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:

September 30, 2016


[ ] 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 October 31, 2016

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



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' 2015 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 7 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

ATC

American Transmission Company LLC

BART

Best Available Retrofit Technology

Blount

Blount Station

CAVR

Clean Air Visibility Rule

CCR

Coal Combustion Residual

Codification

Financial Accounting Standards Board Accounting Standards Codification

Columbia

Columbia Energy Center

Cooling degree days

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

CPP

Clean Power Plan

CSAPR

Cross-State Air Pollution Rule

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

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

NO2

Nitrogen Dioxide

NOx

Nitrogen Oxides



4





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

PPA

Purchased Power Agreement

ppb

Parts Per Billion

PSCW

Public Service Commission of Wisconsin

ROE

Return on Equity

Riverside

Riverside Energy Center

SCR

Selective Catalytic Reduction

SEC

Securities and Exchange Commission

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

WEPCO

Wisconsin Electric Power Company

Working capital

Current assets less current liabilities

WPDES

Wisconsin Pollutant Discharge Elimination System

WPL

Wisconsin Power and Light Company

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

119,147

$

123,364

$

313,452

$

325,027

    Gas revenues

 

17,570

 

17,431

 

92,368

 

108,028

        Total Operating Revenues

 

136,717

 

140,795

 

405,820

 

433,055

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

20,505

 

17,055

 

47,567

 

41,624

    Purchased power

 

9,167

 

18,484

 

38,698

 

62,614

    Cost of gas sold

 

4,314

 

4,299

 

43,247

 

57,868

    Other operations and maintenance

 

40,146

 

38,721

 

123,839

 

120,895

    Depreciation and amortization

 

11,212

 

11,182

 

33,358

 

33,026

    Other general taxes

 

4,846

 

4,877

 

14,841

 

14,951

        Total Operating Expenses

 

90,190

 

94,618

 

301,550

 

330,978

Operating Income

 

46,527

 

46,177

 

104,270

 

102,077

 

 

 

 

 

 

 

 

 

Other income, net

 

2,105

 

2,564

 

6,726

 

7,115

Interest expense, net

 

(5,038)

 

(5,036)

 

(14,995)

 

(15,135)

    Income before income taxes

 

43,594

 

43,705

 

96,001

 

94,057

Income tax provision

 

(15,714)

 

(15,351)

 

(34,943)

 

(33,946)

Net Income

$

27,880

$

28,354

$

61,058

$

60,111

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

 

(basic and diluted)

$

0.80

$

0.82

$

1.76

$

1.73

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

0.308

$

0.295

$

0.898

$

0.860

 

 

 

 

 

 

 

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

Net Income

$

27,880

$

28,354

$

61,058

$

60,111

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax (($8) and $56, and $96 and

 

 

 

 

 

 

 

 

    $120, respectively)

 

11

 

(85)

 

(143)

 

(180)

Comprehensive Income

$

27,891

$

28,269

$

60,915

$

59,931

 

 

 

 

 

 

 

 

 

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)


 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

2016

 

2015

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

61,058

$

60,111

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

33,358

 

33,026

 

 

        Deferred income taxes

 

15,041

 

7,370

 

 

        Provision for doubtful receivables

 

583

 

(78)

 

 

        Employee benefit plan expenses

 

165

 

2,500

 

 

        Equity earnings in ATC

 

(6,023)

 

(6,568)

 

 

        Other items

 

693

 

(154)

 

 

    Changes in working capital items:

 

 

 

 

 

 

        Decrease in current assets

 

33,740

 

39,034

 

 

        Decrease in current liabilities

 

(3,147)

 

(18,231)

 

 

    Dividend income from ATC

 

4,214

 

4,732

 

 

    Cash contributions to pension and other postretirement plans

 

(13,134)

 

(12,460)

 

 

    Other noncurrent items, net

 

2,644

 

13,373

 

 

            Cash Provided by Operating Activities

 

129,192

 

122,655

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(62,273)

 

(52,311)

 

 

    Capital contributions to investments

 

(2,036)

 

(785)

 

 

    Other

 

(310)

 

(85)

 

 

            Cash Used for Investing Activities

 

(64,619)

 

(53,181)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(31,115)

 

(29,816)

 

 

    Repayment of long-term debt

 

(3,192)

 

(3,128)

 

 

    Repayment of short-term debt

 

-

 

(7,000)

 

 

    Other

 

(65)

 

(1,018)

 

 

            Cash Used for Financing Activities

 

(34,372)

 

(40,962)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

30,201

 

28,512

 

 

Cash and cash equivalents at beginning of period

 

81,384

 

65,755

 

 

Cash and cash equivalents at end of period

$

111,585

$

94,267

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

10,603

$

3,497

 

 

 

 

 

 

 

 

 

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

 




7





MGE Energy, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands)


 

 

September 30,

December 31,

ASSETS

 

2016

 

2015

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

111,585

$

81,384

    Accounts receivable, less reserves of $2,815 and $3,052, respectively

 

40,007

 

37,112

    Other accounts receivable, less reserves of $480 and $642, respectively

 

6,885

 

7,477

    Unbilled revenues

 

13,885

 

25,008

    Materials and supplies, at average cost

 

20,004

 

19,155

    Fossil fuel, at average cost

 

9,113

 

13,110

    Stored natural gas, at average cost

 

14,886

 

16,145

    Prepaid taxes

 

12,617

 

35,252

    Regulatory assets - current

 

7,207

 

9,538

    Other current assets

 

13,115

 

10,570

        Total Current Assets

 

249,304

 

254,751

Regulatory assets

 

146,305

 

148,199

Other deferred assets and other

 

6,361

 

6,377

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,243,081

 

1,217,094

    Construction work in progress

 

38,290

 

26,351

        Total Property, Plant, and Equipment

 

1,281,371

 

1,243,445

Investments

 

76,731

 

73,631

        Total Assets

$

1,760,072

$

1,726,403

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,333

$

4,266

    Accounts payable

 

49,961

 

40,830

    Accrued interest and taxes

 

4,538

 

5,067

    Accrued payroll related items

 

9,783

 

11,215

    Regulatory liabilities - current

 

3,564

 

9,515

    Derivative liabilities

 

8,030

 

8,343

    Other current liabilities

 

5,950

 

4,910

        Total Current Liabilities

 

86,159

 

84,146

Other Credits:

 

 

 

 

    Deferred income taxes

 

376,194

 

360,785

    Investment tax credit - deferred

 

973

 

1,050

    Regulatory liabilities

 

21,959

 

20,785

    Accrued pension and other postretirement benefits

 

61,825

 

75,680

    Derivative liabilities

 

42,460

 

44,935

    Other deferred liabilities and other

 

66,450

 

61,820

        Total Other Credits

 

569,861

 

565,055

Capitalization:

 

 

 

 

    Common shareholders' equity

 

720,258

 

690,458

    Long-term debt

 

383,794

 

386,744

        Total Capitalization

 

1,104,052

 

1,077,202

Commitments and contingencies (see Footnote 7)

 

-

 

-

        Total Liabilities and Capitalization

$

1,760,072

$

1,726,403

 

 

 

 

 

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/(Loss)

 

Total

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2014

34,668

$

34,668

$

316,268

$

308,007

$

458

$

659,401

 

 

Cumulative effect of new accounting principle

 

 

 

 

 

 

(142)

 

 

 

(142)

 

 

Beginning balance - Adjusted

 

 

 

 

 

 

307,865

 

 

 

659,259

 

 

Net income

 

 

 

 

 

 

60,111

 

 

 

60,111

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(180)

 

(180)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.860 per share)

 

 

 

 

 

 

(29,816)

 

 

 

(29,816)

 

 

Ending balance - September 30, 2015

34,668

$

34,668

$

316,268

$

338,160

$

278

$

689,374

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2015

34,668

$

34,668

$

316,268

$

339,165

$

357

$

690,458

 

 

Net income

 

 

 

 

 

 

61,058

 

 

 

61,058

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(143)

 

(143)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.898 per share)

 

 

 

 

 

 

(31,115)

 

 

 

(31,115)

 

 

Ending balance - September 30, 2016

34,668

$

34,668

$

316,268

$

369,108

$

214

$

720,258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

119,152

$

123,371

$

313,470

$

325,044

    Gas revenues

 

17,576

 

17,435

 

92,390

 

108,039

        Total Operating Revenues

 

136,728

 

140,806

 

405,860

 

433,083

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

20,507

 

17,057

 

47,574

 

41,630

    Purchased power

 

9,171

 

18,488

 

38,709

 

62,624

    Cost of gas sold

 

4,320

 

4,302

 

43,269

 

57,879

    Other operations and maintenance

 

40,003

 

38,561

 

123,117

 

120,269

    Depreciation and amortization

 

11,212

 

11,170

 

33,334

 

32,991

    Other general taxes

 

4,846

 

4,877

 

14,841

 

14,951

    Income tax provision

 

14,934

 

14,401

 

32,488

 

31,218

        Total Operating Expenses

 

104,993

 

108,856

 

333,332

 

361,562

Operating Income

 

31,735

 

31,950

 

72,528

 

71,521

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

 

    AFUDC - equity funds

 

253

 

206

 

777

 

501

    Equity earnings in MGE Transco

 

1,451

 

2,398

 

5,451

 

6,568

    Income tax provision

 

(606)

 

(977)

 

(2,315)

 

(2,763)

    Other income, net

 

(62)

 

(73)

 

(298)

 

(288)

        Total Other Income and Deductions

 

1,036

 

1,554

 

3,615

 

4,018

    Income before interest expense

 

32,771

 

33,504

 

76,143

 

75,539

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

    Interest on long-term debt

 

5,079

 

5,123

 

15,284

 

15,410

    Other interest, net

 

112

 

37

 

163

 

52

    AFUDC - borrowed funds

 

(82)

 

(67)

 

(253)

 

(163)

        Net Interest Expense

 

5,109

 

5,093

 

15,194

 

15,299

Net Income

$

27,662

$

28,411

$

60,949

$

60,240

Less: Net Income Attributable to Noncontrolling

 

 

 

 

 

 

 

 

Interest, net of tax

 

