10-K 1 f10k_2012.htm FORM 10-K Converted by EDGARwiz

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


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


For the fiscal year ended:

December 31, 2012


[ ] 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 53703

(608) 252-7000

www.mgeenergy.com


39-2040501


000-1125


Madison Gas and Electric Company

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53703

(608) 252-7000

www.mge.com


39-0444025


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


 


Title of Class

Name of Each Exchange on which Registered

MGE Energy, Inc.

Common Stock, $1 Par Value Per Share

The Nasdaq Stock Market



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


 

Title of Class

Madison Gas and Electric Company

Common Stock, $1 Par Value Per Share


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


MGE Energy, Inc.

Yes [X] No [   ]

Madison Gas and Electric Company

Yes [X] No [   ]


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

MGE Energy, Inc.

Yes [  ] No [X]

Madison Gas and Electric Company

Yes [  ] No [X]




1




Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ]


Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web sites, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files): Yes [X] No [ ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]


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

MGE Energy, Inc.

X

 

 

 

Madison Gas and Electric Company

 

 

X

 


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


MGE Energy, Inc.

Yes [  ] No [X]

Madison Gas and Electric Company

Yes [  ] No [X]


The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2012, was as follows:


MGE Energy, Inc.

$1,090,221,546

Madison Gas and Electric Company

$0


The number of shares outstanding of each registrant's common stock as of February 1, 2013, were as follows:


MGE Energy, Inc.

23,113,638

Madison Gas and Electric Company

17,347,894


DOCUMENTS INCORPORATED BY REFERENCE


Portions of MGE Energy, Inc.'s definitive proxy statement to be filed on or before March 28, 2013, relating to its annual meeting of shareholders, are incorporated by reference into Part III of this annual report on Form 10-K.


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




2




Table of Contents


Filing Format

4

Forward-Looking Statements

4

Where to Find More Information

4

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

5

PART I.

7

Item 1. Business.

7

Item 1A. Risk Factors.

14

Item 1B. Unresolved Staff Comments.

18

Item 2. Properties.

18

Item 3. Legal Proceedings.

19

Item 4. Mine Safety Disclosures.

19

PART II.

20

Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.  20

Item 6. Selected Financial Data.

23

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

24

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

45

Item 8. Financial Statements and Supplementary Data.

48

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

105

Item 9A. Controls and Procedures.

105

Item 9B. Other Information.

105

PART III.

106

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

106

Item 11. Executive Compensation.

106

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

106

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

106

Item 14. Principal Accounting Fees and Services.

107

PART IV.

108

Item 15. Exhibits and Financial Statement Schedules.

108

Signatures - MGE Energy, Inc.

117

Signatures - Madison Gas and Electric Company

118




3




Filing Format


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


Forward-Looking Statements


This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to 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," and other similar words generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.


The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include (a) those factors discussed in Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, 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 publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this report.


Where to Find More Information


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




4




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


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


MGE Energy and Subsidiaries:

 

 

 

MAGAEL

MAGAEL, LLC

MGE

Madison Gas and Electric Company

MGE Construct

MGE Construct LLC

MGE Energy

MGE Energy, Inc.

MGE Power

MGE Power LLC

MGE Power Elm Road

MGE Power Elm Road, LLC

MGE Power West Campus

MGE Power West Campus, LLC

MGE Transco

MGE Transco Investment LLC

 

 

Other Defined Terms:

 

 

 

AFUDC

Allowance for Funds Used During Construction

Alliant

Alliant Energy Corporation

ANR

ANR Pipeline Company

ARO

Asset Retirement Obligation

ASM

Ancillary Services Market

ATC

American Transmission Company LLC

BACT

Best Available Control Technology

BART

Best Available Retrofit Technology

Bechtel

Bechtel Power Corporation

Blount

Blount Station

CAA

Clean Air Act

CAIR

Clean Air Interstate Rule

CAVR

Clean Air Visibility Rule

CO2

Carbon Dioxide

Codification

Financial Accounting Standards Board Accounting Standards Codification

Columbia

Columbia Energy Center

cooling degree days

Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide cooling

COSO

Committee of Sponsoring Organizations

CSAPR

Cross-State Air Pollution Rule

CWA

Clean Water Act

CWDC

Central Wisconsin Development Corporation

DNR

Department of Natural Resources

DOE

United States Department of Energy

Dth

Dekatherms

EEI

Edison Electric Institute

EGUs

Electric Generating Units

Elm Road Units

Elm Road Generating Station

EPA

United States Environmental Protection Agency

ERISA

Employee Retirement Income Security Act

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

FTR

Financial Transmission Rights

GAAP

Generally Accepted Accounting Principles

GHG

Greenhouse Gas

HAPs

Hazardous Air Pollutants

heating degree days (HDD)

Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating

ICF

Insurance Continuance Fund

IRS

Internal Revenue Service

kV

Kilovolt

kVA

Kilovolt Ampere



5





kWh

Kilowatt-hour

LIBOR

London Inter Bank Offer Rate

MACT

Maximum Achievable Control Technology

MATs

Mercury and Air Toxins Standards

MISO

Midwest Independent System Operator (a regional transmission organization)

MW

Megawatt

MWh

Megawatt-hour

NAAQS

National Ambient Air Quality Standards

Nasdaq

The Nasdaq Stock Market

NERC

North American Electric Reliability Corporation

NGCC

Natural Gas Combined Cycle

NNG

Northern Natural Gas Company

NO2

Nitrogen Dioxide

NODA

Notices of Data Availability

NOV

Notice of Violation

NOx

Nitrogen Oxides

NSPS

New Source Performance Standards

NYSE

New York Stock Exchange

OPRB

Other Postretirement Benefits

PCBs

Polychlorinated Biphenyls

PGA

Purchased Gas Adjustment clause

PJM

PJM Interconnection, LLC (a regional transmission organization)

PM

Particulate Matter

PPA

Purchased power agreement

PPACA

Patient Protection and Affordable Care Act

PSCW

Public Service Commission of Wisconsin

PSD

Prevention of Significant Deterioration

REC

Renewable Energy Credit

RICE

Reciprocating Internal Combustion Engine

RTO

Regional Transmission Organization

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

WPDES

Wisconsin Pollutant Discharge Elimination System

WPL

Wisconsin Power and Light Company

WPSC

Wisconsin Public Service Corporation

WRERA

Worker, Retiree and Employer Recovery Act of 2008




6




PART I.


Item 1. Business.


MGE Energy operates in the following business segments:


·

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


·

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


·

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


·

Transmission investments – representing our investment in American Transmission Company LLC, a company engaged in the business of providing electric transmission services primarily in Wisconsin.


