United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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


For the quarterly period ended:

June 30, 2015


[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934


For the transition period from _______________ to _______________


Commission

File No.

 

Name of Registrant, State of Incorporation, Address

of Principal Executive Offices, and Telephone No.

 

IRS Employer

Identification No.

000-49965

 

MGE Energy, Inc.

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53788

(608) 252-7000

mgeenergy.com

 

39-2040501

000-1125

 

Madison Gas and Electric Company

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53788

(608) 252-7000

mge.com

 

39-0444025


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 registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes [X] No [ ]


Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files):

Yes [X] No [ ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


 

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

MGE Energy, Inc.

X

 

 

 

Madison Gas and Electric Company

 

 

X

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

MGE Energy, Inc. and Madison Gas and Electric Company: Yes [ ] No [X]


Number of Shares Outstanding of Each Class of Common Stock as of July 31, 2015

MGE Energy, Inc.

Common stock, $1.00 par value, 34,668,370 shares outstanding.

Madison Gas and Electric Company

Common stock, $1.00 par value, 17,347,894 shares outstanding (all of which are owned beneficially and of record by MGE Energy, Inc.).




1




Table of Contents



PART I. FINANCIAL INFORMATION.

3

Filing Format

3

Forward-Looking Statements

3

Where to Find More Information

3

Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report

4

Item 1. Financial Statements.

6

MGE Energy, Inc.

6

Consolidated Statements of Income (unaudited)

6

Consolidated Statements of Comprehensive Income (unaudited)

6

Consolidated Statements of Cash Flows (unaudited)

7

Consolidated Balance Sheets (unaudited)

8

Consolidated Statements of Common Equity (unaudited)

9

Madison Gas and Electric Company

10

Consolidated Statements of Income (unaudited)

10

Consolidated Statements of Comprehensive Income (unaudited)

10

Consolidated Statements of Cash Flows (unaudited)

11

Consolidated Balance Sheets (unaudited)

12

Consolidated Statements of Common Equity (unaudited)

13

MGE Energy, Inc., and Madison Gas and Electric Company

14

Notes to Consolidated Financial Statements (unaudited)

14

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

47

Item 4. Controls and Procedures.

49

PART II. OTHER INFORMATION.

50

Item 1. Legal Proceedings.

50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

50

Item 4. Mine Safety Disclosures.

50

Item 6. Exhibits.

50

Signatures - MGE Energy, Inc.

52

Signatures - Madison Gas and Electric Company

53




2




PART I. FINANCIAL INFORMATION.


Filing Format


This combined Form 10-Q 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 the Registrants' 2014 Annual Report on Form 10-K: Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and Item 8. Financial Statements and Supplementary Data – Note 18, as updated by Part I, Item 1. Financial Statements – Note 8 in this report, 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.




3





Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report


Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.


MGE Energy and Subsidiaries:

 

 

 

CWDC

Central Wisconsin Development Corporation

MAGAEL

MAGAEL, LLC

MGE

Madison Gas and Electric Company

MGE Energy

MGE Energy, Inc.

MGE Power

MGE Power, LLC

MGE Power Elm Road

MGE Power Elm Road, LLC

MGE Power West Campus

MGE Power West Campus, LLC

MGE Services

MGE Services, LLC

MGE State Energy Services

MGE State Energy Services, LLC

MGE Transco

MGE Transco Investment, LLC

NGV Fueling Services

NGV Fueling Services, LLC

North Mendota

North Mendota Energy & Technology Park, LLC

 

 

Other Defined Terms:

 

 

 

AFUDC

Allowance for Funds Used During Construction

ARO

Asset Retirement Obligation

ATC

American Transmission Company LLC

BART

Best Available Retrofit Technology

Blount

Blount Station

CAA

Clean Air Act

CAIR

Clean Air Interstate Rule

CAVR

Clean Air Visibility Rule

Codification

Financial Accounting Standards Board Accounting Standards Codification

Columbia

Columbia Energy Center

CSAPR

Cross-State Air Pollution Rule

CWA

Clean Water Act

Dth

Dekatherms, a quantity measure used in respect of natural gas

EGUs

Electric Generating Units

ELG

Effluent Limitations Guidelines

Elm Road Units

Elm Road Generating Station

EPA

United States Environmental Protection Agency

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

FTR

Financial Transmission Rights

GHG

Greenhouse Gas

Heating degree days (HDD)

Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating

IRS

Internal Revenue Service

kWh

Kilowatt-hour, a measure of electric energy produced

MATS

Mercury and Air Toxics Standards

MISO

Midcontinent Independent System Operator (a regional transmission organization)

MW

Megawatt, a measure of electric energy generating capacity

MWh

Megawatt-hour, a measure of electric energy produced

NAAQS

National Ambient Air Quality Standards

NOV

Notice of Violation

NOx

Nitrogen Oxides

PGA

Purchased Gas Adjustment clause, a regulatory mechanism used to reconcile natural gas costs recovered in rates to actual costs

PJM

PJM Interconnection, LLC (a regional transmission organization)

PM

Particulate Matter



4





PPA

Purchased Power Agreement

ppb

Parts Per Billion

PSCW

Public Service Commission of Wisconsin

ROE

Return on Equity

SCR

Selective Catalytic Reduction

SEC

Securities and Exchange Commission

SIP

State Implementation Plan

SO2

Sulfur Dioxide

the State

State of Wisconsin

Stock Plan

Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy

UW

University of Wisconsin at Madison

VIE

Variable Interest Entity

WCCF

West Campus Cogeneration Facility

WDNR

Wisconsin Department of Natural Resources

Working capital

Current assets less current liabilities

WPDES

Wisconsin Pollutant Discharge Elimination System

WPL

Wisconsin Power and Light Company

WPSC

Wisconsin Public Service Corporation

XBRL

eXtensible Business Reporting Language




5




Item 1. Financial Statements.


MGE Energy, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except per-share amounts)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Operating Revenues:

 

 

 

 

 

 

 

 

    Regulated electric revenues

$

 99,481

$

 96,697

$

 197,721

$

 195,549

    Regulated gas revenues

 

 20,669

 

 31,218

 

 90,597

 

 141,931

    Nonregulated revenues

 

 1,976

 

 850

 

 3,942

 

 1,530

        Total Operating Revenues

 

 122,126

 

 128,765

 

 292,260

 

 339,010

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

 12,677

 

 11,866

 

 24,569

 

 25,998

    Purchased power

 

 21,265

 

 18,921

 

 44,130

 

 37,476

    Cost of gas sold

 

 6,650

 

 18,132

 

 53,569

 

 96,640

    Other operations and maintenance

 

 41,500

 

 40,208

 

 82,174

 

 80,680

    Depreciation and amortization

 

 10,995

 

 10,069

 

 21,844

 

 19,815

    Other general taxes

 

 4,990

 

 5,128

 

 10,074

 

 9,989

        Total Operating Expenses

 

 98,077

 

 104,324

 

 236,360

 

 270,598

Operating Income

 

 24,049

 

 24,441

 

 55,900

 

 68,412

 

 

 

 

 

 

 

 

 

Other income, net

 

 2,446

 

 3,548

 

 4,551

 

 8,100

Interest expense, net

 

 (5,008)

 

 (4,868)

 

 (10,099)

 

 (9,409)

    Income before income taxes

 

 21,487

 

 23,121

 

 50,352

 

 67,103

Income tax provision

 

 (8,008)

 

 (9,034)

 

 (18,595)

 

 (25,299)

Net Income

$

 13,479

$

 14,087

$

 31,757

$

 41,804

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

 

(basic and diluted)

$

0.39

$

0.41

$

0.92

$

1.21

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

0.283

$

0.272

$

0.565

$

0.543

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

(basic and diluted)

 

34,668

 

34,668

 

34,668

 

34,668

 

 

 

 

 

 

 

 

 

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


MGE Energy, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Net Income

$

 13,479

$

 14,087

$

 31,757

$

 41,804

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized loss on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax ($7 and $31, and $64 and

 

 

 

 

 

 

 

 

    $26, respectively)

 

 (11)

 

 (46)

 

 (95)

 

 (39)

Comprehensive Income

$

 13,468

$

 14,041

$

 31,662

$

 41,765

 

 

 

 

 

 

 

 

 

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




6





MGE Energy, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

 31,757

$

 41,804

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

 21,844

 

 19,815

 

 

        Deferred income taxes

 

 6,201

 

 15,110

 

 

        Provision for doubtful receivables

 

 85

 

 984

 

 

        Employee benefit plan expenses

 

 1,660

 

 (555)

 

 

        Equity earnings in ATC

 

 (4,170)

 

 (4,883)

 

 

        Other items

 

 (772)

 

 (1,077)

 

 

    Changes in working capital items:

 

 

 

 

 

 

        Decrease in current assets

 

 29,599

 

 17,349

 

 

        Decrease in current liabilities

 

 (14,789)

 

 (5,840)

 

 

    Dividend income from ATC

 

 2,891

 

 3,835

 

 

    Cash contributions to pension and other postretirement plans

 

 (11,626)

 

 (1,633)

 

 

    Other noncurrent items, net

 

 10,313

 

 (229)

 

 

            Cash Provided by Operating Activities

 

 72,993

 

 84,680

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

 (33,211)

 

 (42,272)

 

 

    Capital contributions to investments

 

 (538)

 

 (1,225)

 

 

    Other

 

 (52)

 

 (1,123)

 

 

            Cash Used for Investing Activities

 

 (33,801)

 

 (44,620)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

 (19,589)

 

 (18,840)

 

 

    Repayment of long-term debt

 

 (2,080)

 

 (2,042)

 

 

    Repayment of short-term debt

 

 (7,000)

 

 -

 

 

    Other

 

 (487)

 

 (80)

 

 

            Cash Used for Financing Activities

 

 (29,156)

 

 (20,962)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 10,036

 

 19,098

 

 

Cash and cash equivalents at beginning of period

 

 65,755

 

 68,813

 

 

Cash and Cash Equivalents at End of Period

$

 75,791

$

 87,911

 

 

 

 

 

 

 

 

 

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

 




7





MGE Energy, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands)


 

 

June 30,

December 31,

ASSETS

 

2015

 

2014

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

 75,791

$

 65,755

    Accounts receivable, less reserves of $3,806 and $4,329, respectively

 

 34,599

 

 41,614

    Other accounts receivable, less reserves of $557 and $420, respectively

 

 6,030

 

 7,610

    Unbilled revenues

 

 23,159

 

 31,262

    Materials and supplies, at average cost

 

 19,696

 

 17,121

    Fossil fuel

 

 15,446

 

 8,098

    Stored natural gas, at average cost

 

 12,712

 

 21,036

    Prepaid taxes

 

 24,656

 

 38,910

    Regulatory assets - current

 

 7,850

 

 8,360

    Deferred income taxes - current

 

 -

 

 3,482

    Other current assets

 

 10,895

 

 10,711

        Total Current Assets

 

 230,834

 

 253,959

Regulatory assets

 

 156,139

 

 156,823

Other deferred assets and other

 

 9,723

 

 7,018

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

 1,193,965

 

 1,189,077

    Construction work in progress

 

 29,204

 

 19,029

        Total Property, Plant, and Equipment

 

 1,223,169

 

 1,208,106

Investments

 

 73,363

 

 71,760

        Total Assets

$

 1,693,228

$

 1,697,666

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

 4,224

$

 4,182

    Short-term debt

 

 -

 

 7,000

    Accounts payable

 

 34,555

 

 41,655

    Accrued interest and taxes

 

 4,905

 

 5,086

    Accrued payroll related items

 

 8,733

 

 11,241

    Deferred income taxes

 

 907

 

 -

    Regulatory liabilities - current

 

 6,282

 

 -

    Derivative liabilities

 

 7,863

 

 6,901

    Other current liabilities

 

 8,682

 

 13,931

        Total Current Liabilities

 

 76,151

 

 89,996

Other Credits:

 

 

 

 

    Deferred income taxes

 

 343,942

 

 342,045

    Investment tax credit - deferred

 

 1,136

 

 1,223

    Regulatory liabilities

 

 21,542

 

 22,715

    Accrued pension and other postretirement benefits

 

 79,324

 

 90,201

    Derivative liabilities

 

 48,090

 

 46,560

    Other deferred liabilities and other

 

 58,565

 

 50,269

        Total Other Credits

 

 552,599

 

 553,013

Capitalization:

 

 

 

 

    Common shareholders' equity

 

 671,332

 

 659,401

    Long-term debt

 

 393,146

 

 395,256

        Total Capitalization

 

 1,064,478

 

 1,054,657

Commitments and contingencies (see Footnote 8)

 

 -

 

 -

        Total Liabilities and Capitalization

$

 1,693,228

$

 1,697,666

 

 

 

 

 

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




8





MGE Energy, Inc.

