United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the :
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ _______________
Commission File No. | Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone No. | IRS Employer Identification No. |
(a ( | ||
(a ( |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
Title of Class |
Trading Symbol | Name of Each Exchange on which Registered |
MGE Energy, Inc. | The |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
| Title of Class |
Madison Gas and Electric Company | Common Stock, $1 Par Value Per Share |
Indicate by check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.
MGE Energy, Inc.
Indicate by check mark if the registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
MGE Energy, Inc. Yes ☐
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.
MGE Energy, Inc.
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrants were required to submit and post such files):
MGE Energy, Inc.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
| Large Accelerated Filer | Accelerated Filer | Non-accelerated Filer | Smaller Reporting Company | Emerging Growth Company |
MGE Energy, Inc. | ☐ | ☐ | |||
Madison Gas and Electric Company | ☐ | ☐ |
If an emerging growth company, indicate by checkmark if the registrants have elected not to use the extended transition period for complying with any new or revised financial reporting standards provided pursuant to Section 13(a) of the Exchange Act.
MGE Energy, Inc. ☐ Madison Gas and Electric Company ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
MGE Energy, Inc. Yes ☐ No Madison Gas and Electric Company Yes ☐ No
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2020 was as follows:
$ | |
| $0 |
The number of shares outstanding of each registrant's common stock as of January 31, 2021, were as follows:
MGE Energy, Inc. | |
Madison Gas and Electric Company |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of MGE Energy, Inc.'s definitive proxy statement to be filed before April 30, 2021, 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).
Table of Contents
Where to Find More Information4
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report5
Item 1B. Unresolved Staff Comments.27
Item 4. Mine Safety Disclosures30
Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.31
Item 6. Selected Financial Data.33
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk55
Item 8. Financial Statements and Supplementary Data.62
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.116
Item 9A. Controls and Procedures.116
Item 9B. Other Information.116
Item 10. Directors, Executive Officers, and Corporate Governance.117
Item 11. Executive Compensation.117
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.117
Item 13. Certain Relationships and Related Transactions, and Director Independence.117
Item 14. Principal Accounting Fees and Services.118
Item 15. Exhibits and Financial Statement Schedules.119
Item 16. Form 10-K Summary.122
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 16. 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:
CWDCCentral Wisconsin Development Corporation
MAGAELMAGAEL, LLC
MGEMadison Gas and Electric Company
MGE EnergyMGE Energy, Inc.
MGE PowerMGE Power, LLC
MGE Power Elm RoadMGE Power Elm Road, LLC
MGE Power West CampusMGE Power West Campus, LLC
MGE ServicesMGE Services, LLC
MGE State Energy ServicesMGE State Energy Services, LLC
MGE TranscoMGE Transco Investment, LLC
MGEE TranscoMGEE Transco, LLC
North MendotaNorth Mendota Energy & Technology Park, LLC
Other Defined Terms:
2006 PlanMGE Energy's 2006 Performance Unit Plan
2013 PlanMGE Energy's 2013 Director Incentive Plan
2017 Tax ActTax Cuts and Jobs Act of 2017
2020 PlanMGE Energy's 2020 Performance Unit Plan
2021 Incentive PlanMGE Energy's 2021 Long-Term Incentive Plan
ACEAffordable Clean Energy
AFUDCAllowance for Funds Used During Construction
ANRANR Pipeline
AROAsset Retirement Obligation
ATCAmerican Transmission Company LLC
ATC HoldcoATC Holdco, LLC
Badger Hollow IBadger Hollow I Solar Farm
Badger Hollow IIBadger Hollow II Solar Farm
BARTBest Available Retrofit Technology
BlountBlount Station
BTABest Technology Available
CACertificate of Authority
CAAClean Air Act
CAVRClean Air Visibility Rule
CCRCoal Combustion Residual
CO2Carbon Dioxide
codificationFinancial Accounting Standards Board Accounting Standards Codification
ColumbiaColumbia Energy Center
Cooling degree daysMeasure 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
COVID-19Coronavirus Disease 2019
COSOCommittee of Sponsoring Organizations
CPPClean Power Plan
CSAPRCross-State Air Pollution Rule
CWAClean Water Act
D.C. CircuitUnited States Court of Appeals for the District of Columbia Circuit
DthDekatherms
EEIEdison Electric Institute
electric marginElectric revenues less fuel for electric generation and purchase power costs, a non-GAAP measure
ELGEffluent Limitations Guidelines
Elm Road UnitsElm Road Generating Station
EPAUnited States Environmental Protection Agency
FASBFinancial Accounting Standards Board
FERCFederal Energy Regulatory Commission
Forward WindForward Wind Energy Center
5
FTRFinancial Transmission Rights
GAAPGenerally Accepted Accounting Principles
gas marginGas revenues less cost of gas sold, a non-GAAP measure
GHGGreenhouse Gas
heating degree days (HDD)Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating
ICFInsurance Continuance Fund
IPCCIntergovernmental Panel on Climate Change
IRSInternal Revenue Service
kVAKilovolt Ampere
KWKilowatt, a measure of electric energy generating capacity
kWhKilowatt-hour
MISOMidcontinent Independent System Operator, Inc. (a regional transmission organization)
MROMidwest Reliability Organization
MWMegawatt
MWhMegawatt-hour
NAAQSNational Ambient Air Quality Standards
NasdaqThe Nasdaq Stock Market
NERCNorth American Electric Reliability Corporation
NNGNorthern Natural Gas Company
NOVNotice of Violation
NOxNitrogen Oxides
NYSENew York Stock Exchange
O'BrienO'Brien Solar Fields
OSCEState of Wisconsin's Office of Sustainability and Clean Energy
Paris AgreementParis Agreement under the United Nations Framework Convention on Climate Change
PCBsPolychlorinated Biphenyls
the PetitionPetition for Judicial Review of Agency Action
PGAPurchased Gas Adjustment clause
PHMDCPublic Health Madison & Dane County
PHMDC DirectivesPublic Health Madison & Dane County's Forward Dane Plan and related emergency orders
PJMPJM Interconnection, LLC (a regional transmission organization)
PMParticulate Matter
PPAPurchased power agreement
PSCWPublic Service Commission of Wisconsin
RECRenewable Energy Credit
RERRenewable Energy Rider
RiversideRiverside Energy Center in Beloit, Wisconsin
ROEReturn on Equity
RTORegional Transmission Organization
SaratogaSaratoga Wind Farm
SCRSelective Catalytic Reduction
SECSecurities and Exchange Commission
SIPState Implementation Plan
SO2Sulfur Dioxide
the StateState of Wisconsin
Stock PlanDirect Stock Purchase and Dividend Reinvestment Plan of MGE Energy
Two CreeksTwo Creeks Solar Farm
UWUniversity of Wisconsin at Madison
VIEVariable Interest Entity
WCCFWest Campus Cogeneration Facility
WDNRWisconsin Department of Natural Resources
WEPCOWisconsin Electric Power Company
working capitalCurrent assets less current liabilities
WPDESWisconsin Pollutant Discharge Elimination System
WPLWisconsin Power and Light Company
WPSCWisconsin Public Service Corporation
WRERAWorker, Retiree and Employer Recovery Act of 2008
XBRLeXtensible Business Reporting Language
6
PART I.
Item 1. Business.
MGE Energy operates in the following business segments:
Regulated electric utility operations – generating, purchasing, and distributing electricity through MGE.
Regulated gas utility operations – purchasing and distributing natural gas through MGE.
Nonregulated energy operations – owning and leasing electric generating capacity that assists MGE through MGE Energy's wholly owned subsidiaries MGE Power Elm Road and MGE Power West Campus.