·

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


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


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


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


MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized as a Wisconsin corporation in 1896. Their principal offices are located at 133 South Blair Street, Madison, Wisconsin 53703, and their telephone number is 608-252-7000.


Electric Utility Operations


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


At December 31, 2012, MGE supplied electric service to approximately 140,000 customers, with approximately 90% located in the cities of Fitchburg, Madison, Middleton, and Monona and 10% in adjacent areas. Of the total number of customers, approximately 86% were residential and 14% were commercial or industrial. Electric retail revenues for 2012, 2011, and 2010 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2012

 

2011

 

2010

 

 

Residential

 

32.9%

 

32.9%

 

33.2%

 

 

Commercial

 

52.4%

 

52.2%

 

51.8%

 

 

Industrial

 

4.9%

 

5.1%

 

5.5%

 

 

Public authorities (including the UW)

 

9.8%

 

9.8%

 

9.5%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Electric operations accounted for approximately 73.7%, 69.5%, and 68.5% of MGE's total 2012, 2011, and 2010 regulated revenues, respectively.




7




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


MGE is registered with two regional entities, The Midwest Reliability Organization and Reliability First Corporation. The essential purposes of these entities are the development and implementation of regional and NERC reliability standards; and determining compliance with those standards, including enforcement mechanisms.


Transmission


American Transmission Company LLC (ATC) is owned by the utilities that contributed facilities or capital to it in accordance with Wisconsin law. ATC's purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of the MISO.


Regional Transmission Organizations


MISO

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


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


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


PJM

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


Fuel supply and generation


MGE satisfies its customers' electric demand with internal generation and purchased power. During the years ended December 31, 2012, 2011, and 2010, MGE's electric energy delivery requirements were satisfied by the following sources:


 

 

 

Year Ended December 31,

 

 

 

 

2012

 

2011

 

2010

 

 

Coal

 

50.1%

 

54.8%

 

50.4%

 

 

Natural gas

 

8.7%

 

4.7%

 

4.2%

 

 

Fuel oil

 

0.1%

 

0.1%

 

0.1%

 

 

Renewable sources

 

2.7%

 

2.8%

 

2.6%

 

 

Purchased power

 

 

 

 

 

 

 

 

    Renewable

 

8.4%

 

7.9%

 

7.2%

 

 

    Other

 

30.0%

 

29.7%

 

35.5%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Sources used depend on market prices, generating unit availability, weather, and customer demand.




8




Coal

MGE and two other utilities jointly own Columbia, a coal-fired generating facility, which accounts for 29% (225 MW) of MGE's net summer rated capacity. Power from this facility is shared in proportion to each owner's ownership interest. MGE has a 22% ownership interest in Columbia. The other owners are WPL (a subsidiary of Alliant), which operates Columbia, and WPSC. The Columbia units burn low-sulfur coal obtained (pursuant to contracts from one to five years in length) from the Powder River Basin coal fields located in Wyoming. The coal inventory supply for the Columbia units increased from approximately 31 days on December 31, 2011, to approximately 37 days on December 31, 2012. The co-owners' current goal is to maintain approximately a 35 day inventory.


MGE Power Elm Road and two other owners own undivided interests in the coal-fired Elm Road Units in Oak Creek, Wisconsin, which accounts for 14% of MGE's net summer rated capacity. Power from this facility is shared in proportion to each owner's ownership interest. MGE Power Elm Road owns an 8.33% ownership interest in the Elm Road Units and its interest in the Elm Road Units is leased to MGE. The other owners are Wisconsin Energy Corporation (which owns approximately 83% of the Elm Road Units and is the operator of those units) and WPPI Energy, Inc. The Elm Road Units burn bituminous coal obtained (pursuant to contracts) from northern West Virginia and southwestern Pennsylvania. MGE's share of the coal inventory supply for the Elm Road Units increased from approximately 36 days on December 31, 2011, to approximately 49 days on December 31, 2012.


See discussion below under Nonregulated Operations regarding MGE's interest in the Elm Road Units.


Natural gas and oil

MGE owns gas-fired combustion turbines. These turbines are primarily located in Madison and Marinette, Wisconsin, and have a total of 155 MW of net summer rated capacity.


MGE also owns the Blount Generating Facility located in Madison, Wisconsin, which is fueled by gas and other alternative renewable sources. As planned, capacity was reduced at Blount from 190 MW to 100 MW as of December 31, 2011.


See discussion below under Nonregulated Operations regarding MGE's interest in the West Campus Cogeneration Facility.


Renewable generation sources

MGE owns 30 MW, consisting of 18 turbines, in a wind-powered electric generating facility in Worth County, Iowa. MGE also owns 11 MW, consisting of 17 turbines, in a wind-powered electric generating facility in Kewaunee County, Wisconsin.


Purchased power

MGE enters into short and long-term purchase power commitments with third parties to meet a portion of its anticipated electric energy supply needs. The following table identifies purchase power commitments at December 31, 2012, with unaffiliated parties for the next five years.


 

(Megawatts)

 

2013

 

2014

 

2015

 

2016

 

2017

 

 

Purchase Power Commitments

253.6

 

153.6

 

153.6

 

153.6

 

153.6

 


Gas Utility Operations


MGE transports and distributes natural gas in a service area covering 1,631 square miles in seven south-central Wisconsin counties. The service area includes the city of Madison, Wisconsin and surrounding areas.


At December 31, 2012, MGE supplied natural gas service to approximately 145,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of 45 townships. Of the total number of customers, approximately 89% were residential and 11% were commercial or industrial.




9




Gas revenues for 2012, 2011, and 2010 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2012

 

2011

 

2010

 

 

Residential

 

56.1%

 

56.5%

 

56.0%

 

 

Commercial

 

32.9%

 

34.4%

 

34.3%

 

 

Industrial

 

8.9%

 

7.2%

 

7.9%

 

 

Transportation service and other

 

2.1%

 

1.9%

 

1.8%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Gas operations accounted for approximately 26.3%, 30.5%, and 31.5% of MGE's total 2012, 2011, and 2010 regulated revenues, respectively.


MGE can curtail gas deliveries to its interruptible customers. Approximately 20% and 14% of retail gas deliveries in 2012 and 2011, respectively, were to interruptible customers.


Gas supply


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


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


By contract, a total of 5,399,949 Dth of gas can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations.


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


·

162,150 Dth (including 96,078 Dth of storage withdrawals) on ANR.

·

60,108 Dth on NNG.


Nonregulated Energy Operations


MGE Energy, through its subsidiaries, has developed generation sources that assist MGE in meeting the electricity needs of its customers.