(5,695)

 

(6,633)

 

(17,899)

 

(19,812)

Net Income Attributable to MGE

$

21,967

$

21,778

$

43,050

$

40,428

 

 

 

 

 

 

 

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2015

 

2016

 

2015

Net Income

$

27,662

$

28,411

$

60,949

$

60,240

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax (($5) and $19, and $21 and

 

 

 

 

 

 

 

 

    $92, respectively)

 

8

 

(28)

 

(31)

 

(137)

Comprehensive Income

$

27,670

$

28,383

$

60,918

$

60,103

    Less: Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

    Noncontrolling Interest, net of tax

 

(5,695)

 

(6,633)

 

(17,899)

 

(19,812)

Comprehensive Income Attributable to MGE

$

21,975

$

21,750

$

43,019

$

40,291

 

 

 

 

 

 

 

 

 

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)


 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

 

2016

 

2015

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

60,949

$

60,240

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

33,334

 

32,991

 

 

        Deferred income taxes

 

13,997

 

4,510

 

 

        Provision for doubtful receivables

 

583

 

(78)

 

 

        Employee benefit plan expenses

 

165

 

2,500

 

 

        Equity earnings in MGE Transco

 

(5,451)

 

(6,568)

 

 

        Other items

 

1,056

 

234

 

 

    Changes in working capital items:

 

 

 

 

 

 

       Decrease in current assets

 

32,557

 

46,806

 

 

       Decrease in current liabilities

 

(1,783)

 

(15,876)

 

 

    Dividend income from MGE Transco

 

4,214

 

4,732

 

 

    Cash contributions to pension and other postretirement plans

 

(13,134)

 

(12,460)

 

 

    Other noncurrent items, net

 

2,472

 

13,076

 

 

            Cash Provided by Operating Activities

 

128,959

 

130,107

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(62,273)

 

(52,311)

 

 

    Capital contributions to investments

 

(1,598)

 

(533)

 

 

    Other

 

(536)

 

(90)

 

 

            Cash Used for Investing Activities

 

(64,407)

 

(52,934)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

(40,000)

 

(20,000)

 

 

    Distributions to parent from noncontrolling interest

 

(18,113)

 

(12,007)

 

 

    Equity contribution received by noncontrolling interest

 

1,598

 

3,053

 

 

    Repayment of long-term debt

 

(3,192)

 

(3,128)

 

 

    Repayment of short-term debt

 

-

 

(7,000)

 

 

    Other

 

(47)

 

(682)

 

 

            Cash Used for Financing Activities

 

(59,754)

 

(39,764)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

4,798

 

37,409

 

 

Cash and cash equivalents at beginning of period

 

26,760

 

4,562

 

 

Cash and cash equivalents at end of period

$

31,558

$

41,971

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

10,603

$

3,497

 

 

 

 

 

 

 

 

 

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)


 

 

September 30,

December 31,

ASSETS

 

2016

 

2015

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

31,558

$

26,760

    Accounts receivable, less reserves of $2,815 and $3,052, respectively

 

40,007

 

37,112

    Affiliate receivables

 

565

 

542

    Other accounts receivable, less reserves of $480 and $642, respectively

 

6,816

 

7,390

    Unbilled revenues

 

13,885

 

25,008

    Materials and supplies, at average cost

 

20,004

 

19,155

    Fossil fuel, at average cost

 

9,113

 

13,110

    Stored natural gas, at average cost

 

14,886

 

16,145

    Prepaid taxes

 

12,793

 

34,279

    Regulatory assets - current

 

7,207

 

9,538

    Other current assets

 

13,082

 

10,544

        Total Current Assets

 

169,916

 

199,583

Affiliate receivable long-term

 

4,369

 

4,766

Regulatory assets

 

146,305

 

148,199

Other deferred assets and other

 

4,100

 

4,216

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,242,459

 

1,216,415

    Construction work in progress

 

38,290

 

26,351

        Total Property, Plant, and Equipment

 

1,280,749

 

1,242,766

Investments

 

47,259

 

69,984

        Total Assets

$

1,652,698

$

1,669,514


 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,333

$

4,266

    Accounts payable

 

49,949

 

40,742

    Accrued interest and taxes

 

5,710

 

5,021

    Accrued payroll related items

 

9,783

 

11,215

    Regulatory liabilities - current

 

3,564

 

9,515

    Derivative liabilities

 

8,030

 

8,343

    Other current liabilities

 

5,901

 

4,791

        Total Current Liabilities

 

87,270

 

83,893

Other Credits:

 

 

 

 

    Deferred income taxes

 

367,066

 

352,626

    Investment tax credit - deferred

 

973

 

1,050

    Regulatory liabilities

 

21,959

 

20,785

    Accrued pension and other postretirement benefits

 

61,825

 

75,680

    Derivative liabilities

 

42,460

 

44,935

    Other deferred liabilities and other

 

66,450

 

61,817

        Total Other Credits

 

560,733

 

556,893

Capitalization:

 

 

 

 

    Common shareholder's equity

 

504,695

 

501,676

    Noncontrolling interest

 

116,206

 

140,308

        Total Equity

 

620,901

 

641,984

    Long-term debt

 

383,794

 

386,744

        Total Capitalization

 

1,004,695

 

1,028,728

Commitments and contingencies (see Footnote 7)

 

-

 

-

        Total Liabilities and Capitalization

$

1,652,698

$

1,669,514


 

 

 

 

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/(Loss)

Interest

 

Total

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

 

 

 

 

 

 

(142)

 

 

 

 

 

(142)

Beginning balance - Adjusted

 

 

 

 

 

 

276,520

 

 

 

 

 

612,118

Net income

 

 

 

 

 

 

40,428

 

 

 

19,812

 

60,240

Other comprehensive loss

 

 

 

 

 

 

 

 

(137)

 

 

 

(137)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

(20,000)

 

 

 

 

 

(20,000)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

3,053

 

3,053

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(12,007)

 

(12,007)

Ending balance - September 30, 2015

17,348

$

17,348

$

192,417

$

296,948

$

7

$

136,547

$

643,267

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2015

17,348

$

17,348

$

192,417

$

291,888

$

23

$

140,308

$

641,984

Net income

 

 

 

 

 

 

43,050

 

 

 

17,899

 

60,949

Other comprehensive loss

 

 

 

 

 

 

 

 

(31)

 

 

 

(31)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

(40,000)

 

 

 

 

 

(40,000)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

1,598

 

1,598

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(18,113)

 

(18,113)

Deconsolidation of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(25,486)

 

(25,486)

Ending balance - September 30, 2016

17,348

$

17,348

$

192,417

$

294,938

$

(8)

$

116,206

$

620,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

September 30, 2016



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 accounting 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 2015 Annual Report on Form 10-K.


MGE Transco is jointly owned by MGE Energy and MGE. MGE's ownership interest in MGE Transco declined below a majority in July 2016. As a result of the change in majority ownership in MGE Transco in July 2016, MGE deconsolidated MGE Energy's proportionate share of the equity in MGE Transco. The change in consolidation was applied prospectively by reducing its investment and noncontrolling interest on MGE's consolidated financial statements. See Footnote 3 for further discussion.


The accompanying consolidated financial statements as of September 30, 2016, and for the three and nine 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 2015 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 55 through 105 of the 2015 Annual Report on Form 10-K.


2.

Equity and Financing Arrangements - MGE Energy.


a.

Common Stock.


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 nine months ended September 30, 2016 and 2015, MGE Energy did not issue any new shares of common stock under the Stock Plan.


b.

Dilutive Shares Calculation.


MGE Energy does not have any dilutive securities.


c.

Long-term Debt - MGE Energy and MGE.


MGE has $30 million of medium-term notes maturing in 2017. MGE priced $40 million of new long-term unsecured debt in October 2016, with funding expected to occur in mid-January 2017. The new debt will carry an interest rate of 3.76% per annum over its 35-year term. The proceeds of this debt financing will be used to refinance the maturing $30 million medium-term notes and assist with the financing of additional capital expenditures. The covenants of this debt are expected to be substantially consistent with MGE's existing unsecured long-term debt. In accordance with applicable accounting guidance, MGE has classified the $30 million of maturing medium-term notes as long-term debt on the consolidated balance sheets for the quarter ended September 30, 2016.




14




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 three and nine months ended September 30, 2016 and 2015, MGE Transco recorded the following:


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2016

 

2015

 

2016

 

2015

 

 

Equity earnings from investment in ATC

$

2,023

$

2,398

$

6,023

$

6,568

 

 

Dividends received from ATC

 

1,486

 

1,841

 

4,214

 

4,732

 

 

Capital contributions to ATC

 

888

 

177

 

1,598

 

533

 


MGE Transco's investment in ATC as of September 30, 2016, and December 31, 2015, was $72.9 million and $69.5 million, respectively. As of September 30, 2016, MGE's investment in MGE Transco was $46.8 million.


At September 30, 2016, MGE Energy, the holding company, is the majority owner (50.5%), and MGE is the minority owner (49.5%) of MGE Transco. MGE's ownership interest declined below a majority in July 2016 as a result of continued funding of ATC capital contributions by MGE Energy. As a result of the change in majority ownership in MGE Transco in July 2016, MGE deconsolidated MGE Energy's proportionate share of the equity in MGE Transco. The change in consolidation was applied prospectively by reducing its investment and noncontrolling interest on MGE's consolidated financial statements. No gain or loss was recognized in July 2016 due to MGE ceasing to have a controlling financial interest. As of December 31, 2015, the noncontrolling interest on MGE's consolidated balance sheets was $23.6 million. For the three and nine months ended September 30, 2016 and 2015, MGE recorded the following amounts attributable to noncontrolling interest in MGE Transco:


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2016

 

2015

 

2016

 

2015

 

 

Equity earnings from investment(a)

$

254

$

679

$

1,410

$

1,848

 

 

Dividends received from investment(a)

 

561

 

423

 

1,113

 

1,007

 

 

Capital contributions by noncontrolling interest

 

888

 

177

 

1,598

 

533

 


(a) Amounts reflected net of tax.


