United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended:
September 30, 2014
[ ] 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
mge.com
39-0444025
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files):
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
X
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
MGE Energy, Inc. and Madison Gas and Electric Company: Yes [ ] No [X]
Number of Shares Outstanding of Each Class of Common Stock as of October 31, 2014
Common stock, $1.00 par value, 34,668,370 shares outstanding.
Common stock, $1.00 par value, 17,347,894 shares outstanding (all of which are owned beneficially and of record by MGE Energy, Inc.).
1
Table of Contents
PART I. FINANCIAL INFORMATION.
3
Filing Format
Forward-Looking Statements
Stock Split
Where to Find More Information
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
4
Item 1. Financial Statements.
6
Consolidated Statements of Income (unaudited)
Consolidated Statements of Comprehensive Income (unaudited)
Consolidated Statements of Cash Flows (unaudited)
7
Consolidated Balance Sheets (unaudited)
8
Consolidated Statements of Common Equity (unaudited)
9
10
11
12
13
MGE Energy, Inc., and Madison Gas and Electric Company
14
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
48
Item 4. Controls and Procedures.
50
PART II. OTHER INFORMATION.
51
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4. Mine Safety Disclosures.
52
Item 6. Exhibits.
Signatures - MGE Energy, Inc.
53
Signatures - Madison Gas and Electric Company
54
2
This combined Form 10-Q is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information. The terms "we" and "our," as used in this report, refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.
This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to economic conditions, future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," "will," and other similar words generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.
The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include (a) those factors discussed in the Registrants' 2013 Annual Report on Form 10-K: Item 1A. Risk Factors, as updated by Part II. Item 1A. Risk Factors in this Report, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and Item 8. Financial Statements and Supplementary Data – Note 18, as updated by Part I, Item 1. Financial Statements – Note 8 in this report, and (b) other factors discussed herein and in other filings made by that registrant with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to release publicly any revision to these forward-looking statements to reflect events or circumstances after the date of this report.
On December 20, 2013, MGE Energy's Board of Directors declared a three-for-two stock split of MGE Energy's outstanding shares of common stock, effective in the form of a stock dividend. Shareholders of record at the close of business on January 24, 2014, received one additional share of MGE Energy common stock for every two shares of common stock owned on that date. The additional shares were distributed on February 7, 2014. All share and per share data provided in this report give effect to this stock split.
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.
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
MGE Energy
MGE Power
MGE Power, LLC
MGE Power Elm Road
MGE Power Elm Road, LLC
MGE Power West Campus
MGE Power West Campus, LLC
MGE State Energy Services
MGE State Energy Services, LLC
MGE Transco
MGE Transco Investment, LLC
NGV Fueling Services
NGV Fueling Services, LLC
North Mendota
North Mendota Energy & Technology Park, LLC
Other Defined Terms:
AFUDC
Allowance for Funds Used During Construction
ATC
American Transmission Company LLC
Blount
Blount Station
CA
Certificate of Authority
CAA
Clean Air Act
CAIR
Clean Air Interstate Rule
CAVR
Clean Air Visibility Rule
CCC
Closed Cycle Cooling
CCR
Coal Combustion Residual
Codification
Financial Accounting Standards Board Accounting Standards Codification
Columbia
Columbia Energy Center
Cooling degree days
Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide cooling
CSAPR
Cross-State Air Pollution Rule
Dth
Dekatherms, a quantity measure used in respect of natural gas
EGUs
Electric Generating Units
Elm Road Units
Elm Road Generating Station
EPA
United States Environmental Protection Agency
FASB
Financial Accounting Standards Board
FTR
Financial Transmission Rights
GHG
Greenhouse Gas
Heating degree days (HDD)
Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating
IRS
Internal Revenue Service
kWh
Kilowatt-hour, a measure of electric energy produced
MATS
Mercury and Air Toxics Standards
MISO
Midcontinent Independent System Operator (a regional transmission organization)
MW
Megawatt, a measure of electric energy generating capacity
MWh
Megawatt-hour, a measure of electric energy produced
NAAQS
National Ambient Air Quality Standards
NOL
Net Operating Loss
NOV
Notice of Violation
NOx
Nitrogen Oxides
NSPS
New Source Performance Standards
PGA
Purchased Gas Adjustment clause, a regulatory mechanism used to reconcile natural gas costs recovered in rates to actual costs
PJM
PJM Interconnection, LLC (a regional transmission organization)
PPA
Purchased Power Agreement
PSCW
Public Service Commission of Wisconsin
PSD
Prevention of Significant Deterioration
ROE
Return on Equity
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
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
WPL
Wisconsin Power and Light Company
WPSC
Wisconsin Public Service Corporation
XBRL
eXtensible Business Reporting Language
5
(In thousands, except per-share amounts)
Three Months Ended
Nine Months Ended
September 30,
2014
2013
Operating Revenues:
Regulated electric revenues
$
112,869
119,836
308,418
310,176
Regulated gas revenues
21,404
18,864
163,335
121,373
Nonregulated revenues
862
1,399
2,392
4,075
Total Operating Revenues
135,135
140,099
474,145
435,624
Operating Expenses:
Fuel for electric generation
9,838
13,950
35,836
34,520
Purchased power
21,303
21,981
58,779
61,237
Cost of gas sold
11,039
8,819
107,679
70,259
Other operations and maintenance
37,587
41,134
118,267
124,670
Depreciation and amortization
10,376
9,710
30,191
28,864
Other general taxes
4,872
4,605
14,861
14,049
Total Operating Expenses
95,015
100,199
365,613
333,599
Operating Income
40,120
39,900
108,532
102,025
Other income, net
2,636
3,750
10,736
9,770
Interest expense, net
(5,141)
(4,605)
(14,550)
(13,937)
Income before income taxes
37,615
39,045
104,718
97,858
Income tax provision
(14,286)
(14,692)
(39,585)
(37,030)
Net Income
23,329
24,353
65,133
60,828
Earnings Per Share of Common Stock
(basic and diluted)
0.67
0.70
1.88
1.75
Dividends per share of common stock
0.283
0.272
0.826
0.799
Weighted Average Shares Outstanding
34,668
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
(In thousands)
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of tax ($63 and $24, and $38 and
$117, respectively)
95
36
56
176
Comprehensive Income
23,424
24,389
65,189
61,004
Operating Activities:
Net income
Items not affecting cash:
Deferred income taxes
24,376
32,706
Provision for doubtful receivables
1,001
1,551
Employee benefit plan expenses
(814)
9,908
Equity earnings in ATC
(7,306)
(7,045)
Other items
(843)
250
Changes in working capital items:
Decrease in current assets
13,318
15,053
Decrease in current liabilities
(7,515)
(5,496)
Dividend income from ATC
5,762
5,498
Cash contributions to pension and other postretirement plans
(2,449)
(33,919)
Debt make-whole premium
-
(6,757)
Other noncurrent items, net
118
7,159
Cash Provided by Operating Activities
120,972
108,600
Investing Activities:
Capital expenditures
(66,138)
(92,092)
Capital contributions to investments
(1,830)
(1,305)
Other
(1,265)
(780)
Cash Used for Investing Activities
(69,233)
(94,177)
Financing Activities:
Cash dividends paid on common stock
(28,634)
(27,685)
Repayment of long-term debt
(3,069)
(42,000)
Issuance of long-term debt
85,000
(130)
(765)
Cash (Used for) Provided by Financing Activities
(31,833)
14,550
Change in cash and cash equivalents
19,906
28,973
Cash and cash equivalents at beginning of period
68,813
46,357
Cash and Cash Equivalents at End of Period
88,719
75,330
Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures
6,549
10,473
The accompanying notes are an integral part of the unaudited consolidated financial statements.
December 31,
ASSETS
Current Assets:
Cash and cash equivalents
Accounts receivable, less reserves of $4,056 and $4,219, respectively
35,251
44,890
Other accounts receivable, less reserves of $448 and $750, respectively
5,365
5,352
Unbilled revenues
19,929
31,982
Materials and supplies, at average cost
17,524
16,662
Fossil fuel
5,121
5,206
Stored natural gas, at average cost
23,292
13,988
Prepaid taxes
15,569
19,106
Regulatory assets - current
4,985
6,377
Other current assets
9,650
8,225
Total Current Assets
225,405
220,601
Regulatory assets
100,227
107,166
Pension benefits
17,942
15,071
Other deferred assets and other
7,029
8,046
Property, Plant, and Equipment:
Property, plant, and equipment, net
1,176,592
1,018,809
Construction work in progress
21,331
141,415
Total Property, Plant, and Equipment
1,197,923
1,160,224
Investments
71,370
67,952
Total Assets
1,619,896
1,579,060
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year
4,162
4,102
Accounts payable
41,871
43,684
Accrued interest and taxes
4,041
5,661
Accrued payroll related items
10,305
10,731
1,711
Regulatory liabilities - current
8,822
13,538
Derivative liabilities
7,131
7,750
Other current liabilities
5,824
9,489
Total Current Liabilities
82,156
96,666
Other Credits:
313,101
284,791
Investment tax credit - deferred
1,274
1,413
Regulatory liabilities
21,970
19,792
Accrued pension and other postretirement benefits
50,339
49,184
47,820
57,930
Other deferred liabilities and other
52,947
52,360
Total Other Credits
487,451
465,470
Capitalization:
Common shareholders' equity
653,985
617,510
Long-term debt
396,304
399,414
Total Capitalization
1,050,289
1,016,924
Commitments and contingencies (see Footnote 8)
Total Liabilities and Capitalization
Accumulated
Additional
Common Stock
Paid-in
Retained
Comprehensive
Shares
Value
Capital
Earnings
Income
Total
Beginning balance - December 31, 2012
316,268
228,399
94
579,429
Other comprehensive income
Common stock dividends declared
($ 0.799 per share)
Ending balance - September 30, 2013
261,542
270
612,748
Beginning balance - December 31, 2013
266,197
377
($0.826 per share)
Cash in lieu of fractional shares related
to stock split
(80)
Ending balance - September 30, 2014
302,616
433
112,875
308,435
21,410
163,351
135,147
474,178
9,841
35,843
21,307
58,790
11,045
107,695
37,309
40,990
117,593
124,133
10,364
30,156
13,338
13,798
36,180
34,237
108,076
113,853
401,118
367,299
27,071
26,246
73,060
68,325
Other Income and Deductions:
AFUDC - equity funds
255
852
3,306
2,178
Equity in earnings in ATC
2,423
2,340
7,306
7,045
(984)
(880)
(3,390)
(2,802)
(111)
407
(351)
Total Other Income and Deductions
1,583
2,719
6,871
6,539
Income before interest expense
28,654
28,965
79,931
74,864
Interest Expense:
Interest on long-term debt
5,225
4,910
15,714
14,757
Other interest, net
44
(31)
AFUDC - borrowed funds
(84)
(281)
(1,090)
(718)
Net Interest Expense
5,185
4,634
14,676
14,008
23,469
24,331
65,255
60,856
Less: Net Income Attributable to Noncontrolling
Interest, net of tax
(6,653)
(6,861)
(19,784)
(20,547)
Net Income Attributable to MGE
16,816
17,470
45,471
40,309
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale
securities, net of tax (($29) and ($33), and $36 and
($52), respectively)
43
49
(54)
77
23,512
24,380
65,201
60,933
Less: Comprehensive Income Attributable to
Noncontrolling Interest, net of tax
Comprehensive Income Attributable to MGE
16,859
17,519
45,417
40,386
23,811
31,467
(446)
652
13,258
14,599
(5,457)
(4,911)
(24)
7,063
122,747
107,826
(1,420)
(1,065)
(1,087)
(678)
(68,645)
(93,835)
Cash dividends paid to parent by MGE
(26,500)
Distributions to parent from noncontrolling interest
(17,778)
(21,148)
Equity contribution received by noncontrolling interest
1,420
1,065
(668)
(45,927)
22,249
8,175
36,240
14,808
6,350
22,983
42,590
Affiliate receivables
609
534
5,290
5,274
20,390
23,934
9,546
8,197
164,920
171,852
Affiliate receivable long-term
5,428
5,825
4,987
6,138
1,175,695
1,017,877
1,197,026
1,159,292
68,172
65,299
1,558,702
1,530,643
41,861
3,774
6,040
1,143
2,723
5,495
6,446
82,693
95,014
306,559
279,085
50,338
52,357
480,908
459,761
Common shareholder's equity
476,408
457,491
Noncontrolling interest
122,389
118,963
Total Equity
598,797
576,454
995,101
975,868
Non-
Controlling
Interest
Beginning balance - Dec. 31, 2012
17,348
192,417
223,527
117,470
550,766
20,547
Other comprehensive income (loss)
Equity contribution received by
noncontrolling interest
Distributions to parent from
263,836
81
117,934
591,616
Beginning balance - Dec. 31, 2013
247,534
192
19,784
Cash dividends paid to parent
by MGE
266,505
138
1.
