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, 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 October 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.

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' 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

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

120,761

$

119,147

$

321,540

$

313,452

    Gas revenues

 

18,778

 

17,570

 

101,285

 

92,368

        Total Operating Revenues

 

139,539

 

136,717

 

422,825

 

405,820

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

15,829

 

20,505

 

39,938

 

47,567

    Purchased power

 

15,984

 

9,167

 

48,058

 

38,698

    Cost of gas sold

 

5,094

 

4,314

 

50,109

 

43,247

    Other operations and maintenance

 

41,529

 

40,146

 

128,143

 

123,839

    Depreciation and amortization

 

13,372

 

11,212

 

39,606

 

33,358

    Other general taxes

 

4,730

 

4,846

 

14,509

 

14,841

        Total Operating Expenses

 

96,538

 

90,190

 

320,363

 

301,550

Operating Income

 

43,001

 

46,527

 

102,462

 

104,270

 

 

 

 

 

 

 

 

 

Other income, net

 

3,939

 

2,105

 

9,004

 

6,726

Interest expense, net

 

(4,727)

 

(5,038)

 

(14,507)

 

(14,995)

    Income before income taxes

 

42,213

 

43,594

 

96,959

 

96,001

Income tax provision

 

(15,584)

 

(15,714)

 

(35,487)

 

(34,943)

Net Income

$

26,629

$

27,880

$

61,472

$

61,058

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

 

(basic and diluted)

$

0.77

$

0.80

$

1.77

$

1.76

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

0.323

$

0.308

$

0.938

$

0.898

 

 

 

 

 

 

 

 

 

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,

 

 

2017

 

2016

 

2017

 

2016

Net Income

$

26,629

$

27,880

$

61,472

$

61,058

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax (($40) and ($8), and ($127) and

 

 

 

 

 

 

 

 

    $96, respectively)

 

60

 

11

 

189

 

(143)

Comprehensive Income

$

26,689

$

27,891

$

61,661

$

60,915

 

 

 

 

 

 

 

 

 

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,

 

 

 

 

2017

 

2016

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

61,472

$

61,058

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

39,606

 

33,358

 

 

        Deferred income taxes

 

4,810

 

15,041

 

 

        Provision for doubtful receivables

 

650

 

583

 

 

        Employee benefit plan cost

 

778

 

165

 

 

        Equity earnings in ATC

 

(7,432)

 

(6,023)

 

 

        Gain on sale of property

 

(1,581)

 

-

 

 

        Other items

 

1,071

 

693

 

 

    Changes in working capital items:

 

 

 

 

 

 

        Decrease in current assets

 

18,161

 

33,740

 

 

        Decrease in current liabilities

 

(17,615)

 

(3,147)

 

 

    Dividends from ATC

 

6,142

 

4,214

 

 

    Cash contributions to pension and other postretirement plans

 

(9,717)

 

(13,134)

 

 

    Other noncurrent items, net

 

2,671

 

2,644

 

 

            Cash Provided by Operating Activities

 

99,016

 

129,192

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(66,286)

 

(62,273)

 

 

    Capital contributions to investments

 

(6,863)

 

(2,036)

 

 

    Proceeds from sale of property

 

2,399

 

-

 

 

    Other

 

(364)

 

(310)

 

 

            Cash Used for Investing Activities

 

(71,114)

 

(64,619)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(32,502)

 

(31,115)

 

 

    Repayment of long-term debt

 

(33,260)

 

(3,192)

 

 

    Issuance of long-term debt

 

40,000

 

-

 

 

    Proceeds from short-term debt

 

7,000

 

-

 

 

    Other

 

(366)

 

(65)

 

 

            Cash Used for Financing Activities

 

(19,128)

 

(34,372)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

8,774

 

30,201

 

 

Cash and cash equivalents at beginning of period

 

95,959

 

81,384

 

 

Cash and cash equivalents at end of period

$

104,733

$

111,585

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

12,469

$

10,603

 

 

 

 

 

 

 

 

 

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

 

2017

 

2016

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

104,733

$

95,959

    Accounts receivable, less reserves of $2,950 and $3,017, respectively

 

38,129

 

39,887

    Other accounts receivable, less reserves of $372 and $426, respectively

 

7,588

 

8,530

    Unbilled revenues

 

21,764

 

29,846

    Materials and supplies, at average cost

 

21,835

 

18,561

    Fossil fuel, at average cost

 

10,017

 

9,757

    Stored natural gas, at average cost

 

14,758

 

12,819

    Prepaid taxes

 

12,406

 

26,636

    Regulatory assets - current

 

7,377

 

6,414

    Assets held for sale

 

6,707

 

14,813

    Other current assets

 

10,043

 

12,293

        Total Current Assets

 

255,357

 

275,515

Regulatory assets

 

146,006

 

158,485

Pension and other postretirement benefit asset

 

3,471

 

2,020

Other deferred assets and other

 

6,311

 

6,691

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,270,124

 

1,245,269

    Construction work in progress

 

42,276

 

36,790

        Total Property, Plant, and Equipment

 

1,312,400

 

1,282,059

Investments

 

86,455

 

76,290

        Total Assets

$

1,810,000

$

1,801,060

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,428

$

4,333

    Short-term debt

 

7,000

 

-

    Accounts payable

 

31,519

 

47,799

    Accrued interest and taxes

 

4,750

 

5,495

    Accrued payroll related items

 

9,981

 

11,892

    Regulatory liabilities - current

 

6,353

 

6,910

    Derivative liabilities

 

8,288

 

7,620

    Other current liabilities

 

12,263

 

19,456

        Total Current Liabilities

 

84,582

 

103,505

Other Credits:

 

 

 

 

    Deferred income taxes

 

389,179

 

383,813

    Investment tax credit - deferred

 

885

 

947

    Regulatory liabilities

 

28,253

 

22,173

    Accrued pension and other postretirement benefits

 

65,616

 

74,347

    Derivative liabilities

 

34,890

 

42,970

    Other deferred liabilities and other

 

63,942

 

66,426

        Total Other Credits

 

582,765

 

590,676

Capitalization:

 

 

 

 

    Common shareholders' equity

 

753,247

 

724,088

    Long-term debt

 

389,406

 

382,791

        Total Capitalization

 

1,142,653

 

1,106,879

Commitments and contingencies (see Footnote 7)

 

 

 

 

        Total Liabilities and Capitalization

$

1,810,000

$

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

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2016

34,668

$

34,668

$

316,268

$

372,950

$

202

$

724,088

 

 

Net income

 

 

 

 

 

 

61,472

 

 

 

61,472

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

189

 

189

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($0.938 per share)

 

 

 

 

 

 

(32,502)

 

 

 

(32,502)

 

 

Ending balance - September 30, 2017

34,668

$

34,668

$

316,268

$

401,920

$

391

$

753,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2017

 

2016

 

2017

 

2016

Operating Revenues:

 

 

 

 

 

 

 

 

    Electric revenues

$

120,760

$

119,152

$

321,543

$

313,470

    Gas revenues

 