Transmission investments – representing our investment in American Transmission Company LLC, a company engaged in the business of providing electric transmission services primarily in Wisconsin, and our investment in ATC Holdco LLC, a company created to facilitate out-of-state electric transmission development and investments.
All other – investing in companies and property that relate to the regulated operations and financing the regulated operations, through its wholly owned subsidiaries CWDC, MAGAEL, MGE State Energy Services, North Mendota, and Corporate functions.
MGE's utility operations represent a majority of the assets, liabilities, revenues, expenses, and operations of MGE Energy. MGE Energy's nonregulated energy operations currently include an undivided interest in two coal-fired generating units located in Oak Creek, Wisconsin, which we refer to as the Elm Road Units, and an undivided interest in a cogeneration facility located on the Madison campus of the University of Wisconsin, which we refer to as the West Campus Cogeneration Facility or WCCF.
As a public utility, MGE is subject to regulation by the PSCW and the FERC. The PSCW has authority to regulate most aspects of MGE's business including rates, accounts, issuance of securities, and plant siting. The PSCW also has authority over certain aspects of MGE Energy as a holding company of a public utility. FERC has jurisdiction, under the Federal Power Act, over certain accounting practices and certain other aspects of MGE's business.
MGE Energy's subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal. See "Environmental" below.
MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized as a Wisconsin corporation in 1896. Our principal offices are located at 133 South Blair Street, Madison, Wisconsin 53788, and our telephone number is (608) 252-7000.
With the global outbreak of the Coronavirus Disease 2019 (COVID-19) and the declaration of a pandemic by the World Health Organization on March 11, 2020, U.S. governmental authorities have deemed electric and gas utilities to be critical infrastructure. MGE Energy therefore has an obligation to keep operating and maintaining our critical electric and gas infrastructure. Since then, MGE Energy has been subject to, and is following, local, state and federal public health and safety regulations and guidance to control the pandemic. MGE Energy has operated continuously throughout the pandemic and has suffered no material disruptions in service or employment.
Electric Utility Operations
MGE distributes electricity in a service area covering a 264 square-mile area of Dane County, Wisconsin. The service area includes the city of Madison, Wisconsin. It owns or leases ownership interests in electric generation facilities located in Wisconsin and Iowa.
As of December 31, 2020, MGE supplied electric service to approximately 157,000 customers, with approximately 90% located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas. Of the total
7
number of customers, approximately 87% were residential and 13% were commercial or industrial.
Electric retail revenues for 2020, 2019, and 2018 were comprised of the following:
|
|
| Year Ended December 31, |
| ||||
|
|
| 2020(a) |
| 2019 |
| 2018 |
|
| Residential |
| 37.6% |
| 34.8% |
| 35.4% |
|
| Commercial |
| 50.9% |
| 53.2% |
| 52.3% |
|
| Industrial |
| 3.0% |
| 3.2% |
| 3.6% |
|
| Public authorities (including the UW) |
| 8.5% |
| 8.8% |
| 8.7% |
|
| Total |
| 100.0% |
| 100.0% |
| 100.0% |
|
(a)In late March 2020, we began to see a shift in commercial and residential sales due to the impacts of COVID-19 and associated governmental regulations on customer demand. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further information.
Electric operations accounted for approximately 73.2%, 71.9%, and 71.8% of MGE's total 2020, 2019, and 2018 regulated revenues, respectively.
See Item 2. Properties for a description of MGE's electric utility plant.
MGE is registered with North American Electric Reliability Corporation (NERC) and one regional entity, the Midwest Reliability Organization (MRO). The essential purposes of these entities are to develop and implement regional and NERC reliability standards and determine compliance with those standards, including enforcement mechanisms.
Transmission
American Transmission Company LLC (ATC) was formed by Wisconsin-based 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. ATC is also regulated by the PSCW for 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 across 15 U.S. states and the Canadian province of Manitoba.
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.
PJM
MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the
8
operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
Fuel supply and generation
MGE satisfies its customers' electric demand with internal generation and purchased power. MGE's current fuel mix for generation fluctuates from year-to-year due to fuel pricing in the market, generating unit availability, weather, and customer demand. MGE has a responsibility to its customers to dispatch the lowest cost generation available pursuant to regulatory requirements.
During 2020, 2019, and 2018, MGE's electric energy delivery requirements were satisfied from the following fuel sources:
| (in MWh) |
| 2020 |
| 2019 |
| 2018 |
|
| Coal |
| 1,566,204 |
| 1,751,224 |
| 1,869,981 |
|
| Natural gas |
| 502,387 |
| 501,093 |
| 492,291 |
|
| Renewable sources(a) |
| 485,965 |
| 470,716 |
| 373,271 |
|
| Fuel oil |
| 472 |
| 695 |
| 578 |
|
| Purchased power - other(b)(c) |
| 789,058 |
| 762,894 |
| 836,741 |
|
| Total fuel sources |
| 3,344,086 |
| 3,486,622 |
| 3,572,862 |
|
|
|
|
|
|
|
|
|
|
| Adjusted total fuel sources(c) |
| 3,663,569 |
| 3,807,652 |
| 3,842,502 |
|
(a) Includes both internal generation and purchased power.
(b) Includes third-party purchased power and MISO market activity. A significant percentage of MGE's electric supply comes from internal generation sources. MGE supplements this internal generation with long-term purchase power agreements and spot purchases in the MISO market.
(c) The MISO market consists of two energy markets, the Day-ahead market and the Real-time market. The table above nets purchases and sales within the same hour in the two MISO markets. For the years ended December 31, 2020, 2019, and 2018, the amount netted between Day-ahead and the Real-time MISO markets was 319,483 MWh, 321,030 MWh, and 269,640 MWh, respectively. These amounts are reflected in "Adjusted total fuel sources."
MGE's Energy 2030 framework describes our plan for growth in renewables generation. This growth is expected to continue as legacy fossil fuel-fired facilities are retired and replaced with renewables, such as wind and solar assets, and battery storage solutions are developed and implemented. In February 2021, MGE and the other co-owners of Columbia, a two-unit coal-fired generation facility located near Portage, Wisconsin, announced plans to retire that facility. MGE currently owns 19% of the facility. The co-owners intend to retire Unit 1 by the end of 2023 and Unit 2 by the end of 2024. Final timing and retirement dates for Units 1 and 2 are subject to PSCW and regional regulatory reviews, including identification and approval of energy and capacity resources to replace Columbia.
MGE's carbon reduction goals are aligned with those of the scientific community, specifically the Intergovernmental Panel on Climate Change (IPCC), which has recognized the need to hold an increase in the global average temperature to well below 2°C above pre-industrial levels. The IPCC also calls for efforts to limit the temperature increase to 1.5°C above pre-industrial levels to significantly reduce the risks and most adverse impacts of climate change. The IPCC further recognized that holding global average temperature rise to the more aggressive scenario (1.5°C limit) requires CO2 emissions to reach net-zero around 2050.
Consistent with that objective, MGE is targeting net-zero carbon electricity by 2050. In November 2020, the University of Wisconsin-Madison's Nelson Institute for Environmental Studies released its analysis of MGE's goal of net-zero carbon electricity by 2050. The study determined that our goal is aggressive and is consistent with the latest climate science. Our solar and wind projects, as described below, are a major step toward deep decarbonization and greater use of clean energy sources in pursuit of our net-zero carbon goal. Additionally, MGE seeks to reduce its use of fossil fuels and work to help customers with energy efficiency and electrification, including transportation.
