date
February 19, 2016 ..........................
February 20, 2015 ..........................
February 21, 2014 ..........................
February 15, 2013 ..........................
MGE Energy
Units Granted
19,055
18,948
21,991
22,884
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.
During the years ended December 31, 2016, 2015, and 2014, MGE recorded $3.1 million, $1.0 million, and
$2.0 million, respectively, in compensation expense as a result of awards under the plans. In January 2016,
cash payments of $1.2 million were distributed relating to awards that were granted in 2011. 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, 2016 and 2014. At December 31, 2016, $6.9 million of
outstanding awards are vested, and of this amount, no cash settlements have occurred.
88
15.
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 financial commodity derivative
activities are conducted in accordance with its electric and gas risk management program, which is
approved by the PSCW and limits the volume MGE can hedge with specific risk management strategies.
The maximum length of time over which cash flows related to energy commodities can be hedged is four
years. If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are
offset with a corresponding regulatory asset or liability. 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 .................................................................
PPA ...................................................................
December 31, 2016
393,395 MWh
4,195,000 Dth
2,251 MW
3,250 MW
December 31, 2015
355,580 MWh
5,037,500 Dth
2,000 MW
3,850 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, 2016, the fair value of exchange traded derivatives and FTRs exceeded
their cost basis by $1.3 million. At December 31, 2015, the cost basis of exchange traded derivatives and
FTRs exceeded their fair value by $0.8 million.
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, 2016
and 2015, reflects a loss position of $50.6 million and $53.3 million, respectively. The actual cost will be
recognized in purchased power expense in the month of purchase.
89
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.
(In thousands)
December 31, 2016
Commodity derivative contracts(a) ........ $
Commodity derivative contracts(a) ........
FTRs ................................................
PPA ..................................................
PPA ..................................................
December 31, 2015
Commodity derivative contracts(a) ........ $
Commodity derivative contracts(a) ........
FTRs ................................................
PPA ..................................................
PPA ..................................................
Derivative
Assets
Derivative
Liabilities
Balance Sheet Location
1,227 $
157
143
N/A
N/A
146 $
144
234
N/A
N/A
164
Other current assets
54 Other deferred charges
- Other current assets
7,620 Derivative liability (current)
42,970 Derivative liability (long-term)
1,266 Derivative liability (current)
70 Derivative liability (long-term)
- Other current assets
8,340 Derivative liability (current)
44,930 Derivative liability (long-term)
(a) As of December 31, 2015, collateral of $1.0 million was posted against and netted with derivative
liability positions on the consolidated balance sheets. No collateral was posted against derivative
positions as of December 31, 2016.
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, 2016
Commodity derivative contracts .... $
FTRs ..........................................
December 31, 2015
Commodity derivative contracts .... $
FTRs ..........................................
Offsetting of Derivative Liabilities
(In thousands)
December 31, 2016
Commodity derivative contracts .... $
PPA ...........................................
December 31, 2015
Commodity derivative contracts .... $
PPA ...........................................
Gross Amounts
Gross Amounts
Offset in
Balance Sheets
Collateral
Posted Against
Derivative Positions
Net Amount
Presented in
Balance Sheets
1,384 $
143
290 $
234
(218) $
-
(290) $
-
- $
-
- $
-
1,166
143
-
234
Gross Amounts
Gross Amounts
Offset in
Balance Sheets
Collateral
Posted Against
Derivative Positions
Net Amount
Presented in
Balance Sheets
218 $
50,590
1,336 $
53,270
(218) $
-
(290) $
-
- $
-
-
50,590
(1,038) $
-
8
53,270
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The following tables summarize the unrealized and realized gains (losses) related to the derivative
instruments on the consolidated balance sheets at December 31, 2016 and 2015, and the consolidated
income statements for the years ended December 31, 2016 and 2015.
2016
2015
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 ..........................................................
Realized (loss) gain reclassified to a deferred account ...
Realized loss reclassified to income statement ..............
Balance at December 31, ........................................... $
54,082 $
1,575
(1,060)
(5,316)
49,281 $
1,208 $
-
1,060
(2,038)
230 $
54,998 $
8,586
(2,953)
(6,549)
54,082 $
1,001
-
2,953
(2,746)
1,208
Realized Losses (Gains)
2016
2015
(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
1,154 $
(445)
4,581
2,064 $
-
-
2,236 $
(309)
4,820
2,548
-
-
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,
2016, 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, 2016, no counterparties were in a net liability position. As of December 31, 2015, 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, 2016, no counterparties have defaulted.
16. Rate Matters - MGE Energy and MGE.
a. Rate Proceedings.
On December 15, 2016, the PSCW authorized MGE to decrease 2017 rates for retail electric customers
by 0.8% or $3.3 million and to increase rates for retail gas customers by 1.9% or $3.1 million. The
decrease in retail electric rates is attributable to declining fuel and purchased power costs. The increase in
retail gas rates covers costs associated with MGE's natural gas system infrastructure improvements. The
authorized return on common stock equity for 2017 is 9.8% on 57.2% common equity. The PSCW also
approved MGE's request to extend the current accounting treatment for transmission related costs
through 2018.
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 allows MGE to reflect any differential between transmission costs reflected in rates
and actual costs incurred in its next rate case filing.
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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 was 10.2%.
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%.
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 in a year is determined in the following year and is then
reflected in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or
minus 2%. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel
costs exceeded 102% of the electric fuel costs allowed in its latest rate order. Excess revenues are defined
as revenues in the year in question that provide MGE with a greater return on common equity than
authorized by the PSCW in MGE's latest rate order. Conversely, MGE is required to defer the benefit of
lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order.
