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, 2018


[ ] 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 check mark if the registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.


MGE Energy, Inc.

Yes [X] No [   ]

Madison Gas and Electric Company

Yes [X] No [   ]




1




Indicate by check mark if the registrants are 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]


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 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 (§229.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:


 

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

MGE Energy, Inc.

X

 

 

 

 

Madison Gas and Electric Company

 

 

X

 

 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2018, was as follows:


MGE Energy, Inc.

$2,180,572,457

Madison Gas and Electric Company

$0


The number of shares outstanding of each registrant's common stock as of February 1, 2019, 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 before April 30, 2019, 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.

14

Item 1B. Unresolved Staff Comments.

20

Item 2. Properties.

21

Item 3. Legal Proceedings.

22

Item 4. Mine Safety Disclosures.

22

PART II.

23

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

23

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

Item 8. Financial Statements and Supplementary Data.

50

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

107

Item 9A. Controls and Procedures.

107

Item 9B. Other Information.

107

PART III.

108

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

108

Item 11. Executive Compensation.

108

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

108

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

108

Item 14. Principal Accounting Fees and Services.

109

PART IV.

110

Item 15. Exhibits and Financial Statement Schedules.

110

Item 16. Form 10-K Summary.

112

Signatures - MGE Energy, Inc.

117

Signatures - Madison Gas and Electric Company

118





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)

North Mendota

North Mendota Energy & Technology Park, LLC

 

 

Other Defined Terms:

 

 

 

ACE

Affordable Clean Energy

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

BSER

Best System of Emissions Reductions

BTA

Best Technology Available

CAA

Clean Air Act

CAVR

Clean Air Visibility Rule

CCR

Coal Combustion Residual

CNG

Compressed Natural Gas

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

EEI

Edison Electric Institute

EGUs

Electric Generating Units

electric margin

Electric revenues less fuel for electric generation and purchase power costs, a non-GAAP measure

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

Forward Wind

Forward Wind Energy Center

FTR

Financial Transmission Rights



5





GAAP

Generally Accepted Accounting Principles

gas margin

Gas revenues less cost of gas sold, a non-GAAP measure

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

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

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

Saratoga

Saratoga Wind Farm

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, North Mendota, 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 264 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.


As of December 31, 2018, MGE supplied electric service to approximately 153,000 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 2018, 2017, and 2016 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2018

 

2017

 

2016

 

 

Residential

 

35.4%

 

33.5%

 

33.9%

 

 

Commercial

 

52.3%

 

53.2%

 

52.9%

 

 

Industrial

 

3.6%

 

4.0%

 

4.4%

 

 

Public authorities (including the UW)

 

8.7%

 

9.3%

 

8.8%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 



7




Electric operations accounted for approximately 71.8%, 73.6%, and 75.2% of MGE's total 2018, 2017, and 2016 regulated revenues, respectively.


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. MGE's current fuel mix for generation will fluctuate from year-to-year due to fuel pricing in the market, generating unit availability, weather, and customer demand. MGE has a responsibility to its customers to dispatch the lowest cost generation available pursuant to regulatory requirements.


MGE's Energy 2030 framework details our plan for growth in generation for renewables. This growth will continue as legacy fossil fuel-fired generation assets are retired and replace with renewables, such as wind and solar assets. The transition or displacement of coal-fired resources is ongoing and active. Currently two utility-scale solar projects are awaiting regulatory approval, totaling approximately 100 MW of MGE's combined ownership share.


MGE's carbon intensity is expected to decrease as our use of coal decreases over time, due in part to our investments in cost-effective, efficient renewables like the Saratoga Wind farm, which is expected to come online in 2019, and the purchase of the Forward Wind farm in 2018.




8




During 2018, 2017, and 2016, MGE's electric energy delivery requirements were satisfied from the following fuel sources:

 

 

 

 

Year Ended December 31,

 

 

 

 

2018

 

2017

 

2016

 

 

Coal

 

52.3%

 

52.7%

 

48.3%

 

 

Natural gas(a)

 

13.8%

 

11.3%

 

18.6%

 

 

Renewable sources(b)

 

10.5%

 

12.4%

 

10.8%

 

 

Purchased power

 

23.4%

 

23.6%

 

22.3%

 

 

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.


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 as of December 31, 2018, with unaffiliated parties for the next five years.


 

(Megawatts)

 

2019

 

2020

 

2021

 

2022

 

2023

 

 

Purchase power commitments

83

 

83

 

83

 

33

 

30

 


Gas Utility Operations


MGE transports and distributes natural gas in a service area covering 1,684 square miles in seven south-central Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.


As of December 31, 2018, MGE supplied natural gas service to approximately 161,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 25 villages; and all or parts of 49 townships. Of the total number of customers, approximately 90% were residential and 10% were commercial or industrial. Gas revenues for 2018, 2017, and 2016 were comprised of the following:


 

 

Year Ended December 31,

 

 

 

2018

 

2017

 

2016

 

 

Residential

59.4%

 

59.6%

 

60.2%

 

 

Commercial

35.8%

 

35.8%

 

34.9%

 

 

Industrial

1.6%

 

1.3%

 

1.1%

 

 

Transportation service and other

3.2%

 

3.3%

 

3.8%

 

 

Total

100.0%

 

100.0%

 

100.0%

 


Gas operations accounted for approximately 28.2%, 26.4%, and 24.8% of MGE's total 2018, 2017, and 2016 regulated revenues, respectively.


MGE can curtail gas deliveries to its interruptible customers. Approximately 3% of retail gas deliveries in 2018 and 2016 and approximately 4% in 2017 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



9




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 5,934,489 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.


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. As of December 31, 2018, 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. As of December 31, 2018, 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, no later than 2023. The operators of the 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.




10




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.


The WCCF, Blount, and Columbia plants are considered existing plants under this rule. The WCCF facility already employs a system that meets the Section 316(b) rule. The 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 the Columbia plant. The operator of the Columbia plant is in the process of a WPDES permit renewal. The draft permit directs the Columbia operator to conduct similar studies on their intake structures. The study requirements will not be known until the permit is final. Future BTA requirements at Blount and Columbia will be based on the results of these required intake studies and will be specified in the next permits issued in 2023 or later. MGE expects that the Section 316(b) rule will not have a material effect on its existing plants.


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 May 2018, the EPA issued a final rule which designated the northeast portion of Milwaukee County as being in nonattainment with Ozone National Ambient Air Quality Standards (NAAQS). The Elm Road Units are located in Milwaukee County, outside the designated nonattainment area. In August 2018, several environmental groups, the City of Chicago, and the State of Illinois filed federal lawsuits challenging several of the EPA's attainment designation decisions, including the EPA's partial Milwaukee County designation as being too narrow and not sufficiently protective. MGE is monitoring the outcome of this lawsuit and how it may affect the Elm Road Units in Milwaukee County. See Footnote 17 of the Notes to Consolidated Financial Statements in this Report for additional information.


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

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


In October 2016, the EPA finalized rulemaking for an update to CSAPR that incorporated 2008 Ozone NAAQS standards into the rule (the original CSAPR is 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 has met our CSAPR obligations in 2017 and 2018 through a combination of reduced emissions through pollution control (e.g. SCR installation at Columbia), as well as owned, received, and purchased allowances. There remains uncertainty around CSAPR due to legal challenges, however, MGE expects that we will meet ongoing CSAPR obligations for the foreseeable future. MGE will continue to monitor developments and litigations to this rule.




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Clean Air Visibility Rule (CAVR)

Columbia is subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's CAVR, which may require pollution control retrofits. Columbia's existing pollution control upgrades, and the EPA's stance that compliance with the CSAPR equals compliance with BART, should mean that Columbia will not need to do additional work to meet BART requirements. At this time, however, the BART regulatory obligations, compliance strategies, and costs remain uncertain in Wisconsin due to the continued legal challenges surrounding CSAPR and CAVR. MGE will continue to monitor developments to this rule.


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.


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 February 2016, the U.S. Supreme Court stayed implementation of the CPP which remains in effect. In October 2017, the EPA proposed to rescind the CPP.


In August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule which would replace the CPP, if successfully implemented. The ACE proposal directs states to submit plans to the EPA for approval that implement standards of performance (called Best System of Emissions Reductions, or BSER) for individual EGUs over 25 MW. ACE defines BSER as on-site, heat-rate efficiency improvements, whereas the CPP defines BSERs using carbon

dioxide emission performance rates. Simple cycle units such as the smaller combustion units, and combined cycle units such as the WCCF are exempt from the proposed rule. Under the ACE proposal, if a state fails to prepare a plan, or its plan is not approved by the EPA, a federal implementation plan will be issued for that state. The proposed ACE as it is currently written has the potential to impact Blount, Columbia, and the Elm Road Units.