Elm Road


MGE Power Elm Road and two other owners own undivided interests in the coal-fired Elm Road Units in Oak Creek, Wisconsin. Unit 1 entered commercial operation in February 2010, and has the capacity to produce 615 MW of electricity. Unit 2 entered commercial operation in January 2011, and has the capacity to produce 615 MW of electricity. Wisconsin Energy Corporation owns approximately 83% of the Elm Road Units and is the operator for those units. MGE Power Elm Road owns an 8.33% ownership interest in both units. Both units are used to provide electricity to MGE's customers.


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




10




WCCF


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


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


Transmission Investments


ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC. That interest is presently held by MGE Transco, which is jointly owned by MGE Energy and MGE. At December 31, 2012, MGE Transco held a 3.6% ownership interest in ATC.


In April 2011, ATC and Duke Energy announced the creation of a joint venture, Duke-American Transmission Company (DATC), that seeks to build, own, and operate new electric transmission infrastructure in North America to address increasing demand for affordable, reliable transmission capacity.


Environmental


MGE is 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 MGE conducts its operations, the costs of those operations, as well as some capital and operating expenditures. They can also affect the siting, timing, and cost of new projects or other significant actions affecting the environment. Some of the most significant are addressed below. MGE is not able to predict with certainty the direction of future regulations or if compliance with any such regulations will involve additional expenditures for pollution control equipment, plant modifications, or curtailment of operations. Such actions could reduce capacity or efficiency at existing plants or delay the construction and operation of future generating facilities. MGE management would expect to seek and receive rate recovery for costs associated with approval and installation of any required pollution controls.


Air Quality


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


Vacation of EPA's Cross State Air Pollution Rule (CSAPR) and Reinstatement of the Clean Air Interstate Rule (CAIR)

EPA has promulgated three interstate air pollution rules consisting of the NOx SIP Call, the Clean Air Interstate Rule (CAIR), and the Cross-State Air Pollution Rule (CSAPR). These rules were each designed to reduce nitrogen oxide (NOx) and/or sulfur dioxide (SO2) air emissions from electric generating units (EGUs) located in Wisconsin and other states. NOx and SO2 interact in the atmosphere to form ambient ozone and fine particulate matter pollution. As explained below, only the CAIR currently affects MGE's generation assets.


In 2000, the U.S. Court of Appeals for the D.C. Circuit held that Wisconsin had been illegally included in a portion of the NOx SIP Call, but stayed the remaining legal challenges to the rule pending EPA's development of additional interstate transport rules. At this time, the requirements of the NOx SIP Call and the costs of compliance remain uncertain in view of the developments affecting the interstate transport rules.



11




In 2005, EPA promulgated the CAIR imposing additional controls on NOx and SO2 emissions from EGUs located in Wisconsin and other states. However, in December 2008, the U.S. Court of Appeals for the D.C. Circuit remanded the CAIR to the EPA with directions to revise or replace the rule. The Court's remand order directed that the CAIR remain in effect until the EPA promulgated a replacement rule. The Court's order did not include a deadline for the EPA to act.


In August 2011, the EPA responded to the remand of the CAIR by promulgating the CSAPR. However, in August, 2012, the U.S. Court of Appeals for the D.C. Circuit vacated CSAPR and instructed the EPA to continue administering the CAIR pending finalizing a valid alternative program to control interstate pollution. In January 2013, the U.S. Court of Appeals for the D.C. Circuit denied EPA's petition for reconsideration decision en banc. At this time, the CAIR remains currently effective.


The CAIR generally requires NOx and SO2 emission reductions from fossil fuel-fired EGUs (25 MW or greater) in the eastern half of the United States in two phases and includes a regional cap-and-trade system. The first phase (currently in place) requires annual regional emission reductions from 2003 levels of 55% for NOx and 40% for SO2. The second phase, scheduled to begin in 2015, reduces regional NOx and SO2 emissions further from 2003 levels to 65% and 70%, respectively. MGE owns or has partial ownership in several generation units currently subject to the CAIR: Blount, Columbia, Elm Road Units, and its combustion turbines located in West Marinette and Fitchburg.


Our evaluation of the CAIR demonstrates that MGE is in compliance with the CAIR's Phase I requirements without capital expenditures or modifications to our operations. We have also evaluated our potential expenditures if the CAIR remains in place for the Phase II reductions. Based on our Phase II evaluation, MGE will be able to meet Phase II NOx emissions reductions through using our NOx allowances provided through the rule, and we will meet Phase II SO2 emissions reductions through installation of pollution controls. New SO2 controls at Columbia are already underway and are planned to be completed by early 2014 (see the discussion regarding the Columbia Environmental Project below). Once the new environmental control project is completed at Columbia, it is expected that the plant will emit SO2 below anticipated Phase II CAIR allocation levels. MGE expects that any costs incurred to meet Phase II of the CAIR will be fully recoverable through rates. MGE will continue monitoring the EPA's actions in response to the August 2012 CSAPR vacature, and the stayed NOx SIP Call litigation.


Clean Air Visibility Rule (CAVR)

Air modeling indicates that SO2 and NOx emissions (and to a lesser extent particulate matter, or PM) from Columbia may impair visibility at certain Class I Scenic Areas and may therefore be subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which may require pollution retrofits to be installed at Columbia. The EPA had proposed that Columbia's compliance with emissions limitations in the CAIR and the CSAPR could also serve as compliance with the BART regulations for SO2 and NOx emissions. However, this proposal is now uncertain because of the D.C. Court of Appeals remanding the CAIR to EPA and vacating the CSAPR. At this time, the BART regulatory obligations, compliance strategies and costs remain uncertain.


Columbia


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 alleges 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 September 2010, the Sierra Club filed a civil lawsuit against WPL alleging violations of the CAA at Columbia and other Wisconsin facilities operated by WPL. See Footnote 18.e for additional information regarding these matters. MGE believes that the parties have reached a tentative agreement on the general terms of a settlement with the EPA and Sierra Club regarding various facilities, including Columbia. The parties are currently negotiating a consent decree based upon those general terms, which may change during the negotiations.


Solid Waste


Proposed Regulation of Coal Combustion Byproducts

The EPA published a proposed rule on May 4, 2010, to regulate coal combustion byproducts from the electric generating sector. If adopted, the final regulations may require new or additional monitoring of storage sites, may re-classify ash and other coal combustion byproducts, and may regulate ash storage site structural design. MGE is evaluating the impact of these proposed regulations on our operations. The EPA has indicated that the final rules will likely not be issued until late 2013 or early 2014. It is not possible for MGE to project the potential costs associated with the implementation of any of these initiatives until the rule is finalized.