In August 2015, the PSCW approved a $0.00256/kWh fuel credit that began on September 1, 2015, and
continued throughout 2016. The fuel credit established a mechanism to return $10.9 million of fuel
savings to electric customers as a bill credit. MGE returned $2.6 million of electric fuel-related savings to
customers through bill credits during the period from September 1, 2015, through December 31, 2015.
MGE returned $8.3 million of electric fuel-related savings during the year ended December 31, 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. Also, in March 2016, MGE filed its 2015 fuel plan
reconciliation application showing an overcollection of 2015 fuel rules monitored costs. In July 2016, the
PSCW issued a final order stating that MGE shall refund the additional fuel savings incurred during 2015
and 2016 for a total of $15.7 million to its retail electric customers over a one-month period. In
September 2016, MGE returned $15.5 million to customers through bill credits.
As of December 31, 2016, MGE has deferred $5.6 million of 2016 fuel savings that were in excess of the
fuel savings included within the fuel credits referenced above. These costs will be subject to the PSCW's
annual review of 2016 fuel costs, expected to be completed in 2017.
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17. Commitments and Contingencies.
a. Purchase Contracts - MGE Energy and MGE.
MGE Energy and MGE have entered into various commodity supply, transportation, and storage
contracts to meet their obligations to deliver electricity and natural gas to customers. As of December 31,
2016, the future minimum commitments related to these purchase contracts were as follows:
(In thousands)
Coal(a) ......................................$
Natural gas ...............................
Transportation and storage(b) ...
Supply(c) ...............................
Purchase power(d) ......................
Other .......................................
$
2017
21,246 $
2018
14,763 $
2019
2020
2021
7,281 $
- $
Thereafter
-
- $
20,859
17,783
48,056
14,902
122,846 $
20,645
-
46,563
324
82,295 $
19,483
-
33,670
143
60,577 $
15,226
-
32,577
-
8,443
-
33,266
-
47,803 $
41,709 $
23,331
-
66,231
-
89,562
(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. Management expects to recover these costs in future customer rates.
(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.
Management expects to recover these costs in future customer rates.
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, 2016, under agreements classified as operating leases
with noncancelable terms in excess of one year are as follows:
(In thousands)
2017
2018
2019
2020
2021
Minimum lease payments .........$
1,331 $
959 $
441 $
310 $
Thereafter
8,020
278 $
Rental expense under operating leases totaled $2.0 million, $2.1 million, and $2.5 million for 2016, 2015,
and 2014, respectively.
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c. Environmental - MGE Energy and MGE.
Water Quality
Water quality regulations promulgated by the EPA and WDNR in accordance with the Federal Water
Pollution Control Act, or more commonly known as the Clean Water Act (CWA), impose restrictions on
discharges of various pollutants into surface waters. The CWA also regulates surface water quality issues
that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA also
includes discharge standards, which require the use of effluent-treatment processes equivalent to
categorical "best practicable" or "best available" technologies. The CWA regulates discharges from
"point sources," such as power plants, through establishing discharge limits in water discharge permits.
MGE's power plants operate under Wisconsin Pollution Discharge Elimination System (WPDES)
permits issued by the WDNR to ensure compliance with these discharge limits. Permits are subject to
periodic renewal.
EPA's Effluent Limitations Guidelines (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 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 be
applied to Wisconsin-based power plants as they renew their WPDES permits, beginning in 2018 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.
The WDNR is currently developing guidance and 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 historical
studies that will show that it will likely be in compliance with this rule when its WPDES permit is
renewed in 2017. The operator of our Columbia plant is conducting 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 10% of the state's electricity be
generated from renewable sources. MGE is in compliance with the requirement. The costs to comply
with the Act and its accompanying regulations are being recovered in rates.
Air Quality
Federal and state air quality regulations impose restrictions on various emissions including emissions of
particulate matter (PM), sulfur dioxide (SO2), nitrogen oxides (NOx), and other pollutants, and require
permits for operation of emission sources. These permits have been obtained by MGE and must be
renewed periodically. Current EPA initiatives under the Clean Air Act, including a recent 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.
94
EPA's Greenhouse Gas (GHG) Reduction Guidelines under the Clean Air Act 111(d) Rule
In October 2015, the EPA finalized its Clean Power Plan (CPP) rule with an effective date of
December 2015, setting guidelines and approval criteria for states to use in developing plans to control
GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems.
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, 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, 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. On January 26, 2016, several parties filed a request for a stay of the CPP with
the U.S. Supreme Court.
On February 9, 2016, the U.S. Supreme Court issued a stay blocking implementation of the CPP pending
the Court's own review. The CPP may not be implemented until the Supreme Court lifts the stay,
presumably after the courts ultimately resolve the underlying legality of the rule. Oral arguments were
held before the D.C. Circuit in September 2016 and a decision by the D.C. Circuit is expected in 2017.
Given the pending legal proceedings, 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. In November 2016, the EPA introduced a proposed
implementation rule for the revised standard. 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 attain them. Final attainment designations for these three counties will be based upon
air monitoring data for years 2014-2016. The EPA will finalize the designations by October 1, 2017
based on that data. Once these EPA designations are complete, the State of Wisconsin will need to
develop implementation plans for each county designated as nonattainment, which could affect
operations and emission control obligations for plants located within the nonattainment counties.
95
The State of Wisconsin has joined a lawsuit filed by several 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. Oral arguments in this case are scheduled to
begin in April 2017. MGE will continue to monitor the EPA's progress on attainment designations and
related litigation to assess potential impacts at our facilities, particularly our Elm Road Units.