Basis of Presentation - MGE Energy and MGE.
This report is a combined report of MGE Energy and MGE. References in this report to "MGE Energy" are to MGE Energy, Inc. and its subsidiaries. References in this report to "MGE" are to Madison Gas and Electric Company.
MGE Power Elm Road and MGE Power West Campus own electric generating assets and lease those assets to MGE. Both entities are variable interest entities under applicable authoritative guidance. MGE is considered the primary beneficiary of these entities as a result of contractual agreements. As a result, MGE has consolidated MGE Power Elm Road and MGE Power West Campus. See Footnote 2 of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2013 Annual Report on Form 10-K.
The accompanying consolidated financial statements as of September 30, 2014, and for the three and nine months ended, are unaudited, but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in MGE Energy's and MGE's 2013 Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These notes should be read in conjunction with the financial statements and the notes on pages 57 through 100 of the 2013 Annual Report on Form 10-K.
On December 20, 2013, MGE Energy's Board of Directors declared a three-for-two stock split of MGE Energy's common stock in the form of a stock dividend. The additional shares were distributed February 7, 2014, to all shareholders of record as of January 24, 2014. All shares and per share data provided in this report give effect to this stock split.
2.
Equity and Financing Arrangements.
a.
Common Stock - MGE Energy.
MGE Energy sells shares of its common stock through its Stock Plan. Those shares may be newly issued shares or shares that MGE Energy has purchased in the open market for resale to participants in the Stock Plan. All sales under the stock plan are covered by a shelf registration statement that MGE Energy filed with the SEC. For both the nine months ended September 30, 2014 and 2013, MGE Energy did not issue any new shares of common stock under the Stock Plan.
b.
Dilutive Shares Calculation - MGE Energy.
MGE Energy does not hold any dilutive securities.
3.
Investment in ATC - MGE Energy and MGE.
ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC as required by Wisconsin law. That interest is presently held by MGE Transco, which is jointly owned by MGE Energy and MGE.
MGE Transco has accounted for its investment in ATC under the equity method of accounting. For the nine months ended September 30, 2014 and 2013, MGE Transco recorded the following:
Equity in earnings from investment in ATC
Dividends received from ATC
Capital contributions to ATC
On October 31, 2014, MGE Transco made an additional $0.4 million capital contribution to ATC.
MGE Transco's investment in ATC as of September 30, 2014, and December 31, 2013, was $67.5 million and $64.5 million, respectively.
At September 30, 2014, MGE is the majority owner, and MGE Energy, the holding company, is the minority owner of MGE Transco. MGE Energy's proportionate share of the equity and net income of MGE Transco is classified within the MGE financial statements as noncontrolling interest.
ATC's summarized financial data for the three and nine months ended September 30, 2014 and 2013, is as follows:
Operating revenues
163,643
160,480
486,970
464,345
Operating expenses
(76,561)
(77,595)
(229,589)
(217,240)
693
917
1,403
585
(22,204)
(21,136)
(66,442)
(63,232)
Earnings before members' income taxes
65,571
62,666
192,342
184,458
4.
Columbia Environmental Project Construction - MGE Energy and MGE.
MGE and two other utilities jointly own Columbia, a coal-fired generating facility. WPL is the plant operator and permit holder, and owns 46.2% of Columbia. WPSC owns a 31.8% interest, and MGE owns a 22% interest, in Columbia. In early 2011, the PSCW issued a Certificate and Order authorizing the construction of scrubbers and baghouses and associated equipment on Columbia Units 1 and 2 to reduce SO2 and mercury emissions. The modifications to Unit 2 were placed into service in April 2014, and the modifications to Unit 1 were placed into service in July 2014. The scrubbers and baghouses are expected to support compliance obligations for current and anticipated air quality regulations, including CAIR, CSAPR, MATS, and the Wisconsin Mercury Rule. As of September 30, 2014, $138.6 million of the capitalized project was transferred from Construction work in progress to Property, plant, and equipment on MGE's balance sheet related to Units 1 and 2 being placed into service. This total amount consisted of $128.8 million of capital expenditures and $9.8 million of AFUDC. MGE's share of various contractual commitments entered for the project as of September 30, 2014, is $5.5 million. For the three months ended September 30, 2014 and 2013, MGE has recognized after tax $0.1 million and $0.8 million, respectively, in AFUDC equity related to this project. For the nine months ended September 30, 2014 and 2013, MGE has recognized after tax $3.0 million and $1.9 million, respectively, in AFUDC equity related to this project.
MGE expects that the costs pertaining to this project will be fully recoverable through rates. For 2014, the PSCW authorized MGE 100% AFUDC on this project during construction. For 2013, the PSCW authorized MGE a 50% current return (included in customer rates) and the remaining 50% as AFUDC.
5.
Taxes - MGE Energy and MGE.
MGE Energy's effective income tax rates for the three and nine months ended September 30, 2014, were 38.0% and 37.8%, respectively, compared to 37.6% and 37.8% for the same periods in 2013. MGE's effective income tax rates for the three and nine months ended September 30, 2014, were 37.9% and 37.8%, respectively, compared to 37.6% and 37.8% for the same periods in 2013. The net increase in the three month effective tax rate is attributable to less AFUDC equity earned during the three month period in 2014 compared to 2013.
15
6.
Pension and Other Postretirement Plans - MGE Energy and MGE.
MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits. Additionally, MGE has defined contribution 401(k) benefit plans.
The following table presents the components of MGE Energy's and MGE's net periodic benefit costs recognized for the three and nine months ended September 30, 2014 and 2013. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.
Pension Benefits
Components of net periodic (benefit) cost:
Service cost
1,536
1,924
4,609
5,764
Interest cost
3,367
3,178
10,102
9,521
Expected return on assets
(5,467)
(4,764)
(16,402)
(14,273)
Amortization of:
Prior service cost
79
152
237
Actuarial loss
180
2,011
539
6,023
Net periodic (benefit) cost
(333)
2,428
(1,000)
7,272
Postretirement Benefits
241
594
722
1,781
564
966
1,691
2,898
(478)
(542)
(1,432)
(1,626)
Transition obligation
Prior service (benefit) cost
(487)
28
(1,462)
83
310
86
930
(131)
1,356
(393)
4,068
7.
Share-Based Compensation - MGE Energy and MGE.
Under MGE Energy's Performance Unit Plan, eligible employees may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period.
In addition to units granted in 2009 through 2013, on February 21, 2014, 21,991 units were granted based on the MGE Energy closing stock price as of that date. These units are subject to a five-year graded vesting schedule and reflect the three-for-two stock split declared December 20, 2013. On the grant date, MGE Energy and MGE measure the cost of the employee services received in exchange for a performance unit award based on the current market value of MGE Energy common stock. The fair value of the awards has been subsequently re-measured at September 30, 2014, as required by applicable accounting standards. Changes in fair value have been recognized as compensation cost. Since this amount is re-measured quarterly throughout the vesting period, the compensation cost is subject to variability.
For nonretirement eligible employees, stock based compensation costs are accrued and recognized using the graded vesting method. Compensation cost for retirement eligible employees or employees that will become retirement eligible during the vesting schedule are recognized on an abridged horizon.
In December 2013, a Director Incentive Plan was approved for the non-employee members of the Board of Directors. This plan is similar to MGE Energy's Performance Unit Plan for eligible employees described above. Under the plan, a non-employee director can receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend payments, at the end of the set performance period. The units are subject to a three-year graded vesting schedule. In January 2014, unit awards of 4,683 (post-split) were granted to the non-employee Directors. For accounting purposes, the awards will be measured similarly to the employee unit awards.
16
During the nine months ended September 30, 2014 and 2013, MGE recorded $0.9 million and $1.1 million, respectively, in compensation expense as a result of the plans. In January 2014, cash payments of $1.2 million were distributed relating to awards that were granted in 2009. No forfeitures occurred during the nine months ended September 30, 2014 or 2013. At September 30, 2014, $3.7 million of outstanding awards are vested.