MGE's carbon footprint is expected to decrease as it transitions to more renewable generation resources. This decrease is due in part to our investments in the following renewable generation resources: Forward Wind, purchased in 2018; Saratoga (wind), which became operational in February 2019; Two Creeks (solar), which
9
became operational in November 2020; and Badger Hollow I and II (solar), which are expected to enter commercial operation in April 2021 for phase I and by the end of 2022 for phase II.
MGE is working to achieve a more sustainable energy future using cost-effective renewable generation technologies for customers. Our Renewable Energy Rider and Shared Solar programs reduce MGE's carbon emissions while providing customers the ability to purchase renewable energy to meet their energy needs.
Renewable Energy Rider (RER) – Under this program, MGE partners with large energy users on customized renewable energy solutions to meet their specific energy needs. MGE owns the generation assets and RER customers are billed a contractual renewable resource rate for all costs associated with the construction and ongoing operations of the renewable generation facility. This contractual rate is approved by the PSCW and subject to terms and conditions specified in the RER rate schedule. The program entitles RER customers to the entire contractual energy output of the renewable energy resource. MGE will continue to recover the distribution system costs related to the energy consumed by these customers. In 2020, MGE completed construction of the Morey Field RER solar project (1.5MW) serving the City of Middleton and Middleton-Cross Plains School District and the Dane County RER solar project (9MW). Construction of a 20MW RER project (O'Brien Solar Fields, primarily serving governmental entities such as UW-Madison, Wisconsin Department of Administration, and the City of Fitchburg) has begun and is expected to be completed mid-2021. MGE is currently awaiting PSCW approval for an additional 8MW RER project serving the City of Madison and Madison Metropolitan School District.
Shared Solar Program – This program provides an opportunity for eligible customers to add locally-generated solar to their energy mix without having to install solar panels on their premises. The first solar array associated with this program, owned by MGE, became operational in 2017 and was fully subscribed for its capacity value of 500 KW. MGE recently expanded the program by completing construction of a second solar facility (Morey Field), which added 3.5 MW of capacity to the program in 2020.
Since 2015, MGE has announced several new utility-scale wind and solar projects, including Saratoga, Forward Wind, Two Creeks, Badger Hollow I & II, and other RER and Shared Solar facilities. These projects will be operational by the end of 2022 or are, in the cases of Saratoga, Forward Wind, Two Creeks, and certain RER and Shared Solar facilities, currently operational. Since introducing the Energy 2030 framework in November 2015, we have announced projects that we expect will increase our owned renewable capacity by almost 675% by the end of 2022.
Generation sources
MGE receives electric generation supply from coal-fired, gas-fired, and renewable energy sources. These sources include owned facilities as well as facilities leased from affiliates and accounted for under our nonregulated energy operations. See Item 2. Properties for more information regarding these generation sources, including location, capacity, ownership or lease arrangement, and fuel source. See "Nonregulated Energy Operations" below for more information regarding generating capacity leased to MGE by nonregulated subsidiaries.
Purchased power
MGE enters into short- and long-term purchase power commitments with third parties to meet a portion of its anticipated electric energy supply needs. The following table identifies purchase power commitments as of December 31, 2020, with unaffiliated parties for the next five years.
| (Megawatts) |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
|
| Purchase power commitments |
| 83 |
| 33 |
| 30 |
| 30 |
| 30 |
|
Gas Utility Operations
MGE transports and distributes natural gas in a service area covering 1,684 square miles in seven south-central Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.
As of December 31, 2020, MGE supplied natural gas service to approximately 166,000 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 2020, 2019, and 2018 were comprised of the following:
10
|
| Year Ended December 31, |
| ||||
|
| 2020 |
| 2019 |
| 2018 |
|
| Residential | 61.6% |
| 59.5% |
| 59.4% |
|
| Commercial | 33.4% |
| 35.8% |
| 35.8% |
|
| Industrial | 1.1% |
| 1.1% |
| 1.6% |
|
| Transportation service and other | 3.9% |
| 3.6% |
| 3.2% |
|
| Total | 100.0% |
| 100.0% |
| 100.0% |
|
Gas operations accounted for approximately 26.8%, 28.1%, and 28.2% of MGE's total 2020, 2019, and 2018 regulated revenues, respectively.
MGE can curtail gas deliveries to interruptible customers. These are customers who agree to reduce their load in the case of an emergency interruption. Approximately 3% of retail gas deliveries in 2020, 2019 and 2018 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 the mid-continent and Gulf Coast regions of the United States.
During the winter months, when customer demand is high, MGE is primarily concerned with meeting its obligation to 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 5,922,505 Dth of gas can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations.
MGE's contracts for firm transportation service of gas include winter maximum daily quantities of:
• 175,650 Dth (including 106,078 Dth of storage withdrawals) on ANR.
• 66,378 Dth on NNG.
Nonregulated Energy Operations
MGE Energy, through our subsidiaries, has developed generation sources that assist MGE in meeting the electricity needs of our customers. These sources consist of the Elm Road Units and the WCCF, which are owned by subsidiaries of MGE Energy and leased 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, a wholly-owned subsidiary of MGE Energy. As of December 31, 2020, MGE Transco held a 3.6% ownership interest in ATC.
In 2016, ATC Holdco was formed by several of the members of ATC, including MGE Energy, to facilitate electric transmission development and investments outside of Wisconsin, which typically have long development and investment lead times before becoming operational. ATC Holdco's future transmission development activities have been suspended for the near term. MGE Energy's ownership interest in ATC Holdco is held by MGEE Transco, a
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wholly-owned subsidiary. As of December 31, 2020, MGEE Transco held a 4.4% ownership interest in ATC Holdco.
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 we conduct our 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 state and federal regulations governing surface water and/or groundwater containing per- and polyfluoroalkyl substances, potential changes to regulations governing polychlorinated biphenyl (PCB), potential changes to air and water standards, and potential climate change legislation.
In February 2021, MGE and the other co-owners of Columbia announced plans to retire that facility. The co-owners intend to retire Unit 1 by the end of 2023 and Unit 2 by the end of 2024. Final timing and retirement dates for Units 1 and 2 are subject to PSCW and regional regulatory reviews, including identification and approval of energy and capacity resources to replace Columbia. Effects of environmental compliance discussed below will depend upon the final approved retirement dates and compliance requirement dates.
Federal and State Environmental Compliance During the Current Pandemic
MGE was identified as an essential business under the State of Wisconsin's Safer at Home directive. It has been operating with full staff and has continued to prioritize its compliance with all applicable environmental regulations. MGE continues to follow local orders, as well as state Department of Health and Center for Disease Control guidance to operate in a manner to address potential spread of COVID-19 in order for the essential utility services to operate without interruptions. Due to the essential nature of the work that many MGE employees perform, MGE requested and received approval for certain critical employees to be included in Phase 1B of Wisconsin's Vaccination Distribution Plan as part of the "Non-EMS First Responder" group. Vaccinations for this group are forthcoming; a tentative date is set for March 1, 2021. The EPA and the WDNR have both provided guidance for regulated entities if compliance with regulations becomes unfeasible due to the current severity of COVID-19. In late June 2020, the EPA announced that COVID-19 guidance would sunset on August 31, 2020. MGE has developed contingencies for remaining in compliance during the pandemic and does not expect to rely on state or federal noncompliance relief. However, management cannot predict with certainty whether COVID-19 will disrupt these compliance activities. MGE expects to continue to build contingencies into compliance operations and communicate with regulators as needed during this unprecedented time.