Sulfur Dioxide (SO2) NAAQS
In March 2015, the EPA identified MGE's Columbia Plant in Columbia County as a large stationary
source of SO2 that may exceed the one hour SO2 NAAQS standard and was subject to a State of
Wisconsin proposed county attainment/nonattainment determination. In September 2015, Wisconsin sent
a letter to the EPA proposing that Columbia County be designated as being in attainment for the SO2
NAAQS based on recent modeling demonstrating that SO2 pollution controls on the Columbia Plant had
brought the county into attainment. In June 2016, the EPA issued a final rule classifying Columbia
County as an unclassified/attainment area. MGE does not anticipate any material costs from this rule.
Nitrogen Dioxide (NO2) NAAQS
The WDNR has revised its state rules to incorporate the EPA's one hour NO2 NAAQS rule that was
finalized in 2010. The effective date of the state rule was August 1, 2016. The WDNR is currently
seeking input from the public on ideas for implementing this one-hour standard. Wisconsin's NO2
NAAQS rule will affect our stationary fossil-fuel generation sources by requiring that we demonstrate
consistency with the NAAQS when applying for certain air permits. Sources that cannot demonstrate
compliance with the NAAQS may be required to install emission controls or restrict operations. MGE
will continue to monitor developments while the WDNR implements guidance for compliance with the
one-hour NAAQS.
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. This is accomplished in the CSAPR through a
reduction in SO2 and NOx from qualifying fossil-fuel fired power plants in upwind or "contributing"
states. NOx and SO2 contribute to fine particulate pollution, and NOx contributes to ozone formation.
Reductions are achieved through a cap and trade system. Individual plants can meet their caps through
modifications and/or buying allowances on the market.
In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone
NAAQS levels into the rule (the original CSAPR is based on 1997 Ozone NAAQS levels). The update
affects 22 states, including Wisconsin, by further limiting statewide NOx allowances in each of those
states. The rule also includes revisions to CSAPR that are designed to address issues remaining from the
D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion of the
rule. The State of Wisconsin filed a legal challenge to the CSAPR update rule asserting, among other
things, that the rule over-controls NOx emissions in Wisconsin.
The CSAPR Update rule will further reduce summertime (or Ozone Season) NOx emissions allocations
from power plants starting in 2017. MGE intends to meet the rule requirements through a combination of
owned, received, and purchased. Depending on the number of allocations MGE receives for ozone
season, the number of allocations that MGE must purchase, and the cost of allocations, this requirement
could be material for MGE.
Clean Air Visibility Rule (CAVR)
Columbia is 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
existing pollution control upgrades, and the EPA's stance that compliance with the CSAPR equals
compliance with BART, should mean that Columbia will not need to do additional work to meet BART
requirements. At this time, however, the BART regulatory obligations, compliance strategies, and costs
remain uncertain due to the continued legal challenges surrounding CSAPR and CAVR.
96
In December 2016, the EPA introduced a final rule (posted online but not yet scheduled for publication
in the Federal Register) extending state implementation plan deadlines by three years from 2018 to 2021
for the next implementation phase of the CAVR, which goes beyond BART and may affect utilities. This
extension would allow for states to coordinate their CAVR compliance with other compliance efforts,
which should lessen the burden to comply. It is too early to determine if the rule will affect MGE. MGE
will continue to monitor developments.
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. This portion of the
rule is accomplished in phases to allow for sites with onsite storage and/or disposal to evaluate their
compliance with the rule's design criteria. Landfills and impoundments that cannot meet design criteria
will need to close formally within defined timeframes.
The Columbia and Elm Road Units co-owners and plant operators are working through the phased
requirements to plan and implement changes necessary at those facilities to meet design criteria. Review
of our Elm Road Units has indicated that the costs to comply with this rule are not expected to be
significant. Columbia's operator has developed a preliminary implementation schedule for meeting the
various deadlines spelled out in the rule. Costs at Columbia will be dependent on what is determined
during the evaluation stage. 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 the co-owners,
including MGE. The NOV alleged that WPL, which is the plant operator, and the Columbia co-owners
failed to comply with appropriate pre-construction review and permitting requirements and, as a result,
violated the Prevention of Significant Deterioration program requirements, Title V Operating Permit
requirements of the CAA, and the Wisconsin SIP. In June 2013, the court approved and entered a
consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia. One of the
requirements of the consent decree requires installation of an SCR system at Columbia Unit 2 by
December 31, 2018. Installation of the SCR has been approved by the PSCW and is currently under
construction. MGE's share of the projected cost for the SCR system is estimated to be $22-$24 million,
with expected completion in 2018.
d. Legal Matters - MGE Energy and MGE.
MGE is involved in various legal matters that are being defended and handled in the normal course of
business. MGE maintains accruals for such costs that are probable of being incurred and subject to
reasonable estimation. The accrued amount for these matters is not material to the financial statements.
MGE does not expect the resolution of these matters to have a material adverse effect on its consolidated
results of operations, financial condition, or cash flows.
e. Other Commitments.
MGE Energy holds investments in nonpublic entities. From time to time, these entities require additional
capital infusions from their investors. MGE Energy has committed to contribute $11.4 million in capital
for such infusions. The timing of these infusions is dependent on the needs of the investee and is
therefore uncertain at this time.
97
In addition, MGE Energy has a three year agreement with a venture debt fund expiring in
December 2019. MGE Energy has committed to invest up to a total of $1.5 million into this fund. As of
December 31, 2016, MGE Energy has $0.4 million remaining in commitments. The timing of infusions is
dependent on the needs of the fund and is therefore uncertain at this time.
MGE has several other commitments related to various projects. Payments for these commitments are
expected to be as follows:
(In thousands)
2017
2018
2019
2020
2021
Other commitments ..................$
1,317 $
1,175 $
511 $
497 $
18. Asset Retirement Obligations - MGE Energy and MGE.
Thereafter
5,646
440 $
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, 2016, 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 summarizes the change in AROs. 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,............................ $
2016
24,360 $
1,303
1,269
(110)
64
26,886 $
2015
19,744
2,380
1,131
(124)
1,229
24,360
(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.
19. Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy
and MGE.
a. 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. The new standard establishes a five step model for recognizing and measuring revenue
from contracts with customers and replaces existing guidance on revenue recognition. The objective of
the new standard is to provide a single, comprehensive revenue recognition model for all contracts with
customers to improve comparability within industries, across industries and across capital markets. The
underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods or services.
98
MGE Energy and MGE have been assessing the impact of this guidance on revenue streams within the
scope of the new standard. All retail electric and gas revenues are tariff rates approved by the PSCW.
Based on our evaluation of the new standard, retail revenues will be recognized within the period in
which utility service is provided to the customer and the performance obligation is fulfilled, consistent
with our current revenue recognition model. Electric revenues for sales to the market represent wholesale
sales made to third parties who are not ultimate users of the electricity. These sales may also include
bilateral sales to other utilities or power marketers. Revenues for sales to the market will be recognized
when the sale is completed within the market operated by MISO, similar to the recognition under our
current revenue recognition model. In addition, revenues from the transportation of gas will continue to
be recognized upon the performance of services for the respective customer. Based on our assessment of
the new standard, revenue recognition for retail revenues, sales to the market, and transportation of gas
will be consistent with our current revenue recognition model. However, additional disclosures regarding
the nature, amount, timing, and uncertainty of these revenue streams and related cash flows arising from
contracts with customers will be required as a result of the new standard.
The Power and Utilities Task Force of the AICPA is formulating a utility industry-specific interpretation
of the guidance regarding the collectability threshold of probable within the new standard. The
collectability criterion could impact the timing of revenue recognition for uncollectible accounts. The
Power and Utilities Task Force of the AICPA is also requesting the FASB issue an industry-specific
clarification regarding the accounting treatment of upfront contributions in the aid of construction, also
known as CIAC. The final clarification on this topic could result in a material impact on the consolidated
financial statements. Management continues to analyze newly-released interpretative guidance and assess
the related impacts to the current revenue recognition model.
This authoritative guidance will become effective January 1, 2018, and MGE Energy and MGE
anticipate adopting the standard upon the effective date. Adoption of this standard is permitted under one
of two methods: the full retrospective method or the modified retrospective method. MGE Energy and
MGE are continuing to assess the permitted implementation methods and the impact on our financial
statements.
b. Consolidation.
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 became effective January 1, 2016. This guidance had no impact on our financial
statements.
c. 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 became effective January 1, 2016, and changed the presentation of debt issuance costs on the
balance sheet. Prior to the authoritative guidance, debt issuance costs were treated as a deferred asset, and
beginning January 1, 2016, these costs are included as a direct deduction to the related debt liability on
the consolidated balance sheets. As of December 31, 2016, assets (other deferred assets and other) and
liabilities (long-term debt) decreased approximately $3.9 million as a cumulative result of the guidance.
In addition, this guidance was applied retrospectively to all prior periods presented, resulting in a
decrease to assets and liabilities of $4.3 million for the year ended December 31, 2015.
d. Financial Instruments.
In January 2016, the FASB issued authoritative guidance within the Codification's Financial Instruments
topic that provides guidance on the recognition and measurement of financial instruments. This
authoritative guidance will become effective January 1, 2018, and will require equity investments to be
measured at fair value with changes in fair value recognized in net income rather than in other
comprehensive income. As a result of this guidance, MGE Energy and MGE will no longer have any
other comprehensive income. This standard will be applied using a modified retrospective approach, with
a cumulative effect adjustment recorded to opening retained earnings as of the beginning of all prior
periods presented.
99
e. Leases.
In February 2016, the FASB issued authoritative guidance within the Codification's Leases topic that
provides guidance on the classification, recognition, measurement, and disclosure of leases. The new
leasing standard establishes that a lease conveys the right to control the use of identified property, plant,
or equipment for a period of time in exchange for consideration. Under the new guidance, lessees will be
required to recognize all leases with terms greater than one year, including operating leases, on the
consolidated balance sheet by recording a right-of-use asset and lease liability. Prior to the authoritative
guidance, only capital leases were recognized on the balance sheet by lessees. The new accounting
guidance as applied by lessors is materially consistent from that applied under current GAAP.
Management has begun utilizing a bottoms-up approach to analyze the impact of the standard on our
lease portfolio. MGE Energy and MGE have been reviewing current accounting policies and procedures
to identify potential differences in accounting treatment that would result from applying the requirements
of the new standard to our existing lease portfolio. In addition, we are identifying appropriate changes to
our business processes, systems, and controls to support recognition and disclosure requirements under
the new standard. This authoritative guidance will become effective January 1, 2019, with early adoption
permitted. The new leasing standard requires entities to recognize and measure leases at the beginning of
the earliest comparative period presented using a modified retrospective approach. MGE Energy and
MGE are currently assessing the impact this pronouncement will have on our financial statements.
f. Restricted Cash.
In November 2016, the FASB issued authoritative guidance within the Codification's Statement of Cash
Flows topic that provides guidance on the classification and presentation of changes in restricted cash
within the statement of cash flows. The new standard was issued to eliminate a current diversity in
practice for the accounting treatment of restricted cash. Under the new guidance, reporting entities will
be required to explain the changes in the total of restricted and unrestricted cash and cash equivalents
when reconciling the beginning and ending balances on the statement of cash flows. Prior to the
authoritative guidance, changes in restricted cash were presented as either cash flows from operating,
investing, or financing activities within the statement of cash flows, as appropriate based on the nature of
the restriction. Also under the new standard, reporting entities will be required to provide a reconciliation
from the balance sheet to the statement of cash flows and disclose the nature of the restrictions of cash.
