United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


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


For the quarterly period ended:

June 30, 2017


[ ] 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, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


 

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

MGE Energy, Inc.

X

 

 

 

 

Madison Gas and Electric Company

 

 

X

 

 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]


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


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


Number of Shares Outstanding of Each Class of Common Stock as of July 31, 2017

MGE Energy, Inc.

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

Madison Gas and Electric Company

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




1





Table of Contents


PART I. FINANCIAL INFORMATION.

3

Filing Format

3

Forward-Looking Statements

3

Where to Find More Information

3

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

4

Item 1. Financial Statements.

6

MGE Energy, Inc.

6

Consolidated Statements of Income (unaudited)

6

Consolidated Statements of Comprehensive Income (unaudited)

6

Consolidated Statements of Cash Flows (unaudited)

7

Consolidated Balance Sheets (unaudited)

8

Consolidated Statements of Common Equity (unaudited)

9

Madison Gas and Electric Company

10

Consolidated Statements of Income (unaudited)

10

Consolidated Statements of Comprehensive Income (unaudited)

10

Consolidated Statements of Cash Flows (unaudited)

11

Consolidated Balance Sheets (unaudited)

12

Consolidated Statements of Common Equity (unaudited)

13

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

14

Notes to Consolidated Financial Statements (unaudited)

14

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

30

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

46

Item 4. Controls and Procedures.

48

PART II. OTHER INFORMATION.

49

Item 1. Legal Proceedings.

49

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

49

Item 4. Mine Safety Disclosures.

49

Item 6. Exhibits.

49

Signatures - MGE Energy, Inc.

51

Signatures - Madison Gas and Electric Company

52




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' 2016 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 17, 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

MGEE Transco

MGEE Transco, LLC

NGV Fueling Services

NGV Fueling Services, LLC

 

 

Other Defined Terms:

 

 

 

AFUDC

Allowance for Funds Used During Construction

ATC

American Transmission Company LLC

ATC Holdco

ATC Holdco, LLC

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

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

GAAP

Generally Accepted Accounting Principles

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

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)

PPA

Purchased Power Agreement

PSCW

Public Service Commission of Wisconsin



4





Riverside

Riverside Energy Center

ROE

Return on Equity

SCR

Selective Catalytic Reduction

SEC

Securities and Exchange Commission

SO2

Sulfur Dioxide

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

WEPCO

Wisconsin Electric Power Company, a subsidiary of WEC Energy Group, Inc.

Working capital

Current assets less current liabilities

WPL

Wisconsin Power and Light Company, a subsidiary of Alliant Energy Corporation

XBRL

eXtensible Business Reporting Language




5





Item 1. Financial Statements.


MGE Energy, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except per-share amounts)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

102,382

$

100,615

$

200,779

$

194,305

    Gas revenues

 

24,081

 

20,961

 

82,507

 

74,798

        Total Operating Revenues

 

126,463

 

121,576

 

283,286

 

269,103

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

11,910

 

15,049

 

24,109

 

27,062

    Purchased power

 

16,720

 

14,861

 

32,074

 

29,531

    Cost of gas sold

 

9,231

 

6,410

 

45,015

 

38,933

    Other operations and maintenance

 

43,924

 

40,963

 

86,614

 

83,693

    Depreciation and amortization

 

13,275

 

11,114

 

26,234

 

22,146

    Other general taxes

 

4,852

 

4,967

 

9,779

 

9,995

        Total Operating Expenses

 

99,912

 

93,364

 

223,825

 

211,360

Operating Income

 

26,551

 

28,212

 

59,461

 

57,743

 

 

 

 

 

 

 

 

 

Other income, net

 

2,614

 

2,179

 

5,065

 

4,621

Interest expense, net

 

(4,886)

 

(4,957)

 

(9,780)

 

(9,957)

    Income before income taxes

 

24,279

 

25,434

 

54,746

 

52,407

Income tax provision

 

(8,736)

 

(9,284)

 

(19,903)

 

(19,229)

Net Income

$

15,543

$

16,150

$

34,843

$

33,178

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

 

(basic and diluted)

$

0.45

$

0.47

$

1.01

$

0.96

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

0.308

$

0.295

$

0.615

$

0.590

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 

(basic and diluted)

 

34,668

 

34,668

 

34,668

 

34,668

 

 

 

 

 

 

 

 

 

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


MGE Energy, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Net Income

$

15,543

$

16,150

$

34,843

$

33,178

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax (($21) and ($7), and ($86) and

 

 

 

 

 

 

 

 

    $104, respectively)

 

32

 

10

 

129

 

(154)

Comprehensive Income

$

15,575

$

16,160

$

34,972

$

33,024

 

 

 

 

 

 

 

 

 

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




6





MGE Energy, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2017

 

2016

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

34,843

$

33,178

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

26,234

 

22,146

 

 

        Deferred income taxes

 

1,037

 

9,522

 

 

        Provision for doubtful receivables

 

367

 

483

 

 

        Employee benefit plan cost

 

727

 

30

 

 

        Equity earnings in ATC

 

(5,094)

 

(4,000)

 

 

        Other items

 

780

 

392

 

 

    Changes in working capital items:

 

 

 

 

 

 

        Decrease in current assets

 

21,287

 

27,585

 

 

        (Decrease) increase in current liabilities

 

(11,516)

 

12,230

 

 

    Dividends from ATC

 

4,072

 

2,728

 

 

    Cash contributions to pension and other postretirement plans

 

(8,284)

 

(12,096)

 

 

    Other noncurrent items, net

 

3,257

 

1,316

 

 

            Cash Provided by Operating Activities

 

67,710

 

93,514

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(42,169)

 

(40,791)

 

 

    Capital contributions to investments

 

(5,557)

 

(998)

 

 

    Other

 

778

 

(184)

 

 

            Cash Used for Investing Activities

 

(46,948)

 

(41,973)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(21,321)

 

(20,454)

 

 

    Repayment of long-term debt

 

(32,167)

 

(2,123)

 

 

    Issuance of long-term debt

 

40,000

 

-

 

 

    Other

 

(317)

 

(40)

 

 

            Cash Used for Financing Activities

 

(13,805)

 

(22,617)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

6,957

 

28,924

 

 

Cash and cash equivalents at beginning of period

 

95,959

 

81,384

 

 

Cash and cash equivalents at end of period

$

102,916

$

110,308

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

8,450

$

7,091

 

 

 

 

 

 

 

 

 

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

 




7





MGE Energy, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands)


 

 

June 30,

December 31,

ASSETS

 