Water Quality
EPA's Effluent Limitations Guidelines and Standards for Steam Electric Power Generating Point Source Category
In August 2020, the EPA finalized rule modifications to the Effluent Limitations Guidelines (ELG) for the steam electric power generating industry. The ELG rule establishes federal limits on the amount of metals and other pollutants that can be discharged in wastewater from new and existing steam electric generation plants. The rule will be applied to Wisconsin-based power plants as they renew their WPDES permits, but no later than December 31, 2023. The Columbia and Elm Road Units are subject to this rule. See Footnote 16.a. of the Notes to the Consolidated Financial Statements in this Report for further discussion of compliance plans for Columbia and the Elm Road Units. 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 to reduce mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens). The EPA finalized its Section 316(b) rule for existing facilities in 2014. Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES permits, which govern plant wastewater discharges.
WCCF, Blount, and Columbia are considered existing plants under this rule. WCCF employs a system that meets the
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Section 316(b) rule. Blount's WPDES permit assumes that the plant meets best technology available (BTA) for the duration of the permit, which expires in 2023. However, MGE must perform an entrainment study by the end of 2021 to determine future BTA, which will be included with the next permit renewal. Section 316(b) applies to river intakes at the Columbia plant. Columbia's operator received a permit in 2019 requiring studies of intake structures to help determine BTA. BTA improvements may not be required given that Columbia could be fully retired before the issuance of the next permit, which is expected to be issued in 2023 or later. MGE will continue to work with Columbia's operator to evaluate all regulatory requirements applicable to the planned retirements. Management believes that the Section 316(b) rule will not have a material effect on its existing plants and that any compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.
Air Quality
Air quality regulations promulgated by the EPA and Wisconsin Department of Natural Resources (WDNR) in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), hazardous air pollutants and other pollutants, and require permits for operation of emission sources. These permits must be renewed periodically. Various newly enacted and/or proposed federal and state initiatives may result in additional operating and capital expenditure costs for fossil-fueled electric generating units.
Ozone NAAQS
In May 2018, the EPA issued a final rule designating the northeast portion of Milwaukee County as being in nonattainment with Ozone National Ambient Air Quality Standards (NAAQS). The Elm Road Units are located in Milwaukee County, outside the designated nonattainment area. In August 2018, several environmental groups, the City of Chicago, and the State of Illinois filed federal lawsuits challenging several of the EPA's attainment designation decisions, including the EPA's partial Milwaukee County designation as being too narrow and not sufficiently protective. In July 2020, the U.S. District Court of the District of Columbia remanded the partial Milwaukee County attainment designation back to the EPA for further explanation. If the entire county were to be considered in nonattainment, the State of Wisconsin would need to develop an implementation plan that addressed emissions that contribute to ozone (NOx and volatile organic compound emissions) for the county, which could affect operations and emissions control obligations of the Elm Road units. MGE is monitoring the outcome of the EPA’s remand analysis and how it may affect our Elm Road Units in Milwaukee County. See Footnote 16.a. of the Notes to Consolidated Financial Statements in this Report for additional information.
EPA's Cross-State Air Pollution Rule (CSAPR): Proposed Ozone Season Update based on 2008 Ozone NAAQS
The EPA's CSAPR and its progeny are a suite of interstate air pollution transport rules designed to reduce ozone and fine particulate (PM2.5) air levels in areas that the EPA has determined as being significantly impacted by pollution from upwind states. This is accomplished in the CSAPR through a reduction in SO2 and NOx from qualifying fossil-fuel fired power plants in upwind or "contributing" states. NOx and SO2 contribute to fine particulate pollution and NOx contributes to ozone formation in downwind areas. Reductions are achieved through a cap and trade system. Individual plants can meet their caps through modifications and/or buying allowances on the market. CSAPR has been subject to ongoing legal challenges.
In 2016, the EPA finalized a CSAPR Update Rule to address pollution transport related to an updated ozone NAAQS. In September 2019, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) remanded the rule to the EPA holding that the rule improperly provided only a partial remedy for addressing interstate transport of pollutants from upwind to downwind states. In October 2020, the EPA published a proposed CSAPR Update Rule to address the remand that explicitly excludes Wisconsin. The EPA is under court order to finalize this update by March 2021. If the proposed rule is finalized as written, Wisconsin will not be subject to the emissions reductions included in the CSAPR Update Rule but will remain subject to the reductions required by the original CSAPR.
MGE has met its current obligations through a combination of reduced emissions through pollution control (e.g. SCR installation at Columbia), as well as owned, received, and purchased allowances. While uncertainty remains around CSAPR due to legal challenges, MGE expects to meet ongoing CSAPR obligations for the foreseeable future. MGE will continue to monitor developments to this rule.
Clean Air Visibility Rule (CAVR)
Columbia is subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's CAVR,
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which may require pollution control retrofits. Columbia's existing pollution control upgrades, and the EPA's stance that compliance with the CSAPR equals compliance with BART, should mean that Columbia will not need to do additional work to meet BART requirements. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain in Wisconsin due to the continued legal challenges surrounding CSAPR and CAVR. MGE will continue to monitor developments to this rule.
Columbia Clean Air Act Litigation
Columbia is a coal-fired generating station operated by WPL and 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 required installation of an SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR was approved by the PSCW and the SCR was placed in service in 2018. The consent decree remains open for compliance monitoring, but significant additional operating and capital expenditures are not expected.
Global Climate Change
MGE is a producer of greenhouse gas (GHG) emissions, primarily from the fossil fuel generating facilities it uses to meet customers' energy needs, as well as from its natural gas pipeline system and fleet vehicles. Climate change and the regulatory response to it could significantly affect our operations in a number of ways, including increased operating costs and capital expenditures, restrictions on energy supply options, operational limits on our fossil fuel fired plants, permitting difficulties, and emission limits. MGE management would expect to seek and receive rate recovery of such compliance costs, if and when required. MGE continues to monitor proposed climate change legislation and regulation.
MGE has taken steps to address GHG emissions through voluntary actions. In 2005, MGE implemented its Energy 2015 Plan, which committed to ensuring a balanced, economic energy supply with reduced environmental emissions. The Plan emphasized increased renewable energy, energy efficiency, and new cleaner generation – three strategies that reduced GHG emissions. Under the Plan and other actions, our CO2 emissions declined from 2005 to 2015 by approximately 20% even though total system delivered 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 prior to the announcement of the Columbia retirement, our plan was to reduce CO2 emissions by 40% from 2005 levels by 2030. With the retirement of Columbia, we currently expect to achieve a reduction of 65% by 2030. Beyond 2030, we are targeting net-zero carbon electricity by 2050.
Federal Action on Climate Change
Executive Actions:
President Biden's actions on climate change, including multiple executive orders and the recommitment of the U.S. to the Paris Agreement under the United Nations Framework Convention on Climate Change (the Paris Agreement), indicate that he intends to make climate considerations a broad focus of his administration.
Executive Order on Tackling the Climate Crisis at Home and Abroad
This executive order establishes climate change as an essential element of domestic and international governmental policy. The order indicates that the U.S. will develop its emissions reduction targets under the Paris Agreement, instructs executive staff and federal departments and agencies to take actions to combat climate change using a government-wide approach, and creates several interagency working groups tasked with providing recommendations to meet the order's goals. MGE is following the development of recommendations and plans developed by agencies as a result of this order, as well as other executive actions taken by the new administration, to determine their applicability to MGE's decarbonization plans and to evaluate any potential impact to our operations.
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Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis
In January 2021, President Biden signed an executive order that establishes a list of national objectives for federal action (including regulations) taken under his administration. The order includes initiatives for protecting the environment, addressing climate change, and addressing public health. Executive departments and agencies are directed to immediately review all federal actions taken under the previous presidential administration to determine whether or not they meet the objectives set out in the order. Departments and agencies are further instructed to take applicable action, including suspending, revising or rescinding rules to correct any federal action under the previous administration that does not meet the national objectives set forth in this order. MGE will monitor and evaluate any potential regulation, guidance, and/or other federal directives that are developed as a result of this order and other executive actions taken by the new administration.