This authoritative guidance will become effective January 1, 2018. Upon the effective date, MGE Energy
and MGE will change the presentation of restricted cash to reflect this change in accounting guidance.
MGE Energy and MGE will also retrospectively apply the guidance to all prior periods presented. As of
December 31, 2016, MGE Energy and MGE had $5.1 million of restricted cash classified within other
current assets on the consolidated balance sheets.
20.
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 and MGEE Transco, in ATC Holdco, a company
formed to pursue electric transmission development and investments outside of Wisconsin. See Footnote 4 for
further discussion.
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.
100
General corporate expenses include the cost of executive management, corporate accounting and finance,
information technology, risk management, human resources and legal functions, and employee benefits that
are allocated to electric and gas segments based on formulas prescribed by the PSCW. Identifiable assets are
those used in MGE's operations in each segment. Assets not allocated consist primarily of cash and cash
equivalents, restricted cash, investments, other accounts receivable, and prepaid assets.
Sales between our electric and gas segments are based on PSCW approved tariffed rates. Additionally,
intersegment operations related to the leasing arrangement between our electric segment and MGE Power
Elm Road/MGE Power West Campus are based on terms previously approved by the PSCW. Consistent with
internal reporting, management has presented the direct financing capital leases between MGE and MGE
Power Elm Road/MGE Power West Campus based on actual lease payments included in rates. Lease
payments made by MGE to MGE Power Elm Road and MGE Power West Campus are shown as operating
expenses. The lease payments received by MGE Power Elm Road and MGE Power West Campus from MGE
are shown as lease income in interdepartmental revenues. The depreciation expense associated with the Elm
Road Units and WCCF is reflected in the nonregulated energy segment.
The following table shows segment information for MGE Energy's and MGE's operations:
(In thousands)
MGE Energy
Year Ended December 31, 2016
Operating revenues .................... $
Interdepartmental revenues ............
Total operating revenues ..............
Depreciation and amortization ........
Other operating expenses ..............
Operating income (loss) ...............
Other income, net ......................
Interest (expense) income, net ........
Income (loss) before taxes .............
Income tax (provision) benefit ........
Net income (loss) ...................... $
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) ...................... $
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Consolidated
Total
409,006 $
134,543 $
1,196 $
1,912
21,378
410,918
155,921
(29,122)
(8,128)
(310,941)
(127,083)
70,855
20,710
960
(11,147)
60,668
(20,115)
30
(3,223)
17,517
(6,894)
43,930
45,126
(7,372)
(155)
37,599
-
(5,768)
31,831
(12,775)
- $
-
-
-
(17)
(17)
8,429
-
8,412
(2,836)
- $
-
-
(24)
(895)
(919)
292
272
(355)
107
40,553 $
10,623 $
19,056 $
5,576 $
(248) $
- $
544,745
(67,220)
(67,220)
-
67,220
-
-
-
-
-
- $
-
544,745
(44,646)
(371,871)
128,228
9,711
(19,866)
118,073
(42,513)
75,560
412,528 $
143,737 $
7,763 $
- $
- $
- $
564,028
513
413,041
(29,945)
11,780
155,517
(6,758)
(318,001)
(128,241)
65,095
400
(11,187)
54,308
(17,915)
20,518
(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
(51,728)
(51,728)
-
51,728
-
-
-
-
-
36,393 $
10,367 $
20,098 $
4,607 $
(122) $
- $
-
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
395,358
(26,933)
8,366
230,086
(6,308)
(297,409)
(194,203)
71,016
2,847
(10,410)
63,453
(22,070)
29,575
(86)
(3,229)
26,260
(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
101
(In thousands)
MGE
Year Ended December 31, 2016
Operating revenues ............................... $
Interdepartmental revenues .......................
Total operating revenues .........................
Depreciation and amortization ...................
Other operating expenses(a).......................
Operating income(a) ...............................
Other (deductions) income, net(a) ................
Interest expense, net ..............................
Net income ........................................
Less: Net income attributable to
noncontrolling interest, net of tax ...............
Net income attributable to MGE ................. $
Year Ended December 31, 2015
Operating revenues ............................... $
Interdepartmental revenues .......................
Total operating revenues .........................
Depreciation and amortization ...................
Other operating expenses(a).......................
Operating income (loss)(a) ........................
Other (deductions) income, net(a) ................
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(a).......................
Operating income(a) ...............................
Other (deductions) income, net(a) ................
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(b)
Consolidation/
Elimination
Entries
Consolidated
Total
409,030 $
134,572 $
1,196 $
- $
- $
544,798
1,888
410,918
(29,122)
(330,924)
50,872
828
(11,147)
40,553
21,349
155,921
(8,128)
(133,940)
13,853
(7)
(3,223)
10,623
43,930
45,126
(7,372)
(12,930)
24,824
-
(5,768)
19,056
-
-
-
-
-
-
-
-
4,360
-
4,360
-
40,553 $
10,623 $
19,056 $
4,360 $
(67,167)
(67,167)
-
67,167
-
-
-
-
-
544,798
(44,622)
(410,627)
89,549
5,181
(20,138)
74,592
(23,358)
(23,358) $
(23,358)
51,234
412,550 $
143,752 $
7,763 $
- $
- $
564,065
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
-
36,393 $
10,367 $
20,098 $
4,607 $
(51,691)
(51,691)
-
51,691
-
-
-
-
-
564,065
(44,178)
(432,887)
87,000
4,848
(20,383)
71,465
(26,097)
(26,097) $
(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
-
41,383 $
15,780 $
19,289 $
5,486 $
(51,524)
(51,524)
-
51,524
-
-
-
-
-
619,895
(40,648)
(485,319)
93,928
7,857
(19,847)
81,938
(26,310)
(26,310) $
(26,310)
55,628
(a) Amounts are shown net of the related tax expense, consistent with the presentation on the MGE Consolidated Statements of Income.
