United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


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


For the fiscal year ended:

December 31, 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


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


 


Title of Class

Name of Each Exchange on which Registered

MGE Energy, Inc.

Common Stock, $1 Par Value Per Share

The Nasdaq Stock Market



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


 

Title of Class

Madison Gas and Electric Company

Common Stock, $1 Par Value Per Share


Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


MGE Energy, Inc.

Yes [X] No [   ]

Madison Gas and Electric Company

Yes [X] No [   ]


Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

MGE Energy, Inc.

Yes [  ] No [X]

Madison Gas and Electric Company

Yes [  ] No [X]



1





Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]


Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition 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

 

 


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


MGE Energy, Inc.

Yes [  ] No [X]

Madison Gas and Electric Company

Yes [  ] No [X]


The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2017, was as follows:


MGE Energy, Inc.

$2,225,394,029

Madison Gas and Electric Company

$0


The number of shares outstanding of each registrant's common stock as of February 1, 2018, were as follows:


MGE Energy, Inc.

34,668,370

Madison Gas and Electric Company

17,347,894


DOCUMENTS INCORPORATED BY REFERENCE


Portions of MGE Energy, Inc.'s definitive proxy statement to be filed on or before March 26, 2018, relating to its annual meeting of shareholders, are incorporated by reference into Part III of this annual report on Form 10-K.


Madison Gas and Electric Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore omitting (i.) the information otherwise required by Item 601 of Regulation S-K relating to a list of subsidiaries of the registrant as permitted by General Instruction (I)(2)(b), (ii.) the information otherwise required by Item 6 relating to Selected Financial Data as permitted by General Instruction (I)(2)(a), (iii.) the information otherwise required by Item 10 relating to Directors and Executive Officers as permitted by General Instruction (I)(2)(c), (iv.) the information otherwise required by Item 11 relating to executive compensation as permitted by General Instruction (I)(2)(c), (v.) the information otherwise required by Item 12 relating to Security Ownership of Certain Beneficial Owners and Management as permitted by General Instruction (I)(2)(c), and (vi.) the information otherwise required by Item 13 relating to Certain Relationships and Related Transactions as permitted by General Instruction (I)(2)(c).




2





Table of Contents



Filing Format

4

Forward-Looking Statements

4

Where to Find More Information

4

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

5

PART I.

7

Item 1. Business.

7

Item 1A. Risk Factors.

13

Item 1B. Unresolved Staff Comments.

19

Item 2. Properties.

20

Item 3. Legal Proceedings.

21

Item 4. Mine Safety Disclosures.

21

PART II.

22

Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.  22

Item 6. Selected Financial Data.

25

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

26

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

48

href="file:///Z:/Data/ASD/PROJECTS/Web/20171231-10k.htm#_Toc506876452">48

Item 8. Financial Statements and Supplementary Data.

50

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

104

Item 9A. Controls and Procedures.

104

Item 9B. Other Information.

104

PART III.

105

Item 10. Directors, Executive Officers, and Corporate Governance.

105

Item 11. Executive Compensation.

105

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

105

Item 13. Certain Relationships and Related Transactions, and Director Independence.

105

Item 14. Principal Accounting Fees and Services.

106

PART IV.

107

Item 15. Exhibits and Financial Statement Schedules.

107

Item 16. Form 10-K Summary.

109

Signatures - MGE Energy, Inc.

114

Signatures - Madison Gas and Electric Company

115





3




Filing Format


This combined Form 10-K is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information. The terms "we" and "our," as used in this report, refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.


Forward-Looking Statements


This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to economic conditions, future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," "will," and other similar words generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.


The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include (a) those factors discussed in Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, Footnote 17. Commitments and Contingencies, and (b) other factors discussed herein and in other filings made by that registrant with the SEC.


Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date of this report, except as required by law.


Where to Find More Information


The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents also are available to the public from commercial document retrieval services, the website maintained by the SEC at sec.gov, MGE Energy's website at mgeenergy.com, and MGE's website at mge.com. Copies may be obtained from our websites free of charge. Information contained on MGE Energy's and MGE's websites shall not be deemed incorporated into, or to be a part of, this report.




4




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


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


MGE Energy and Subsidiaries:

 

 

 

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 (which holds our interest in ATC)

MGEE Transco

MGEE Transco, LLC (which holds our interest in ATC Holdco)

NGV Fueling Services

NGV Fueling Services, LLC

 

 

Other Defined Terms:

 

 

 

AFUDC

Allowance for Funds Used During Construction

ANPR

Advanced Notice of Proposed Rulemaking

ANR

ANR Pipeline Company

ARO

Asset Retirement Obligation

ATC

American Transmission Company LLC

ATC Holdco

ATC Holdco, LLC

BART

Best Available Retrofit Technology

Blount

Blount Station

BTA

Best Technology Available

CAA

Clean Air Act

CAVR

Clean Air Visibility Rule

CCR

Coal Combustion Residual

CO2

Carbon Dioxide

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

COSO

Committee of Sponsoring Organizations

CPP

Clean Power Plan

CSAPR

Cross-State Air Pollution Rule

CWA

Clean Water Act

DTA

Deferred Tax Assets

Dth

Dekatherms

DTL

Deferred Tax Liabilities

EEI

Edison Electric Institute

EGUs

Electric Generating Units

ELG

Effluent Limitations Guidelines

Elm Road Units

Elm Road Generating Station

EPA

United States Environmental Protection Agency

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

FTR

Financial Transmission Rights

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



5





ICF

Insurance Continuance Fund

IRS

Internal Revenue Service

kVA

Kilovolt Ampere

kWh

Kilowatt-hour

MISO

Midcontinent Independent System Operator Inc. (a regional transmission organization)

MRO

Midwest Reliability Organization

MW

Megawatt

MWh

Megawatt-hour

NAAQS

National Ambient Air Quality Standards

Nasdaq

The Nasdaq Stock Market

NERC

North American Electric Reliability Corporation

NGO

Nongovernment Organizations

NNG

Northern Natural Gas Company

NOV

Notice of Violation

NOx

Nitrogen Oxides

NYSE

New York Stock Exchange

PCBs

Polychlorinated Biphenyls

PGA

Purchased Gas Adjustment clause

PJM

PJM Interconnection, LLC (a regional transmission organization)

PM

Particulate Matter

PPA

Purchased power agreement

ppb

Parts Per Billion

PSCW

Public Service Commission of Wisconsin

REC

Renewable Energy Credit

Riverside

Riverside Energy Center in Beloit, Wisconsin

ROE

Return on Equity

RTO

Regional Transmission Organization

SCR

Selective Catalytic Reduction

SEC

Securities and Exchange Commission

SIP

State Implementation Plan

SO2

Sulfur Dioxide

the State

State of Wisconsin

Stock Plan

Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy

Tax Act

Tax Cuts and Jobs Act

UW

University of Wisconsin at Madison

VIE

Variable Interest Entity

WCCF

West Campus Cogeneration Facility

WDNR

Wisconsin Department of Natural Resources

WEPCO

Wisconsin Electric Power Company

Working capital

Current assets less current liabilities

WPDES

Wisconsin Pollutant Discharge Elimination System

WPL

Wisconsin Power and Light Company

WPSC

Wisconsin Public Service Corporation

WRERA

Worker, Retiree and Employer Recovery Act of 2008

XBRL

eXtensible Business Reporting Language




6




PART I.


Item 1. Business.


MGE Energy operates in the following business segments:


·

Regulated electric utility operations – generating, purchasing, and distributing electricity through MGE.


·

Regulated gas utility operations – purchasing and distributing natural gas through MGE.


·

Nonregulated energy operations – owning and leasing electric generating capacity that assists MGE through MGE Energy's wholly owned subsidiaries MGE Power Elm Road and MGE Power West Campus.


·

Transmission investments – representing our investment in American Transmission Company LLC, a company engaged in the business of providing electric transmission services primarily in Wisconsin, and our investment in ATC Holdco LLC, a company created to facilitate out-of-state electric transmission development and investments.


·

All other – investing in companies and property that relate to the regulated operations and financing the regulated operations, through its wholly owned subsidiaries CWDC, MAGAEL, MGE State Energy Services, NGV Fueling Services, and Corporate functions.


MGE's utility operations represent a majority of the assets, liabilities, revenues, expenses, and operations of MGE Energy. MGE Energy's nonregulated energy operations currently include an undivided interest in two coal-fired generating units located in Oak Creek, Wisconsin, which we refer to as the Elm Road Units, and an undivided interest in a cogeneration facility located on the Madison campus of the University of Wisconsin, which we refer to as the West Campus Cogeneration Facility or WCCF.


As a public utility, MGE is subject to regulation by the PSCW and the FERC. The PSCW has authority to regulate most aspects of MGE's business including rates, accounts, issuance of securities, and plant siting. The PSCW also has authority over certain aspects of MGE Energy as a holding company of a public utility. FERC has jurisdiction, under the Federal Power Act, over certain accounting practices and certain other aspects of MGE's business.


MGE Energy's subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal. See "Environmental" below.


MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized as a Wisconsin corporation in 1896. Their principal offices are located at 133 South Blair Street, Madison, Wisconsin 53788, and their telephone number is (608) 252-7000.


Electric Utility Operations


MGE distributes electricity in a service area covering a 316 square-mile area of Dane County, Wisconsin. The service area includes the city of Madison, Wisconsin. It owns or leases ownership interests in electric generation facilities located in Wisconsin and Iowa.


At December 31, 2017, MGE supplied electric service to approximately 151,000 customers, with approximately 90% located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas. Of the total number of customers, approximately 87% were residential and 13% were commercial or industrial. Electric retail revenues for 2017, 2016, and 2015 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2017

 

2016

 

2015

 

 

Residential

 

33.5%

 

33.9%

 

32.6%

 

 

Commercial

 

53.2%

 

52.9%

 

53.2%

 

 

Industrial

 

4.0%

 

4.4%

 

4.8%

 

 

Public authorities (including the UW)

 

9.3%

 

8.8%

 

9.4%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Electric operations accounted for approximately 73.6%, 75.2%, and 74.2% of MGE's total 2017, 2016, and 2015 regulated revenues, respectively.



7




See Item 2. Properties for a description of MGE's electric utility plant.


MGE is registered with North American Electric Reliability Corporation (NERC) and one regional entity, the Midwest Reliability Organization (MRO). The essential purposes of these entities are the development and implementation of regional and NERC reliability standards; and determining compliance with those standards, including enforcement mechanisms.


Transmission


American Transmission Company LLC (ATC) was formed by utilities who were required by Wisconsin law to contribute their transmission facilities to it in 2001, and is owned by those utilities and their affiliates. ATC's purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service, is regulated by the PSCW as to some aspects of its governance and is a transmission-owning member of the MISO.


Regional Transmission Organizations (RTO)


MISO

MGE is a nontransmission owning member of the MISO. MISO, a FERC approved RTO, is responsible for monitoring the electric transmission system that delivers power from generating plants to wholesale power transmitters. MISO's role is to ensure equal access to the transmission system and to maintain or improve electric system reliability in the Midwest.


MISO maintains a bid-based energy market. MGE offers substantially all of its generation on the MISO market and purchases much of its load requirement from the MISO market in accordance with the MISO Tariff. MGE participates in the ancillary services market operated by MISO. That market is an extension of the existing energy market in which MISO assumes the responsibility of maintaining sufficient generation reserves. In the ancillary services market, MISO provides the reserves for MGE's load, and MGE may offer to sell reserves from its generating units.


MGE participates in the voluntary capacity auction, which provides an optional monthly forum for buyers and sellers of aggregate planning resource credits to interact. Load serving entities, such as MGE, may participate in the voluntary capacity auction potentially to obtain the necessary aggregate planning resource credits needed to meet their planning reserve margin requirement established by the PSCW. Generator owners may participate to sell any excess aggregate planning resource credits that are not needed by them.


PJM

MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.


Fuel supply and generation


MGE satisfies its customers' electric demand with internal generation and purchased power. Sources used depend on market prices, generating unit availability, weather, and customer demand. During 2017, 2016, and 2015, MGE's electric energy delivery requirements were satisfied from the following fuel sources:


 

 

 

Year Ended December 31,

 

 

 

 

2017

 

2016

 

2015

 

 

Coal

 

52.7%

 

48.3%

 

48.0%

 

 

Natural gas(a)

 

11.3%

 

18.6%

 

9.1%

 

 

Renewable sources(b)

 

12.4%

 

10.8%

 

11.2%

 

 

Purchased power

 

23.6%

 

22.3%

 

31.7%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


(a)

MGE's electric operations burn natural gas in several of its peaking power plants. The market price of natural gas decreased in 2016, which improved the economics of natural gas-fueled generation over other types of generation.


(b)

Includes both internal generation and purchased power.



8




Generation sources

MGE receives electric generation supply from coal-fired, gas-fired, and renewable energy sources. These sources include owned facilities as well as facilities leased from affiliates and accounted for under our nonregulated energy operations. See Item 2. Properties for more information regarding these generation sources, including location, capacity, ownership or lease arrangement, and fuel source. See "Nonregulated Energy Operations" below for more information regarding generating capacity leased to MGE by nonregulated subsidiaries.


Purchased power

MGE enters into short and long-term purchase power commitments with third parties to meet a portion of its anticipated electric energy supply needs. The following table identifies purchase power commitments at December 31, 2017, with unaffiliated parties for the next five years.


 

(Megawatts)

 

2018

 

2019

 

2020

 

2021

 

2022

 

 

Purchase power commitments

 

102.5

 

98.5

 

98.5

 

98.5

 

48.5

 


Gas Utility Operations


MGE transports and distributes natural gas in a service area covering 1,682 square miles in seven south-central Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.


At December 31, 2017, MGE supplied natural gas service to approximately 158,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 25 villages; and all or parts of 50 townships. Of the total number of customers, approximately 90% were residential and 10% were commercial or industrial. Gas revenues for 2017, 2016, and 2015 were comprised of the following:


 

 

Year Ended December 31,

 

 

 

2017

 

2016

 

2015

 

 

Residential

59.6%

 

60.2%

 

59.4%

 

 

Commercial

35.8%

 

34.9%

 

35.7%

 

 

Industrial

1.3%

 

1.1%

 

1.3%

 

 

Transportation service and other

3.3%

 

3.8%

 

3.6%

 

 

Total

100.0%

 

100.0%

 

100.0%

 


Gas operations accounted for approximately 26.4%, 24.8%, and 25.8% of MGE's total 2017, 2016, and 2015 regulated revenues, respectively.


MGE can curtail gas deliveries to its interruptible customers. Approximately 4% of retail gas deliveries in 2017 and approximately 3% in 2016 and 2015 were to interruptible customers.


Gas supply


MGE has physical interconnections with ANR Pipeline Company (ANR) and Northern Natural Gas Company (NNG). MGE's primary service territory, which includes Madison and the surrounding area, receives deliveries at one NNG and four ANR gate stations. MGE's outlying territory receives deliveries at NNG gate stations located in Elroy, Prairie du Chien, Viroqua, and Crawford County. Interconnections with two major pipelines provide competition in interstate pipeline service and a more reliable and economical gas supply mix, which includes gas from Canada and from the mid-continent and Gulf/offshore regions in the United States.


During the winter months, when customer demand is high, MGE is primarily concerned with meeting its obligation to firm customers. MGE meets customer demand by using firm supplies under contracts finalized before the heating season, supplies in storage (injected during the summer), and other firm supplies purchased during the winter period.