Given the pending CPP legal proceedings, and the proposed ACE rule, the nature and timing of any final requirements is subject to uncertainty. MGE is unable to determine with any certainty the impact of the CPP and proposed ACE rule on our operations. If an ACE 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 the proposed ACE rule, the CPP rule, and related litigation.


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.




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Columbia and the Elm Road Units are subject to this rule. The Elm Road Units' operator has indicated that cost to comply with this rule will not be significant. 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 August 2018, the Court of Appeals for the D.C. Circuit vacated parts of the CCR for not being sufficiently protective of the environment. It is unclear how the EPA will respond to that decision. MGE will continue to monitor potential rule modifications to assess potential impacts on our operations.


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 was approved by the PSCW, which was placed in service in 2018.


Employees


As of December 31, 2018, MGE had 706 employees. MGE employs 223 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 84 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. These collective bargaining agreements expire on April 30, 2023 and May 31, 2023, respectively. 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, 2023.


Financial Information About Segments


See Footnote 21 of the Notes to the Consolidated Financial Statements in this Report for financial information relating to MGE Energy's and MGE's business segments.




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Executive Officers of the Registrants


As of December 31, 2018, the executive officers of the registrants were as follows:


Executive

Title

Effective

Date

Service

Years as

an Officer

Jeffrey M. Keebler(a)

Chairman of the Board, President, and Chief Executive Officer

10/01/2018

7

Age: 47

President and Chief Executive Officer

Senior Vice President – Energy Supply and Planning

03/01/2017

07/23/2015


 

Assistant VP – Energy Supply and Customer Service

01/01/2012

 

 

 

 

 

Craig A. Fenrick(b)(c)

Executive Vice President – Energy Operations

03/01/2017

12

Age: 59

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

24

Age: 60

Senior Vice President – Marketing and Communications

02/01/2000

 

 

 

 

 

Jeffrey C. Newman(a)

Executive Vice President, Chief Financial Officer, Secretary,

03/01/2017

21

Age: 56

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: 45

Vice President and General Counsel

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

11/02/2015

06/11 – 10/15

3


Note: Ages, years of service, and positions as of December 31, 2018.


(a)

Executive officer of MGE Energy and MGE.

(b)

Executive officer of MGE.

(c)

Expected to retire April 30, 2019.


Item 1A. Risk Factors.


MGE Energy and our subsidiaries, including MGE, operate in a market environment that involves significant risks, many of which are beyond our control. The following risk factors may adversely affect our results of operations, cash flows and market price for our publicly traded securities. While MGE Energy and MGE believe we have identified and discussed below the key risk factors affecting our business, additional unknown risks and uncertainties may adversely affect our performance or financial condition in the future.


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. The PSCW regulates the following aspects of MGE's business: 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 how we do business, our ability to undertake specified actions since pre-approval or authorization may be required for projects, the costs of operations, and the rates charged to recover such costs. Our ability to attract capital also depends, 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



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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, we have 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 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 as a current period expense and could materially and adversely impact 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.


MGE Energy's 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. These include: 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.


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.




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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 the impact of the Tax Act in our 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. 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. 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 systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.


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, a reduction 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 rooftop 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.




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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, recessionary economic conditions generally have an adverse impact on 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 our 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 fulfill the underlying obligation at higher prices. We may also be forced to reduce generation at our coal units and replace this 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,


·

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 place over prolonged periods or may be unsuccessful. We may also be unable to make the necessary improvements to our operational system, causing service interruptions. Furthermore, our facilities are interconnected with third-party transmission providers. Damage to or failures of these providers' equipment or facilities is out of MGE's control but could 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.




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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 and electric distribution are 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.


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


An aging workforce and the 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 time required for replacement employees to develop necessary skills. 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 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.




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


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, oil, and environmental allowances.


We face commodity price risk exposure with respect to the purchase of natural gas, electricity, coal, oil, and environmental allowances. We also face risk through our use of derivatives such as futures, forwards, and swaps, to manage our 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 and are a key assumption in the determination of the costs and funding of our defined benefit pension plans. Changes in rates 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.


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. Our subsidiaries have financial obligations that must be satisfied before funding us. These obligations include debt service and obligations to trade creditors, among others. Our subsidiaries are also subject to contractual and regulatory restrictions on the payment of dividends.




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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 economic conditions changes locally and in the broader economy. These conditions include 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.




20




Item 2. Properties.


Electric Generation


Net summer rated capacity in service as of December 31, 2018, 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

 

219(b)(c)

 

2

   Blount

 

Madison, WI

 

1957 & 1961

 

Gas

 

103(g)

 

2

   WCCF

 

Madison, WI

 

2005

 

Gas/oil

 

126(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(f)

 

54

Wind turbines

 

Townships of Lincoln

 

 

 

 

 

 

 

 

 

 

and Red River, WI

 

1999

 

Wind

 

1(f)(g)

 

17

 

 

Township of

 

 

 

 

 

 

 

 

 

  

Brookfield, IA

 

2008

 

Wind

 

4(f)(h)

 

18

 

 

Counties of Dodge

 

 

 

 

 

 

 

 

 

 

and Fond du Lac, WI

 

2008(i)

 

Wind

 

2(i)

 

86

                 Total

 

 

 

 

  

 

 

757

 

 


(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 Units" below.

(f)

These facilities are owned by MGE.

(g)

Nameplate capacity rating is 11 MW.

(h)

Nameplate capacity rating is 30 MW.

(i)

Facility is jointly owned with WPL and WPSC. Power from this facility is shared in proportion to each owner's ownership interest. Nameplate capacity rating of the MGE-owned portion is 16.5 MW. Commercial operation date of facility is 2008; MGE purchased its ownership interest in 2018.


Columbia


MGE and two other utilities jointly own Columbia, a coal-fired generating facility consisting of two 556 MW units, which, as of December 31, 2018, accounted for 29% of MGE's net summer rated capacity. Power from this facility is shared in proportion to each owner's ownership interest. As of December 31, 2018, MGE had a 19.4% ownership interest in Columbia. The other owners are WPL, which operates Columbia, and WPSC. The Columbia units burn low-sulfur sub-bituminous coal obtained from the Powder River Basin coal fields located in Wyoming. The coal inventory supply for the Columbia units decreased from approximately 61 days as of December 31, 2017, to approximately 46 days as of December 31, 2018. 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, as of December 31, 2018, accounted 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 sub-bituminous coal from the Powder River Basin in Wyoming. MGE's share of the coal inventory supply for the Elm Road Units increased from approximately 48 days as of December 31, 2017, to approximately 56 days as of December 31, 2018.


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.



21




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


As of December 31, 2018, MGE owned 865 miles of overhead electric distribution line and 1,224 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 2,900 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, 2018, there were $1.2 million of first mortgage bonds outstanding. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report 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 $57.3 million of senior secured notes issued by MGE Power Elm Road. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report 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 $41.6 million of senior secured notes issued by MGE Power West Campus. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report 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 in this Report for a description of several environmental proceedings involving MGE. See Footnote 17.d. of the Notes to Consolidated Financial Statements in this Report for a description of other legal matters.


Item 4. Mine Safety Disclosures.


MGE Energy and MGE


Not applicable.


22




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 January 25, 2019, there were approximately 37,843 shareholders of record. For additional information regarding dividends and dividend restrictions, see Footnote 9 of the Notes to the Consolidated Financial Statements in this Report.


MGE


As of January 25, 2019, 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.


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(a)

 

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

 

 

October 1-31, 2018

 

10,111

$

63.86

 

-

 

-

 

 

November 1-30, 2018

 

6,467

 

62.92

 

-

 

-

 

 

December 1-31, 2018

 

44,048

 

68.12

 

-

 

-

 

 

Total

 

60,626

$

66.85

 

-

 

-

 


(a)

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 the transfer agent's 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 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 2013 through 2018. 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 12/31/2013 with dividends reinvested)


[f20181231_10k002.gif]


Value of Investment as of December 31,


 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

 

MGEE

$

1,000

$

1,219

$

1,275

$

1,835

$

1,808

$

1,756

 

 

Russell 2000

 

1,000

 

1,049

 

1,003

 

1,216

 

1,394

 

1,241

 

 

EEI Index

 

1,000

 

1,289

 

1,239

 

1,455

 

1,625

 

1,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




24




Item 6. Selected Financial Data.