18,779

 

17,576

 

101,294

 

92,390

        Total Operating Revenues

 

139,539

 

136,728

 

422,837

 

405,860

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

    Fuel for electric generation

 

15,828

 

20,507

 

39,939

 

47,574

    Purchased power

 

15,985

 

9,171

 

48,061

 

38,709

    Cost of gas sold

 

5,094

 

4,320

 

50,117

 

43,269

    Other operations and maintenance

 

41,327

 

40,003

 

127,355

 

123,117

    Depreciation and amortization

 

13,372

 

11,212

 

39,606

 

33,334

    Other general taxes

 

4,730

 

4,846

 

14,509

 

14,841

    Income tax provision

 

14,059

 

14,934

 

32,080

 

32,488

        Total Operating Expenses

 

110,395

 

104,993

 

351,667

 

333,332

Operating Income

 

29,144

 

31,735

 

71,170

 

72,528

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

 

    AFUDC - equity funds

 

310

 

253

 

875

 

777

    Equity earnings in MGE Transco

 

-

 

1,451

 

-

 

5,451

    Income tax provision

 

(663)

 

(606)

 

(754)

 

(2,315)

    Other expense, net

 

1,488

 

(62)

 

1,301

 

(298)

        Total Other Income and Deductions

 

1,135

 

1,036

 

1,422

 

3,615

    Income before interest expense

 

30,279

 

32,771

 

72,592

 

76,143

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

 

    Interest on long-term debt

 

4,995

 

5,079

 

15,051

 

15,284

    Other interest, net

 

54

 

112

 

150

 

163

    AFUDC - borrowed funds

 

(123)

 

(82)

 

(295)

 

(253)

        Net Interest Expense

 

4,926

 

5,109

 

14,906

 

15,194

Net Income

$

25,353

$

27,662

$

57,686

$

60,949

Less: Net Income Attributable to Noncontrolling

 

 

 

 

 

 

 

 

Interest, net of tax

 

(5,439)

 

(5,695)

 

(16,224)

 

(17,899)

Net Income Attributable to MGE

$

19,914

$

21,967

$

41,462

$

43,050

 

 

 

 

 

 

 

 

 

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,

 

 

2017

 

2016

 

2017

 

2016

Net Income

$

25,353

$

27,662

$

57,686

$

60,949

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

    Unrealized (loss) gain on available-for-sale

 

 

 

 

 

 

 

 

    securities, net of tax ($5 and ($5), and $26 and

 

 

 

 

 

 

 

 

    $21, respectively)

 

(7)

 

8

 

(38)

 

(31)

Comprehensive Income

$

25,346

$

27,670

$

57,648

$

60,918

    Less: Comprehensive Income Attributable to

 

 

 

 

 

 

 

 

    Noncontrolling Interest, net of tax

 

(5,439)

 

(5,695)

 

(16,224)

 

(17,899)

Comprehensive Income Attributable to MGE

$

19,907

$

21,975

$

41,424

$

43,019

 

 

 

 

 

 

 

 

 

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,

 

 

 

 

2017

 

2016

 

 

Operating Activities:

 

 

 

 

 

 

    Net income

$

57,686

$

60,949

 

 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

39,606

 

33,334

 

 

        Deferred income taxes

 

2,255

 

13,997

 

 

        Provision for doubtful receivables

 

650

 

583

 

 

        Employee benefit plan cost

 

778

 

165

 

 

        Equity earnings in MGE Transco

 

-

 

(5,451)

 

 

        Gain on sale of property

 

(1,581)

 

-

 

 

        Other items

 

1,344

 

1,056

 

 

    Changes in working capital items:

 

 

 

 

 

 

       Decrease in current assets

 

17,536

 

32,557

 

 

       Decrease in current liabilities

 

(16,670)

 

(1,783)

 

 

    Dividends from MGE Transco

 

-

 

4,214

 

 

    Cash contributions to pension and other postretirement plans

 

(9,717)

 

(13,134)

 

 

    Other noncurrent items, net

 

2,479

 

2,472

 

 

            Cash Provided by Operating Activities

 

94,366

 

128,959

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(66,286)

 

(62,273)

 

 

    Capital contributions to investments

 

-

 

(1,598)

 

 

    Proceeds from sale of property

 

1,751

 

-

 

 

    Other

 

(570)

 

(536)

 

 

            Cash Used for Investing Activities

 

(65,105)

 

(64,407)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

(35,000)

 

(40,000)

 

 

    Distributions to parent from noncontrolling interest

 

(16,500)

 

(18,113)

 

 

    Equity contribution received from noncontrolling interest

 

-

 

1,598

 

 

    Repayment of long-term debt

 

(33,260)

 

(3,192)

 

 

    Issuance of long-term debt

 

40,000

 

-

 

 

    Proceeds from short-term debt

 

7,000

 

-

 

 

    Other

 

(315)

 

(47)

 

 

            Cash Used for Financing Activities

 

(38,075)

 

(59,754)

 

 

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

(8,814)

 

4,798

 

 

Cash and cash equivalents at beginning of period

 

10,768

 

26,760

 

 

Cash and cash equivalents at end of period

$

1,954

$

31,558

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

12,469

$

10,603

 

 

 

 

 

 

 

 

 

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

 

2017

 

2016

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

1,954

$

10,768

    Accounts receivable, less reserves of $2,950 and $3,017, respectively

 

38,129

 

39,887

    Affiliate receivables

 

683

 

539

    Other accounts receivable, less reserves of $372 and $426, respectively

 

7,529

 

6,363

    Unbilled revenues

 

21,764

 

29,846

    Materials and supplies, at average cost

 

21,835

 

18,561

    Fossil fuel, at average cost

 

10,017

 

9,757

    Stored natural gas, at average cost

 

14,758

 

12,819

    Prepaid taxes

 

12,524

 

25,798

    Regulatory assets - current

 

7,377

 

6,414

    Assets held for sale

 

6,707

 

14,813

    Other current assets

 

10,010

 

12,268

        Total Current Assets

 

153,287

 

187,833

Affiliate receivable long-term

 

3,839

 

4,236

Regulatory assets

 

146,006

 

158,485

Pension and other postretirement benefit asset

 

3,471

 

2,020

Other deferred assets and other

 

4,066

 

4,353

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,270,153

 

1,244,648

    Construction work in progress

 

42,276

 

36,790

        Total Property, Plant, and Equipment

 

1,312,429

 

1,281,438

Investments

 

423

 

487

        Total Assets

$

1,623,521

$

1,638,852


 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,428

$

4,333

    Short-term debt

 

7,000

 

-

    Accounts payable

 

31,508

 

47,790

    Accrued interest and taxes

 

5,717

 

5,440

    Accrued payroll related items

 

9,981

 

11,892

    Regulatory liabilities - current

 

6,353

 

6,910

    Derivative liabilities

 

8,288

 

7,620

    Other current liabilities

 

12,079

 

19,347

        Total Current Liabilities

 

85,354

 