12




Global climate change


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


MGE is already addressing GHG emissions through voluntary actions. In 2005, MGE announced its Energy 2015 Plan, which commits to ensuring a balanced, economic energy supply with reduced environmental emissions. The Plan emphasizes increased renewable energy, energy efficiency, and new cleaner generation – three strategies that reduce GHG emissions. Under MGE's Energy 2015 Plan and other actions, our CO2 emissions are currently projected to decline from 2005 to 2015 even though total system energy is estimated to increase.


Climate Change Legislation


Federal Actions on Climate Change

Currently, there is no specific federal proposal for climate change legislation in 2013. Several bills related to GHG regulation including bills to limit, prevent or delay the EPA's regulation of GHGs under the current Clean Air Act have been proposed previously but none have become law to date.


State and Regional Actions on Climate Change

It is not expected that the Wisconsin Legislature will enact broad GHG regulation in 2013.


DNR's Green Tier Environmental Leadership Program


MGE is the first utility in Wisconsin to be designated to participate in the highest level (Tier 2) of the DNR's Green Tier environmental leadership program. MGE is only the fifth state company to achieve Tier 2 status. Green Tier encourages a collaborative approach to environmental performance between the DNR and Wisconsin businesses, local governments, and other organizations. As part of Green Tier, participants voluntarily commit to reducing their environmental footprint by developing proactive management strategies. These plans act as a roadmap, helping organizations see opportunities to adopt new technologies and practices to continually improve their environmental performance.


MGE is participating in the Green Tier program to continue its voluntary commitment to superior environmental performance. In cooperation with DNR, MGE will set goals to make significant environmental improvements.


Employees


As of December 31, 2012, MGE had 688 employees. MGE employs 210 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 96 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. Both of these collective bargaining agreements expire on April 30, 2015. There are also 5 employees covered by a collective bargaining agreement with Local Union No. 2006, Unit 6 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union. This collective bargaining agreement expires on October 31, 2015.


Financial Information About Segments


See Footnote 23 of the Notes to Consolidated Financial Statements for financial information relating to MGE Energy's and MGE's business segments.




13




Executive Officers of the Registrants

Executive

Title

Effective

Date

Service

Years as

an Officer

Gary J. Wolter(a)

Age: 58

Chairman of the Board, President and Chief Executive Officer

02/01/2002

23

Lynn K. Hobbie(b)

Age: 54

Senior Vice President

02/01/2000

18

Scott A. Neitzel(b)

Age: 52

Senior Vice President

Vice President – Energy Supply

01/01/2012

09/01/2006

15

Kristine A. Euclide(b)

Age: 60

Vice President and General Counsel

11/15/2001

11

Craig A. Fenrick(b)

Age: 53

Vice President – Electric Transmission and Distribution

Assistant VP – Electric Transmission and Distribution

01/01/2012

09/01/2006

6

Jeffrey C. Newman(a)

Age: 50

Vice President, Chief Financial Officer, Secretary and Treasurer

Vice President and Treasurer

01/01/2009

01/01/2001

15

Peter J. Waldron(b)

Age: 55

Vice President and Chief Information Officer

Vice President and Operations Officer

01/01/2012

09/01/2006

16


Note: Ages, years of service, and positions as of December 31, 2012.

(a) Executive officer of MGE Energy and MGE.

(b) Executive officer of MGE.


Item 1A. Risk Factors.


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


Regulatory Risk


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


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


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


MGE burns natural gas in several of its peak electric generation facilities, and in many cases, the cost of purchased power is tied to the cost of natural gas. Under the electric fuel rules, MGE would defer electric fuel-related costs that fall outside a symmetrical cost tolerance band that is currently plus or minus 2%. Any over/under recovery of the actual costs is determined on an annual basis and will be adjusted in future billings to its electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs if its actual fuel costs fall outside the lower end of the range and would defer costs, less any excess revenues, if its actual fuel costs exceeded the upper end of the range. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. MGE assumes the risks and benefits of variances that are within the cost tolerance band.




14




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


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


Numerous environmental laws and regulations govern many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, threatened and endangered species and hazardous waste. These evolving regulations can introduce uncertainty with respect to capital expenditures and operational planning, and can introduce costly delays if previous decisions need to be revisited as a result of judicial mandate or regulatory change. These regulations generally require us to obtain and comply with a wide variety of environmental permits and approvals, and can result in increased capital, operating, and other costs and operating restrictions, particularly with regard to enforcement efforts focused on obligations under existing regulations with respect to power plant emissions and compliance costs associated with regulatory requirements. These effects can be seen not only with respect to new construction but could also require the installation of additional control equipment or other compliance measures such as altered operating conditions at existing facilities.


In addition, we may be a responsible party for environmental clean-up at current or future sites identified as containing hazardous materials or to which waste was sent that is subsequently determined to be hazardous. It is difficult to predict the costs potentially associated with a site clean-up due to the potential joint and several liability for all potentially responsible parties, the nature of the clean-up required and the availability of recovery from other potentially responsible parties.


Additionally, depending on their form and phase-in provisions, GHG emission restrictions could have the potential for a significant financial impact on MGE, including the cost to install new emission control equipment, purchase allowances, or do fuel switching.


Operating Risk


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


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


We are affected by economic activity within our service area.


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


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


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


·

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


·

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


·

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




15




·

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


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


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


Weather conditions, accidents, and catastrophic events, including terrorism, cyber terrorism, and acts of sabotage or war, can result in damage or failures of equipment or facilities and disrupt or limit our ability to generate, transmit, transport, purchase, or distribute electricity and gas. Efforts to repair or replace equipment and facilities may take prolonged periods or may be unsuccessful, or we may be unable to make the necessary improvements to our operational system, causing service interruptions. The resulting interruption of services would result in lost revenues and additional costs. We are also exposed to the risk of accidents or other incidents that could result in damage to or destruction of our facilities or damage to persons or property. Such issues could adversely affect revenues or increase costs to repair and maintain our systems.


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


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


We face construction risk in connection with the completion of the Columbia environmental project.


The large-scale environmental project at the Columbia generating facility, which is being managed by WPL as plant operator, is subject to various risks that could cause costs to increase or delays in completion. These risks include shortages of, the inability to obtain, the cost of, and the consistency of, labor, materials and equipment; the inability of the general contractor or subcontractors to perform under their contracts; the inability to agree to terms of contracts or disputes in contract terms; work stoppages; adverse weather conditions; the inability to obtain necessary permits in a timely manner; changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions; governmental actions; legal action; and unforeseen engineering or technology issues. If the construction project is over budget, we may not be able to recover those excess costs. Inability to recover excess costs, or inability to complete the project in a timely manner, could adversely impact our financial condition and results of operations.