MGE Energy, Inc.

(In thousands, except per share amounts)


 

 

For the Years Ended December 31,

 

 

2018

 

2017

 

2016

 

2015

 

2014

Summary of Operations

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

    Electric

$

402,001

$

414,274

$

410,202

$

420,291

$

398,132

    Gas

 

157,767

 

148,825

 

134,543

 

143,737

 

221,720

        Total operating revenues

 

559,768

 

563,099

 

544,745

 

564,028

 

619,852

Operating expenses(a)

 

426,151

 

419,180

 

400,801

 

423,159

 

468,326

Other general taxes

 

19,410

 

19,294

 

20,062

 

19,879

 

19,652

Operating income

 

114,207

 

124,625

 

123,882

 

120,990

 

131,874

Other income, net(a)

 

17,055

 

14,399

 

14,057

 

11,878

 

16,303

Interest expense, net

 

(19,609)

 

(19,324)

 

(19,866)

 

(20,162)

 

(19,673)

    Income before taxes

 

111,653

 

119,700

 

118,073

 

112,706

 

128,504

Income tax provision(b)

 

(27,434)

 

(22,094)

 

(42,513)

 

(41,363)

 

(48,185)

    Net income

$

84,219

$

97,606

$

75,560

$

71,343

$

80,319

Average shares outstanding

 

34,668

 

34,668

 

34,668

 

34,668

 

34,668

    Basic and diluted earnings per share

$

2.43

$

2.82

$

2.18

$

2.06

$

2.32

    Dividends declared per share

$

1.32

$

1.26

$

1.21

$

1.16

$

1.11

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Electric

$

1,193,083

$

1,058,988

$

1,038,308

$

1,004,087

$

970,464

Gas

 

377,005

 

354,875

 

329,538

 

318,336

 

322,556

Nonregulated energy operations

 

265,301

 

270,384

 

271,277

 

277,858

 

280,542

Transmission investments(b)

 

66,366

 

61,783

 

74,535

 

69,470

 

67,697

All others

 

465,661

 

485,548

 

465,202

 

434,868

 

438,898

Eliminations

 

(378,798)

 

(376,396)

 

(377,800)

 

(378,216)

 

(390,636)

    Total assets

$

1,988,618

$

1,855,182

$

1,801,060

$

1,726,403

$

1,689,521

 

 

 

 

 

 

 

 

 

 

 

Capitalization including Short-Term Debt

 

 

 

 

 

 

 

 

 

 

Common shareholders' equity

$

816,644

$

778,187

$

724,088

$

690,458

$

659,401

Long-term debt(c)

 

497,896

 

422,613

 

387,124

 

391,010

 

394,775

Short-term debt

 

13,000

 

4,000

 

-

 

-

 

7,000

    Total capitalization and short-term debt

$

1,327,540

$

1,204,800

$

1,111,212

$

1,081,468

$

1,061,176


(a)

Reflects retrospective application of new accounting pronouncement related to pension and other postretirement benefits. See Footnote 2 of the Notes to Consolidated Financial Statements in this Report for further information.


(b)

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 to Consolidated Financial Statements in this Report for further information.


(c)

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 153,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 161,000 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 reduction in its ownership of Columbia and its growing ownership of renewable generation sources. MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE maintains safe and efficient operations in addition to providing customer value. We believe it is critical to maintain a strong credit standing consistent with financial strength in MGE as well as the parent company in order to accomplish these goals.


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


·

Weather, and its impact on customer sales,

·

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

·

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

·

Energy commodity prices, including natural gas prices,

·

Equity price risk pertaining to pension related assets,

·

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

·

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

·

Other factors listed in Item 1A. Risk Factors.


For the year ended December 31, 2018, MGE Energy's earnings were $84.2 million or $2.43 per share compared to $97.6 million or $2.82 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2018, were $56.5 million compared to $49.8 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:

 

2018

 

2017

 

2016

 

 

    Electric Utility

$

45.9

$

41.4

$

40.6

 

 

    Gas Utility

 

12.9

 

11.1

 

10.6

 

 

    Nonregulated Energy

 

20.2

 

40.5

 

19.1

 

 

    Transmission Investments

 

6.2

 

5.9

 

5.6

 

 

    All Others

 

(1.0)

 

(1.3)

 

(0.3)

 

 

    Net Income

$

84.2

$

97.6

$

75.6

 


Our net income during 2018 compared to 2017 primarily reflects the effects of the following factors:


Electric Utility

For 2018, electric operating income increased primarily as a result of more favorable weather conditions in the current year. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 37.2% compared to 2017.


Gas Utility

For 2018, gas operating income increased primarily related to an increase in gas retail sales reflecting higher customer demand resulting from colder weather experienced compared to the same period in the prior year and an increase in retail customers. Heating degree days (a measure for determining the impact of weather during the heating season) increased by 11.2% compared to 2017.


Nonregulated Energy

Nonregulated Energy income decreased due to a $21.6 million one-time tax impact in 2017 as a result of lower federal income tax rates associated with the passage of the Tax Cuts and Jobs Act. See "Tax Reform" below for additional information.


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 in 2017 as a result of lower federal income tax rates associated with the passage of the Tax Cuts and Jobs Act. See "Tax Reform" below for additional information.


All Others

The decrease in all other income in 2017 primarily results from a $2 million (pre-tax) voluntary contribution to the Madison Gas and Electric Foundation.


During 2018, the following events occurred:


Tax Reform: On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Act made broad and complex changes to the U.S. tax code, including the reduction in the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.


Customer rates approved for 2018 reflect an income tax rate of 35 percent. In January 2018, the PSCW issued an order directing Wisconsin investor-owned utilities to defer the over-collection of income tax expense as a result of the decrease in tax rate to 21 percent. The PSCW issued an order in May 2018 to return to customers the estimated 2018 over-collection of income tax expense. As of December 31, 2018, MGE returned $8.2 million to customers through bill credits. Any over/under recovery of the actual costs will be subject to the PSCW's review in a future rate case. As of December 31, 2018, MGE has deferred $3.1 million as a regulatory liability and recorded a corresponding reduction in operating revenues for over-collection of income tax expense (net of customer bill credits).




27




Saratoga Wind Farm: In December 2017, the PSCW authorized construction of a 66 MW wind farm, consisting of 33 turbines, located near Saratoga, Iowa. MGE received specific approval to recover 100% AFUDC on the project. As of December 31, 2018, MGE has incurred $95.8 million of capital expenditures. After tax, MGE has recognized $2.5 million in AFUDC equity related to this project for the year ended December 31, 2018. Construction of the project is expected to be completed in February 2019 for approximately $112 million.


Forward Wind: In April 2018, MGE, along with two other utilities, purchased the Forward Wind Energy Center, which consists of 86 wind turbines located in Wisconsin with a total capacity of 137.85 MW. The aggregate purchase price was approximately $174 million, of which MGE's proportionate share is 12.8%, or approximately $23 million. The purchase of the Forward Wind Energy Center replaced an existing purchase power agreement, under which MGE purchased 12.8% of the facility's energy output.


Columbia: MGE and WPL have negotiated an amendment to the existing Columbia joint operating agreement, effective January 1, 2017, under which MGE has reduced its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a proportional reduction in MGE's ownership in Columbia. On January 1 of each year from 2017 through 2019 and then on June 1, 2020, the ownership percentage is adjusted through a partial sale based on the amount of capital expenditures foregone. As of December 31, 2018 and 2017, MGE classified $3.1 million and $8.8 million, respectively, of Columbia assets as held-for-sale on the consolidated balance sheets. In January 2018, MGE reduced its ownership interest in Columbia from 20.4% to 19.4% as a result of the partial sale of plant assets to WPL.


Deferred Fuel Costs – Subject to Refund: As of December 31, 2018, MGE has deferred $9.5 million of 2018 fuel savings. These costs will be subject to the PSCW's annual review of 2018 fuel costs, expected to be completed in 2019.


Debt Issuance: MGE issued $40 million of long-term unsecured debt in July 2018 and $60 million of long-term unsecured debt in September 2018. The proceeds of these debt financings were used to assist with the financing of additional capital expenditures, such as the Saratoga Wind Farm, and refinanced $20 million of long-term debt which matured in September 2018. The covenants of these debt issues are substantially consistent with MGE's existing unsecured long-term debt.