In June 2016, the PSCW accepted a staff recommendation to have MGE transfer its interest in ATC to MGE Energy. As a result, MGE's ownership interest in MGE Transco will be completely eliminated in favor of MGE Energy when the transfers are complete, which is required by December 31, 2022. The recommendation arose in the context of requests for regulatory approvals by several owners of ATC in connection with a reorganization of ATC designed to separate its existing Wisconsin-based transmission operations from its non-Wisconsin transmission development activities. The change will have no effect on MGE Energy's consolidated financial statements.


ATC's summarized financial data for the three and nine months ended September 30, 2016 and 2015, is as follows:


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2016

 

2015

 

2016

 

2015

 

 

Operating revenues

$

158,126

$

164,515

$

476,591

$

482,043

 

 

Operating expenses

 

(80,271)

 

(78,059)

 

(241,034)

 

(238,336)

 

 

Other income, net

 

1,128

 

585

 

2,563

 

566

 

 

Interest expense, net

 

(24,624)

 

(23,655)

 

(73,714)

 

(72,310)

 

 

Earnings before members' income taxes

$

54,359

$

63,386

$

164,406

$

171,963

 




15




MGE receives transmission and other related services from ATC. During the three and nine months ended September 30, 2016, MGE recorded $7.4 million and $22.1 million, respectively, for transmission services received compared to $7.0 million and $21.1 million for the comparable periods in 2015. MGE also provides a variety of operational, maintenance, and project management services for ATC, which is reimbursed by ATC. As of September 30, 2016, and December 31, 2015, MGE had a receivable due from ATC of $0.3 million and $0.2 million, respectively.


4.

Taxes - MGE Energy and MGE.


MGE Energy's effective income tax rates for the three and nine months ended September 30, 2016, were 36.1% and 36.4%, respectively, compared to 35.1% and 36.1% for the same periods in 2015. MGE's effective income tax rates for the three and nine months ended September 30, 2016, were 36.0% and 36.4%, respectively, compared to 35.1% and 36.1% for the same periods in 2015. The increase in the effective tax rates is due in part to a lower estimated domestic manufacturing deduction offset by higher estimated AFUDC equity earnings in 2016.


5.

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. MGE refined its methodology for using discount rates to measure the components of net periodic benefit cost for 2016. The refined methodology uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components.


The following table presents the components of MGE Energy's and MGE's net periodic benefit costs recognized for the three and nine months ended September 30, 2016 and 2015. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2016

 

2015

 

2016

 

2015

 

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

1,413

$

1,878

$

4,358

$

5,715

 

 

    Interest cost

 

3,161

 

3,594

 

9,744

 

10,936

 

 

    Expected return on assets

 

(5,724)

 

(5,930)

 

(17,646)

 

(18,045)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Prior service cost

 

3

 

6

 

8

 

18

 

 

    Actuarial loss

 

1,388

 

1,393

 

4,278

 

4,240

 

 

Net periodic cost

$

241

$

941

$

742

$

2,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic (benefit) cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

361

$

194

$

1,084

$

580

 

 

    Interest cost

 

753

 

392

 

2,258

 

1,176

 

 

    Expected return on assets

 

(787)

 

(355)

 

(2,360)

 

(1,063)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Transition obligation

 

1

 

-

 

3

 

1

 

 

    Prior service benefit

 

(744)

 

(337)

 

(2,233)

 

(1,009)

 

 

    Actuarial loss

 

178

 

133

 

533

 

397

 

 

Net periodic (benefit) cost

$

(238)

$

27

$

(715)

$

82

 


6.

Share-Based Compensation - MGE Energy and MGE.


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


In January 2016, 3,773 units were granted under the Director Incentive Plan and are subject to a three-year graded vesting schedule. In February 2016, 19,055 units were granted under the Performance Unit Plan and are subject to a five-year graded vesting schedule. On the grant date, MGE Energy and MGE measure the cost of the



16




employee services received in exchange for a performance unit award based on the current market value of MGE Energy common stock. The fair value of the awards is re-measured quarterly, including at September 30, 2016, as required by applicable accounting standards. Changes in fair value as well as the original grant are recognized as compensation cost. Since this amount is re-measured throughout the vesting period, the compensation cost is subject to variability.


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


During the three and nine months ended September 30, 2016, MGE recorded $0.2 million and $2.0 million, respectively, in compensation expense as a result of awards under the plans compared to $0.3 million and $0.4 million for the comparable periods in 2015. In January 2016, cash payments of $1.2 million were distributed relating to awards that were granted in 2011. During the nine months ended September 30, 2015, MGE recorded a $0.2 million gain on 4,676 units forfeited. No forfeitures occurred during the nine months ended September 30, 2016. At September 30, 2016, $5.8 million of outstanding awards are vested, and of this amount, no cash settlements have occurred.


7.

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 we conduct our operations, the costs of those operations, as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted rules, have the potential to have a material effect on our capital expenditures and operating costs. These initiatives, proposed rules, and court challenges include:


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

In November 2015, the EPA published its final rule setting Effluent Limitations Guidelines (ELG) for the steam electric power generating industry. The ELG rule establishes federal limits on the amount of metals and other pollutants that can be discharged in wastewater from new and existing steam electric generation plants. The ELG rule mostly covers pollutants that are captured by certain air pollution control systems and via wet ash handling systems at coal-burning power plants with units greater than 50 MW generation capacity. The operators of our Columbia and Elm Road Units have indicated that equipment upgrades may be necessary to comply with the new discharge standards. The rule will be applied to Wisconsin-based power plants as they renew their WPDES permits, beginning in 2018 but no later than 2023. Management believes that any compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


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

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


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




17




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

In October 2015, the EPA published its Clean Power Plan (CPP) rule with an effective date of December 2015, setting guidelines and approval criteria for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. In October 2015, the EPA also published a proposed federal implementation plan under the CPP rule. The proposed federal implementation plan is designed to provide mass-based and rate-based emissions trading options to serve as a model and/or resource for states that are adopting their own plans, or for use by the EPA in states that do not implement their own plans under the finalized CPP. Implementation of the rule is expected to have a direct impact on existing coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs.


On February 9, 2016, the U.S. Supreme Court issued a stay blocking implementation of the CPP pending the Court's own review. The CPP may not be implemented until the Supreme Court lifts the stay, presumably after the courts ultimately resolve the underlying legality of the rule. Oral arguments were held before the D.C. Circuit on September 27, 2016, and a decision by the D.C. Circuit is expected in 2017.


Given the pending legal proceedings and the need for a yet-to-be-developed state implementation plan or finalization of the federal implementation plan, the nature and timing of any final requirements is subject to uncertainty. If the rule remains substantially in its present form, it is expected to have a material impact on MGE.


National Ambient Air Quality Standards (NAAQS)

The EPA's NAAQS regulations 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 EPA's efforts to update several NAAQS, including for particulate matter, nitrogen dioxide, sulfur dioxide, and ozone. Further discussion on ozone, sulfur dioxide, and nitrogen dioxide NAAQS follows. For additional information on the NAAQS process, see Footnote 18.c. of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2015 Annual Report on Form 10-K.


Ozone NAAQS

In October 2015, the EPA revised the primary and secondary ozone NAAQS, lowering each to 70 ppb. The rule became effective in December 2015. Based on current ozone monitoring data, it appears that Milwaukee County (where our Elm Road Units are located) will likely not attain the lowered standards, and Dane and Columbia Counties (where our WCCF/Blount and Columbia Units are located, respectively) may attain them. Final attainment designations for these three counties will be based upon air monitoring data for years 2014-2016. The EPA will finalize the designations by October 1, 2017 based on air monitoring data for the years 2014-2016. Once these EPA designations are complete, the State of Wisconsin will need to develop implementation plans for each county designated as nonattainment, which could affect operations and emission control obligations for plants located within the nonattainment counties. The State of Wisconsin has joined a lawsuit filed by several states challenging the EPA's new ozone standard, alleging that the new standard is not attainable and the EPA is not properly considering background levels in setting its ozone attainment levels. MGE will continue to monitor the EPA's progress on attainment designations and related litigation to assess potential impacts at our facilities, particularly our Elm Road Units.


Sulfur Dioxide (SO2) NAAQS

In March 2015, the EPA identified MGE's Columbia Plant in Columbia County as a large stationary source of SO2 that may exceed the one hour SO2 NAAQS standard and was subject to a State of Wisconsin proposed county attainment/nonattainment determination. In September 2015, Wisconsin sent a letter to the EPA proposing that Columbia County be designated as being in attainment for the SO2 NAAQS based on recent modeling demonstrating that SO2 pollution controls on the Columbia Plant had brought the county into attainment. In June 2016, the EPA issued a final rule classifying Columbia County as an unclassified/attainment area. In addition to the EPA's actions on the SO2 NAAQS, the WDNR has revised its state rules to incorporate the one hour SO2 standard. MGE does not anticipate any material costs from this rule.




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Nitrogen Dioxide (NO2) NAAQS

The WDNR has revised its state rules to incorporate the EPA's one hour NO2 NAAQS rule that was finalized in 2010. The effective date of the state rule was August 1, 2016. The WDNR is currently seeking input from the public on ideas for implementing this one-hour standard. Wisconsin's NO2 NAAQS rule will affect our stationary fossil-fuel generation sources by requiring that we demonstrate consistency with the NAAQS when applying for certain air permits. Sources that cannot demonstrate compliance with the NAAQS may be required to install emission controls or restrict operations. MGE will continue to monitor developments while the WDNR implements guidance for compliance with the one-hour NAAQS.


EPA's Cross-State Air Pollution Rule: Proposed Ozone Season Update based on 2008 Ozone NAAQS

The EPA's Cross-State Air Pollution Rule (CSAPR) is an interstate air pollution transport rule designed to reduce ozone and fine particulate (PM2.5) air levels in areas that the EPA has determined are being affected by pollution from neighboring and upwind states. This is accomplished in the CSAPR through a reduction in SO2 and Nitrogen Oxides (NOx) from fossil-fuel fired power plants. NOx and SO2 contribute to fine particulate pollution, and NOx contributes to ozone formation. Reductions are achieved through a cap and trade system. Individual plants can meet their caps through modifications and/or buying allowances on the market.