2017

 

2016

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

102,916

$

95,959

    Accounts receivable, less reserves of $3,030 and $3,017, respectively

 

35,252

 

39,887

    Other accounts receivable, less reserves of $386 and $426, respectively

 

7,024

 

8,530

    Unbilled revenues

 

23,238

 

29,846

    Materials and supplies, at average cost

 

20,354

 

18,561

    Fossil fuel, at average cost

 

11,186

 

9,757

    Stored natural gas, at average cost

 

9,607

 

12,819

    Prepaid taxes

 

15,679

 

26,636

    Regulatory assets - current

 

7,602

 

6,414

    Assets held for sale

 

5,117

 

14,813

    Other current assets

 

11,320

 

12,293

        Total Current Assets

 

249,295

 

275,515

Regulatory assets

 

149,866

 

158,485

Pension and other postretirement benefit asset

 

2,984

 

2,020

Other deferred assets and other

 

6,228

 

6,691

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,262,674

 

1,245,269

    Construction work in progress

 

36,511

 

36,790

        Total Property, Plant, and Equipment

 

1,299,185

 

1,282,059

Investments

 

84,946

 

76,290

        Total Assets

$

1,792,504

$

1,801,060

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,404

$

4,333

    Accounts payable

 

34,047

 

47,799

    Accrued interest and taxes

 

5,600

 

5,495

    Accrued payroll related items

 

9,719

 

11,892

    Regulatory liabilities - current

 

10,795

 

6,910

    Derivative liabilities

 

9,000

 

7,620

    Other current liabilities

 

10,075

 

19,456

        Total Current Liabilities

 

83,640

 

103,505

Other Credits:

 

 

 

 

    Deferred income taxes

 

385,210

 

383,813

    Investment tax credit - deferred

 

906

 

947

    Regulatory liabilities

 

23,579

 

22,173

    Accrued pension and other postretirement benefits

 

66,800

 

74,347

    Derivative liabilities

 

37,620

 

42,970

    Other deferred liabilities and other

 

66,572

 

66,426

        Total Other Credits

 

580,687

 

590,676

Capitalization:

 

 

 

 

    Common shareholders' equity

 

737,739

 

724,088

    Long-term debt

 

390,438

 

382,791

        Total Capitalization

 

1,128,177

 

1,106,879

Commitments and contingencies (see Footnote 7)

 

 

 

 

        Total Liabilities and Capitalization

$

1,792,504

$

1,801,060

 

 

 

 

 

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

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2015

34,668

$

34,668

$

316,268

$

339,165

$

357

$

690,458

 

 

Net income

 

 

 

 

 

 

33,178

 

 

 

33,178

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(154)

 

(154)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.590 per share)

 

 

 

 

 

 

(20,454)

 

 

 

(20,454)

 

 

Ending balance - June 30, 2016

34,668

$

34,668

$

316,268

$

351,889

$

203

$

703,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2016

34,668

$

34,668

$

316,268

$

372,950

$

202

$

724,088

 

 

Net income

 

 

 

 

 

 

34,843

 

 

 

34,843

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

129

 

129

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.615 per share)

 

 

 

 

 

 

(21,321)

 

 

 

(21,321)

 

 

Ending balance - June 30, 2017

34,668

$

34,668

$

316,268

$

386,472

$

331

$

737,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 




9





Madison Gas and Electric Company

Consolidated Statements of Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

102,382

$

100,622

$

200,783

$

194,318

    Gas revenues

 

24,080

 

20,967

 

82,515

 

74,814

        Total Operating Revenues

 

126,462

 

121,589

 

283,298

 

269,132

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

11,910

 

15,051

 

24,111

 

27,067

    Purchased power

 

16,720

 

14,864

 

32,076

 

29,538

    Cost of gas sold

 

9,230

 

6,415

 

45,023

 

38,949

    Other operations and maintenance

 

43,707

 

40,712

 

86,028

 

83,114

    Depreciation and amortization

 

13,275

 

11,102

 

26,234

 

22,122

    Other general taxes

 

4,852

 

4,967

 

9,779

 

9,995

    Income tax provision

 

7,756

 

8,464

 

18,021

 

17,554

        Total Operating Expenses

 

107,450

 

101,575

 

241,272

 

228,339

Operating Income

 

19,012

 

20,014

 

42,026

 

40,793

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

 

    AFUDC - equity funds

 

294

 

263

 

565

 

524

    Equity earnings in MGE Transco

 

-

 

1,767

 

-

 

4,000

    Income tax provision

 

(47)

 

(767)

 

(91)

 

(1,709)

    Other expense, net

 

(111)

 

(163)

 

(187)

 

(236)

        Total Other Income and Deductions

 

136

 

1,100

 

287

 

2,579

    Income before interest expense

 

19,148

 

21,114

 

42,313

 

43,372

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

    Interest on long-term debt

 

5,013

 

5,096

 

10,056

 

10,205

    Other interest, net

 

65

 

14

 

96

 

51

    AFUDC - borrowed funds

 

(80)

 

(86)

 

(172)

 

(171)

        Net Interest Expense

 

4,998

 

5,024

 

9,980

 

10,085

Net Income

$

14,150

$

16,090

$

32,333

$

33,287

Less: Net Income Attributable to Noncontrolling

 

 

 

 

 

 

 

 

Interest, net of tax

 

(5,396)

 

(5,952)

 

(10,785)

 

(12,204)

Net Income Attributable to MGE

$

8,754

$

10,138

$

21,548

$

21,083

 

 

 

 

 

 

 

 

 

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


Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2017

 

2016

 

2017

 

2016

Net Income

$

14,150

$

16,090

$

32,333

$

33,287

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized loss on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax ($17 and $6, and $21 and

 

 

 

 

 

 

 

 

    $26, respectively)

 

(25)

 

(9)

 

(31)

 

(39)

Comprehensive Income

$

14,125

$

16,081

$

32,302

$

33,248

    Less: Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

    Noncontrolling Interest, net of tax

 

(5,396)

 

(5,952)

 

(10,785)

 

(12,204)

Comprehensive Income Attributable to MGE

$

8,729

$

10,129

$

21,517

$

21,044

 

 

 

 

 

 

 

 

 

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




10





Madison Gas and Electric Company

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


 

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

 

 

2017

 

2016

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

32,333

$

33,287

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

26,234

 

22,122

 

 

        Deferred income taxes

 

(149)

 

8,894

 

 

        Provision for doubtful receivables

 

367

 

483

 

 

        Employee benefit plan cost

 