Consolidated Statements of Common Equity (unaudited)

(In thousands, except per-share amounts)


 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income

 

Total

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2013

 34,668

$

 34,668

$

 316,268

$

 266,197

$

 377

$

 617,510

 

 

Net income

 

 

 

 

 

 

 41,804

 

 

 

 41,804

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 (39)

 

 (39)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.543 per share)

 

 

 

 

 

 

 (18,840)

 

 

 

 (18,840)

 

 

Cash in lieu of fractional shares related

 

 

 

 

 

 

 

 

 

 

 

 

 

to stock split

 

 

 

 

 

 

 (80)

 

 

 

 (80)

 

 

Ending balance - June 30, 2014

 34,668

$

 34,668

$

 316,268

$

 289,081

$

 338

$

 640,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2014

 34,668

$

 34,668

$

 316,268

$

 308,007

$

 458

$

 659,401

 

 

Cumulative effect of new accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

principle (see Footnote 4)

 

 

 

 

 

 

 (142)

 

 

 

 (142)

 

 

Beginning balance - Adjusted

 

 

 

 

 

 

 307,865

 

 

 

 659,259

 

 

Net income

 

 

 

 

 

 

 31,757

 

 

 

 31,757

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 (95)

 

 (95)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.565 per share)

 

 

 

 

 

 

 (19,589)

 

 

 

 (19,589)

 

 

Ending balance - June 30, 2015

 34,668

$

 34,668

$

 316,268

$

 320,033

$

 363

$

 671,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 




9





Madison Gas and Electric Company

Consolidated Statements of Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Operating Revenues:

 

 

 

 

 

 

 

 

    Regulated electric revenues

$

 99,486

$

 96,702

$

 197,731

$

 195,560

    Regulated gas revenues

 

 20,671

 

 31,223

 

 90,604

 

 141,941

    Nonregulated revenues

 

 1,976

 

 850

 

 3,942

 

 1,530

        Total Operating Revenues

 

 122,133

 

 128,775

 

 292,277

 

 339,031

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

 12,679

 

 11,868

 

 24,573

 

 26,002

    Purchased power

 

 21,268

 

 18,925

 

 44,136

 

 37,483

    Cost of gas sold

 

 6,654

 

 18,137

 

 53,577

 

 96,650

    Other operations and maintenance

 

 41,236

 

 39,967

 

 81,708

 

 80,284

    Depreciation and amortization

 

 10,984

 

 10,058

 

 21,821

 

 19,792

    Other general taxes

 

 4,990

 

 5,128

 

 10,074

 

 9,989

    Income tax provision

 

 7,041

 

 7,918

 

 16,817

 

 22,842

        Total Operating Expenses

 

 104,852

 

 112,001

 

 252,706

 

 293,042

Operating Income

 

 17,281

 

 16,774

 

 39,571

 

 45,989

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

 

    AFUDC - equity funds

 

 167

 

 1,101

 

 295

 

 3,051

    Equity in earnings in ATC

 

 2,289

 

 2,402

 

 4,170

 

 4,883

    Income tax provision

 

 (978)

 

 (1,142)

 

 (1,786)

 

 (2,406)

    Other income, net

 

 (176)

 

 (82)

 

 (215)

 

 (240)

        Total Other Income and Deductions

 

 1,302

 

 2,279

 

 2,464

 

 5,288

    Income before interest expense

 

 18,583

 

 19,053

 

 42,035

 

 51,277

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

    Interest on long-term debt

 

 5,136

 

 5,240

 

 10,287

 

 10,489

    Other interest, net

 

 (17)

 

 33

 

 15

 

 8

    AFUDC - borrowed funds

 

 (54)

 

 (363)

 

 (96)

 

 (1,006)

        Net Interest Expense

 

 5,065

 

 4,910

 

 10,206

 

 9,491

Net Income

$

 13,518

$

 14,143

$

 31,829

$

 41,786

Less: Net Income Attributable to Noncontrolling

 

 

 

 

 

 

 

 

Interest, net of tax

 

 (6,626)

 

 (6,621)

 

 (13,179)

 

 (13,131)

Net Income Attributable to MGE

$

 6,892

$

 7,522

$

 18,650

$

 28,655

 

 

 

 

 

 

 

 

 

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


Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2015

 

2014

 

2015

 

2014

Net Income

$

 13,518

$

 14,143

$

 31,829

$

 41,786

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized loss on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax ($18 and $77, and $73 and

 

 

 

 

 

 

 

 

    $66, respectively)

 

 (27)

 

 (116)

 

 (109)

 

 (98)

Comprehensive Income

$

 13,491

$

 14,027

$

 31,720

$

 41,688

    Less: Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

    Noncontrolling Interest, net of tax

 

 (6,626)

 

 (6,621)

 

 (13,179)

 

 (13,131)

Comprehensive Income Attributable to MGE

$

 6,865

$

 7,406

$

 18,541

$

 28,557

 

 

 

 

 

 

 

 

 

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




10





Madison Gas and Electric Company

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2015

 

2014

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

 31,829

$

 41,786

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

 21,821

 

 19,792

 

 

        Deferred income taxes

 

 3,909

 

 14,566

 

 

        Provision for doubtful receivables

 

 85

 

 984

 

 

        Employee benefit plan expenses

 

 1,660

 

 (555)

 

 

        Equity earnings in ATC

 

 (4,170)

 

 (4,883)

 

 

        Other items

 

 (524)

 

 (812)

 

 

    Changes in working capital items:

 

 

 

 

 

 

       Decrease in current assets

 

 35,282

 

 17,169

 

 

       Decrease in current liabilities

 

 (12,369)

 

 (3,536)

 

 

    Dividend income from ATC

 

 2,891

 

 3,835

 

 

    Cash contributions to pension and other postretirement plans

 

 (11,626)

 

 (1,633)

 

 

    Other noncurrent items, net

 

 10,204

 

 (321)

 

 

            Cash Provided by Operating Activities

 

 78,992

 

 86,392

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

 (33,211)

 

 (42,272)

 

 

    Capital contributions to investments

 

 (355)

 

 (1,065)

 

 

    Other

 

 (62)

 

 (1,014)

 

 

            Cash Used for Investing Activities

 

 (33,628)

 

 (44,351)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

 (10,000)

 

 (16,750)

 

 

    Distributions to parent from noncontrolling interest

 

 (10,084)

 

 (12,838)

 

 

    Equity contribution received by noncontrolling interest

 

 2,875

 

 1,065

 

 

    Repayment of long-term debt

 

 (2,080)

 

 (2,042)

 

 

    Repayment of short-term debt

 

 (7,000)

 

 -

 

 

    Other

 

 (314)

 

 -

 

 

            Cash Used for Financing Activities

 

 (26,603)

 

 (30,565)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 18,761

 

 11,476

 

 

Cash and cash equivalents at beginning of period

 

 4,562

 

 14,808

 

 

Cash and Cash Equivalents at End of Period

$

 23,323

$

 26,284

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 




11





Madison Gas and Electric Company

Consolidated Balance Sheets (unaudited)

(In thousands)


 

 

June 30,

December 31,

ASSETS

 

2015

 

2014

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

 23,323

$

 4,562

    Accounts receivable, less reserves of $3,806 and $4,329, respectively

 

 34,599

 

 41,614

    Affiliate receivables

 

 583

 

 7,112

    Other accounts receivable, less reserves of $557 and $420, respectively

 

 5,980

 

 7,524

    Unbilled revenues

 

 23,159

 

 31,262

    Materials and supplies, at average cost

 

 19,696

 

 17,121

    Fossil fuel

 

 15,446

 

 8,098

    Stored natural gas, at average cost

 

 12,712

 

 21,035

    Prepaid taxes

 

 25,638

 

 39,103

    Regulatory assets - current

 

 7,850

 

 8,360

    Deferred income taxes - current

 

 -

 

 1,271

    Other current assets

 

 10,887

 

 10,683

        Total Current Assets

 

 179,873

 

 197,745

Affiliate receivable long-term

 

 5,031

 

 5,295

Regulatory assets

 

 156,139

 

 156,823

Other deferred assets and other

 

 7,599

 

 4,977

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

 1,193,262

 

 1,188,351

    Construction work in progress

 

 29,204

 

 19,029

        Total Property, Plant, and Equipment

 

 1,222,466

 

 1,207,380

Investments

 

 69,846

 

 68,402

        Total Assets

$

 1,640,954

$

 1,640,622


 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

 4,224

$

 4,182

    Short-term debt

 

 -

 

 7,000

    Accounts payable

 

 34,542

 

 41,654

    Accrued interest and taxes

 

 4,860

 

 5,039

    Accrued payroll related items

 

 8,733

 

 11,241

    Deferred income taxes

 

 1,151

 

 -

    Regulatory liabilities - current

 

 6,282

 

 -

    Derivative liabilities

 

 7,863

 

 6,901

    Other current liabilities

 

 8,531

 

 11,350

        Total Current Liabilities

 

 76,186

 

 87,367

Other Credits:

 

 

 

 

    Deferred income taxes

 

 336,336

 

 334,773

    Investment tax credit - deferred

 

 1,136

 

 1,223

    Regulatory liabilities

 

 21,542

 

 22,715

    Accrued pension and other postretirement benefits

 

 79,324

 

 90,201

    Derivative liabilities

 

 48,090

 

 46,560

    Other deferred liabilities and other

 

 58,565

 

 50,267

        Total Other Credits

 

 544,993

 

 545,739

Capitalization:

 

 

 

 

    Common shareholder's equity

 

 494,970

 

 486,571

    Noncontrolling interest

 

 131,659

 

 125,689

        Total Equity

 

 626,629

 

 612,260

    Long-term debt

 

 393,146

 

 395,256

        Total Capitalization

 

 1,019,775

 

 1,007,516

Commitments and contingencies (see Footnote 8)

 

 -

 

 -

        Total Liabilities and Capitalization

$

 1,640,954

$

 1,640,622


 

 

 

 

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




12





Madison Gas and Electric Company

Consolidated Statements of Common Equity (unaudited)

(In thousands)


 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Non-

 

 

 

Common Stock

 

Paid-in

 

Retained

Comprehensive

Controlling

 

 

 

Shares

 

Value

 

Capital

 

Earnings

Income

Interest

 

Total

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2013

 17,348

$

 17,348

$

 192,417

$

 247,534

$

 192

$

 118,963

$

 576,454

Net income

 

 

 

 

 

 

 28,655

 

 

 

 13,131

 

 41,786

Other comprehensive loss

 

 

 

 

 

 

 

 

 (98)

 

 

 

 (98)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

 (16,750)

 

 

 

 

 

 (16,750)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 1,065

 

 1,065

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 (12,838)

 

 (12,838)

Ending balance - June 30, 2014

 17,348

$

 17,348

$

 192,417

$

 259,439

$

 94

$

 120,321

$

 589,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2014

 17,348

$

 17,348

$

 192,417

$

 276,662

$

 144

$

 125,689

$

 612,260

Cumulative effect of new accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

principle (see Footnote 4)

 

 

 

 

 

 

 (142)

 

 

 

 

 

 (142)

Beginning balance - Adjusted

 

 

 

 

 

 

 276,520

 

 

 

 

 

 612,118

Net income

 

 

 

 

 

 

 18,650

 

 

 

 13,179

 

 31,829

Other comprehensive loss

 

 

 

 

 

 

 

 

 (109)

 

 

 

 (109)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

 (10,000)

 

 

 

 

 

 (10,000)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 2,875

 

 2,875

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 (10,084)

 

 (10,084)

Ending balance - June 30, 2015

 17,348

$

 17,348

$

 192,417

$

 285,170

$

 35

$

 131,659

$

 626,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



13





MGE Energy, Inc., and Madison Gas and Electric Company

Notes to Consolidated Financial Statements (unaudited)

June 30, 2015



1.