By contract, a total of 5,911,240 Dth of gas can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations.


MGE's contracts for firm transportation service of gas include winter maximum daily quantities of:


·

167,150 Dth (including 106,078 Dth of storage withdrawals) on ANR.

·

65,828 Dth on NNG.



9




Nonregulated Energy Operations


MGE Energy, through its subsidiaries, has developed generation sources that assist MGE in meeting the electricity needs of its customers. These sources consist of the Elm Road Units and the WCCF, which are leased by MGE Power Elm Road and MGE Power West Campus, respectively, to MGE. See Item 2. Properties for a description of these facilities, their joint owners, and the related lease arrangements.


Transmission Investments


ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by Wisconsin law. That interest is presently held by MGE Transco, which is owned by MGE Energy. At December 31, 2017, MGE Transco held a 3.6% ownership interest in ATC.


In 2016, ATC Holdco was formed by several of the members of ATC, including MGE Energy, to facilitate electric transmission development and investments outside of Wisconsin. MGE Energy's ownership interest in ATC Holdco is held by MGEE Transco, a wholly-owned subsidiary. At December 31, 2017, MGEE Transco held a 4.4% ownership interest in ATC Holdco. 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.


Environmental


MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which they conduct their operations, the costs of those operations, as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted rules, have the potential to have a material effect on our capital expenditures and operating costs. In addition to the regulations discussed below, MGE continues to track state and federal initiatives such as potential changes to regulations governing polychlorinated biphenyl (PCB), potential changes to air and water standards, and potential climate change legislation.


Water Quality


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

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


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

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


Our WCCF, Blount, and Columbia plants are considered existing plants under this rule. Our WCCF facility already employs a system that meets the Section 316(b) rule. Our Blount plant's WPDES permit assumes that Blount meets best technology available (BTA) for the duration of the permit, which expires in 2023. However, MGE needs to perform an entrainment study by the end of 2021 to determine future BTA, which will be included with the next permit renewal. Section 316(b) applies to river intakes at our Columbia plant. The operator of our Columbia plant is conducting an intake study to demonstrate compliance with the Section 316(b) rule and/or identify design criteria needed to meet the new rule requirements prior to Columbia's WPDES permit renewal. The results of this study will determine if Columbia will have additional requirements in its WPDES renewal. The exact requirements at Blount and Columbia, however, will remain unknown until those sites' WPDES permits are modified to account for this rule. Nonetheless, MGE expects that the Section 316(b) rule will not have material effects on its existing plants.




10




Energy Efficiency and Renewables


The Wisconsin Energy Efficiency and Renewables Act requires that 10% of the state's electricity be generated from renewable sources. MGE is in compliance with the requirement. The costs to comply with the Act and its accompanying regulations are being recovered in rates.


Air Quality


Air quality regulations promulgated by the EPA and Wisconsin Department of Natural Resources (WDNR) in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), hazardous air pollutants and other pollutants, and require permits for operation of emission sources. These permits must be renewed periodically. Various newly enacted and/or proposed federal and state initiatives may result in additional operating and capital expenditure costs for fossil-fueled electric generating units.


Ozone NAAQS

In October 2015, the EPA revised the primary and secondary ozone NAAQS, lowering it to 70 ppb. In December 2017, the EPA informed the Governor of Wisconsin of its proposal to designate Milwaukee County, where MGE's Elm Road Units are located, as being in nonattainment with this standard. If finalized by the EPA, a nonattainment designation may have an effect on operations at our Elm Road Units, however, the NAAQS process involves many steps and any effect on our generation units will not be fully understood until the State of Wisconsin develops, receives approval for, and finalizes an implementation plan for any counties found to be in nonattainment.


The State of Wisconsin has joined a lawsuit filed by several states challenging the 2015 ozone standard. The lawsuit has been stayed at the request of the EPA which is reviewing the 2015 standard and may repeal or modify the standard. MGE will continue to monitor the EPA's progress on attainment designations and related litigation to assess potential impacts at our facilities, particularly our Elm Road Units.


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

In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone NAAQS standards into the rule (the original CSAPR was based on 1997 Ozone NAAQS standards) and began further reducing summertime ozone season NOx allowances in 2017. The update affects 22 states, including Wisconsin, by further limiting statewide NOx allowances in each of those states. The rule also includes revisions to CSAPR that are designed to address issues remaining from the D.C. Circuit remand of CSAPR, including Wisconsin's inclusion in the NOx ozone season portion of the rule. The State of Wisconsin filed a legal challenge to the CSAPR update rule asserting, among other things, that the rule over-controls NOx emissions in Wisconsin.


MGE intends to meet the rule requirements through a combination of reduced emissions through pollution control (e.g. SCR installation at Columbia), as well as owned, received, and purchased allowances. Until MGE fully understand our long-term costs associated with compliance, the results of the pending litigation, the impact of the pollution controls installed at Columbia, and the ozone season market stabilizes, there remains some uncertainty about our future costs to comply. Depending on the cost of allowances in future years, this requirement may or may not be material for MGE.


Global Climate Change


MGE is a producer of greenhouse gas (GHG) emissions, primarily from the fossil fuel generating facilities it uses to meet customers' energy needs, as well as from its natural gas pipeline system and fleet vehicles. Climate change and the regulatory response to it could significantly affect our operations in a number of ways, including increased operating costs and capital expenditures, restrictions on energy supply options, operational limits on our fossil fuel fired plants, permitting difficulties, and emission limits. MGE management would expect to seek and receive rate recovery of such compliance costs, if and when required. MGE continues to monitor proposed climate change legislation and regulation.


MGE has taken steps to address GHG emissions through voluntary actions. In 2005, MGE implemented its Energy 2015 Plan, which committed to ensuring a balanced, economic energy supply with reduced environmental emissions. The Plan emphasized increased renewable energy, energy efficiency, and new cleaner generation – three strategies that reduced GHG emissions. Under the Plan and other actions, our CO2 emissions declined from 2005 to 2015 by approximately 20% even though total system energy increased. In 2015, MGE announced its Energy 2030 framework that continues steps to reduce CO2 emissions. Subject to regulatory approvals and other conditions, MGE aims to increase renewable energy to 25% of retail electric sales by 2025 and to 30% by 2030. Under our Energy 2030 framework, we will also work to reduce CO2 emissions by 40% from 2005 levels by 2030. MGE is further committed to reducing carbon emissions by 80% from 2005 levels by 2050.



11




Greenhouse Gas Regulation


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

The EPA's Clean Power Plan (CPP) rule became effective in December 2015, setting guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel-fired EGUs and systems. When fully implemented in 2030, the CPP was projected to reduce GHG emissions from this sector by 32% below 2005 levels. States were given up to three years to submit a plan or be subject to a federal plan to meet the reduction goals, and states were expected to meet interim goals starting in 2022 and the final goals in 2030. Implementation of the rule was expected to have a direct impact on coal and natural gas fired generating units, including possible changes in dispatch and additional operating costs.


In October 2015, many states (including Wisconsin) and other litigants filed petitions with the U.S. Court of Appeals for the District of Columbia Circuit. On January 26, 2016, several parties filed a request for a stay of the CPP with the U.S. Supreme Court; and in February 2016, the U.S. Supreme Court issued an order staying the final CPP rule. The stay will remain in effect until the D.C. Circuit Court reaches its decision and the U.S. Supreme Court either declines to review the lower court's decision or reaches a decision of its own. During the pendency of the stay, states are not required to submit implementation plans and the EPA will not enforce deadlines or issue a federal plan for any state.


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. In December 2017, the EPA published an Advanced Notice of Proposed Rulemaking (ANPR) to solicit information from the public as it considers a future rule to limit greenhouse gas emissions from electric generating units.


Given the pending legal proceedings, and the ANPR, the nature and timing of any final requirements is subject to uncertainty. If the rule remains substantially in its present form, it is expected to have a material impact on MGE. MGE will continue to monitor developments with this proposed rule.


Solid Waste


EPA's Coal Combustion Residuals Rule

EPA's Coal Combustion Residuals (CCR) rule regulates landfills, ash ponds, and other surface impoundments used to manage coal combustion residuals by regulating their design, location, monitoring, and operation. The CCR rule is implemented in phases to allow for sites with onsite storage and/or disposal to evaluate their compliance with the rule's design criteria. Landfills, impoundments and ash storage systems, such as ash ponds, that cannot meet design criteria will need to close formally within defined timeframes.


Columbia's operator has completed a review of their system and has determined that an onsite ash pond will need to be closed by 2023. Columbia's operator will install a dry ash handling system to replace the ash pond. The dry ash handling system installation is planned for 2020-2021. In 2015, MGE recorded an asset retirement obligation for its share of the legal liability associated with the effect of the CCR rule. Actual costs of compliance may be different than the amount recorded due to potential changes in compliance strategies that will be used, as well as other potential cost estimate changes. Management believes compliance costs will be recovered in future rates based on previous treatment of environmental compliance projects.


Columbia


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


Columbia Clean Air Act Litigation

Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC, and MGE have ownership interests. In December 2009, the EPA sent a Notice of Violation (NOV) to the co-owners, including MGE. The NOV alleged that WPL and the Columbia co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the Prevention of Significant Deterioration program requirements, Title V Operating Permit requirements of the CAA, and the Wisconsin SIP. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia. One of the requirements of the consent decree requires installation of an SCR system at Columbia Unit 2 by December 31, 2018. Installation of the SCR has been approved by the PSCW. The SCR project is currently under construction and is expected to be placed in service in 2018. MGE's portion of capital expenditures (past and future) for the SCR is expected to be approximately $19-$24 million.




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Employees


As of December 31, 2017, MGE had 712 employees. MGE employs 228 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 90 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. Both of these collective bargaining agreements expire on April 30, 2018. There are also 5 employees covered by a collective bargaining agreement with Local Union No. 2006, Unit 6 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union. This collective bargaining agreement expires on October 31, 2018.


Financial Information About Segments


See Footnote 20 of the Notes to the Consolidated Financial Statements for financial information relating to MGE Energy's and MGE's business segments.


Executive Officers of the Registrants


As of December 31, 2017, the executive officers of the registrants were as follows:

Executive

Title

Effective

Date

Service

Years as

an Officer

Jeffrey M. Keebler(a)

Age: 46

President and Chief Executive Officer

Senior Vice President – Energy Supply and Planning

03/01/2017

07/23/2015

6

 

Assistant VP – Energy Supply and Customer Service

01/01/2012

 

 

 

 

 

Craig A. Fenrick(b)

Executive Vice President – Energy Operations

03/01/2017

11

Age: 58

Senior Vice President – Energy Operations

07/23/2015

 

 

Vice President – Energy Delivery

02/10/2015

 

 

Vice President – Electric Transmission and Distribution

01/01/2012

 

 

 

 

 

Lynn K. Hobbie(b)

Executive Vice President – Marketing and Communications

03/01/2017

23

Age: 59

Senior Vice President – Marketing and Communications

02/01/2000

 

 

 

 

 

Jeffrey C. Newman(a)

Executive Vice President, Chief Financial Officer, Secretary

03/01/2017

20

Age: 55

and Treasurer

 

 

 

Senior Vice President, Chief Financial Officer, Secretary

07/23/2015

 

 

and Treasurer

 

 

 

Vice President, Chief Financial Officer, Secretary and Treasurer

01/01/2009

 

 

 

 

 

Cari Anne Renlund(b)

Age: 44

Vice President and General Counsel

Dewitt Ross & Stevens S.C. (law firm) – Partner

11/02/2015

06/11 – 10/15

2


(a)

Executive officer of MGE Energy and MGE.

(b)

Executive officer of MGE.


·

Effective March 1, 2017, Gary J. Wolter retired as President and Chief Executive Officer.

·

Ages, years of service, and positions as of December 31, 2017.


Item 1A. Risk Factors.


MGE Energy and its subsidiaries, including MGE, operate in a market environment that involves significant risks, many of which are beyond their control. The following risk factors may adversely affect their results of operations, cash flows and market price for their publicly traded securities. While MGE Energy and MGE believe they have identified and discussed below the key risk factors affecting their business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect their performance or financial condition in the future.




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Regulatory Risk


We are subject to extensive government regulation in our business, which affects our costs and responsiveness to changing events and circumstances.


Our business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding company by the PSCW. MGE is regulated by the PSCW as to its rates, terms and conditions of service; various business practices and transactions; financing; and transactions between it and its affiliates, including MGE Energy. MGE is also subject to regulation by the FERC, which regulates certain aspects of its business. The regulations adopted by the State and Federal agencies affect the manner in which we do business, our ability to undertake specified actions since pre-approval or authorization may be required, the costs of operations, and the level of rates charged to recover such costs. Our ability to attract capital is also dependent, in part, upon our ability to obtain a fair return from the PSCW.


Our utility revenues are subject to regulatory proceedings, which can affect our ability to recover, and the timing of recovery of, costs that we incur in our operations.


Our utility customer rates have a material impact on our financial condition, results of operations, and liquidity. Our ability to obtain adjustments to those rates depends upon timely regulatory action under applicable statues and regulations. Rate regulation is based on providing an opportunity to recover costs that have been reasonably incurred and the ability to earn a reasonable rate of return on invested capital. However, there is no assurance that our regulators will consider all of our costs to have been reasonably incurred. In addition, our rate proceedings may not always result in rates that fully recover our costs or provide for a reasonable return on equity (ROE). Certain costs and revenues are deferred as regulatory assets and liabilities for future recovery or refund to customers, as authorized by our regulators. If recovery of regulatory assets is not approved or is no longer deemed probable, these costs would be recognized in current period expense and could materially and adversely impact on our operations and financial performance.


We could be subject to higher costs and potential penalties resulting from mandatory reliability standards.


MGE must adhere in its electric distribution system to mandatory reliability standards established by NERC. These standards cover areas such as critical infrastructure protection, emergency preparedness, facility design, and transmission operations, among others. The critical infrastructure protection standards focus on physical and access security of cyber assets, as well as incident response and recovery planning. Compliance with these standards affects operating costs, and any noncompliance can result in sanctions, including monetary penalties.


We are subject to changing environmental laws and regulations that may affect our costs and business plans.


Our subsidiaries are subject to environmental laws and regulations that affect the manner in which they conduct business, including capital expenditures, operating costs and potential liabilities. Changes and developments in these laws and evolving regulations may alter or limit our business plans, make them more costly, or expose us to liabilities for past, present or future operations.


Numerous environmental laws and regulations govern many aspects of our present and future operations, including air emissions limits and reporting; ambient air quality standards; water quality; water intake and discharges; wetlands; solid and hazardous waste; handling and disposal of hazardous substances; protection of endangered resources, such as threatened and endangered species, protection of cultural resources and archaeological sites; remediation and management of contaminated sites; and control of potential pollution from electric and gas construction sites. These evolving regulations affect us by:


·

Introducing uncertainty into our planning and capital expenditures processes, as changes in requirements may affect the timing and choice of compliance methods and require costly revisions to prior plans and commitments.


·

Imposing or modifying limits on the operations of our facilities in order to meet restrictions on air emissions, water use or water discharges.


·

Requiring capital expenditures and changes in operating procedures and costs as a result of the need to install additional pollution controls or more advanced technology or equipment at new or existing facilities.