In October 2016, the EPA finalized an update to the existing CSAPR. The CSAPR Rule Update is designed to incorporate 2008 Ozone NAAQS attainment levels (the original CSAPR is based on 1997 Ozone NAAQS levels) in 22 states, including Wisconsin, by further limiting ozone season NOx levels through a reduction in NOx allowances. The rule also includes revisions to CSAPR that are designed to address issues remaining from the D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion of the rule.


The rule will further reduce summertime (or Ozone Season) NOx emissions from power plants starting in 2017. Initial review of this rule shows that we will likely need to buy NOx Ozone Season allowances to comply with the rule. MGE is still evaluating the impact of this final rule on our operations, and we are unable to determine the full extent of the rule's impacts at this time. Depending on the cost of allowances, this requirement could be material for MGE.


Clean Air Visibility Rule (CAVR)

Columbia may be subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which may require pollution control retrofits. Columbia's pollution control upgrades and the EPA's stance that compliance with the CSAPR equals compliance with BART should mean that Columbia will not need to do additional work to meet BART requirements. In February 2016, the EPA submitted a proposed revision to the CAVR. The proposed revision would move state plan due dates from July 2018 to July 2021. This would allow for states to coordinate their CAVR compliance with other compliance efforts. If this proposed revision is finalized, it would reduce the chances that CAVR would be material for MGE. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain due to the continued legal challenges surrounding CSAPR and CAVR.


Solid Waste


EPA's Coal Combustion Residuals Rule

In December 2014, the EPA finalized its Disposal of Coal Combustion Residuals from Electric Utilities (CCR) rule. The rule became effective in October 2015. It provides that coal ash will be regulated as a solid waste, and defines what ash use activities would be considered generally exempt beneficial reuse of coal ash. The rule also regulates landfills, ash ponds, and other surface impoundments for coal combustion residuals by regulating their design, location, monitoring, and operation. This portion of the rule is accomplished in phases to allow for sites with onsite storage and/or disposal to evaluate their compliance with the rule's design criteria. Landfills and impoundments that cannot meet design criteria will need to close formally within defined timeframes.


The Columbia and Elm Road Units co-owners and plant operators are working through the phased requirements to plan and implement changes necessary at those facilities to meet design criteria. Review of our Elm Road facility has indicated that the costs to comply with this rule are not expected to be significant. Columbia's operator has developed a preliminary implementation schedule for meeting the various deadlines



19




spelled out in the rule. Costs at Columbia will be dependent on what is determined during the evaluation stage. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


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. MGE does not expect the resolution of these matters to have a material adverse effect on its consolidated results of operations, financial condition, or cash flows.


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 September 30, 2016, the future commitments related to these purchase contracts were as follows:


 

(In thousands)

 

2016

 

2017

 

2018

 

2019

 

2020

 

Thereafter

 

 

Coal(a)

$

23,260

$

16,535

$

12,640

$

3,850

$

-

$

-

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Transportation & storage(b)

 

6,005

 

20,858

 

20,644

 

19,482

 

15,225

 

31,767

 

 

    Supply(c)

 

11,661

 

12,580

 

-

 

-

 

-

 

-

 

 

 

$

40,926

$

49,973

$

33,284

$

23,332

$

15,225

$

31,767

 


(a)

Total coal commitments for the Columbia and Elm Road Units, including transportation. Fuel procurement for MGE's jointly owned Columbia and Elm Road Units is handled by WPL and WEPCO, respectively, who are the operators of those facilities. If any minimum purchase obligations must be paid under these contracts, management believes these obligations would be considered costs of service and recoverable in rates.


(b)

MGE's natural gas transportation and storage contracts require fixed monthly payments for firm supply pipeline transportation and storage capacity. The pricing components of the fixed monthly payments for the transportation and storage contracts are established by FERC but may be subject to change. Management expects to recover these costs in future customer rates.


(c)

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


8.

Derivative and Hedging Instruments - MGE Energy and MGE.


a.

Purpose.


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




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b.

Notional Amounts.


The gross notional volume of open derivatives is as follows:


 

 

September 30, 2016

 

December 31, 2015

 

 

Commodity derivative contracts

465,835 MWh

 

355,580 MWh

 

 

Commodity derivative contracts

6,157,500 Dth

 

5,037,500 Dth

 

 

FTRs

3,567 MW

 

2,000 MW

 


c.

Financial Statement Presentation.


MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds FTRs. An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. At September 30, 2016, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $0.9 million. At December 31, 2015, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $0.8 million.


MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at September 30, 2016, and December 31, 2015, reflects a loss position of $50.5 million and $53.3 million, respectively. The actual cost will be recognized in purchased power expense in the month of purchase.


The following table summarizes the fair value of the derivative instruments on the consolidated balance sheets. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, MGE Energy and MGE have netted instruments with the same counterparty under a master netting agreement as well as the netting of collateral. As of September 30, 2016, and December 31, 2015, MGE Energy and MGE had a receivable – margin account balance of $1.6 million and $2.3 million, respectively, which is shown net of any collateral posted against derivative positions.


 

 

Asset Derivatives

 

Liability Derivatives

(In thousands)

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

September 30, 2016

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

Other current assets

$

1,023

Derivative liability (current)

$

351

Commodity derivative contracts

 

Other deferred charges

 

114

 

Derivative liability (long-term)

 

97

FTRs

 

Other current assets

 

230

 

Derivative liability (current)

 

-

PPA

 

N/A

 

N/A

 

Derivative liability (current)

 

8,030

PPA

 

N/A

 

N/A

 

Derivative liability (long-term)

 

42,460

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

Other current assets

$

146

 

Derivative liability (current)

$

1,266

Commodity derivative contracts

 

Other deferred charges

 

144

 

Derivative liability (long-term)

 

70

FTRs

 

Other current assets

 

234

 

Derivative liability (current)

 

-

PPA

 

N/A

 

N/A

 

Derivative liability (current)

 

8,340

PPA

 

N/A

 

N/A

 

Derivative liability (long-term)

 

44,930




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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 Sheets

 

Collateral Posted Against Derivative Positions

 

Net Amount Presented in Balance Sheets

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

1,137

$

(448)

$

-

$

689

 

 

FTRs

 

230

 

-

 

-

 

230

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

290

$

(290)

$

-

$

-

 

 

FTRs

 

234

 

-

 

-

 

234

 


 

Offsetting of Derivative Liabilities

 

 

(In thousands)

 

Gross Amounts

 

Gross Amounts Offset in Balance Sheets

 

Collateral Posted Against Derivative Positions

 

Net Amount Presented in Balance Sheets

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

448

$

(448)

$

-

$

-

 

 

PPA

 

50,490

 

-

 

-

 

50,490

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

1,336

$

(290)

$

(1,038)

$

8

 

 

PPA

 

53,270

 

-

 

-

 

53,270

 


The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheets at September 30, 2016 and 2015, and the consolidated income statements for the three and nine months ended September 30, 2016 and 2015.


 

 

2016

 

 

2015

(In thousands)

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

 

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

Three Months Ended September 30:

 

 

 

 

 

 

 

 

 

Balance at July 1,

$

50,521

$

659

 

$

56,048

$

455

Unrealized (gain) loss

 

(663)

 

-

 

 

4,036

 

-

Realized gain (loss) reclassified to a deferred account

 

17

 

(17)

 

 

(408)

 

408

Realized (loss) gain reclassified to income statement

 

(304)

 

46

 

 

(2,278)

 

(91)

Balance at September 30,

$

49,571

$

688

 

$

57,398

$

772

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

Balance at January 1,

$

54,082

$

1,208

 

$

54,998

$

1,001

Unrealized loss

 

1,128

 

-

 

 

8,514

 

-

Realized (loss) gain reclassified to a deferred account

 

(1,417)

 

1,417

 

 

(1,700)

 

1,700

Realized (loss) gain reclassified to income statement

 

(4,222)

 

(1,937)

 

 

(4,414)

 

(1,929)

Balance at September 30,

$

49,571

$

688

 

$

57,398

$

772




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Realized Losses (Gains)

 

 

2016

 

 

2015

(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 September 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

45

$

-

 

$

862

$

(17)

FTRs

 

(703)

 

-

 

 

(233)

 

-

PPA

 

916

 

-

 

 

1,757

 

-

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

1,469

$

1,814

 

$

1,860

$

1,742

FTRs

 

(635)

 

-

 

 

(607)

 

-

PPA

 

3,511

 

-

 

 

3,348

 

-


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 September 30, 2016, no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of September 30, 2016, no counterparties were in a net liability position. As of December 31, 2015, certain counterparties were in a net liability position 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 September 30, 2016, no counterparties have defaulted.


9.

Rate Matters - MGE Energy and MGE.


a.

Rate Proceedings.


In April 2016, MGE filed an application with the PSCW requesting a 1.7% increase to electric rates and a 3.7% increase to gas rates for 2017. The proposed electric and gas rate increases cover costs primarily associated with the state's electric transmission and MGE's natural gas system infrastructure improvements.


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


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


The PSCW also approved changes to customer rates and rate design for gas service that became effective January 1, 2015. Gas rate design consists of a fixed monthly customer charge and a variable charge tied to actual usage, in addition to the separate charge through the PGA for natural gas commodity costs. The change shifted more of the rate recovery to the monthly charge, reflecting the related fixed costs of providing gas services, and reduced the variable usage-based charge. Thus, gas net income is expected to be more evenly distributed during the year and less sensitive to weather.




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b.

Fuel Rules.


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


In August 2015, the PSCW approved a $0.00256/kWh fuel credit that began on September 1, 2015, and will continue throughout 2016. The fuel credit established a mechanism to return $10.9 million of fuel savings to electric customers as a bill credit. MGE returned $2.6 million of electric fuel-related savings to customers through bill credits during the period from September 1, 2015, through December 31, 2015. MGE returned $6.3 million of electric fuel-related savings during the nine months ended September 30, 2016.