8.
Commitments and Contingencies - MGE Energy and MGE.
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. These initiatives, proposed rules, and court challenges include:
·
The President's announced plan and directive to the EPA to regulate carbon pollution, or greenhouse gas (GHG) emissions, from new and existing electric power generation units, and the EPA's related proposed GHG New Source Performance Standards (NSPS) (see below for additional information on the NSPS rule).
Rules to regulate NOx and SO2 emissions, including the EPA's Cross State Air Pollution Rule (CSAPR) (see below for recent developments with CSAPR). An environmental group has sought federal appellate court review of the EPA's Clean Air Visibility Rule (CAVR) to address regional haze. Both the pending challenges to CSAPR and the appellate court review of CAVR make the nature of compliance requirements uncertain.
Rules to regulate mercury and similar emissions, including Wisconsin's adopted Mercury Rule and the EPA's adopted Mercury and Air Toxics Standards.
The EPA's cooling water intake rules. The EPA issued a final rule for existing facilities in May 2014. The final rule is discussed below.
The EPA's proposed water effluent limitations guidelines and standards for steam electric power plants, which focus on the reduction of metals and other pollutants in wastewater from new and existing power plants from coal-burning plants such as Columbia and the Elm Road Units.
The EPA's ongoing review of several National Ambient Air Quality Standards (NAAQS), including the potential lowering of the ozone NAAQS and its proposed requirements for air agencies to characterize sulfur dioxide air quality for purposes of implementing the 1-hour SO2 NAAQS. This approach focuses on large sources of SO2 emissions and proposes area designations to be made in two rounds (2017 and 2020). The proposed rule gives states broad discretion in its implementation. The final rule is expected late in 2014. MGE will be reviewing the rule for potential impacts on its operations.
The matters in the bullet points above are discussed further in Footnote 18.d. of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2013 Annual Report on Form 10-K. In addition to the developments noted above, the following discussion is an update to the current status of environmental matters set forth in that Footnote.
EPA's Final 316(b) Rule Governing Water Intake Systems at Electric Generating Facilities
In August 2014, the EPA published its Phase II and III Rules pursuant to Section 316(b) of the Clean Water Act, which governs cooling water intake structures located at large existing power plant and industrial facilities. The 316(b) Rule requires these facilities to implement methods for reducing fish impingement by their water intakes using one of seven options, including closed cycle cooling (CCC) systems.
Our WCCF facility already employs a CCC system as defined under the Rule. The Columbia plant may need to address multiple intake structures. Our Blount plant has conducted studies regarding options for compliance with this rule. The exact requirements at Blount and Columbia, however, will not be known until those sites' permits are modified to account for this rule. Nonetheless, MGE expects that the 316(b) Rule will not have material effects on its existing plants.
17
EPA's Cross-State Air Pollution Rule (CSAPR) Upheld by the Supreme Court
On April 29, 2014, the US Supreme Court issued a decision reversing the D.C. Circuit Court's decision that had vacated CSAPR and remanding the matter back to the D.C. Circuit for further proceedings. At that time CSPAR remained subject to an order of the D.C. Circuit that stayed its implementation. On October 23, 2014, the D.C. Circuit lifted its stay of CSAPR and set a briefing schedule to resolve issues remaining in the lawsuit. The court also set the briefing schedule for ongoing litigation with oral arguments scheduled for March 2015. The State of Wisconsin has filed a motion with the D.C. Circuit Court reiterating its contention that Wisconsin be removed from CSAPR and may be a part of the court's briefing and oral argument schedule. With several issues undecided and court proceedings extending into 2015, there is remaining uncertainty as to whether MGE's facilities will be required to meet the CSAPR mandates and, if so, the deadline for achieving compliance. The Clean Air Interstate Rule (CAIR) remains in effect for the time being. See MGE Energy's and MGE's 2013 Annual Report on Form 10K for additional information on the legal proceedings associated with these environmental matters.
With CSAPR now reinstated, it will require (once implemented) that qualifying power plants meet SO2 and NOx allocations or purchase them on the market. MGE has been monitoring our overall compliance options, particularly at our Columbia power plant as we awaited installation and testing of SO2 controls. With the 2014 installation of SO2 pollution controls at Columbia, we will likely meet or exceed the allocations for Columbia based on the CSAPR allocations in the current rule (see Footnote 4 for information regarding the Columbia environmental construction project and below in this Footnote for information regarding our consent decree). MGE expects that the costs pertaining to meeting CSAPR and the consent decree requirements will be fully recoverable through rates. We will continue to monitor and evaluate the D.C. Circuit Court remand proceedings and the implementation of the rule by the EPA and WDNR.
EPA's Greenhouse Gas Reduction Guidelines under the Clean Air Act 111(d) Rule
On June 2, 2014, the EPA released proposed guidelines for states to use in developing plans to control GHG emissions from existing fossil fuel fired electric generating units (EGUs). The proposed rule was published in the Federal Register on June 17, 2014.
The EPA's proposal seeks to reduce GHG emissions from EGUs by a national average of 30% by 2030 as measured from a 2005 baseline. Each state is given its own emission reduction targets to meet this goal. These targets are expressed as a "rate-based" emission average to be achieved by the combined fleet of EGUs within the state. States would be expected to make "meaningful progress" towards these reductions by 2020 and to meet their respective targets by 2030.
The EPA's proposal establishes guidelines for states and encourages the use of four "building blocks" for achieving these reductions. These "building blocks" are: (1) increasing the efficiency of EGUs; (2) re-dispatching of gas-fired generation at the expense of coal; (3) expanding the use of low and no carbon power sources, such as wind, nuclear and solar; and (4) improving demand side energy efficiency to reduce electric use.
The EPA is taking comments on the proposed rule through December 1, 2014. The rule is expected to be finalized by June 2015. States will then have up to two years to prepare compliance plans. This rule could have significant impacts on EGUs. MGE is reviewing the proposal at this time.
Coal Combustion Residual Rule
The EPA's proposed Coal Combustion Residual (CCR) Rule is anticipated to be finalized in December 2014. The final CCR Rule will regulate disposal and management of ash and other coal combustion byproducts as a waste under the EPA's solid waste rules.
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 Environmental Project
See Footnote 4 for information regarding the Columbia environmental construction project.
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Columbia Clean Air Act Litigation
In December 2009, the EPA sent a notice of violation (NOV) to MGE and the other co-owners of Columbia. The NOV alleged that WPL, as owner-operator, and the other co-owners failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the PSD program requirements, the Title V operating permit requirements of the CAA and the Wisconsin State Implementation Plan (SIP). In April 2013, the EPA filed a lawsuit against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, Sierra Club filed lawsuits against WPL alleging violations of the CAA at Columbia and other WPL-operated Wisconsin facilities.
In April 2013, WPL, as owner-operator, along with the other owners of Columbia, entered into a consent decree with the EPA and the Sierra Club to resolve these claims, while admitting no liability. In June 2013, the consent decree was approved and entered by the Court. The consent decree requires installation of the following emission controls at Columbia: SO2 scrubbers and baghouses at Columbia Units 1 and 2 by December 31, 2014, which have now been installed, and an SCR system at Columbia Unit 2 by December 31, 2018. In addition, the consent decree establishes emission rate limits for SO2, NOx, and particulate matter for Columbia Units 1 and 2. The consent decree also includes annual plant-wide emission caps for SO2 and NOx for Columbia. MGE also paid approximately $0.2 million as its share of a civil penalty and will complete approximately $0.6 million in environmental mitigation projects. MGE intends to seek recovery in rates of the costs associated with its compliance with the terms of the final consent decree and currently expects to recover any material compliance costs.
Chattel Paper Agreement and Other Guarantees.
MGE makes available to qualifying customers a financing program for the purchase and installation of energy-related equipment that will provide more efficient use of utility service at the customer's property. MGE is party to a chattel paper purchase agreement with a financial institution under which it can sell or finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until July 31, 2015. At September 30, 2014, MGE had sold a $4.1 million interest in these receivables. MGE retains the servicing responsibility for these receivables. As of September 30, 2014, the servicing asset recognized by MGE is $0.2 million.
MGE accounts for servicing rights under the amortization method. Initial determination of the servicing asset fair value is based on the present value of the estimated future cash flows. The discount rate is based on the PSCW authorized weighted cost of capital.
MGE would be required to perform under its guarantee if a customer defaulted on its loan. The energy-related equipment installed at the customer sites is used to secure the customer loans. The loan balances outstanding at September 30, 2014, approximate the fair value of the energy-related equipment acting as collateral. The length of the MGE guarantee to the financial institution varies from one to ten years depending on the term of the underlying customer loan. Principal payments for the remainder of 2014 and the next four years on the loans are:
2015
2016
2017
2018
Chattel Paper
108
921
841
438
374
c.
Legal Matters.
MGE is involved in various legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements.
19
d.
Purchase Contracts.
MGE Energy and MGE have entered into various commodity supply, transportation, and storage contracts to meet their obligations to deliver electricity and natural gas to customers. As of September 30, 2014, the future commitments related to these purchase contracts were as follows:
Coal(a)
11,950
18,439
10,765
5,073
2,710
Natural gas
Transportation & storage(b)
5,234
18,073
9,937
272
191
Supply(c)
16,951
16,070
Purchase power(d)
12,665
48,964
49,633
50,132
51,153
16,102
62,902
101,546
70,335
55,477
54,054
(a)
Total coal commitments for the Columbia and Elm Road Units, including transportation. Fuel procurements for MGE's jointly owned Columbia and Elm Road Units are handled by WPL and WEPCO, respectively, who are the operators of those facilities. If any minimum purchase obligations must be paid under these contracts, management believes these obligations would be considered costs of service and recoverable in rates.
(b)
MGE's natural gas transportation and storage contracts require fixed monthly payments for firm supply pipeline transportation and storage capacity. The pricing components of the fixed monthly payments for the transportation and storage contracts are established by FERC but may be subject to change.
(c)
These commitments include market-based pricing. Management expects to recover these costs in future customer rates.
(d)
MGE has several purchase power agreements to help meet future electric supply requirements. Management expects to recover these costs in future customer rates.
e.
Elm Road - MGE Energy and MGE.