(b) As of July 31, 2016, MGE no longer consolidates MGE Energy's proportionate share of equity earnings in MGE Transco.
See Footnote 4 for additional information.
102
The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:
(In thousands)
MGE Energy
Utility
Consolidated
Electric
Gas
Assets not
Allocated
Non-regulated
Energy
Transmission
Investment
All Others
Consolidation/
Elimination
Entries
Total
974,235
Assets:
December 31, 2016 ........... $ 1,021,905 $
December 31, 2015(c) .........
December 31, 2014(c) .........
Capital Expenditures:
Year ended Dec. 31, 2016 .... $
Year ended Dec. 31, 2015 ....
Year ended Dec. 31, 2014 ....
50,699 $
945,790
49,370
68,067
318,603 $
27,338 $
271,277 $
74,535 $
465,202 $
(377,800) $
1,801,060
298,435
306,106
49,753
41,124
277,858
280,542
69,470
67,697
434,868
438,898
(378,216)
1,726,403
(390,636)
1,689,521
29,136 $
- $
3,824 $
-
-
3,873
2,505
18,787
22,104
Utility
- $
-
-
- $
-
-
- $
-
-
83,659
72,030
92,676
Consolidated
(In thousands)
MGE
Electric
Gas
Assets not
Allocated
Non-regulated
Energy
Transmission
Investment(d)
Consolidation/
Elimination
Entries
Total
974,235
Assets:
December 31, 2016 ........... $ 1,021,905 $
December 31, 2015(c) .........
December 31, 2014(c) .........
Capital Expenditures:
Year ended Dec. 31, 2016 .... $
Year ended Dec. 31, 2015 ....
Year ended Dec. 31, 2014 ....
50,699 $
945,790
68,067
49,370
318,603 $
27,338 $
271,227 $
- $
(221) $
1,638,852
298,435
306,106
49,753
41,124
277,808
280,492
69,470
67,697
(187)
1,669,514
(6,521)
1,634,688
29,136 $
- $
3,824 $
18,787
22,104
-
-
3,873
2,505
- $
-
-
- $
-
-
83,659
72,030
92,676
(c) Reflects retrospective application of new accounting pronouncement related to debt issuance costs, see Footnote 19 for additional information.
(d) In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy, see Footnote 4 for additional information.
21. Quarterly Summary of Operations - MGE Energy (unaudited).
(In thousands, except per share amounts)
2016
Operating revenues:
Electric revenues ....................................... $
Gas 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 ...................................... $
2015
Operating revenues:
Electric revenues ....................................... $
Gas revenues .............................................
Total Operating Revenues ........................
Operating expenses .......................................
Operating income .........................................
Interest and other income, net ........................
Income tax provision ....................................
Earnings on common stock ............................ $
Earnings per common share ........................... $
Dividends per share ...................................... $
March 31
June 30
September 30 December 31
Quarters Ended
100,615 $
20,961
121,576
93,364
28,212
(2,778)
(9,284)
16,150 $
0.47 $
0.295 $
101,457 $
20,669
122,126
98,077
24,049
(2,562)
(8,008)
13,479 $
0.39 $
0.283 $
119,147 $
17,570
136,717
90,190
46,527
(2,933)
(15,714)
27,880 $
0.80 $
0.308 $
123,364 $
17,431
140,795
94,618
46,177
(2,472)
(15,351)
28,354 $
0.82 $
0.295 $
96,750
42,175
138,925
114,967
23,958
(1,886)
(7,570)
14,502
0.42
0.308
95,264
35,709
130,973
108,795
22,178
(3,529)
(7,417)
11,232
0.32
0.295
93,690 $
53,837
147,527
117,996
29,531
(2,558)
(9,945)
17,028 $
0.49 $
0.295 $
100,206 $
69,928
170,134
138,283
31,851
(2,986)
(10,587)
18,278 $
0.53 $
0.283 $
103
Notes:
The quarterly results of operations within a year may not be comparable because of seasonal and other
factors.
The sum of earnings per share of common stock for any four quarters may vary slightly from the earnings
per share of common stock for the equivalent twelve-month period due to rounding.
MGE Energy's operations are based primarily on its utility subsidiary MGE.
22. Related Party Transactions - MGE Energy and MGE.
ATC
During 2016, 2015, and 2014, MGE recorded $29.1 million, $28.2 million, and $26.8 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, 2016
and 2014, MGE had a receivable due from ATC of $0.1 million. For the year ended December 31, 2015,
MGE had a receivable due from ATC of $0.2 million.
For additional discussion on MGE's relationship with ATC, see Footnote 4.
104
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 2016, 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, 2016, 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, 2016, 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, 2016. As a result of that assessment, management determined that there
were no material weaknesses as of December 31, 2016 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.
105
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 (2017 Proxy Statement) to be filed
with the SEC on or before March 27, 2017. 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 2017 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 2017 Proxy Statement, which will be filed with the SEC on or before
March 27, 2017, for Item 11 under the section "EXECUTIVE COMPENSATION," not including "Compensation
Committee Report," and "Cumulative Five-Year Total Return Comparison Graph," and for Item 12 under the section
"BENEFICIAL OWNERSHIP," which is incorporated herein by reference.
MGE Energy does not have or maintain any compensation plans pursuant to which equity is issued.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
MGE Energy
The information required by Item 13 is incorporated by reference herein from the "BOARD OF DIRECTORS
INFORMATION" section in the 2017 Proxy Statement, which will be filed with the SEC on or before March 27,
2017.