In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs by $14.8 million as a result of continued lower projected fuel costs in 2016. Also, in March 2016, MGE filed its 2015 fuel plan reconciliation application showing an overcollection of 2015 fuel rules monitored costs. In July 2016, the PSCW issued a final order stating that MGE shall refund the additional fuel savings incurred during 2015 and 2016 for a total of $15.7 million to its retail electric customers over a one-month period. In September 2016, MGE returned $15.5 million to customers through bill credits.


As of September 30, 2016, MGE has deferred $4.1 million of 2016 fuel savings that were in excess of the fuel savings included within the fuel credits referenced above. These costs will be subject to the PSCW's annual review of 2016 fuel costs, expected to be completed in 2017.


10.

Fair Value of Financial Instruments - MGE Energy and MGE.


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


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


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


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


a.

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


At September 30, 2016, and December 31, 2015, the carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of MGE Energy's and MGE's long-term debt is based on quoted market prices for similar financial instruments at September 30, 2016, and December 31, 2015. Since long-term debt is not traded in an active market, it is classified as Level 2.




24




The estimated fair market values of financial instruments are as follows:


 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

(In thousands)

 

Carrying Amount

 

Fair Value

 

 

Carrying Amount

 

Fair Value

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

111,585

$

111,585

 

$

81,384

$

81,384

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Long-term debt(a)

 

392,316

 

463,849

 

 

395,508

 

435,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

31,558

$

31,558

 

$

26,760

$

26,760

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

    Long-term debt(a)

 

392,316

 

463,849

 

 

395,508

 

435,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Includes long-term debt due within one year. Excludes debt issuance costs and unamortized discount of $4.2 million and $4.5 million at September 30, 2016, and December 31, 2015, respectively.


b.

Recurring Fair Value Measurements.


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


 

 

 

Fair Value as of September 30, 2016

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,367

$

917

$

-

$

450

 

 

    Exchange-traded investments

 

520

 

520

 

-

 

-

 

 

    Total Assets

$

1,887

$

1,437

$

-

$

450

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

50,938

$

59

$

-

$

50,879

 

 

    Deferred compensation

 

2,963

 

-

 

2,963

 

-

 

 

    Total Liabilities

$

53,901

$

59

$

2,963

$

50,879

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,367

$

917

$

-

$

450

 

 

    Exchange-traded investments

 

97

 

97

 

-

 

-

 

 

    Total Assets

$

1,464

$

1,014

$

-

$

450

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

50,938

$

59

$

-

$

50,879

 

 

    Deferred compensation

 

2,963

 

-

 

2,963

 

-

 

 

    Total Liabilities

$

53,901

$

59

$

2,963

$

50,879

 

 

 

 

 

 

 

 

 

 

 

 



25





 

 

 

Fair Value as of December 31, 2015

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

234

$

-

$

-

$

234

 

 

    Exchange-traded investments

 

759

 

759

 

-

 

-

 

 

    Total Assets

$

993

$

759

$

-

$

234

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives(b)

$

54,316

$

581

$

-

$

53,735

 

 

    Deferred compensation

 

3,145

 

-

 

3,145

 

-

 

 

    Total Liabilities

$

57,461

$

581

$

3,145

$

53,735

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

234

$

-

$

-

$

234

 

 

    Exchange-traded investments

 

148

 

148

 

-

 

-

 

 

    Total Assets

$

382

$

148

$

-

$

234

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives(b)

$

54,316

$

581

$

-

$

53,735

 

 

    Deferred compensation

 

3,145

 

-

 

3,145

 

-

 

 

    Total Liabilities

$

57,461

$

581

$

3,145

$

53,735

 

 

 

 

 

 

 

 

 

 

 

 

 

(b)   These amounts are shown gross and exclude $1.0 million of collateral that was posted

 

 

        against derivative positions with counterparties as of December 31, 2015.

 


No transfers were made in or out of Level 1 or Level 2 for the nine months ended September 30, 2016.


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


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


The purchased power agreement (see Footnote 8) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market, where such exchange-traded contracts exist, and upon calculations based on forward gas prices, where such exchange-traded contracts do not exist. A basis adjustment is applied to the market energy price to reflect the price differential between the market price delivery point and the counterparty delivery point. The historical relationship between the delivery points is reviewed and a discount (below 100%) or premium (above 100%) is derived. This comparison is done for both peak times when demand is high and off peak times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease, and if the basis adjustment is increased, the fair value measurement will increase.


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



26




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


 

 

 

Model Input

 

Significant Unobservable Inputs

 

September 30, 2016

 

December 31, 2015

 

Basis adjustment:

 

 

 

 

 

    On peak

 

93.3%

 

96.9%

 

    Off peak

 

94.1%

 

95.1%

 

Counterparty fuel mix:

 

 

 

 

 

    Internal generation

 

55% - 75%

 

60% - 75%

 

    Purchased power

 

45% - 25%

 

40% - 25%


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


The following table summarizes the changes in Level 3 commodity derivative assets and liabilities measured at fair value on a recurring basis.


 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(In thousands)

 

2016

 

2015

 

2016

 

2015

Beginning balance

$

(51,883)

$

(56,194)

$

(53,501)

$

(53,986)

Realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

    Included in regulatory liabilities (assets)

 

1,455

 

(888)

 

3,073

 

(3,096)

    Included in other comprehensive income

 

-

 

-

 

-

 

-

    Included in earnings

 

(278)

 

(2,285)

 

(4,250)

 

(4,497)

    Included in current assets

 

-

 

-

 

-

 

-

Purchases

 

5,814

 

6,364

 

16,751

 

17,497

Sales

 

-

 

-

 

-

 

-

Issuances

 

-

 

-

 

-

 

-

Settlements

 

(5,537)

 

(4,079)

 

(12,502)

 

(13,000)

Transfers in and/or out of Level 3

 

-

 

-

 

-

 

-

Balance as of September 30,

$

(50,429)

$

(57,082)

$

(50,429)

$

(57,082)

Total gains (losses) included in earnings attributed to

 

 

 

 

 

 

 

 

the change in unrealized gains (losses) related to

 

 

 

 

 

 

 

 

assets and liabilities held at September 30,(c)

$

-

$

-

$

-

$

-


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


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2016

 

2015

 

2016

 

2015

 

 

Purchased Power Expense

$

(278)

$

(2,302)

$

(4,250)

$

(4,515)

 

 

Cost of Gas Sold Expense

 

-

 

17

 

-

 

18

 

 

Total

$

(278)

$

(2,285)

$

(4,250)

$

(4,497)

 


(c)

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




27




11.

New Accounting Pronouncements - MGE Energy and MGE.


a.

Revenue from Contracts with Customers.


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


b.

Consolidation.


In February 2015, the FASB issued authoritative guidance within the Codification's Consolidation topic that provides guidance on the evaluation of certain legal entities for consolidation purposes. This authoritative guidance became effective January 1, 2016. This guidance had no impact on our financial statements.


c.

Debt Issuance Costs.


In April 2015, the FASB issued authoritative guidance within the Codification's Interest topic that provides guidance on the presentation of debt issuance costs in financial statements. This authoritative guidance became effective January 1, 2016, and changed the presentation of debt issuance costs on the balance sheet. Prior to the authoritative guidance, debt issuance costs were treated as a deferred asset, and beginning January 1, 2016, these costs are included as a direct deduction to the related debt liability on the consolidated balance sheet. As of September 30, 2016, assets (other deferred assets and other) and liabilities (long-term debt) decreased approximately $4.0 million as a cumulative result of the guidance. In addition, this guidance was applied retrospectively to all prior periods presented, resulting in a decrease to assets and liabilities of $4.3 million for the year ended December 31, 2015.


d.

Financial Instruments.


In January 2016, the FASB issued authoritative guidance within the Codification's Financial Instruments topic that provides guidance on the recognition and measurement of financial instruments. This authoritative guidance will become effective January 1, 2018, and will require equity investments to be measured at fair value with changes in fair value recognized in net income rather than in other comprehensive income. The impact of this guidance on our financial statements is not expected to be material.


e.

Leases.


In February 2016, the FASB issued authoritative guidance within the Leases topic that provides guidance on the classification, recognition, measurement, and disclosure of leases. This authoritative guidance will become effective January 1, 2019. MGE Energy and MGE are currently assessing the impact this pronouncement will have on their financial statements.


12.

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 2015 Annual Report on Form 10-K for additional discussion of each of these segments.




28




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 September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

118,933

$

17,570

$

214

$

-

$

-

$

-

$

136,717

Interdepartmental revenues

 

459

 

6,040

 

10,998

 

-

 

-

 

(17,497)

 

-

Total operating revenues

 

119,392

 

23,610

 

11,212

 

-

 

-

 

(17,497)

 

136,717

Depreciation and amortization

 

(7,332)

 

(2,047)

 

(1,833)

 

-

 

-

 

-

 

(11,212)

Other operating expenses

 

(77,010)

 

(19,292)

 

(33)

 

(13)

 

(127)

 

17,497

 

(78,978)

Operating income (loss)

 

35,050

 

2,271

 

9,346

 

(13)

 

(127)

 

-

 

46,527

Other income (deductions), net

 

178

 

13

 

-

 

2,023

 

(109)

 

-

 

2,105

Interest (expense) income, net

 

(2,855)

 

(818)

 

(1,436)

 

-

 

71

 

-

 

(5,038)

Income (loss) before taxes

 

32,373

 

1,466

 

7,910

 

2,010

 

(165)

 

-

 

43,594

Income tax (provision) benefit

 

(11,290)

 

(494)

 

(3,175)

 

(812)

 

57

 

-

 

(15,714)

Net income (loss)

$

21,083

$

972

$

4,735

$

1,198

$

(108)

$

-

$

27,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

121,453

$

17,431

$

1,911

$

-

$

-

$

-

$

140,795

Interdepartmental revenues

 

163

 

3,855

 

9,866

 

-

 

-

 

(13,884)

 

-

Total operating revenues

 

121,616

 

21,286

 

11,777

 

-

 

-

 

(13,884)

 

140,795

Depreciation and amortization

 

(7,584)

 

(1,714)

 

(1,872)

 

-

 

(12)

 

-

 

(11,182)

Other operating expenses

 

(80,202)

 

(16,906)

 

(36)

 

(15)

 

(161)

 

13,884

 

(83,436)