The warranty periods for both of the Elm Road Units have expired. During 2013, WEPCO and Bechtel (the construction contractor for the Elm Road Units) were working through the outstanding warranty claims. The warranty claim for the costs incurred to repair steam turbine corrosion damage identified on both units was resolved through a binding arbitration in June 2013. Final acceptance of the Elm Road Units occurred in June 2013 after all requirements stated in the contract with Bechtel were satisfied. In April 2014, an additional warranty claim was resolved that did not have a material impact on our financial statements. The parties continue to work through one potential remaining warranty claim.
9.
Derivative and Hedging Instruments - MGE Energy and MGE.
Purpose.
As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices and gas revenues. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts to which this exclusion cannot be applied, MGE Energy and MGE recognize such derivatives in the consolidated balance sheets at fair value. The majority of MGE's derivative activities are conducted in accordance with its electric and gas risk management program, which is approved by the PSCW and limits the volume MGE can hedge with specific risk management strategies. The maximum length of time over which cash flows related to energy commodities can be hedged is four years. If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. The deferred gain or loss is recognized in earnings in the delivery month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.
20
Notional Amounts.
The gross notional volume of open derivatives is as follows:
December 31, 2013
Commodity derivative contracts
447,570 MWh
458,660 MWh
6,555,000 Dth
3,750,000 Dth
FTRs
3,104 MW
1,984 MW
Financial Statement Presentation.
MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on electricity transmission paths in the MISO market, MGE holds FTRs. An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are offset with a corresponding regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. At September 30, 2014, and December 31, 2013, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $2.3 million and $1.8 million, respectively.
MGE is a party to a ten-year purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheet. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at September 30, 2014, and December 31, 2013, reflects a loss position of $54.9 million and $65.7 million, respectively. The actual fuel cost will be recognized in purchased power expense in the month of purchase and collected in rates.
The following table summarizes the fair value of the derivative instruments on the consolidated balance sheet. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, MGE Energy and MGE have netted instruments with the same counterparty under a master netting agreement as well as the netting of collateral. At September 30, 2014, MGE Energy and MGE had the right to reclaim collateral (a receivable) of $0.6 million.
Asset Derivatives
Liability Derivatives
Balance Sheet Location
Fair Value
1,507
Derivative liability (current)
532
Other deferred charges
Derivative liability (long-term)
1,237
Ten-year PPA
N/A
7,120
167
363
21
The following tables show the effect of netting arrangements for recognized derivative assets and liabilities that are subject to a master netting arrangement or similar arrangement on the balance sheet.
Offsetting of Derivative Assets
Gross amounts
Gross amounts offset in balance sheet
Collateral posted against derivative positions
Net amount presented in balance sheet
1,555
(525)
1,030
1,523
(99)
(175)
1,249
Offsetting of Derivative Liabilities
536
54,940
99
65,680
The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheet at September 30, 2014 and 2013, and the consolidated income statement for the three and nine months ended September 30, 2014 and 2013.
Current and long-term regulatory asset
Three Months Ended September 30:
Balance at July 1,
48,853
676
66,649
658
Change in unrealized loss
5,329
2,330
Realized gain (loss) reclassified to a deferred
account
(314)
314
(275)
275
Realized gain (loss) reclassified to income
statement
(1,184)
(249)
(621)
Balance at September 30,
52,684
741
68,083
822
Nine Months Ended September 30:
Balance at January 1,
63,893
411
72,329
574
Change in unrealized gain
(18,090)
(1,330)
1,120
(1,120)
(953)
953
5,761
1,450
(1,963)
(705)
22
Realized losses (gains)
Fuel for electric generation/ purchased power
480
(18)
(7)
(97)
(387)
1,068
1,126
(5,376)
(1,367)
(523)
608
(929)
(896)
461
3,479
MGE's commodity derivative contracts, FTRs, and ten-year PPA are subject to regulatory deferral. These derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. Realized gains and losses are deferred on the consolidated balance sheet and are recognized in earnings in the delivery month applicable to the instrument. As a result of the above described treatment, there are no unrealized gains or losses that flow through earnings.
The ten-year PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of September 30, 2014, no collateral has been posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of September 30, 2014, certain counterparties were in a net liability of less than $0.1 million. As of December 31, 2013, no counterparties were in a net liability position.
Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of September 30, 2014, no counterparties have defaulted.
10.
Rate Matters - MGE Energy and MGE.
Rate Proceedings.
On April 17, 2014, MGE filed an application with the PSCW requesting a 2.8% increase to electric rates and a 2.3% decrease to gas rates for 2015. MGE has requested escrow accounting treatment for transmission related costs starting in 2015. This treatment will allow MGE to reflect any differential between costs reflected in rates and actual costs incurred in its next rate case filing. The proposed electric rate increases cover costs associated with the construction of emission-reduction equipment at Columbia and improvements and reliability of the state's electric transmission system.
During the rate case proceeding, certain updates have been made to reflect changing conditions from the initial filing. Those updates include increased costs for fuel and purchased power costs primarily related to coal delivery costs, lower transmission costs due to favorable FERC decisions on cost allocations for system reliability payments, and increased costs to reflect current market conditions for pension and post-retirement benefit costs. Incorporating the revisions would adjust the electric rate increase from 2.8% to 4.3% and adjust the gas rate decrease from 2.3% to 1.4%. A PSCW decision is expected by the end of 2014.
On July 26, 2013, the PSCW authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014. The order includes authorizing 100% AFUDC on the Columbia scrubber construction project and deferral of increased costs related to ATC and MISO Schedule 26 fees. As part of the rate freeze plan authorized by the PSCW, effective January 1, 2014, approximately $6.2 million associated with a 2012 fuel rule surplus credit will not be required to be refunded to customers and will be amortized in 2014. The fuel credit will accrue interest at MGE's weighted cost of capital. The authorized return on equity remained unchanged at 10.3%.
23
On December 14, 2012, the PSCW authorized MGE to increase 2013 rates for retail electric customers by 3.8% or $14.9 million and to increase gas rates by 1.0% or $1.6 million. The change in retail electric rates was driven by costs for new environmental equipment at Columbia, final construction costs for the Elm Road Units, transmission reliability enhancements, and purchased power costs. The authorized return on common stock equity remained unchanged at 10.3%.
Fuel Rules.
Fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band around the amount approved for a utility in its most recent base rate proceedings. Any over/under recovery of the actual costs is determined on an annual basis and will be adjusted in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or minus 2%. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel costs exceeded 102% of the electric fuel costs allowed in its latest rate order. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. Conversely, MGE is required to defer the benefit of lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order.
As of September 30, 2014, MGE did not defer any 2014 electric fuel-related savings/costs that are outside the range authorized by the PSCW. As part of the rate freeze plan authorized by the PSCW for 2014, $4.7 million of the approximately $6.2 million associated with the 2012 fuel rule surplus credit was amortized against purchased power expense during the nine months ended September 30, 2014. The 2013 fuel rule surplus credit of $6.7 million was returned to customers in October 2014.
11.
Fair Value of Financial Instruments - MGE Energy and MGE.
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:
Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.
Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.
Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.
Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.
At September 30, 2014, and December 31, 2013, the carrying amount of cash and cash equivalents approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of MGE Energy's and MGE's long-term debt is based on quoted market prices for similar financial instruments at September 30, 2014, and December 31, 2013. Since long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market value of MGE Energy's and MGE's financial instruments are as follows:
24
Carrying Amount
Assets:
Liabilities:
Long-term debt*
400,724
443,203
403,793
432,010
*Includes long-term debt due within one year.
Recurring Fair Value Measurements.
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for MGE Energy and MGE.
Fair Value as of September 30, 2014
Level 1
Level 2
Level 3
Derivatives, net
2,267
417
1,850
Exchange-traded investments
886
3,153
1,303
54,951
Deferred compensation
2,705
Total Liabilities
57,656
341
2,608
758
25
Fair Value as of December 31, 2013
Derivatives, net(a)
1,787
735
1,052
792
2,579
1,527
2,364
68,044
431
2,218
1,166
(a) These amounts are shown gross and exclude $0.2 million of collateral that was
posted against derivative positions with counterparties as of December 31, 2013.
No transfers were made in or out of Level 1 or Level 2 for the nine months ended September 30, 2014.
Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as Level 1.
Derivatives include exchange-traded derivative contracts, over-the-counter transactions, a ten-year purchased power agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as Level 1. A small number of exchange-traded derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore classified as Level 3. Transactions done with an over-the-counter party are on inactive markets and are therefore considered unobservable and classified as Level 3. These transactions are valued based on quoted prices from markets with similar exchange traded transactions. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as Level 3.
The ten-year purchased power agreement (see Footnote 9) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market, where such exchange-traded contracts exist, and upon calculations based on forward gas prices, where such exchange-traded contracts do not exist. A basis adjustment is applied to the market energy price to reflect the price differential between the market price delivery point and the counterparty delivery point. The historical relationship between the delivery points is reviewed and a discount (below 100%) or premium (above 100%) is derived. This comparison is done for both peak times when demand is high and off peak times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease and if the basis adjustment is increased, the fair value measurement will increase.
The projected power costs anticipated to be incurred under the purchased power agreement are determined using many factors, including historical generating costs, future prices, and expected fuel mix of the counterparty. An increase in the projected fuel costs would result in a decrease in the fair value measurement of the purchased power agreement. A significant input that MGE estimates is the counterparty's fuel mix in determining the projected power cost. MGE also considers the assumptions that market participants would use in valuing the asset or liability. This consideration includes assumptions about market risk such as liquidity, volatility, and contract duration. The fair value model uses a discount rate that incorporates discounting, credit, and model risks.
26
This model is prepared by members of MGE's Energy Accounting group. It is reviewed on a quarterly basis by management in Energy Supply and Finance to review the assumptions, inputs, and fair value measurements.
The following table presents the significant unobservable inputs used in the pricing model.
Model Input
Significant Unobservable Inputs
Basis adjustment:
On peak
97.5%
94.2%
Off peak
94.4%
92.6%
Counterparty fuel mix:
Internal generation
50% - 70%
50% - 30%
The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the consolidated balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26 week maturity increased by 1% compounded monthly with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon observable market data, however, since the deferred compensation obligations themselves are not exchanged in an active market, they are classified as Level 2.
The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE.