103,332

Other Credits:

 

 

 

 

    Deferred income taxes

 

346,278

 

343,117

    Investment tax credit - deferred

 

885

 

947

    Regulatory liabilities

 

28,253

 

22,173

    Accrued pension and other postretirement benefits

 

65,616

 

74,347

    Derivative liabilities

 

34,890

 

42,970

    Other deferred liabilities and other

 

63,942

 

66,426

        Total Other Credits

 

539,864

 

549,980

Capitalization:

 

 

 

 

    Common shareholder's equity

 

493,508

 

487,084

    Noncontrolling interest

 

115,389

 

115,665

        Total Equity

 

608,897

 

602,749

    Long-term debt

 

389,406

 

382,791

        Total Capitalization

 

998,303

 

985,540

Commitments and contingencies (see Footnote 7)

 

 

 

 

        Total Liabilities and Capitalization

$

1,623,521

$

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

 

 

 

 

 

 

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 from

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - Dec. 31, 2016

17,348

$

17,348

$

192,417

$

277,300

$

19

$

115,665

$

602,749

Net income

 

 

 

 

 

 

41,462

 

 

 

16,224

 

57,686

Other comprehensive loss

 

 

 

 

 

 

 

 

(38)

 

 

 

(38)

Cash dividends paid to parent

 

 

 

 

 

 

 

 

 

 

 

 

 

by MGE

 

 

 

 

 

 

(35,000)

 

 

 

 

 

(35,000)

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(16,500)

 

(16,500)

Ending balance - September 30, 2017

17,348

$

17,348

$

192,417

$

283,762

$

(19)

$

115,389

$

608,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 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 (the 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 September 30, 2017, 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 the 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 nine months ended September 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 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.


On October 2, 2017, MGE issued $30 million of 3.11% senior unsecured notes due October 1, 2027. MGE will use the net proceeds from the sale of senior notes to cover capital expenditures and other corporate obligations. The long-term debt carries an interest rate of 3.11% per annum over its 10-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 nine months ended September 30, 2017 and 2016, MGE Transco recorded the following:


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

 

Equity earnings from investment in ATC

$

2,338

$

2,023

$

7,432

$

6,023

 

 

Dividends from ATC(a)

 

2,070

 

1,486

 

4,070

 

4,214

 

 

Capital contributions to ATC

 

710

 

888

 

3,018

 

1,598

 


(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 September 30, 2017, and December 31, 2016, MGE Transco held a 3.6% ownership interest in ATC. At September 30, 2017, and December 31, 2016, MGEE Transco held a 4.4% 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 nine months ended September 30, 2017 and 2016, is as follows:


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

 

Operating revenues

$

171,123

$

158,126

$

522,402

$

476,591

 

 

Operating expenses

 

(85,063)

 

(80,271)

 

(250,116)

 

(241,034)

 

 

Other income, net

 

796

 

1,128

 

1,615

 

2,563

 

 

Interest expense, net

 

(28,273)

 

(24,624)

 

(81,188)

 

(73,714)

 

 

Earnings before members' income taxes

$

58,583

$

54,359

$

192,713

$

164,406

 


MGE receives transmission and other related services from ATC. During the three and nine months ended September 30, 2017, MGE recorded $7.3 million and $21.9 million, respectively, for transmission services received compared to $7.4 million and $22.1 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 September 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 rate for the three months ended September 30, 2017 and 2016, was 36.9% and 36.1%, respectively. MGE's effective income tax rate for the three months ended September 30, 2017 and 2016, was 36.7% and 36.0%, respectively. For both MGE Energy and MGE, the increase in the effective tax rate is due in part to lower estimated federal tax credits.


MGE Energy's effective income tax rate for the nine months ended September 30, 2017 and 2016, was 36.6% and 36.4%, respectively. MGE's effective income tax rate for the nine months ended September 30, 2017 and 2016, was 36.3% and 36.4%, respectively.


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 nine months ended September 30, 2017 and 2016. 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)

 

2017

 

2016

 

2017

 

2016

 

 

Pension Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

1,351

$

1,413

$

4,043

$

4,358

 

 

    Interest cost

 

3,168

 

3,161

 

9,481

 

9,744

 

 

    Expected return on assets

 

(5,762)

 

(5,724)

 

(17,244)

 

(17,646)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Prior service (credit) cost

 

(4)

 

3

 

(12)

 

8

 

 

    Actuarial loss

 

1,594

 

1,388

 

4,769

 

4,278

 

 

Net periodic benefit cost

$

347

$

241

$

1,037

$

742

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Benefits

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

    Service cost

$

315

$

361

$

944

$

1,084

 

 

    Interest cost

 

678

 

753

 

2,034

 

2,258

 

 

    Expected return on assets

 

(722)

 

(787)

 

(2,165)

 

(2,360)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

    Transition obligation

 

1

 

1

 

2

 

3

 

 

    Prior service credit

 

(667)

 

(744)

 

(2,001)

 

(2,233)

 

 

    Actuarial loss

 

190

 

178

 

570

 

533

 

 

Net periodic benefit credit

$

(205)

$

(238)

$

(616)

$

(715)

 


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 September 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 nine months ended September 30, 2017, MGE recorded $0.3 million and $1.0 million, respectively, in compensation expense as a result of awards under the plans compared to $0.2 million and $2.0 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 nine months ended September 30, 2017 and 2016. At September 30, 2017, $5.1 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 (the Clean Power Plan, or 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. 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. In October 2017, the EPA published a proposed rule announcing the EPA's intention to repeal the CPP and has sought public comment on whether to replace the rule, and if so how. Given the pending legal proceedings, and the EPA's recent proposal, the nature and timing of any final requirements to control GHG emissions from existing fossil fuel-fired EGUs is subject to uncertainty. If a rule is implemented substantially in its present form, it is expected to have a material impact on MGE. MGE will continue to monitor developments with this proposed rule.


Federal and state air quality regulations impose restrictions on various emissions including emissions of sulfur dioxide (SO2), nitrogen dioxide (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. The EPA missed its regulatory deadline to



17




designate areas as attainment or nonattainment under the 2015 standard. MGE will continue to monitor the EPA's progress on attainment designations to assess potential impacts at our facilities, particularly our Elm Road Units.


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 ongoing 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 the 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 September 30, 2017, the future commitments related to these purchase contracts were as follows:


 

(In thousands)

 

2017

 

2018

 

2019

 

2020

 

2021

 

Thereafter

 

 

Coal(a)

$

6,402

$

19,685

$

13,497

$

3,445

$

-

$

-

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Transportation & storage(b)

 

6,073

 

20,839

 

19,680

 

15,423

 

8,660

 

24,373

 

 

  Supply(c)

 

11,243

 

11,817

 

-

 

-

 

-

 

-

 

 

 

$

23,718

$

52,341

$

33,177

$

18,868

$

8,660

$

24,373

 


(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)

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.


(c)

These commitments include market-based pricing.


d.

Other Commitments - MGE Energy.


In May 2017, MGE Energy entered into 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.