2017 Annual Fuel Proceeding: In August 2018, the PSCW issued a final decision in the fuel rules proceedings for MGE to refund $4.2 million of additional fuel savings realized during 2017 to its retail electric customers which was returned over a one-month period in October 2018. There was no change to the refund in the fuel rules proceedings from the amount MGE deferred as of December 31, 2017.


During 2019, several items may affect us, including:


2019/2020 Rate Change Settlement: In December 2018, the PSCW approved the settlement agreement between MGE and intervening parties in the rate case. The settlement decreases electric rates by 2.24% or $9.2 million in 2019. MGE will maintain this rate level for 2020, with the exception that MGE will file a 2020 Fuel Cost Plan in 2019 and MGE's electric rates will be adjusted accordingly. The decrease reflects the ongoing tax impacts of the Tax Act and the addition of lower-cost renewable generation capacity. The settlement agreement increases gas rates by 1.06% or $1.7 million in 2019 and 1.46% or $2.4 million in 2020. The increase covers infrastructure costs. It also reflects the impacts of the Tax Act.


Tax Reform: Pursuant to the Tax Act, deferred income tax balances as of December 31, 2017, were remeasured to reflect the decrease in corporate tax rate. A $130.5 million regulatory liability was recorded 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 determined by the PSCW. A portion of the regulatory liability will be returned to customers using a normalization method of accounting.


Pension and Other Postretirement Benefit Costs: Costs for pension and other postretirement benefits are affected by actual investment returns on the assets held for those benefits and by the discount rate, which is sensitive to interest rates, used to calculate those benefits. Volatility in interest rates and investment returns could affect the value of the pension and postretirement benefit obligations. These changes may affect benefit costs in future years. As a result of lower investment returns in the fourth quarter of 2018, pension and postretirement benefit costs will increase in 2019. In December 2018, MGE filed a deferral request with the PSCW to defer the difference between estimated pension and other postretirement costs included in the 2019 and 2020 rate settlement and actual expense incurred. If approved, MGE expects to defer approximately $5.9 million in 2019 as a regulatory asset. The pension and other postretirement costs for 2020 are currently unknown. Any overcollection or undercollection of actual expense in 2020 will be netted with the



28




amount deferred in 2019. MGE expects that the deferred cost for employee benefit plans will be factored into future rate actions starting in 2021. A PSCW decision is expected in early 2019.


ATC Return on Equity: Several parties have filed complaints with the FERC seeking to reduce the ROE used by MISO transmission owners, including ATC. Any change to ATC's ROE could result in lower equity earnings and distributions from ATC in the future. We derived approximately 7.3% of our net income for the year ended December 31, 2018, from our investment in ATC. See "Other Matters" below for additional information concerning ATC.


Environmental Initiatives: There are proposed legislative rules and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. At present, it is unclear how the changes in the Presidential, Congressional, and EPA administrations may affect existing, pending or new legislative or rulemaking proposals or regulatory initiatives. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 43% of our electric generating capacity as of December 31, 2018. 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 and systems. Implementation of the rule is currently stayed by order to the U.S. Supreme Court, however, if implemented, the CPP 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 August 2018, the EPA proposed the Affordable Clean Energy (ACE) rule which would replace the CPP, if successfully implemented. The proposed ACE as it is currently written has the potential to impact Blount, Columbia, and the Elm Road Units. Given the pending CPP legal proceedings and the proposed ACE rule, the nature and timing of any final requirements to control GHG emissions from existing fossil fuel-fired EGUs is subject to uncertainty. MGE is unable to determine with any certainty the impact of the CPP and proposed ACE rule on our operations. If an ACE 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 the proposed ACE rule, the CPP rule, and related litigation.


Columbia: MGE will reduce its obligation to pay certain capital expenditures (other than SCR-related expenditures) at Columbia in exchange for a proportional reduction in MGE's ownership in Columbia. In January 2019, MGE reduced its ownership interest in Columbia from 19.4% to 19.1% as a result of the partial sale of plant assets to WPL. By June 2020, MGE's ownership in Columbia is forecasted to be approximately 19%, a decrease of 3% from the 22% ownership interest held by MGE on January 1, 2016.


Future Generation - Riverside: In 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.


Future Generation - Utility Solar: In May 2018, MGE and WPSC filed a joint application with the PSCW for the approval to acquire 300 MW of solar generating capacity from two separate solar projects in Wisconsin, Badger Hollow Solar Farm and Two Creeks Solar Farm. MGE's combined ownership share of the two projects is expected to be 100 MW. If approved by the PSCW, construction of the projects is expected to begin in 2019. MGE's share of the construction cost is expected to be approximately $130 million.


The following discussion is based on the business segments as discussed in Footnote 21 of the Notes to Consolidated Financial Statements in this Report.


Results of Operations


Results of operations include financial information prepared in accordance with GAAP and electric and gas margins, both which are non-GAAP measures. Electric margin (electric revenues less fuel for electric generation and purchase power costs) and gas margin (gas revenues less cost of gas sold) are non-GAAP measures because they exclude nonregulated operating revenues used in the calculation of the most comparable GAAP measure, operating income;



29




other operations and maintenance expense, depreciation and amortization expense, and other general taxes expense and thus are not measures determined in accordance with GAAP.


Management believes that electric and gas margins provide a meaningful basis for evaluating and managing utility operations since fuel for electric generation, purchase power costs, and cost of gas sold are passed through to customers in current rates. As a result, management uses electric and gas margins internally when assessing the operating performance of our segments. The presentation of utility electric and gas margins herein is intended to provide supplemental information for investors regarding operating performance. These electric and gas margins may not be comparable to how other entities calculate utility electric and gas margin or similar measures. Furthermore, these measures are not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.


Year Ended December 31, 2018, Versus the Year Ended December 31, 2017


The following table provides a calculation of electric and gas margins (non-GAAP), along with a reconciliation to the most comparable GAAP measure, operating income:


 

 

 

Year Ended December 31,

 

 

(In millions)

 

2018

 

2017

 

$ Change

 

 

Electric revenues

$

400.9

$

413.9

$

(13.0)

 

 

Fuel for electric generation

 

56.2

 

53.0

 

3.2

 

 

Purchased power

 

50.8

 

58.7

 

(7.9)

 

 

    Total Electric Margins

 

293.9

 

302.2

 

(8.3)

 

 

 

 

 

 

 

 

 

 

 

Gas revenues

 

157.8

 

148.8

 

9.0

 

 

Cost of gas sold

 

85.0

 

76.6

 

8.4

 

 

    Total Gas Margins

 

72.8

 

72.2

 

0.6

 

 

 

 

 

 

 

 

 

 

 

Other operating revenues

 

1.1

 

0.3

 

0.8

 

 

Other operations and maintenance

 

177.8

 

177.7

 

0.1

 

 

Depreciation and amortization

 

56.4

 

53.1

 

3.3

 

 

Other general taxes

 

19.4

 

19.3

 

0.1

 

 

Operating Income

$

114.2

$

124.6

$

(10.4)

 


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)

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

Residential

$

138,566

$

136,168

 

1.8 %

 

860,246

 

793,337

 

8.4 %

 

 

Commercial

 

204,683

 

216,461

 

(5.4)%

 

1,867,418

 

1,825,922

 

2.3 %

 

 

Industrial

 

13,878

 

16,176

 

(14.2)%

 

180,151

 

196,629

 

(8.4)%

 

 

Other-retail/municipal

 

34,023

 

38,010

 

(10.5)%

 

381,610

 

421,360

 

(9.4)%

 

 

    Total retail

 

391,150

 

406,815

 

(3.9)%

 

3,289,425

 

3,237,248

 

1.6 %

 

 

Sales to the market

 

7,438

 

4,067

 

82.9 %

 

181,342

 

117,039

 

54.9 %

 

 

Other revenues

 

1,870

 

2,323

 

(19.5)%

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

424

 

721

 

(41.2)%

 

-

 

-

 

-%

 

 

    Total

$

400,882

$

413,926

 

(3.2)%

 

3,470,767

 

3,354,287

 

3.5 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 677)

 

 

 

 

 

 

 

796

 

580

 

37.2 %

 




30




Electric margin, a non-GAAP measure, decreased $8.3 million during 2018 compared to 2017, due to the following:


 

(In millions)

 

 

 

 

Revenue subject to refund, net

$

(22.3)

 

 

Other

 

(1.8)

 

 

Increase in volume

 

8.4

 

 

Decreased fuel costs

 

7.4

 

 

Total

$

(8.3)

 


·

Revenue subject to refund. For cost recovery mechanisms, any over-collection of the difference between actual costs incurred and the amount of costs collected from customers is recorded as a reduction of revenue in the period incurred.