Operating income (loss)

 

33,830

 

2,666

 

9,869

 

(15)

 

(173)

 

-

 

46,177

Other income (deductions), net

 

141

 

(7)

 

-

 

2,397

 

33

 

-

 

2,564

Interest (expense) income, net

 

(2,798)

 

(804)

 

(1,491)

 

-

 

57

 

-

 

(5,036)

Income (loss) before taxes

 

31,173

 

1,855

 

8,378

 

2,382

 

(83)

 

-

 

43,705

Income tax (provision) benefit

 

(10,321)

 

(732)

 

(3,362)

 

(962)

 

26

 

-

 

(15,351)

Net income (loss)

$

20,852

$

1,123

$

5,016

$

1,420

$

(57)

$

-

$

28,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

312,470

$

92,368

$

982

$

-

$

-

$

-

$

405,820

Interdepartmental revenues

 

1,482

 

17,278

 

32,894

 

-

 

-

 

(51,654)

 

-

Total operating revenues

 

313,952

 

109,646

 

33,876

 

-

 

-

 

(51,654)

 

405,820

Depreciation and amortization

 

(21,754)

 

(6,043)

 

(5,537)

 

-

 

(24)

 

-

 

(33,358)

Other operating expenses

 

(230,680)

 

(88,328)

 

(115)

 

(17)

 

(706)

 

51,654

 

(268,192)

Operating income (loss)

 

61,518

 

15,275

 

28,224

 

(17)

 

(730)

 

-

 

104,270

Other income (deductions), net

 

492

 

(13)

 

-

 

6,023

 

224

 

-

 

6,726

Interest (expense) income, net

 

(8,421)

 

(2,425)

 

(4,348)

 

-

 

199

 

-

 

(14,995)

Income (loss) before taxes

 

53,589

 

12,837

 

23,876

 

6,006

 

(307)

 

-

 

96,001

Income tax (provision) benefit

 

(17,984)

 

(5,048)

 

(9,583)

 

(2,418)

 

90

 

-

 

(34,943)

Net income (loss)

$

35,605

$

7,789

$

14,293

$

3,588

$

(217)

$

-

$

61,058

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

319,174

$

108,028

$

5,853

$

-

$

-

$

-

$

433,055

Interdepartmental revenues

 

400

 

8,871

 

29,566

 

-

 

-

 

(38,837)

 

-

Total operating revenues

 

319,574

 

116,899

 

35,419

 

-

 

-

 

(38,837)

 

433,055

Depreciation and amortization

 

(22,372)

 

(5,018)

 

(5,601)

 

-

 

(35)

 

-

 

(33,026)

Other operating expenses

 

(239,963)

 

(96,063)

 

(122)

 

(15)

 

(626)

 

38,837

 

(297,952)

Operating income (loss)

 

57,239

 

15,818

 

29,696

 

(15)

 

(661)

 

-

 

102,077

Other income (deductions), net

 

247

 

(33)

 

-

 

6,568

 

333

 

-

 

7,115

Interest (expense) income, net

 

(8,385)

 

(2,398)

 

(4,516)

 

-

 

164

 

-

 

(15,135)

Income (loss) before taxes

 

49,101

 

13,387

 

25,180

 

6,553

 

(164)

 

-

 

94,057

Income tax (provision) benefit

 

(15,868)

 

(5,370)

 

(10,106)

 

(2,637)

 

35

 

-

 

(33,946)

Net income (loss)

$

33,233

$

8,017

$

15,074

$

3,916

$

(129)

$

-

$

60,111




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(b)

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

118,938

$

17,576

$

214

$

-

$

-

$

136,728

Interdepartmental revenues

 

454

 

6,034

 

10,998

 

-

 

(17,486)

 

-

Total operating revenues

 

119,392

 

23,610

 

11,212

 

-

 

(17,486)

 

136,728

Depreciation and amortization

 

(7,332)

 

(2,047)

 

(1,833)

 

-

 

-

 

(11,212)

Other operating expenses(a)

 

(88,282)

 

(19,781)

 

(3,208)

 

4

 

17,486

 

(93,781)

Operating income(a)

 

23,778

 

1,782

 

6,171

 

4

 

-

 

31,735

Other income, net(a)

 

160

 

8

 

-

 

868

 

-

 

1,036

Interest expense, net

 

(2,855)

 

(818)

 

(1,436)

 

-

 

-

 

(5,109)

Net income

 

21,083

 

972

 

4,735

 

872

 

-

 

27,662

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(5,695)

 

(5,695)

Net income attributable to MGE

$

21,083

$

972

$

4,735

$

872

$

(5,695)

$

21,967

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

121,460

$

17,435

$

1,911

$

-

$

-

$

140,806

Interdepartmental revenues

 

156

 

3,851

 

9,866

 

-

 

(13,873)

 

-

Total operating revenues

 

121,616

 

21,286

 

11,777

 

-

 

(13,873)

 

140,806

Depreciation and amortization

 

(7,584)

 

(1,714)

 

(1,872)

 

-

 

-

 

(11,170)

Other operating expenses(a)

 

(90,511)

 

(17,635)

 

(3,398)

 

(15)

 

13,873

 

(97,686)

Operating income (loss)(a)

 

23,521

 

1,937

 

6,507

 

(15)

 

-

 

31,950

Other (deductions) income, net(a)

 

129

 

(10)

 

-

 

1,435

 

-

 

1,554

Interest expense, net

 

(2,798)

 

(804)

 

(1,491)

 

-

 

-

 

(5,093)

Net income

 

20,852

 

1,123

 

5,016

 

1,420

 

-

 

28,411

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(6,633)

 

(6,633)

Net income attributable to MGE

$

20,852

$

1,123

$

5,016

$

1,420

$

(6,633)

$

21,778

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

312,488

$

92,390

$

982

$

-

$

-

$

405,860

Interdepartmental revenues

 

1,464

 

17,256

 

32,894

 

-

 

(51,614)

 

-

Total operating revenues

 

313,952

 

109,646

 

33,876

 

-

 

(51,614)

 

405,860

Depreciation and amortization

 

(21,754)

 

(6,043)

 

(5,537)

 

-

 

-

 

(33,334)

Other operating expenses(a)

 

(248,566)

 

(93,348)

 

(9,698)

 

-

 

51,614

 

(299,998)

Operating income(a)

 

43,632

 

10,255

 

18,641

 

-

 

-

 

72,528

Other income (deductions), net(a)

 

394

 

(41)

 

-

 

3,262

 

-

 

3,615

Interest expense, net

 

(8,421)

 

(2,425)

 

(4,348)

 

-

 

-

 

(15,194)

Net income

 

35,605

 

7,789

 

14,293

 

3,262

 

-

 

60,949

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(17,899)

 

(17,899)

Net income attributable to MGE

$

35,605

$

7,789

$

14,293

$

3,262

$

(17,899)

$

43,050

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

319,191

$

108,039

$

5,853

$

-

$

-

$

433,083

Interdepartmental revenues

 

383

 

8,860

 

29,566

 

-

 

(38,809)

 

-

Total operating revenues

 

319,574

 

116,899

 

35,419

 

-

 

(38,809)

 

433,083

Depreciation and amortization

 

(22,372)

 

(5,018)

 

(5,601)

 

-

 

-

 

(32,991)

Other operating expenses(a)

 

(255,732)

 

(101,405)

 

(10,228)

 

(15)

 

38,809

 

(328,571)

Operating income (loss)(a)

 

41,470

 

10,476

 

19,590

 

(15)

 

-

 

71,521

Other income (deductions), net(a)

 

148

 

(61)

 

-

 

3,931

 

-

 

4,018

Interest expense, net

 

(8,385)

 

(2,398)

 

(4,516)

 

-

 

-

 

(15,299)

Net income

 

33,233

 

8,017

 

15,074

 

3,916

 

-

 

60,240

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(19,812)

 

(19,812)

Net income attributable to MGE

$

33,233

$

8,017

$

15,074

$

3,916

$

(19,812)

$

40,428

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)     Amounts are shown net of the related tax expense, consistent with the presentation on the MGE Consolidated Statement of Income.

(b)     As of July 31, 2016, MGE no longer consolidates MGE Energy's proportionate share of equity earnings in MGE Transco. See Footnote 3 for further discussion.




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 146,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 152,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


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


Executive Overview


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


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


·

Weather, and its impact on customer sales,

·

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

·

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

·

Energy commodity prices, including natural gas prices,

·

Equity price risk pertaining to pension related assets,

·

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

·

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


and other factors listed in "Item 1A. Risk Factors" in our 2015 Annual Report on Form 10-K.


For the three months ended September 30, 2016, MGE Energy's earnings were $27.9 million or $0.80 per share compared to $28.4 million or $0.82 per share for the same period in the prior year. MGE's earnings for the three months ended September 30, 2016, were $22.0 million compared to $21.8 million for the same period in the prior year.


For the nine months ended September 30, 2016, MGE Energy's earnings were $61.1 million or $1.76 per share compared to $60.1 million or $1.73 per share for the same period in the prior year. MGE's earnings for the nine months ended September 30, 2016, were $43.1 million compared to $40.4 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

 

Nine Months Ended

 

 

(In thousands)

 

September 30,

 

September 30,

 

 

Business Segment:

 

2016

 

2015

 

2016

 

2015

 

 

    Electric Utility

$

21,083

$

20,852

$

35,605

$

33,233

 

 

    Gas Utility

 

972

 

1,123

 

7,789

 

8,017

 

 

    Nonregulated Energy

 

4,735

 

5,016

 

14,293

 

15,074

 

 

    Transmission Investments

 

1,198

 

1,420

 

3,588

 

3,916

 

 

    All Other

 

(108)

 

(57)

 

(217)

 

(129)

 

 

    Net Income

$

27,880

$

28,354

$

61,058

$

60,111

 


Our net income during the three months ended September 30, 2016, compared to the same period in the prior year primarily reflects the effects of the following factors:


·

Electric residential customer usage increased 10.7% and commercial customers consumed 2.0% more electricity. The increase in sales was partially offset by an increase in electric and gas utility operating and maintenance costs compared to the same period in the prior year.