727

 

30

 

 

        Equity earnings in MGE Transco

 

-

 

(4,000)

 

 

        Other items

 

971

 

770

 

 

    Changes in working capital items:

 

 

 

 

 

 

       Decrease in current assets

 

20,394

 

27,628

 

 

       (Decrease) increase in current liabilities

 

(11,021)

 

12,123

 

 

    Dividends from MGE Transco

 

-

 

2,728

 

 

    Cash contributions to pension and other postretirement plans

 

(8,284)

 

(12,096)

 

 

    Other noncurrent items, net

 

3,141

 

1,240

 

 

            Cash Provided by Operating Activities

 

64,713

 

93,209

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(42,169)

 

(40,791)

 

 

    Capital contributions to investments

 

-

 

(710)

 

 

    Other

 

(9)

 

(527)

 

 

            Cash Used for Investing Activities

 

(42,178)

 

(42,028)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

(25,000)

 

(25,000)

 

 

    Distributions to parent from noncontrolling interest

 

(10,000)

 

(10,552)

 

 

    Equity contribution received from noncontrolling interest

 

-

 

710

 

 

    Repayment of long-term debt

 

(32,167)

 

(2,123)

 

 

    Issuance of long-term debt

 

40,000

 

-

 

 

    Other

 

(305)

 

(29)

 

 

            Cash Used for Financing Activities

 

(27,472)

 

(36,994)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

(4,937)

 

14,187

 

 

Cash and cash equivalents at beginning of period

 

10,768

 

26,760

 

 

Cash and cash equivalents at end of period

$

5,831

$

40,947

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

8,450

$

7,091

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 




11





Madison Gas and Electric Company

Consolidated Balance Sheets (unaudited)

(In thousands)


 

 

June 30,

December 31,

ASSETS

 

2017

 

2016

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

5,831

$

10,768

    Accounts receivable, less reserves of $3,030 and $3,017, respectively

 

35,252

 

39,887

    Affiliate receivables

 

802

 

539

    Other accounts receivable, less reserves of $386 and $426, respectively

 

6,954

 

6,363

    Unbilled revenues

 

23,238

 

29,846

    Materials and supplies, at average cost

 

20,354

 

18,561

    Fossil fuel, at average cost

 

11,186

 

9,757

    Stored natural gas, at average cost

 

9,607

 

12,819

    Prepaid taxes

 

15,905

 

25,798

    Regulatory assets - current

 

7,602

 

6,414

    Assets held for sale

 

5,117

 

14,813

    Other current assets

 

11,312

 

12,268

        Total Current Assets

 

153,160

 

187,833

Affiliate receivable long-term

 

3,971

 

4,236

Regulatory assets

 

149,866

 

158,485

Pension and other postretirement benefit asset

 

2,984

 

2,020

Other deferred assets and other

 

3,997

 

4,353

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,262,702

 

1,244,648

    Construction work in progress

 

36,511

 

36,790

        Total Property, Plant, and Equipment

 

1,299,213

 

1,281,438

Investments

 

434

 

487

        Total Assets

$

1,613,625

$

1,638,852


 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,404

$

4,333

    Accounts payable

 

34,044

 

47,790

    Accrued interest and taxes

 

6,298

 

5,440

    Accrued payroll related items

 

9,719

 

11,892

    Regulatory liabilities - current

 

10,795

 

6,910

    Derivative liabilities

 

9,000

 

7,620

    Other current liabilities

 

9,702

 

19,347

        Total Current Liabilities

 

83,962

 

103,332

Other Credits:

 

 

 

 

    Deferred income taxes

 

343,697

 

343,117

    Investment tax credit - deferred

 

906

 

947

    Regulatory liabilities

 

23,579

 

22,173

    Accrued pension and other postretirement benefits

 

66,800

 

74,347

    Derivative liabilities

 

37,620

 

42,970

    Other deferred liabilities and other

 

66,572

 

66,426

        Total Other Credits

 

539,174

 

549,980

Capitalization:

 

 

 

 

    Common shareholder's equity

 

483,601

 

487,084

    Noncontrolling interest

 

116,450

 

115,665

        Total Equity

 

600,051

 

602,749

    Long-term debt

 

390,438

 

382,791

        Total Capitalization

 

990,489

 

985,540

Commitments and contingencies (see Footnote 7)

 

 

 

 

        Total Liabilities and Capitalization

$

1,613,625

$

1,638,852


 

 

 

 

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

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2015

17,348

$

17,348

$

192,417

$

291,888

$

23

$

140,308

$

641,984

Net income

 

 

 

 

 

 

21,083

 

 

 

12,204

 

33,287

Other comprehensive loss

 

 

 

 

 

 

 

 

(39)

 

 

 

(39)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

(25,000)

 

 

 

 

 

(25,000)

Equity contribution received from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

710

 

710

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(10,552)

 

(10,552)

Ending balance - June 30, 2016

17,348

$

17,348

$

192,417

$

287,971

$

(16)

$

142,670

$

640,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2016

17,348

$

17,348

$

192,417

$

277,300

$

19

$

115,665

$

602,749

Net income

 

 

 

 

 

 

21,548

 

 

 

10,785

 

32,333

Other comprehensive loss

 

 

 

 

 

 

 

 

(31)

 

 

 

(31)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

(25,000)

 

 

 

 

 

(25,000)

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(10,000)

 

(10,000)

Ending balance - June 30, 2017

17,348

$

17,348

$

192,417

$

273,848

$

(12)

$

116,450

$

600,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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




13





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

Notes to Consolidated Financial Statements (unaudited)

June 30, 2017


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 2016 Annual Report on Form 10-K.


Prior to December 1, 2016, MGE Transco was jointly owned by MGE Energy and MGE. MGE's ownership interest in MGE Transco declined below a majority in July 2016. As a result of the change in majority ownership 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. On December 1, 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 3 for further discussion.


The accompanying consolidated financial statements as of June 30, 2017, and for the three and six months ended, are unaudited, but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in MGE Energy's and MGE's 2016 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 54 through 104 of the 2016 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 three and six months ended June 30, 2017 and 2016, 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 stock option or stock award programs or any dilutive securities.


c.

Long-term Debt - MGE Energy and MGE.


On January 13, 2017, MGE issued $40 million of 3.76% senior unsecured notes due January 15, 2052. MGE used the net proceeds from the sale of senior notes to refinance $30 million of medium-term notes, which matured in January 2017, and assist with the financing of additional capital expenditures. The new, unsecured long-term debt carries an interest rate of 3.76% per annum over its 35-year term. The covenants of this debt are substantially consistent with MGE's existing unsecured long-term debt.