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 2017 Proxy Statement, which will be filed with the SEC on or before March 27,
2017.
106
MGE
Independent Registered Public Accounting Firm Fees Disclosure
Audit fees(a) ............................................................................................. $
Audit-related fees(b) ..................................................................................
Tax fees(c) ................................................................................................
All other fees(d) .........................................................................................
2016
823,495 $
75,000
83,027
236,509
2015
822,605
75,000
137,965
7,900
(a) Professional services rendered for the audits of the financial statements, review of the interim financial
statements, opinion on the effectiveness of our internal control over financial reporting for MGE Energy,
and services that generally only the independent auditor can reasonably provide, such as comfort letters,
statutory audits, consents and assistance with and review of documents filed with the SEC.
(b) Professional services rendered in connection with utility commission-mandated obligations.
(c) Review of federal and state income tax returns and tax planning.
(d) Other fees for 2016 include customer information system advisory services and a cyber-security risk
assessment.
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.
107
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, 2016, 2015, and 2014 .................. 54
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and
2014 ............................................................................................................................................................ 54
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014 ............ 55
Consolidated Balance Sheets as of December 31, 2016 and 2015 .............................................................. 56
Consolidated Statements of Common Equity as of December 31, 2016, 2015, and 2014 ........................... 57
Notes to Consolidated Financial Statements ............................................................................................... 62
MGE
Consolidated Statements of Income for the years ended December 31, 2016, 2015, and 2014 .................. 58
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015, and
2014 ............................................................................................................................................................ 58
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015, and 2014 ............ 59
Consolidated Balance Sheets as of December 31, 2016 and 2015 .............................................................. 60
Consolidated Statements of Common Equity as of December 31, 2016, 2015, and 2014 ........................... 61
Notes to Consolidated Financial Statements ............................................................................................... 62
2.
Financial Statement Schedule.
Schedule I – Condensed Parent Company Financial Statements.
Schedule II – Valuation and Qualifying Accounts for MGE Energy, Inc. and Madison Gas and Electric
Company.
All other schedules have been omitted because they are not applicable or not required, or because the required
information is shown in the consolidated financial statements or notes thereto.
3.
All Exhibits Including Those Incorporated by Reference.
Exhibits. Several of the following exhibits are incorporated herein by reference under Rule 12b-32 of the
Securities Exchange Act of 1934, as amended, 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
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.)
108
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
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.)
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.)
109
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.)
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.)
110
10.24 Substation and Transformer Shared Use Agreement and Easement Agreement, dated as of
September 29, 2006, among Madison Gas and Electric Company and Northern Iowa Windpower II
LLC as Joint Owners. (Exhibit 10.6 to Form 10-Q for the quarter ended September 30, 2006, File
No. 0-1125.)
10.25 Management and Administration Agreement, dated as of October 13, 2006, among Madison Gas and
Electric Company as Owner and Midwest Renewable Energy Resources, LLC as Manager. (Exhibit
10.7 to Form 10-Q for the quarter ended September 30, 2006, File No. 0-1125.)
10.26* Form of Severance Agreement. (Exhibit 10.37 to Form 10-K for the year ended December 31, 2008,
File No. 0-49965.)
10.27* Form of Amendment to Severance Agreement. (Exhibit 10.01 to Form 10-Q for the quarter ended
March 31, 2016, File No. 0-49965.)
10.28* Form of Severance Agreement for Officers hired on or after January 1, 2012. (Exhibit 10.2 to Form
10-Q for the quarter ended March 31, 2016, 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 as revised January 1, 2016. (Exhibit 10.3 to Form 10-Q for
the quarter ended March 31, 2016, File No. 0-49965.)
10.32* Defined Contribution Supplemental Executive Retirement Plan
10.33* Form of Participation Agreement for the Defined Contribution Supplemental Executive Retirement
Plan
10.34* 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.)
10.35* 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.)
10.36* 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.)
10.37* Form of Performance Unit Award Agreement. (Exhibit 10.42 to Form 10-K for the year ended
December 31, 2008, File No. 0-49965.)
10.38* Form of Amendment to Performance Unit Award Agreement. (Exhibit 10.1 to Form 8-K dated
April 15, 2011, File No. 0-49965.)
10.39* 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.)
10.40* 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
Statements regarding computation of ratio of earnings to fixed charges:
12.1
12.2
MGE Energy, Inc.
Madison Gas and Electric Company
21
Subsidiaries of MGE Energy, Inc.
111
23
31
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, 2016, 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
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, 2016,
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.
Item 16. Form 10-K Summary.
MGE Energy and MGE
None.
112
Schedule I
Condensed Parent Company Financial Statements
MGE Energy, Inc.
Statements of Comprehensive Income
(Parent Company Only)
(In thousands)
For the Years Ended December 31,
2015
2016
2014
Operating Expenses:
Other operations and maintenance ..................................................... $
Total Operating Expenses .............................................................
Operating Loss ..................................................................................
Equity in earnings of investments ..........................................................
Other income (loss), net .......................................................................
Other interest ......................................................................................
Income before income taxes ..............................................................
Income tax provision ............................................................................
Net Income ........................................................................................
Other Comprehensive Income, Net of Tax:
Unrealized (loss) gain on available-for-sale securities, net of
tax ($104, $67, and ($54)) .................................................................
Comprehensive Income ...................................................................... $
720 $
720
(720)
75,581
435
176
75,472
88
75,560
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
(155)
75,405 $
(101)
71,242 $
81
80,400
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,
2015
2016
2014
Net Cash Flows Provided by Operating Activities ............................... $
Investing Activities:
Other investing ................................................................................
Cash Used for Investing Activities ..................................................
Financing Activities:
Cash dividends paid on common stock ...............................................
Other financing ................................................................................