Legislative Actions:
MGE is monitoring current legislative actions on climate change to determine their level of significance to MGE's decarbonization plans.
State and Regional Action on Climate Change
Executive Actions
Executive Order Relating to Clean Energy Wisconsin
In August 2019, Wisconsin Governor Tony Evers signed an executive order to establish the Office of Sustainability and Clean Energy (OSCE). The order tasks the OSCE with, among other things, ensuring that the actions of the State of Wisconsin are aligned with the goals and recommendations of the Paris Agreement, verifying that electricity consumed by the State of Wisconsin is 100% carbon-free by 2050, and developing a comprehensive multi-sector clean energy plan for the state. The OSCE has put forth preliminary recommendations and is in the process of creating the statewide plan. MGE is engaged in this process and is participating on a Stakeholder Advisory Team in a voluntary capacity. MGE will be evaluating this plan for its applicability to MGE's decarbonization plans and to evaluate potential impact to our operations.
Legislative Actions
MGE continues to monitor current legislative actions on climate change. There are no legislative actions to report at this time.
EPA's Greenhouse Gas Reduction Guidelines under the Clean Air Act 111(d) Rule
In January 2021, the D.C. Circuit vacated and remanded to the EPA the Affordable Clean Energy Rule (ACE Rule) and the repeal of the predecessor Clean Power Plan Rule (CPP Rule), both of which regulated greenhouse gas emissions from existing electric generation units pursuant to Section 111(d) of the Clean Air Act. MGE is evaluating this D.C. Circuit decision for what impacts it may have on MGE's operations. MGE will continue to evaluate the rule development and monitor ongoing and potential legal proceedings.
Solid Waste
EPA's Coal Combustion Residuals Rule
The EPA's 2015 Coal Combustion Residuals Rule (CCR), which regulates coal ash from burning coal for the purpose of generating electricity as a solid waste and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash. The CCR rule also regulates landfills, ash ponds, and other surface impoundments used for coal combustion residuals by regulating their design, location, monitoring, and operation.
In July 2018, the EPA published a final rule that included amendments to the CCR. The amendments include the allowance of alternative performance standards for landfills and surface impoundments, revised risk-based groundwater protection standards, and an extension of the deadline by which certain facilities must cease the placement of waste in CCR units. In August 2018, the D.C. Circuit vacated parts of the 2015 CCR for not being sufficiently protective of the environment. In August 2020, the EPA revised the CCR rule to require owners or operators of coal-fired power plants to stop transporting CCR and non-CCR wastewater (a process known as "sluicing") to unlined surface impoundments. In addition, regulated entities must initiate impoundment closure as
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soon as feasible and in no event later than April 2021, unless the EPA grants an extension. Columbia requested an extension to comply by October 2022. The EPA will address the remaining issues on remand in a subsequent action.
Review of the Elm Road Units has indicated that the costs to comply with this rule are not expected to be significant. Columbia's operator has completed a review of its system and has developed a compliance plan. See Footnote 16.a. of the Notes to the Consolidated Financial Statements in this Report for further discussion.
Renewable Energy Standards
Wisconsin law establishes a minimum amount of energy MGE must supply from renewable sources. MGE currently exceeds the applicable minimum requirement of approximately 8%. The costs to comply with this requirement are being recovered in rates.
Human Capital
The energy industry is ever-changing. MGE Energy and MGE believe it is important to continue to develop our human capital resources to meet the changing demands of our customers and communities. We are committed to sustainable workforce practices such as career development and training. We offer all employees the opportunity to learn and grow—whether the goal is to increase job proficiency, improve decision-making skills, or prepare for new roles and responsibilities. We work to provide our employees with the tools they need to grow and to be successful in their careers. This strategy is essential given our aging workforce and the recent retirement of key employees.
We value equity, diversity, and inclusion. We promote an inclusive, respectful work environment where individuals and groups can achieve their full potential. All employees have equitable access to employment and development opportunities. Everyone is responsible for helping to meet the objectives of our diversity and inclusion policy as well as supporting the principles of equal opportunity and affirmative action. We believe that our diversity makes us stronger.
In 2014, we launched a corporate safety commitment to strengthen our safety culture and thereby took another step on our journey to becoming an industry safety leader. Our Safety Steering Team meets bimonthly to examine safety topics and to identify and to prioritize continuous improvement opportunities. Our safety vision statement "We Power Safety" is highly visible throughout the organization.
The COVID-19 pandemic drove several changes in 2020. These changes range from equipping our field workers with personal protective equipment to offering support to office employees working from home. We continue to address challenges related to the pandemic as they arrive and will continue to meet the critical needs of our community. The safety of our employees and customers is always our top priority.
As of December 31, 2020, MGE had 723 employees, of which 327 employees are covered by collective bargaining agreements as described below:
| Union |
| Number of Employees Represented |
| Expiration of Collective Bargaining Agreement |
|
| Local Union 2304 of the International Brotherhood of Electrical Workers |
| 235 |
| April 30, 2023 |
|
| Local Union No. 39 of the Office and Professional Employees International Union |
| 87 |
| May 31, 2023 |
|
| Local Union No. 2006, Unit 6 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union |
| 5 |
| October 31, 2023 |
|
Financial Information About Segments
See Footnote 22 of the Notes to the Consolidated Financial Statements in this Report for financial information relating to MGE Energy's and MGE's business segments.
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Information About our Executive Officers
As of December 31, 2020, the executive officers of the registrants were as follows:
Executive | Title | Effective Date | Service Years as an Officer |
Jeffrey M. Keebler(a) | Chairman of the Board, President, and Chief Executive Officer | 10/01/2018 | 9 |
Age: 49
| President and Chief Executive Officer Senior Vice President – Energy Supply and Planning | 03/01/2017 07/23/2015 |
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Jared J. Bushek(a)(b) | Vice President – Finance, Chief Information Officer and Treasurer | 09/01/2020 | 5 |
Age: 40 | Assistant Vice President – Chief Information Officer | 07/23/2015 |
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Lynn K. Hobbie(d) | Executive Vice President – Marketing and Communications | 03/01/2017 | 26 |
Age: 62 | Senior Vice President – Marketing and Communications | 02/01/2000 |
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Tamara J. Johnson(a)(c) | Vice President – Accounting and Controller | 09/01/2020 | 5 |
Age: 56 | Assistant Vice President – Controller | 07/23/2015 |
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Jeffrey C. Newman(a)(e) | Executive Vice President | 09/01/2020 | 23 |
Age: 58 | Executive Vice President, Chief Financial Officer, Secretary | 03/01/2017 |
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| and Treasurer |
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| Senior Vice President, Chief Financial Officer, Secretary | 07/23/2015 |
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| and Treasurer |
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Donald D. Peterson(d) | Vice President – Energy Technology | 03/01/2019 | 5 |
Age: 61 | Assistant Vice President – Strategic Products and Services | 07/23/2015 |
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Cari Anne Renlund(a) Age: 47 | Vice President, General Counsel and Secretary Vice President and General Counsel | 09/01/2020 11/02/2015 | 5
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Note: Ages, years of service, and positions as of December 31, 2020.
(a) Executive officer of MGE Energy and MGE.
(b) Appointed as Chief Financial Officer of MGE Energy and MGE, effective as of September 1, 2020.
(c) Appointed as Chief Accounting Officer of MGE Energy and MGE, effective as of September 1, 2020.
(d) Executive officer of MGE.