Financial Risk


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


We face commodity price risk exposure with respect to our purchases of natural gas, electricity, coal and oil, SO2 allowances and risk through our use of derivatives, such as futures, forwards and swaps, to manage that commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.


We are exposed to interest rate risk.


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




16




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


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


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


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


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


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


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


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


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


Operational

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


Liquidity

Long-term instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital. Although MGE Energy and MGE believe they have sufficient liquidity despite the disruption of capital and credit markets, the costs of such funds may increase.


Counterparty creditworthiness

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




17




Item 1B. Unresolved Staff Comments.


MGE Energy and MGE


None.


Item 2. Properties.


Electric Generation


Net summer rated capacity in service at December 31, 2012, was as follows:


 

 

 

 

 

 

 

 

Net Summer

 

 

 

 

 

 

Commercial

 

 

 

Rated

 

 

 

 

 

 

Operation

 

 

 

Capacity(1)

 

No. of

Plants

 

Location

 

Date

 

Fuel

 

(MW)

 

Units

Steam plants:

 

 

 

 

 

 

 

  

 

 

   Columbia

 

Portage, WI

 

1975 & 1978

 

Low-sulfur coal

 

225 (2,3)

 

2

   Blount

 

Madison, WI

 

1957 & 1961

 

Gas

 

100 (7)

 

2

   WCCF

 

Madison, WI

 

2005

 

Gas/oil

 

126 (4)

 

2

   Elm Road Units

 

Oak Creek, WI

 

2010 & 2011

 

Coal

 

106 (2,5)

 

2

Combustion turbines

 

Madison, WI

 

1964-2000

 

Gas/oil

 

155 (6)

 

6

 

 

Marinette, WI

 

 

 

 

 

  

 

 

Portable generators

 

Madison, WI

 

1998-2001

 

Diesel

 

50 (7)

 

54

Wind turbines

 

Townships of Lincoln

 

 

 

 

 

  

 

 

 

 

and Red River, WI

 

1999

 

Wind

 

1 (7, 8)

 

17

 

 

Township of

 

 

 

 

 

  

 

 

 

  

Brookfield, IA

 

2008

 

Wind

 

3 (7,9)

 

18

                 Total

 

 

 

 

  

 

 

766  

 

 


(1)

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


(2)

Baseload generation.


(3)

MGE's 22% share of two 512-MW units. The other owners are WPL (a subsidiary of Alliant), which operates Columbia, and WPSC.


(4)

Facility is jointly owned. MGE Power West Campus owns a controlling interest in the electric generation plant and the UW owns a controlling interest in the chilled-water and steam plants. MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the facility. Amounts shown represent MGE's share of the net summer rated capacity. Based on the terms of the joint plant agreement between MGE and the UW, the UW has the ability to reduce net capability of these units by approximately 17 MW in the summer. The net summer rated capacity shown reflects this decrease.


(5)

MGE's 8.33% share in each of two 615 MW coal-fired generating units. The other owners are Wisconsin Energy Corporation, which operates the units, and WPPI Energy, Inc. MGE leases the electric generating assets owned by MGE Power Elm Road. Unit 1 and Unit 2 entered commercial operation in February 2010 and January 2011, respectively. Amounts shown represent MGE's share of the net summer rated capacity of the Units.


(6)

Three facilities are owned by MGE and three facilities are leased.


(7)

These facilities are owned by MGE.


(8)

Nameplate capacity rating is 11 MW.


(9)

Nameplate capacity rating is 30 MW.




18




Electric and Gas Distribution Facilities


Major electric distribution lines and substations in service at December 31, 2012, which are owned by MGE, are as follows:


 

Miles

Distribution lines:

Overhead

 

Underground

13.8 kV and under

894

 

1,143

 

 

 

 

Distribution:

Substations

 

Installed Capacity (kVA)

69-13.8 kV

27

 

1,243,500

13.8-4 kV

28

 

275,300


Gas facilities include 2,466 miles of distribution mains, which are owned by MGE.


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


Encumbrances


The principal plants and properties of MGE are subject to the lien of its Indenture of Mortgage and Deed of Trust dated as of January 1, 1946, as amended and supplemented, under which MGE's first mortgage bonds are issued. As of December 31, 2012, there were $1.2 million of first mortgage bonds outstanding. See Footnote 9 for additional information regarding MGE's first mortgage bonds.


MGE Power Elm Road has collaterally assigned its right to lease payments from MGE for the Elm Road Units in order to secure the repayment of $73.3 million of senior secured notes issued by MGE Power Elm Road. See Footnote 9 for additional information regarding these senior notes.


MGE Power West Campus has collaterally assigned its right to lease payments from MGE for the WCCF in order to secure the repayment of $50.0 million of senior secured notes issued by MGE Power West Campus. See Footnote 9 for additional information regarding these senior notes.


Item 3. Legal Proceedings.


MGE Energy and MGE


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


See "Environmental" under Item 1, Business, and Footnote 18.e for a description of several environmental proceedings involving MGE. See Footnote 18.f for a description of other legal matters.


Item 4. Mine Safety Disclosures.


MGE Energy and MGE


Not applicable.



19




PART II.


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


Market for Common Equity


MGE Energy


MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On February 1, 2013, there were approximately 36,421 shareholders of record. The following table shows high and low sale prices for the common stock on Nasdaq for each quarter over the past two years.


 

 

 

Common stock price range

 

 

 

 

2012

 

 

2011

 

 

 

 

High

 

Low

 

 

High

 

Low

 

 

Fourth quarter

$

53.97

$

47.24

 

$

47.85

$

39.30

 

 

Third quarter

$

56.06

$

46.79

 

$

43.06

$

37.06

 

 

Second quarter

$

47.82

$

43.10

 

$

42.72

$

39.55

 

 

First quarter

$

47.23

$

43.03

 

$

43.46

$

38.99

 


MGE


As of February 1, 2013, there were 17,347,894 outstanding shares of common stock, all of which were held by MGE Energy. There is no market for shares of common stock of MGE.