Basis of Presentation - MGE Energy and MGE.


This report is a combined report of MGE Energy and MGE. References in this report to "MGE Energy" are to MGE Energy, Inc. and its subsidiaries. References in this report to "MGE" are to Madison Gas and Electric Company.


MGE Power Elm Road and MGE Power West Campus own electric generating assets and lease those assets to MGE. Both entities are variable interest entities under applicable authoritative guidance. MGE is considered the primary beneficiary of these entities as a result of contractual agreements. As a result, MGE has consolidated MGE Power Elm Road and MGE Power West Campus. See Footnote 2 of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2014 Annual Report on Form 10-K.


The accompanying consolidated financial statements as of June 30, 2015, and for the three and six months ended, are unaudited, but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in MGE Energy's and MGE's 2014 Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These notes should be read in conjunction with the financial statements and the notes on pages 52 through 101 of the 2014 Annual Report on Form 10-K.


2.

Equity and Financing Arrangements.


a.

Common Stock - MGE Energy.


MGE Energy sells shares of its common stock through its Stock Plan. Those shares may be newly issued shares or shares that MGE Energy has purchased in the open market for resale to participants in the Stock Plan. All sales under the stock plan are covered by a shelf registration statement that MGE Energy filed with the SEC. For both the six months ended June 30, 2015 and 2014, MGE Energy did not issue any new shares of common stock under the Stock Plan.


b.

Dilutive Shares Calculation - MGE Energy.


MGE Energy does not hold any dilutive securities.


c.

Credit Facilities - MGE Energy and MGE.


On June 1, 2015, MGE Energy and MGE entered into new revolving credit agreements, and terminated its existing revolving credit agreements.


MGE Energy entered into a Credit Agreement with an aggregate commitment of $50 million (MGE Energy Credit Agreement) with various financial institutions, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent. Also, MGE entered into two revolving credit agreements: a Credit Agreement with an aggregate commitment of $60 million (MGE JPM Credit Agreement) with various financial institutions, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent, and a Credit Agreement with an aggregate commitment of $40 million (MGE USB Credit Agreement) with various financial institutions, as lenders, and U.S. Bank National Association, as administrative agent. The MGE Energy Credit Agreement, the MGE JPM Credit Agreement, and the MGE USB Credit Agreement are collectively referred to as the Credit Agreements. As of June 30, 2015, neither MGE Energy nor MGE had any borrowings outstanding under the Credit Agreements, and MGE had no commercial paper outstanding.




14




The Credit Agreements have a term expiring on June 1, 2020, subject, in the case of MGE, to obtaining necessary regulatory approvals. Borrowings under the Credit Agreements may bear interest at a rate based upon either a "floating rate" or a "Eurodollar Rate" adjusted for statutory reserve requirements, plus an adder based upon the credit ratings assigned to MGE's senior unsecured long-term debt securities. The "floating rate" is calculated on a daily basis as the highest of a prime rate, a Federal Funds effective rate plus 0.5% per annum, or a Eurodollar Rate for a one-month interest period plus 1%. The "floating rate" adder ranges from zero to 0.125%. The "Eurodollar Rate" is calculated as provided in the Credit Agreements. The "Eurodollar Rate" adder ranges from 0.625% to 1.125%.


3.

Investment in ATC - MGE Energy and MGE.


ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by Wisconsin law. That interest is presently held by MGE Transco, which is jointly owned by MGE Energy and MGE.


MGE Transco has accounted for its investment in ATC under the equity method of accounting. For the six months ended June 30, 2015 and 2014, MGE Transco recorded the following:


 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

(In thousands)

 

2015

 

2014

 

 

Equity in earnings from investment in ATC

$

4,170

$

4,883

 

 

Dividends received from ATC

 

2,891

 

3,835

 

 

Capital contributions to ATC

 

355

 

1,065

 


MGE Transco's investment in ATC as of June 30, 2015, and December 31, 2014, was $69.3 million and $67.7 million, respectively. On July 31, 2015, MGE Transco made a $0.2 million capital contribution to ATC.


At June 30, 2015, MGE is the majority owner, and MGE Energy, the holding company, is the minority owner of MGE Transco. MGE Energy's proportionate share of the equity and net income of MGE Transco is classified within the MGE financial statements as noncontrolling interest.


ATC's summarized financial data for the three and six months ended June 30, 2015 and 2014, is as follows:


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

 

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

 

Operating revenues

$

 165,172

$

 159,990

$

 317,529

$

 323,327

 

 

Operating expenses

 

 (80,326)

 

 (74,405)

 

 (160,277)

 

 (153,028)

 

 

Other (expense) income, net

 

 (81)

 

 322

 

 (19)

 

 710

 

 

Interest expense, net

 

 (24,172)

 

 (22,242)

 

 (48,655)

 

 (44,238)

 

 

Earnings before members' income taxes

$

 60,593

$

 63,665

$

 108,578

$

 126,771

 


4.

Chattel Paper Agreements - MGE Energy and MGE.


MGE makes available to qualifying customers a financing program for the purchase and installation of energy-related equipment that will provide more efficient use of utility service at the customer's property. The energy-related equipment installed at the customer sites is used to secure the customer loans. MGE is a party to a chattel paper purchase agreement with a financial institution under which it can sell or finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until July 31, 2016. The length of the MGE guarantee to the financial institution varies from one to ten years depending on the term of the underlying customer loan. The loan balances outstanding at June 30, 2015, approximate the fair value of the energy-related equipment acting as collateral. MGE accounts for these agreements as secured borrowings.


Prior to the Transfers and Servicing Asset authoritative guidance that became effective in 2015, these agreements were treated as off-balance sheet arrangements. Beginning January 1, 2015, these agreements are included as assets and liabilities in the consolidated balance sheet. As of June 30, 2015, assets (other accounts receivable and other deferred assets) and liabilities (accounts payable and other deferred liabilities) increased approximately $3.7 million as a cumulative result of the guidance. In addition, the cumulative effect of this guidance resulted in a $0.1 million reduction in retained earnings.



15




As of June 30, 2015, the remaining contractual maturities of the chattel paper agreements were as follows:


 

(In thousands)

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

 

Repurchase-to-Maturity Transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Loans

$

 220

$

 838

$

 433

$

 464

$

 1,759

$

 3,714

 


5.

Taxes - MGE Energy and MGE.


MGE Energy's effective income tax rates for the three and six months ended June 30, 2015, were 37.3% and 36.9%, respectively, compared to 39.1% and 37.7% for the same periods in 2014. MGE's effective income tax rates for the three and six months ended June 30, 2015, were 37.2% and 36.9%, respectively, compared to 39.1% and 37.7% for the same periods in 2014. The decrease in the effective tax rates is due in part to a higher domestic manufacturing deduction offset by lower AFUDC equity earnings in 2015.


6.

Pension and Other Postretirement Plans - MGE Energy and MGE.


MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits. Additionally, MGE has defined contribution 401(k) benefit plans.


The following table presents the components of MGE Energy's and MGE's net periodic benefit costs recognized for the three and six months ended June 30, 2015 and 2014. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

 

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

 2,039

$

 1,589

$

 3,837

$

 3,073

 

 

    Interest cost

 

 3,902

 

 3,483

 

 7,342

 

 6,735

 

 

    Expected return on assets

 

 (6,438)

 

 (5,656)

 

 (12,115)

 

 (10,935)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Prior service cost

 

 6

 

 53

 

 12

 

 102

 

 

    Actuarial loss

 

 1,513

 

 186

 

 2,847

 

 358

 

 

Net periodic (benefit) cost

$

 1,022

$

 (345)

$

 1,923

$

 (667)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

 3

$

 152

$

 386

$

 482

 

 

    Interest cost

 

 6

 

 356

 

 784

 

 1,127

 

 

    Expected return on assets

 

 (5)

 

 (301)

 

 (708)

 

 (955)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Transition obligation

 

 -

 

 -

 

 1

 

 1

 

 

    Prior service benefit

 

 (5)

 

 (307)

 

 (672)

 

 (974)

 

 

    Actuarial loss

 

 2

 

 17

 

 264

 

 57

 

 

Net periodic (benefit) cost

$

 1

$

 (83)

$

 55

$

 (262)

 


7.

Share-Based Compensation - MGE Energy and MGE.


Under MGE Energy's Performance Unit Plan, eligible employees may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period.


On February 20, 2015, 18,948 units were granted based on the MGE Energy closing stock price as of that date. Units are subject to a five-year graded vesting schedule. On the grant date, MGE Energy and MGE measure the cost of the employee services received in exchange for a performance unit award based on the current market value of MGE Energy common stock. The fair value of the awards has been subsequently re-measured at June 30, 2015, as required by applicable accounting standards. Changes in fair value have been recognized as compensation cost. Since this amount is re-measured quarterly throughout the vesting period, the compensation cost is subject to variability.



16




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


In December 2013, a Director Incentive Plan was approved for the non-employee members of the Board of Directors. This plan is similar to MGE Energy's Performance Unit Plan for eligible employees described above. Under the plan, a non-employee director can receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend payments, at the end of the set performance period. The units are subject to a three-year graded vesting schedule. In January 2015, 3,794 units were granted. For accounting purposes, the awards will be measured similarly to the employee unit awards.


During the six months ended June 30, 2015 and 2014, MGE recorded less than $0.1 million and $1.1 million, respectively, in compensation expense as a result of awards under the plans. In January 2015, cash payments of $1.3 million were distributed relating to awards that were granted in 2010. During the six months ended June 30, 2015, MGE recorded a $0.2 million gain on 4,676 units forfeited. No forfeitures occurred during the six months ended June 30, 2014. At June 30, 2015, $5.3 million of outstanding awards are vested, and of this amount no cash settlements have occurred.


8.

Commitments and Contingencies - MGE Energy and MGE.


a.

Environmental.


MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which they conduct their operations, the costs of those operations, as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted rules, have the potential to have a material effect on our capital expenditures and operating costs. These initiatives, proposed rules, and court challenges include:


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

The EPA published a proposed rule in June 2013 that would amend the current ELG rule and lower the existing permissible water discharge of metals and other pollutants in wastewater from new and existing steam electric generation plants. The proposed rule mostly covers certain air pollution control systems and ash handling systems at coal-burning power plants with units greater than 50 megawatt (MW) generation capacity. The EPA is under a consent decree to finalize the rule by September 2015. Once finalized, the rule will apply to Wisconsin-based power plants as they renew their WPDES permits beginning in July 2017.


