2016 Annual Report and Form 10K

MGE Energy, Inc.

MGE Energy is an investor-owned public utility holding company headquartered in the state capital of Madison, Wis. MGE Energy is the parent company of Madison Gas and Electric Co. The utility provides natural gas and electric service in south-central and western Wisconsin. Assets total approximately $1.8 billion. In 2016, revenue was approximately $545 million.

MGE Energy (MGEE)

Year at a Glance (Thousands, except per share amounts and shares outstanding)	2016	2015	Increase/ (Decrease)	% Change
Total Market Value (Dec. 31)	$ 2,263,845	$ 1,608,612	$ 655,232	40.7
Market Price Per Share (Dec. 31)	$ 65.30	$ 46.40	$ 18.90	40.7
Book Value Per Share	$ 20.89	$ 19.92	$ 0.97	4.9
Average Shares Outstanding	34,668,370	34,668,370	-	0.0
Shares Outstanding at Year-End	34,668,370	34,668,370	-	0.0
Operating Revenues	$ 544,745	$ 564,028	$ (19,283)	-3.4
Net Income	$ 75,560	$ 71,343	$ 4,217	5.9
Basic and Diluted Earnings Per Share	$ 2.18	$ 2.06	$ 0.12	5.8
Dividends Declared Per Share	$ 1.21	$ 1.16	$ 0.05	4.3
Dividend Payout Ratio	55.5%	56.3%	(0.8%)	-1.4
Total Assets	$ 1,801,060	$ 1,726,403	$ 74,657	4.3
Total Retail Electric Sales (kWh) Total Gas Deliveries (therms)	3,323,438 251,354	3,288,623 257,031	34,815 (5,677)	1.1 -2.2

For detailed financial information, see the 2016 MGE Energy Form 10-K.
 

 

To Our Shareholders

Gary J. Wolter, MGE Energy Chairman, with new MGE President and CEO, Jeffrey M. Keebler

We are partnering to create a stronger tomorrow.

Madison Gas and Electric (MGE) partners with our customers and our communities to provide critical services, to create more sustainable communities and to foster a vibrant local economy. These partnerships will continue to guide our commitment to reliability, sustainability and shareholder value.

We are proud to be a local company for more than 150 years. MGE is building upon its rich history as a community and industry leader to succeed in a rapidly changing energy world. By working together, we can accomplish our goals.

Consistent financial performance

Building shareholder loyalty is part of our mission. In 2016, MGE Energy continued to deliver solid financial performance for our shareholders in both stock price appreciation and dividend increases.

MGE Energy is among a select group of U.S. companies dedicated to investor dividends. Compared to combination utility holding companies nationwide, MGE Energy is one of only four to increase its dividend for 41 or more consecutive years. No other Wisconsin utility or utility holding company can match our history of dividend increases.

Your Board of Directors increased the dividend by 4.2% to $1.21 paid per share in 2016. The financial publisher Mergent consistently ranks us as a “Dividend Achiever” for our annual dividend increases.

MGE Energy shareholders also saw an increase in the stock price in 2016—building on a long-term trend. In the last decade, our stock price has more than doubled, outperforming both the Dow Jones Industrial Average and the S&P 500.

Strong total return

Stock price appreciation is one part of shareholders' total return, which combines both stock price and reinvested dividends. Many shareholders choose to reinvest their dividends to grow their investment.

Taking a five-year view of our annual total return, a $1,000 investment at the end of 2011 grew to $2,414 by the close of 2016 with reinvested dividends.

Earnings

In 2016, we reported earnings of $2.18 per share, compared to $2.06 per share in 2015, resulting from increased electric consumption due to a warmer summer in 2016 versus 2015 and due to an increase in the number of electric and gas residential customers.

Capital expenditures

Our investments have been driven by our high standards for energy reliability, by new technologies and by our goals for a more sustainable energy future. Under our long-range Energy 2030 framework, we project an increase in our capital expenditures.

These projected investments include emission control technologies, electric distribution and metering expenditures and continued customer additions in MGE's gas service area. We also anticipate increased expenditures on renewable energy resources and natural gas generation.

In addition, we expect to invest a significant amount of capital in information technology infrastructure for a more dynamic, integrated electric grid. Also, investments in a new customer information system, smart meters and other systems will help enhance the grid and provide customers more information about their energy use.