18




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 on an annual basis and to increase rates for retail gas customers by 1.9% or $3.1 million on an annual basis. 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 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. MGE did not file 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 September 30, 2017, MGE has deferred $3.3 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



19




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:


 

 

September 30, 2017

 

December 31, 2016

 

 

Commodity derivative contracts

634,605 MWh

 

393,395 MWh

 

 

Commodity derivative contracts

7,924,500 Dth

 

4,195,000 Dth

 

 

FTRs

3,552 MW

 

2,251 MW

 

 

PPA

2,800 MW

 

3,250 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, 2017, and December 31, 2016, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $0.9 million and $1.3 million, respectively.


MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at September 30, 2017, and December 31, 2016, reflects a loss position of $43.1 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 September 30, 2017, and December 31, 2016, the receivable – margin account balance of $1.5 million and $1.3 million, respectively, is shown net of any collateral posted against derivative positions.


 

 

 

Derivative

 

Derivative

 

 

 

 

(In thousands)

 

Assets

 

Liabilities

 

Balance Sheet Location

 

 

September 30, 2017

 

 

 

 

 

 

 

 

Commodity derivative contracts(a)

$

857

$

560

 

Other current assets(b)

 

 

Commodity derivative contracts(a)

 

112

 

122

 

Other deferred charges

 

 

FTRs

 

567

 

-

 

Other current assets

 

 

PPA

 

N/A

 

8,240

 

Derivative liability (current)

 

 

PPA

 

N/A

 

34,890

 

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)

 




20





(a)

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


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, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

969

$

(634)

$

-

$

335

 

 

FTRs

 

567

 

-

 

-

 

567

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

682

$

(634)

$

-

$

48

 

 

PPA

 

43,130

 

-

 

-

 

43,130

 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2017 and 2016, and the consolidated income statements for the three and nine months ended September 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 September 30:

 

 

 

 

 

 

 

 

 

Balance at July 1,

$

45,316

$

618

 

$

50,521

$

659

Unrealized gain

 

(1,277)

 

-

 

 

(663)

 

-

Realized (loss) gain reclassified to a deferred account

 

(313)

 

313

 

 

17

 

(17)

Realized (loss) gain reclassified to income statement

 

(1,450)

 

(57)

 

 

(304)

 

46

Balance at September 30,

$

42,276

$

874

 

$

49,571

$

688

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

Balance at January 1,

$

49,281

$

230

 

$

54,082

$

1,208

Unrealized (gain) loss

 

(3,698)

 

-

 

 

1,128

 

-

Realized (loss) gain reclassified to a deferred account

 

(935)

 

935

 

 

(1,417)

 

1,417

Realized loss reclassified to income statement

 

(2,372)

 

(291)

 

 

(4,222)

 

(1,937)

Balance at September 30,

$

42,276

$

874

 

$

49,571

$

688




21





 

 

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 September 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

362

$

18

 

$

45

$

-

FTRs

 

(224)

 

-

 

 

(703)

 

-

PPA

 

1,351

 

-

 

 

916

 

-

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30:

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

764

$

227

 

$

1,469

$

1,814

FTRs

 

(1,349)

 

-

 

 

(635)

 

-

PPA

 

3,021

 

-

 

 

3,511

 

-


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, 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 September 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 September 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.




22




a.

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


At September 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 September 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:


 

 

 

September 30, 2017

 

December 31, 2016

 

 

(In thousands)

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

104,733

$

104,733

$

95,959

$

95,959

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

7,000

 

7,000

 

-

 

-

 

 

    Long-term debt(a)

 

397,981

 

444,195

 

391,242

 

430,122

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Cash and cash equivalents

$

1,954

$

1,954

$

10,768

$

10,768

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Short-term debt - commercial paper

 

7,000

 

7,000

 

-

 

-

 

 

    Long-term debt(a)

 

397,981

 

444,195

 

391,242

 

430,122

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

        $4.1 million at September 30, 2017, and December 31, 2016.


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, 2017

 

 

(In thousands)

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,536

$

673

$

-

$

863

 

 

    Exchange-traded investments

 

816

 

816

 

-

 

-

 

 

    Total Assets

$

2,352

$

1,489

$

-

$

863

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

43,812

$

190

$

-

$

43,622

 

 

    Deferred compensation

 

3,150

 

-

 

3,150

 

-

 

 

    Total Liabilities

$

46,962

$

190

$

3,150

$

43,622

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

1,536

$

673

$

-

$

863

 

 

    Exchange-traded investments

 

78

 

78

 

-

 

-

 

 

    Total Assets

$

1,614

$

751

$

-

$

863

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

    Derivatives

$

43,812

$

190

$

-

$

43,622

 

 

    Deferred compensation

 

3,150

 

-

 

3,150

 

-

 

 

    Total Liabilities

$

46,962

$

190

$

3,150

$

43,622

 

 

 

 

 

 

 

 

 

 

 

 



23





 

 

 

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 nine months ended September 30, 2017.


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 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.




24




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


 

 

 

Model Input

 

Significant Unobservable Inputs

 

September 30, 2017

 

December 31, 2016

 

Basis adjustment:

 

 

 

 

 

    On peak

 

92.4%

 

91.9%

 

    Off peak

 

94.2%

 

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.


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)

 

2017

 

2016

 

2017

 

2016

Beginning balance

$

(45,605)

$

(51,883)

$

(50,305)

$

(53,501)

Realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

    Included in regulatory liabilities

 

2,846

 

1,455

 

7,547

 

3,073

    Included in other comprehensive income

 

-

 

-

 

-

 

-

    Included in earnings

 

(1,478)

 

(278)

 

(2,614)

 

(4,250)

    Included in current assets

 

(14)

 

-

 

(111)

 

-

Purchases

 

6,299

 

5,814

 

18,481

 

16,751

Sales

 

-

 

-

 

-

 

-

Issuances

 

-

 

-

 

-

 

-

Settlements

 

(4,807)

 

(5,537)

 

(15,757)

 

(12,502)

Transfers in and/or out of Level 3

 

-

 

-

 

-

 

-

Balance as of September 30,

$

(42,759)

$

(50,429)

$

(42,759)

$

(50,429)

Total gains (losses) included in earnings attributed to

 

 

 

 

 

 

 

 

the change in unrealized gains (losses) related to

 

 

 

 

 

 

 

 

assets and liabilities held at September 30,(b)

$

-

$

-

$

-

$

-


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


 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

(In thousands)

 

2017

 

2016

 

2017

 

2016

 

 

Purchased Power Expense

$

(1,460)

$

(278)

$

(2,377)

$

(4,250)

 

 

Cost of Gas Sold Expense

 

(18)

 

-

 

(237)

 

-

 

 

Total

$

(1,478)

$

(278)

$

(2,614)

$

(4,250)

 


(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.




25




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 nine months ended September 30, 2017, MGE accrued $1.6 million and $6.7 million, respectively, of 2017 capital expenditures that MGE has forgone subject to the ownership transfer agreement. As of September 30, 2017, MGE classified $6.7 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.