Dividends


MGE Energy


The following table sets forth MGE Energy's quarterly cash dividends per share declared during 2012 and 2011:


 

(Per share)

 

2012

 

2011

 

 

Fourth quarter

$

0.395

$

0.383

 

 

Third quarter

$

0.395

$

0.383

 

 

Second quarter

$

0.383

$

0.375

 

 

First quarter

$

0.383

$

0.375

 


MGE


The following table sets forth MGE's quarterly cash dividends declared during 2012 and 2011:


 

(In thousands)

 

2012

 

2011

 

 

Fourth quarter

$

6,948

$

6,728

 

 

Third quarter

$

-

$

6,728

 

 

Second quarter

$

6,728

$

6,596

 

 

First quarter

$

6,728

$

6,596

 


See discussion below as well as the "Liquidity and Capital Resources - Financing Activities" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a description of restrictions applicable to dividend payments by MGE.


Dividend Restrictions


Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order limits the amount of dividends that MGE may pay MGE Energy when its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. Under those circumstances, MGE may not pay annual dividends in excess of $39.8 million plus dividends on MGE Energy shares issued in excess of the issued share number used in the rate proceeding forecast if the proceeds are invested in MGE. MGE's thirteen month rolling average common equity ratio at December 31, 2012, is 58.3%, as determined under the



20




calculation used in the rate proceeding. MGE paid cash dividends of $20.4 million to MGE Energy in 2012. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.


MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2012, approximately $281.6 million was available for the payment of dividends under this covenant.


Issuer Purchases of Equity Securities


MGE Energy

Period

 

Total

Number

of

Shares

Purchased

 

Average

Price

Paid

per Share

 

Total Number

of Shares

Purchased as Part of

Publicly Announced

Plans or Programs*

 

Maximum number (or

Approximate Dollar

Value) of Shares That

May Yet Be

Purchased

Under the Plans or

Programs*

October 1-31, 2012

 

31,144

$

52.82

 

-  

 

-  

November 1-30, 2012

 

38,805

 

50.39

 

-  

 

-  

December 1-31, 2012

 

73,100

 

51.68

 

-  

 

-  

Total

 

143,049

$

51.58

 

-  

 

-  


* 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.


MGE


None.




21




Stock Performance Graph


The performance graph below illustrates a five-year comparison of cumulative total returns based on an initial investment of $1,000 in MGE Energy common stock, as compared with the Russell 2000 and the EEI Index for the period 2008 through 2012. The EEI Index reflects the consolidated performance of Edison Electric Institute investor-owned electric utilities.


[f10k_2012002.gif]


Value of Investment at December 31,


 

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

2012

 

 

MGEE

$

1,000

$

970

$

1,099

$

1,369

$

1,552

$

1,747

 

 

Russell 2000

 

1,000

 

662

 

842

 

1,068

 

1,024

 

1,191

 

 

EEI Index

 

1,000

 

741

 

820

 

878

 

1,054

 

1,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




22




Item 6. Selected Financial Data.


MGE Energy

(In thousands, except per share amounts)


  

 

For the years ended December 31,

  

 

2012

 

2011

 

2010

 

2009

 

2008

  

 

 

 

 

 

 

 

 

 

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

    Regulated electric

$

392,365

$

375,858

$

360,729

$

332,324

$

345,962

    Regulated gas

 

139,727

 

165,271

 

165,915

 

192,334

 

242,598

    Nonregulated

 

9,231

 

5,253

 

5,947

 

9,161

 

7,433

        Total

 

541,323

 

546,382

 

532,591

 

533,819

 

595,993

Operating expenses

 

410,200

 

421,170

 

418,931

 

431,296

 

491,418

Other general taxes

 

18,360

 

17,344

 

17,058

 

17,858

 

16,793

Operating income

 

112,763

 

107,868

 

96,602

 

84,665

 

87,782

Other income, net

 

10,069

 

9,214

 

11,093

 

8,096

 

8,044

Interest expense, net

 

(19,467)

 

(20,162)

 

(16,157)

 

(13,594)

 

(14,002)

    Income before taxes

 

103,365

 

96,920

 

91,538

 

79,167

 

81,824

Income tax provision

 

(38,919)

 

(35,992)

 

(33,820)

 

(28,170)

 

(29,056)

    Net income

$

64,446

$

60,928

$

57,718

$

50,997

$

52,768

Average shares outstanding

 

23,114

 

23,114

 

23,114

 

23,070

 

22,197

    Basic and diluted earnings per share

$

2.79

$

2.64

$

2.50

$

2.21

$

2.38

    Dividends declared per share

$

1.56

$

1.52

$

1.49

$

1.46

$

1.43

  

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Electric

$

888,444

$

794,738

$

721,721

$

695,897

$

677,540

Gas

 

285,468

 

285,702

 

257,505

 

249,610

 

284,211

Assets not allocated

 

18,559

 

32,882

 

22,079

 

22,342

 

14,642

Nonregulated energy operations

 

323,216

 

299,421

 

300,862

 

292,101

 

271,568

Transmission investments

 

61,064

 

57,006

 

54,241

 

51,728

 

46,292

All others

 

413,291

 

401,862

 

376,219

 

389,744

 

381,433

Eliminations

 

(403,118)

 

(412,729)

 

(414,734)

 

(419,537)

 

(407,411)

    Total

$

1,586,924

$

1,458,882

$

1,317,893

$

1,281,885

$

1,268,275

  

 

 

 

 

 

 

 

 

 

 

Capitalization including Short-Term Debt

 

 

 

 

 

 

 

 

 

 

Common shareholders' equity

$

579,429

$

550,952

$

525,080

$

501,795

$

478,202

Long-term debt*

 

361,504

 

363,570

 

336,018

 

322,470

 

272,408

Short-term debt

 

-

 

-

 

22,500

 

64,500

 

124,500

    Total capitalization and short-term debt

$

940,933

$

914,522

$

883,598

$

888,765

$

875,110

  

 

 

 

 

 

 

 

 

 

 

*Includes current maturities

 

 

 

 

 

 

 

 

 

 




23




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


General


MGE Energy is an investor-owned public utility holding company operating through subsidiaries in five business segments:


·

Regulated electric utility operations, conducted through MGE,

·

Regulated gas utility operations, conducted through MGE,

·

Nonregulated energy operations, conducted through MGE Power and its subsidiaries,

·

Transmission investments, representing our equity investment in ATC, and

·

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 140,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 145,000 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. In the future, MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE will continue to maintain 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,

·

Construction risk in connection with the Columbia environmental project,


and other factors listed in Item 1A. Risk Factors.


For the year ended December 31, 2012, MGE Energy's earnings were $64.4 million or $2.79 per share compared to $60.9 million or $2.64 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2012, were $40.8 million compared to $37.3 million for the same period in the prior year.