Based on our current evaluation of the proposed rule and its alternatives, our Elm Road Units and Columbia plant may need to add treatment systems or additional equipment, and those capital additions may be significant. However, MGE cannot estimate those costs with any certainty until we are able to evaluate the final version of this rule. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


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

Section 316(b) of the Clean Water Act (CWA) requires that the cooling water intake structures at electric power plants meet best available technology standards so that mortality from entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens) are reduced. The EPA finalized its 316(b) rule for existing facilities in 2014. Section 316(b) requirements are implemented in Wisconsin through modifications to plants' WPDES permits, which govern plant water discharges. WDNR is currently developing rules to implement the EPA 316(b) rule.


Our WCCF facility already employs a system that meets the 316(b) rule. Our Blount plant has conducted studies showing that it will likely be in compliance with this rule. The operator of our Columbia plant plans to conduct an intake study to demonstrate compliance with this rule and/or identify design criteria needed to meet the new rule requirements prior to Columbia's 2017 permit renewal. The exact requirements at Blount and Columbia, however, will not be known until the WDNR finalizes its rule, approves the plant operators' approach, and those sites' permits are modified to account for this rule. Nonetheless, MGE expects that the 316(b) rule will not have material effects on its existing plants.




17




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

On August 3, 2015, the EPA finalized its Clean Power Plan rule setting guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. When fully implemented in 2030, the Clean Power Plan is projected to reduce GHG emissions from this sector by 32 percent below 2005 levels. States are given up to three years to submit a plan to meet the reduction goals and are expected to meet interim goals starting in 2022 and the final goal in 2030. Implementation of the rule is expected to have a direct impact on coal-based generating units, including possible changes in dispatch and additional operating costs.


MGE is currently evaluating the rule and its requirements; however, compliance with the rule's requirements, including the yet-to-be-developed state implementation plan, will have a material impact on MGE.


National Ambient Air Quality Standards (NAAQS)

The EPA's NAAQS regulations have been developed to set ambient levels of six pollutants to protect sensitive populations (primary NAAQS) and the environment (secondary NAAQS) from the negative effects of exposure to these pollutants at higher levels. MGE is following developments for several NAAQS, including for particulate matter, nitrogen dioxide, sulfur dioxide, and ozone. Further discussion on sulfur dioxide and ozone NAAQS follows. For additional information on the NAAQS process, see Footnote 18.d. of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2014 Annual Report on Form 10-K.


Sulfur Dioxide (SO2) NAAQS

The EPA's new 1-hour SO2 NAAQS has been in place since 2010 and initial attainment/nonattainment designations by states were due in 2013. However, the EPA was sued by environmental groups for not making these designations in a timely and proper manner. In March 2015, the EPA entered into a court-approved consent decree requiring 1-hour SO2 attainment/nonattainment area designations to be completed in three phases extending out until 2020. States must submit their first designation proposals in September 2015 encompassing those areas that contain large stationary sources of SO2 (sources that emit over a threshold mass of SO2, and/or over a threshold emissions rate). The EPA must make final designation determinations for these areas by July 2016.


In March 2015, MGE's Columbia plant was identified in the Federal Register as meeting the criteria of a large stationary source of SO2 (based on 2012 data). As such, the State of Wisconsin must submit an attainment/nonattainment area designation for Columbia County (the county in which the Columbia plant is located). Since the 2012 data was collected, Columbia has installed pollution control equipment that has lowered its total SO2 emissions and its SO2 emissions rate. However, we will not know with any certainty if Columbia County will be determined to be in attainment until the State of Wisconsin completes its attainment/nonattainment demonstration. The outcome of this designation may have an adverse effect on the operation of the Columbia plant. MGE will monitor and participate in developments with the Columbia County designation process. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


Ozone NAAQS

MGE is monitoring developments in the EPA's revision of the Ozone NAAQS rule. In November 2014, the EPA published proposed regulations to lower the Ozone NAAQS to between 65 to 70 parts per billion (ppb). In this proposed rule, the EPA has stated they are also considering leaving the standard at its current level of 75 ppb, or lowering it further to 60 ppb. The EPA sought comments on all of these options. In addition, the EPA is proposing a secondary ozone standard that would use a new index to measure ecosystem and vegetation effects. It is not clear how this secondary standard would affect sources. Milwaukee County (where our Elm Road Units are located) and Dane and Columbia Counties (where several of our facilities are located) may not meet the Ozone NAAQS if it is lowered to 70 ppb or below. The EPA plans to have a final Ozone NAAQS rule completed by the end of 2015. MGE will continue to monitor rule developments and subsequent state actions and implementation plans.


EPA's Cross-State Air Pollution Rule

In July 2011, the EPA finalized its Cross-State Air Pollution Rule (CSAPR) as a court-ordered replacement for its Clean Air Interstate Rule (CAIR) that had been remanded in 2008. CSAPR is an interstate air pollution transport rule designed to reduce ozone and fine particulate matter (PM2.5) air levels in areas that the EPA has determined are being affected by pollution from neighboring and upwind states.




18




CSAPR has been the subject of extensive litigation. Although many aspects of CSAPR have been upheld on appeal, the litigation has delayed implementation and created uncertainty. In late 2014, the EPA tolled CSAPR's original compliance deadlines by three years and MGE's affected facilities must now meet their Phase I reduction obligations in 2015 and Phase II in 2017. However, the ongoing litigation leaves unresolved several residual issues that may affect whether, when, and how MGE's facilities will need to comply with CSAPR. Regardless, MGE expects to be able to meet CSAPR requirements at all of our applicable facilities by applying reductions achieved from recent pollution control installations and early reduction efforts. We will continue to monitor developments.


Clean Air Visibility Rule (CAVR)

Columbia may be subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which may require pollution control retrofits. Columbia's pollution control upgrades and the EPA's stance that compliance with the CSAPR equals compliance with BART should mean that Columbia will not need to do additional work to meet BART requirements. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain due to the legal uncertainty surrounding CSAPR.


EPA's Coal Combustion Residuals Rule

In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities rule. The rule becomes effective on October 19, 2015. The rule provides that coal ash will be regulated as a solid waste and defines what ash use activities would be considered beneficial use of coal ash. The rule also regulates landfills, ash ponds, and other surface impoundments for coal combustion residuals (CCRS or coal ash) by regulating their design, location, monitoring, and operation. Landfills and impoundments that cannot meet design criteria will need to formally close within defined timeframes.


The Columbia and Elm Road Units co-owners and plant operators are evaluating the final rule to determine what changes may be necessary at those facilities and the associated timeframes. We anticipate that some design and operational changes may need to be made at these facilities. Preliminary review for our Elm Road facility has indicated that the costs may not be significant. We are still evaluating the rule's full effects at Columbia, however, Columbia's operator has begun to develop preliminary schedules and assign cost estimates with its ash operations under this rule. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


Columbia


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


Columbia Clean Air Act Litigation

Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC, and MGE have ownership interests. In December 2009, the EPA sent a Notice of Violation (NOV) to MGE as one of the co-owners of Columbia. The NOV alleged that WPL and the Columbia co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the Prevention of Significant Deterioration program requirements, Title V Operating Permit requirements of the CAA, and the Wisconsin SIP. In April 2013, the EPA filed a lawsuit against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, the Sierra Club filed civil lawsuits against WPL alleging violations of the CAA at Columbia and other Wisconsin facilities operated by WPL. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia to resolve these claims, while admitting no liability. One of the requirements of the consent decree requires installation of a SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR has been approved by the PSCW. MGE's share of the projected cost for the SCR system is approximately $30-$40 million. In addition, the consent decree establishes emission rate limits for SO2, NOx, and particulate matter and annual plant-wide emission caps for SO2 and NOx. MGE intends to seek recovery in future rates of the costs associated with its compliance with the terms of the final consent decree and currently expects to recover any material compliance costs.




19




b.

Legal Matters.


MGE is involved in various legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements.


c.

Purchase Contracts.


MGE Energy and MGE have entered into various commodity supply, transportation, and storage contracts to meet their obligations to deliver electricity and natural gas to customers. As of June 30, 2015, the future commitments related to these purchase contracts were as follows:


 

(In thousands)

 

2015

 

2016

 

2017

 

2018

 

2019

 

 

Natural gas supply(a)

$

 10,303

$

 12,307

$

 -

$

 -

$

 -

 


(a)

These commitments include market-based pricing. Management expects to recover these costs in future customer rates.


d.

Asset Retirement Obligation.


MGE Energy and MGE are required to record a liability for the fair value of an ARO to be recognized in the period in which it is incurred if it can be reasonably estimated. The offsetting associated asset retirement costs are capitalized as a long-lived asset and depreciated over the asset's useful life. As of June 30, 2015, MGE recorded an obligation of $2.2 million for the fair value of its legal liability for asset retirement obligations (AROs) associated with the effect of the final Coal Combustion Residual Rule at Columbia. MGE has regulatory treatment and recognizes regulatory assets or liabilities for the timing differences between when we recover legal AROs in rates and when we would recognize these costs.


9.

Derivative and Hedging Instruments - MGE Energy and MGE.


a.

Purpose.


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


b.

Notional Amounts.


The gross notional volume of open derivatives is as follows:


 

 

June 30, 2015

 

December 31, 2014

 

 

Commodity derivative contracts

374,820 MWh

 

448,000 MWh

 

 

Commodity derivative contracts

4,049,260 Dth

 

4,405,000 Dth

 

 

FTRs

5,409 MW

 

1,854 MW

 




20




c.

Financial Statement Presentation.


MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds FTRs. An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. At June 30, 2015, and December 31, 2014, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $0.1 million and $1.6 million, respectively.


MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at June 30, 2015, and December 31, 2014, reflects a loss position of $56.0 million and $53.4 million, respectively. The actual cost will be recognized in purchased power expense in the month of purchase and collected in rates.


The following table summarizes the fair value of the derivative instruments on the consolidated balance sheets. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, MGE Energy and MGE have netted instruments with the same counterparty under a master netting agreement as well as the netting of collateral. At June 30, 2015, MGE Energy and MGE had the right to reclaim collateral (a receivable) of $0.9 million.


 

 

Asset Derivatives

 

Liability Derivatives

(In thousands)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

June 30, 2015

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

Other current assets

$

 522

Derivative liability (current)

$

 1,325

Commodity derivative contracts

 

Other deferred charges

 

 3

 

Derivative liability (long-term)

 

 111

FTRs

 

Other current assets

 

 813

 

Derivative liability (current)

 

 -

PPA

 

N/A

 

N/A

 

Derivative liability (current)

 

 7,860

PPA

 

N/A

 

N/A

 

Derivative liability (long-term)

 

 48,090

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

Other current assets

$

 130

 

Derivative liability (current)

$

 2,262

Commodity derivative contracts

 

Other deferred charges

 

 93

 

Derivative liability (long-term)

 

 171

FTRs

 

Other current assets

 

 642

 

Derivative liability (current)

 

 -

PPA

 

N/A

 

N/A

 

Derivative liability (current)

 

 6,870

PPA

 

N/A

 

N/A

 

Derivative liability (long-term)

 

 46,560




21




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


 

Offsetting of Derivative Assets

 

 

(In thousands)

 

Gross amounts

 

Gross amounts offset in balance sheet

 

Collateral posted against derivative positions

 

Net amount presented in balance sheet

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 525

$

 (525)

$

 -

$

 -

 

 

FTRs

 

 813

 

 -

 

 -

 

 813

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 223

$

 (223)

$

 -

$

 -

 

 

FTRs

 

 642

 

 -

 

 -

 

 642

 


 

Offsetting of Derivative Liabilities

 

 

(In thousands)

 

Gross amounts

 

Gross amounts offset in balance sheet

 

Collateral posted against derivative positions

 

Net amount presented in balance sheet

 

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 1,436

$

 (525)

$

 (908)

$

 3

 

 

PPA

 

 55,950

 

 -

 

 -

 

 55,950

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 2,433

$

 (223)

$

 (2,179)

$

 31

 

 

PPA

 

 53,430

 

 -

 

 -

 

 53,430

 


The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheets at June 30, 2015 and 2014, and the consolidated income statements for the three and six months ended June 30, 2015 and 2014.