14




3.

Investment in ATC and ATC Holdco - 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, as of December 1, 2016, is owned solely by MGE Energy. ATC Holdco was formed by several members of ATC, including MGE Energy, to pursue electric transmission development and investments outside of Wisconsin. The ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned subsidiary of MGE Energy.


MGE Transco and MGEE Transco have accounted for their investment in ATC and ATC Holdco, respectively, under the equity method of accounting. Equity earnings from investments are recorded as "Other income" on MGE Energy's consolidated statements of income. For the three and six months ended June 30, 2017 and 2016, MGE Transco recorded the following:


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

 

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

 

Equity earnings from investment in ATC

$

2,486

$

1,767

$

5,094

$

4,000

 

 

Dividends from ATC(a)

 

2,000

 

1,863

 

2,000

 

2,728

 

 

Capital contributions to ATC

 

888

 

177

 

2,308

 

710

 


(a)

As of December 31, 2016, MGE Transco recorded a $2.1 million receivable from ATC for a cash dividend received in January 2017.


ATC Holdco's activities commenced in late December 2016 and had an immaterial impact on results of operations, cash flows, and financial condition.


At June 30, 2017, and December 31, 2016, MGE Transco held a 3.6% ownership interest in ATC. At June 30, 2017, and December 31, 2016, MGEE Transco held a 4.3% and 4.0% ownership interest in ATC Holdco, respectively.


In June 2016, the PSCW required MGE to transfer its interest in ATC to MGE Energy, which was to be completed by December 31, 2022. The requirement arose in the context of requests for regulatory approvals by several owners of ATC in connection with a reorganization of ATC. MGE's ownership interest in ATC, held through MGE Transco, was transferred net of deferred tax liabilities to MGE Energy by way of a dividend in kind of $15.8 million as of December 1, 2016. As a result of the transfer, MGE's ownership interest in MGE Transco was completely eliminated in favor of MGE Energy. The change had no effect on MGE Energy's consolidated financial statements.


ATC's summarized financial data for the three and six months ended June 30, 2017 and 2016, is as follows:


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

Operating revenues

$

176,610

$

154,225

$

351,279

$

318,465

 

Operating expenses

 

(82,665)

 

(81,698)

 

(165,053)

 

(160,763)

 

Other income, net

 

612

 

1,308

 

819

 

1,435

 

Interest expense, net

 

(26,299)

 

(24,882)

 

(52,915)

 

(49,090)

 

Earnings before members' income taxes

$

68,258

$

48,953

$

134,130

$

110,047


MGE receives transmission and other related services from ATC. During the three and six months ended June 30, 2017, MGE recorded $7.3 million and $14.6 million, respectively, for transmission services received compared to $7.4 million and $14.7 million for the comparable periods in 2016. MGE also provides a variety of operational, maintenance, and project management services for ATC, which is reimbursed by ATC. As of June 30, 2017, and December 31, 2016, MGE had a receivable due from ATC of $0.1 million.




15




4.

Taxes - MGE Energy and MGE.


MGE Energy's effective income tax rates for the three and six months ended June 30, 2017, were 36.0% and 36.4%, respectively, compared to 36.5% and 36.7% for the same periods in 2016. MGE's effective income tax rates for the three and six months ended June 30, 2017, were 35.5% and 35.9%, respectively, compared to 36.5% and 36.7% for the same periods in 2016. For both MGE Energy and MGE, the decrease in the effective tax rate is due in part to a higher estimated domestic manufacturing deduction in 2017. In addition, MGE's effective income tax rate decreased as a result of the transfer in December 2016 of its ownership interest in MGE Transco to MGE Energy.


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.


The following table presents the components of net periodic benefit costs recognized for the three and six months ended June 30, 2017 and 2016. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.


 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

(In thousands)

 

2017

 

2016

 

2017

 

2016

Pension Benefits

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

    Service cost

$

1,360

$

1,564

$

2,692

$

2,945

    Interest cost

 

3,194

 

3,494

 

6,313

 

6,583

    Expected return on assets

 

(5,740)

 

(6,329)

 

(11,482)

 

(11,922)

Amortization of:

 

 

 

 

 

 

 

 

    Prior service (credit) cost

 

(4)

 

3

 

(8)

 

5

    Actuarial loss

 

1,711

 

1,534

 

3,175

 

2,890

Net periodic benefit cost

$

521

$

266

$

690

$

501

 

 

 

 

 

 

 

 

 

Postretirement Benefits

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

    Service cost

$

423

$

399

$

629

$

723

    Interest cost

 

912

 

831

 

1,356

 

1,505

    Expected return on assets

 

(971)

 

(868)

 

(1,443)

 

(1,573)

Amortization of:

 

 

 

 

 

 

 

 

    Transition obligation

 

1

 

1

 

1

 

2

    Prior service credit

 

(898)

 

(822)

 

(1,334)

 

(1,489)

    Actuarial loss

 

251

 

196

 

380

 

355

Net periodic benefit credit

$

(282)

$

(263)

$

(411)

$

(477)


6.

Share-Based Compensation - MGE Energy and MGE.


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


In January 2017, 4,032 units were granted under the Director Incentive Plan and are subject to a three-year graded vesting schedule. In March 2017, 14,704 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 director or employee services received in exchange for a performance unit award based on the current market value of MGE Energy common stock. The fair value of the awards is re-measured quarterly, including at June 30, 2017, 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.




16




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 six months ended June 30, 2017, MGE recorded $0.2 million and $0.7 million, respectively, in compensation expense as a result of awards under the plans compared to $0.5 million and $1.8 million for the comparable periods in 2016. In January 2017, cash payments of $2.0 million were distributed according to the terms of the awards granted earlier under the plans that had reached their payment dates. No forfeitures of units occurred during the three and six months ended June 30, 2017 and 2016. At June 30, 2017, $5.4 million of outstanding awards are vested, and of this amount, no cash settlements have occurred.


7.

Commitments and Contingencies.


a.

Environmental - MGE Energy and MGE.


MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which they conduct their operations, the costs of those operations, as well as capital and operating expenditures. Several of these environmental rules are subject to legal challenges, reconsideration and/or other uncertainties. 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. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects. These initiatives, proposed rules, and court challenges include:


The EPA's published water effluent limitations guidelines and standards for steam electric power plants, which focus on the reduction of metals and other pollutants in wastewater from new and existing power plants, such as the coal-burning plants at Columbia and the Elm Road Units.