·

Mandating increasing purchases of renewable energy, which affects the use of existing generation, and energy efficiency initiatives, which affect revenues.




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In addition, we face costs associated with site clean-up costs associated with prior operations. We also face costs as a result of a settlement related to the operation of the Columbia Plant, which will require additional capital expenditure and changes in operations at that generating facility.


We may be subject to future laws, regulations, or actions associated with public concern with fossil-fuel generation, greenhouse gases and the effects of global climate change.


Our subsidiaries operate or co-own electric power plants that burn fossil fuels, deliver natural gas, and deliver electricity to customers. These business activities are subject to evolving public concern regarding greenhouse gases (GHG), and legislative and regulatory action, and possible litigation, in response to that public concern. The primary greenhouse gas associated with our subsidiaries' combustion of fossil fuels, and the largest emission in our system overall, is carbon dioxide (CO2).


Our subsidiaries could incur costs from the regulation of GHG from power plants, natural gas delivery, greenhouse gases used in power distribution, and efficiencies lost during power distribution. While the current State and Federal governments are unlikely to pass comprehensive greenhouse gas legislation or regulations in the immediate future, future legislation is likely. In addition, litigation by environmental nongovernment organizations (NGOs) targeting GHG emissions from the electric power industry is also likely if the federal government fails to act on greenhouse gas initiatives. We may also incur costs associated with actions taken due to investor interest in reducing our subsidiaries' reliance on fossil fuel generation, and coal in particular. Investors may also move away from investing in fossil fuel generated electricity for reputational or perceived risk-related reasons. These matters represent uncertainties in the operation and management of our business.


We face risks associated with the passing of the new tax reform.


On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (Tax Act) into law. The passing of the law significantly lowers MGE's corporate tax rates and triggers a remeasurement of deferred taxes. We have reflected estimates of the impact of the Tax Act in our year-end 2017 financial results; however, those estimates could be affected by, and require subsequent adjustment as a result of, clarity and regulatory guidance that develops around the Tax Act and its implementation during 2018. Furthermore, while regulation allows us to incorporate changes in tax law into the rate-setting process, there will most likely be timing delays before realization of the changes.


We face risk for the recovery of fuel and purchased power costs.


MGE has price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE burns natural gas in several of its peak electric generation facilities, and in many cases, the cost of purchased power is tied to the cost of natural gas. In the event of an unexpected interruption in energy supply, whether due to equipment problems, transmission constraints or otherwise, we may incur additional costs to obtain alternative sources of energy supply, in order to meet our contractual or regulatory obligations to our customers. Under the electric fuel rules, MGE is required to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band that is currently plus or minus 2% around the amount approved in its most recent rate order. Any over/under recovery of the actual costs in a year is determined in the following year and is then reflected in future billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs, if its actual fuel costs fall outside the lower end of the range, and is required to defer costs, less any excess revenues, if its actual fuel costs exceed the upper end of the range. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. MGE assumes the risks and benefits of variances that are within the cost tolerance band.


Operating Risk


We are affected by weather, which affects customer demand and can affect the operation of our facilities.


The demand for electricity and gas is affected by weather. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity and gas for cooling and heating, respectively, as opposed to the softening effect of more moderate temperatures. Our electric revenues are sensitive to the summer cooling season and, to a lesser extent, the winter heating season. Similarly, very cold temperatures can dramatically increase the demand for gas for heating. A significant portion of our gas system demand is driven by heating. Extreme summer conditions or storms may stress electric transmission and distribution systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.




15




We could be adversely affected by changes in the development, and utilization by our customers, of power generation, storage, and use technologies.


Our revenues and the timing of the recovery of our costs could be adversely affected by improvements in power generation, storage, and use technology.


Advancements in power generation technology, including commercial and residential solar generation installations and commercial micro turbine installations, are improving the cost-effectiveness of customer self-supply of electricity. Improvements in energy storage technology, including batteries and fuel cells, could also better position customers to meet their around-the-clock electricity requirements. Improvements in the energy efficiency of lighting, appliances, and equipment will also affect energy consumption by customers. Such developments could reduce customer purchases of electricity, but may not necessarily reduce our investment and operating requirements due to our obligation to serve customers, including those self-supply customers whose equipment has failed for any reason to provide the power they need whether due to inadequate on-site resources, restricted operating hours, or equipment failure. In addition, since a portion of our costs are recovered through charges based upon the volume of power delivered, reductions in electricity deliveries will affect the timing of our recovery of those costs and may require changes to our rate structures.


Changes in power generation, storage, and use technologies could have significant effects on customer behaviors and their energy consumption. Customers could engage in individual conservation efforts by voluntarily reducing their consumption of electricity through changes in energy use and through the use of more energy efficient lighting, appliances, and equipment. They could also change their consumption of electricity from us through the installation of alternative energy sources, such as roof top solar panels and micro turbines for self-supply. Customer energy conservation could adversely affect our results of operations by reducing our revenues without necessarily changing our operating costs due to our obligation to serve.


We are affected by economic activity within our service area.


Higher levels of development and business activity generally increase the numbers of customers and their use of electricity and gas. Likewise, periods of recessionary economic conditions generally adversely affect our results of operations.


Our ability to obtain an adequate supply of coal could limit our ability to operate our coal-fired facilities.


The availability of coal and the means to transport coal could:


·

Affect our operating costs due to increased costs associated with lower levels of generation or the need for alternate supply or alternate transportation,


·

Limit our ability to generate electricity if we are unable to arrange adequate deliveries of coal, and


·

Result in potentially higher costs for replacement purchased power as well as potential lost market sales opportunities.


A significant portion of our electric generating capacity is dependent on coal. Demand for coal has been impacted by prevailing prices for natural gas and may affect mine performance. Consequently, we are exposed to the risk that counterparties to these contracts will not be able to fulfill their obligations. Disruption in the delivery of fuel, including disruptions as a result of transportation delays, weather, labor relations, force majeure events, or environmental regulations affecting any of these fuel suppliers, could limit our ability to generate electricity at our facilities at the desired level. Should counterparties fail to perform, or other unplanned disruptions occur, we may be forced to replace the underlying commitment at higher prices, or we may be forced to reduce generation at our coal units and replace this lost generation through additional power purchases from third parties. These factors may also affect the terms under which any of our existing coal supply or transportation agreements are renewed or replaced upon the expiration of their current terms.


Our ability to manage our purchased power costs is influenced by a number of uncontrollable factors.


We are exposed to additional purchased power costs to the extent that our power needs cannot be fully covered by the supplies available from our existing facilities and contractual arrangements. Those needs, and our costs, could be affected by:


·

Increased demand due to, for example, abnormal weather, customer growth, or customer obligations,


·

The inability to transmit our contracted power from its generation source to our customers due to transmission line constraints, outages, or equipment failures,



16




·

Reductions in the availability of power from our owned or contracted generation sources due to equipment failures, shortages of fuel or environmental limitations on operations, and


·

Failure to perform on the part of any party from which we purchase capacity or energy, whether due to equipment failures, transmission constraints or other causes.


An unexpected change in demand or the availability of generation or transmission facilities can expose us to increased costs of sourcing electricity in the short-term market where pricing may be more volatile.


The equipment and facilities in our operational system are subject to risks which may adversely affect our financial performance.


Weather conditions, accidents, and catastrophic events can result in damage or failures of equipment or facilities and disrupt or limit our ability to generate, transmit, transport, purchase, or distribute electricity and gas. Efforts to repair or replace equipment and facilities may take prolonged periods or may be unsuccessful, or we may be unable to make the necessary improvements to our operational system, causing service interruptions. Furthermore, our electric generation facilities are interconnected with third-party transmission providers. Damages or failures of equipment or facilities, of these providers are out of MGE's control, but could also lead to service interruptions. The resulting interruption of services would result in lost revenues and additional costs. We are also exposed to the risk of accidents or other incidents that could result in damage to or destruction of our facilities or damage to persons or property. Such issues could adversely affect revenues or increase costs to repair and maintain our systems.


Our operations and confidential information are subject to the risk of cyber-attacks.


Our operations rely on sophisticated information technology systems and networks. Cyber-attacks targeting our electronic control systems used at our generating facilities and for electric and gas distribution systems, including denial of service and ransomware attacks, could result in a full or partial disruption of our operations. Any disruption of these operations could result in a loss of service to customers and loss of revenue, as well as significant expense to repair system damage and remedy security breaches.


Our business requires the collection and retention of personally identifiable information of our customers, shareholders, and employees, who expect that we will adequately protect such information. A significant theft, loss, or fraudulent use of personally identifiable information may cause our business reputation to be adversely impacted and could lead to potentially large costs to notify and protect the impacted persons. The occurrence of such an event may cause us to become subject to legal claims, fines, or penalties, any of which could adversely impact our results of operations.


The safeguards we have may not always be effective due to the evolving nature of cyber-attacks. We cannot guarantee that such protections will be completely successful in the event of a cyber-attack. If the technology systems were to fail or be breached by a cyber-attack, and not be recovered in a timely fashion, we may be unable to fulfill critical business functions and confidential data could be compromised, adversely impacting our financial condition and results of operations.


We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.


We operate in a highly engineered industry that requires the continued operation of sophisticated information technology systems and network infrastructure to manage our finances, to operate our control facilities, to provide electric and gas service to our customers, and to enable compliance with applicable regulatory requirements. Our computer-based systems are vulnerable to interruption or failure due to the age of certain systems, the introduction of viruses, malware, ransomware, security breaches, fire, power loss, system malfunction, network outages and other events, which may be beyond our control. System interruptions or failures, whether isolated or more widespread, could impact our ability to provide service to our customers, which could have a material adverse effect on our operations and financial performance.


Acts of terrorism could materially and adversely impact our operations and financial condition.


Facilities for electric generation, transmission, and gas distribution are subject to the risk of being potential targets of terrorist threats and activities. A terrorist act at our facilities could result in a disruption of our ability to generate, transmit, transport, purchase, or distribute electricity or natural gas. A possible attack would have additional adverse effects, including environmental ramifications, increased security and insurance costs, as well as general economic volatility or uncertainty within our service territories. The inability to maintain operational continuity and any additional costs incurred for repairing our facilities could materially and adversely affect our financial condition and results of operations.



17




Failure to attract and retain an appropriately qualified workforce could affect our operations.


Events such as an aging workforce and retirement of key employees without appropriate replacements may lead to operating challenges and increased costs. Some of the challenges include lack of resources, loss of knowledge, and length of time period associated with skill development. Failure to identify qualified replacement employees could result in decreased productivity and increased safety costs. If we are unable to attract and retain an appropriately qualified workforce, our operations could be negatively affected.


We face construction risk in connection with the completion of the Saratoga Wind Farm project.


The 66-megawatt (MW) wind farm project is subject to various risks that could cause costs to increase or delays in completion. These risks include shortages of, the inability to obtain, the cost of, and the consistency of, labor, materials and equipment; the inability of the contractors to perform under their contracts; the inability to agree to terms of contracts or disputes in contract terms; work stoppages; adverse weather conditions; the inability to obtain necessary permits in a timely manner; changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions; governmental actions; legal action; and unforeseen engineering or technology issues. If the project is over budget, we may not be able to recover those excess costs. Inability to recover excess costs, or inability to complete the project in a timely manner, could adversely impact our financial condition and results of operations.


Failure to successfully manage the implementation of our Enterprise Forward corporate initiative could adversely affect our operations.


In 2017, MGE committed to undertake a multi-year project aimed at transforming our foundational customer engagement capabilities and enabling it to be flexible in delivering new products and services as outlined in our energy 2030 framework. These objectives are expected to be accomplished through the implementation of a new customer information system, enterprise resource planning platform, along with other solutions that meet the goals of the initiative. Integrating new systems is complex, costly and time consuming. If the systems and related processes do not operate as intended, it could result in disruptions to our business as well as unrecoverable excess costs. Inability to recover excess costs, or inability to implement the project successfully and in a timely manner, could adversely impact our financial condition and results of operations.


Financial Risk


We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal and oil.


We face commodity price risk exposure with respect to our purchases of natural gas, electricity, coal, oil, and environmental allowances and risk through our use of derivatives, such as futures, forwards and swaps, to manage that commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.


Interest rate movements and market performance affects our employee benefit plan costs.


Prevailing interest rates affect our assessment and determination of discount rates that are a key assumption in the determination of the costs and funding of our defined benefit pension plans and may impact the amount of expense and timing of contributions to those plans. The performance of the capital markets affects the values of the assets that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of those assets may increase our current and longer-term funding requirements for these obligations. Changes in the value of trust fund assets may affect the level of required contributions to these trusts to meet benefit obligations. Reduced benefit plan assets could result in increased benefit costs in future years and may increase the amount and accelerate the timing of required future funding contributions.


We are exposed to interest rate risk.


We are exposed to interest rate risk on our variable rate financing. Borrowing levels under commercial paper arrangements vary from period to period depending upon capital investments and other factors. Such interest rate risk means that we are exposed to increased financing costs and associated cash payments as a result of changes in the short-term interest rates.



18




We are exposed to credit risk primarily through our regulated energy business.


Credit risk is the loss that may result from counterparty nonperformance. We face credit risk primarily through MGE's regulated energy business. Failure of contractual counterparties to perform their obligations under purchase power agreements, commodity supply arrangements or other agreements may result in increased expenses for MGE as a result of being forced to cover the shortfall in the spot or short-term market, where prices may be more volatile.


As a holding company, we are dependent on upstream cash flows from our subsidiaries for the payment of dividends on our common stock.


As a holding company, we have no operations of our own, and our ability to pay dividends on our common stock is dependent on the earnings and cash flows of our operating subsidiaries and their ability to pay upstream dividends or to repay funds to us. Prior to funding us, our subsidiaries have financial obligations that must be satisfied, including among others, debt service and obligations to trade creditors, and are subject to contractual and regulatory restrictions on the payment of dividends.


Disruptions in the financial markets or changes to our credit ratings may affect our ability to finance at a reasonable cost and in accordance with our planned schedule.


The credit markets have experienced disruption and uncertainty in prior years. To the extent that such issues affect the ability or willingness of credit providers or investors to participate in the credit markets or particular types of investments, or affect their perception of the risk associated with particular types of investments, our cost of borrowing could be affected. We also rely on our strong credit ratings to access the credit markets. If our credit ratings are downgraded for any reason, borrowing costs could increase, potential investors could decrease, or we could be required to provide additional credit assurance, including cash collateral, to contract counterparties.


General economic conditions may affect our operating revenues and our counterparty risks.


Operational

MGE Energy's and MGE's operations are affected by local, national and worldwide economic conditions. The consequences of a prolonged period of reduced economic activity may include lower demand for energy, uncertainty regarding energy prices and the capital and commodity markets, and increased credit risk. A decline in energy consumption may adversely affect our revenues and future growth. Increased credit risk reflects the risk that our retail customers will not pay their bills in a timely manner or at all, which may lead to a reduction in liquidity and an eventual increase in bad debt expense.


Counterparty creditworthiness

Credit risk also includes the risk that trading counterparties that owe us money or product will breach their obligations. MGE's risk management policy is to limit transactions to a group of high quality counterparties. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements. In that event, our financial results could be adversely affected and we could incur losses.


The stock market can be volatile, and various factors, could cause our stock price to decline.