 

 

2015

 

 

2014

(In thousands)

 

Current and long-term regulatory asset

 

Other current assets

 

 

Current and long-term regulatory asset

 

Other current assets

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

Balance at April 1,

$

 53,966

$

 268

 

$

 58,213

$

 351

Unrealized loss (gain)

 

 3,160

 

 -

 

 

 (9,817)

 

 -

Realized (loss) gain reclassified to a deferred

 

 

 

 

 

 

 

 

 

account

 

 (231)

 

 231

 

 

 (101)

 

 101

Realized (loss) gain reclassified to income

 

 

 

 

 

 

 

 

 

statement

 

 (847)

 

 (44)

 

 

 559

 

 224

Balance at June 30,

$

 56,048

$

 455

 

$

 48,854

$

 676

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

Balance at January 1,

$

 54,998

$

 1,001

 

$

 63,893

$

 411

Unrealized loss (gain)

 

 4,478

 

 -

 

 

 (23,418)

 

 -

Realized (loss) gain reclassified to a deferred

 

 

 

 

 

 

 

 

 

account

 

 (1,292)

 

 1,292

 

 

 1,434

 

 (1,434)

Realized (loss) gain reclassified to income

 

 

 

 

 

 

 

 

 

statement

 

 (2,136)

 

 (1,838)

 

 

 6,945

 

 1,699

Balance at June 30,

$

 56,048

$

 455

 

$

 48,854

$

 676




22





 

 

Realized losses (gains)

 

 

2015

 

 

2014

(In thousands)

 

Fuel for electric generation/ purchased power

 

Cost of gas sold

 

 

Fuel for electric generation/ purchased power

 

Cost of gas sold

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 578

$

 (2)

 

$

 (1,061)

$

 (128)

FTRs

 

 (255)

 

 -

 

 

 (196)

 

 -

PPA

 

 570

 

 -

 

 

 602

 

 -

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

 998

$

 1,759

 

$

 (5,856)

$

 (1,349)

FTRs

 

 (374)

 

 -

 

 

 (832)

 

 -

PPA

 

 1,591

 

 -

 

 

 (607)

 

 -


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


The PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of June 30, 2015, no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of June 30, 2015, and December 31, 2014, certain counterparties were in a net liability of less than $0.1 million.


Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of June 30, 2015, no counterparties have defaulted.


10.

Rate Matters - MGE Energy and MGE.


a.

Rate Proceedings.


In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission related costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This treatment would allow MGE to reflect any differential between costs reflected in rates and actual costs incurred in its next rate case filing.


Also in July 2015, MGE filed with the PSCW an application to implement a fuel credit associated with its fuel savings for 2015. The application proposes a mechanism for the return of the fuel savings to electric customers via a bill credit expected to be implemented from September 2015 to December 31, 2015. MGE has deferred $5.9 million of actual fuel savings through June 30, 2015. Approximately $2.7 million is expected to be returned to customers through December 31, 2015. The application further proposes the fuel credit to cover expected fuel savings for 2016 in the amount of approximately $5.0 million based on anticipated fuel costs. The actual fuel savings will depend upon the completion of the annual PSCW fuel cost audits for 2015 and 2016.


On December 23, 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by 3.8% or $15.4 million and to decrease gas rates by 2.0% or $3.8 million. The increase in retail electric rates cover costs associated with the construction of emission-reduction equipment at Columbia, improvements and reliability of the state's electric transmission system, fuel and purchased power related to coal delivery costs, partially offset by lower cost as a result of market conditions for pension and postretirement benefit costs. The authorized return on common stock equity is 10.2%.




23




The PSCW approved changes to customer rates and rate design for gas service. Gas rate design consists of a fixed monthly customer charge and a variable charge tied to actual usage, in addition to the separate charge for natural gas commodity costs (PGA). The change shifted more of the rate recovery to the monthly charge, reflecting the related fixed costs of providing gas services, and reduced the variable usage-based charge. Thus, gas net income is expected to be more evenly distributed during the year and less sensitive to weather. A similar, but much smaller rate design shift was also approved for electric rates.


On July 26, 2013, the PSCW authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014. The order authorized 100% AFUDC on the Columbia scrubber construction project and deferral of increased costs related to ATC and MISO network upgrade fees. As part of the rate freeze plan authorized by the PSCW, effective January 1, 2014, approximately $6.3 million associated with a 2012 fuel rule surplus credit was required to be refunded to customers and was amortized in 2014. The fuel credit accrued interest at MGE's weighted cost of capital. The authorized return on equity remained unchanged at 10.3%.


b.

Fuel Rules.


Fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band around the amount approved for a utility in its most recent base rate proceedings. Any over/under recovery of the actual costs is determined on an annual basis and will be adjusted in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or minus 2%. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel costs exceeded 102% of the electric fuel costs allowed in its latest rate order. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. Conversely, MGE is required to defer the benefit of lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order.


As of June 30, 2015, MGE has deferred $5.7 million (to be returned to customers in a future period) of 2015 electric fuel-related savings that are outside the range authorized by the PSCW. As part of the rate freeze plan authorized by the PSCW for 2014, $3.2 million of the approximately $6.3 million associated with the 2012 fuel rule credit was amortized against purchased power expense during the six months ended June 30, 2014.


c.

Purchased Gas Adjustment Clause.


MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates. At June 30, 2015, and December 31, 2014, MGE had over collected $4.0 million and $1.2 million, respectively, which was recorded in other current liabilities on the consolidated balance sheets.


11.

Fair Value of Financial Instruments - MGE Energy and MGE.


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


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


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


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




24




a.

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


At June 30, 2015, and December 31, 2014, the carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of MGE Energy's and MGE's long-term debt is based on quoted market prices for similar financial instruments at June 30, 2015, and December 31, 2014. Since long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market value of MGE Energy's and MGE's financial instruments are as follows:


 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

(In thousands)

 

Carrying Amount

 

Fair Value

 

 

Carrying Amount

 

Fair Value

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

 75,791

$

 75,791

 

$

 65,755

$

 65,755

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

 -

 

 -

 

 

 7,000

 

 7,000

 

 

    Long-term debt*

 

 397,610

 

 443,180

 

 

 399,690

 

 457,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

 23,323

$

 23,323

 

$

 4,562

$

 4,562

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

 -

 

 -

 

 

 7,000

 

 7,000

 

 

    Long-term debt*

 

 397,610

 

 443,180

 

 

 399,690

 

 457,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Includes long-term debt due within one year.

 

 

 

 

 

 

 

 


b.

Recurring Fair Value Measurements.


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


 

 

 

Fair Value as of June 30, 2015

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 959

$

 146

$

 -

$

 813

 

 

    Exchange-traded investments

 

 768

 

 768

 

 -

 

 -

 

 

    Total Assets

$

 1,727

$

 914

$

 -

$

 813

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 57,007

$

 -

$

 -

$

 57,007

 

 

    Deferred compensation

 

 3,058

 

 -

 

 3,058

 

 -

 

 

    Total Liabilities

$

 60,065

$

 -

$

 3,058

$

 57,007

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 959

$

 146

$

 -

$

 813

 

 

    Exchange-traded investments

 

 169

 

 169

 

 -

 

 -

 

 

    Total Assets

$

 1,128

$

 315

$

 -

$

 813

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 57,007

$

 -

$

 -

$

 57,007

 

 

    Deferred compensation

 

 3,058

 

 -

 

 3,058

 

 -

 

 

    Total Liabilities

$

 60,065

$

 -

$

 3,058

$

 57,007

 

 

 

 

 

 

 

 

 

 

 

 




25





 

 

 

Fair Value as of December 31, 2014

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

 642

$

 -

$

 -

$

 642

 

 

    Exchange-traded investments

 

 927

 

 927

 

 -

 

 -

 

 

    Total Assets

$

 1,569

$

 927

$

 -

$

 642

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 55,640

$

 1,012

$

 -

$

 54,628

 

 

    Deferred compensation

 

 2,832

 

 -

 

 2,832

 

 -

 

 

    Total Liabilities

$

 58,472

$

 1,012

$

 2,832

$

 54,628

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net

$

 642

$

 -

$

 -

$

 642

 

 

    Exchange-traded investments

 

 350

 

 350

 

 -

 

 -

 

 

    Total Assets

$

 992

$

 350

$

 -

$

 642

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives, net(a)

$

 55,640

$

 1,012

$

 -

$

 54,628

 

 

    Deferred compensation

 

 2,832

 

 -

 

 2,832

 

 -

 

 

    Total Liabilities

$

 58,472

$

 1,012

$

 2,832

$

 54,628

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)   These amounts are shown gross and exclude $0.9 million and $2.2 million of collateral that was

 

 

        posted against derivative positions with counterparties as of  June 30, 2015, and

 

 

        December 31, 2014, respectively.

 


No transfers were made in or out of Level 1 or Level 2 for the six months ended June 30, 2015.


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


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


The purchased power agreement (see Footnote 9) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market, where such exchange-traded contracts exist, and upon calculations based on forward gas prices, where such exchange-traded contracts do not exist. A basis adjustment is applied to the market energy price to reflect the price differential between the market price delivery point and the counterparty delivery point. The historical relationship between the delivery points is reviewed and a discount (below 100%) or premium (above 100%) is derived. This comparison is done for both peak times when demand is high and off peak times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease and if the basis adjustment is increased, the fair value measurement will increase.




26




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


This model is prepared by members of MGE's Energy Accounting group. It is reviewed on a quarterly basis by management in Energy Supply and Finance to review the assumptions, inputs, and fair value measurements.


The following table presents the significant unobservable inputs used in the pricing model.


 

 

 

Model Input

 

Significant Unobservable Inputs

 

June 30, 2015

 

December 31, 2014

 

Basis adjustment:

 

 

 

 

 

    On peak

 

97.6%

 

98.1%

 

    Off peak

 

95.4%

 

95.0%

 

Counterparty fuel mix:

 

 

 

 

 

    Internal generation

 

60% - 75%

 

50% - 70%

 

    Purchased power

 

40% - 25%

 

50% - 30%


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


The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE.


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In thousands)

 

2015

 

2014

 

2015

 

2014

Beginning balance

$

 (53,866)

$

 (58,797)

$

 (53,986)

$

 (64,628)

Realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

    Included in regulatory liabilities (assets)

 

 (2,327)

 

 9,448

 

 (2,208)

 

 15,279

    Included in other comprehensive income

 

 -

 

 -

 

 -

 

 -

    Included in earnings

 

 (883)

 

 651

 

 (2,211)

 

 7,218

    Included in current assets

 

 -

 

 (185)

 

 -

 

 (185)

Purchases

 

 4,953

 

 6,828

 

 11,115

 

 13,634

Sales

 

 -

 

 -

 

 34

 

 (60)

Issuances

 

 -

 

 -

 

 -

 

 -

Settlements

 

 (4,071)

 

 (7,294)

 

 (8,938)

 

 (20,607)

Transfers in and/or out of Level 3

 

 -

 

 -

 

 -

 

 -

Balance as of June 30,

$

 (56,194)

$

 (49,349)

$

 (56,194)

$

 (49,349)

Total gains (losses) included in earnings attributed to

 

 

 

 

 

 

 

 

the change in unrealized gains (losses) related to

 

 

 

 

 

 

 

 

assets and liabilities held at June 30,(b)

$

 -

$

 -

$

 -

$

 -




27




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


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

 

 

(In thousands)

 

2015

 

2014

 

2015

 

2014

 

 

Purchased Power Expense

$

 (885)

$

 651

$

 (2,213)

$

 7,218

 

 

Cost of Gas Sold Expense

 

 2

 

 -

 

 2

 

 -

 

 

Total

$

 (883)

$

 651

$

 (2,211)

$

 7,218

 


(b)

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


12.