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.




26




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. As of September 30, 2017, MGE Energy had $0.4 million and MGE had less than $0.1 million of accumulated other comprehensive income related to equity investments within the scope of this standard.


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.


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 September 30, 2017, and December 31, 2016, MGE Energy and MGE had $4.5 million and $5.1 million, respectively, of restricted cash classified within other current assets on the consolidated balance sheets.




27




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 (together, net benefit cost). This authoritative guidance will become effective January 1, 2018. 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. A practical expedient within the standard permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan footnote for prior comparative periods as the estimation basis for applying the retrospective presentation requirements. MGE Energy and MGE have elected to apply the practical expedient. Operating income will decrease and other income will increase $6.6 million and $5.0 million for the years ended December 31, 2016 and 2015, respectively. The standard also only allows the service cost component to be eligible for capitalization prospectively from the effective date of the pronouncement (whereas under current GAAP, all components of net benefit cost are eligible for capitalization). MGE Energy and MGE are currently evaluating the impact of how the change in components of net benefit cost eligible for capitalization will affect our 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 the 2016 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

 

Nonregulated Energy

 

Transmission Investment

 

All Others

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

120,649

$

18,778

$

112

$

-

$

-

$

-

$

139,539

Interdepartmental revenues

 

(110)

 

3,892

 

11,130

 

-

 

-

 

(14,912)

 

-

Total operating revenues

 

120,539

 

22,670

 

11,242

 

-

 

-

 

(14,912)

 

139,539

Depreciation and amortization

 

(9,256)

 

(2,258)

 

(1,858)

 

-

 

-

 

-

 

(13,372)

Other operating expenses

 

(78,886)

 

(18,940)

 

(50)

 

(9)

 

(193)

 

14,912

 

(83,166)

Operating income (loss)

 

32,397

 

1,472

 

9,334

 

(9)

 

(193)

 

-

 

43,001

Other income (deductions), net

 

1,440

 

358

 

-

 

2,258

 

(117)

 

-

 

3,939

Interest (expense) income, net

 

(2,760)

 

(795)

 

(1,371)

 

-

 

199

 

-

 

(4,727)

Income (loss) before taxes

 

31,077

 

1,035

 

7,963

 

2,249

 

(111)

 

-

 

42,213

Income tax (provision) benefit

 

(11,175)

 

(351)

 

(3,196)

 

(906)

 

44

 

-

 

(15,584)

Net income (loss)

$

19,902

$

684

$

4,767

$

1,343

$

(67)

$

-

$

26,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

321,279

$

101,285

$

261

$

-

$

-

$

-

$

422,825

Interdepartmental revenues

 

(334)

 

11,708

 

33,307

 

-

 

-

 

(44,681)

 

-

Total operating revenues

 

320,945

 

112,993

 

33,568

 

-

 

-

 

(44,681)

 

422,825

Depreciation and amortization

 

(27,341)

 

(6,703)

 

(5,562)

 

-

 

-

 

-

 

(39,606)

Other operating expenses

 

(231,827)

 

(92,670)

 

(153)

 

(9)

 

(779)

 

44,681

 

(280,757)

Operating income (loss)

 

61,777

 

13,620

 

27,853

 

(9)

 

(779)

 

-

 

102,462

Other income (deductions), net

 

1,821

 

355

 

-

 

7,242

 

(414)

 

-

 

9,004

Interest (expense) income, net

 

(8,337)

 

(2,399)

 

(4,170)

 

-

 

399

 

-

 

(14,507)

Income (loss) before taxes

 

55,261

 

11,576

 

23,683

 

7,233

 

(794)

 

-

 

96,959

Income tax (provision) benefit

 

(18,753)

 

(4,576)

 

(9,505)

 

(2,909)

 

256

 

-

 

(35,487)

Net income (loss)

$

36,508

$

7,000

$

14,178

$

4,324

$

(538)

$

-

$

61,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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




29




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


(In thousands)

MGE

 

Electric

 

Gas

 

Nonregulated Energy

 

Transmission Investment(b)

 

Consolidation/ Elimination Entries

 

Consolidated Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

120,648

$

18,779

$

112

$

-

$

-

$

139,539

Interdepartmental revenues

 

(109)

 

3,891

 

11,130

 

-

 

(14,912)

 

-

Total operating revenues

 

120,539

 

22,670

 

11,242

 

-

 

(14,912)

 

139,539

Depreciation and amortization

 

(9,256)

 

(2,258)

 

(1,858)

 

-

 

-

 

(13,372)

Other operating expenses(a)

 

(89,544)

 

(19,145)

 

(3,246)

 

-

 

14,912

 

(97,023)

Operating income(a)

 

21,739

 

1,267

 

6,138

 

-

 

-

 

29,144

Other income, net(a)

 

923

 

212

 

-

 

-

 

-

 

1,135

Interest expense, net

 

(2,760)

 

(795)

 

(1,371)

 

-

 

-

 

(4,926)

Net income

 

19,902

 

684

 

4,767

 

-

 

-

 

25,353

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(5,439)

 

(5,439)

Net income attributable to MGE

$

19,902

$

684

$

4,767

$

-

$

(5,439)

$

19,914

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

$

321,282

$

101,294

$

261

$

-

$

-

$

422,837

Interdepartmental revenues

 

(337)

 

11,699

 

33,307

 

-

 

(44,669)

 

-

Total operating revenues

 

320,945

 

112,993

 

33,568

 

-

 

(44,669)

 

422,837

Depreciation and amortization

 

(27,341)

 

(6,703)

 

(5,562)

 

-

 

-

 

(39,606)

Other operating expenses(a)

 

(249,992)

 

(97,080)

 

(9,658)

 

-

 

44,669

 

(312,061)

Operating income(a)

 

43,612

 

9,210

 

18,348

 

-

 

-

 

71,170

Other income, net(a)

 

1,233

 

189

 

-

 

-

 

-

 

1,422

Interest expense, net

 

(8,337)

 

(2,399)

 

(4,170)

 

-

 

-

 

(14,906)

Net income

 

36,508

 

7,000

 

14,178

 

-

 

-

 

57,686

Less: Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 noncontrolling interest, net of tax

 

-

 

-

 

-

 

-

 

(16,224)

 

(16,224)

Net income attributable to MGE

$

36,508

$

7,000

$

14,178

$

-

$

(16,224)

$

41,462

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(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 ATC Holdco, and

·

All other, which includes corporate operations and services.


Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to approximately 149,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 154,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


Our nonregulated energy operations own interests in electric generating capacity that is leased to MGE. The ownership/leasing structure was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an ownership interest in two coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the UW-Madison campus. A third party operates the units in Oak Creek, and MGE operates the cogeneration project. Due to the nature of MGE's participation in these facilities, the results of MGE Energy's 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 continues to examine and pursue opportunities to reduce the proportion that coal generation represents in its generation mix, including the announced reduction in its ownership of Columbia. 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 2016 Annual Report on Form 10-K.