o

Tax Act. MGE received a PSCW order in January 2018 to defer the over-collection of income tax expense collected in customer rates as a result of the Tax Act reduction in federal income tax rate to 21 percent. During 2018, MGE recorded a $4.4 million reduction in retail electric revenues and recorded a corresponding regulatory liability. During 2018, MGE returned $6.3 million to electric customers through bill credits related to the tax credit.


o

Fuel-related costs. MGE's fuel-related costs subject to refund decreased revenue $5.3 million. MGE returned $4.2 million and $6.2 million of electric fuel-related savings in October 2018 and 2017, respectively. As of December 31, 2018 and 2017, MGE has deferred $9.5 million and $4.2 million, respectively, of fuel-related savings. 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. Beginning in 2018, over-collection of fuel-related costs outside the tolerance band are reflected as a reduction of revenue in the period incurred. Under-collection of costs outside the tolerance band is reflected as a reduction of purchase power expense in the period incurred. Any potential recovery of excess fuel costs will be recorded in the period received. Prior to adoption of the new revenue recognition guidance, effective January 1, 2018, deferred fuel-related costs were 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.


o

Transmission. MGE's transmission costs subject to refund decreased revenue $2.2 million primarily related to a one-time refund received in June 2018.


o

Operating Costs. MGE's electric plant operating costs subject to refund decreased revenue $4.1 million primarily related to lower leased generation costs due to the reduction in tax rate.


·

Other. During 2018, other items affecting electric operating revenues decreased $1.8 million primarily attributable to a decrease in demand charges as a result of a large industrial customer relocating its operations out of state.


·

Volume. During 2018, there was an 8.4% increase in residential electric sales volumes compared to the same period in the prior year driven by favorable weather conditions. During 2018, there was a 8.4% decrease in industrial retail electric 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.


·

Fuel Costs. Fuel costs decreased during 2018, primarily as a result of a reduction in purchased power. The purchase of the Forward Wind Energy Center in April 2018 replaced an existing purchase power agreement that was previously recorded as purchased power expense in fuel costs.




31




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

 

 

 

2018

 

2017

 

% Change

 

2018

 

2017

 

% Change

 

 

Residential

$

94,017

$

88,695

 

6.0 %

 

106,899

 

94,631

 

13.0 %

 

 

Commercial/Industrial

 

59,060

 

55,151

 

7.1 %

 

101,028

 

91,411

 

10.5 %

 

 

    Total retail

 

153,077

 

143,846

 

6.4 %

 

207,927

 

186,042

 

11.8 %

 

 

Gas transportation

 

4,283

 

4,561

 

(6.1)%

 

74,773

 

70,234

 

6.5 %

 

 

Other revenues

 

407

 

418

 

(2.6)%

 

-

 

-

 

-%

 

 

    Total

$

157,767

$

148,825

 

6.0 %

 

282,700

 

256,276

 

10.3 %

 

 

Heating degree days (normal 6,913)

 

 

 

 

 

 

 

7,306

 

6,569

 

11.2 %

 

 

Average rate per therm of retail customer

$

0.736

$

0.773

 

(4.8)%

 

 

 

 

 

 

 


Gas margin, a non-GAAP measure, increased $0.6 million during 2018 compared to 2017, due to the following:


 

(In millions)

 

 

 

 

Increase in volume

$

3.8

 

 

Other

 

0.2

 

 

Revenue subject to refund/tax credit

 

(3.4)

 

 

Total

$

0.6

 


·

Volume. For 2018, retail gas deliveries increased 11.8% compared to the same period in the prior year primarily related to customer growth and more favorable weather conditions in the current year.


·

Revenue subject to refund/tax credit. MGE received a PSCW order in January 2018 to defer the over-collection of income tax expense collected in customer rates as a result of the Tax Act reduction in federal income tax rate to 21 percent. Any over-collection of the difference between actual costs incurred and the amount of costs collected from customers is recorded as a reduction of revenue in the period incurred. For 2018, MGE recorded a $1.5 million reduction in retail gas revenues and recorded a corresponding regulatory liability. During 2018, MGE returned $1.9 million to gas customers through bill credits related to the tax credit.


Consolidated operations and maintenance expenses


For 2018, operations and maintenance expenses increased $0.1 million, compared to the same period in the prior year. The following contributed to the net change:


 

(In millions)

 

 

 

 

Increased customer accounts costs

$

0.9

 

 

Increased gas distribution costs

 

0.5

 

 

Increased electric distribution costs

 

0.4

 

 

Increased other costs

 

0.4

 

 

Decreased electric transmission costs

 

(2.1)

 

 

Total

$

0.1

 


For 2018, decreased electric transmission costs are primarily related to a decrease in transmission rates as a result of a one-time refund received in June 2018. The lower transmission rate is reflected in customer revenue as revenue subject to refund.


Consolidated depreciation expense


Electric depreciation expense increased $2.3 million and gas depreciation expense increased $1.0 million for 2018, compared to the same period in the prior year primarily related to an increase in depreciable assets and change in estimated useful lives of capitalized software assets affected by the technology corporate initiative.




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 2018 and 2017, net income at the nonregulated energy operations segment was $20.2 million and $40.5 million, respectively. The decrease in net income is attributable to a $21.6 million one-time tax impact in 2017 as a result of the Tax Act. The Tax Act reduced the federal tax rate from 35% to 21%. The decrease in tax rate lowered lease revenues and income tax expense in 2018. Income tax expense is a factor used in the formula to calculate lease rates. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report.


Transmission Investment Operations - MGE Energy and MGE


For 2018 and 2017, other income at the transmission investment segment was $8.6 million and $9.8 million, respectively. The decrease in tax rate from 35% to 21%, effective January 1, 2018, lowered earnings from ATC and income tax expense for 2018. Income tax expense is a factor used in the calculation of ATC's transmission rates. 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 6 of the Notes to Consolidated Financial Statements in this Report and "Other Matters" below for additional information concerning ATC and summarized financial information regarding ATC.


Consolidated Income Taxes - MGE Energy and MGE


Although effective tax rates have been lowered as a result of the Tax Act, regulated revenues have been affected as tax expense is a factor in the determination of rates for electric and gas service, and rates relating to our investment in transmission. See Footnote 12 of the Notes to Consolidated Financial Statements in this Report 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. 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)

 

2018

 

2017

 

 

MGE Power Elm Road(a)

$

15.4

$

29.3

 

 

MGE Power West Campus(a)

$

7.2

$

13.9

 


(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 in this Report for additional information.




33




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)%

 

-

 

-

 

-%

 

 

Other revenues

 

2,323

 

1,906

 

21.9 %

 

-

 

-

 

-%

 

 

Adjustments to revenues

 

721

 

(1,653)

 

n.m.%

 

-

 

-

 

-%

 

 

    Total

$

413,926

$

409,006

 

1.2 %

 

3,354,287

 

3,506,633

 

(4.3)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cooling degree days (normal 659)

 

 

 

 

 

 

 

580

 

780

 

(25.6)%

 


n.m.: not meaningful


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 2016 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 2016 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 2016.



34




·

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 2016, reflecting decreased opportunities for sales, and those sales were made at lower market prices. The revenue generated from these sales is included in fuel rules monitored costs. See fuel rules discussion in Footnote 8.b. of the Notes to Consolidated Financial Statements in this Report.


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 2016. 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)

 


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

 




35




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 during 2017 compared to 2016 as a result of new depreciation rates for Columbia, as approved by the PSCW.


Other electric income


Other electric income increased $1.0 million during 2017 compared to 2016 primarily due to the gain on sale of property assets.


Gas Utility Operations - MGE Energy and MGE


Gas deliveries and revenues


The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the 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 2016. The increase in volume is primarily related to customer growth and cooler weather in the fourth quarter of 2017 compared to 2016.


Cost of gas sold


For 2017, cost of gas sold increased by $9.9 million, compared to 2016. 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.




36




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.


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


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 6 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 in this Report 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.



37




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 in this Report 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 20 of the Notes to Consolidated Financial Statements in this Report for further discussion of noncontrolling interest. In December 2016, MGE's ownership interest in MGE Transco was transferred to MGE Energy. See Footnote 6 of the Notes to Consolidated Financial Statements in this Report 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.