New Accounting Pronouncements - MGE Energy and MGE.


a.

Transfers and Servicing Assets.


In June 2014, the FASB issued authoritative guidance within the Codification's Transfers and Servicing topic that provides guidance on the accounting and disclosures for repurchase-to-maturity transactions, securities lending transactions, and repurchase financings. This authoritative guidance became effective January 1, 2015. The authoritative guidance changed the accounting for the Chattel Paper program and required additional disclosures. Prior to adoption of the standard, Chattel Paper was treated as an off-balance sheet arrangement. See Footnote 4 for additional information.


b.

Revenue from Contracts with Customers.


In May 2014, the FASB issued authoritative guidance within the Codification's Revenue Recognition topic that provides guidance on the recognition, measurement, and disclosure of revenue from contracts with customers. This authoritative guidance was scheduled to become effective January 1, 2017. In July 2015, the FASB deferred the effective date to January 1, 2018. MGE Energy and MGE are currently assessing the impact this pronouncement will have on their financial statements.


c.

Consolidations.


In February 2015, the FASB issued authoritative guidance within the Codification's Consolidation topic that provides guidance on the evaluation of certain legal entities for consolidation purposes. This authoritative guidance will become effective January 1, 2016. The impact of this guidance on our financial statements is not expected to be material.


d.

Debt Issuance Costs.


In April 2015, the FASB issued authoritative guidance within the Codification's Interest topic that provides guidance on the presentation of debt issuance costs in financial statements. This authoritative guidance will become effective January 1, 2016. The authoritative guidance changes the presentation of debt issuance costs on the balance sheet from an asset to a direct deduction from the related debt liability. The impact of this guidance on our financial statements is not expected to be material.


e.

Cloud Computing Arrangements.


In April 2015, the FASB issued authoritative guidance within the Codification's Software topic that provides guidance on the accounting treatment of cloud computer arrangements. This authoritative guidance will become effective January 1, 2016. The authoritative guidance provides criteria for determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. The impact of this guidance on our financial statements is not expected to be material.




28




13.

Segment Information - MGE Energy and MGE.


MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See MGE Energy's and MGE's 2014 Annual Report on Form 10-K for additional discussion of each of these segments. The following tables show segment information for MGE Energy's operations for the indicated periods:


(In thousands)

MGE Energy

 

Electric

 

Gas

 

Non- Regulated Energy

 

Transmission Investment

 

All Others

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 99,481

$

 20,669

$

 1,976

$

 -

$

 -

$

 -

$

 122,126

Interdepartmental revenues

 

 122

 

 2,291

 

 9,853

 

 -

 

 -

 

 (12,266)

 

 -

Total operating revenues

 

 99,603

 

 22,960

 

 11,829

 

 -

 

 -

 

 (12,266)

 

 122,126

Depreciation and amortization

 

 (7,456)

 

 (1,662)

 

 (1,866)

 

 -

 

 (11)

 

 -

 

 (10,995)

Other operating expenses

 

 (79,961)

 

 (19,089)

 

 (36)

 

 -

 

 (262)

 

 12,266

 

 (87,082)

Operating income (loss)

 

 12,186

 

 2,209

 

 9,927

 

 -

 

 (273)

 

 -

 

 24,049

Other (deductions) income, net

 

 16

 

 (25)

 

 -

 

 2,290

 

 165

 

 -

 

 2,446

Interest (expense) income, net

 

 (2,768)

 

 (790)

 

 (1,507)

 

 -

 

 57

 

 -

 

 (5,008)

Income (loss) before taxes

 

 9,434

 

 1,394

 

 8,420

 

 2,290

 

 (51)

 

 -

 

 21,487

Income tax (provision) benefit

 

 (3,164)

 

 (557)

 

 (3,380)

 

 (919)

 

 12

 

 -

 

 (8,008)

Net income (loss)

$

 6,270

$

 837

$

 5,040

$

 1,371

$

 (39)

$

 -

$

 13,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 96,697

$

 31,218

$

 850

$

 -

$

 -

$

 -

$

 128,765

Interdepartmental revenues

 

 127

 

 1,892

 

 10,673

 

 -

 

 -

 

 (12,692)

 

 -

Total operating revenues

 

 96,824

 

 33,110

 

 11,523

 

 -

 

 -

 

 (12,692)

 

 128,765

Depreciation and amortization

 

 (6,641)

 

 (1,562)

 

 (1,855)

 

 -

 

 (11)

 

 -

 

 (10,069)

Other operating expenses

 

 (76,812)

 

 (29,865)

 

 (30)

 

 -

 

 (240)

 

 12,692

 

 (94,255)

Operating income (loss)

 

 13,371

 

 1,683

 

 9,638

 

 -

 

 (251)

 

 -

 

 24,441

Other (deductions) income, net

 

 1,036

 

 (17)

 

 -

 

 2,402

 

 127

 

 -

 

 3,548

Interest (expense) income, net

 

 (2,534)

 

 (817)

 

 (1,559)

 

 -

 

 42

 

 -

 

 (4,868)

Income (loss) before taxes

 

 11,873

 

 849

 

 8,079

 

 2,402

 

 (82)

 

 -

 

 23,121

Income tax (provision) benefit

 

 (4,491)

 

 (364)

 

 (3,242)

 

 (963)

 

 26

 

 -

 

 (9,034)

Net income (loss)

$

 7,382

$

 485

$

 4,837

$

 1,439

$

 (56)

$

 -

$

 14,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 197,721

$

 90,597

$

 3,942

$

 -

$

 -

$

 -

$

 292,260

Interdepartmental revenues

 

 237

 

 5,016

 

 19,700

 

 -

 

 -

 

 (24,953)

 

 -

Total operating revenues

 

 197,958

 

 95,613

 

 23,642

 

 -

 

 -

 

 (24,953)

 

 292,260

Depreciation and amortization

 

 (14,788)

 

 (3,304)

 

 (3,729)

 

 -

 

 (23)

 

 -

 

 (21,844)

Other operating expenses

 

 (159,761)

 

 (79,157)

 

 (86)

 

 -

 

 (465)

 

 24,953

 

 (214,516)

Operating income (loss)

 

 23,409

 

 13,152

 

 19,827

 

 -

 

 (488)

 

 -

 

 55,900

Other (deductions) income, net

 

 106

 

 (26)

 

 -

 

 4,171

 

 300

 

 -

 

 4,551

Interest (expense) income, net

 

 (5,587)

 

 (1,594)

 

 (3,025)

 

 -

 

 107

 

 -

 

 (10,099)

Income (loss) before taxes

 

 17,928

 

 11,532

 

 16,802

 

 4,171

 

 (81)

 

 -

 

 50,352

Income tax (provision) benefit

 

 (5,547)

 

 (4,638)

 

 (6,744)

 

 (1,675)

 

 9

 

 -

 

 (18,595)

Net income (loss)

$

 12,381

$

 6,894

$

 10,058

$

 2,496

$

 (72)

$

 -

$

 31,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 195,549

$

 141,931

$

 1,530

$

 -

$

 -

$

 -

$

 339,010

Interdepartmental revenues

 

 245

 

 5,516

 

 21,343

 

 -

 

 -

 

 (27,104)

 

 -

Total operating revenues

 

 195,794

 

 147,447

 

 22,873

 

 -

 

 -

 

 (27,104)

 

 339,010

Depreciation and amortization

 

 (12,978)

 

 (3,125)

 

 (3,689)

 

 -

 

 (23)

 

 -

 

 (19,815)

Other operating expenses

 

 (154,713)

 

 (122,708)

 

 (70)

 

 -

 

 (396)

 

 27,104

 

 (250,783)

Operating income (loss)

 

 28,103

 

 21,614

 

 19,114

 

 -

 

 (419)

 

 -

 

 68,412

Other (deductions) income, net

 

 2,863

 

 (52)

 

 -

 

 4,883

 

 406

 

 -

 

 8,100

Interest (expense) income, net

 

 (4,739)

 

 (1,621)

 

 (3,131)

 

 -

 

 82

 

 -

 

 (9,409)

Income before taxes

 

 26,227

 

 19,941

 

 15,983

 

 4,883

 

 69

 

 -

 

 67,103

Income tax provision

 

 (8,844)

 

 (8,029)

 

 (6,414)

 

 (1,961)

 

 (51)

 

 -

 

 (25,299)

Net income

$

 17,383

$

 11,912

$

 9,569

$

 2,922

$

 18

$

 -

$

 41,804




29




The following tables show segment information for MGE's operations for the indicated periods:


(In thousands)

MGE

 

Electric

 

Gas

 

Non-Regulated Energy

 

Transmission Investment

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 99,486

$

 20,671

$

 1,976

$

 -

$

 -

$

 122,133

Interdepartmental revenues

 

 117

 

 2,289

 

 9,853

 

 -

 

 (12,259)

 

 -

Total operating revenues

 

 99,603

 

 22,960

 

 11,829

 

 -

 

 (12,259)

 

 122,133

Depreciation and amortization

 

 (7,456)

 

 (1,662)

 

 (1,866)

 

 -

 

 -

 

 (10,984)

Other operating expenses*

 

 (83,079)

 

 (19,632)

 

 (3,416)

 

 -

 

 12,259

 

 (93,868)

Operating income (loss)*

 

 9,068

 

 1,666

 

 6,547

 

 -

 

 -

 

 17,281

Other (deductions) income, net*

 

 (30)

 

 (39)

 

 -

 

 1,371

 

 -

 

 1,302

Interest expense, net

 

 (2,768)

 

 (790)

 

 (1,507)

 

 -

 

 -

 

 (5,065)

Net income

 

 6,270

 

 837

 

 5,040

 

 1,371

 

 -

 

 13,518

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

 -

 

 -

 

 -

 

 -

 

 (6,626)

 

 (6,626)

Net income attributable to MGE

$

 6,270

$

 837

$

 5,040

$

 1,371

$

 (6,626)

$

 6,892

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 96,702

$

 31,223

$

 850

$

 -

$

 -

$

 128,775

Interdepartmental revenues

 

 122

 

 1,887

 

 10,673

 

 -

 

 (12,682)

 

 -

Total operating revenues

 

 96,824

 

 33,110

 

 11,523

 

 -

 

 (12,682)

 

 128,775

Depreciation and amortization

 

 (6,641)

 

 (1,562)

 

 (1,855)

 

 -

 

 -

 

 (10,058)

Other operating expenses*

 

 (81,165)

 

 (30,188)

 

 (3,272)

 

 -

 

 12,682

 

 (101,943)

Operating income*

 

 9,018

 

 1,360

 

 6,396

 

 -

 

 -

 

 16,774

Other (deductions) income, net*

 

 898

 

 (58)

 

 -

 

 1,439

 

 -

 

 2,279

Interest expense, net

 

 (2,534)

 

 (817)

 

 (1,559)

 

 -

 

 -

 

 (4,910)

Net income

 

 7,382

 

 485

 

 4,837

 

 1,439

 

 -

 

 14,143

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

 -

 

 -

 

 -

 

 -

 

 (6,621)

 

 (6,621)

Net income attributable to MGE

$

 7,382

$

 485

$

 4,837

$

 1,439

$

 (6,621)

$

 7,522

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 197,731

$

 90,604

$

 3,942

$

 -

$

 -

$

 292,277

Interdepartmental revenues

 

 227

 

 5,009

 

 19,700

 

 -

 

 (24,936)

 

 -

Total operating revenues

 

 197,958

 

 95,613

 

 23,642

 

 -

 

 (24,936)

 

 292,277

Depreciation and amortization

 

 (14,788)

 

 (3,304)

 

 (3,729)

 

 -

 

 -

 

 (21,821)

Other operating expenses*

 