The EPA's cooling water intake rules, which require cooling water intake structures at electric power plants, such as our WCCF, Blount, and Columbia 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.


Greenhouse Gas (GHG) reduction guidelines and approval criteria established under the Clean Air Act for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. Implementation of the rule is expected to have a direct impact on existing coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. In May 2017, the EPA requested the U.S. Court of Appeals for the D.C. Circuit to put on hold, indefinitely, any ongoing challenges to the rules while the EPA reviews the rule and undertakes any potential rulemaking. Given the pending legal proceedings, and the EPA's recent request, 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.


Federal and state air quality regulations impose restrictions on various emissions including emissions of sulfur dioxide (SO2), nitrogen dioxides (NO2), and other pollutants, and may require permits for operation of emission sources.


The EPA's rule to regulate ambient levels of a pollutant through the Ozone National Ambient Air Quality Standards (NAAQS). The State of Wisconsin has joined a lawsuit filed by several states challenging the EPA's new ozone standard, alleging that the new standard is not attainable and the EPA is not properly considering background levels in setting its ozone attainment levels. Oral arguments in this case were delayed following a request by the EPA. In June 2017, the EPA gave notice that it will delay decisions on area designations until October 2018, an action that is being challenged in the U.S. Court of Appeals for the D.C. Circuit by several environmental groups. 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.




17




Rules regulating nitrogen oxide (NOx) and SO2 emissions including the Cross State Air Pollution Rule (CSAPR) and Clean Air Visibility Rule (CAVR). At this time, regulatory obligations, compliance strategies, and costs remain uncertain due to uncertainties surrounding the pending implementation of Phase II of CSAPR and the continued legal challenges surrounding CSAPR and CAVR.


The EPA's Coal Combustion Residuals Rule, which regulates coal ash 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. Review of our Elm Road Units has indicated that the costs to comply with this rule are not expected to be significant. Columbia's operator has developed a preliminary implementation schedule for meeting the various deadlines spelled out in the rule. Costs at Columbia will be dependent on what is determined during the evaluation stage.


The matters in the bullet points above are discussed further in Footnote 17.c. in the Financial Statements of MGE Energy's and MGE's 2016 Annual Report on Form 10-K.


b.

Legal Matters - MGE Energy and MGE.


MGE is involved in various legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements. MGE does not expect the resolution of these matters to have a material adverse effect on its consolidated results of operations, financial condition, or cash flows.


c.

Purchase Contracts - MGE Energy and MGE.


MGE has entered into various commodity supply, transportation, and storage contracts to meet its obligation to deliver electricity and natural gas to customers. Management expects to recover these costs in future customer rates. As of June 30, 2017, the future commitments related to these purchase contracts were as follows:


(In thousands)

 

2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

Coal(a)

$

13,656

$

18,333

$

10,851

$

-

$

-

$

-

Natural gas supply(b)

 

10,393

 

11,984

 

-

 

-

 

-

 

-

 

$

24,049

$

30,317

$

10,851

$

-

$

-

$

-


(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.


(b)

These commitments include market-based pricing.


d.

Other Commitments - MGE Energy.


In May 2017, MGE Energy entered a subscription agreement to invest in a nonpublic venture capital fund. From time to time, this entity will require capital infusions from its investors. MGE Energy has committed to contribute $5 million in capital for such infusions. The timing of these infusions is dependent on the needs of the investee and is therefore uncertain at this time.


8.

Rate Matters - MGE Energy and MGE.


a.

Rate Proceedings.


In December 2016, the PSCW authorized MGE, effective January 1, 2017, to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million and to increase rates for retail gas customers by 1.9% or $3.1 million. The decrease in retail electric rates is attributable to declining fuel and purchased power costs. The increase in retail gas rates covers costs associated with MGE's natural gas system infrastructure improvements. The authorized return on common stock equity for 2017 is 9.8% based on a capital structure consisting of 57.2% common equity. The PSCW also approved MGE's request to extend the current accounting treatment for transmission related costs through 2018. This accounting treatment allows MGE to



18




reflect any differential between transmission costs reflected in rates and actual costs incurred in its next rate case filing.


In July 2015, the PSCW approved MGE's request to extend the current accounting treatment for transmission related costs through 2016, conditioned upon MGE not filing a base rate case for 2016.


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 in the following year and is then reflected in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or minus 2%. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel costs exceeded 102% of the electric fuel costs allowed in its latest rate order. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. Conversely, MGE is required to defer the benefit of lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order.


In August 2015, the PSCW approved a $0.00256/kWh fuel credit that began on September 1, 2015, and continued throughout 2016. MGE returned $2.6 million of electric fuel-related savings to customers through bill credits during the period from September 1, 2015, through December 31, 2015. MGE returned $8.3 million of electric fuel-related savings during the year ended December 31, 2016.


In July 2016, the PSCW issued a final order in the fuel rules proceedings requiring MGE to refund additional fuel savings realized during 2015 and 2016 to its retail electric customers over a one-month period. In September 2016, MGE returned $15.5 million to customers through bill credits.


In July 2017, the PSCW issued a final order in the fuel rules proceedings requiring MGE to refund $6.0 million of additional fuel savings realized during 2015 and 2016 to its retail electric customers over a one-month period in October 2017.


As of June 30, 2017, MGE has deferred $1.8 million of 2017 fuel savings. The 2017 fuel savings will be subject to the PSCW's annual review of 2017 fuel costs, expected to be completed in 2018.


9.

Derivative and Hedging Instruments - MGE Energy and MGE.


a.

Purpose.


As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts to which this exclusion cannot be applied, the derivatives are recognized 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 depending on whether the derivative is in a net loss or net gain position, respectively. The deferred gain or loss is recognized in earnings in the delivery month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.


b.

Notional Amounts.


The gross notional volume of open derivatives is as follows:


 

 

June 30, 2017

 

December 31, 2016

 

 

Commodity derivative contracts

461,165 MWh

 

393,395 MWh

 

 

Commodity derivative contracts

4,781,500  Dth

 

4,195,000  Dth

 

 

FTRs

5,091 MW

 

2,251 MW

 

 

PPA

2,950 MW

 

3,250 MW

 




19




c.

Financial Statement Presentation.


MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds FTRs. An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. At June 30, 2017, and December 31, 2016, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $1.3 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 June 30, 2017, and December 31, 2016, reflects a loss position of $46.6 million and $50.6 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, instruments are netted with the same counterparty under a master netting agreement as well as the netting of collateral. As of June 30, 2017, and December 31, 2016, the receivable – margin account balance of $1.6 million and $1.3 million, respectively, is shown net of any collateral posted against derivative positions.