National recognition

MGE Energy continues to earn recognition nationwide for its prudent approach to financial management. MGE, the main regulated subsidiary of MGE Energy, maintains the highest credit rating of any combination utility in the nation from both Standard and Poor's (S&P) and Moody’s.

Value Line, Inc., also gives MGE Energy top ratings for financial strength and investment safety. We have maintained these top ratings for more than a decade.

National recognition from these leading organizations reflects our commitment to our shareholders and to strategic investments for MGE's long-term growth.

 

Energy 2030: Partnering for our future

Through unparalleled engagement with our customers, communities, other stakeholders and industry experts, MGE is advancing Energy 2030, our ambitious framework for our future. Energy 2030 continues our long-term direction of reducing carbon emissions, greater use of renewables, innovative products and services and ongoing partnerships.

By listening to and working with our customers, we are developing programs, products and services responsive to their needs. As we invest in new technologies, we also are building shareholder value in a changing energy world.

Our Energy 2030 framework includes two high-level goals:

• To transition toward supplying 30% of retail electric sales with renewable resources by 2030; and, 25% of retail electric sales with renewable resources by 2025.
• To work with customers to reduce carbon dioxide emissions by 40% from 2005 levels by 2030.

In 2016, as part of our ongoing commitment to invest further in cleaner energy, MGE reached an agreement to reduce our ownership in the Columbia Energy Center near Portage, Wis. MGE is a minority owner in the coal-fired power plant. Once finalized, this agreement reduces MGE's capacity from Columbia by about 33 megawatts (MW).

Renewable energy investments

Under Energy 2030, we also are building on our history of renewable energy investments.

• MGE is proposing to construct, own and operate its largest wind farm to date. MGE began site selection in 2015 for this 66-MW wind farm about 200 miles west of Madison near Saratoga, Iowa. MGE secured the rights to the construction-ready site in 2016 from the site’s initial developer. The site is well situated due to its strong winds and proximity to transmission infrastructure. In February 2017, MGE filed with state regulators its intent to seek approval to build the wind farm. If it receives regulatory approval, construction on the approximately $107 million project could begin in 2018.
• We also completed construction of MGE's Shared Solar pilot project in the City of Middleton on the roof of the Municipal Operations Center. MGE owns and maintains the 500-kilowatt (kW) solar installation, which delivers locally generated solar power to the electric grid. Our innovative model for community-sourced solar is one example of how we're partnering to grow investments in renewable energy.

Innovation

Innovative products offer new opportunities to partner with customers. Our Smart Thermostat Demand Response pilot program for residential customers will explore the use of smart technology to manage peak power demands. With customers' consent, MGE will be able to use smart thermostats to manage the electricity use of residential air conditioners to reduce peak in the summer.

In 2016, MGE launched Charge@Home. This electric vehicle charging pilot program offers drivers a faster way to charge at their homes. MGE installs and maintains the chargers. Customers enjoy faster, more convenient charging that can be controlled remotely with a smartphone. Such opportunities to work together with customers allow MGE to research new technologies while learning more about how electric vehicle charging impacts the grid.

Sustainability

MGE partners to help create healthier communities for generations to come. As part of our partnership with the City of Middleton to build the Shared Solar project, MGE also installed a 100-kW solar array on the roof of the city's police department. The electricity from this array helps to fulfill the city’s sustainability goal of 25% renewable energy by 2025.

In addition, MGE is collaborating with the City of Madison, which also has sustainability goals. MGE and the city continue to discuss how to move forward areas of mutual interest, including solar, electric vehicles and efficiency.

MGE's commitment to sustainable practices extends throughout our daily operations. For the third consecutive year, MGE has received the Green Master designation from the Wisconsin Sustainable Business Council. The statewide program evaluates applicants on their sustainable practices and results in nine operational areas to be considered for the designation. The top 20% of the companies achieve the highest-ranking category as a Green Master.

Reliability

Our obligation to provide safe, reliable energy remains a top priority. We invest in new technologies, in infrastructure and in our people to ensure that MGE is an industry leader in electric service reliability. In 2015, we were ranked number one in a nationwide industry survey for the fewest number of outages. In this yearly survey of more than 90 electric utilities, MGE has ranked in the top four utilities in the country for both the fewest number of outages and the shortest duration of outages in each of the last nine years.

MGE also scores at the top when called upon to respond to natural gas leaks. Our crews recorded the second-fastest average response times, according to a 2015 nationwide survey of more than 80 utilities. MGE averaged a response time of 16 minutes compared to a national average of 26 minutes.