24




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


 

(In millions)

 

 

Year Ended December 31,

 

 

Business Segment:

 

 

2012

 

2011

 

2010

 

 

    Electric Utility

$

36.7

$

29.8

$

30.2

 

 

    Gas Utility

 

5.1

 

8.4

 

7.4

 

 

    Nonregulated Energy

 

18.1

 

17.9

 

15.8

 

 

    Transmission Investments

 

5.4

 

5.1

 

5.1

 

 

    All Other

 

(0.9)

 

(0.3)

 

(0.8)

 

 

    Net Income

$

64.4

$

60.9

$

57.7

 


Our net income during 2012 compared to 2011 primarily reflects the effects of the following factors:


·

A 4.7% increase in retail electric revenues, driven by increased residential customer demand primarily as a result of warmer-than-normal weather. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 31% compared to the prior period.


·

A 5.5% decrease in gas sales reflecting lower customer demand due to a milder winter. Heating degree days (a measure for determining the impact of weather during the heating season) decreased by 15% compared to the prior period.


·

MGE has recognized $1.4 million (after tax) in AFUDC equity related to the Columbia environmental project for the year ended December 31, 2012.


Our net income during 2011 compared to 2010 primarily reflects the effects of the following factors:


·

A 3.0% increase in retail electric revenues due to increased customer demand.


·

A 3.0% increase in gas sales reflecting higher customer demand due to a colder winter. Heating degree days increased by 3% compared to the prior period.


·

The electric and gas utilities received a one-time $2.6 million (pretax) gain on a sale of property to ATC in March 2010.


·

Higher nonregulated energy revenues are attributable to both Elm Road Units being in commercial operation. Elm Road Unit 1 was placed in-service in February 2010, and Elm Road Unit 2 was placed in-service in January 2011.


During 2012, 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. MGE's estimated share of the capital expenditures required to complete this project is approximately $140 million. MGE expects to incur capital expenditures as follows: $68 million in 2013 and $12 million in 2014. As of December 31, 2012, MGE has accumulated $59.9 million (excluding carrying costs) related to its share of the project, which is reflected in the Construction Work in Progress balance on MGE Energy's and MGE's consolidated balance sheets. Of this amount, MGE has accumulated $55.6 million in 2012.


ATC: MGE Transco contributed $2.1 million for voluntary capital contributions to ATC for the year ended December 31, 2012.


Smart Grid Investment Grant: MGE was approved in 2010 by the U.S. Department of Energy (DOE) under the federal stimulus program for a $5.5 million grant for smart grid projects. The DOE grant requires MGE to match the grant funding, bringing the total cost of the projects to more than $11 million. The projects involve the installation of technologies to boost efficiency, enhance service and improve reliability for customers. The stimulus grant is being used to fund the following projects: advanced metering infrastructure, plug-in hybrid electric vehicles support, and distribution management. As of December 31, 2012, MGE has spent $8.4 million related to these projects and has outstanding agreements to purchase $1.3 million in smart grid related products for 2013.




25




During 2013, several items may affect us, including:


2013 Rate Filing: In December 2012, the PSCW authorized MGE to increase 2013 rates for retail electric customers by 3.8% and to increase rates for gas customers by 1.0%. 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.


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 these costs. In addition, the PSCW deferred the final decision regarding the $1.8 million fuel flexibility project (MGE Power Elm Road's share) until a future rate proceeding.


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 in particular the costs of owning and operating fossil-fueled generating plants, such as Columbia and the Elm Road Units, from which we derive approximately 43% of our electric generating capacity. 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, MGE is involved in claims surrounding the alleged failure, among other things, to obtain necessary air permits and implement necessary emission controls associated with past activities at Columbia. MGE and the other co-owners are defending against these claims. See Columbia discussion in Footnote 18.e in Notes to Consolidated Financial Statements.


Columbia Environmental Project: During 2013, our share of the capital expenditures associated with the Columbia environmental project will be approximately $68 million. We intend to fund any remaining capital commitments with funds generated from normal operations, and the issuance of long-term and short-term debt.


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 $115.0 million for MGE Energy (including MGE) and $75.0 million for MGE to address our liquidity needs.


The following discussion is based on the business segments as discussed in Footnote 23.


Results of Operations


Year Ended December 31, 2012, Versus the Year Ended December 31, 2011


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)

 

2012

 

2011

 

% Change

 

2012

 

2011

 

% Change

 

 

Residential

$

130,581

$

124,524

 

4.9 %

 

826,766

 

821,543

 

0.6 %

 

 

Commercial

 

207,574

 

197,621

 

5.0 %

 

1,825,701

 

1,826,636

 

(0.1)%

 

 

Industrial

 

19,437

 

19,427

 

0.1 %

 

247,179

 

263,224

 

(6.1)%

 

 

Other-retail/municipal

 

38,805

 

36,990

 

4.9 %

 

442,906

 

442,066

 

0.2 %

 

 

    Total retail

 

396,397

 

378,562

 

4.7 %

 

3,342,552

 

3,353,469

 

(0.3)%

 

 

Sales to the market

 

991

 

1,711

 

(42.1)%

 

31,588

 

61,034

 

(48.2)%

 

 

Other revenues

 

1,811

 

1,584

 

14.3 %

 

-

 

-

 

- %

 

 

Adjustments to revenues

 

(6,834)

 

(5,999)

 

(13.9)%

 

-

 

-

 

- %

 

 

    Total

$

392,365

$

375,858

 

4.4 %

 

3,374,140

 

3,414,503

 

(1.2)%

 

 

 

 

 

 

 

 

  

 

 

 

 

 

  

 

 

Cooling degree days (normal 630)

 

 

 

 

 

  

 

1,068

 

814

 

31.2 %

 




26




Electric operating revenues increased $16.5 million or 4.4% for the year ended December 31, 2012, due to the following:


 

(In millions)

 

 

 

 

Rate changes

$

19.0

 

 

Other revenues

 

0.2

 

 

Volume

 

(1.2)

 

 

Adjustments to revenues

 

(0.8)

 

 

Sales to the market

 

(0.7)

 

 

Total

$

16.5

 


·

Rates changes. Rate changes have resulted in $19.0 million of additional revenue in 2012 compared to the same period in the prior year. The change is primarily a result of an electric retail rate increase which was authorized by the PSCW. Effective January 1, 2012, the retail rate increased 4.3% or $15.7 million for electric retail customers. The increase in electric rates was driven by MGE's electric fuel and purchased power costs, increased transmission costs, an update to the Elm Road Units' costs, and an increase for energy efficiency programs. Other factors also contributed to the revenue increase over the prior year, including customer mix (sales to various customer classes), demand charges, and customer fixed charges.


·

Volume. During the year ended December 31, 2012, there was a 0.3% decrease in total retail sales volumes compared to the same period in the prior year, reflecting decreased industrial customer demand, offset in part by an increase in residential demand.