(e) Retired effective December 31, 2020.
Item 1A. Risk Factors.
MGE Energy and our subsidiaries, including MGE, operate in a regulated market environment that involves significant risks, many of which are beyond our control. The following risk factors may adversely affect our results of operations, cash flows and financial position and market price for our publicly traded securities. While we believe we have identified and discussed below the key risk factors affecting our business, additional unknown risks and uncertainties may adversely affect our performance or financial condition in the future.
Pandemic virus or diseases, including COVID-19, could have a material adverse effect on our business, financial condition and liquidity.
The outbreak of the Coronavirus Disease 2019 (COVID-19), and the implemented and evolving steps being taken to address it, could adversely affect our customers, our business, our financial condition and our liquidity. Possible effects include:
Reduced economic activity impacting the use of electricity and gas services
The continued spread of COVID-19 may have a material adverse impact on the local economy in our service area, which could impact our business, results of operations, and financial condition. Federal, state, and local governments have implemented mitigation measures, including quarantines or closures or reduced operations of businesses, governmental agencies and other institutions. Reduced economic
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activity can lead to lower consumption of electricity and gas that may not be offset by residential consumption.
Delay in, and possible loss of, payments for utility service
During the first several months of the pandemic, the PSCW ordered Wisconsin utilities not to charge for late payments and not to disconnect customers for non-payment, which, in combination with the economic hardship caused by quarantine or stay-at-home orders, could result in losses as those payments are received late or not at all. Further, significant delays in those payments could affect our liquidity. Although the PSCW order was lifted in July 2020, we have undertaken to continue to waive late fees until April 1, 2021.
Regulatory delays
We operate in a regulated environment. Delays in regulatory proceedings or the issuance of required permits or variances, due to limited operations, hours or ability to convene necessary meetings, could delay required approvals or permits and affect the timing of activities. The failure to get timely variances could expose us to fines and penalties.
Regulatory recovery of deferred costs
Certain incurred costs are being deferred as regulatory assets for future recovery and not being recognized in the statements of income, reflecting a March 24, 2020, PSCW Order. These costs can affect our cash, but are not presently recoverable in rates. If recovery of those regulatory assets in customer rates is not approved or is no longer deemed probable, these deferred costs would be recognized as a current period expense, which could be material in the period in which such recognition is required.
Employee and supplier disruptions
Employee absences and supply interruptions could affect our ability to operate and maintain our system.
Volatility in the capital markets
Concerns about COVID-19 and its effects have caused, and may continue to cause, significant volatility in the capital markets. Market volatility as a result of COVID-19 may have a material adverse impact on the value of our employee benefits trusts investments, which could impact our costs for those benefits. The price of our common stock has been volatile. The COVID-19 pandemic and the significant uncertainties it has caused for the global economy, business activity, and business confidence have had, and are likely to continue to have, a significant effect on the market price of securities generally, including our securities.
The situation around COVID-19 remains fluid and the potential for a material impact on the results of operations, financial condition, and liquidity increases the longer the virus disrupts the local economy. Although we expect sales for future periods in 2021 to be negatively impacted by the COVID-19 pandemic, we cannot reasonably estimate with any degree of certainty the actual impact COVID-19 may have on our results of operations, financial position, and liquidity. The extent to which the COVID-19 pandemic may impact our business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease.
Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in this section including, but not limited to, interest rate changes, rating agency actions, governmental actions and market volatility.
Regulatory Risk
We are subject to extensive government regulation in our business, which affects our costs and responsiveness to changing events and circumstances.
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Our business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding company by the PSCW. The PSCW regulates MGE's 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. ATC, in which we have an investment, is subject to regulation by FERC as to, among other things, rates. The regulations adopted by the State and Federal agencies affect how we do business, our ability to undertake specified actions since pre-approval or authorization may be required for projects, the costs of operations, and the rates charged to recover those costs. Our ability to attract capital also depends, in part, upon our ability to obtain a fair return from the PSCW.
Our utility revenues are subject to regulatory proceedings, which can affect our ability to recover, and the timing of recovery of, costs that we incur in our operations.
Our utility customer rates have a material impact on our financial condition, results of operations, and liquidity. Our ability to obtain adjustments to those rates depends upon timely regulatory action under applicable statues and regulations. Rate regulation is based on providing an opportunity to recover costs that have been reasonably incurred and the ability to earn a reasonable rate of return on invested capital. However, we have no assurance that our regulators will consider all of our costs to have been reasonably incurred. In addition, our rate proceedings may not always result in rates that fully recover our costs or provide a reasonable return on equity. Certain costs and revenues are deferred as regulatory assets and liabilities for future recovery or refund to customers, as authorized by our regulators. If recovery of regulatory assets is not approved or is no longer deemed probable, these costs would be recognized as a current period expense and could materially and adversely impact our operations and financial performance in that period.
We could be subject to higher costs and potential penalties resulting from mandatory reliability standards.
MGE must adhere in its electric distribution system to mandatory reliability standards established by NERC. These standards cover areas such as critical infrastructure protection, emergency preparedness, facility design, and transmission operations, among others. The critical infrastructure protection standards focus on physical and access security of cyber assets, as well as incident response and recovery planning. Compliance with these standards affects operating costs and any noncompliance can result in sanctions, including monetary penalties.
We are subject to changing environmental laws and regulations that may affect our costs and business plans.
We are subject to environmental laws and regulations that affect the manner in which we conduct business, including capital expenditures, operating costs, and potential liabilities. Based upon early announcements, the new presidential administration is expected to undertake an active effort on climate change-related matters, including restrictions on greenhouse gas emissions, such as carbon. While it is difficult to know the extent of possible legislation or regulatory activity, it is expected there will be an increase in the number and scope of environmental laws and regulations. These laws and regulations may alter or limit our business plans, make them more costly, or expose us to liabilities for past, present, or future operations.
Numerous environmental laws and regulations govern many aspects of our present and future operations. These include: air emissions limits and reporting; ambient air quality standards; water quality; water intake and discharges; wetlands; solid and hazardous waste; handling and disposal of hazardous substances; protection of endangered resources, such as threatened and endangered species, protection of cultural resources and archaeological sites; remediation and management of contaminated sites; and control of potential pollution from electric and gas construction sites. These evolving regulations affect us by:
Introducing uncertainty into our planning and capital expenditures processes, as changes in requirements may affect the timing and choice of compliance methods and require costly revisions to prior plans and commitments.
Imposing or modifying limits on the operations of our facilities in order to meet restrictions on air emissions, water use or water discharges.
Requiring capital expenditures and changes in operating procedures and costs as a result of the need to install additional pollution controls or more advanced technology or equipment at new or existing facilities.
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Mandating increasing purchases of renewable energy, which affects the use of existing generation, and energy efficiency initiatives, which affect revenues.
We may be subject to future laws, regulations, or actions associated with public concern with fossil-fuel generation, greenhouse gases, and the effects of global climate change.
Our subsidiaries operate or co-own electric power plants that burn fossil fuels, deliver natural gas, and deliver electricity to customers. These business activities are subject to evolving public concern regarding greenhouse gases (GHG), legislative and regulatory action, and possible litigation in response to that public concern. The primary greenhouse gas associated with our subsidiaries' combustion of fossil fuels, and the largest emission in our system overall, is carbon dioxide (CO2).
Our subsidiaries have incurred and are expected to continue to incur costs from more stringent regulation of GHG from power plants, natural gas delivery, greenhouse gases used in power distribution, and efficiencies lost during power distribution. While it is difficult to know the extent of possible legislation or regulatory activity, the federal government is likely to consider and pass some form of greenhouse gas legislation or regulations. In addition, litigation by environmental nongovernment organizations targeting GHG emissions from the electric power industry is also likely if the federal government fails to act on greenhouse gas initiatives.