We continue to expand our natural gas service to more customers through our gas expansion model, or GEM, program. Since the program's pilot in 2012, MGE has completed 14 GEM projects totaling 182 miles of gas main with additional projects planned for 2017. Through our GEM program, we're able to work with new customers and grow our investment in safe, dependable natural gas service.

Continuity for the future

On March 1, 2017, Jeffrey Keebler succeeded Gary Wolter as President and CEO. Gary continues to serve the company as Chairman. Jeff also has been appointed to our Board of Directors. Since joining MGE in 1995, Jeff has served in various executive positions including Energy Supply and Planning, Customer Services, Information Technology and Human Resources. All of our talented employees will continue to serve with vision, ingenuity and a commitment to being a strong community energy company, building both customer and shareholder value.

We wish to thank our employees, our customers and you, our shareholders, for your contributions to our success. With deep pride and gratitude, we look forward to the future of MGE Energy.

 

 

Partnerships lead to new, large solar installation

MGE owns and operates a new 1,728-panel solar installation built with community support and collaboration. Our Shared Solar project is on the roof of the City of Middleton's new operations center. Customers have signed up to purchase this clean energy through an innovative new program for community solar. Working together, we are increasing our investment in renewable resources as we advance Energy 2030 and give customers new options to support clean energy.

Moving forward together for a cleaner, more sustainable future

 

New wind farm proposal advances renewable energy goals

MGE is proposing to construct, own and operate a new 66-megawatt wind farm. This opportunity continues the progress the company has made in reducing carbon emissions and increasing renewable energy. The project represents a long-term, cost-effective strategy for MGE to meet its Energy 2030 commitments to cleaner energy.

MGE secured the rights to the construction-ready site in 2016 from the site's initial developer. In February 2017, MGE filed with state regulators its intent to seek approval to build the wind farm. With regulatory approval, construction could begin in 2018.

The project's 33 wind turbines would stand nearly 500 feet tall. Wind turbine technology has improved with larger turbines producing energy more efficiently.

The Saratoga project builds upon MGE's history of reducing carbon emissions and growing renewable resources. Under our now completed Energy 2015 framework, MGE increased energy from renewable resources by almost 12 times and reduced carbon emissions 20% between 2005 and 2015.

 

Innovative efficiency program serves local businesses

Working with customers to be more energy efficient is key to meeting our Energy 2030 goals.

We are partnering with Wisconsin's Focus on Energy in a pilot program called On Demand Savings. This program encourages businesses to better manage their energy use when electric use peaks across the region. As part of the program, MGE electric meters interface with customers' own energy management systems—providing businesses real-time data on their energy use. This allows the businesses that participate in On Demand Savings to take action and control their energy use during high demand periods and helps control costs for all customers in the long run.

MGE is tracking the program's results as part of its partnership with Focus on Energy and the National Governors Association. Results from this pilot will be shared with the Governors Association, and similar programs could be replicated across the country.
 

 

No. 1 in electric reliability in national survey

MGE once again has been recognized as the most reliable electric utility in the United States based on the results of a national industry survey. In 2016, MGE was ranked number one in reliability with the fewest power interruptions based on average customer outages in 2015. This reliability is core to our service and is the foundation on which we are building a utility grid for the future.

Improving our grid and service to meet future needs

 

Connecting new energy sources to the grid

A more advanced electric grid can handle the growth of distributed electric generation, such as customer-owned solar arrays. MGE works with customers who need help in determining how to move forward with solar and also need the reliability of grid-connected service.

Steep & Brew Coffee is a local business with nationwide coffee distribution. MGE worked with Steep & Brew to connect its 315-panel solar array to our electric grid.

MGE specialists helped to evaluate the electricity usage at the facility and provided insight into customer-owned generation. This thriving coffee business uses the electricity generated by the solar panels but still needs additional energy from MGE. On days when the panels generate excess electricity, MGE purchases the excess power and feeds it into the grid to help serve all customers.

Projects like these support our Energy 2030 objective to create a more advanced grid that supports and enables new technologies.

 

Ensuring energy reliability for a growing economy

MGE plans ahead to meet growing customer needs. A building boom in a former factory district along Madison's East Washington Avenue is a prime example. Overall, more than $350 million in redevelopment is projected by 2020. In addition to high-rise apartments, a new $60 million redevelopment project includes a center for entrepreneurs, office and commercial space and a 2,500-seat music venue.