Beginning balance
(49,349)
(66,856)
(64,628)
(72,346)
Realized and unrealized gains (losses):
Included in regulatory liabilities (assets)
(3,752)
(1,472)
11,528
4,018
Included in other comprehensive income
Included in earnings
(1,419)
(174)
5,837
(2,034)
Included in current assets
(38)
(89)
(94)
Purchases
6,371
6,052
19,900
17,709
Sales
(60)
(2)
Issuances
Settlements
(4,952)
(5,840)
(25,589)
(15,579)
Transfers in and/or out of Level 3
Balance as of September 30,
(53,101)
(68,328)
Total gains (losses) included in earnings attributed to
the change in unrealized gains (losses) related to
assets and liabilities held at September 30,(b)
The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE (b).
Purchased Power Expense
(1,411)
5,845
Cost of Gas Sold Expense
(8)
MGE's exchange-traded derivative contracts, over-the-counter party transactions, ten-year purchased power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair value and are offset in the financial statements with a corresponding regulatory asset or liability.
27
12.
New Accounting Pronouncements - MGE Energy and MGE.
Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.
In February 2013, the FASB issued authoritative guidance within the Codification's Balance Sheet topic that provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This authoritative guidance became effective January 1, 2014. The authoritative guidance did not have a financial or disclosure impact.
Presentation of an Unrecognized Tax Benefit.
In July 2013, the FASB issued authoritative guidance within the Codification's Income Statement topic that provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The authoritative guidance was issued to eliminate diversity in practice by providing guidance on the presentation of unrecognized tax benefits. This authoritative guidance became effective January 1, 2014. The authoritative guidance will not have a financial statement or disclosure impact, unless MGE Energy or its subsidiaries are in a net operating loss position. MGE Energy or its subsidiaries are currently not in a net operating loss position.
Revenue from Contracts with Customers.
In May 2014, the FASB issued authoritative guidance within the Codification's Revenue Recognition topic that provides guidance on the recognition, measurement, and disclosure of revenue from contracts with customers. This authoritative guidance will become effective January 1, 2017. MGE Energy and MGE are currently assessing the impact this pronouncement will have on their financial statements.
Transfers and Servicing Assets.
In June 2014, the FASB issued authoritative guidance within the Codification's Transfers and Servicing topic that provides guidance on the accounting and disclosures for repurchase-to-maturity transactions, securities lending transactions, and repurchase financings. This authoritative guidance will become effective January 1, 2015. The authoritative guidance will change the accounting for the Chattel Paper program. Prior to adoption of the standard, Chattel Paper was treated as an off-balance sheet arrangement. Upon adoption, assets and liabilities will increase approximately $4.0 million and additional disclosures will be required. The cumulative impact of this guidance on our financial statements is not expected to be material.
13.
Segment Information - MGE Energy and MGE.
MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See MGE Energy's and MGE's 2013 Annual Report on Form 10-K for additional discussion of each of these segments.
The following tables show segment information for MGE Energy's operations for the indicated periods:
Electric
Gas
Non- Regulated Energy
Transmission Investment
All Others
Consolidation/ Elimination Entries
Consolidated Total
Three Months Ended September 30, 2014
Interdepartmental revenues
156
1,614
10,674
(12,444)
Total operating revenues
113,025
23,018
11,536
(6,931)
(1,575)
(1,858)
(12)
(10,376)
Other operating expenses
(74,573)
(22,199)
(35)
(276)
12,444
(84,639)
Operating income (loss)
31,521
(756)
9,643
(288)
136
69
Interest (expense) income, net
(2,832)
(808)
(1,545)
Income (loss) before taxes
28,825
(1,556)
8,098
Income tax (provision) benefit
(10,758)
651
(3,251)
(963)
35
Net income (loss)
18,067
(905)
4,847
1,460
(140)
Three Months Ended September 30, 2013
172
2,757
10,660
(13,589)
120,008
21,621
12,059
(6,425)
(1,497)
(1,788)
(9,710)
(82,414)
(21,485)
(33)
(1)
(145)
13,589
(90,489)
31,169
(1,361)
10,238
92
(2,309)
(729)
(1,596)
29
30,026
(1,998)
8,642
2,339
(11,021)
751
(3,469)
(939)
(14)
19,005
(1,247)
5,173
1,400
Nine Months Ended September 30, 2014
401
7,130
32,017
(39,548)
308,819
170,465
34,409
(19,909)
(4,700)
(5,547)
(30,191)
(229,286)
(144,907)
(105)
(672)
39,548
(335,422)
59,624
20,858
28,757
(707)
Other (deductions) income, net
2,999
(44)
475
(7,571)
(2,429)
(4,676)
126
55,052
18,385
24,081
(106)
(19,602)
(7,378)
(9,665)
(2,924)
(16)
35,450
11,007
14,416
4,382
(122)
Nine Months Ended September 30, 2013
410
10,449
31,924
(42,783)
310,586
131,822
35,999
(19,139)
(4,357)
(5,368)
(28,864)
(235,390)
(111,494)
(96)
(537)
42,783
(304,735)
56,057
15,971
30,535
2,226
430
(7,028)
(2,166)
(4,814)
71
51,255
13,874
25,721
7,044
(36)
(18,148)
(5,844)
(10,209)
(2,837)
33,107
8,030
15,512
4,207
(28)
The following tables show segment information for MGE's operations for the indicated periods:
Nonregulated Energy
150
1,608
(12,432)
(10,364)
Other operating expenses*
(85,314)
(21,544)
(3,286)
12,432
(97,712)
Operating income (loss)*
20,780
(101)
6,392
Other income, net*
119
(5,185)
Less: Net income attributable to
noncontrolling interest, net of tax
Net income (loss) attributable to MGE
(93,481)
(20,748)
(3,502)
(104,143)
20,102
(624)
6,769
1,212
106
1,401
(4,634)
384
7,114
(39,515)
(30,156)
(248,525)
(152,182)
(9,770)
39,515
(370,962)
Operating income*
40,385
13,583
19,092
Other (deductions) income, net*
(147)
(14,676)
Net income attributable to MGE
(253,566)
(117,346)
(10,305)
(338,435)
37,881
10,119
20,326
2,254
4,208
(14,008)
*Amounts are shown net of the related tax expense, consistent with the presentation on the consolidated MGE Income Statement.
30
The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:
Utility
Consolidated
Assets not Allocated
914,839
263,688
30,962
307,599
67,476
443,898
(408,566)
899,257
265,694
19,853
288,116
64,504
431,436
(389,800)
Capital Expenditures:
50,033
1,506
66,138
Year ended Dec. 31, 2013
100,146
15,554
3,347
119,047
Elimination Entries
917,503
262,237
30,778
286,600
(5,892)
288,066
(6,731)
31
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
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 141,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 147,000 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 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 of electricity and gas,
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,
Equity price risk pertaining to pension related assets,
Credit market conditions, including interest rates and our debt credit rating,
Environmental laws and regulations, including adopted and pending environmental rule changes,
and other factors listed in "Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K and in this report.
For the three months ended September 30, 2014, MGE Energy's earnings were $23.3 million or $0.67 per share compared to $24.4 million or $0.70 per share for the same period in the prior year. MGE's earnings for the three months ended September 30, 2014, were $16.8 million compared to $17.5 million for the same period in the prior year.
For the nine months ended September 30, 2014, MGE Energy's earnings were $65.1 million or $1.88 per share compared to $60.8 million or $1.75 per share for the same period in the prior year. MGE's earnings for the nine months ended September 30, 2014, were $45.5 million compared to $40.3 million for the same period in the prior year.
MGE Energy's income was derived from our business segments as follows:
Business Segment:
Electric Utility
Gas Utility
Transmission Investments
All Other
Our net income during the three months ended September 30, 2014, compared to the same period in the prior year primarily reflects the effects of the following factors:
Electric net income decreased due to a 4.4% decrease in electric retail sales reflecting lower customer demand. Cooling degree days (a measure for determining the impact of weather during the cooling season) decreased by 25.1% compared to the prior year. In addition, AFUDC equity decreased $0.7 million (after tax) related to the Columbia environmental project compared to the same period in the prior year. The Columbia units were placed into service in April 2014 and July 2014. The decrease in electric retail sales was partially offset by savings from operating and maintenance expenditures.
Lower non-regulated revenues in 2014 due to the approved recovery, as part of the WEPCO 2013 Wisconsin rate case, of certain one-time force majeure costs associated with the Elm Road Units including a one-time cumulative adjustment for prior periods all recognized in 2013.
Our net income during the nine months ended September 30, 2014, primarily reflects the effects of the following factors:
Electric net income increased due to a $1.1 million (after tax) increase in AFUDC equity related to the Columbia environmental project compared to the same period in the prior year. In addition, operating and maintenance expenditures decreased compared to the prior period.
Gas net income increased due to a 14.6% increase in gas retail sales reflecting higher customer demand due to a colder winter. The average temperatures in January and February were 11.5 degrees and 12.5 degrees, respectively, compared to 21.8 degrees and 21.3 degrees in the prior year. Heating degree days (a measure for determining the impact of weather during the heating season) increased by 9.2% compared to the prior year. In addition, operating and maintenance expenditures decreased over the prior year.
During the first nine months of 2014, the following events occurred:
Columbia Environmental Project: In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. These systems and equipment for Unit 2 and Unit 1 were placed into service in April 2014 and July 2014, respectively. As of September 30, 2014, $128.8 million of the capitalized project (excluding carrying costs) was transferred from Construction work in progress to Property, plant, and equipment on MGE's balance sheet related to Unit 1 and Unit 2 being placed into service. MGE has accumulated $7.9 million of capital expenditures and recognized $3.0 million (after tax) in AFUDC equity related to this project for the nine months ended September 30, 2014.
In the near term, several items may affect us, including:
2015 Rate Filing: On April 17, 2014, MGE filed an application with the PSCW requesting a 2.8% increase to electric rates and a 2.3% decrease to gas rates for 2015. MGE has requested escrow accounting treatment for transmission related costs starting in 2015. This treatment will allow MGE to reflect any differential between the costs reflected in rates and actual costs incurred in its next rate case filing. The proposed electric rate increases cover costs associated with the construction of emission-reduction equipment at Columbia and improvements and reliability of the state's electric transmission system.