 

 

 

Derivative Assets

 

Derivative Liabilities

 

 

 

(In thousands)

 

 

 

Balance Sheet Location

 

June 30, 2017

 

 

 

 

 

 

 

Commodity derivative contracts(a)

$

807

$

459

 

Other current assets(b)

 

Commodity derivative contracts(a)

 

10

 

105

 

Other deferred charges

 

FTRs

 

1,001

 

-

 

Other current assets

 

PPA

 

N/A

 

8,950

 

Derivative liability (current)

 

PPA

 

N/A

 

37,620

 

Derivative liability (long-term)

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

Commodity derivative contracts(a)

$

1,227

$

164

 

Other current assets

 

Commodity derivative contracts(a)

 

157

 

54

 

Other deferred charges

 

FTRs

 

143

 

-

 

Other current assets

 

PPA

 

N/A

 

7,620

 

Derivative liability (current)

 

PPA

 

N/A

 

42,970

 

Derivative liability (long-term)


(a)

As of June 30, 2017, and December 31, 2016, no collateral was posted against and netted with derivative liability positions on the consolidated balance sheets.


(b)

As of June 30, 2017, $0.1 million was presented as current derivative liabilities on the consolidated balance sheets.




20




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

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

817

$

(514)

$

-

$

303

 

 

FTRs

 

1,001

 

-

 

-

 

1,001

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

1,384

$

(218)

$

-

$

1,166

 

 

FTRs

 

143

 

-

 

-

 

143

 


 

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

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

564

$

(514)

$

-

$

50

 

 

PPA

 

46,570

 

-

 

-

 

46,570

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

218

$

(218)

$

-

$

-

 

 

PPA

 

50,590

 

-

 

-

 

50,590

 


The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheets at June 30, 2017 and 2016, and the consolidated income statements for the three and six months ended June 30, 2017 and 2016.


 

 

2017

 

 

2016

(In thousands)

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

 

 

Current and Long-Term Regulatory Asset

 

Other Current Assets

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

Balance at April 1,

$

48,073

$

142

 

$

56,884

$

655

Unrealized gain

 

(1,731)

 

-

 

 

(4,580)

 

-

Realized (loss) gain reclassified to a deferred account

 

(544)

 

544

 

 

17

 

(17)

Realized (loss) gain reclassified to income statement

 

(482)

 

(68)

 

 

(1,800)

 

21

Balance at June 30,

$

45,316

$

618

 

$

50,521

$

659

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

Balance at January 1,

$

49,281

$

230

 

$

54,082

$

1,208

Unrealized (gain) loss

 

(2,420)

 

-

 

 

1,791

 

-

Realized (loss) gain reclassified to a deferred account

 

(622)

 

622

 

 

(1,434)

 

1,434

Realized loss reclassified to income statement

 

(923)

 

(234)

 

 

(3,918)

 

(1,983)

Balance at June 30,

$

45,316

$

618

 

$

50,521

$

659


 

 

Realized Losses (Gains)

 

 

2017

 

 

2016

(In thousands)

 

Fuel for Electric Generation/ Purchased Power

 

Cost of Gas Sold

 

 

Fuel for Electric Generation/ Purchased Power

 

Cost of Gas Sold

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

17

$

63

 

$

417

$

-

FTRs

 

(439)

 

-

 

 

136

 

-

PPA

 

909

 

-

 

 

1,226

 

-

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

402

$

209

 

$

1,424

$

1,814

FTRs

 

(1,124)

 

-

 

 

68

 

-

PPA

 

1,670

 

-

 

 

2,595

 

-




21




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


The PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of June 30, 2017, no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of June 30, 2017, certain counterparties were in a net liability position of less than $0.1 million. As of December 31, 2016, no counterparties were in a net liability position.


Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of June 30, 2017, no counterparties have defaulted.


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 June 30, 2017, and December 31, 2016, 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 long-term debt is based on quoted market prices for similar financial instruments at June 30, 2017, and December 31, 2016. Since long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market values of financial instruments are as follows:


 

 

 

June 30, 2017

 

December 31, 2016

 

 

(In thousands)

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

102,916

$

102,916

$

95,959

$

95,959

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Long-term debt(a)

 

399,074

 

450,497

 

391,242

 

430,122

 

 

 

 

 

 

 

 

 

 

 

 



22





 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

5,831

$

5,831

$

10,768

$

10,768

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Long-term debt(a)

 

399,074

 

450,497

 

391,242

 

430,122

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)   Includes long-term debt due within one year. Excludes debt issuance costs and unamortized discount of

 

        $4.0 million and $4.1 million at June 30, 2017, and December 31, 2016, 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 June 30, 2017

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,818

$

455

$

-

$

1,363

 

 

    Exchange-traded investments

 

715

 

715

 

-

 

-

 

 

    Total Assets

$

2,533

$

1,170

$

-

$

1,363

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

47,134

$

166

$

-

$

46,968

 

 

    Deferred compensation

 

3,103

 

-

 

3,103

 

-

 

 

    Total Liabilities

$

50,237

$

166

$

3,103

$

46,968

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,818

$

455

$

-

$

1,363

 

 

    Exchange-traded investments

 

90

 

90

 

-

 

-

 

 

    Total Assets

$

1,908

$

545

$

-

$

1,363

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

47,134

$

166

$

-

$

46,968

 

 

    Deferred compensation

 

3,103

 

-

 

3,103

 

-

 

 

    Total Liabilities

$

50,237

$

166

$

3,103

$

46,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value as of December 31, 2016

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,527

$

1,041

$

-

$

486

 

 

    Exchange-traded investments

 

500

 

500

 

-

 

-

 

 

    Total Assets

$

2,027

$

1,541

$

-

$

486

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

50,808

$

16

$

-

$

50,792

 

 

    Deferred compensation

 

3,039

 

-

 

3,039

 

-

 

 

    Total Liabilities

$

53,847

$

16

$

3,039

$

50,792

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,527

$

1,041

$

-

$

486

 

 

    Exchange-traded investments

 

143

 

143

 

-

 

-

 

 

    Total Assets

$

1,670

$

1,184

$

-

$

486

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

50,808

$

16

$

-

$

50,792

 

 

    Deferred compensation

 

3,039

 

-

 

3,039

 

-

 

 

    Total Liabilities

$

53,847

$

16

$

3,039

$

50,792

 


No transfers were made in or out of Level 1 or Level 2 for the six months ended June 30, 2017.