The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market prices of securities issued by many companies. Many factors affect the volatility and price of our common stock in addition to our operating results and prospects, including changes locally and in the broader economy affecting levels of economic activity, technological change, the level of interest rates and yields on other investments, and the effects of the other risk factors discussed in this report. Our stock price could fluctuate significantly in response to our quarterly or annual results, as well as factors affecting the broader economy that are beyond our control.


Item 1B. Unresolved Staff Comments.


MGE Energy and MGE


None.




19




Item 2. Properties.


Electric Generation


Net summer rated capacity in service at December 31, 2017, was as follows:


Plants

 

Location

 

Commercial Operation Date

 

Fuel

 

Net Summer Rated Capacity (MW)(a)

 

No. of Units

Steam plants:

 

 

 

 

 

 

 

 

 

 

   Columbia

 

Portage, WI

 

1975 & 1978

 

Low-sulfur coal

 

221(b,c)

 

2

   Blount

 

Madison, WI

 

1957 & 1961

 

Gas

 

102(g)

 

2

   WCCF

 

Madison, WI

 

2005

 

Gas/oil

 

124(d)

 

2

   Elm Road Units

 

Oak Creek, WI

 

2010 & 2011

 

Coal

 

106(b,e)

 

2

Combustion turbines

 

Madison, WI

 

1964-2000

 

Gas/oil

 

147(f)

 

6

 

 

Marinette, WI

 

 

 

 

 

 

 

 

Portable generators

 

Madison, WI

 

1998-2001

 

Diesel

 

49(g)

 

54

Wind turbines

 

Townships of Lincoln

 

 

 

 

 

 

 

 

 

 

and Red River, WI

 

1999

 

Wind

 

1(g,h)

 

17

 

 

Township of

 

 

 

 

 

 

 

 

 

  

Brookfield, IA

 

2008

 

Wind

 

4(g,i)

 

18

                 Total

 

 

 

 

  

 

 

754

 

 


(a)

Net summer rated capacity is determined by annual testing and may vary from year to year due to, among other things, the operating and physical conditions of the units.

(b)

Baseload generation.

(c)

MGE's share. See "Columbia" below.

(d)

Facility is jointly owned. Based on the terms of the joint plant agreement between MGE and the UW, the UW has the ability to reduce net capability of these units by approximately 17 MW in the summer. The net summer rated capacity shown reflects this decrease. See "WCCF" below.

(e)

MGE's share. See "Elm Road" below.

(f)

Four facilities are owned by MGE, and two facilities are leased. The leased facilities are under an agreement ending July 2018.

(g)

These facilities are owned by MGE.

(h)

Nameplate capacity rating is 11 MW.

(i)

Nameplate capacity rating is 30 MW.


Columbia


MGE and two other utilities jointly own Columbia, a coal-fired generating facility consisting of two 512 MW units, which, at December 31, 2017, accounts for 29% of MGE's net summer rated capacity. Power from this facility is shared in proportion to each owner's ownership interest. At December 31, 2017, MGE had a 20.4% ownership interest in Columbia. The other owners are WPL, which operates Columbia, and WPSC. The Columbia units burn low-sulfur coal obtained from the Powder River Basin coal fields located in Wyoming. The coal inventory supply for the Columbia units decreased from approximately 65 days on December 31, 2016, to approximately 61 days on December 31, 2017. See "Executive Overview" under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, for a discussion of the reduction in MGE's ownership share in Columbia commencing January 2017 and continuing through June 2020.


Elm Road Units


MGE Power Elm Road and two other owners own undivided interests in the Elm Road Units, consisting of two 615 MW units, which, at December 31, 2017, account for 14% of MGE's net summer rated capacity. Power from these units is shared in proportion to each owner's ownership interest. MGE Power Elm Road owns an 8.33% ownership interest in the Elm Road Units, and its interest in the Elm Road Units is leased to MGE. The other owners are Wisconsin Energy Corporation, which operates the Units, and WPPI Energy, Inc. The Elm Road Units burn bituminous coal obtained from northern West Virginia and southwestern Pennsylvania, and Powder River Basin coal from Wyoming. MGE's share of the coal inventory supply for the Elm Road Units decreased from approximately 51 days on December 31, 2016, to approximately 48 days on December 31, 2017.


MGE leases MGE Power Elm Road's ownership interest in the Elm Road Units pursuant to two separate facility leases. The financial terms of each facility lease include a capital structure of 55% equity and 45% long-term debt, return on equity of 12.7%, and a lease term of 30 years. At the end of the respective lease terms, MGE may, at its option, renew the facility lease for an additional term, purchase the leased ownership interest at fair market value, or allow the lease to end. The Unit 1 and Unit 2 leases commenced with the commercial operation of each respective unit.




20




WCCF


MGE Power West Campus and the UW jointly own undivided interests in a natural gas-fired cogeneration facility on the UW campus. The facility has the capacity to produce 20,000 tons of chilled water, 500,000 pounds per hour of steam, and approximately 150 MW of electricity. The UW owns 45% of the facility, which represents its interest in the chilled-water and steam assets. These assets are used to meet a part of the UW's need for air-conditioning and steam-heat capacity. MGE Power West Campus owns 55% of the facility, which represents its interest in the electric generating assets. These assets are used to provide electricity to MGE's customers. The UW's share of the plant and portion of the earnings from the WCCF are not reflected in the consolidated financial statements of MGE Energy or MGE. MGE Power West Campus' share of the plant is reflected in property, plant, and equipment on MGE Energy's and MGE's consolidated balance sheets.


MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the entire facility. The financial terms of the facility lease include a capital structure of 53% equity and 47% long-term debt, return on equity of 12.1%, and a lease term of 30 years. At the end of the lease term in 2035, MGE may, at its option, renew the facility lease for an additional term, purchase the generating facility at fair market value, or allow the lease contract to end.


Electric and Gas Distribution Facilities


At December 31, 2017, MGE owned 868 miles of overhead electric distribution line and 1,261 miles of underground electric distribution cable, all of which are located in Wisconsin. These electric distribution facilities are connected by approximately 52 substations, installed with a capacity of 1,202,500 kVA. MGE's gas facilities include 2,843 miles of distribution mains, which are all owned by MGE.


A significant portion of MGE's electric and gas distribution facilities are located above or underneath highways, streets, other public places or property that others own. MGE believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements, and licenses; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.


Encumbrances


The principal plants and properties of MGE are subject to the lien of its Indenture of Mortgage and Deed of Trust dated as of January 1, 1946, as amended and supplemented, under which MGE's first mortgage bonds are issued. As of December 31, 2017, there were $1.2 million of first mortgage bonds outstanding. See Footnote 9 of the Notes to Consolidated Financial Statements for additional information regarding MGE's first mortgage bonds.


MGE Power Elm Road has collaterally assigned its right to lease payments from MGE for the Elm Road Units in order to secure the repayment of $60.0 million of senior secured notes issued by MGE Power Elm Road. See Footnote 9 of the Notes to Consolidated Financial Statements for additional information regarding these senior notes.


MGE Power West Campus has collaterally assigned its right to lease payments from MGE for the WCCF in order to secure the repayment of $43.4 million of senior secured notes issued by MGE Power West Campus. See Footnote 9 of the Notes to Consolidated Financial Statements for additional information regarding these senior notes.


Item 3. Legal Proceedings.


MGE Energy and MGE


MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that are handled and defended in the ordinary course of business.


See "Environmental" under Item 1. Business and Footnote 17.c. of the Notes to Consolidated Financial Statements for a description of several environmental proceedings involving MGE. See Footnote 17.d. of the Notes to Consolidated Financial Statements for a description of other legal matters.


Item 4. Mine Safety Disclosures.


MGE Energy and MGE


Not applicable.



21




PART II.


Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.


Market for Common Equity


MGE Energy


MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On February 1, 2018, there were approximately 38,928 shareholders of record. The following table shows high and low sale prices for the common stock on Nasdaq for each quarter over the past two years.


 

 

 

Common Stock Price Range

 

 

 

 

2017

 

 

2016

 

 

 

 

High

 

Low

 

 

High

 

Low

 

 

Fourth quarter

$

68.10

$

61.40

 

$

66.85

$

53.48

 

 

Third quarter

$

68.70

$

61.80

 

$

59.49

$

53.78

 

 

Second quarter

$

68.60

$

62.60

 

$

56.54

$

47.90

 

 

First quarter

$

67.20

$

60.30

 

$

53.48

$

44.83

 


MGE


As of February 1, 2018, there were 17,347,894 outstanding shares of common stock, all of which were held by MGE Energy. There is no market for shares of common stock of MGE.


Dividends


MGE Energy


The following table sets forth MGE Energy's quarterly cash dividends per share declared during 2017 and 2016:


 

(Per share)

 

2017

 

2016

 

 

Fourth quarter

$

0.323

$

0.308

 

 

Third quarter

$

0.323

$

0.308

 

 

Second quarter

$

0.308

$

0.295

 

 

First quarter

$

0.308

$

0.295

 


MGE


The following table sets forth MGE's quarterly cash dividends declared during 2017 and 2016:


 

(In thousands)

 

2017

 

2016

 

 

Fourth quarter

$

10,000

$

10,000

 

 

Third quarter

$

10,000

$

15,000

 

 

Second quarter

$

10,000

$

15,000

 

 

First quarter

$

15,000

$

10,000

 


See discussion below for a description of restrictions applicable to dividend payments by MGE.


Dividend Restrictions


Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount of $70.8 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio at December 31, 2017, is 58.5%, as determined under the calculation used in the rate proceeding. This restriction did not impact MGE's payment of dividends in 2017. Cash dividends of $45.0 million and $50.0 million were paid by MGE to MGE Energy in 2017 and 2016, respectively. In 2016, MGE also transferred its ownership interest in MGE Transco to MGE Energy in the form of a dividend in kind of $15.8 million. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness



22




associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.


MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2017, approximately $343.3 million was available for the payment of dividends under this covenant.


Issuer Purchases of Equity Securities


MGE Energy


 

Period

 

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*

 

Maximum number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs*

 

 

October 1-31, 2017

 

25,607

$

65.64

 

-

 

-

 

 

November 1-30, 2017

 

15,695

 

66.21

 

-

 

-

 

 

December 1-31, 2017

 

52,997

 

63.50

 

-

 

-

 

 

Total

 

94,299

$

64.53

 

-

 

-

 


*

Under the MGE Energy, Inc. Direct Stock Purchase and Dividend Reinvestment Plan (Stock Plan), common stock shares deliverable to plan participants may be either newly issued shares or shares purchased on the open market, as determined from time to time by MGE Energy. MGE Energy's transfer agent uses open market purchases to provide shares to meet obligations to participants in the Stock Plan. The shares are purchased on the open market through their securities broker-dealer and then are reissued under the Stock Plan as needed to meet share delivery requirements. The volume and timing of share repurchases in the open market depends upon the level of dividend reinvestment and optional share purchases being made from time to time by plan participants. As a result, there is no specified maximum number of shares to be repurchased and no specified termination date for the repurchases. All shares issued through the Stock Plan, whether newly issued or reissued following open market purchases, are issued and sold by MGE Energy pursuant to a registration statement that was filed with the SEC and is currently effective.


MGE


None.




23




Stock Performance Graph


The performance graph below illustrates a five-year comparison of cumulative total returns based on an initial investment of $1,000 in MGE Energy common stock, as compared with the Russell 2000 and the EEI Index for the period 2012 through 2017. The EEI Index reflects the consolidated performance of Edison Electric Institute investor-owned electric utilities.


Cumulative Five-Year Total Return Comparison

(assumes $1,000 invested on 12/31/2012 with dividends reinvested)

[20171231-10k.gif] 


Value of Investment at December 31,


 

 

 

2012

 

2013

 

2014

 

2015

 

2016

 

2017

 

 

MGEE

$

1,000

$

1,167

$

1,422

$

1,488

$

2,141

$

2,109

 

 

Russell 2000

 

1,000

 

1,388

 

1,456

 

1,392

 

1,688

 

1,936

 

 

EEI Index

 

1,000

 

1,130

 

1,457

 

1,400

 

1,644

 

1,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




24




Item 6. Selected Financial Data.


MGE Energy, Inc.

(In thousands, except per share amounts)


 

 

For the Years Ended December 31,

 

 

2017

 

2016

 

2015

 

2014

 

2013

Summary of Operations

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

    Electric

$

414,274

$

410,202

$

420,291

$

398,132

$

409,425

    Gas

 

148,825

 

134,543

 

143,737

 

221,720

 

181,462

        Total operating revenues

 

563,099

 

544,745

 

564,028

 

619,852

 

590,887

Operating expenses

 

415,069

 

396,455

 

419,894

 

462,102

 

444,293

Other general taxes

 

19,294

 

20,062

 

19,879

 

19,652

 

18,607

Operating income

 

128,736

 

128,228

 

124,255

 

138,098

 

127,987

Other income, net

 

10,288

 

9,711

 

8,613

 

10,079

 

10,701

Interest expense, net

 

(19,324)

 

(19,866)

 

(20,162)

 

(19,673)

 

(18,924)

    Income before taxes

 

119,700

 

118,073

 

112,706

 

128,504

 

119,764

Income tax provision(a)

 

(22,094)

 

(42,513)

 

(41,363)

 

(48,185)

 

(44,859)

    Net income

$

97,606

$

75,560

$

71,343

$

80,319

$

74,905

Average shares outstanding

 

34,668

 

34,668

 

34,668

 

34,668

 

34,668

    Basic and diluted earnings per share

$

2.82

$

2.18

$

2.06

$

2.32

$

2.16

    Dividends declared per share

$

1.26

$

1.21

$

1.16

$

1.11

$

1.07

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Electric

$

1,043,181

$

1,021,905

$

974,235

$

945,790

$

896,864

Gas

 

344,337

 

318,603

 

298,435

 

306,106

 

264,099

Assets not allocated

 

26,345

 

27,338

 

49,753

 

41,124

 

19,853

Nonregulated energy operations

 

270,384

 

271,277

 

277,858

 

280,542

 

287,042

Transmission investments(a)

 

61,783

 

74,535

 

69,470

 

67,697

 

64,504

All others

 

485,548

 

465,202

 

434,868

 

438,898

 

431,436

Eliminations

 

(376,396)

 

(377,800)

 

(378,216)

 

(390,636)

 

(389,800)

    Total assets

$

1,855,182

$

1,801,060

$

1,726,403

$

1,689,521

$

1,573,998

 

 

 

 

 

 

 

 

 

 

 

Capitalization including Short-Term Debt

 

 

 

 

 

 

 

 

 

 

Common shareholders' equity

$

778,187

$

724,088

$

690,458

$

659,401

$

617,510

Long-term debt(b)

 

422,613

 

387,124

 

391,010

 

394,775

 

398,454

Short-term debt

 

4,000

 

-

 

-

 

7,000

 

-

    Total capitalization and short-term debt

$

1,204,800

$

1,111,212

$

1,081,468

$

1,061,176

$

1,015,964


(a)

In December 2017, a one-time tax impact, as a result of the Tax Act, decreased income tax provision and transmission investment $21.7 million and $20.4 million, respectively. See Footnote 12 of the Notes of the Consolidated Financial Statements for further information.


(b)

Includes long-term debt due within one year, debt issuance costs, and unamortized discount.