33
Environmental Initiatives: There are proposed legislation, rules, and initiatives involving matters related to air emissions, water effluent, hazardous materials, and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and Elm Road, from which we derive approximately 44% of our electric generating capacity. 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. In addition, the Columbia owners, including MGE, resolved claims surrounding the alleged failure, among other things, to obtain necessary air permits and implement necessary emission controls associated with past activities at Columbia, which will require the installation of additional emission controls at Columbia. See Columbia discussion in Footnote 8.a. in the Notes to Consolidated Financial Statements.
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. Interest rates have declined since the end of 2013 that could cause discount rates used to value the pension and postretirement benefit obligations to decline. A new set of mortality tables, which are used to develop actuarial estimates, was finalized by the Society of Actuaries in October 2014. The changes in the value of the plan assets, the discount rate, and the mortality tables are not expected to have an impact on the income statement for 2014. However, these changes may increase benefit costs in future years. MGE expects any changes in the cost for employee benefit plans will be factored into future rate actions.
Coal Supplies: Coal supplies at our principal coal-fired generating plants have been affected since the beginning of 2014 by railroad transportation constraints affecting the availability and scheduling of coal transport trains. Reduced on-site supplies could impact the generation available from these units and increase the use of relatively more expensive forms of internal generation or market purchases of external generation from third parties. See Risk Factors in Part II, Item 1A of this report for additional information.
ATC Return on Equity: Several parties have filed a complaint with FERC seeking to reduce the base return on equity (ROE) of MISO and numerous other MISO transmission owners, including ATC, "due to changes in the capital markets." The complaint alleges 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. MISO's base ROE is 12.38% and ATC's base ROE is 12.2%. We derived approximately 7% of our net income for the nine months ended September 30, 2014, from our investment in ATC.
General Economic Conditions: Economic conditions both inside and outside our service area are expected to continue to affect the level of demand for our utility services and may affect the collection of our accounts receivable and the creditworthiness of counterparties with whom we do business. We have in place lines of credit aggregating $150 million for MGE Energy (including MGE) and $100 million for MGE to address our liquidity needs. As of September 30, 2014, there were no borrowings outstanding under our lines of credit.
The following discussion is based on the business segments as discussed in Footnote 13 of the Notes to Consolidated Financial Statements.
34
Three Months Ended September 30, 2014 and 2013
Electric Utility Operations - MGE Energy and MGE
Electric sales and revenues
The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the periods indicated:
Revenues
Sales (kWh)
(In thousands, except cooling degree days)
Three Months Ended September 30,
% Change
Residential
37,455
40,578
(7.7)%
217,677
238,046
(8.6)%
Commercial
60,127
62,582
(3.9)%
488,310
502,924
(2.9)%
Industrial
5,513
5,612
(1.8)%
65,145
66,366
Other-retail/municipal
10,958
11,952
(8.3)%
118,311
123,221
(4.0)%
Total retail
114,053
120,724
(5.5)%
889,443
930,557
(4.4)%
Sales to the market
179
465
(61.5)%
508
8,038
(93.7)%
Adjustments to revenues
(1,363)
(1,353)
(0.7)%
- %
(5.8)%
889,951
938,595
(5.2)%
Cooling degree days (normal 477)
387
517
(25.1)%
Electric operating revenues decreased $7.0 million or 5.8% for the three months ended September 30, 2014, compared to the same period in 2013, due to the following:
(In millions)
Volume
(5.3)
(1.4)
(0.3)
(7.0)
In July 2013, the PSCW authorized MGE to freeze 2014 rates at 2013 levels for retail electric customers.
Volume. During the three months ended September 30, 2014, there was a 4.4% decrease in total retail sales volumes compared to the same period in the prior year driven by cooler than normal weather.
Other. During the three months ended September 30, 2014, other items affecting electric operating revenues decreased $1.4 million primarily attributable to a decrease in demand charges and lower monthly on-peak sales.
Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For the three months ended September 30, 2014, market volumes decreased compared to the same period in the prior year, reflecting decreased opportunities for sales; however, market settlement resulted in higher revenue per kWh for the three months ended September 30, 2014, reflecting higher market prices.
Electric fuel and purchased power
Electric fuel and purchased power costs reflect a decrease in internal generation volumes offset by an increase in the volume of purchased power when compared to the prior period. Adjustments related to the regulatory recovery for fuel costs, known as fuel rules, moderated the effects of that increased volume. These items are explained below.
The expense for fuel for internal electric generation decreased $4.1 million during the three months ended September 30, 2014, compared to the same period in the prior year, due to the following:
Decrease in volume
(4.9)
Increase in per-unit cost
0.8
(4.1)
This decrease in expense reflects a 34.9% decrease in internal generated volume delivered to the system primarily as a result of reduced generation at Columbia to reduce coal use in order to maintain inventory levels, partially offset by an 8.2% increase in per-unit cost of internal electric generation.
Purchased power expense decreased $0.7 million during the three months ended September 30, 2014, compared to the same period in the prior year, due to the following:
Increase in volume
10.0
Decrease in per-unit cost
(5.1)
Fuel Rules Adjustments
Decrease in recorded fuel rule surplus credit
(4.0)
Amortization of 2012 fuel rule surplus credits
(1.6)
(0.7)
The decrease in expense reflects an 18.2% decrease in the per-unit cost of purchased power and a 55.5% increase in the volume of power purchased from third parties primarily as a result of the reduced generation at Columbia.
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. Cost savings that may be returned to customers are recorded as an increase to purchased power expense, and higher costs that MGE is entitled to recover, after adjustment for excess revenues, are recorded as a reduction to purchased power expense. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. During the three months ended September 30, 2014, MGE amortized $1.6 million of the 2012 fuel rule surplus credits. No fuel-related cost savings were deferred during the current period, as compared to $4.0 million of cost savings (surplus credit) in the prior period.
Electric operating and maintenance expenses
Electric operating and maintenance expenses decreased $3.1 million during the three months ended September 30, 2014, compared to the same period in 2013. The following changes contributed to the net change:
Decreased administrative and general costs
(1.5)
Decreased transmission costs
(0.8)
Decreased customer accounts costs
Decreased production expenses
Decreased distribution expenses
(0.2)
(3.1)
For the three months ended September 30, 2014, decreased administrative and general costs are primarily due to decreased pension and other postretirement benefit costs.
Gas Utility Operations - MGE Energy and MGE
Gas deliveries and revenues
The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the periods indicated:
Therms Delivered
(In thousands, except HDD and average rate per therm of retail customer)
9,507
8,794
8.1 %
6,105
5,676
7.6 %
Commercial/Industrial
11,188
9,343
19.7 %
18,714
17,789
5.2 %
20,695
18,137
14.1 %
24,819
23,465
5.8 %
Gas transportation
593
2.5 %
7,127
6,937
2.7 %
Other revenues
101
134
(24.6)%
13.5 %
31,946
30,402
5.1 %
Heating degree days (normal 172)
165
157
Average rate per therm of
retail customer
0.834
0.773
7.9 %
Gas revenues increased $2.5 million or 13.5% for the three months ended September 30, 2014, compared to the same period in 2013. These changes are related to the following factors:
Rate/PGA changes
1.5
1.0
2.5
Rate/PGA changes. The average retail rate per therm for the three months ended September 30, 2014, increased 7.9% compared to the same period in 2013, reflecting higher natural gas commodity costs. 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.
Volume. For the three months ended September 30, 2014, retail gas deliveries increased 5.8% compared to the same period in 2013, as a result of colder weather compared to warmer weather in the prior year.
For the three months ended September 30, 2014, cost of gas sold increased by $2.2 million, compared to the same period in the prior year. The cost per therm of natural gas increased 17.8%, which resulted in $1.7 million of increased expense. The volume of gas purchased increased 6.2%, which resulted in $0.5 million of increased expense.
Gas operating and maintenance expenses
Gas operating and maintenance expenses decreased by $0.6 million for the three months ended September 30, 2014, compared to the same period in 2013. The following changes contributed to the net change:
(0.1)
Decreased customer service costs
Increased distribution expenses
0.3
(0.6)
37
Nonregulated Energy Operations - MGE Energy and MGE
For the three months ended September 30, 2014 and 2013, net income at the nonregulated energy operations segment was $4.8 million and $5.2 million, respectively. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus, which have been formed to own and lease electric generating capacity to assist MGE.
Results reflect the recovery of force majeure costs associated with the construction of the Elm Road Units. In December 2012, as part of WEPCO's (the operator and primary owner of the Elm Road Units) 2013 Wisconsin rate case, the PSCW determined that 100% of the construction costs for the Elm Road Units were prudently incurred, and approved the recovery in rates of more than 99.5% of the force majeure costs. The recovery of the force majeure costs began in 2013, including a one-time cumulative adjustment pertaining to affected periods prior to the PSCW order. The portion pertaining to prior periods was fully reflected in 2013 results.
Transmission Investment Operations - MGE Energy and MGE
Transmission investment other income
For the three months ended September 30, 2014 and 2013, other income at the transmission investment segment was $2.4 million and $2.3 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 3 of the Notes to Consolidated Financial Statements for additional information concerning ATC and summarized financial information regarding ATC.
Consolidated Income Taxes - MGE Energy and MGE
MGE Energy's effective income tax rate for the three months ended September 30, 2014 and 2013, was 38.0% and 37.6%, respectively. MGE's effective income tax rate for the three months ended September 30, 2014 and 2013, was 37.9% and 37.6%, respectively. The net increase is attributable to less AFUDC equity earned during the three month period in 2014 compared to 2013.
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 and their results are consolidated with those of MGE, the primary beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, is MGE Energy's interest in MGE Transco, which holds our investment in ATC. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:
4.1
4.3
1.9
0.7
0.6
38
Nine Months Ended September 30, 2014 and 2013
Nine Months Ended September 30,
102,698
104,020
(1.3)%
616,775
624,877
163,992
164,024
(0.0)%
1,394,272
1,382,151
0.9 %
15,141
15,283
(0.9)%
186,085
189,882
(2.0)%
28,543
30,322
(5.9)%
314,338
326,717
(3.8)%
310,374
313,649
(1.0)%
2,511,470
2,523,627
(0.5)%
2,239
682
228.3 %
62,538
22,052
183.6 %
(4,195)
(4,155)
(0.6)%
2,574,008
2,545,679
1.1 %
Cooling degree days (normal 659)
620
707
(12.3)%
Electric operating revenues decreased $1.8 million or 0.6% for the nine months ended September 30, 2014, compared to the same period in 2013, due to the following:
(1.8)
Volume. During the nine months ended September 30, 2014, there was a 0.5% decrease in total retail sales volumes compared to the same period in the prior year driven by cooler than normal weather.