For the three months ended September 30, 2017, MGE Energy's earnings were $26.6 million or $0.77 per share compared to $27.9 million or $0.80 per share for the same period in the prior year. MGE's earnings for the three months ended September 30, 2017, were $19.9 million compared to $22.0 million for the same period in the prior year.


For the nine months ended September 30, 2017, MGE Energy's earnings were $61.5 million or $1.77 per share compared to $61.1 million or $1.76 per share for the same period in the prior year. MGE's earnings for the nine months ended September 30, 2017, were $41.5 million compared to $43.1 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:

 

2017

 

2016

 

2017

 

2016

 

 

    Electric Utility

$

19,902

$

21,083

$

36,508

$

35,605

 

 

    Gas Utility

 

684

 

972

 

7,000

 

7,789

 

 

    Nonregulated Energy

 

4,767

 

4,735

 

14,178

 

14,293

 

 

    Transmission Investments

 

1,343

 

1,198

 

4,324

 

3,588

 

 

    All Other

 

(67)

 

(108)

 

(538)

 

(217)

 

 

    Net Income

$

26,629

$

27,880

$

61,472

$

61,058

 


Our net income during the three and nine months ended September 30, 2017, compared to the same period in the prior year primarily reflects the effects of the following factors:


Electric Utility

For the three months ended, electric net income decreased primarily resulting from cooler weather. The average temperature in August 2017 was 67 degrees compared to 73 in August 2016. For the nine months ended, electric net income increased primarily related to efforts to manage the level of operating and maintenance costs.


Transmission Investments

Transmission investment income reflects our share of ATC's earnings and a favorable comparison to 2016, which included an expense reflecting ATC's establishment of a reserve covering its estimate of its refund liability associated with the return on equity complaint filed with FERC. See "Other Matters" below for additional information concerning ATC.


During the first nine months ended of 2017, the following events occurred:


2017 Rate Case Order: On December 15, 2016, the PSCW authorized MGE, effective January 1, 2017, to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million on an annual basis and to increase rates for retail gas customers by 1.9% or $3.1 million on an annual basis. The decrease in retail electric rates reflects declining fuel and purchased power costs. The increase in retail gas rates covers costs associated with MGE's natural gas system infrastructure improvements. The authorized return on common stock equity for 2017 is 9.8% 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.


Deferred Fuel Costs: As of September 30, 2017, MGE has deferred $3.3 million of 2017 fuel savings. These costs will be subject to the PSCW's annual review of 2017 fuel costs, expected to be completed in 2018.


Debt Issuance: MGE issued $40 million of long-term unsecured debt in January 2017. The debt carries an interest rate of 3.76% per annum over its 35-year term. The proceeds of this debt financing were used to refinance $30 million of medium-term notes, which matured in January 2017, and assist with the financing of additional capital expenditures. The covenants of this debt are substantially consistent with MGE's existing unsecured long-term debt.


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


2016 Annual Fuel Proceeding: 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.


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 7.2% and 5.8% of our net income for the nine months ended September 30, 2017 and 2016, respectively, from our investment in ATC. See "Other Matters" below for additional information concerning ATC.




32




Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. At present, it is unclear how the changes in the Presidential and EPA administrations may affect existing, pending or new legislative or rulemaking proposals or regulatory initiatives. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 43% of our electric generating capacity as of September 30, 2017. We would expect to seek and receive recovery of any such costs in rates; however, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of the legislation and rules, and the scope and time of the recovery of costs in rates, which may lag the incurrence of those costs.


EPA's Clean Power Plan: In October 2015, the EPA finalized its Clean Power Plan (CPP) rule with an effective date of December 2015, setting guidelines and approval criteria for states to use in developing plans to control GHG emissions from existing fossil fuel-fired electric generating units (EGUs) and systems. Implementation of the rule is expected to have a direct impact on existing coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs. In October 2017, the EPA published a proposed rule announcing the EPA's intention to repeal the CPP and has sought public comment on whether to replace the rule, and if so how. Given the pending legal proceedings, and the EPA's proposal, the nature and timing of any final requirements to control GHG emissions from existing fossil fuel-fired EGUs is subject to uncertainty. If a rule is implemented substantially in its present form, it is expected to have a material impact on MGE. MGE will continue to monitor developments with this proposed rule.


Future Generation: During the first quarter of 2016, MGE entered into an agreement with WPL under which MGE may acquire up to 50 MW of capacity in a gas-fired generating plant to be constructed by WPL at its Riverside Energy Center in Beloit, Wisconsin, during the five-year period following the in-service date of the plant. The plant is expected to be completed by early 2020. MGE and WPL have negotiated an amendment to the existing Columbia joint operating agreement, effective January 1, 2017, under which MGE will reduce its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia prior to the expected in-service date of the Riverside gas-fired generating plant in exchange for a proportional reduction in MGE's ownership in Columbia. On January 1 of each year, beginning in 2017 and ending June 1, 2020, the ownership percentage will be adjusted, through a partial sale, based on the amount of capital expenditures foregone. During three and nine months ended September 30, 2017, MGE accrued $1.6 million and $6.7 million of 2017 capital expenditures that MGE has forgone as part of the ownership transfer agreement with WPL. During 2016, MGE accrued $14.8 million of 2016 capital expenditures forgone. As of September 30, 2017, and December 31, 2016, MGE classified $6.7 million and $14.8 million, respectively, of Columbia assets as held-for-sale on the consolidated balance sheets. In January 2017, MGE reduced its ownership interest in Columbia from 22.0% to 20.4% through the partial sale of plant assets to WPL. By June 2020, MGE's ownership in Columbia is forecasted to be approximately 19%.


Saratoga Wind Farm: In April 2017, MGE filed an application with the PSCW to seek approval to construct, own and operate a 66MW wind farm, consisting of 33 turbines, located near Saratoga, Iowa. If approved by the PSCW, construction of the project is expected to begin in early 2018, with an estimated capital cost of $107 million.


Forward Wind: In October 2017, MGE, along with two other utilities, entered into an agreement to purchase the Forward Wind Energy Center, which consists of 86 wind turbines located in Wisconsin with a total capacity of 129 MWs. The aggregate purchase price is approximately $174 million of which MGE's proportionate share is 12.8%, or approximately $23 million. MGE currently purchases 12.8% of the facility's energy output under a purchase power agreement. The transaction is subject to PSCW and FERC approvals and is expected to close in the spring of 2018.


Debt Issuance: In October 2017, MGE issued $30 million of long-term unsecured debt to cover capital expenditures and other corporate obligations. The debt carries an interest rate of 3.11% per annum, over its 10-year term. The covenants of this debt are substantially consistent with MGE's existing unsecured long-term debt.