Cash Flows


The following summarizes cash flows for MGE Energy and MGE during 2018, 2017, and 2016:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2018

 

2017

 

2016

 

 

2018

 

2017

 

2016

 

 

Cash provided by/(used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

$

153,040

$

131,373

$

147,864

 

$

147,994

$

124,120

$

146,852

 

 

    Investing activities

 

(218,328)

 

(116,275)

 

(86,813)

 

 

(213,302)

 

(106,572)

 

(85,635)

 

 

    Financing activities

 

38,123

 

(4,637)

 

(46,112)

 

 

61,885

 

(23,897)

 

(76,845)

 


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.


2018 vs. 2017


Cash provided by operating activities for 2018 was $153.0 million, an increase of $21.7 million when compared to the prior year.


MGE Energy's net income decreased $13.4 million for 2018 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.


MGE Energy's federal and state taxes paid decreased $14.6 million during 2018, when compared to the prior year, reflecting the reduction in tax rates effected by the Tax Act.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $10.5 million in cash provided by operating activities for 2018, primarily due to increased current liabilities, decreased unbilled revenues, and decreased inventories, partially offset by decreased accounts payable and increased receivables.


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.




38




A decrease in pension contribution resulted in an additional $5.7 million in cash provided by operating activities for 2018, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


2017 vs. 2016


Cash provided by operating activities for 2017 was $131.4 million, a decrease of $16.5 million when compared to 2016.


MGE Energy's net income increased $22.0 million for 2017 when compared to 2016 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 2016.


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 $7.7 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 pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to 2016. Pension contributions reflect amounts required by law and discretionary amounts.


MGE


2018 vs. 2017


Cash provided by operating activities for 2018 was $148.0 million, an increase of $23.9 million when compared to the prior year.


Net income decreased $14.0 million for 2018, 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.


MGE's federal and state taxes paid decreased $14.7 million during 2018, when compared to the prior year, reflecting the reduction in tax rates effected by the Tax Act.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $10.1 million in cash provided by operating activities for 2018, primarily due to increased current liabilities, decreased unbilled revenues, and decreased inventories, partially offset by decreased accounts payable and increased accounts receivable.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.2 million in cash used for operating activities for 2018, primarily due to decreased accounts payable, increased receivables, increased inventories, and increased unbilled revenues, partially offset by increased current liabilities.


A decrease in pension contribution resulted in an additional $5.7 million in cash provided by operating activities for 2018, when compared to the prior year. Pension contributions reflect amounts required by law and discretionary amounts.


2017 vs. 2016


Cash provided by operating activities for 2017 was $124.1 million, a decrease of $22.7 million when compared to 2016.


Net income increased $18.5 million for 2017, when compared to 2016 primarily related to a $21.6 million one-time 2017 noncash tax impact of the Tax Act from the nonregulated energy segment.




39




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 2016.


Working capital accounts (excluding prepaid and accrued taxes) resulted in $14.2 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 $7.8 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 pension contribution resulted in an additional $3.2 million in cash provided by operating activities for 2017, when compared to 2016. 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.


Capital Requirements and Investing Activities


MGE Energy


2018 vs. 2017


MGE Energy's cash used for investing activities increased $102.1 million for 2018 when compared to the prior year.


Capital expenditures for 2018 were $212.2 million. This amount represents an increase of $104.1 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on the construction of the Saratoga wind project and the purchase of Forward Wind.


Capital contributions in ATC and other investments decreased $5.2 million for 2018 when compared to the prior year.


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


2017 vs. 2016


MGE Energy's cash used for investing activities increased $29.5 million for 2017 when compared to 2016.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in 2016. 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 2016.


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


MGE


2018 vs. 2017


MGE's cash used for investing activities increased $106.7 million for 2018 when compared to the prior year.


Capital expenditures for 2018 were $212.2 million. This amount represents an increase of $104.1 million from the expenditures made in the prior year. This increase primarily reflects increased expenditures on the construction of the Saratoga wind project and the purchase of Forward Wind.


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




40




2017 vs. 2016


MGE's cash used for investing activities increased $20.9 million for 2017 when compared to 2016.


Capital expenditures for 2017 were $108.1 million. This amount represents an increase of $24.5 million from the expenditures made in 2016. 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 2016. In December 2016, MGE transferred its ownership interest in ATC to MGE Energy. See Footnote 6 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.


Capital expenditures


The following table shows MGE Energy's actual capital expenditures for both 2018 and 2017, forecasted capital expenditures for 2019, and annual average forecasted capital expenditures for the years 2020 through 2022:


 

 

 

Actual

 

Forecasted

 

 

(In thousands)

 

 

 

 

 

 

 

(Annual Average)

 

 

For the years ended December 31,

2017

 

2018

2019

2020-2022

 

 

Electric

$

77,353

$

176,399

$

100,696

$

90,118

 

 

Gas

 

26,847

 

30,497

 

38,620

 

43,092

 

 

    Utility plant total

 

104,200

 

206,896

 

139,316

 

133,210

 

 

Nonregulated

 

3,931

 

5,301

 

5,517

 

3,066

 

 

    MGE Energy total

$

108,131

$

212,197

$

144,833

$

136,276

 


The Saratoga Wind Farm began construction in 2018. This project accounts for $95.8 million of the capital expenditures for 2018.


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 2018 capital requirements and cash obligations, including dividend payments. External financing included short-term financing under existing lines of credit.


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.


In May 2018, MGE and WPSC filed a joint application with the PSCW for the approval to acquire 300 MW of solar generating capacity from two separate solar projects in Wisconsin, Badger Hollow Solar Farm and Two Creeks Solar Farm. MGE's combined ownership share of the two projects is expected to be 100 MW. If approved by the PSCW, construction of the projects is expected to begin in 2019. MGE's share of the construction cost is expected to be approximately $130 million. The application is pending approval by the PSCW and is excluded from the forecasted capital expenditures noted above.


Financing Activities


MGE Energy


2018 vs. 2017


Cash provided by MGE Energy's financing activities was $38.1 million for 2018, compared to $4.6 million of cash used for 2017.


For 2018, cash dividends paid were $45.8 million compared to $43.7 million in the prior year. This increase was a result of a higher dividend per share ($1.32 vs. $1.26).




41




During 2018, MGE issued $100.0 million of senior unsecured notes, which was used to refinance $20.0 million of maturing long-term notes and assist with financing additional capital expenditures. The increase in long-term debt primarily reflects expenditures on the construction of the Saratoga wind project. 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 2018, net short-term debt borrowings were $9.0 million compared to $4.0 million in the prior year.


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 2016. 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.


MGE


2018 vs. 2017


During 2018, cash provided by MGE's financing activities was $61.9 million, compared to $23.9 million of cash used for MGE's financing activities in the prior year.


Cash dividends paid from MGE to MGE Energy were $45.0 million in the prior year. There were no cash dividends paid from MGE to MGE Energy for 2018.


Distributions to parent (MGE Energy) from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $22.0 million for 2018, compared to $18.0 million in the prior year.


During 2018, MGE issued $100.0 million of senior unsecured notes, which was used to refinance $20.0 million of maturing long-term notes and assist with financing additional capital expenditures. The increase in long-term debt primarily reflects expenditures on the construction of the Saratoga wind project. 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 2018, net short-term debt borrowings were $9.0 million compared to $4.0 million in the prior year.


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 2016.


Cash dividends paid from MGE to MGE Energy were $45.0 million for 2017, compared to $50.0 million in 2016.


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 2016.


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.




42




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 as of December 31, 2018, is 56.3%, as determined under the calculation used in the rate proceeding. This restriction did not impact MGE's payment of dividends in 2018. Cash dividends of $45.0 million were paid by MGE to MGE Energy in 2017. No cash dividends were paid by MGE to MGE Energy in 2018. 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, 2018, approximately $400.0 million was available for the payment of dividends under this covenant.


Credit Facilities


As of December 31, 2018, 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(a)

 

 

(Dollars in millions)

 

 

MGE Energy

$

50.0

$

-

$

-

$

50.0

 

June 1, 2020

 

 

 

 

 

 

 

 

 

 

 

MGE

$

100.0

$

13.0

$

-

$

87.0

 

June 1, 2020


(a)

On February 7, 2019, MGE Energy and MGE amended and restated the credit agreements to extend the initial term expiration date to February 7, 2024.


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. As of December 31, 2018, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE, as calculated under the credit agreements' covenant, were 38.5% and 43.0%, respectively. See Footnote 11 of the Notes to Consolidated Financial Statements in this Report for additional information regarding the credit facilities.