Other. During the nine months ended September 30, 2014, other items affecting electric operating revenues decreased $1.8 million primarily attributable to a decrease in demand charges and lower monthly on-peak sales.
Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than are needed for its own system demand. The excess electricity is then sold to others in the market. For the nine months ended September 30, 2014, market volumes increased compared to the same period in the prior year, reflecting increased opportunities for sales. In addition, market settlement resulted in higher revenue per kWh for the nine months ended September 30, 2014, reflecting higher market prices.
39
The expense for fuel for internal electric generation increased $1.3 million during the nine months ended September 30, 2014, compared to the same period in the prior year, due to the following:
4.0
(2.7)
1.3
This increase in expense reflects an 11.5% increase in per-unit cost of internal electric generation, partially offset by a 6.9% decrease in internal generated volume delivered to the system primarily as a result of reduced generation at Columbia to reduce coal use in order to maintain inventory levels.
Purchased power expense decreased $2.5 million during the nine months ended September 30, 2014, compared to the same period in the prior year, due to the following:
8.0
(1.3)
(4.4)
(4.8)
(2.5)
The decrease in expense reflects a 2.0% decrease in the per-unit cost of purchased power and a 14.0% increase in the volume of power purchased from third parties primarily as a result of the reduced generation at Columbia.
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. Cost savings that may be returned to customers are recorded as an increase to purchased power expense, and higher costs that MGE is entitled to recover, after adjustment for excess revenues, are recorded as a reduction to purchased power expense. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. During the nine months ended September 30, 2014, MGE amortized $4.8 million of the 2012 fuel rule surplus credits. No fuel-related cost savings were deferred during the current period, as compared to $4.4 million of cost savings (surplus credit) in the prior period.
Electric operating and maintenance expenses decreased $5.0 million during the nine months ended September 30, 2014, compared to the same period in 2013. The following changes contributed to the net change:
(4.7)
(0.5)
Increased production expenses
Increased transmission costs
0.2
(5.0)
For the nine months ended September 30, 2014, decreased administrative and general costs are primarily due to decreased pension and other postretirement benefit costs. Increased production expenses are primarily due to increased costs at Columbia.
40
84,275
66,034
27.6 %
76,626
67,181
76,460
52,758
44.9 %
103,313
89,836
15.0 %
160,735
118,792
35.3 %
179,939
157,017
14.6 %
2,223
2,181
1.9 %
27,651
27,048
2.2 %
400
34.6 %
207,590
184,065
12.8 %
Heating degree days (normal 4,512)
5,240
4,799
9.2 %
Average Rate Per Therm of
Retail Customer
0.893
0.757
18.0 %
Gas revenues increased $42.0 million or 34.6% for the nine months ended September 30, 2014, compared to the same period in 2013. These changes are related to the following factors:
24.6
17.4
42.0
Rate/PGA changes. The average retail rate per therm for the nine months ended September 30, 2014, increased 18.0% compared to the same period in 2013, reflecting higher natural gas commodity costs. 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.
Volume. For the nine months ended September 30, 2014, retail gas deliveries increased 14.6% compared to the same period in 2013, as a result of colder weather during the winter months compared to milder weather in the prior year.
For the nine months ended September 30, 2014, cost of gas sold increased by $37.4 million, compared to the same period in the prior year. The cost per therm of natural gas increased 33.5%, which resulted in $27.0 million of increased expense. In addition, the volume of purchased gas increased 14.8%, which resulted in $10.4 million of increased expense.
Gas operating and maintenance expenses decreased by $1.6 million for the nine months ended September 30, 2014, compared to the same period in 2013. The following changes contributed to the net change:
(2.2)
0.5
Increased customer account costs
0.4
For the nine months ended September 30, 2014, decreased administrative and general costs are primarily due to decreased pension and other postretirement benefit costs.
41
For the nine months ended September 30, 2014 and 2013, net income at the nonregulated energy operations segment was $14.4 million and $15.5 million, respectively. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus, which have been formed to construct, own and lease electric generating capacity to assist MGE.
For the nine months ended September 30, 2014 and 2013, other income at the transmission investment segment was $7.3 million and $7.0 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 3 of Notes to Consolidated Financial Statements for additional information concerning ATC and summarized financial information regarding ATC.
MGE Energy's and MGE's effective income tax rate for the nine months ended September 30, 2014 and 2013, was 37.8%.
12.1
13.0
5.7
2.0
1.8
Contractual Obligations and Commercial Commitments - MGE Energy and MGE
There were no material changes, other than from the normal course of business, to MGE Energy's and MGE's contractual obligations (representing cash obligations that are considered to be firm commitments) and commercial commitments (representing commitments triggered by future events) during the nine months ended September 30, 2014, except as noted below. Further discussion of the contractual obligations and commercial commitments is included in Footnote 8 of Notes to Consolidated Financial Statements in this Report, and Footnote 18 of Notes to Consolidated Financial Statements, and "Contractual Obligations and Commercial Commitments for MGE Energy and MGE" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in MGE Energy's and MGE's 2013 Annual Report on Form 10-K.
Purchase Contracts - MGE Energy and MGE
See Footnote 8.d. of Notes to Consolidated Financial Statements for a description of commitments at September 30, 2014 that MGE Energy and MGE have entered with respect to various commodity supply, transportation, and storage contracts to meet their obligations to deliver electricity and natural gas to customers.
42
Liquidity and Capital Resources
Cash Flows
The following summarizes cash flows for MGE Energy and MGE during the nine months ended September 30, 2014 and 2013:
Cash provided by/(used for):
Operating activities
Investing activities
Financing activities
MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.
Cash provided by operating activities for the nine months ended September 30, 2014, was $121.0 million, an increase of $12.4 million when compared to the same period in the prior year. The increase is primarily related to no pension contributions being made in 2014.
MGE Energy's net income increased $4.3 million for the nine months ended September 30, 2014, when compared to the same period in the prior year.
MGE Energy's federal and state taxes paid increased $12.3 million during the nine months ended September 30, 2014, when compared to the same period in the prior year, primarily due to federal tax payments made in 2014. No federal tax payments were made during the nine months ended September 30, 2013, due to the NOL as a result of bonus depreciation, which was fully utilized in 2013.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $2.3 million in cash provided by operating activities for the nine months ended September 30, 2014, primarily due to decreased unbilled revenues and decreased accounts receivable, partially offset by increased inventories and decreased other current liabilities. Working capital accounts (excluding prepaid and accrued taxes) resulted in $2.6 million in cash provided by operating activities for the nine months ended September 30, 2013, primarily due to decreased accounts receivable and decreased unbilled revenues, partially offset by decreased accounts payable and increased gas inventories.
A decrease in pension contribution resulted in an additional $31.5 million in cash provided by operating activities for the nine months ended September 30, 2014, when compared to the same period in the prior year. Pension contributions reflect amounts required by law and discretionary amounts. There have been no required contributions and no discretionary contributions for 2014.
A decrease in employee benefit plan expenses resulted in $9.9 million lower net cash provided by operations for the nine months ended September 30, 2014, when compared to the same period in the prior year
During the nine months ended September 30, 2013, MGE paid a make-whole premium equal to $6.8 million related to the redemption of $40 million of long-term debt.
Cash provided by operating activities for the nine months ended September 30, 2014, was $122.7 million, an increase of $14.9 million when compared to the same period in the prior year. The increase is primarily related to no pension contributions being made in 2014.
Net income increased $4.4 million for the nine months ended September 30, 2014, when compared to the same period in the prior year.
MGE's federal and state taxes paid to MGE Energy increased $11.9 million during the nine months ended September 30, 2014, when compared to the same period in the prior year, primarily due to federal tax payments made in 2014. No federal tax payments were made during the nine months ended September 30, 2013, due to the NOL as a result of the bonus depreciation, which was fully utilized in 2013.
Working capital accounts (excluding prepaid and accrued taxes) resulted in $4.9 million in cash provided by operating activities for the nine months ended September 30, 2014, primarily due to decreased unbilled revenues and decreased accounts receivable, partially offset by increased inventories and decreased accounts payable. Working capital accounts (excluding prepaid taxes and accrued taxes) resulted in $3.0 million in cash provided by operating activities for the nine months ended September 30, 2013, primarily due to decreased accounts receivable, decreased unbilled revenues, and increased current liabilities, partially offset by decreased accounts payable and increased gas inventories.
MGE Energy's cash used for investing activities decreased $24.9 million for the nine months ended September 30, 2014, when compared to the same period in the prior year.
Capital expenditures for the nine months ended September 30, 2014, were $66.1 million. This amount represents a decrease of $26.0 million from the expenditures made in the same period in the prior year. This decrease primarily reflects $39.7 million of lower expenditures on the Columbia environmental project in 2014 versus 2013.
MGE's cash used for investing activities decreased $25.2 million for the nine months ended September 30, 2014, when compared to the same period in the prior year.
Cash Provided by (Used for) Financing Activities
Cash used for MGE Energy's financing activities was $31.8 million for the nine months ended September 30, 2014, compared to $14.6 million of cash provided by MGE Energy's financing activities in the nine months ended September 30, 2013.
For the nine months ended September 30, 2014, dividends paid were $28.6 million compared to $27.7 million in the prior year. This increase was a result of a higher dividend per share ($0.826 vs. $0.799).
During the nine months ended September 30, 2013, MGE issued $85 million of long-term debt, which was used to retire $40 million of long-term debt and to assist with the funding for the Columbia environmental project.
During the nine months ended September 30, 2014, cash used for MGE's financing activities was $45.9 million compared to $22.2 million of cash provided by MGE's financing activities in the prior year.
Dividends paid from MGE to MGE Energy were $26.5 million during the nine months ended September 30, 2014. There were no dividends paid from MGE to MGE Energy in 2013.
Distributions to parent from noncontrolling interest, which represent distributions from MGE Power Elm Road and MGE Power West Campus, were $17.8 million for the nine months ended September 30, 2014, compared to $21.1 million in the prior year.
Capitalization Ratios
MGE Energy's capitalization ratios were as follows:
62.0 %
60.5 %
38.0 %
39.5 %
*Includes the current portion of long-term debt.