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




33




Three Months Ended September 30, 2017 and 2016


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,

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

Residential

$

39,905

$

40,120

 

 (0.5)%

 

225,992

 

259,529

 

 (12.9)%

Commercial

 

64,036

 

55,232

 

 15.9 %

 

505,771

 

517,253

 

 (2.2)%

Industrial

 

4,555

 

4,122

 

 10.5 %

 

48,896

 

61,362

 

 (20.3)%

Other-retail/municipal

 

10,459

 

9,091

 

 15.0 %

 

119,979

 

114,097

 

 5.2 %

    Total retail

 

118,955

 

108,565

 

 9.6 %

 

900,638

 

952,241

 

 (5.4)%

Sales to the market

 

1,068

 

2,120

 

 (49.6)%

 

27,581

 

52,278

 

 (47.2)%

Deferral of fuel savings

 

-

 

8,194

 

 (100.0)%

 

-

 

-

 

 -  %

Adjustments to revenues

 

626

 

54

 

N/A%

 

-

 

-

 

 -  %

    Total

$

120,649

$

118,933

 

 1.4 %

 

928,219

 

1,004,519

 

 (7.6)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 473)

 

 

 

 

 

 

 

398

 

570

 

(30.2)%


Electric operating revenues increased $1.7 million or 1.4% for the three months ended September 30, 2017, compared to the same period in 2016, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

9.6

 

 

Adjustments to revenues

 

0.6

 

 

Volume

 

(5.9)

 

 

Sales to the market

 

(1.1)

 

 

Other

 

(0.8)

 

 

Rate changes

 

(0.7)

 

 

Total

$

1.7

 


·

Deferral of fuel savings/fuel credit. During the three months ended September 30, 2016, customers received a fuel credit on their bill related to accumulated fuel savings of $17.8 million, which decreased electric revenues in the prior year. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs, which were deferred in revenue in the prior period, as a result of continued lower projected fuel costs in 2016.


·

Adjustments to revenue. 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.


·

Volume. During the three months ended September 30, 2017, there was a 20.3% decrease in industrial retail sales volumes compared to the same period in the prior year as a result of a large industrial customer relocating its operations out of state. During the three months ended September 30, 2017, there was a 12.9% decrease in residential sales volumes compared to the same period in the prior year driven by decreased customer demand due, at least in part, to less favorable weather conditions, as evidenced by the lower number of cooling degree days.


·

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For the three months ended September 30, 2017, market volumes decreased compared to the same period in the prior year, reflecting decreased opportunities for sales and those sales were made at lower market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 8.b. of the Notes to the Consolidated Financial Statements.




34




·

Rate Changes. In December 2016, the PSCW authorized MGE to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million on an annual basis.


Rates charged to retail customers for the three months ended September 30, 2017, were 2.4% or $0.7 million lower than those charged during the same period in the prior year.


Electric fuel and purchased power


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


Fuel for electric generation

The expense for fuel for internal electric generation decreased $4.7 million during the three months ended September 30, 2017, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(3.2)

 

 

Decrease in per-unit cost

 

(1.5)

 

 

Total

$

(4.7)

 


This decrease in expense reflects a 15.8% decrease in internal generation volume delivered to the system primarily as a result of decreased generation at WCCF based on market prices and an 8.4% decrease in per-unit cost of internal electric generation.


Purchased power

Purchased power expense increased $6.8 million during the three months ended September 30, 2017, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Change in fuel rule adjustments, net of recoveries

$

5.0

 

 

Increase in volume

 

2.2

 

 

Decrease in per-unit cost

 

(0.4)

 

 

Total

$

6.8

 


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, with potential refunds associated with fuel savings increasing that expense and potential recovery of excess fuel costs decreasing that expense.


The increase in expense (before fuel rules adjustments) reflects a 17.4% increase in the volume of power purchased from third parties partially offset by a 2.5% decrease in the per-unit cost of purchased power.


Electric operating and maintenance expenses


For the three months ended September 30, 2017, electric operating and maintenance expenses increased $0.6 million, compared to the same period in the prior year. The following contributed to the net change:


 

(In millions)

 

 

 

 

Increased transmission costs

$

1.3

 

 

Increased customer accounts costs

 

0.5

 

 

Decreased production expenses

 

(0.5)

 

 

Decreased distribution expenses

 

(0.5)

 

 

Decreased administrative and general costs

 

(0.2)

 

 

Total

$

0.6

 


For the three months ended September 30, 2017, increased transmission costs are primarily due to an increase in transmission reliability enhancements.




35




Electric depreciation expense


Electric depreciation expense increased $1.9 million for the three months ended September 30, 2017, compared to the same period in the prior year as a result of new depreciation rates for Columbia, as approved by the PSCW.


Other electric income


Other electric income increased $1.3 million for the three months ended September 30, 2017, compared to the same period in the prior year, primarily due to the gain on sale of property assets.


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,

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

Residential

$

12,121

$

11,440

 

 6.0 %

 

5,841

 

5,468

 

 6.8 %

Commercial/Industrial

 

5,622

 

5,043

 

 11.5 %

 

8,847

 

8,488

 

 4.2 %

    Total retail

 

17,743

 

16,483

 

 7.6 %

 

14,688

 

13,956

 

 5.2 %

Gas transportation

 

944

 

997

 

 (5.3)%

 

14,606

 

15,982

 

 (8.6)%

Other revenues

 

91

 

90

 

 1.1 %

 

-

 

-

 

 -  %

    Total

$

18,778

$

17,570

 

 6.9 %

 

29,294

 

29,938

 

 (2.2)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating degree days (normal 158)

 

 

 

 

 

 

 

138

 

49

 

181.6 %

Average rate per therm of

 

 

 

 

 

 

 

 

 

 

 

 

retail customer

$

1.208

$

1.181

 

2.3 %

 

 

 

 

 

 


Gas revenues increased $1.2 million or 6.9% for the three months ended September 30, 2017, compared to the same period in 2016. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Rate/PGA changes

$

0.9

 

 

Volume

 

0.3

 

 

Total

$

1.2

 


·

Rate/PGA changes. In December 2016, the PSCW authorized MGE to increase 2017 rates for retail gas customers by 1.9% or $3.1 million on an annual basis.


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 change net income.


The average retail rate per therm for the three months ended September 30, 2017, increased 2.3% compared to the same period in 2016, reflecting a $0.5 million increase in natural gas commodity costs (recovered through the PGA) and an increase in fixed rate charges.


·

Volume. For the three months ended September 30, 2017, retail gas deliveries increased 5.2% compared to the same period in the prior year.


Cost of gas sold


For the three months ended September 30, 2017, cost of gas sold increased $0.8 million compared to the same period in the prior year. The cost per therm of natural gas increased 10.5%, which resulted in $0.5 million of increased expense. The volume of gas purchased increased 6.9%, which resulted in $0.3 million of increased expense.




36




Gas operating and maintenance expenses


Gas operating and maintenance expenses increased by $0.7 million for the three months ended September 30, 2017, compared to the same period in 2016. The following contributed to the net change:


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

0.7

 

 

Increased customer service costs

 

0.2

 

 

Increased other costs

 

0.2

 

 

Decreased administrative and general costs

 

(0.4)

 

 

Total

$

0.7

 


For the three months ended September 30, 2017, increased customer accounts costs are primarily related to technology improvements.