25




Item 7. 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 151,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 158,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


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


Executive Overview


Our primary focus today and for the foreseeable future is our core utility customers at MGE as well as creating long-term value for our shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE meets this challenge by investing in more efficient generation projects, including renewable energy sources. MGE 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.


For the year ended December 31, 2017, MGE Energy's earnings were $97.6 million or $2.82 per share compared to $75.6 million or $2.18 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2017, were $49.8 million compared to $51.2 million for the same period in the prior year.




26




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


 

(In millions)

 

Year Ended December 31,

 

 

Business Segment:

 

2017

 

2016

 

2015

 

 

    Electric Utility

$

41.4

$

40.6

$

36.4

 

 

    Gas Utility

 

11.1

 

10.6

 

10.4

 

 

    Nonregulated Energy

 

40.5

 

19.1

 

20.1

 

 

    Transmission Investments

 

5.9

 

5.6

 

4.6

 

 

    All Others

 

(1.3)

 

(0.3)

 

(0.2)

 

 

    Net Income

$

97.6

$

75.6

$

71.3

 


Our net income during 2017 compared to 2016 primarily reflects the effects of the following factors:


Electric and Gas Utility

Electric and gas net income increased primarily related to a $1.5 million (pre-tax) gain on sale of property assets in 2017, customer growth, and cooler weather in the fourth quarter of 2017 compared to 2016.


Nonregulated Energy

Nonregulated Energy income increased due to a $21.6 million one-time tax impact as a result of lower federal income tax rates associated with the passage of the Tax Cuts and Jobs Act, as discussed below. The new law reduced the federal tax rate from 35% to 21%. See "Tax Reform" below for additional information.


All Others

The decrease in all other income primarily results from a $2 million (pre-tax) voluntary contribution to the Madison Gas and Electric Foundation.


Our net income during 2016 compared to 2015 primarily reflects the effects of the following factors:


Electric Utility

Electric net income increased due to a 5.4% increase in residential electric retail sales as the result of more favorable weather conditions in 2016 compared to 2015. Electric utility operations experienced an increase in operating and maintenance costs partially offsetting the increase in net income compared to the same period in the prior year.


Nonregulated Energy

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


Transmission Investments

Transmission investment income reflects our share of ATC's earnings. ATC's earnings for 2015 reflected a charge representing its estimate of its refund liability covering 2015, 2014, and a portion of 2013 associated with a complaint filed with FERC challenging ATC's return on equity in its transmission rates. See "Other Matters" below for additional information concerning ATC.


During 2017, the following events occurred:


Tax Reform: On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the Tax Act). Pursuant to the Tax Act, deferred income tax balances as of December 31, 2017, were remeasured to reflect the decrease in the corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018. The one-time 2017 impacts of the Tax Act include a decrease in deferred income taxes of $176.9 million and $156.5 million for MGE Energy and MGE, respectively. MGE Energy recorded a corresponding decrease in its investment in ATC of $20.4 million. MGE Energy and MGE recorded a corresponding decrease in income tax expense of $21.7 million, a decrease in regulatory assets of $4.3 million, and an increase in regulatory liabilities of $130.5 million, given that changes in income taxes are generally passed through in customer rates for the regulated utility. The amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which will be subject to review by the PSCW in future rate cases. A portion of the regulatory liability will be returned to customers based on a mandated timeframe dictated by applicable tax laws. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report for additional information.




27




2017 Rate Case Order: 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 was attributable to declining fuel and purchased power costs. The increase in retail gas rates covered 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 December 31, 2017, MGE has deferred $4.2 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.


2016 Annual Fuel Proceeding: In July 2017, 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 October 2017, MGE returned $6.2 million to customers through bill credits.


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. 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 these debt issuances are substantially consistent with MGE's existing unsecured long-term debt.


During 2018, several items may affect us, including:


Tax Reform: MGE Energy and MGE will incur lower income tax expense beginning January 1, 2018. The lower income tax expense and the refund of deferred income tax regulatory liabilities are expected to lead to lower customer rates over time. For 2018, MGE will defer the amount collected in rates associated with the decrease in tax rate. The rate at which the refund is returned is subject to review by the PSCW, anticipated in 2018. The Tax Act is generally expected to result in lower operating cash inflows in future years as a result of the elimination of bonus depreciation and lower customer rates.


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 6.2% and 6.8% of our net income for the years ended December 31, 2017 and 2016, respectively, from our investment in ATC. See "Other Matters" below for additional information concerning ATC.


Environmental Initiatives: There are proposed legislation, rules, and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. At present, it is unclear how the changes in the Presidential and EPA administration may affect 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 December 31, 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. The rule is the subject of pending legal challenges. 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 the form of the CPP rule, it is expected to have a material impact on MGE. MGE will continue to monitor developments with this proposed rule.




28




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. As of December 31, 2017, MGE classified $8.8 million of Columbia assets as held-for-sale on the consolidated balance sheets as a result of capital expenditures foregone during 2017 under the amendment. In January 2018, MGE reduced its ownership interest in Columbia from 20.4% to 19.4% 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 November 2017, the PSCW approved MGE's request to construct, own and operate a 66MW wind farm, consisting of 33 turbines, located near Saratoga, Iowa. Construction of the project is expected to be completed by the end of 2018, with an estimated capital cost of $108 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, which was approved by the FERC in January 2018, is subject to PSCW approval and is expected to close in the spring of 2018.


Financing Plans: MGE has regulatory authority to issue up to $150 million of new long-term debt during the next three years to finance authorized utility capital expenditures, including the Saratoga Wind Farm, refinance a portion of its current and maturing long-term debt, reduce short-term debt, and finance other corporate utility purposes.


The following discussion is based on the business segments as discussed in Footnote 20 of the Notes to Consolidated Financial Statements.


Results of Operations


Year Ended December 31, 2017, Versus the Year Ended December 31, 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 years indicated:


 

 

 

Revenues

 

Sales (kWh)

 

 

(In thousands, except cooling degree days)

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

 

 

Residential

$

136,168

$

136,792

 

(0.5)%

 

793,337

 

828,887

 

(4.3)%

 

 

Commercial

 

216,461

 

213,101

 

1.6 %

 

1,825,922

 

1,866,035

 

(2.1)%

 

 

Industrial

 

16,176

 

17,589

 

(8.0)%

 

196,629

 

232,854

 

(15.6)%

 

 

Other-retail/municipal

 

38,010

 

35,559

 

6.9 %

 

421,360

 

395,662

 

6.5 %

 

 

    Total retail

 

406,815

 

403,041

 

0.9 %

 

3,237,248

 

3,323,438

 

(2.6)%

 

 

Sales to the market

 

4,067

 

6,135

 

(33.7)%

 

117,039

 

183,195

 

(36.1)%

 

 

Return of fuel savings

 

-

 

(423)

 

(100.0)%

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

3,044

 

253

 

N/A%

 

-

 

-

 

-%

 

 

    Total

$

413,926

$

409,006

 

1.2 %

 

3,354,287

 

3,506,633

 

(4.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 659)

 

 

 

 

 

 

 

580

 

780

 

(25.6)%

 




29




Electric operating revenues increased $4.9 million or 1.2% during 2017, due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

17.9

 

 

Adjustments to revenues

 

2.4

 

 

Other

 

0.3

 

 

Volume

 

(9.6)

 

 

Rate changes

 

(4.0)

 

 

Sales to the market

 

(2.1)

 

 

Total

$

4.9

 


·

Deferral of fuel savings/fuel credit. During 2017, customers received a fuel credit on their bill related to accumulated fuel savings of $6.2 million, which decreased electric revenues. During 2016, customers received a fuel credit on their bill related to the fuel savings of $23.7 million, which decreased electric revenues in the prior year. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs 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 2017, there was a 15.6% 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 2017, there was a 4.3% 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 2017, were 2.2% or $4.0 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 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 16.b. of the Notes to Consolidated Financial Statements.


Electric fuel and purchased power


Electric fuel and purchased power costs reflect a decrease in internal generation volumes partially offset by an increase in the volume of purchased power when compared to the prior year. 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 $7.7 million during 2017 compared to 2016 due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(4.7)

 

 

Decrease in per-unit cost

 

(3.0)

 

 

Total

$

(7.7)

 




30




This decrease in expense reflects an 8.1% decrease in internal generation volume delivered to the system primarily as a result of decreased generation at WCCF based on market prices and a 5.0% decrease in per-unit cost of internal electric generation.


Purchased power

Purchased power expense increased $2.4 million during 2017 compared to 2016 due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

2.9

 

 

Decrease in per-unit cost

 

(2.2)

 

 

Change in fuel rule adjustments, net of recoveries

 

1.7

 

 

Total

$

2.4

 


The increase in expense (before fuel rules adjustments) reflects a 4.9% increase in the volume of power purchased from third parties, partially offset by a 3.5% decrease in the per-unit cost of purchased power.


Under fuel rules, MGE is required to defer electric fuel-related costs that fall outside a 2% cost tolerance band around the amount used in the most recent rate proceeding. Any fuel rules adjustments are reflected in purchased power expense, with potential refunds associated with fuel savings increasing that expense and potential recovery of excess fuel costs decreasing that expense.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $3.9 million during 2017 compared to 2016. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased transmission costs

$

5.2

 

 

Increased customer accounts costs

 

1.7

 

 

Increased other costs

 

0.1

 

 

Decreased production costs

 

(2.3)

 

 

Decreased administrative and general costs

 

(0.8)

 

 

Total

$

3.9

 


For 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 $7.5 million for 2017, compared to the prior year as a result of new depreciation rates for Columbia, as approved by the PSCW.


Other electric income


Other electric income increased $1.0 million for 2017, compared to the same period in the prior year, primarily due to the gain on sale of property assets.




31




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 years indicated:


 

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

 

Revenues

 

Therms Delivered

 

 

 

 

2017

 

2016

 

% Change

 

2017

 

2016

 

% Change

 

 

Residential

$

88,695

$

81,014

 

9.5 %

 

94,631

 

91,791

 

3.1 %

 

 

Commercial/Industrial

 

55,151

 

48,497

 

13.7 %

 

91,411

 

86,641

 

5.5 %

 

 

    Total retail

 

143,846

 

129,511

 

11.1 %

 

186,042

 

178,432

 

4.3 %

 

 

Gas transportation

 

4,561

 

4,635

 

(1.6)%

 

70,234

 

72,922

 

(3.7)%

 

 

Other revenues

 

418

 

397

 

5.3 %

 

-

 

-

 

-%

 

 

    Total

$

148,825

$

134,543

 

10.6 %

 

256,276

 

251,354

 

2.0 %

 

 

Heating degree days (normal 6,916)

 

 

 

 

 

 

 

6,569

 

6,417

 

2.4 %

 

 

Average rate per therm of retail customer

$

0.773

$

0.726

 

6.5 %

 

 

 

 

 

 

 


Gas revenues increased $14.3 million or 10.6% during 2017. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Rate/PGA changes

$

10.1

 

 

Volume

 

4.2

 

 

Total

$

14.3

 


·

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 impact net income.


The average retail rate per therm for 2017, increased 6.5% compared to 2016, reflecting a $6.5 million increase in natural gas commodity costs (recovered through the PGA). Additionally, there was an increase in fixed rate charges.


·

Volume. For 2017, retail gas deliveries increased 4.3% compared to the prior year. The increase in volume is primarily related to customer growth and cooler weather in the fourth quarter of 2017 compared to the prior year.


Cost of gas sold


For 2017, cost of gas sold increased by $9.9 million, compared to the prior year. The cost per therm of natural gas increased 9.2%, which resulted in $6.5 million of increased expense. The volume of gas purchased increased 5.1%, which resulted in $3.4 million of increased expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $1.6 million for 2017 compared to 2016. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

1.6

 

 

Increased customer service costs

 

0.9

 

 

Increased other costs

 

0.2

 

 

Decreased administrative and general costs

 

(1.1)

 

 

Total

$

1.6

 


For 2017, increased customer accounts costs are primarily related to technology improvements. Increased customer service costs are due to higher Focus on Energy payments. Focus on Energy is Wisconsin's statewide energy efficiency and renewable resource program to promote energy efficiency on customer's premises. Decreased administrative and general costs are primarily related to a decrease in payroll expense.



32




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 2017 and 2016, net income at the nonregulated energy operations segment was $40.5 million and $19.1 million, respectively. The increase in net income is attributable to a $21.6 million one-time tax impact as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For 2017 and 2016, other income at the transmission investment segment was $9.8 million and $8.4 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 4 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.


All Other Operations - MGE Energy and MGE


Other income


The decrease in all other income primarily results from a $2 million (pre-tax) voluntary contribution to the Madison Gas and Electric Foundation.


Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for 2017 and 2016 was 18.5% and 36.0%, respectively. MGE's effective income tax rate for 2017 and 2016 was 17.0% and 35.9%, respectively. The decrease in the effective tax rate for both MGE Energy and MGE in 2017 was primarily related to the Tax Act, which was signed into law on December 22, 2017. Pursuant to the Tax Act, deferred income tax balances as of December 31, 2017, were remeasured to reflect the decrease in the corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018. See Footnote 12 of the Notes to Consolidated Financial Statements for details of effective income tax rates for continuing operations.


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 2016, is MGE Energy's interest in MGE Transco, which holds our investment in ATC. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2017

 

2016

 

 

MGE Power Elm Road(a)

$

29.3

$

14.8

 

 

MGE Power West Campus(a)

$

13.9

$

7.2

 

 

MGE Transco(b)

$

-

$

1.4

 


(a)

In 2017, there was a $21.6 million one-time tax impact as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. See Footnote 12 of the Notes to Consolidated Financial Statements for additional information.


(b)

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. See Footnote 8 of the Notes to Consolidated Financial Statements for further discussion of noncontrolling interest. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 4 of the Notes to Consolidated Financial Statements for additional information.




33




Results of Operations


Year Ended December 31, 2016, Versus the Year Ended December 31, 2015


Electric Utility Operations - MGE Energy and MGE


Electric sales and revenues


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


 

 

 

Revenues

 

Sales (kWh)

 

 

(In thousands, except cooling degree days)

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

 

 

Residential

$

136,792

$

135,201

 

1.2 %

 

828,887

 

786,741

 

5.4 %

 

 

Commercial

 

213,101

 

220,745

 

(3.5)%

 

1,866,035

 

1,831,251

 

1.9 %

 

 

Industrial

 

17,589

 

20,283

 

(13.3)%

 

232,854

 

248,443

 

(6.3)%

 

 

Other-retail/municipal

 

35,559

 

38,824

 

(8.4)%

 

395,662

 

422,188

 

(6.3)%

 

 

    Total retail

 

403,041

 

415,053

 

(2.9)%

 

3,323,438

 

3,288,623

 

1.1 %

 

 

Sales to the market

 

6,135

 

2,154

 

N/A%

 

183,195

 

68,886

 

N/A%

 

 

Return of fuel savings

 

(423)

 

-

 

-%

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

253

 

(4,679)

 

(105.4)%

 

-

 

-

 

-%

 

 

    Total

$

409,006

$

412,528

 

(0.9)%

 

3,506,633

 

3,357,509

 

4.4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 647)

 

 

 

 

 

 

 

780

 

666

 

17.1 %

 


Electric operating revenues decreased $3.5 million or 0.9% during 2016 due to the following:


 

(In millions)

 

 

 

 

Deferral of fuel savings/fuel credit

$

(21.5)

 

 

Volume

 

6.7

 

 

Adjustments to revenues

 

4.9

 

 

Sales to the market

 

4.0

 

 

Other

 

2.4

 

 

Total

$

(3.5)

 


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


·

Deferral of fuel savings/fuel credit. During 2016, customers received a fuel credit on their bill related to the fuel savings of $21.1 million, which decreased electric revenues when compared to 2015. This amount was partially offset by the 2016 deferred fuel rules monitored costs. In January 2016, the PSCW lowered MGE's 2016 fuel rules monitored costs as a result of continued lower projected fuel costs in 2016.