Climate change could affect us in several other ways:
Changes in weather patterns, including swings in intensity, could affect use of electricity and gas by our customers, affecting revenues; and could affect the condition of our facilities, affecting our costs.
We may also incur costs associated with actions taken due to investor interest in reducing our subsidiaries' reliance on fossil fuel generation, and coal in particular. Investors may also move away from investing in fossil fuel generated electricity for reputational or perceived risk-related reasons, which could raise our costs of attracting capital.
If we are not seen as being proactive in addressing concerns, we may experience reputational issues among our customers and the communities that we serve. Those issues could affect customers' energy choices, including efforts at self-supply, and could affect the handling and treatment of our rate requests and cost recovery.
These matters represent uncertainties in the operation and management of our business.
We face risk for the recovery of fuel and purchased power costs.
MGE has price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE burns natural gas in several of its peak electric generation facilities. In many cases, the cost of purchased power is tied to the cost of natural gas. In the event of an interruption in energy supply, whether due to equipment problems, transmission constraints, or otherwise, we may incur additional costs to obtain alternative sources of energy supply, in order to meet our contractual or regulatory obligations to our customers. Under the electric fuel rules, MGE would defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. The tolerance band is defined by the PSCW and has been modified throughout the years based on market conditions and other relevant factors. Beginning in 2021, MGE is subject to a plus or minus 1% range. Prior to 2021, the range was set at 2%. Any over- or 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 would 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.
Changes in federal income tax policy may adversely affect our financial condition, results of operations, and cash flows, as well as our subsidiaries' credit ratings.
We currently own and operate renewable energy generating facilities. These facilities generate production tax credits and investment tax credits that we use to reduce our federal tax obligations. The amount of tax credits we
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earn depends on multiple factors, including facility generation, the cost of qualifying property, and the applicable tax credit rate. The disallowance of these tax credits in whole or in part as a result of changes in tax law or regulation could adversely impact our earnings and cash flows.
If corporate tax rates or policies are changed with future federal or state legislation, we may be required to take material charges against earnings. The 2017 Tax Act is still being interpreted and implemented by the IRS as well as state income tax authorities, and the 2017 Tax Act could continue to be subject to potential amendments and technical corrections, any of which could lessen or increase certain adverse impacts of the 2017 Tax Act.
There is still uncertainty as to when or how credit rating agencies, capital markets, the FERC, or state public utility commissions will treat any additional impacts of the 2017 Tax Act. These impacts could subject us or any of our subsidiaries to further credit rating downgrades. It is unclear whether additional opportunities may evolve for us to manage the adverse impacts of the 2017 Tax Act. In addition, certain financial metrics used by credit rating agencies, such as our funds from operations-to-debt percentage, could be negatively impacted by future rulings related to the 2017 Tax Act.
We may not be able to use all tax credits for which we are eligible.
We have historically reduced our consolidated federal and state income tax liability with the use of various tax credits under the applicable tax codes. We may not be able to fully use tax credits if our future federal and state taxable income and related income tax liability is insufficient to permit their use. In addition, any future disallowance of some or all of those tax credits as a result of legislation or an adverse determination by one of the applicable taxing jurisdictions could materially affect our tax obligations and financial results.
Operating Risk
We are affected by weather, which affects customer demand and can affect the operation of our facilities.
The demand for electricity and gas is affected by weather. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity and gas for cooling and heating, respectively, as opposed to the softening effect of more moderate temperatures. Our electric revenues are sensitive to the summer cooling season and, to a lesser extent, the winter heating season. Similarly, very cold temperatures can dramatically increase the demand for gas for heating. A significant portion of our gas system demand is driven by heating. Extreme summer conditions or storms may stress electric systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.
We could be adversely affected by changes in the development, and utilization by our customers, of power generation, storage, and use technologies.
Our revenues and the timing of the recovery of our costs could be adversely affected by improvements in power generation, storage, and use technology.
Advancements in power generation technology, including commercial and residential solar generation installations and commercial micro turbine installations, are improving the cost-effectiveness of customer self-supply of electricity. Improvements in energy storage technology, including batteries and fuel cells, could also better position customers to meet their around-the-clock electricity requirements. Improvements in the energy efficiency of lighting, appliances, and equipment will also affect energy consumption by customers. Such developments could reduce customer purchases of electricity but may not necessarily reduce our investment and operating requirements due to our obligation to serve customers, including those self-supply customers whose equipment has failed for any reason to provide the power they need whether due to inadequate on-site resources, restricted operating hours, or equipment failure. In addition, since a portion of our costs are recovered through charges based upon the volume of power delivered, a reduction in electricity deliveries will affect the timing of our recovery of those costs and may require changes to our rate structures.
Changes in power generation, storage, and use technologies could have significant effects on customer behaviors and their energy consumption. Customers could engage in individual conservation efforts by voluntarily reducing their consumption of electricity through changes in energy use and through the use of more energy efficient
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lighting, appliances, and equipment. They could also change their consumption of electricity from us through the installation of alternative energy sources, such as rooftop solar panels and micro turbines for self-supply. Customer energy conservation could adversely affect our results of operations by reducing our revenues without necessarily changing our operating costs due to our obligation to serve.
We are affected by economic activity within our service area.
Higher levels of development and business activity generally increase the numbers of customers and their use of electricity and gas. Likewise, recessionary economic conditions generally have an adverse impact on our results of operations.
The ability to obtain an adequate supply of coal could limit the ability to operate the co-owned coal-fired facilities from which we receive a significant portion of our electric supply.
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 the ability to generate electricity if the plant operator is 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 coal plant closures and may affect mine performance. Consequently, we are exposed to the risk that counterparties to these contracts will not be able to fulfill their obligations. Disruption in the delivery of fuel, including disruptions as a result of transportation delays, weather, labor relations, force majeure events, or environmental regulations affecting any of our fuel suppliers, could limit our ability to generate electricity at our facilities at the desired level. Should counterparties fail to perform, or other unplanned disruptions occur, we may be forced to fulfill the underlying obligation at higher prices. The plant operators may also be forced to reduce generation at our jointly-held coal units, which would cause us to replace this generation through additional power purchases from third parties. These factors may also affect the terms under which any of the 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 owned or contracted power from the 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 that 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
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to repair or replace equipment and facilities may take place over prolonged periods or may be unsuccessful. We may also be unable to make the necessary improvements to our operational system, causing service interruptions. Furthermore, our facilities are interconnected with third-party transmission providers. Damage to or failures of these providers' equipment or facilities is out of our control but could lead to service interruptions. The resulting interruption of services would result in lost revenues and additional costs. We are also exposed to the risk of accidents or other incidents that could result in damage to or destruction of our facilities or damage to persons or property. Such issues could adversely affect revenues or increase costs to repair and maintain our systems.
We could be adversely affected by production disruptions at our wind generating facilities.
We own and operate wind generating facilities, which generate production tax credits used to reduce our federal tax obligations. Various operating and economic factors, including transmission constraints, unfavorable trends in pricing for wind energy, adverse weather conditions and the breakdown or failure of equipment, could significantly reduce the production tax credits generated by our wind farms, resulting in increased federal income tax expense. We could also be forced to replace lost wind generation capacity with additional power purchases from third parties, potentially leading to increased costs. These factors could have an adverse impact on our financial condition and results of operations, which could be material depending upon the cause of the disruption and its duration.
Our operations and confidential information are subject to the risk of cyber-attacks.