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, 2017 and 2016, net income at the nonregulated energy operations segment was $4.8 million and $4.7 million, respectively.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the three months ended September 30, 2017 and 2016, other income at the transmission investment segment was $2.3 million and $2.0 million, respectively. The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of the investments. ATC Holdco was formed in December 2016. In the near term, it is expected that ATC Holdco will be pursuing transmission development opportunities that typically have long development and investment lead times before becoming operational. See Footnote 3 of the Notes to Consolidated Financial Statements in this Report 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, 2017 and 2016, was 36.9% and 36.1%, respectively. MGE's effective income tax rate for the three months ended September 30, 2017 and 2016, was 36.7% and 36.0%, respectively. For both MGE Energy and MGE, the increase in the effective tax rate is due in part to lower estimated federal tax credits.


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, for the three months ended September 30, 2016, was 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)

 

2017

 

2016

 

 

MGE Power Elm Road

$

3.6

$

3.7

 

 

MGE Power West Campus

 

1.8

 

1.8

 

 

MGE Transco(a)

 

 -

 

0.2

 


(a)

MGE Transco holds an ownership interest in ATC. In July 2016, MGE's ownership interest in MGE Transco declined below a majority, resulting in MGE Energy's investment in MGE Transco being deconsolidated from MGE's consolidated financial statements. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 3 of the Notes to Consolidated Financial Statements in this Report for additional information.


Nine Months Ended September 30, 2017 and 2016


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,

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

Residential

$

104,892

$

104,917

 

-%

 

601,310

 

641,551

 

 (6.3)%

Commercial

 

168,921

 

161,056

 

 4.9 %

 

1,389,036

 

1,420,769

 

 (2.2)%

Industrial

 

13,286

 

13,381

 

 (0.7)%

 

153,759

 

178,535

 

 (13.9)%

Other-retail/municipal

 

29,141

 

26,498

 

 10.0 %

 

315,692

 

296,093

 

 6.6 %

    Total retail

 

316,240

 

305,852

 

 3.4 %

 

2,459,797

 

2,536,948

 

 (3.0)%

Sales to the market

 

3,090

 

5,281

 

 (41.5)%

 

80,273

 

161,217

 

 (50.2)%

Deferral of fuel savings

 

-

 

1,125

 

 (100.0)%

 

-

 

-

 

 -  %

Adjustments to revenues

 

1,949

 

212

 

N/A%

 

-

 

-

 

 -  %

    Total

$

321,279

$

312,470

 

 2.8 %

 

2,540,070

 

2,698,165

 

 (5.9)%

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 653)

 

 

 

 

 

 

 

570

 

771

 

(26.1)%


Electric operating revenues increased $8.8 million or 2.8% for the nine months ended September 30, 2017, compared to the same period in 2016, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

20.7

 

 

Adjustments to revenue

 

1.8

 

 

Volume

 

(8.8)

 

 

Rate changes

 

(2.5)

 

 

Sales to the market

 

(2.2)

 

 

Other

 

(0.2)

 

 

Total

$

8.8

 


·

Deferral of fuel savings/fuel credit. During the nine months ended September 30, 2016, customers received a fuel credit on their bill related to accumulated fuel savings of $21.8 million, which decreased electric revenues in the prior year. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs, which were deferred in revenue in the prior period, as a result of continued lower projected fuel costs in 2016.




38




·

Adjustments to revenue. 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.


·

Volume. During the nine months ended September 30, 2017, there was a 13.9% decrease in industrial retail sales volumes compared to the same period in the prior year as a result of a large industrial customer relocating its operations out of state. During the nine months ended September 30, 2017, there was a 6.3% decrease in residential sales volumes compared to the same period in the prior year driven by decreased customer demand due, at least in part, to less favorable weather conditions, as evidenced by the lower number of cooling degree days.


·

Rate Changes. In December 2016, the PSCW authorized MGE to decrease 2017 rates for retail electric customers by 0.8% or $3.3 million on an annual basis.


Rates charged to retail customers for the nine months ended September 30, 2017, were 2.1% or $2.5 million lower than those charged during the same period in the prior year.


·

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 nine months ended September 30, 2017, market volumes decreased compared to the same period in the prior year, reflecting decreased opportunities for sales and those sales were made at lower market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 8.b. of the Notes to the Consolidated Financial Statements.


Electric fuel and purchased power


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


Fuel for electric generation

The expense for fuel for internal electric generation decreased $7.6 million during the nine months ended September 30, 2017, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(6.0)

 

 

Decrease in per-unit cost

 

(1.6)

 

 

Total

$

(7.6)

 


This decrease in expense reflects a 13.0% decrease in internal generation volume delivered to the system primarily as a result of decreased generation at WCCF based on market prices and a 3.5% decrease in per-unit cost of internal electric generation.


Purchased power

Purchased power expense increased $9.4 million during the nine months ended September 30, 2017, compared to the same period in the prior year, due to the following:


 

(In millions)

 

 

 

 

Change in fuel rule adjustments, net of recoveries

$

8.4

 

 

Increase in volume

 

5.4

 

 

Decrease in per-unit cost

 

(4.4)

 

 

Total

$

9.4

 


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, with potential refunds associated with fuel savings increasing that expense and potential recovery of excess fuel costs decreasing that expense.



39




The decrease in expense (before fuel rules adjustments) reflects a 12.2% increase in the volume of power purchased from third parties partially offset by a 9.0% decrease in the per-unit cost of purchased power.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $2.5 million during the nine months ended September 30, 2017, compared to the same period in 2016. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased transmission costs

$

3.8

 

 

Increased customer accounts costs

 

1.7

 

 

Increased customer service costs

 

0.3

 

 

Decreased production expenses

 

(2.1)

 

 

Decreased administrative and general costs

 

(0.7)

 

 

Decreased distribution expenses

 

(0.5)

 

 

Total

$

2.5

 


For the nine months ended September 30, 2017, increased transmission costs are primarily due to an increase in transmission reliability enhancements and increased customer accounts costs are primarily related to technology improvements, partially offset by decreased production costs at Columbia and the Elm Road Units.


Electric depreciation expense


Electric depreciation expense increased $5.6 million for the nine months ended September 30, 2017, compared to the same period in the prior year as a result of new depreciation rates for Columbia, as approved by the PSCW.


Other electric income


Other electric income increased $1.3 million for the nine months ended September 30, 2017, compared to the same period in the prior year, primarily due to the gain on sale of property assets.


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,

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

Residential

$

61,164

$

56,344

 

 8.6 %

 

60,794

 

62,188

 

 (2.2)%

Commercial/Industrial

 

36,512

 

32,324

 

 13.0 %

 

58,865

 

58,812

 

 0.1 %

    Total retail

 

97,676

 

88,668

 

 10.2 %

 

119,659

 

121,000

 

 (1.1)%

Gas transportation

 

3,285

 

3,402

 

 (3.4)%

 

50,828

 

53,957

 

 (5.8)%

Other revenues