Capitalization Ratios


MGE Energy's capitalization ratios were as follows:


 

 

MGE Energy

 

 

 

2018

 

2017

 

 

Common shareholders' equity

61.5 %

 

64.6 %

 

 

Long-term debt(a)

37.5 %

 

35.1 %

 

 

Short-term debt

1.0 %

 

0.3 %

 


(a)

Includes the current portion of long-term debt.




43




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.


Contractual Obligations and Commercial Commitments for MGE Energy and MGE


MGE Energy's and MGE's contractual obligations as of December 31, 2018, 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)

$

502,431

$

4,553

$

24,430

$

39,903

$

433,545

Short-term debt(b)

 

13,000

 

13,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

2,181

 

396

 

799

 

864

 

122

Interest expense(d)

 

419,617

 

22,689

 

44,137

 

42,373

 

310,418

Operating leases(e)

 

28,783

 

1,646

 

2,466

 

1,964

 

22,707

Purchase obligations(f)

 

352,688

 

95,479

 

113,491

 

68,599

 

75,119

Other obligations(g)

 

30,815

 

22,696

 

2,454

 

1,968

 

3,697

Total MGE Energy contractual obligations

$

1,349,515

$

160,459

$

187,777

$

155,671

$

845,608

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

502,431

$

4,553

$

24,430

$

39,903

$

433,545

Short-term debt(b)

 

13,000

 

13,000

 

-

 

-

 

-

Repurchase-to-maturity transactions - loans(c)

 

2,181

 

396

 

799

 

864

 

122

Interest expense(d)

 

419,617

 

22,689

 

44,137

 

42,373

 

310,418

Operating leases(e)

 

28,783

 

1,646

 

2,466

 

1,964

 

22,707

Purchase obligations(f)

 

352,688

 

95,479

 

113,491

 

68,599

 

75,119

Other obligations(g)

 

18,888

 

10,769

 

2,454

 

1,968

 

3,697

Total MGE contractual obligations

$

1,337,588

$

148,532

$

187,777

$

155,671

$

845,608


(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 11 of the Notes to Consolidated Financial Statements in this Report.


(c)

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


(d)

Amount represents interest expense on long-term debt. See Footnote 10 of the Notes to Consolidated Financial Statements in this Report for further discussion of the long-term debt outstanding as of December 31, 2018.


(e)

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


(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 in this Report.


(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 2019 or 2020. The contributions for years after 2020 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 2019, MGE Transco made a $0.2 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.



44




MGE Energy's and MGE's commercial commitments as of December 31, 2018, 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)(c)

$

150,000

$

-

$

150,000

$

-

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

 

Available lines of credit(b)(c)

$

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. As of December 31, 2018, 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. As of December 31, 2018, MGE had no borrowings outstanding under these facilities. On that date, MGE had $13.0 million of commercial paper outstanding.


(c)

On February 7, 2019, MGE Energy and MGE amended and restated the credit agreements to extend the initial term expiration date to February 7, 2024.


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 2019. 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.


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. There was not a pre-tax expense for 2018. We derived approximately 7.3%, 6.2%, and 6.8% of our net income for 2018, 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.




45




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.


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.


MGE uses 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 2018, MGE used an assumed return on assets of 7.40% for pension and 6.94% for other postretirement benefits. In 2019, the pension asset assumption will decrease to 7.20% and the postretirement benefit assumption will decrease to 6.72%. 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 $4.0 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%



46




reduction in the discount rate on the obligation balance as of December 31, 2018, would increase annual pension and other postretirement cost by approximately $2.6 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 2018.


See Footnote 13 of the Notes to Consolidated Financial Statements in this Report 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.


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 reflected estimates of the impact of the Tax Act in our year-end 2017 financial results. In accordance with Staff Accounting Bulletin 118, any subsequent adjustment to these amounts would be recorded in 2018 when the analysis is complete. No material adjustments have been recorded during 2018. Furthermore, while regulation allows us to incorporate changes in tax law into the rate-setting process, there will 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.




47




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 2 of the Notes to Consolidated Financial Statements in this Report for discussion of new accounting pronouncements.


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 2019, fuel and purchased power costs included in MGE's fuel monitoring level rates are $77.3 million. See Footnote 8 of the Notes to Consolidated Financial Statements in this Report 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



48




financial transmission rights (FTRs), which are used to hedge the risk of increased transmission congestion charges. As of December 31, 2018, the fair value of these instruments exceeded their cost basis by $0.7 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 as of December 31, 2018, reflects a loss position of $32.5 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 2018 average interest rate under those borrowings, it is estimated that our 2018 interest expense and net income would have changed $0.1 million for both MGE Energy and MGE.


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 $4.0 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 decreased in value by approximately 7.01% and increased in value by approximately 18.36% during the years ended December 31, 2018 and 2017, 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. As of December 31, 2018, 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 264 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,684 square miles in Wisconsin. Based on results for the year ended December 31, 2018, 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.




49




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.


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, 2018.


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, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


February 22, 2019


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, 2018.


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 22, 2019




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 (the "Company") as of December 31, 2018 and 2017, 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, 2018, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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



51




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.


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 22, 2019


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 (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and equity for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2018 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 22, 2019


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,

 

 

 

2018

 

2017

 

2016

 

Operating Revenues:

 

 

 

 

 

 

 

    Electric revenues

$

402,001

$

414,274

$

410,202

 

    Gas revenues

 

157,767

 

148,825

 

134,543

 

        Total Operating Revenues

 

559,768

 

563,099

 

544,745

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

56,141

 

53,029

 

60,736

 

    Purchased power

 

50,807

 

58,690

 

56,313

 

    Cost of gas sold

 

84,968

 

76,644

 

66,771

 

    Other operations and maintenance

 

177,823

 

177,740

 

172,335

 

    Depreciation and amortization

 

56,412

 

53,077

 

44,646

 

    Other general taxes

 

19,410

 

19,294

 

20,062

 

        Total Operating Expenses

 

445,561

 

438,474

 

420,863

 

Operating Income

 

114,207

 

124,625

 

123,882

 

 

 

 

 

 

 

 

 

Other income, net

 

17,055

 

14,399

 

14,057

 

Interest expense, net

 

(19,609)

 

(19,324)

 

(19,866)

 

    Income before income taxes

 

111,653

 

119,700

 

118,073

 

Income tax provision

 

(27,434)

 

(22,094)

 

(42,513)

 

Net Income

$

84,219

$

97,606

$

75,560

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

(basic and diluted)

$

2.43

$

2.82

$

2.18

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

1.32

$

1.26

$

1.21

 

 

 

 

 

 

 

 

 

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,

 

 

 

2018

 

2017

 

2016

 

Net Income

$

84,219

$

97,606

$

75,560

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

    tax ($-, $(117), and $104)

 

-

 

175

 

(155)

 

Comprehensive Income

$

84,219

$

97,781

$

75,405

 

 

 

 

 

 

 

 

 

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,

 

 

2018

 

2017

 

2016

Operating Activities:

 

 

 

 

 

 

    Net income

$

84,219

$

97,606

$

75,560

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

56,412

 

53,077

 

44,646

        Deferred income taxes

 

3,749

 

(4,082)

 

22,421

        Provision for doubtful receivables

 

1,366

 

1,016

 

1,196

        Employee benefit plan (credit) cost

 

(2,002)

 

831

 

295

        Equity earnings in ATC

 

(8,821)

 

(10,125)

 

(8,428)

        Gain on sale of property

 

-

 

(1,547)

 

-

        Other items

 

(814)

 

641

 

2,462

    Changes in working capital items:

 

 

 

 

 

 

        Trade and other receivables

 

(2,235)

 

(4,502)

 

(3,594)

        Inventories

 

2,724

 

(2,568)

 

7,273

        Unbilled revenues

 

3,157

 

(1,554)

 

(4,838)

        Prepaid taxes

 

10,320

 

101

 

8,616

        Other current assets

 

251

 

(2,786)

 

15

        Accounts payable

 

(4,855)

 

(5,290)

 

9,881

        Other current liabilities

 

11,957

 

3,948

 

(1,738)

    Dividends from ATC

 

6,958

 

8,803

 

5,854

    Cash contributions to pension and other postretirement plans

 

(5,584)

 

(11,304)

 

(14,452)

    Other noncurrent items, net

 

(3,762)

 

9,108

 

2,695

            Cash Provided by Operating Activities

 

153,040

 

131,373

 

147,864

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(212,197)

 

(108,131)

 

(83,659)

    Capital contributions to investments

 

(5,926)

 

(11,081)

 

(2,958)

    Proceeds from sale of property

 

-

 

2,819

 

-

    Other

 

(205)

 

118

 

(196)

            Cash Used for Investing Activities

 

(218,328)

 

(116,275)

 

(86,813)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(45,762)

 

(43,682)

 

(41,775)

    Repayment of long-term debt

 

(24,453)

 

(34,358)

 

(4,267)

    Issuance of long-term debt

 

100,000

 

70,000

 

-

    Proceeds from short-term debt

 

9,000

 

4,000

 

-

    Other

 

(662)

 

(597)

 

(70)

            Cash Provided by (Used for) Financing Activities

 

38,123

 

(4,637)

 

(46,112)

    Change in cash, cash equivalents, and restricted cash

 

(27,165)

 

10,461

 

14,939

    Cash, cash equivalents, and restricted cash at beginning of period

 

112,094

 

101,633

 

86,694

    Cash, cash equivalents, and restricted cash at end of period

$

84,929

$

112,094

$

101,633


 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

    Interest paid

$

20,018

$

19,176

$

19,415

    Income taxes paid

$

12,597

$

27,149

$

21,831

    Income taxes received

$

(59)

$

-

$

(10,000)

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

11,129

$

16,602

$

16,376

 

 

 

 

 

 

 

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



55





MGE Energy, Inc.