Cash Used for Financing Activities .................................................
Change in cash and cash equivalents: .................................................
Cash and cash equivalents at beginning of period ................................
Cash and cash equivalents at end of period ..................................... $
74,994 $
37,085 $
48,165
(2,764)
(2,764)
(3,690)
(3,690)
(41,775)
(11)
(41,786)
30,444
51,781
82,225 $
(40,043)
-
(40,043)
(6,648)
58,429
51,781 $
(2,422)
(2,422)
(38,429)
(89)
(38,518)
7,225
51,204
58,429
The accompanying notes are an integral part of the above consolidated financial statements.
113
Schedule I
Condensed Parent Company Financial Statements (continued)
MGE Energy, Inc.
Balance Sheets
(Parent Company Only)
(In thousands)
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,
2016
2015
82,225 $
51,781
83
1,221
83,529
201
684,968
1,161
686,129
769,859 $
530 $
218
115
863
40,672
4,236
44,908
350,936
372,950
202
724,088
-
769,859 $
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
The accompanying notes are an integral part of the above consolidated financial statements.
114
Schedule I
Condensed Parent Company Financial Statements (continued)
Notes to Condensed Financial Statements
(Parent Company Only)
1.
Basis of Presentation.
MGE Energy is a holding company and conducts substantially all of its business operations through its
subsidiaries. For Parent Company only presentation, investment in subsidiaries are accounted for using the
equity method. These condensed Parent Company financial statements and related notes have been prepared
in accordance with Rule 12-04, Schedule I of Regulation S-X. These statements should be read in
conjunction with the financial statements and the notes in Item 8. Financial Statements and Supplementary
Data of the Annual Report on Form 10-K for the year ended December 31, 2016.
2.
Credit Agreements.
As of December 31, 2016, MGE Energy had access to an unsecured, committed credit facility with aggregate
bank commitments of $50.0 million. At December 31, 2016, 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 17 of the Notes to Consolidated Financial Statements for commitments and contingencies.
4.
Dividends from Affiliates.
(In thousands)
MGE(a) ............................................................................ $
MGE Power Elm Road......................................................
MGE Power West Campus ................................................
MGE Transco ..................................................................
Total ............................................................................... $
Dividends from Affiliates
2015
2016
2014
50,000 $
13,500
9,500
1,107
74,107 $
30,000 $
10,000
3,000
1,708
44,708 $
26,500
13,500
6,000
1,859
47,859
(a) Excludes $15.8 million dividend in kind to MGE Energy from 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, 2016, is 60.2% as determined under the calculation used in the rate proceeding.
MGE was not restricted from paying cash dividends in 2016. Cash dividends of $50.0 million and
$30.0 million were paid by MGE to MGE Energy in 2016 and 2015, respectively. In 2016, MGE also
transferred its ownership interest in MGE Transco to MGE Energy in the form of a dividend in kind of
$15.8 million. 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, 2016, approximately $338.5 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.
115
Schedule II
MGE Energy, Inc. and Madison Gas and Electric Company
Valuation and Qualifying Accounts
Additions
Balance at
Beginning of
Period
Charged to
Costs and
Expenses
Charged to
Other
Accounts
Net Accounts
Written Off(a)
Balance at
End of Period
Fiscal Year 2014:
Accumulated provision for uncollectibles
Fiscal Year 2015:
Accumulated provision for uncollectibles
Fiscal Year 2016:
Accumulated provision for uncollectibles
$
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
$
3,694,080
1,195,500
19,500
(1,465,784) $
3,443,296
(a) Net of recovery of amounts previously written off.
116
Signatures - MGE Energy, Inc.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
MGE Energy, Inc.
(Registrant)
Date: February 24, 2017
/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 24, 2017.
/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
117
Signatures - Madison Gas and Electric Company
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Madison Gas and Electric Company
(Registrant)
Date: February 24, 2017
/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 24, 2017.
/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
2016 annual report
Corporate profile
Table of Contents
1. 2016 Highlights
MGE Energy, Inc.
MGE Energy is an investor-owned public utility
2. Letter to our shareholders
holding company headquartered in the state
6. Partnering for sustainability
capital of Madison, Wis. MGE Energy is the
8. Partnering for a dynamic, integrated grid
parent company of Madison Gas and Electric
10. Partnering to innovate
Co. The utility provides natural gas and electric
12. Partnering for a strong community
service in south-central and western Wisconsin.
14. Corporate leadership
Assets total approximately $1.8 billion. In 2016,
16. Shareholder information
revenue was approximately $545 million. See
Financials: Form 10-K
the Corporate Profile on the inside back cover.
Partnerships
About the cover
Partnering with our customers and communities is key to how we
move forward. New opportunities, technologies and investments
are opening the doors to a more sustainable future. It’s the power
of working together.
Madison Gas and
Electric Company
MGE Transco
Investment LLC
MGEE Transco, LLC
MGE Power LLC
MAGAEL, LLC
Central Wisconsin
Development
Corporation
MGE 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 holds an
ownership interest in ATC LLC, which
invests in transmission assets, primarily
within Wisconsin.
MGEE Transco LLC holds an ownership
interest in ATC Holdco, which invests in
transmission assets outside ATC LLC
service territory.
MGE Electric Services
Generation and Distribution
Customers: 149,000
Population: 319,500
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 Power
West Campus, LLC
MGE Power
Elm Road, LLC
North Mendota
Energy & Technology
Park, LLC
NGV Fueling
Services, LLC
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 Natural Gas Services
Purchase and Distribution
Customers: 154,000
Population: 443,200
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
2016 ANNUAL REPORT
Partnerships
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Learn more at mgeenergy.com
MGE is committed to environmental stewardship. This report is printed on recycled paper.