·

Carrying costs incurred during construction of the Elm Road Units and WCCF were recognized by MGE Power Elm Road and MGE Power West Campus over the period allowed for recovery in rates. The recovery period ended in 2015, contributing to a reduction in nonregulated earnings in 2016. The reduction in earnings was partially offset by an increase in lease revenue.


Our net income during the nine months ended September 30, 2016, primarily reflects the effects of the following factors:


·

Electric net income increased due to a 5.5% increase in residential electric retail sales as the result of more favorable weather conditions in 2016 compared to the same period in the prior year. Electric utility operations experienced an increase in operating and maintenance costs partially offsetting the increase in net income compared to the same period in the prior year.


·

Carrying costs incurred during construction of the Elm Road Units and WCCF were recognized by MGE Power Elm Road and MGE Power West Campus over the period allowed for recovery in rates. The recovery period ended in 2015, contributing to a reduction in nonregulated earnings in 2016. The reduction in earnings was partially offset by an increase in lease revenue.


During the first nine months of 2016, the following events occurred:


2016 Rates: In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission related costs through 2016, conditioned upon MGE not filing a base rate case for 2016. This accounting treatment allows MGE to reflect any differential between transmission costs reflected in rates and actual costs incurred in its next rate case filing, which occurred as part of the April 2016 filing for 2017 base rates.


2016 Annual Fuel Proceeding: In August 2015, the PSCW approved a $0.00256/kWh fuel credit that began on September 1, 2015, and will continue throughout 2016. The fuel credit established a mechanism to return $10.9 million of fuel savings to electric customers as a bill credit. MGE returned $6.3 million of electric fuel-related savings to customers through bill credits during the nine months ended September 30, 2016.


In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs by $14.8 million as a result of continued lower projected fuel costs in 2016. Also, in March 2016, MGE filed its 2015 fuel plan reconciliation application showing an overcollection of 2015 fuel rules monitored costs. In July 2016, the PSCW issued a final order stating that MGE shall refund the additional fuel savings incurred during 2015 and 2016 for a total of $15.7 million to its retail electric customers over a one-month period. In September 2016, MGE returned $15.5 million to customers through bill credits.


As of September 30, 2016, MGE has deferred $4.1 million of 2016 fuel savings that were in excess of the fuel savings included within the fuel credits referenced above. These costs will be subject to the PSCW's annual review of 2016 fuel costs, expected to be completed in 2017.




32




ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the base return on equity (ROE) used by MISO transmission owners, including ATC. In September 2016, FERC issued an order regarding the first filed complaint reducing the transmission owners' base ROE to 10.32% for the period of November 2013 through February 2015 following an administrative law judge initial decision. In June 2016, an administrative law judge issued an initial decision regarding a second filed complaint in February 2015 that would reduce the transmission owners' base ROE to 9.7%. ATC recorded an estimated refund liability with respect to the administrative law judge's order, which was reflected within our share of ATC earnings. See "Other Matters" below for additional information concerning ATC.


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


2017 Rate Case Filing: In April 2016, MGE filed an application with the PSCW requesting a 1.7% increase to electric rates and a 3.7% increase to gas rates for 2017. The proposed electric and gas rate increases cover costs primarily associated with the state's electric transmission and MGE's natural gas system infrastructure improvements. A decision is expected during the fourth quarter of 2016.


ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the ROE used by MISO transmission owners, including ATC. Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future. We derived approximately 5.8% and 6.4% of our net income for the nine months ended September 30, 2016 and 2015 respectively, from our investment in ATC. See "Other Matters" below for additional information concerning ATC.


Loss of Industrial Customer: In November 2015, a large industrial customer announced its intention to relocate its operations out of state and to close its manufacturing facilities within our service territory. That closure is expected to occur in early 2017. For the nine months ended September 30, 2016 and 2015, this customer contributed approximately $2.8 million and $2.9 million, respectively, of pre-tax earnings. Our rate case filing for 2017 addresses the effects of the closure. There could be some impact on our electric revenues during 2016 if the customer's operations are curtailed as a result of the impending closure.


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


EPA's Clean Power Plan: In 2015, the EPA published its Clean Power Plan rule setting guidelines and approval criteria for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. Implementation of the rule is expected to have a direct impact on coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. MGE is currently evaluating the rule and its requirements. Although the implementation of the rule is presently stayed as a result of a February 9, 2016, U.S. Supreme Court ruling, compliance with the rule's requirements, including the yet-to-be-developed state implementation plan, is expected to have a material impact on MGE if the rule is upheld and becomes effective.


Pension and Other Postretirement Benefit Costs: Costs for pension and other postretirement benefits are affected by actual investment returns on the assets held for those benefits and by the discount rate, which is sensitive to interest rates, used to calculate those benefits. Interest rates and investment returns have experienced volatility since the end of the year that 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 statements for 2016. However, these changes may affect benefit costs in future years. MGE expects changes in the cost for employee benefit plans will be factored into future rate actions, although there could be a lag between actual costs and cost permitted to be recovered in rates.


Future Generation: During the first quarter of 2016, MGE entered into an agreement with WPL under which MGE may acquire up to 50 MW of capacity in a gas-fired generating plant to be constructed by WPL at its Riverside Energy Center in Beloit, Wisconsin, during the five-year period following the in-service date of the plant. The plant is expected to be completed by early 2020. MGE and WPL have negotiated a second agreement under which MGE will reduce its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia prior to the expected in-service date of the Riverside gas-fired generating plant in exchange for a proportional reduction in MGE's ownership



33




in Columbia. As of September 30, 2016, MGE has accrued $11.2 million of 2016 capital expenditures in total property, plant, and equipment (of which $8.7 million is included in construction work in progress) related to Columbia, that MGE would forgo as part of this second agreement with WPL, subject to approval by the PSCW. In October 2016, the PSCW approved the second agreement and as a result MGE's property, plant and equipment will be reduced by $11.2 million in the fourth quarter of 2016. MGE currently owns 22% of Columbia. By June 2020, MGE's ownership in Columbia is forecasted to be approximately 19%.


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 September 30, 2016, there were no borrowings outstanding under MGE Energy's or MGE's lines of credit.


Financing Plans: MGE has $30 million of medium-term notes maturing in 2017. MGE priced $40 million of new long-term unsecured debt in October 2016, with funding expected to occur in mid-January 2017. The new debt will carry an interest rate of 3.76% per annum over its 35-year term. The proceeds of this debt financing will be used to refinance the maturing $30 million medium-term notes and assist with the financing of additional capital expenditures. The covenants of this debt are expected to be substantially consistent with MGE's existing unsecured long-term debt. In accordance with applicable accounting guidance, MGE has classified the $30 million of maturing medium-term notes as long-term debt on the consolidated balance sheets for the quarter ended September 30, 2016.


The following discussion is based on the business segments as discussed in Footnote 12 of the Notes to Consolidated Financial Statements.


Three Months Ended September 30, 2016 and 2015


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

Revenues

 

Sales (kWh)

(In thousands, except cooling degree days)

 

Three Months Ended September 30,

 

Three Months Ended September 30,

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

Residential

$

40,120

$

40,584

 

 (1.1)%

 

259,529

 

234,421

 

 10.7 %

Commercial

 

55,232

 

64,240

 

 (14.0)%

 

517,253

 

507,033

 

 2.0 %

Industrial

 

4,122

 

5,793

 

 (28.8)%

 

61,362

 

66,150

 

 (7.2)%

Other-retail/municipal

 

9,091

 

11,217

 

 (19.0)%

 

114,097

 

114,728

 

 (0.5)%

    Total retail

 

108,565

 

121,834

 

 (10.9)%

 

952,241

 

922,332

 

 3.2 %

Sales to the market

 

2,120

 

737

 

N/A%

 

52,278

 

19,712

 

N/A%

Deferral of fuel savings

 

8,194

 

-

 

 -  %

 

-

 

-

 

 -  %

Adjustments to revenues

 

54

 

(1,118)

 

 104.8 %

 

-

 

-

 

 -  %

    Total

$

118,933

$

121,453

 

 (2.1)%

 

1,004,519

 

942,044

 

 6.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 465)

 

 

 

 

 

 

 

570

 

504

 

13.1 %


Electric operating revenues decreased $2.5 million or 2.1% for the three months ended September 30, 2016, compared to the same period in 2015, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

(8.9)

 

 

Volume

 

3.8

 

 

Sales to the market

 

1.4

 

 

Adjustments to revenues

 

1.1

 

 

Other

 

0.1

 

 

Total

$

(2.5)

 




34




In July 2015, the PSCW authorized MGE to freeze 2016 rates at 2015 levels for retail electric customers.


·

Deferral of fuel savings/fuel credit. During the three months ended September 30, 2016, customers received a fuel credit on their bill related to the fuel savings of $17.1 million, which decreased electric revenues when compared to the same period in the prior year. This amount was partially offset by the 2016 deferred fuel rules monitored costs. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs as a result of continued lower projected fuel costs in 2016. MGE has deferred the fuel credit in revenue.


·

Volume. During the three months ended September 30, 2016, there was a 10.7% increase in residential sales volumes compared to the same period in the prior year driven by increased customer demand due, at least in part, to more favorable weather conditions, as evidenced by the higher number of cooling degree days.


·

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 September 30, 2016, market volumes increased compared to the same period in the prior year, reflecting increased opportunities for sales and those sales were made at higher market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 9.b.


·

Adjustments to revenue. The adjustments to revenues amount includes the elimination of carrying costs for the Elm Road Units and the WCCF that were collected in electric rates ending in 2015, which were recognized as operating revenues in our Nonregulated Energy Operations segment.


MGE leases electric generating capacity from MGE Power Elm Road. MGE collects in rates the lease payments associated with the electric generating capacity as authorized by the PSCW. Any differential between estimated lease payments collected in rates and actual lease payments paid to MGE Power Elm Road are included in adjustments to revenues.


Electric fuel and purchased power


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


Fuel for electric generation

The expense for fuel for internal electric generation increased $3.5 million during the three months ended September 30, 2016, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

4.6

 

 

Decrease in per-unit cost

 

(1.1)

 

 

Total

$

3.5

 


This increase in expense reflects a 26.9% increase in internal generation volume delivered to the system primarily as a result of increased generation at WCCF based on market prices, partially offset by a 5.3% decrease in per-unit cost of internal electric generation, reflective of lower natural gas prices.