·

Volume. During 2016, there was a 5.4% increase in total residential sales volumes compared to the same period in the prior year driven by increased customer demand due, at least in part, to more favorable weather conditions, as evidenced by the higher number of cooling degree days.


·

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


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


·

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO. 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 2016, market volumes increased compared to the same period in the prior year,



34




reflecting increased opportunities for sales, and those sales were made at higher market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 16.b. of the Notes to Consolidated Financial Statements.


·

Other. During 2016, other items affecting electric operating revenues increased $2.4 million. MGE experienced an increase in residential and small commercial customers contributing to the increase in other electric revenue. Higher monthly on-peak sales also attributed to the increase.


Electric fuel and purchased power


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


Fuel for electric generation

The expense for fuel for internal electric generation increased $6.9 million during 2016 compared to 2015 due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

10.5

 

 

Decrease in per-unit cost

 

(3.6)

 

 

Total

$

6.9

 


This increase in expense reflects a 21.0% increase in internal generation volume delivered to the system primarily as a result of increased generation at WCCF based on market prices, partially offset by a 6.8% decrease in per-unit cost of internal electric generation, reflective of lower natural gas prices.


Purchased power

Purchased power expense decreased $24.9 million during 2016 compared to 2015 due to the following:


 

(In millions)

 

 

 

 

Decrease in volume

$

(15.2)

 

 

Increase in per-unit cost

 

3.0

 

 

Change in fuel rule adjustments, net of recoveries

 

(12.7)

 

 

Total

$

(24.9)

 


The decrease in expense (before fuel rules adjustments) reflects a 21.1% decrease in the volume of power purchased from third parties primarily as a result of the increased internal generation, partially offset by a 5.2% increase in the per-unit cost of purchased power.


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


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $2.5 million during 2016 compared to 2015. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

0.9

 

 

Increased production costs

 

0.7

 

 

Increased distribution costs

 

0.5

 

 

Increased other costs

 

0.4

 

 

Total

$

2.5

 


For 2016, increased customer accounts costs are primarily related to higher customer billing expenses.


Electric depreciation expense


Electric depreciation expense decreased $0.8 million for 2016, compared to the prior year. A new depreciation study approved by the PSCW, effective January 1, 2016, resulted in a decrease in expense.



35




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 years indicated:


 

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

 

Revenues

 

Therms Delivered

 

 

 

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

 

 

Residential

$

81,014

$

85,438

 

(5.2)%

 

91,791

 

92,970

 

(1.3)%

 

 

Commercial/Industrial

 

48,497

 

53,161

 

(8.8)%

 

86,641

 

88,489

 

(2.1)%

 

 

    Total retail

 

129,511

 

138,599

 

(6.6)%

 

178,432

 

181,459

 

(1.7)%

 

 

Gas transportation

 

4,635

 

4,652

 

(0.4)%

 

72,922

 

75,572

 

(3.5)%

 

 

Other revenues

 

397

 

486

 

(18.3)%

 

-

 

-

 

-%

 

 

    Total

$

134,543

$

143,737

 

(6.4)%

 

251,354

 

257,031

 

(2.2)%

 

 

Heating degree days (normal 7,083)

 

 

 

 

 

 

 

6,417

 

6,395

 

0.3 %

 

 

Average rate per therm of retail customer

$

0.726

$

0.764

 

(5.0)%

 

 

 

 

 

 

 


Gas revenues decreased $9.2 million or 6.4% during 2016. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Rate/PGA changes

$

(5.6)

 

 

Volume

 

(3.5)

 

 

Transportation and other effects

 

(0.1)

 

 

Total

$

(9.2)

 


·

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


The average retail rate per therm for 2016, decreased 5.0% compared to 2015, reflecting a $6.3 million decrease in natural gas commodity costs (recovered through the PGA). The decrease was partially offset by an increase in fixed rate charges.


·

Volume. For 2016, retail gas deliveries decreased 1.7% compared to the prior year.


Cost of gas sold


For 2016, cost of gas sold decreased by $9.3 million, compared to the prior year. The cost per therm of natural gas decreased 10.3%, which resulted in $7.6 million of decreased expense. The volume of gas purchased decreased 2.2%, which resulted in $1.7 million of decreased expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $1.0 million for 2016 compared to 2015. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

0.8

 

 

Increased administrative and general costs

 

0.5

 

 

Decreased distribution costs

 

(0.3)

 

 

Total

$

1.0

 


For 2016, increased customer accounts costs are due to higher customer billing expenses.


Gas depreciation expense


Gas depreciation expense increased $1.4 million for 2016, compared to the prior year. This increase is primarily driven by an increase in gas utility plant in-service in 2016 and a new depreciation study approved by the PSCW, effective January 1, 2016.



36




Nonregulated Energy Operations - MGE Energy and MGE


For 2016 and 2015, net income at the nonregulated energy operations segment was $19.1 million and $20.1 million, respectively. 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. Carrying costs incurred during construction of the Elm Road Units and WCCF were recognized by MGE Power Elm Road and MGE Power West Campus over the period allowed for recovery in rates. The recovery period ended in 2015, contributing to a reduction in nonregulated earnings in 2016. The reduction in earnings was partially offset by an increase in lease revenue.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For 2016 and 2015, other income at the transmission investment segment was $8.4 million and $7.7 million, respectively. The transmission investment segment holds our interest in ATC and ATC Holdco, and its income reflects our equity in the earnings of ATC. ATC Holdco was formed in 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 4.b. of the Notes to Consolidated Financial Statements and "Other Matters" below for additional information concerning the transmission investments and summarized financial information regarding ATC.


Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for 2016 and 2015 was 36.0% and 36.7%, respectively. MGE's effective income tax rate for 2016 and 2015 was 35.9% and 36.7%, respectively. The decrease in the effective tax rate is due in part to a combination of individually insignificant fluctuations. See Footnote 12 of the Notes to Consolidated Financial Statements for details of effective income tax rates for continuing operations.


Noncontrolling Interest, Net of Tax - MGE


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


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2016

 

2015

 

 

MGE Power Elm Road

$

14.8

$

16.6

 

 

MGE Power West Campus

$

7.2

$

7.3

 

 

MGE Transco

$

1.4

$

2.2

 


(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. See Footnote 8 of the Notes to Consolidated Financial Statements for further discussion of noncontrolling interest. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 4 of the Notes to Consolidated Financial Statements for additional information.


Liquidity and Capital Resources


MGE Energy and MGE have adequate liquidity to fund operations and capital expenditures over the next twelve months. Available resources include cash and cash equivalents, operating cash flows, liquid assets, borrowing capacity under revolving credit facilities, and access to equity and debt capital markets.




37




Cash Flows


The following summarizes cash flows for MGE Energy and MGE during 2017, 2016, and 2015:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2017

 

2016

 

2015

 

 

2017

 

2016

 

2015

 

 

Cash provided by/(used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

$

132,991

$

147,513

$

141,185

 

$

125,738

$

146,501

$

148,460

 

 

    Investing activities

 

(116,361)

 

(86,826)

 

(73,313)

 

 

(106,658)

 

(85,648)

 

(72,920)

 

 

    Financing activities

 

(4,637)

 

(46,112)

 

(52,243)

 

 

(23,897)

 

(76,845)

 

(53,342)

 


Cash Provided by Operating Activities


MGE Energy


MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.


2017 vs. 2016


Cash provided by operating activities for 2017 was $133.0 million, a decrease of $14.5 million when compared to the prior year.


MGE Energy's net income increased $22.0 million for 2017 when compared to the prior year primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.


In 2016, MGE received a $10.0 million refund from the IRS for the 2015 tax year. Excluding the 2016 refund, MGE Energy's federal and state taxes paid increased $5.3 million during 2017, when compared to the prior year.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $11.1 million in cash used for operating activities for 2017, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.3 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased unbilled revenues, increased receivables, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.


A decrease in discretionary pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


2016 vs. 2015


Cash provided by operating activities for 2016 was $147.5 million, an increase of $6.3 million when compared to the prior year.


MGE Energy's net income increased $4.2 million for 2016 when compared to the prior year.


In both 2016 and 2015, MGE received a $10.0 million refund from the IRS for the 2015 and 2014 tax years, respectively. Excluding the 2016 and 2015 refund, MGE Energy's federal and state taxes paid decreased $1.8 million during 2016, when compared to the prior year.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.3 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased unbilled revenues, increased receivables, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.



38




Working capital accounts (excluding prepaid and accrued taxes) resulted in $5.0 million in cash provided by operating activities for 2015, primarily due to decreased receivables and decreased unbilled revenues, partially offset by increased inventories, decreased accounts payable, and decreased current liabilities. The decrease in current liabilities includes a fuel credit of $2.6 million that customers received on their bill in the period September through December 2015 related to the 2015 fuel savings and $11.4 million of deferred fuel related cost savings that was returned to customers.


MGE


2017 vs. 2016


Cash provided by operating activities for 2017 was $125.7 million, a decrease of $20.8 million when compared to the prior year.


Net income increased $18.5 million for 2017, when compared to the prior year primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.


In 2016, MGE received a $10.0 million refund from the IRS for the 2015 tax year. Excluding the 2016 refund, MGE's federal and state taxes paid to MGE Energy increased $5.2 million during 2017, when compared to the prior year.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $12.7 million in cash used for operating activities for 2017, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.4 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased receivables, increased unbilled revenues, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.


A decrease in discretionary pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


In 2016, MGE received dividends of $5.0 million from ATC. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy.


2016 vs. 2015


Cash provided by operating activities for 2016 was $146.5 million, a decrease of $2.0 million when compared to the prior year.


Net income increased $3.1 million for 2016, when compared to the prior year.


In both 2016 and 2015, MGE received a $10.0 million refund from the IRS for the 2015 and 2014 tax years, respectively. Excluding the 2016 and 2015 refund, MGE's federal and state taxes paid to MGE Energy increased $4.2 million during 2016, when compared to the prior year.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $7.4 million in cash provided by operating activities for 2016, primarily due to increased accounts payable, decreased inventories, and decreased receivable margin, partially offset by increased receivables, increased unbilled revenues, and decreased current liabilities. The decrease in current liabilities includes a fuel credit, approved in August 2015, of $8.3 million that customers received on their bill throughout 2016 and a one-time fuel credit, approved in July 2016, of $15.5 million that customers received on their bill in September 2016.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.0 million in cash provided by operating activities for 2015, primarily due to decreased receivables and decreased unbilled revenues, partially offset by increased gas inventories, decreased accounts payable, and decreased other current liabilities. The decrease in current liabilities includes a fuel credit of $2.6 million that customers received on their bill in the period September through December 2015 related to the 2015 fuel savings and $11.4 million of deferred fuel related cost savings that was returned to customers.



39




Capital Requirements and Investing Activities


MGE Energy


2017 vs. 2016


MGE Energy's cash used for investing activities increased $29.5 million for 2017 when compared to the prior year.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on electric assets.


Capital contributions in ATC and other investments increased $8.1 million for 2017 when compared to the prior year.


MGE Energy received $2.8 million in proceeds from the sales of property in 2017.


2016 vs. 2015


MGE Energy's cash used for investing activities increased $13.5 million for 2016 when compared to the prior year.


Capital expenditures for 2016 were $83.7 million. This amount represents an increase of $11.6 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on electric and gas distribution assets.


There was a $1.9 million increase in the capital contributions to investments for 2016 when compared to the prior year.


MGE


2017 vs. 2016


MGE's cash used for investing activities increased $21.0 million for 2017 when compared to the prior year.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on electric assets.


Capital contributions in ATC and other investments decreased $1.6 million in 2017, when compared to the prior year. In December 2016, MGE transferred its ownership interest in ATC to MGE Energy. See Footnote 4 of the Notes to Consolidated Financial Statements in this Report for further details.


MGE received $1.7 million in proceeds from the sales of property in 2017.


2016 vs. 2015


MGE's cash used for investing activities increased $12.7 million for 2016 when compared to the prior year.


Capital expenditures for 2016 were $83.7 million. This amount represents an increase of $11.6 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on electric and gas distribution assets.


There was a $0.9 million increase in the capital contributions to investments for 2016 when compared to the prior year.




40




Capital expenditures


The following table shows MGE Energy's actual capital expenditures for both 2017 and 2016, forecasted capital expenditures for 2018, and annual average forecasted capital expenditures for the years 2019 through 2021:


 

 

Actual

 

Forecasted

(In thousands)

 

 

 

 

 

 

 

(Annual Average)

For the years ended December 31,

 

2016

 

2017

 

2018

 

2019-2021

Electric

$

50,699

$

77,353

$

185,616

$

77,556

Gas

 

29,136

 

26,847

 

38,013

 

36,031

    Utility plant total

 

79,835

 

104,200

 

223,629

 

113,587

Nonregulated

 

3,824

 

3,931

 

7,481

 

3,124

    MGE Energy total

$

83,659

$

108,131

$

231,110

$

116,711


The Saratoga Wind Farm will be constructed in 2018. This project accounts for $108 million of the forecasted capital expenditures for 2018 and is expected to be financed through internally generated cash, short-term debt, and issuance of long-term debt.


The forecasted capital expenditures are based upon management's assumptions with respect to future events, including the timing and amount of expenditures associated with compliance with environmental compliance initiatives, load growth, and the timing and adequacy of rate recovery. Actual events may differ materially from those assumptions and result in material changes to those forecasted amounts.


MGE Energy used funds received as dividend payments from MGE Power West Campus and MGE Power Elm Road, internally generated cash, and long-term and short-term external financing to meet its 2017 capital requirements and cash obligations, including dividend payments. External financing included short-term financing under existing lines of credit.


Financing Activities


MGE Energy


2017 vs. 2016


Cash used for MGE Energy's financing activities was $4.6 million for 2017, compared to $46.1 million of cash used for 2016.


For 2017, cash dividends paid were $43.7 million compared to $41.8 million in the prior year. This increase was a result of a higher dividend per share ($1.26 vs. $1.21).


During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2017, short-term debt borrowings were $4.0 million. There were no short-term borrowings for 2016.


2016 vs. 2015


Cash used for MGE Energy's financing activities was $46.1 million for 2016, compared to $52.2 million of cash used for 2015.


For 2016, cash dividends paid were $41.8 million compared to $40.0 million in the prior year. This increase was a result of a higher dividend per share ($1.21 vs. $1.16).


For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2016.


MGE


2017 vs. 2016


During 2017, cash used for MGE's financing activities was $23.9 million, compared to $76.8 million of cash used for MGE's financing activities in the prior year.



41




Cash dividends paid from MGE to MGE Energy were $45.0 million for 2017, compared to $50.0 million in the prior year.


Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $18.0 million for 2017, compared to $24.1 million in the prior year.