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




23




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 9) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market. 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.


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


 

 

 

Model Input

 

Significant Unobservable Inputs

 

June 30, 2017

 

December 31, 2016

 

Basis adjustment:

 

 

 

 

 

    On peak

 

92.8%

 

91.9%

 

    Off peak

 

94.7%

 

93.4%

 

Counterparty fuel mix:

 

 

 

 

 

    Internal generation

 

55% - 75%

 

55% - 75%

 

    Purchased power

 

45% - 25%

 

45% - 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. 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.




24




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

 

Six Months Ended

 

 

June 30,

 

June 30,

(In thousands)

 

2017

 

2016

 

2017

 

2016

Beginning balance

$

(48,354)

$

(57,101)

$

(50,305)

$

(53,501)

Realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

    Included in regulatory liabilities

 

2,748

 

5,218

 

4,701

 

1,618

    Included in other comprehensive income

 

-

 

-

 

-

 

-

    Included in earnings

 

(550)

 

(1,809)

 

(1,136)

 

(3,972)

    Included in current assets

 

(222)

 

-

 

(97)

 

-

Purchases

 

6,186

 

5,636

 

12,182

 

10,937

Sales

 

-

 

-

 

-

 

-

Issuances

 

-

 

-

 

-

 

-

Settlements

 

(5,413)

 

(3,827)

 

(10,950)

 

(6,965)

Transfers in and/or out of Level 3

 

-

 

-

 

-

 

-

Balance as of June 30,

$

(45,605)

$

(51,883)

$

(45,605)

$

(51,883)

Total gains (losses) included in earnings attributed to

 

 

 

 

 

 

 

 

the change in unrealized gains (losses) related to

 

 

 

 

 

 

 

 

assets and liabilities held at June 30,(b)

$

-

$

-

$

-

$

-


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 (b).


 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

June 30,

 

June 30,

 

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

 

Purchased Power Expense

$

(487)

$

(1,809)

$

(918)

$

(3,972)

 

 

Cost of Gas Sold Expense

 

(63)

 

-

 

(218)

 

-

 

 

Total

$

(550)

$

(1,809)

$

(1,136)

$

(3,972)

 


(b)

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


11.

Joint Plant Ownership - MGE Energy and MGE.


Columbia.


In 2016, MGE and WPL negotiated an amendment to the existing Columbia joint operating agreement, that has been approved by the PSCW, under which MGE will have the option to reduce its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a proportional reduction in MGE's ownership in Columbia. On January 1 of each year, beginning in 2017 and ending June 1, 2020, the ownership percentage will be adjusted, through a partial sale, based on the amount of capital expenditures foregone. In June 2017, the FERC approved the ownership transfer in Columbia, effective January 1, 2017.


During 2016, MGE accrued $14.8 million of 2016 capital expenditures that MGE has forgone as part of the ownership transfer agreement with WPL. As of December 31, 2016, MGE classified $14.8 million of Columbia assets as held-for-sale on the consolidated balance sheets. In January 2017, MGE reduced its ownership interest in Columbia from 22.0% to 20.4% through the partial sale of plant assets to WPL.


During three and six months ended June 30, 2017, MGE accrued $2.8 million and $5.1 million, respectively, of 2017 capital expenditures that MGE has forgone subject to the ownership transfer agreement. As of June 30, 2017, MGE classified $5.1 million of Columbia assets as held-for-sale on the consolidated balance sheets. The assets recognized as held-for-sale are subject to a partial sale of plant assets to WPL, expected to occur in January 2018.




25




12.

Adoption of Accounting Principles and Recently Issued Accounting Pronouncements - MGE Energy and MGE.


a.

Revenue from Contracts with Customers.


In May 2014, the FASB issued authoritative guidance within the Codification's Revenue Recognition topic that provides guidance on the recognition, measurement, and disclosure of revenue from contracts with customers. The new standard establishes a five step model for recognizing and measuring revenue from contracts with customers and replaces existing guidance on revenue recognition. The objective of the new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.


MGE Energy and MGE have been assessing the impact of this guidance on revenue streams within the scope of the new standard. All retail electric and gas revenues are tariff rates approved by the PSCW. Based on our evaluation of the new standard, retail revenues will be recognized within the period in which utility service is provided to the customer and the performance obligation is fulfilled, consistent with our current revenue recognition model. Electric revenues for sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may also include bilateral sales to other utilities or power marketers. Revenues for sales to the market will be recognized when the sale is completed within the market operated by MISO, similar to the recognition under our current revenue recognition model. In addition, revenues from the transportation of gas will continue to be recognized upon the performance of services for the respective customer. Based on our assessment of the new standard, revenue recognition for retail revenues, sales to the market, and transportation of gas will be materially consistent with our current revenue recognition model. However, additional disclosures regarding the nature, amount, timing, and uncertainty of these revenue streams and related cash flows arising from contracts with customers will be required as a result of the new standard. Management continues to analyze newly-released interpretative guidance and assess the related impacts to the current revenue recognition model.


This authoritative guidance will become effective January 1, 2018, and MGE Energy and MGE anticipate adopting the standard upon the effective date. Adoption of this standard is permitted under one of two methods: the full retrospective method or the modified retrospective method. MGE Energy and MGE are continuing to assess the permitted implementation methods and the impact on our financial statements.


b.

Financial Instruments.


In January 2016, the FASB issued authoritative guidance within the Codification's Financial Instruments topic that provides guidance on the recognition and measurement of financial instruments. This authoritative guidance will become effective January 1, 2018, and will require equity investments to be measured at fair value with changes in fair value recognized in net income rather than in other comprehensive income. As a result of this guidance, MGE Energy and MGE will no longer have any other comprehensive income related to equity investments. This standard will be applied using a modified retrospective approach, with a cumulative effect adjustment recorded to opening retained earnings as of the beginning of all prior periods presented.


c.

Leases.


In February 2016, the FASB issued authoritative guidance within the Codification's Leases topic that provides guidance on the classification, recognition, measurement, and disclosure of leases. The new leasing standard establishes that a lease conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Under the new guidance, lessees will be required to recognize all leases with terms greater than one year, including operating leases, on the consolidated balance sheet by recording a right-of-use asset and lease liability. Prior to the authoritative guidance, only capital leases were recognized on the balance sheet by lessees. The new accounting guidance as applied by lessors is materially consistent from that applied under current GAAP.