Consolidated Balance Sheets

(In thousands)

 

 

As of December 31,

ASSETS

 

2018

 

2017

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

83,102

$

107,952

    Accounts receivable, less reserves of $2,614 and $2,840, respectively

 

43,593

 

42,299

    Other accounts receivable, less reserves of $540 and $335, respectively

 

6,262

 

9,440

    Unbilled revenues

 

28,243

 

31,400

    Materials and supplies, at average cost

 

24,093

 

22,614

    Fuel for electric generation, at average cost

 

6,599

 

8,256

    Stored natural gas, at average cost

 

11,303

 

12,923

    Prepaid taxes

 

16,215

 

26,535

    Regulatory assets - current

 

9,477

 

7,888

    Assets held for sale

 

3,080

 

8,817

    Other current assets

 

8,593

 

12,507

        Total Current Assets

 

240,560

 

290,631

Other long-term receivables

 

2,709

 

4,788

Regulatory assets

 

145,424

 

142,567

Pension and other postretirement benefit asset

 

-

 

7,336

Other deferred assets and other

 

12,488

 

731

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

1,369,766

 

1,283,313

    Construction work in progress

 

139,671

 

58,044

        Total Property, Plant, and Equipment

 

1,509,437

 

1,341,357

Investments

 

78,000

 

67,772

        Total Assets

$

1,988,618

$

1,855,182

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

4,553

$

24,452

    Short-term debt

 

13,000

 

4,000

    Accounts payable

 

46,158

 

47,645

    Accrued interest and taxes

 

7,384

 

5,602

    Accrued payroll related items

 

13,044

 

12,244

    Regulatory liabilities - current

 

13,826

 

5,633

    Derivative liabilities

 

8,550

 

8,180

    Other current liabilities

 

14,113

 

18,758

        Total Current Liabilities

 

120,628

 

126,514

Other Credits:

 

 

 

 

    Deferred income taxes

 

231,952

 

225,130

    Investment tax credit - deferred

 

818

 

918

    Regulatory liabilities

 

165,638

 

154,153

    Accrued pension and other postretirement benefits

 

67,483

 

69,088

    Derivative liabilities

 

23,980

 

33,990

    Other deferred liabilities and other

 

68,132

 

69,041

        Total Other Credits

 

558,003

 

552,320

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

 

465,708

 

426,874

        Accumulated other comprehensive income, net of tax

 

-

 

377

        Total Common Shareholders' Equity

 

816,644

 

778,187

    Long-term debt

 

493,343

 

398,161

        Total Capitalization

 

1,309,987

 

1,176,348

Commitments and contingencies (see Footnote 17)

 

 

 

 

        Total Liabilities and Capitalization

$

1,988,618

$

1,855,182

 

 

 

 

 

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

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2015

34,668

$

34,668

$

316,268

$

339,165

$

357

$

690,458

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of new accounting principle

 

 

 

 

 

 

377

 

(377)

 

-

 

 

Beginning balance - Adjusted

 

 

 

 

 

 

427,251

 

-

 

778,187

 

 

Net income

 

 

 

 

 

 

84,219

 

 

 

84,219

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.32 per share)

 

 

 

 

 

 

(45,762)

 

 

 

(45,762)

 

 

Ending balance - December 31, 2018

34,668

$

34,668

$

316,268

$

465,708

$

-

$

816,644

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 



57





Madison Gas and Electric Company

 

Consolidated Statements of Income

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Operating Revenues:

 

 

 

 

 

 

 

    Electric revenues

$

402,001

$

414,277

$

410,226

 

    Gas revenues

 

157,767

 

148,834

 

134,572

 

        Total Operating Revenues

 

559,768

 

563,111

 

544,798

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

56,141

 

53,031

 

60,745

 

    Purchased power

 

50,807

 

58,692

 

56,327

 

    Cost of gas sold

 

84,968

 

76,652

 

66,800

 

    Other operations and maintenance

 

176,762

 

176,729

 

171,423

 

    Depreciation and amortization

 

56,412

 

53,077

 

44,622

 

    Other general taxes

 

19,410

 

19,294

 

20,062

 

    Income tax provision

 

25,098

 

18,280

 

39,616

 

        Total Operating Expenses

 

469,598

 

455,755

 

459,595

 

Operating Income

 

90,170

 

107,356

 

85,203

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

    AFUDC - equity funds

 

3,284

 

1,222

 

1,207

 

    Equity earnings in MGE Transco

 

-

 

-

 

6,366

 

    Income tax provision

 

(363)

 

(710)

 

(2,175)

 

    Other income, net

 

7,142

 

5,228

 

4,129

 

        Total Other Income and Deductions

 

10,063

 

5,740

 

9,527

 

    Income before interest expense

 

100,233

 

113,096

 

94,730

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

    Interest on long-term debt

 

21,967

 

20,273

 

20,351

 

    Other interest, net

 

338

 

163

 

182

 

    AFUDC - borrowed funds

 

(1,108)

 

(412)

 

(395)

 

        Net Interest Expense

 

21,197

 

20,024

 

20,138

 

Net Income

$

79,036

$

93,072

$

74,592

 

Less Net Income Attributable to Noncontrolling Interest, net of tax

 

(22,552)

 

(43,237)

 

(23,358)

 

Net Income Attributable to MGE

$

56,484

$

49,835

$

51,234

 

 

 

 

 

 

 

 

 

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

 


Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

 

 

 

 

 

 

For the Years Ended December 31,

 

 

 

2018

 

2017

 

2016

 

Net Income

$

79,036

$

93,072

$

74,592

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

    Unrealized loss on available-for-sale securities, net of

 

 

 

 

 

 

 

    tax ($-, $31, and $2)

 

-

 

(47)

 

(4)

 

Comprehensive Income

$

79,036

$

93,025

$

74,588

 

    Less: Comprehensive Income Attributable to Noncontrolling

 

 

 

 

 

 

 

    Interest, net of tax

 

(22,552)

 

(43,237)

 

(23,358)

 

Comprehensive Income Attributable to MGE

$

56,484

$

49,788

$

51,230

 

 

 

 

 

 

 

 

 

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

 



58





Madison Gas and Electric Company

Consolidated Statements of Cash Flows

(In thousands)

 

 

For the Years Ended December 31,

 

 

2018

 

2017

 

2016

Operating Activities:

 

 

 

 

 

 

    Net income

$

79,036

$

93,072

$

74,592

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

56,412

 

53,077

 

44,622

        Deferred income taxes

 

(69)

 

(7,760)

 

20,876

        Provision for doubtful receivables

 

1,366

 

1,016

 

1,196

        Employee benefit plan (credit) cost

 

(2,002)

 

831

 

295

        Equity earnings in MGE Transco

 

-

 

-

 

(6,366)

        Gain on sale of property

 

-

 

(1,547)

 

-

        Other items

 

(107)

 

1,408

 

2,990

    Changes in working capital items:

 

 

 

 

 

 

        Trade and other receivables

 

(2,160)

 

(4,113)

 

(3,583)

        Inventories

 

2,724

 

(2,568)

 

7,273

        Unbilled revenues

 

3,157

 

(1,554)

 

(4,838)

        Prepaid taxes

 

9,283

 

725

 

8,481

        Other current assets

 

255

 

(2,788)

 

14

        Accounts payable

 

(4,817)

 

(5,312)

 

9,941<