MGE Energy's and MGE's Capital Requirements
MGE Energy's and MGE's liquidity are primarily affected by their capital requirements. During the nine months ended September 30, 2014, capital expenditures for MGE Energy and MGE totaled $66.1 million, which included $64.6 million of capital expenditures for utility operations.
In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. For the nine months ended September 30, 2014, MGE had incurred $11.0 million (excluding carrying costs) in construction expenditures at Columbia related to the project and had accrued $5.0 million in incurred, but unpaid capital expenditures. MGE has recognized $3.0 million (after tax) in AFUDC equity related to this project for the nine months ended September 30, 2014.
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.
Environmental Matters
The following discussion is limited to updates or developments in environmental matters that occurred during the nine months ended September 30, 2014. Further discussion of environmental matters is included in MGE Energy's and MGE's 2013 Annual Report on Form 10-K and Footnote 8.a. of Notes to Consolidated Financial Statements in this Report.
Our WCCF facility already employs a CCC system as defined under the Rule. The Columbia plant may need to address multiple intake structures. Our Blount plant has conducted studies regarding compliance with this rule. The exact requirements at Blount and Columbia, however, will not be known until those sites' permits are modified to account for this rule. Nonetheless, MGE expects that this 316(b) Rule will not have material effects on its existing plants.
45
On April 29, 2014, the US Supreme Court issued a decision upholding CSAPR, thereby reversing the D.C. Circuit Court's decision on CSAPR, and remanding the matter back to the D.C. Circuit for further proceedings. At that time CSAPR remained subject to an order of the D.C. Circuit that stayed its implementation. On October 23, 2014, the D.C. Circuit lifted its stay of CSAPR and set a briefing schedule for ongoing litigation with oral arguments scheduled for March 2015. The State of Wisconsin has filed a motion with the D.C. Circuit Court reiterating its contention that Wisconsin be removed from CSAPR and may be part of the court's briefing and oral arguments schedule. With several issues undecided and court proceedings extending into 2015, there is remaining uncertainty as to whether MGE's facilities will be required to meet the CSAPR mandates and, if so, the deadline for achieving compliance. The Clean Air Interstate Rule (CAIR) remains in effect for the time being. See MGE Energy's and MGE's 2013 Annual Report on Form 10K for additional information on the legal proceedings associated with these environmental matters.
With CSAPR now reinstated, it will require (once implemented) that qualifying power plants meet SO2 and NOx allocations or purchase them on the market. MGE has been monitoring our overall compliance options, particularly at our Columbia power plant as we awaited installation and testing of SO2 controls. With the 2014 installation of SO2 pollution controls at Columbia, we will likely meet or exceed the allocations for Columbia based on the CSAPR allocations in the current rule (see Footnote 4 for information regarding the Columbia environmental construction project and Footnote 8.a. for information regarding our consent decree). MGE expects that the costs pertaining to meeting CSAPR requirements will be fully recoverable through rates. We will continue to monitor and evaluate the D.C. Circuit Court remand proceedings and the implementation of the rule by the EPA and WDNR.
EPA's Greenhouse Gas Reduction Guidelines under the Clean Air Act 111d Rule
The EPA's proposed Coal Combustion Residual (CCR) is anticipated to be finalized in December 2014. The final CCR Rule will regulate disposal and management of ash and other coal combustion byproducts as a waste under the EPA's solid waste rules.
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 MGE as one of the co-owners of Columbia. 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 April 2013, the EPA filed a lawsuit against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, the Sierra Club filed civil lawsuits against WPL alleging violations of the CAA at Columbia and other Wisconsin facilities operated by WPL. In June 2013, the court approved and entered a consent decree entered by the EPA, Sierra Club, and the co-owners of Columbia to resolve these claims, while admitting no liability. One of the requirements of the consent decree requires installation of a SCR system at Columbia Unit 2 by December 31, 2018. In July 2014, a CA was filed with the PSCW for the installation of the SCR system. MGE's share of the projected cost for the SCR system is approximately $30-40 million. See Footnote 8.a. of the Notes to Consolidated Financial Statements for additional information regarding this matter.
46
Other Matters
Elm Road
On November 12, 2013, MISO and numerous other MISO transmission owners, including ATC, were named as respondents in a complaint filed at FERC. The complainants argue that the respondents' transmission rates are no longer just and reasonable "due to changes in the capital markets," and that the MISO base return on equity (ROE) should not exceed 9.15%, equity components of hypothetical capital structures should be restricted to 50%, and that relevant incentive ROE adders should be discontinued. MISO's base ROE is 12.38% and ATC's base ROE is 12.2%. MISO and the other MISO transmission owners filed a motion to dismiss the complaint. MGE Energy and MGE are currently unable to determine what, if any, impact the complaint may have on MISO's and ATC's current authorized return on equity.
Joint Venture
MGE Energy has entered into a joint venture with Wisconsin Energy Corporation to evaluate the advisability and feasibility of potentially bidding on generating assets owned by the State of Wisconsin, which might include the University of Wisconsin's interest in the WCCF, which the Company co-owns and operates.
Should the State determine that the assets be sold, the joint venture would decide on a case-by-case basis whether to submit a bid. If the bid is successful, the joint venture would finance the acquisition and would own and manage the acquired assets. If those acquired assets include the State's interest in the WCCF, MGE would continue to operate the WCCF as it does currently.
New Accounting Principles
See Footnote 12 of Notes to Consolidated Financial Statements for discussion of new accounting pronouncements.
47
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 is determined on an annual basis and is adjusted 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 2014, fuel and purchased power costs included in MGE's base fuel rates are $106.1 million. See Footnote 10.b. of the Notes to Consolidated Financial Statements for additional information.
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.
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 segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds FTRs, which are used to hedge the risk of increased transmission congestion charges. At September 30, 2014, the fair value of these instruments exceeded their cost basis by $2.3 million. Under the PGA clause and electric fuel rules, MGE may include in the costs of fuel (natural gas or power) the costs and benefits of the aforementioned fuel price risk management tools. Because these costs/benefits are recoverable, the related unrealized loss/gain has been deferred on the consolidated balance sheet as a regulatory asset/liability.
MGE has also entered into a ten-year 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 sheet. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at September 30, 2014, reflects a loss position of $54.9 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.
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.
Credit Risk - Counterparty
Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily through its merchant energy business. MGE uses credit policies to manage its credit risk, which include utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as collateral or prepayment arrangements, and using netting agreements.
Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example, fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact on its financial results.
Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses on accrual contracts. As of September 30, 2014, no counterparties have defaulted.
MGE is obligated to provide service to all electric and gas customers within its respective franchised territories. MGE's franchised electric territory includes a 316 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,649 square miles in Wisconsin. Based on results for the year ended December 31, 2013, no one customer constituted more than 10% of total operating revenues for MGE Energy and MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.
Cash, cash equivalents, and customer accounts receivable are the financial instruments that potentially subject MGE Energy and MGE to concentrations of credit risk. MGE Energy and MGE place their cash and cash equivalents with high credit-quality financial institutions. MGE has limited concentrations of credit risk from customer accounts receivable because of the large number of customers and relatively strong economy in its service territory.
During the third quarter of 2014, each registrant's management, including the principal executive officer and principal financial officer, evaluated its disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to that registrant, including its subsidiaries, is accumulated and made known to that registrant's management, including these officers, by other employees of that registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and that this information is recorded, processed, summarized, evaluated, and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, the registrants do not control or manage certain of their unconsolidated entities and thus, their access and ability to apply their procedures to those entities is more limited than is the case for their consolidated subsidiaries.
As of September 30, 2014, each registrant's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective. Each registrant intends to strive continually to improve its disclosure controls and procedures to enhance the quality of its financial reporting.
During the quarter ended September 30, 2014, there were no changes in either registrant's internal controls over financial reporting that materially affected, or are reasonably likely to affect materially, that registrant's internal control over financial reporting.
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 Footnote 8.a. and 8.c. of Notes to Consolidated Financial Statements for more information.
There have been no material changes in the risk factors affecting MGE Energy and MGE from those factors discussed in in their 2013 Annual Report on Form 10-K, except as follows:
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. Increased oil exploration and production in the United States has increased the amount of oil being transported by railroad, which has affected the availability and scheduling of trains to transport coal. Demand for coal has also been impacted by prevailing prices for natural gas and may affect mine performance. Consequently, we are exposed to the risk that counterparties to these contracts will not be able to fulfill their obligations. Disruption in the delivery of fuel, including disruptions as a result of transportation delays, weather, labor relations, force majeure events, or environmental regulations affecting any of these fuel suppliers, could limit our ability to generate electricity at our facilities at the desired level. Should counterparties fail to perform, or other unplanned disruptions occur, we may be forced to replace the underlying commitment at higher prices, or we may be forced to reduce generation at our coal units and replace this lost generation through additional power purchases from third parties. These factors may also affect the terms under which any of our existing coal supply or transportation agreements are renewed or replaced upon the expiration of their current terms.
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs*
Maximum number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs*
July 1-31, 2014
33,010
39.34
August 1-31, 2014
27,821
39.19
September 1-30, 2014
78,425
39.61
139,256
39.46
* Under the 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. In June 2009, MGE Energy switched to using open market purchases to provide shares to meet obligations to participants in the Stock Plan. The shares are purchased on the open market through a 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.
Not applicable to MGE Energy and MGE.
Statement regarding computation of ratio of earnings to fixed charges for Madison Gas and Electric Company.
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed by the following officers for the following companies:
31.1
Filed by Gary J. Wolter for MGE Energy, Inc.
31.2
Filed by Jeffrey C. Newman for MGE Energy, Inc.
31.3
Filed by Gary J. Wolter for Madison Gas and Electric Company
31.4
Filed by Jeffrey C. Newman for Madison Gas and Electric Company
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) as to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed by the following officers for the following companies:
32.1
32.2
32.3
32.4
Interactive Data Files:
101.INS
XBRL Instance
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation
101.DEF
XBRL Taxonomy Extension Definition
101.LAB
XBRL Taxonomy Extension Labels
101.PRE
XBRL Taxonomy Extension Presentation
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
MGE ENERGY, INC.
Date: November 6, 2014
/s/ Gary J. Wolter
Gary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)
/s/ Jeffrey C. Newman
Jeffrey C. Newman
Vice President, Chief Financial Officer, Secretary and Treasurer
(Chief Financial and Accounting Officer)
MADISON GAS AND ELECTRIC COMPANY