26




Management has begun utilizing a bottoms-up approach to analyze the impact of the standard on our lease portfolio. MGE Energy and MGE have been reviewing current accounting policies and procedures to identify potential differences in accounting treatment that would result from applying the requirements of the new standard to our existing lease portfolio. In addition, we are identifying appropriate changes to our business processes, systems, and controls to support recognition and disclosure requirements under the new standard. This authoritative guidance will become effective January 1, 2019, with early adoption permitted. MGE Energy and MGE anticipate adopting the standard upon the effective date. The new leasing standard requires entities to recognize and measure leases at the beginning of the earliest comparative period presented using a modified retrospective approach. MGE Energy and MGE are currently assessing the impact this pronouncement will have on our financial statements.


d.

Restricted Cash.


In November 2016, the FASB issued authoritative guidance within the Codification's Statement of Cash Flows topic that provides guidance on the classification and presentation of changes in restricted cash within the statement of cash flows. The new standard was issued to eliminate a current diversity in practice for the accounting treatment of restricted cash. Under the new guidance, reporting entities will be required to explain the changes in the total of restricted and unrestricted cash and cash equivalents when reconciling the beginning and ending balances on the statement of cash flows. Prior to the authoritative guidance, changes in restricted cash were presented as either cash flows from operating, investing, or financing activities within the statement of cash flows, as appropriate based on the nature of the restriction. Also under the new standard, reporting entities will be required to provide a reconciliation from the balance sheet to the statement of cash flows and disclose the nature of the restrictions of cash. This authoritative guidance will become effective January 1, 2018. Upon the effective date, MGE Energy and MGE will change the presentation of restricted cash to reflect this change in accounting guidance. MGE Energy and MGE will also retrospectively apply the guidance to all prior periods presented. As of June 30, 2017, and December 31, 2016, MGE Energy and MGE had $5.1 million of restricted cash classified within other current assets on the consolidated balance sheets.


e.

Pension and Other Postretirement Benefits.


In March 2017, the FASB issued authoritative guidance within the Compensation – Retirement Benefits topic that provides guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under the new guidance, the service cost component of net benefit cost is required to be recorded in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The standard also only allows the service cost component to be eligible for capitalization when applicable. 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.


13.

Segment Information - MGE Energy and MGE.


MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See MGE Energy's and MGE's 2016 Annual Report on Form 10-K for additional discussion of each of these segments.




27




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


(In thousands)

MGE Energy

 

Electric

 

Gas

 

Nonregulated Energy

 

Transmission Investment

 

All Others

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

102,306

$

24,081

$

76

$

-

$

-

$

-

$

126,463

Interdepartmental revenues

 

(119)

 

3,422

 

11,107

 

-

 

-

 

(14,410)

 

-

Total operating revenues

 

102,187

 

27,503

 

11,183

 

-

 

-

 

(14,410)

 

126,463

Depreciation and amortization

 

(9,185)

 

(2,232)

 

(1,858)

 

-

 

-

 

-

 

(13,275)

Other operating expenses

 

(77,615)

 

(23,153)

 

(62)

 

-

 

(217)

 

14,410

 

(86,637)

Operating income (loss)

 

15,387

 

2,118

 

9,263

 

-

 

(217)

 

-

 

26,551

Other income (deductions), net

 

191

 

(8)

 

-

 

2,506

 

(75)

 

-

 

2,614

Interest (expense) income, net

 

(2,801)

 

(805)

 

(1,392)

 

-

 

112

 

-

 

(4,886)

Income (loss) before taxes

 

12,777

 

1,305

 

7,871

 

2,506

 

(180)

 

-

 

24,279

Income tax (provision) benefit

 

(4,124)

 

(521)

 

(3,158)

 

(1,006)

 

73

 

-

 

(8,736)

Net income (loss)

$

8,653

$

784

$

4,713

$

1,500

$

(107)

$

-

$

15,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

100,329

$

20,961

$

286

$

-

$

-

$

-

$

121,576

Interdepartmental revenues

 

567

 

6,141

 

10,919

 

-

 

-

 

(17,627)

 

-

Total operating revenues

 

100,896

 

27,102

 

11,205

 

-

 

-

 

(17,627)

 

121,576

Depreciation and amortization

 

(7,259)

 

(2,015)

 

(1,828)

 

-

 

(12)

 

-

 

(11,114)

Other operating expenses

 

(78,291)

 

(21,295)

 

(35)

 

(3)

 

(253)

 

17,627

 

(82,250)

Operating income (loss)

 

15,346

 

3,792

 

9,342

 

(3)

 

(265)

 

-

 

28,212

Other income (deductions), net

 

118

 

(18)

 

-

 

1,767

 

312

 

-

 

2,179

Interest (expense) income, net

 

(2,776)

 

(799)

 

(1,449)

 

-

 

67

 

-

 

(4,957)

Income before taxes

 

12,688

 

2,975

 

7,893

 

1,764

 

114

 

-

 

25,434

Income tax provision

 

(4,158)

 

(1,195)

 

(3,168)

 

(709)

 

(54)

 

-

 

(9,284)

Net income

$

8,530

$

1,780

$

4,725

$

1,055

$

60

$

-

$

16,150

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

200,630

$

82,507

$

149

$

-

$

-

$

-

$

283,286

Interdepartmental revenues

 

(224)

 

7,816

 

22,177

 

-

 

-

 

(29,769)

 

-

Total operating revenues

 

200,406

 

90,323

 

22,326

 

-

 

-

 

(29,769)

 

283,286

Depreciation and amortization

 

(18,085)

 

(4,445)

 

(3,704)

 

-

 

-

 

-

 

(26,234)

Other operating expenses

 

(152,941)

 

(73,730)

 

(103)

 

-

 

(586)

 

29,769

 

(197,591)

Operating income (loss)

 

29,380

 

12,148

 

18,519

 

-

 

(586)

 

-

 

59,461

Other income (deductions), net

 

381

 

(3)

 

-

 

4,984

 

(297)

 

-

 

5,065

Interest (expense) income, net

 

(5,577)

 

(1,604)

 

(2,799)

 

-

 

200

 

-

 

(9,780)

Income (loss) before taxes

 

24,184

 

10,541

 

15,720

 

4,984

 

(683)

 

-

 

54,746

Income tax (provision) benefit

 

(7,578)

 

(4,225)

 

(6,309)

 

(2,003)

 

212

 

-

 

(19,903)

Net income (loss)

$

16,606

$

6,316

$

9,411

$

2,981

$

(471)

$

-

$

34,843

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

193,537

$

74,798

$

768

$

-

$

-

$

-

$

269,103

Interdepartmental revenues