 (165,221)

 

 (83,770)

 

 (6,830)

 

 -

 

 24,936

 

 (230,885)

Operating income*

 

 17,949

 

 8,539

 

 13,083

 

 -

 

 -

 

 39,571

Other (deductions) income, net*

 

 19

 

 (51)

 

 -

 

 2,496

 

 -

 

 2,464

Interest expense, net

 

 (5,587)

 

 (1,594)

 

 (3,025)

 

 -

 

 -

 

 (10,206)

Net income

 

 12,381

 

 6,894

 

 10,058

 

 2,496

 

 -

 

 31,829

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

 -

 

 -

 

 -

 

 -

 

 (13,179)

 

 (13,179)

Net income attributable to MGE

$

 12,381

$

 6,894

$

 10,058

$

 2,496

$

 (13,179)

$

 18,650

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

 195,560

$

 141,941

$

 1,530

$

 -

$

 -

$

 339,031

Interdepartmental revenues

 

 234

 

 5,506

 

 21,343

 

 -

 

 (27,083)

 

 -

Total operating revenues

 

 195,794

 

 147,447

 

 22,873

 

 -

 

 (27,083)

 

 339,031

Depreciation and amortization

 

 (12,978)

 

 (3,125)

 

 (3,689)

 

 -

 

 -

 

 (19,792)

Other operating expenses*

 

 (163,211)

 

 (130,638)

 

 (6,484)

 

 -

 

 27,083

 

 (273,250)

Operating income*

 

 19,605

 

 13,684

 

 12,700

 

 -

 

 -

 

 45,989

Other (deductions) income, net*

 

 2,517

 

 (151)

 

 -

 

 2,922

 

 -

 

 5,288

Interest expense, net

 

 (4,739)

 

 (1,621)

 

 (3,131)

 

 -

 

 -

 

 (9,491)

Net income

 

 17,383

 

 11,912

 

 9,569

 

 2,922

 

 -

 

 41,786

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

 -

 

 -

 

 -

 

 -

 

 (13,131)

 

 (13,131)

Net income attributable to MGE

$

 17,383

$

 11,912

$

 9,569

$

 2,922

$

 (13,131)

$

 28,655

 

*Amounts are shown net of the related tax expense, consistent with the presentation on the consolidated MGE Income Statement.




30




Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.


General


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


·

Regulated electric utility operations, conducted through MGE,

·

Regulated gas utility operations, conducted through MGE,

·

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

·

Transmission investments, representing our equity investment in ATC, and

·

All other, which includes corporate operations and services.


Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to approximately 143,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 149,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


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


Executive Overview


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


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


·

Weather, and its impact on customer sales,

·

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

·

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

·

Energy commodity prices, including natural gas prices,

·

Equity price risk pertaining to pension related assets,

·

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

·

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


and other factors listed in "Item 1A. Risk Factors" in our 2014 Annual Report on Form 10-K.


For the three months ended June 30, 2015, MGE Energy's earnings were $13.5 million or $0.39 per share compared to $14.1 million or $0.41 per share for the same period in the prior year. MGE's earnings for the three months ended June 30, 2015, were $6.9 million compared to $7.5 million for the same period in the prior year.


For the six months ended June 30, 2015, MGE Energy's earnings were $31.8 million or $0.92 per share compared to $41.8 million or $1.21 per share for the same period in the prior year. MGE's earnings for the six months ended June 30, 2015, were $18.7 million compared to $28.7 million for the same period in the prior year.




31




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


 

 

 

Three Months Ended

 

Six Months Ended

 

 

(In thousands)

 

June 30,

 

June 30,

 

 

Business Segment:

 

2015

 

2014

 

2015

 

2014

 

 

    Electric Utility

$

 6,270

$

 7,382

$

 12,381

$

 17,383

 

 

    Gas Utility

 

 837

 

 485

 

 6,894

 

 11,912

 

 

    Nonregulated Energy

 

 5,040

 

 4,837

 

 10,058

 

 9,569

 

 

    Transmission Investments

 

 1,371

 

 1,439

 

 2,496

 

 2,922

 

 

    All Other

 

 (39)

 

 (56)

 

 (72)

 

 18

 

 

    Net Income

$

 13,479

$

 14,087

$

 31,757

$

 41,804

 


Our net income during the three months ended June 30, 2015, compared to the same period in the prior year primarily reflects the effects of the following factors:


·

Electric net income decreased due to a 2.0% decrease in electric retail sales reflecting lower customer demand. Cooling degree days (a measure for determining the impact of weather during the cooling season) decreased by 30.9% compared to the prior year. Electric net income was also affected by lower AFUDC and higher depreciation expense primarily related to the Columbia environment project being placed in service in April (Unit 2) and July 2014 (Unit 1). AFUDC decreased $1.3 million and electric depreciation increased $0.8 million compared to the same period in the prior year.


Our net income during the six months ended June 30, 2015, primarily reflects the effects of the following factors:


·

Gas net income decreased due to a 24.0% decrease in gas retail sales reflecting lower customer demand compared to the demand resulting from the extremely cold weather experienced in 2014. The average temperature in January was 20.1 degrees compared to 11.5 degrees in the prior year. Heating degree days (a measure for determining the impact of weather during the heating season) decreased by 10.3% compared to the prior year. In addition gas revenue increased $1.6 million related to rate design changes that became effective in 2015. The rate design changes are expected to make gas revenues less dependent upon usage as more of the costs are recovered in a fixed month customer charge. As a consequence, revenues in the first and fourth quarters, when usage is higher, are expected to be lower than in past years; and revenues in the second and third quarters, when usage is lower, are expected to be higher than in past years.


·

Electric net income was also affected by lower customer demand when compared to the much colder weather during the first quarter of 2014. For example, electric retail sales decreased 1.6% compared to the prior year and excess generation sold into MISO market dropped over 60%. Lower customer demand in 2015 was also affected by a 30.9% decrease in cooling degree days during the second quarter of 2015 compared to the same period in the prior year. Electric net income also decreased due to lower AFUDC and higher depreciation expense primarily related to the Columbia environment project being placed in service in April (Unit 2) and July 2014 (Unit 1). AFUDC decreased $3.8 million and electric depreciation increased $1.8 million compared to the same period in the prior year.


During the first six months of 2015, the following events occurred:


2015 Rate Filing: In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by 3.8% and to decrease rates for gas customers by 2.0%. The increase in retail electric rates covers costs associated with the construction of emission-reduction equipment at Columbia, improvements and reliability of the state's electric transmission system, fuel and purchased power related to coal delivery costs, partially offset by lower cost as a result of market conditions for pension and postretirement benefit costs.


The PSCW approved changes to customer rates and rate design for gas service. Gas rate design consists of a fixed monthly customer charge and a variable charge tied to actual usage, in addition to the separate charge for natural gas commodity costs (PGA). The change shifted more of the rate recovery to the monthly charge, reflecting the related fixed costs of providing gas services, and reduced the variable usage-based charge. Thus, gas net income is expected to be more evenly distributed during the year and less sensitive to weather. A similar, but much smaller rate design shift was also approved for electric rates.




32




In the near term, several items may affect us, including:


2016 Rate Case Filing: In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission related costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This treatment would allow MGE to reflect any differential between costs reflected in rates and actual costs incurred in its next rate case filing. Also in July 2015, MGE filed with the PSCW an application to implement a fuel credit associated with its fuel savings for 2015. The application proposes a mechanism for the return of the fuel savings to electric customers via a bill credit expected to be implemented from September 2015 to December 31, 2015. MGE has deferred $5.9 million of actual fuel savings through June 30, 2015. Approximately $2.7 million is expected to be returned to customers through December 31, 2015. The application further proposes the fuel credit to cover expected fuel savings for 2016 in the amount of approximately $5.0 million based on anticipated fuel costs. The actual fuel savings will depend upon the completion of the annual PSCW fuel cost audits for 2015 and 2016.


Environmental Initiatives: There are proposed legislation, rules, and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 44% of our electric generating capacity. We would expect to seek and receive recovery of any such costs in rates; however, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of the legislation and rules, and the scope and time of the recovery of costs in rates, which may lag the incurrence of those costs.


EPA's Clean Power Plan: On August 3, 2015, the EPA finalized its Clean Power Plan rule setting guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. Implementation of the rule is expected to have a direct impact on coal-based generating units, including possible changes in dispatch and additional operating costs. MGE is currently evaluating the rule and its requirements; however, compliance with the rule's requirements, including the yet-to-be-developed state implementation plan, will have a material impact on MGE.


Pension and Other Postretirement Benefit Costs: Costs for pension and other postretirement benefits are affected by actual investment returns on the assets held for those benefits and by the discount rate, which is sensitive to interest rates, used to calculate those benefits. Interest rates and investment returns have experienced volatility since the end of the year which could affect the value of the pension and postretirement benefit obligations. The changes in the discount rates and value of plan assets are not expected to have an impact on the income statement for 2015. However, these changes may affect benefit costs in future years. MGE expects any changes in the cost for employee benefit plans will be factored into future rate actions.


ATC Return on Equity: Several parties have filed a complaint with FERC seeking to reduce the base return on equity (ROE) of MISO and numerous other MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint alleges that the MISO ROE should not exceed 9.15%, the equity components of hypothetical capital structures should be restricted to 50%, and the relevant incentive ROE adders should be discontinued. FERC denied the portion of the complaint seeking to restrict the use of capital structures that include more than 50% common equity and also denied the portion of the complaint requesting the termination of the incentive ROE adders used by certain transmission owners. MISO's base ROE is 12.38% and ATC's base ROE is 12.2%. FERC ordered formal hearing proceedings to begin, and an initial decision in the complaint is expected by November 30, 2015. ATC provided MGE its 2015 earnings reflecting an adjustment for this matter representing ATC's estimate of its potential refund liability. We derived approximately 7.7% of our net income for the six months ended June 30, 2015, from our investment in ATC.


General Economic Conditions: Economic conditions both inside and outside our service area are expected to continue to affect the level of demand for our utility services and may affect the collection of our accounts receivable and the creditworthiness of counterparties with whom we do business. We have in place lines of credit aggregating $150 million for MGE Energy (including MGE) and $100 million for MGE to address our liquidity needs. As of June 30, 2015, there were no borrowings outstanding under MGE Energy's or MGE's lines of credit.


The following discussion is based on the business segments as discussed in Footnote 13 of the Notes to Consolidated Financial Statements.




33




Three Months Ended June 30, 2015 and 2014


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

Revenues

 

Sales (kWh)

(In thousands, except cooling degree days)

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

2015

 

2014

 

% Change

 

2015

 

2014

 

% Change

Residential

$

 29,902

$

 29,950

 

 (0.2)%

 

 166,970

 

 177,402

 

 (5.9)%

Commercial

 

 55,252

 

 53,704

 

 2.9 %

 

 451,890

 

 457,482

 

 (1.2)%

Industrial

 

 5,181

 

 5,047

 

 2.7 %

 

 62,620

 

 62,635

 

-%

Other-retail/municipal

 

 9,638

 

 9,331

 

 3.3 %

 

 106,730

 

 106,592

 

 0.1 %

    Total retail

 

 99,973

 

 98,032

 

 2.0 %

 

 788,210

 

 804,111

 

 (2.0)%

Sales to the market

 

 604

 

 100

 

 504.0 %

 

 16,615

 

 17,863

 

 (7.0)%

Adjustments to revenues

 

 (1,096)

 

 (1,435)

 

 23.6 %

 

 -

 

 -

 

 -  %

    Total

$

 99,481

$

 96,697

 

 2.9 %

 

 804,825

 

 821,974

 

 (2.1)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 181)

 

 

 

 

 

 

 

161

 

233

 

(30.9)%


Electric operating revenues increased $2.8 million or 2.9% for the three months ended June 30, 2015, compared to the same period in 2014, due to the following:


 

(In millions)

 

 

 

 

Rate changes

$

3.9

 

 

Sales to the market

 

0.5

 

 

Other revenues

 

0.3

 

 

Volume

 

(1.9)

 

 

Total

$

2.8

 


·

Rate changes. Rates charged to retail customers for the three months ended June 30, 2015, were 4.0% or $3.9 million higher than those charged during the same period in the prior year.