Our operations rely on sophisticated information technology systems and networks. Cyber-attacks targeting our electronic control systems used at our generating facilities and for electric and gas distribution systems, including denial of service and ransomware attacks, could result in a full or partial disruption of our operations. Any disruption of these operations could result in a loss of service to customers and loss of revenue, as well as significant expense to repair system damage and remedy security breaches.
Our business requires the collection and retention of personally identifiable information of our customers, shareholders, and employees, who expect that we will adequately protect such information. A significant theft, loss, or fraudulent use of personally identifiable information may cause our business reputation to be adversely impacted and could lead to potentially large costs to notify and protect the impacted persons. The occurrence of such an event may cause us to become subject to legal claims, fines, or penalties, any of which could adversely impact our results of operations.
The safeguards we have may not always be effective due to the evolving nature of cyber-attacks. We cannot guarantee that such protections will be completely successful in the event of a cyber-attack. If the technology systems were to fail or be breached by a cyber-attack, and not be recovered in a timely fashion, we may be unable to fulfill critical business functions and confidential data could be compromised, adversely impacting our financial condition and results of operations.
We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.
We operate in a highly engineered industry that requires the continued operation of sophisticated information technology systems and network infrastructure to manage our finances, to operate our control facilities, to provide electric and gas service to our customers, and to enable compliance with applicable regulatory requirements. Our computer-based systems are vulnerable to interruption or failure due to the age of certain systems, the introduction of viruses, malware, ransomware, security breaches, fire, power loss, system malfunction, network outages and other events that 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.
Catastrophic and unpredictable events could have a material adverse effect on our business.
A terrorist attack, war, natural disaster, pandemic virus or disease, or other catastrophic or unpredictable event could adversely affect our future revenues, expenses and operating results by: interrupting our normal business operations; causing employee absences or casualties, including loss of our key employees; interrupting or affecting
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supplier operations; requiring substantial expenditures and expenses to repair, replace and restore normal business operations; and reducing investor confidence. Facilities for electric generation, transmission, and gas and electric distribution are potential targets of terrorist threats and activities. A terrorist act or catastrophic event at our facilities or the facilities of other companies to which we are interconnected could result in a disruption of our ability to generate, transmit, transport, purchase, or distribute electricity or natural gas. Such an event 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 or making alternative arrangements could materially and adversely affect our financial condition and results of operations.
We face risk in connection with the completion of significant capital projects.
Our capital projects, such as our renewable generation projects, are subject to various risks that could cause costs to increase or delays in completion. These risks include shortages of, the inability to obtain, the cost of, and the consistency of, labor, materials and equipment; the inability of the contractors to perform under their contracts; the inability to agree to terms of contracts or disputes in contract terms; work stoppages; adverse weather conditions; the inability to obtain necessary permits in a timely manner; changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions; governmental actions; legal action; and unforeseen engineering or technology issues. In the case of our renewable generation projects, we may face delays in the completion of the necessary transmission system connection or upgrades to accommodate the project.
If a capital project exceeds the approved project costs approved by the PSCW, we may not be able to recover those excess costs through regulated customer rates. If that happens, we may have to finance overruns through cash from operations, which may delay other projects, or by securing additional financing. Any or all of these methods may not be available when or in the amounts needed or may adversely affect our financial condition, results of operations and cash flows.
Inability to recover excess costs, or inability to complete the project in a timely manner, could adversely impact our financial condition and results of operations. Further, our revenues and cash flows may not increase immediately following our expenditure of funds on a particular project, which could affect our liquidity and financial position.
Our stated long-term goals are based on various assumptions and beliefs that may not prove to be achievable in the time frame projected.
Some of our current long-term goals include MGE's targeting of a net‐zero carbon electricity by 2050 and MGE's Energy 2030 framework, which describes our plan for growth in renewables generation. MGE is working to achieve a more sustainable energy future using cost‐effective renewable generation technologies. Management established these goals in conjunction with our board of directors based upon a number of different internal and external factors that characterize and influence our current and expected future activities. These long-term goals are based on certain assumptions regarding the timing, scope and relative costs of technological advancements, including generation, storage and energy use technologies; levels of customer participation in programs and partnerships, which will be critical to the achievement of the goals; our ability to transition or displace existing coal-fired resources on an ongoing basis; our ability to complete renewable generation projects in a timely manner and within approved budgets; our ability to obtain recovery of costs in rates; and our ability to obtain the necessary permits or licenses for such projects. These assumptions may differ materially from actual future results. Accordingly, we may not achieve our stated long-term goals in the timeframe projected or at all.
Failure to successfully manage the implementation of our Enterprise Forward corporate initiative could adversely affect our operations.
MGE committed to undertake a multi-year information technology project aimed at transforming our foundational customer engagement capabilities and enabling it to be flexible in delivering new products and services as outlined in our energy 2030 framework. These objectives are expected to be accomplished through the implementation of a new customer information and billing system, and enterprise resource planning platform, along with other solutions that meet the goals of the initiative. Integrating new systems is complex, costly and time consuming and could result in performance delays and errors. If the systems and related processes do not operate as intended, it could result in disruptions to our business as well as unrecoverable excess costs. Inability to recover excess capital
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and operating costs, or inability to implement the project successfully and in a timely manner, could adversely impact our financial condition and results of operations.
We do not own all of the land on which our facilities are located, and we access certain facilities through rights-of-way which could disrupt our operations.
We do not own all of the land on which certain of our facilities are located, and we are, therefore, subject to the risk of increased costs to maintain necessary land use. We obtain the rights to construct and operate certain of our related facilities on land owned by third parties for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts on acceptable terms or increased costs to renew such rights, could have a material adverse effect on our financial condition, results of operations and cash flows.
Failure to attract and retain an appropriately qualified workforce could affect our operations.
An aging workforce and the retirement of key employees without appropriate replacements may lead to operating challenges and increased costs. Some of the challenges include lack of resources, loss of knowledge, and time required for replacement employees to develop necessary skills. Failure to identify qualified replacement employees could result in decreased productivity and increased safety costs. If we are unable to attract and retain an appropriately qualified workforce, our operations could be negatively affected.
Financial Risk
We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal, oil, and environmental allowances.
We face commodity price risk exposure with respect to the purchase of natural gas, electricity, coal, oil, and environmental allowances. We also face risk through our use of derivatives such as futures, forwards, and swaps, to manage our commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.
Our business is concentrated in Wisconsin.
Our business activities, including those of our subsidiaries, are concentrated in Wisconsin. Changes in the economies of Wisconsin and surrounding regions could negatively impact the growth opportunities available to us and our subsidiaries, and the financial condition of our customers and prospects.
Interest rate movements and market performance affects our employee benefit plan costs.
Prevailing interest rates affect our assessment and determination of discount rates and are a key assumption in the determination of the costs and funding of our defined benefit pension plans. Changes in rates may impact the amount of expense and timing of contributions to those plans. The performance of the capital markets affects the values of the assets that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of those assets may increase our current and longer-term funding requirements for these obligations. Changes in the value of trust fund assets may affect the level of required contributions to these trusts to meet benefit obligations. Reduced benefit plan assets could result in increased benefit costs in future years and may increase the amount and accelerate the timing of required future funding contributions.
We are exposed to interest rate risk.
We are exposed to interest rate risk on our variable rate financing. Borrowing levels under commercial paper arrangements vary from period to period depending upon capital investments and other factors. Such interest rate risk means that we are exposed to increased financing costs and associated cash payments as a result of changes in
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the short-term interest rates.
We are exposed to counterparty credit risk primarily through our regulated energy business.
Credit risk is the loss and additional expense 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. That risk may be increased during periods of weak or stressed economic conditions.