MGE is extending its underground electric network system to accommodate this significant, future growth. Underground electric network systems are more reliable by design. MGE's system has redundant energy feeds to help ensure dependable energy—so if one circuit is out of service, the other takes over automatically to keep the power flowing without interruption.

Careful strategic planning and our investment in robust infrastructure will provide the energy needed for today and tomorrow.
 

 

Working together to grow the electric vehicle market

We're helping customers plug in to make a difference. MGE is working to grow the use of electric vehicles in our community. We built an extensive network of public charging stations. We also offer electric vehicle services, such as our workplace charging program for employers. In 2016, MGE partnered with Nissan and Wisconsin Clean Cities on Drive Electric—a successful promotion that offered discounted Nissan electric vehicles.

Advancing leading-edge technology to serve in an evolving energy world

 

Project taps smart thermostat technology

When temperatures climb, demand for electricity goes up too. MGE is launching a Smart Thermostat Demand Response pilot program to test a new method of controlling peaks in energy demand.

During electric peaks, utilities must use their maximum capacity of electric generation, transmission facilities and distribution lines.

Our new pilot program will test using smart thermostats to manage residential air conditioners' operations to reduce the demand for electricity while maintaining comfort. Smart thermostats can be controlled remotely through communication technologies. We are recruiting approximately 500 residential customers to participate in research with us to better understand the potential for reducing electric peaks.

MGE will, with customers' permission, use their smart thermostats' communications to set parameters, send control signals and report on air conditioner responses.

 

Solar overhead lighting offers a new green option to customers

MGE is expanding its Outdoor Overhead Lighting program to include a new solar option. Solar structures gather the energy of the sun during the day, store that energy in batteries and then illuminate parking lots and other outdoor areas at night.

Customers can choose to have MGE install and maintain solar overhead lighting structures—especially for remote areas where access to power lines may make outdoor lighting cost prohibitive. MGE prepares a customized lighting plan and provides fixtures, poles and regular maintenance for a low monthly charge.

Adding the solar option allows MGE to offer customers more choices in how they source their energy and could potentially lead to new service options. MGE has its own outdoor solar lighting projects including a bike path near the University of Wisconsin- Madison campus and a local park.
 

 

Helping the next generation learn in and out of the classroom

Educating the next generation is a responsibility we all share, which is why MGE partners with local schools and academic organizations on a wide range of programs. Energy efficiency is a key part of our student outreach, which includes an interactive program and energy curriculum materials. However, learning doesn't stop with the final school bell. Every day, local nonprofits work with children to learn by doing. MGE supports these efforts. For example, at Simpson Street Free Press students in grades 3 through 12 produce and publish news stories on various media platforms, participate in book clubs and write book reviews to expand their literacy competencies.

Working with our communities to create a brighter future

 

Venture fund spurs local business growth

To help local businesses grow, MGE works with the nonprofit Madison Development Corp. MGE and other partners formed the Venture Debt Fund, which provides loans to high-tech, start-up companies with the potential of long-term success and job creation. MGE also supports growth in the local technology sector with business incubators and by partnering with business, education and government leaders.

Since it began in 2004, the Venture Debt Fund has invested in 39 companies in the Madison area. The fund allows our economy to reap the dividend of future jobs and growing companies.

TrafficCast is a prime example. This growing company monitors traffic across North America, including all cities in the U.S. Based on advanced digital traffic data, TrafficCast provides travel time forecasting, road speed monitoring and route choices. The Venture Debt Fund has provided two rounds of financing to TrafficCast as it has continued to expand its services and to create jobs.

 

MGE Foundation partners throughout the community

From behind the scenes, the MGE Foundation helps support a variety of nonprofit organizations that help keep our community strong. In the last five years, the MGE Foundation has given more than $4.6 million to more than 350 community organizations ranging from the Boys and Girls Club to the United Way of Dane County.

We understand the importance of being a true community partner—whether it's through financial donations or giving of our time and talent. For example, in 2016, we launched our Career Ambassador program so high school students could get hands-on learning at MGE. Outside of work, many of our employees volunteer their time with local nonprofits—ranging from chambers of commerce to Big Brothers Big Sisters. Being a good, local partner is part of our mission to serve as a community energy company.
 