In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by 3.8% or $15.4 million. See "2015 Rate Filing" under "Executive Overview" for more information.


·

Volume. During the three months ended June 30, 2015, there was a 2.0% decrease in total retail sales volumes compared to the same period in the prior year driven by lower customer demand due, at least in part, to less favorable weather conditions, as evidenced by the lower number of cooling degree days.


·

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For the three months ended June 30, 2015, market volumes decreased compared to the same period in the prior year, reflecting decreased opportunities for sales; however, those sales were made at higher market prices.


Electric fuel and purchased power


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




34




Fuel for electric generation

The expense for fuel for internal electric generation increased $0.8 million during the three months ended June 30, 2015, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Increase in per-unit cost

$

1.8

 

 

Decrease in volume

 

(1.0)

 

 

Total

$

0.8

 


This increase in expense reflects a 16.9% increase in per-unit cost of internal electric generation, partially offset by an 8.6% decrease in internal generated volume delivered to the system primarily as a result of reduced generation at Columbia based on market prices.


Purchased power

Purchased power expense increased $2.3 million during the three months ended June 30, 2015, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

1.7

 

 

Decrease in per-unit cost

 

(4.3)

 

 

Fuel Rules Adjustments

 

 

 

 

    Increase in recorded fuel rule credit in 2015

 

3.3

 

 

    Amortization of 2012 fuel rule credits in 2014

 

1.6

 

 

Total

$

2.3

 


The increase in expense reflects a 19.3% decrease in the per-unit cost of purchased power and an 8.6% increase in the volume of power purchased from third parties primarily as a result of the reduced generation at Columbia.


Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased power expense. Cost savings that may be returned to customers are recorded as an increase to purchased power expense, and higher costs that MGE is entitled to recover, after adjustment for excess revenues, are recorded as a reduction to purchased power expense. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. During the three months ended June 30, 2015, MGE deferred $3.3 million in fuel related cost savings to be returned to customers. During the three months ended June 30, 2014, MGE amortized $1.6 million of the 2012 fuel rule credits, which reduced purchased power expense for that period.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $0.8 million during the three months ended June 30, 2015, compared to the same period in 2014. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

1.1

 

 

Increased transmission costs

 

0.5

 

 

Increased customer services

 

0.3

 

 

Increased distribution expenses

 

0.3

 

 

Decreased production expenses

 

(1.2)

 

 

Decreased customer accounts costs

 

(0.2)

 

 

Total

$

0.8

 


For the three months ended June 30, 2015, increased administrative and general costs are primarily due to increased pension and other postretirement benefit costs predominantly driven by a reduction in the discount rate. Decreased production expenses are primarily due to decreased costs at Columbia as a result of lower maintenance costs incurred during the scheduled outage in 2015 compared to the prior year.


Electric depreciation expense


Electric depreciation expense increased $0.8 million for the three months ended June 30, 2015, compared to the same period in the prior year. This increase is related to the completion of the Columbia environmental project. The systems and equipment for Unit 2 and Unit 1 were placed into service in April 2014 and July 2014, respectively.



35




Other Electric Income


Other electric income decreased $1.0 million, primarily due to AFUDC equity related to the completion of the Columbia environmental project. Unit 2 and Unit 1 were placed into service in April and July 2014, respectively.


Gas Utility Operations - MGE Energy and MGE


Gas deliveries and revenues


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


 

 

Revenues

 

Therms Delivered

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

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

2015

 

2014

 

% Change

 

2015

 

2014

 

% Change

Residential

$

 13,214

$

 15,578

 

 (15.2)%

 

 11,178

 

 13,152

 

 (15.0)%

Commercial/Industrial

 

 6,338

 

 14,861

 

 (57.4)%

 

 12,009

 

 22,575

 

 (46.8)%

    Total retail

 

 19,552

 

 30,439

 

 (35.8)%

 

 23,187

 

 35,727

 

 (35.1)%

Gas transportation

 

 1,003

 

 662

 

 51.5 %

 

 16,013

 

 8,031

 

 99.4 %

Other revenues

 

 114

 

 117

 

 (2.6)%

 

 -

 

 -

 

 -  %

    Total

$

 20,669

$

 31,218

 

 (33.8)%

 

 39,200

 

 43,758

 

 (10.4)%

Heating degree days (normal 836)

 

 

 

 

 

 

 

721

 

 797

 

(9.5)%

Average rate per therm of

 

 

 

 

 

 

 

 

 

 

 

 

retail customer

$

0.843

$

0.852

 

(1.1)%

 

 

 

 

 

 


Gas revenues decreased $10.5 million or 33.8% for the three months ended June 30, 2015, compared to the same period in 2014. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Volume

$

(10.7)

 

 

Rate/PGA changes

 

(0.2)

 

 

Transportation and other effects

 

0.4

 

 

Total

$

(10.5)

 


·

Volume. For the three months ended June 30, 2015, retail gas deliveries decreased 35.1% compared to the same period in the prior year due, at least in part, to warmer weather in the current period compared to the prior period and a large commercial customer's decision to purchase gas from a third party supplier and to use MGE's facilities for the transport of that gas. The impact to gas income of this shift is not material.


·

Rate/PGA changes. In December 2014, the PSCW approved changes to customer rates and rate design for gas service. Rates were reduced by 2.0%, effective January 1, 2015. Gas rate design consists of a fixed monthly customer charge and a variable charge tied to actual usage, in addition to the separate charge for natural gas commodity costs (PGA). The change shifted more of the rate recovery to the monthly charge, reflecting the related fixed costs of providing gas services, and reduced the variable usage-based charge. Thus, gas net income is expected to be more evenly distributed during the year and less sensitive to weather.


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


The average retail rate per therm for the three months ended June 30, 2015, decreased 1.1% compared to the same period in 2014, reflecting a $5.1 million decrease in natural gas commodity costs (PGA) and a $4.9 million increase (comprised of a decrease in variable rate costs offset by an increase in fixed rate charges) related to rate design changes. As noted previously, as a result of the rate design changes, revenues in the first and fourth quarters, when usage is higher, are expected to be lower than in past years; and revenues in the second and third quarters, when usage is lower, are expected to be higher than in past years.


·

Transportation and other effects. During the three months ended June 30, 2015, transportation and other effects increased $0.4 million primarily attributable to a large commercial customer's decision to purchase gas from a third party supplier and to use MGE's facilities for the transport of that gas. The impact to gas income of this shift is not material.



36




Cost of gas sold


For the three months ended June 30, 2015, cost of gas sold decreased by $11.5 million, compared to the same period in the prior year. The cost per therm of natural gas decreased 44.4%, which resulted in $5.3 million of decreased expense. The volume of gas purchased decreased 34.0%, which resulted in $6.2 million of decreased expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased by $0.5 million for the three months ended June 30, 2015, compared to the same period in 2014. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

0.6

 

 

Increased distribution expenses

 

0.2

 

 

Decreased customer service costs

 

(0.2)

 

 

Decreased customer accounts costs

 

(0.1)

 

 

Total

$

0.5

 


Nonregulated Energy Operations - MGE Energy and MGE


For the three months ended June 30, 2015 and 2014, net income at the nonregulated energy operations segment was $5.0 million and $4.8 million, respectively. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus, which have been formed to own and lease electric generating capacity to assist MGE.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the three months ended June 30, 2015 and 2014, other income at the transmission investment segment was $2.3 million and $2.4 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 3 of the Notes to Consolidated Financial Statements and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.


Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for the three months ended June 30, 2015 and 2014, was 37.3% and 39.1%, respectively. MGE's effective income tax rate for the three months ended June 30, 2015 and 2014, was 37.2% and 39.1%, respectively. The decrease in the effective tax rate is due in part to a higher estimated domestic manufacturing deduction, offset by lower AFUDC equity earnings in 2015.


Noncontrolling Interest, Net of Tax - MGE


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


 

 

 

Three Months Ended

 

 

 

 

June 30,

 

 

(In millions)

 

2015

 

2014

 

 

MGE Power Elm Road

$

4.2

$

4.0

 

 

MGE Power West Campus

 

1.8

 

1.9

 

 

MGE Transco

 

0.6

 

0.7

 




37




Six Months Ended June 30, 2015 and 2014


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

Revenues

 

Sales (kWh)

(In thousands, except cooling degree days)

 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

% Change

 

2015

 

2014

 

% Change

Residential

$

 64,149

$

 65,243

 

 (1.7)%

 

 373,783

 

 399,098

 

 (6.3)%

Commercial

 

 106,430

 

 103,865

 

 2.5 %

 

 893,325

 

 905,962

 

 (1.4)%

Industrial

 

 9,873

 

 9,628

 

 2.5 %

 

 121,343

 

 120,940

 

 0.3 %

Other-retail/municipal

 

 18,799

 

 17,585

 

 6.9 %

 

 208,153

 

 196,027

 

 6.2 %

    Total retail

 

 199,251

 

 196,321

 

 1.5 %

 

 1,596,604

 

 1,622,027

 

 (1.6)%

Sales to the market

 

 900

 

 2,060

 

 (56.3)%

 

 24,548

 

 62,030

 

 (60.4)%

Adjustments to revenues

 

 (2,430)

 

 (2,832)

 

 14.2 %

 

 -

 

 -

 

 -  %

    Total

$

 197,721

$

 195,549

 

 1.1 %

 

 1,621,152

 

 1,684,057

 

 (3.7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 181)

 

 

 

 

 

 

 

161

 

233

 

(30.9)%


Electric operating revenues increased $2.2 million or 1.1% for the six months ended June 30, 2015, compared to the same period in 2014, due to the following:


 

(In millions)

 

 

 

 

Rate changes

$

6.0

 

 

Other

 

0.5

 

 

Volume

 

(3.1)

 

 

Sales to the market

 

(1.2)

 

 

Total

$

2.2

 


·

Rate changes. Rates charged to retail customers for the six months ended June 30, 2015, were 3.1% or $6.0 million higher than those charged during the same period in the prior year.


In December 2014, the PSCW authorized MGE to increase 2015 rates for retail electric customers by 3.8% or $15.4 million. See "2015 Rate Filing" under "Executive Overview" for more information.


·

Volume. During the six months ended June 30, 2015, there was a 1.6% decrease in total retail sales volumes compared to the same period in the prior year driven by lower customer demand due, at least in part, to less favorable weather conditions, as evidenced by the lower number of cooling degree days.


·

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For the six months ended June 30, 2015, market volumes decreased compared to the same period in the prior year, reflecting decreased opportunities for sales. In addition, market settlement resulted in lower revenue per kWh for the six months ended June 30, 2015, reflecting lower market prices in the early portion of that period.


Electric fuel and purchased power


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




38




Fuel for electric generation

The expense for fuel for internal electric generation decreased $1.4 million during the six months ended June 30, 2015, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(3.7)

 

 

Increase in per-unit cost

 

2.3

 

 

Total

$

(1.4)

 


This decrease in expense reflects a 13.0% decrease in internal generated volume delivered to the system primarily as a result of reduced generation at Columbia based on market prices, partially offset by an 8.7% increase in per-unit cost of internal electric generation.


Purchased power

Purchased power expense increased $6.7 million during the six months ended June 30, 2015, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

4.9

 

 

Decrease in per-unit cost

 

(7.1)

 

 

Fuel Rules Adjustments

 

 

 

 

    Increase in recorded fuel rule credit in 2015

 

5.7