Purchased power

Purchased power expense decreased $9.3 million during the three months ended September 30, 2016, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(5.1)

 

 

Increase in per-unit cost

 

0.5

 

 

Change in fuel rule adjustments, net of recoveries

 

(4.7)

 

 

Total

$

(9.3)

 




35




The decrease in expense (before fuel rules adjustments) reflects a 29.8% decrease in the volume of power purchased from third parties primarily as a result of the increased internal generation, partially offset by a 4.6% increase in the per-unit cost of purchased power.


Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased power expense.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $0.8 million during the three months ended September 30, 2016, compared to the same period in 2015. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

0.4

 

 

Increased customer accounts costs

 

0.3

 

 

Increased distribution expenses

 

0.3

 

 

Decreased production expenses

 

(0.2)

 

 

Total

$

0.8

 


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 September 30,

 

Three Months Ended September 30,

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

Residential

$

11,440

$

11,306

 

 1.2 %

 

5,468

 

5,651

 

 (3.2)%

Commercial/Industrial

 

5,043

 

5,039

 

 0.1 %

 

8,488

 

8,553

 

 (0.8)%

    Total retail

 

16,483

 

16,345

 

 0.8 %

 

13,956

 

14,204

 

 (1.7)%

Gas transportation

 

997

 

990

 

 0.7 %

 

15,982

 

15,939

 

 0.3 %

Other revenues

 

90

 

96

 

 (6.3)%

 

-

 

-

 

 -  %

    Total

$

17,570

$

17,431

 

 0.8 %

 

29,938

 

30,143

 

 (0.7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree days (normal 163)

 

 

 

 

 

 

 

49

 

98

 

(50.0)%

Average rate per therm of

 

 

 

 

 

 

 

 

 

 

 

 

retail customer

$

1.181

$

1.151

 

2.6 %

 

 

 

 

 

 


Gas revenues increased $0.1 million or 0.8% for the three months ended September 30, 2016, compared to the same period in 2015. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Rate/PGA changes

$

0.2

 

 

Volume

 

(0.1)

 

 

Total

$

0.1

 


In July 2015, the PSCW authorized MGE to freeze 2016 rates at 2015 levels for retail gas customers.


·

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


The average retail rate per therm for the three months ended September 30, 2016, increased 2.6% compared to the same period in 2015, reflecting a $0.1 million increase in natural gas commodity costs (recovered through the PGA) and an increase in fixed rate charges.




36




·

Volume. For the three months ended September 30, 2016, retail gas deliveries decreased 1.7% compared to the same period in the prior year.


Cost of gas sold


For the three months ended September 30, 2016, cost of gas sold was flat, compared to the same period in the prior year. The cost per therm of natural gas increased 2.7%, which resulted in $0.1 million of increased expense. The volume of gas purchased decreased 2.3%, which resulted in $0.1 million of decreased expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased by $0.7 million for the three months ended September 30, 2016, compared to the same period in 2015. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

0.6

 

 

Increased customer accounts costs

 

0.3

 

 

Decreased distribution expenses

 

(0.2)

 

 

Total

$

0.7

 


Nonregulated Energy Operations - MGE Energy and MGE


The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road (the Elm Road Units) and MGE Power West Campus (WCCF), which have been formed to own and lease electric generating capacity to assist MGE. For the three months ended September 30, 2016 and 2015, net income at the nonregulated energy operations segment was $4.7 million and $5.0 million, respectively. Carrying costs incurred during construction of the Elm Road Units and WCCF were recognized by MGE Power Elm Road and MGE Power West Campus over the period allowed for recovery in rates. The recovery period ended in 2015, contributing to a reduction in nonregulated earnings in 2016. The reduction in earnings was partially offset by an increase in lease revenue.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the three months ended September 30, 2016 and 2015, other income at the transmission investment segment was $2.0 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 September 30, 2016 and 2015, was 36.1% and 35.1%, respectively. MGE's effective income tax rate for the three months ended September 30, 2016 and 2015, was 36.0% and 35.1%, respectively. The increase in the effective tax rate is due in part to a lower estimated domestic manufacturing deduction offset by higher estimated AFUDC equity earnings in 2016.


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.




37




The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Three Months Ended

 

 

 

 

September 30,

 

 

(In millions)

 

2016

 

2015

 

 

MGE Power Elm Road

$

3.7

$

4.1

 

 

MGE Power West Campus

 

1.8

 

1.8

 

 

MGE Transco(a)

 

0.2

 

0.7

 


(a)

MGE's ownership interest declined below a majority in July 2016 as a result of continued funding of ATC capital contributions by MGE Energy. As a result of the change in majority ownership in MGE Transco in July 2016, MGE deconsolidated the noncontrolling interest within MGE's financial statements for MGE Energy's proportionate share of the equity in MGE Transco. No gain or loss was recognized in July 2016 due to MGE ceasing to have a controlling financial interest. See Footnote 3 of the Notes to Consolidated Financial Statements for additional information.


Nine Months Ended September 30, 2016 and 2015


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

Revenues

 

Sales (kWh)

(In thousands, except cooling degree days)

 

Nine Months Ended September 30,

 

Nine Months Ended September 30,

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

Residential

$

104,917

$

104,733

 

 0.2 %

 

641,551

 

608,204

 

 5.5 %

Commercial

 

161,056

 

170,670

 

 (5.6)%

 

1,420,769

 

1,400,358

 

 1.5 %

Industrial

 

13,381

 

15,666

 

 (14.6)%

 

178,535

 

187,493

 

 (4.8)%

Other-retail/municipal

 

26,498

 

30,016

 

 (11.7)%

 

296,093

 

322,881

 

 (8.3)%

    Total retail

 

305,852

 

321,085

 

 (4.7)%

 

2,536,948

 

2,518,936

 

 0.7 %

Sales to the market

 

5,281

 

1,637

 

N/A%

 

161,217

 

44,260

 

N/A%

Deferral of fuel savings

 

1,125

 

-

 

 -  %

 

-

 

-

 

 -  %

Adjustments to revenues

 

212

 

(3,548)

 

 (106.0)%

 

-

 

-

 

 -  %

    Total

$

312,470

$

319,174

 

 (2.1)%

 

2,698,165

 

2,563,196

 

 5.3 %

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 641)

 

 

 

 

 

 

 

771

 

665

 

15.9 %


Electric operating revenues decreased $6.7 million or 2.1% for the nine months ended September 30, 2016, compared to the same period in 2015, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

(19.9)

 

 

Volume

 

4.9

 

 

Adjustments to revenue

 

3.8

 

 

Sales to the market

 

3.6

 

 

Other

 

0.9

 

 

Total

$

(6.7)

 


In July 2015, the PSCW authorized MGE to freeze 2016 rates at 2015 levels for retail electric customers.


·

Deferral of fuel savings/fuel credit. During the nine months ended September 30, 2016, customers received fuel credit on their bill related to the fuel savings of $21.0 million, which decreased electric revenues when compared to the same period in the prior year. This amount was partially offset by the 2016 deferred fuel rules monitored costs. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs as a result of continued lower projected fuel costs in 2016. MGE has deferred the fuel credit in revenue.




38




·

Volume. During the nine months ended September 30, 2016, there was a 5.5% increase in residential sales volumes compared to the same period in the prior year driven by increased customer demand due, at least in part, to more favorable weather conditions, as evidenced by the higher number of cooling degree days.


·

Adjustments to revenue. The adjustments to revenues amount includes the elimination of carrying costs for the Elm Road Units and the WCCF that were collected in electric rates ending in 2015, which were recognized as operating revenues in our Nonregulated Energy Operations segment.


MGE leases electric generating capacity from MGE Power Elm Road. MGE collects in rates the lease payments associated with the electric generating capacity as authorized by the PSCW. Any differential between estimated lease payments collected in rates and actual lease payments paid to MGE Power Elm Road are included in adjustments to revenues.


·

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO 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 purchases and generation online exceeding its own system demand. The excess electricity is then sold to others in the market. For the nine months ended September 30, 2016, market volumes increased compared to the same period in the prior year, reflecting increased opportunities for sales and those sales were made at higher market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 9.b.


Electric fuel and purchased power


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


Fuel for electric generation

The expense for fuel for internal electric generation increased $5.9 million during the nine months ended September 30, 2016, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

10.1

 

 

Decrease in per-unit cost

 

(4.2)

 

 

Total

$

5.9

 


This increase in expense reflects a 27.0% increase in internal generation volume delivered to the system primarily as a result of increased generation at WCCF based on market prices, partially offset by a 10.0% decrease in per-unit cost of internal electric generation, reflective of lower natural gas prices.


Purchased power

Purchased power expense decreased $23.9 million during the nine months ended September 30, 2016, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(15.0)

 

 

Increase in per-unit cost

 

3.1

 

 

Change in fuel rule adjustments, net of recoveries

 

(12.0)

 

 

Total

$

(23.9)

 


The decrease in expense (before fuel rules adjustments) reflects a 26.8% decrease in the volume of power purchased from third parties primarily as a result of the increased internal generation, partially offset by a 7.5% increase in the per-unit cost of purchased power.


Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased power expense.




39




Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $2.1 million during the nine months ended September 30, 2016, compared to the same period in 2015. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased production expenses

$

0.8

 

 

Increased distribution expenses

 

0.5

 

 

Increased administrative and general costs

 

0.4

 

 

Increased customer accounts costs

 

0.2

 

 

Increased transmission costs

 

0.2

 

 

Total

$

2.1

 


For the nine months ended September 30, 2016, increased production expenses are primarily related to increased maintenance costs at Columbia and WCCF compared to the prior year.


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)

 

Nine Months Ended September 30,

 

Nine Months Ended September 30,

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

Residential

$

56,344

$

64,208

 

 (12.2)%

 

62,188

 

67,690

 

 (8.1)%

Commercial/Industrial

 

32,324

 

39,973

 

 (19.1)%