For 2016, equity contributions received from noncontrolling interest, which represent contributions by MGE Energy to MGE Transco, were $1.6 million. There were no equity contributions received from noncontrolling interest, which represent contributions to MGE Transco for 2017, as MGE Transco was a wholly-owned subsidiary of MGE Energy during 2017.


During 2017, MGE issued $70.0 million of senior unsecured notes, which was used to refinance $30.0 million of medium-term notes and assist with financing additional capital expenditures.


For 2017, short-term borrowings were $4.0 million. There were no short-term borrowings for 2016.


2016 vs. 2015


During 2016, cash used for MGE's financing activities was $76.8 million, compared to $53.3 million of cash used for MGE's financing activities in the prior year.


Cash dividends paid from MGE to MGE Energy were $50.0 million for 2016, compared to $30.0 million in the prior year.


Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $24.1 million for 2016, compared to $14.7 million in the prior year.


For 2015, net short-term debt repayments were $7.0 million. There were no short-term debt repayments for 2016.


Dividend Restrictions


Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order restricts any dividends, above the PSCW authorized amount of $70.8 million, that MGE may pay MGE Energy if its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. MGE's thirteen month rolling average common equity ratio at December 31, 2017, is 58.5%, as determined under the calculation used in the rate proceeding. This restriction did not impact MGE's payment of dividends in 2017. Cash dividends of $45.0 million and $50.0 million were paid by MGE to MGE Energy in 2017 and 2016, respectively. In 2016, MGE also transferred its ownership interest in MGE Transco to MGE Energy in the form of a dividend in kind of $15.8 million. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.


MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2017, approximately $343.3 million was available for the payment of dividends under this covenant.


Credit Facilities


At December 31, 2017, MGE Energy and MGE had the following aggregate bank commitments and available capacity under their credit agreements:


Borrower

 

Aggregate Bank Commitments

 

Outstanding Commercial Paper

 

Outstanding Borrowings

 

Available Capacity

 

Expiration Date

 

 

(Dollars in millions)

 

 

MGE Energy

$

50.0

$

-

$

-

$

50.0

 

June 1, 2020

MGE

$

100.0

$

4.0

$

-

$

96.0

 

June 1, 2020




42




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


The credit agreements require the borrower to maintain a ratio of consolidated debt to consolidated total capitalization not to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities, revenues, and expenses included in MGE's financial statements as a result of the consolidation of VIEs, such as MGE Power Elm Road and MGE Power West Campus. At December 31, 2017, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE, as calculated under the credit agreements' covenant, were 35.4% and 40.1%, respectively. See Footnote 10 of the Notes to Consolidated Financial Statements for additional information regarding the credit facilities.


Capitalization Ratios


MGE Energy's capitalization ratios were as follows:


 

 

MGE Energy

 

 

 

2017

 

2016

 

 

Common shareholders' equity

64.6 %

 

65.2 %

 

 

Long-term debt*

35.1 %

 

34.8 %

 

 

Short-term debt

0.3 %

 

-%

 

 

*Includes the current portion of long-term debt.

 


Credit Ratings


MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is accessing the capital markets.


None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of credit ratings, although a downgrading of MGE's credit ratings could increase fees and interest charges under both MGE Energy's and MGE's credit agreements.




43




Contractual Obligations and Commercial Commitments for MGE Energy and MGE


MGE Energy's and MGE's contractual obligations as of December 31, 2017, representing cash obligations that are considered to be firm commitments, are as follows:


 

 

 

 

Payment Due Within:

 

Due After

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

MGE Energy

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

426,883

$

24,452

$

24,212

$

9,660

$

368,559

Short-term debt(b)

 

4,000

 

4,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

3,130

 

538

 

1,079

 

816

 

697

Interest expense(d)

 

300,796

 

19,467

 

36,665

 

34,692

 

209,972

Operating leases(e)

 

10,521

 

1,205

 

1,053

 

552

 

7,711

Purchase obligations(f)

 

474,886

 

128,064

 

129,913

 

97,290

 

119,619

Other obligations(g)

 

25,289

 

16,801

 

1,873

 

1,413

 

5,202

Total MGE Energy contractual obligations

$

1,245,505

$

194,527

$

194,795

$

144,423

$

711,760

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

426,883

$

24,452

$

24,212

$

9,660

$

368,559

Short-term debt(b)

 

4,000

 

4,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

3,130

 

538

 

1,079

 

816

 

697

Interest expense(d)

 

300,796

 

19,467

 

36,665

 

34,692

 

209,972

Operating leases(e)

 

10,521

 

1,205

 

1,053

 

552

 

7,711

Purchase obligations(f)

 

474,886

 

128,064

 

129,913

 

97,290

 

119,619

Other obligations(g)

 

13,780

 

5,292

 

1,873

 

1,413

 

5,202

Total MGE contractual obligations

$

1,233,996

$

183,018

$

194,795

$

144,423

$

711,760


(a)

Long-term debt consisting of secured first mortgage bonds, unsecured medium-term notes, and Industrial Development Revenue Bonds issued by MGE, and private placement debt issued by MGE, MGE Power Elm Road, and MGE Power West Campus.

(b)

Short-term debt consisting of commercial paper for MGE. See Footnote 10 of the Notes to Consolidated Financial Statements.

(c)

Chattel paper agreements. See Footnote 1.g. of the Notes to Consolidated Financial Statements.

(d)

Amount represents interest expense on long-term debt. See Footnote 9 of the Notes to Consolidated Financial Statements for further discussion of the long-term debt outstanding at December 31, 2017.

(e)

Operating leases. See Footnote 17.b. of the Notes to Consolidated Financial Statements.

(f)

Purchase obligations for MGE Energy and MGE consist primarily of the purchase of electricity and natural gas, electric transmission, natural gas storage capacity, natural gas pipeline transportation, and the purchase and transport of coal. See Footnote 17.a. of the Notes to Consolidated Financial Statements.

(g)

Other obligations are primarily related to investment commitments, easements, environmental projects, fuel credit, and uncertain tax positions.


The above amounts do not include any contributions for MGE's pension and postretirement plans. MGE does not expect to need to make any required contributions to the qualified plans for 2018 or 2019. The contributions for years after 2019 are not yet currently estimated. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions to the plans.


The above amounts do not include future capital calls by ATC and ATC Holdco. In January 2018, MGE Transco made a $0.7 million capital contribution to ATC, and MGEE Transco made a $0.1 million capital contribution to ATC Holdco. The amount and timing of future capital calls to these entities is uncertain and primarily dependent on the operations and expansion of ATC and ATC Holdco.


MGE Energy's and MGE's commercial commitments as of December 31, 2017, representing commitments triggered by future events and including financing arrangements to secure obligations of MGE Energy and MGE, are as follows:


 

 

 

 

 

Expiration Within:

 

Due After

 

 

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

 

Available lines of credit(a)

$

150,000

$

-

$

150,000

$

-

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

 

Available lines of credit(b)

$

100,000

$

-

$

100,000

$

-

$

-

 


(a)

Amount includes the facilities discussed in (b) plus an additional line of credit. MGE Energy has available at any time a $50 million committed revolving credit agreement, expiring in June 2020. At December 31, 2017, MGE Energy had no borrowings outstanding under this credit facility.


(b)

Amount includes two committed revolving credit agreements totaling $100 million expiring in June 2020. These credit facilities are used to support commercial paper issuances. At December 31, 2017, MGE had no borrowings outstanding under these facilities. On that date, MGE had $4.0 million of commercial paper outstanding.




44




Other Matters


ATC


In 2013, several parties filed a complaint with the FERC seeking to reduce the base return on equity (ROE) used by MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint alleged that the MISO ROE should not exceed 9.15%, the equity components of hypothetical capital structures should be restricted to 50%, and the relevant incentive ROE adders should be discontinued. At the time, MISO's base ROE was 12.38% and ATC's base ROE was 12.2%. In February 2015, a second complaint was filed for the period February 2015 through May 2015 with the FERC requesting a reduction in the base ROE used by MISO transmission owners, including ATC, to 8.67%, with a refund effective date retroactive to the filing date of the complaint. In June 2016, an administrative law judge issued an initial decision for the second complaint that would reduce the transmission owner's base ROE to 9.7%. The initial decision will be reviewed by FERC. It is anticipated FERC will issue an order on this issue in the beginning of 2018. On September 28, 2016, FERC issued an order on the first complaint, for the period November 2013 through February 2015, reducing the base ROE to 10.32%. This base ROE also became effective September 28, 2016, and will apply to future periods until FERC rules in the second complaint, at which time the base ROE ordered by FERC in the second complaint will prospectively become the authorized base ROE. Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future.


In January 2015, FERC accepted the transmission owner's request for a 50 basis-point incentive ROE adder for participating in MISO. The adder became effective January 6, 2015.


FERC staff has challenged certain aspects of ATC's implementation of its formula rate tariff. Although ATC disagrees with FERC staff's interpretation of the tariff, ATC has determined that it is probable that FERC will require a refund.


Our share of ATC's earnings reflects a pre-tax adjustment of $0.5 million and $1.9 million for 2017 and 2016, respectively, recorded by ATC for these matters representing its estimate of its refund liability. We derived approximately 6.2% and 6.8% of our net income for 2017 and 2016, respectively, from our investment in ATC.


Critical Accounting Estimates - MGE Energy and MGE


The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to unbilled revenues, allowance for doubtful accounts, pension obligations, income taxes, derivatives, and regulatory assets and liabilities. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Those values may differ from these estimates under different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments used in the preparation of our consolidated financial statements.


Unbilled Revenues


Revenues from the sale of electricity and gas to customers are recorded when electricity/gas is delivered to those customers. The quantity of those sales is measured by customers' meters. Due to the large volume of those meters, it is impractical to read all of them at month end. Meters are read on a systematic basis throughout the month based on established meter-reading schedules. Consequently, at the end of any month, there exists a quantity of electricity and gas that has been delivered to customers but has not been captured by the meter readings. As a result, management must estimate revenue related to electricity and gas delivered to customers between their meter-read dates and the end of the period. These estimates include:


·

The amount of electricity expected to be lost in the process of its transmission and distribution to customers (line loss) and the amount of electricity actually delivered to customers.


·

The amount of gas expected to be lost in the process of its distribution to customers and the amount of gas actually delivered to customers.


·

The mix of sales between customer rate classes, which is based upon historical utilization assumptions.




45




MGE monitors the reasonableness of the unbilled revenue estimate through the review of ratios such as unbilled electric consumption compared to billed electric sales. In the case of unbilled gas, the estimated unbilled consumption is compared to various other statistics, including percent of gas available for sale, change in unbilled month to month and change in unbilled compared to the prior year in order to confirm its reasonableness.


Allowance for Doubtful Accounts


MGE maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. It determines the allowance based on historical write-off experience, regional economic data, and review of the accounts receivable aging. MGE reviews its allowance for doubtful accounts monthly. Although management believes that the allowance for doubtful accounts is MGE's best estimate of the amount of probable credit losses, if the financial condition of MGE's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.


Pension and Other Postretirement Benefit Plans


MGE provides employees with certain retirement (pension) and postretirement (health care and life insurance) benefits. In order to measure the expense and obligations associated with these benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, the expected return on plan assets set aside to fund these costs, the rate of compensation increase, employee turnover rates, retirement rates, health care trends, mortality rates, and other factors. These accounting estimates bear the risk of change due to the uncertainty attached to the estimate as well as the fact that these estimates are difficult to measure. Different estimates used by us could result in recognizing different amounts of expense over different periods of time. Recovery in rates is expected.


We use third-party specialists to assist us in evaluating our assumptions as well as appropriately measure the costs and obligations associated with these retirement benefits. The discount rate and expected return on plan assets are based primarily on available investment yields and the historical performance of our plan assets. They are critical accounting estimates because they are subject to management's judgment and can materially affect net income.


·

Assumed return on assets. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested (or to be invested) to provide for the benefits included in the projected benefit obligation. For 2017, MGE used an assumed return on assets of 7.40% for pension and 6.80% for other postretirement benefits. In 2018, the pension asset assumption will remain at 7.40%. MGE will increase the postretirement benefit assumption from 6.80% to 6.87% in 2018. The annual expected rate of return is based on projected long-term equity and bond returns, maturities and asset allocations. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $3.5 million, before taxes.


·

Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount rate. MGE uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components for net periodic benefit cost. Holding other assumptions constant, a 0.5% reduction in the discount rate on the obligation balance at December 31, 2017, would increase annual pension and other postretirement cost by approximately $3.2 million, before taxes.


·

Medical trend assumptions. The health care cost trend rate is the assumed rate of increase in per-capita health care charges.


·

Mortality rate assumption. Expected mortality rates are used in the valuation to determine the expected duration of future benefit payments to the plan participants. MGE utilizes mortality tables and projection scales developed by a third party actuary that were updated in 2016.


See Footnote 13 of the Notes to Consolidated Financial Statements for additional discussion of these plans.


Income Tax Provision


MGE Energy's and MGE's income tax provisions, including both current and deferred components, are based on estimates, assumptions, calculations, and interpretation of tax statutes for the current and future years. Determination of current-year federal and state income tax will not be settled for years.




46




Management regularly makes assessments of tax return outcomes relative to financial statement tax provisions and adjusts the tax provisions in the period when facts become final.


Additionally, in determining our current income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our balance sheets. When we maintain deferred tax assets, we assess the likelihood that these assets will be recovered through adjustments to future taxable income. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is recorded for those benefits that do not meet this criterion. We record an allowance reducing the asset to a value we believe will be recoverable based on our expectation of future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets, and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.


On December 22, 2017, President Trump signed the Tax Act into law. The passing of the law significantly lowers MGE's corporate tax rates and triggered a remeasurement of deferred taxes. We have reflected estimates of the impact of the Tax Act in our year-end 2017 financial results; however, those estimates could be affected by, and require subsequent adjustment as a result of, clarity and regulatory guidance that develops around the Tax Act and its implementation during 2018. Furthermore, while regulation allows us to incorporate changes in tax law into the rate-setting process, there will most likely be timing delays before realization of the changes.


Accounting for uncertainty in income taxes applies to all tax positions and requires a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. The threshold is defined for recognizing tax return positions in the financial statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition, derecognition, and measurement is based on management's best judgment given the facts, circumstances and information available at the reporting date.


Accounting for Derivative Instruments


MGE accounts for derivative financial instruments, except those qualifying for the normal purchase normal sale exception, at their fair value on the balance sheet. Fair value is determined using current quoted market prices, except for the PPA, which is valued utilizing an internally-developed pricing model. This model includes observable and unobservable inputs.


MGE received approval from the PSCW to establish a regulatory asset or liability for the deferral of the effects of mark-to-market accounting on contracts related to commodity hedging in MGE's regulated operations.


Regulatory Assets/Liabilities


Regulatory assets represent costs that have been deferred to future periods when it is probable that the regulator will allow future recovery of those costs through rates. MGE bases its assessment of recovery on precedents established by the regulatory body. Regulatory liabilities represent previous collections from customers that are expected to be refunded to customers in future periods. Regulatory assets and regulatory liabilities typically include deferral of energy costs, the normalization of income taxes, the deferral of certain operating expenses, and non-ARO removal costs. The accounting for these regulatory assets and liabilities is in accordance with regulatory accounting standards.