Corporate Leadership

Directors of MGE Energy and MGE

 
 
 

1. As of March 1, 2017, Gary Wolter retired as President and CEO of MGE Energy and MGE. Jeffrey Keebler assumed the roles of President and CEO of both companies and joined the Board of Directors.
Note: Ages as of Dec. 31, 2016.
For detailed information on board members, see the MGE Energy Proxy Statement .

Officers of MGE Energy and MGE

1. Officers of MGE Energy and MGE. All others are MGE officers.
2. As of March 1, 2017, Jeffrey Keebler (formerly Senior Vice President - Energy Supply and Planning) was promoted to President and CEO of MGE Energy and MGE. Gary Wolter retired as President and CEO of both companies and continues to serve as Chairman of the Board of Directors.
Note: Ages as of Dec. 31, 2016.

 

Shareholder Information

Shareholder Services

We welcome inquiries from shareholders. Please notify us promptly if:

• A stock certificate is lost or stolen.
• A dividend check or statement is not received within 10 days of the scheduled payment date.
• Your name or address changes.

Direct Stock Purchase and Dividend Reinvestment Plan

MGE Energy's Direct Stock Purchase and Dividend Reinvestment Plan allows investors to:

• Buy common stock directly through the company.
• Reinvest dividends.
• Deposit certificates for safekeeping.

Materials Available

More financial information is available upon request or on our website including the Direct Stock Purchase and Dividend Reinvestment Plan.

National Association of Investors Corp.

MGE Energy is a corporate sponsor of the NAIC, which is a nonprofit, volunteer-based group providing investment information, education and support to help create successful lifetime investors. Web address: betterinvesting.org

2017 Expected Record and Dividend Payment Dates

MGE Common Stock

Record Dates	Payment Dates
March 1	March 15
June 1	June 15
Sept. 1	Sept. 15
Dec. 1	Dec. 15

Online Account Access

MGE Energy Shareholder Services (left to right) Kari Foster, Ken Frassetto, Jill Olson, Jerilyn Geishirt and Joan Stuessy.

Registered shareholders can access their account information online. Visit MGE Energy's website to log on through the secure My Shareholder Account link.

Contact Shareholder Services for a security code to help you set up private access to your account.

Go to the home page at mgeenergy.com and click the My Shareholder Account link.

Eliminate Duplicate Proxy Mailings

If you receive more than one proxy mailing from MGE Energy, you can reduce the mailbox clutter.

• Registered shareholders: call or email MGE Energy
• Brokerage shareholders: contact your broker

Sign Up For Electronic Delivery

You may choose to receive email alerts when annual meeting invitations, proxy materials, the annual report and newsletters are available on our website. Registered shareholders can sign up by visiting mgeenergy.com/paperless. If your MGEE shares are held in a brokerage account, contact your broker.

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP
 

Corporate Profile

MGE Energy, Inc.

MGE Energy is the parent company of Madison Gas and Electric Co. (MGE) and its divisions, which serve natural gas and electric customers in south-central and western Wisconsin.

MGE Transco Investment holds an ownership interest in ATC LLC, which invests in transmission assets, primarily within Wisconsin.

MGEE Transco LLC holds an ownership interest in ATC Holdco, which invests in transmission assets outside ATC LLC service territory.

MGE Power owns assets in the West Campus Cogeneration Facility at Madison, Wis. and the Elm Road Generating Station at Oak Creek, Wis.

MAGAEL holds title to properties acquired for future utility plant expansion.

Central Wisconsin Development Corp. promotes business growth in MGE's service area.

North Mendota Energy & Technology Park owns property and serves as the development entity for the property.

MGE Services provides construction and other services. Its subsidiary NGV Fueling Services, LLC, installs, owns and maintains equipment used to fuel natural gaspowered vehicles.

Learn more at mgeenergy.com

 

 

MGE Electric Services

Generation and Distribution
Customers: 149,000
Population: 319,500
Area: 316 square miles

Communities served: Cross Plains, Fitchburg, Madison, Maple Bluff, McFarland, Middleton, Monona, and Shorewood Hills

Generating facilities: Blount Station, West Campus Cogeneration Facility, combustion turbines and solar units at Madison, Columbia Energy Center at Portage, natural gas combustion turbine at Marinette, MGE wind farm in Kewaunee County, Top of Iowa Wind Farm in northcentral Iowa and Elm Road Generating Station at Oak Creek.

MGE Natural Gas Services

Purchase and Distribution
Customers: 154,000
Population: 443,200
Area: 1,682 square miles

Counties served: Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon

Learn more at mge.com