MGE continually assesses whether the regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. This assessment considers factors such as changes in the regulatory environment, recent rate orders to other regulated entities under the same jurisdiction, and the status of any pending or potential deregulation legislation. If future recovery of costs becomes no longer probable, the assets and liabilities would be recognized as current-period revenues or expenses.


Amortization of regulatory assets and liabilities is provided over the recovery or deferral period as allowed in the related regulatory agreement.


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


See Footnote 19 of the Notes to Consolidated Financial Statements for discussion of new accounting pronouncements.




47




Item 7A. Quantitative and Qualitative Disclosures About Market Risk.


MGE Energy and MGE are potentially exposed to market risk associated with interest rates, commodity prices, and equity returns. MGE currently has no exposure to foreign currency risk. MGE manages some risk exposure through risk management policies and the use of derivative instruments. MGE's risk management policy prohibits speculative trading transactions.


Commodity Price Risk


MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE's electric operations burn natural gas in several of its peaking power plants and, in many cases, the cost of purchased power is tied to the cost of natural gas. MGE employs established policies and procedures to reduce the market risks associated with changing commodity prices. MGE's commodity risks are somewhat mitigated by the current ratemaking process in place for recovering electric fuel cost, purchased energy costs, and the cost of natural gas.


MGE's electric fuel costs are subject to fuel rules established by the PSCW. The fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the actual costs in a year outside of the symmetrical cost tolerance band is determined in the following year and is then reflected in future billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs if the actual electric fuel costs fall outside the lower end of the range and is required to defer costs, less any excess revenues, if the actual electric fuel costs exceed the upper end of the range. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. The range is defined by the PSCW and has been modified throughout the years based on market conditions and other relevant factors. Currently, MGE is subject to a plus or minus 2% range. MGE assumes the risks and benefits of variances that are within the cost tolerance band. For 2018, fuel and purchased power costs included in MGE's fuel monitoring level rates are $102.4 million. See Footnote 16 of the Notes to Consolidated Financial Statements for additional information.


MGE recovers the cost of natural gas in its gas utility 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.


MGE also reduces price risk caused by market fluctuations via physical contracts and financial derivative contracts, including futures, swaps, options, forwards, and other contractual commitments. The maximum length of time over which cash flows related to energy commodities can be hedged under applicable PSCW approvals is four years.


MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric utility segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds financial transmission rights (FTRs), which are used to hedge the risk of increased transmission congestion charges. At December 31, 2017, the fair value of these instruments exceeded their cost basis by $0.2 million. Under the PGA clause and electric fuel rules, MGE may include the costs and benefits of the aforementioned fuel price risk management tools in the costs of fuel (natural gas or power). Because these costs/benefits are recoverable, the related unrealized loss/gain has been deferred on the consolidated balance sheets as a regulatory asset/liability.


MGE has also entered into a purchased power agreement that provides MGE with firm capacity and energy that began on June 1, 2012, and ends on May 31, 2022 (the "base term"). The agreement also allows MGE an option to extend the contract after the base term. The agreement is considered 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 December 31, 2017, reflects a loss position of $42.2 million.


Interest Rate Risk


Both MGE Energy and MGE may have short term borrowings at varying interest rates. MGE issues commercial paper for its short-term borrowings, while MGE Energy draws from its current credit facility to meet its short-term borrowing needs. Borrowing levels vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels. MGE Energy and MGE manage interest rate risk by limiting their variable rate exposure and continually monitoring the effects of market changes on interest rates. MGE is not exposed to changes in interest rates on a substantial portion of its long-term debt until that debt matures and is refinanced at market rates. Assuming the current level of variable rate borrowings and assuming a 1% change in the 2017 average interest rate under those borrowings, it is estimated that our 2017 interest expense and net income would have changed less than $0.1 million for both MGE Energy and MGE.



48




Equity Price Risk - Pension-Related Assets


MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various investment managers. Changes in market value of these investments can have an impact on the future expenses related to these liabilities. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $3.5 million, before taxes. MGE's risk of expense and annuity payments, as a result of changes in the market value of the trust funds, is mitigated in part through future rate actions by the PSCW. The value of employee benefit plans trusts' assets have increased in value by approximately 18.36% and 8.36% during the years ended December 31, 2017 and 2016, respectively.


Credit Risk - Counterparty


Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily through its merchant energy business. MGE uses credit policies to manage its credit risk, which include utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as collateral or prepayment arrangements, and using netting agreements.


Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example, fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact on its financial results.


Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses on accrual contracts. As of December 31, 2017, no counterparties have defaulted.


MGE is obligated to provide service to all electric and gas customers within its respective franchised territories. MGE's franchised electric territory includes a 316 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,682 square miles in Wisconsin. Based on results for December 31, 2017, no one customer constituted more than 10% of total operating revenues for MGE Energy and MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.


Cash, cash equivalents, and customer accounts receivable are the financial instruments that potentially subject MGE Energy and MGE to concentrations of credit risk. MGE Energy and MGE place their cash and cash equivalents with high credit-quality financial institutions. MGE has limited concentrations of credit risk from customer accounts receivable because of the large number of customers and relatively strong economy in its service territory.




49




Item 8. Financial Statements and Supplementary Data.


MGE Energy


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in the Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


The effectiveness of MGE Energy's internal control over financial reporting as of December 31, 2017, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


February 23, 2018


MGE


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in the Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


February 23, 2018

 



50




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholders of MGE Energy, Inc.:


Opinions on the Financial Statements and Internal Control over Financial Reporting


We have audited the accompanying consolidated balance sheets of MGE Energy, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, cash flows and common equity for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.


Basis for Opinions


The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.


Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control over Financial Reporting


A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.




51




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 23, 2018


We have served as the Company's auditor since 1993.




52





Report of Independent Registered Public Accounting Firm


To the Board of Directors and Shareholder of Madison Gas and Electric Company:


Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of Madison Gas and Electric Company and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, cash flows and common equity for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.


Basis for Opinion


These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.


Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

February 23, 2018


We have served as the Company's auditor since 1993.




53




MGE Energy, Inc.

Consolidated Statements of Income

(In thousands, except per share amounts)


 

 

For the Years Ended December 31,

 

 

 

2017

 

2016

 

2015

 

Operating Revenues:

 

 

 

 

 

 

 

    Electric revenues

$

414,274

$

410,202

$

420,291

 

    Gas revenues

 

148,825

 

134,543

 

143,737

 

        Total Operating Revenues

 

563,099

 

544,745

 

564,028

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

53,029

 

60,736

 

53,858

 

    Purchased power

 

58,690

 

56,313

 

81,224

 

    Cost of gas sold

 

76,644

 

66,771

 

76,109

 

    Other operations and maintenance

 

173,629

 

167,989

 

164,478

 

    Depreciation and amortization

 

53,077

 

44,646

 

44,225

 

    Other general taxes

 

19,294

 

20,062

 

19,879

 

        Total Operating Expenses

 

434,363

 

416,517

 

439,773

 

Operating Income

 

128,736

 

128,228

 

124,255

 

 

 

 

 

 

 

 

 

Other income, net

 

10,288

 

9,711

 

8,613

 

Interest expense, net

 

(19,324)

 

(19,866)

 

(20,162)

 

    Income before income taxes

 

119,700

 

118,073

 

112,706

 

Income tax provision

 

(22,094)

 

(42,513)

 

(41,363)

 

Net Income

$

97,606

$

75,560

$

71,343

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

(basic and diluted)

$

2.82

$

2.18

$

2.06

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

1.26

$

1.21

$

1.16

 

 

 

 

 

 

 

 

 

Weighted Average Shares Outstanding

 

 

 

 

 

 

 

 (basic and diluted)

 

34,668

 

34,668

 

34,668

 

 

 

 

 

 

 

 

 

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

 


MGE Energy, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)


 

 

For the Years Ended December 31,

 

 

 

2017

 

2016

 

2015

 

Net Income

$

97,606

$

75,560

$

71,343

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

    Unrealized gain (loss) on available-for-sale securities, net of

 

 

 

 

 

 

 

    tax ($(117), $104, and $67)

 

175

 

(155)

 

(101)

 

Comprehensive Income

$

97,781

$

75,405

$

71,242

 

 

 

 

 

 

 

 

 

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

 




54




MGE Energy, Inc.

Consolidated Statements of Cash Flows

(In thousands)


 

 

For the Years Ended December 31,

 

 

2017

 

2016

 

2015

Operating Activities:

 

 

 

 

 

 

    Net income

$

97,606

$

75,560

$

71,343

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

53,077

 

44,646

 

44,225

        Deferred income taxes

 

(4,082)

 

22,421

 

21,927

        Provision for doubtful receivables

 

1,016

 

1,196

 

596

        Employee benefit plan cost

 

831

 

295

 

3,333

        Equity earnings in ATC

 

(10,125)

 

(8,428)

 

(7,728)

        Gain on sale of property

 

(1,547)

 

-

 

-

        Other items

 

748

 

1,426

 

721

    Changes in working capital items:

 

 

 

 

 

 

        Trade and other receivables

 

(4,502)

 

(3,594)

 

4,508

        Inventories

 

(2,568)

 

7,273

 

(2,646)

        Unbilled revenues

 

(1,554)

 

(4,838)

 

6,254

        Prepaid taxes

 

101

 

8,616

 

3,658

        Other current assets

 

(1,275)

 

700

 

978

        Accounts payable

 

(5,290)

 

9,881

 

(3,499)

        Other current liabilities

 

3,948

 

(1,738)

 

(597)

    Dividends from ATC

 

8,803

 

5,854

 

6,645

    Cash contributions to pension and other postretirement plans

 

(11,304)

 

(14,452)

 

(13,676)

    Other noncurrent items, net

 

9,108

 

2,695

 

5,143

            Cash Provided by Operating Activities

 

132,991

 

147,513

 

141,185

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(108,131)

 

(83,659)

 

(72,030)

    Capital contributions to investments

 

(11,081)

 

(2,958)

 

(1,053)

    Proceeds from sale of property

 

2,819

 

-

 

-

    Other

 

32

 

(209)

 

(230)

            Cash Used for Investing Activities

 

(116,361)

 

(86,826)

 

(73,313)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(43,682)

 

(41,775)

 

(40,043)

    Repayment of long-term debt

 

(34,358)

 

(4,267)

 

(4,182)

    Issuance of long-term debt

 

70,000

 

-

 

-

    Proceeds from (repayments of) short-term debt

 

4,000

 

-

 

(7,000)

    Other

 

(597)

 

(70)

 

(1,018)

            Cash Used for Financing Activities

 

(4,637)

 

(46,112)

 

(52,243)

    Change in cash and cash equivalents:

 

11,993

 

14,575

 

15,629

    Cash and cash equivalents at beginning of period

 

95,959

 

81,384

 

65,755

    Cash and cash equivalents at end of period

$

107,952

$

95,959

$

81,384


 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

    Interest paid

$

19,176

$

19,415

$

19,636

    Income taxes paid

$

27,149

$

21,831

$

23,800

    Income taxes received

$

-

$

(10,000)

$

(10,130)

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

16,602

$

16,376

$

3,963

 

 

 

 

 

 

 

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




55




MGE Energy, Inc.

Consolidated Balance Sheets

(In thousands)


 

 

At December 31,

ASSETS

 

2017

 

2016

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

107,952

$

95,959

    Accounts receivable, less reserves of $2,840 and $3,017, respectively

 

42,299

 

39,887

    Other accounts receivable, less reserves of $335 and $426, respectively

 

9,440

 

8,530

    Unbilled revenues

 

31,400

 

29,846

    Materials and supplies, at average cost

 

22,614

 

18,561

    Fuel for electric generation, at average cost

 

8,256

 

9,757

    Stored natural gas, at average cost

 

12,923

 

12,819

    Prepaid taxes

 

26,535

 

26,636

    Regulatory assets - current

 

7,888

 

6,414

    Assets held for sale

 

8,817

 

14,813

    Other current assets

 

12,507

 

12,293

        Total Current Assets

 

290,631

 

275,515

Other long-term receivables

 

4,788

 

5,603

Regulatory assets

 

142,567

 

158,485

Pension and other postretirement benefit asset

 

7,336

 

2,020

Other deferred assets and other

 

731

 

1,088

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,283,313

 

1,245,269

    Construction work in progress

 

58,044

 

36,790

        Total Property, Plant, and Equipment

 

1,341,357

 

1,282,059

Investments

 

67,772

 

76,290

        Total Assets

$

1,855,182

$

1,801,060

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

24,452

$

4,333

    Short-term debt

 

4,000

 

-

    Accounts payable

 

47,645

 

47,799

    Accrued interest and taxes

 

5,602

 

5,495

    Accrued payroll related items

 

12,244

 

11,892

    Regulatory liabilities - current

 

5,633

 

6,910

    Derivative liabilities

 

8,180

 

7,620

    Other current liabilities

 

18,758

 

19,456

        Total Current Liabilities

 

126,514

 

103,505

Other Credits:

 

 

 

 

    Deferred income taxes

 

225,130

 

383,813

    Investment tax credit - deferred

 

918

 

947

    Regulatory liabilities

 

154,153

 

22,173

    Accrued pension and other postretirement benefits

 

69,088

 

74,347

    Derivative liabilities

 

33,990

 

42,970

    Other deferred liabilities and other

 

69,041

 

66,426

        Total Other Credits

 

552,320

 

590,676

Capitalization:

 

 

 

 

    Common shareholders' equity:

 

 

 

 

        Common Stock - $1 par value - 75,000 shares authorized;

 

 

 

 

        34,668 shares issued and outstanding

 

34,668

 

34,668

        Additional paid-in capital

 

316,268

 

316,268

        Retained earnings

 

426,874

 

372,950

        Accumulated other comprehensive income, net of tax

 

377

 

202

        Total Common Shareholders' Equity

 

778,187

 

724,088

    Long-term debt

 

398,161

 

382,791

        Total Capitalization

 

1,176,348

 

1,106,879

Commitments and contingencies (see Footnote 17)

 

 

 

 

        Total Liabilities and Capitalization

$

1,855,182

$

1,801,060

 

 

 

 

 

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




56




MGE Energy, Inc.

Consolidated Statements of Common Equity

(In thousands, except per share amounts)


 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

Income/(Loss)

 

Total

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2014

34,668

$

34,668

$

316,268

$

308,007

$

458

$

659,401

 

 

Cumulative effect of new accounting principle

 

 

 

 

 

 

(142)

 

 

 

(142)

 

 

Beginning balance - Adjusted

 

 

 

 

 

 

307,865

 

 

 

659,259

 

 

Net income

 

 

 

 

 

 

71,343

 

 

 

71,343

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(101)

 

(101)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.16 per share)

 

 

 

 

 

 

(40,043)

 

 

 

(40,043)

 

 

Ending balance - December 31, 2015

34,668

$

34,668

$

316,268

$

339,165

$

357

$

690,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

75,560

 

 

 

75,560

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

(155)

 

(155)

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.21 per share)

 

 

 

 

 

 

(41,775)

 

 

 

(41,775)

 

 

Ending balance - December 31, 2016

34,668

$

34,668

$

316,268

$

372,950

$

202

$

724,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

97,606

 

 

 

97,606

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

175

 

175

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.26 per share)

 

 

 

 

 

 

(43,682)

 

 

 

(43,682)

 

 

Ending balance - December 31, 2017

34,668

$

34,668

$

316,268

$

426,874

$

377

$

778,187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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