·

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


·

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.


Electric fuel and purchased power


The expense for fuel for electric generation decreased $4.3 million or 8.5% during the year ended December 31, 2012, compared to the same period in the prior year. Internal electric generation costs decreased $3.2 million as a result of a 6.3% decrease in the per-unit cost (largely due to lower natural gas prices), and lower generation volumes of 1.1% or $1.1 million.


Excluding the fuel rules adjustments discussed below, purchased power expense increased $3.6 million during the year ended December 31, 2012, compared to the same period in the prior year. This increase in expense reflects a $3.0 million or 4.7% increase in per-unit cost of purchased power and a $0.6 million or 0.9% increase in the volume of power purchased from third parties.


The PSCW adopted new fuel rules effective January 1, 2011, that require MGE 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. During the year ended December 31, 2012, MGE's actual fuel costs fell below the lower end of this tolerance band, which resulted in MGE deferring $6.2 million in fuel-related cost savings to be returned to customers and increased purchased power costs. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. After combining the fuel rules adjustments with the actual savings discussed above, purchased power expense increased $9.8 million ($6.2 million fuel rules difference plus the $3.6 million purchased power expense increase discussed above) during the year ended December 31, 2012, compared to the prior year.




27




Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $4.7 million during the year ended December 31, 2012, compared to the same period in 2011. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

4.7

 

 

Increased customer service costs

 

0.9

 

 

Increased transmission costs

 

0.6

 

 

Increased distribution costs

 

0.2

 

 

Decreased production costs

 

(1.7)

 

 

Total

$

4.7

 


For the year ended December 31, 2012, increased administrative and general costs are primarily due to increased pension costs, reflecting changes in the discount rate and assumptions regarding investment returns used in calculating such costs. Increased customer service costs are due to higher energy conservation spending. Increased transmission costs are due to higher transmission network costs. Production costs decreased primarily due to decreased costs at Columbia and Blount.


Electric depreciation expense


Electric depreciation expense decreased $2.3 million for the year ended December 31, 2012, compared to the same period in the prior year. This decrease is related to the retirement of Blount assets at the end of 2011 due to the switch from operating with coal to natural gas.


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:


 

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

 

Revenues

 

Therms Delivered

 

 

 

2012

 

2011

 

% Change

 

2012

 

2011

 

% Change

 

 

Residential

$

78,411

$

93,373

 

(16.0)%

 

79,936

 

91,663

 

(12.8)%

 

 

Commercial/Industrial

 

58,374

 

68,729

 

(15.1)%

 

106,653

 

104,254

 

2.3 %

 

 

    Total retail

 

136,785

 

162,102

 

(15.6)%

 

186,589

 

195,917

 

(4.8)%

 

 

Gas transportation

 

2,465

 

2,586

 

(4.7)%

 

32,202

 

35,531

 

(9.4)%

 

 

Other revenues

 

477

 

583

 

(18.2)%

 

-

 

-

 

- %

 

 

    Total

$

139,727

$

165,271

 

(15.5)%

 

218,791

 

231,448

 

(5.5)%

 

 

Heating degree days (normal 7,122)

 

 

 

 

 

  

 

5,964

 

6,993

 

(14.7)%

 

 

Average rate per therm of

 

 

 

 

 

  

 

 

 

 

 

  

 

 

retail customer

$

0.733

$

0.827

 

(11.4)%

 

 

 

 

 

  

 


Gas revenues decreased $25.5 million or 15.5% for the year ended December 31, 2012. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Gas costs/rates

$

(17.6)

 

 

Gas deliveries

 

(7.7)

 

 

Transportation and other effects

 

(0.2)

 

 

Total

$

(25.5)

 


·

Gas costs/rates. The average retail rate per therm for the year ended December 31, 2012, decreased 11.4% compared to the same period in 2011, reflecting lower natural gas commodity costs.


·

Retail gas deliveries. For the year ended December 31, 2012, retail gas deliveries decreased 4.8% compared to the same period in 2011, as a result of milder weather during the winter months.




28




Cost of gas sold


For the year ended December 31, 2012, cost of gas sold decreased by $21.3 million, compared to the same period in the prior year. The cost per therm of natural gas decreased 17.2%, which resulted in $16.2 million of reduced expense. In addition, the volume of purchased gas decreased 5.1%, which resulted in $5.1 million of reduced expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $2.4 million for the year ended December 31, 2012, compared to the same period in 2011. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

1.3

 

 

Increased customer service costs

 

0.6

 

 

Increased customer accounts costs

 

0.3

 

 

Increased distribution costs

 

0.2

 

 

Total

$

2.4

 


For the year ended December 31, 2012, increased administrative and general costs were primarily due to increased pension costs, reflecting changes in the discount rate and assumptions regarding investment returns used in calculating such costs. Increased customer service costs are due to higher energy conservation spending.


Other Income (Deductions), Net - MGE Energy and MGE


For the year ended December 31, 2012, other income, net for the electric and gas segments increase by $1.4 million, compared to the same period in the prior year related to AFUDC equity recognized on the Columbia environmental project.


Nonregulated Energy Operations - MGE Energy and MGE


For the years ended December 31, 2012 and 2011, net income at the nonregulated energy operations segment was $18.1 million and $17.9 million, respectively. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power Elm Road and MGE Power West Campus. These subsidiaries have been formed to construct, own and lease electric generating capacity to assist MGE.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the years ended December 31, 2012 and 2011, other income at the transmission investment segment was $9.1 million and $8.6 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 4.b for additional information concerning ATC and summarized financial information regarding ATC.


Consolidated Other General Taxes - MGE Energy and MGE


MGE Energy's and MGE's other general taxes increased $1.0 million or 5.9% for the year ended December 31, 2012, when compared to the same period in 2011, partially due to increased Wisconsin license fee tax. The annual license fee tax expense is based on the prior year's adjusted operating revenues. Tax rates have not changed.


Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for the year ended December 31, 2012, was 37.7% compared to 37.1% for the same period in 2011, and MGE's effective income tax rate for the year ended December 31, 2012, was 37.7% compared to 37.0% for the same period in 2011. The effective income tax rate differences for both MGE Energy and MGE are primarily due to a lower estimated domestic manufacturing deduction.




29




For 2011 tax return purposes, MGE Energy and MGE changed their income tax method of accounting for electric transmission and distribution repairs and accounting for depreciation. The 2012 financial statement impact pertaining to finalization of the electric transmission and distribution repairs is an increase to deferred tax expense and a corresponding decrease in the current tax provision in the amount of $4.8 million. The 2012 financial statement impact pertaining to finalization of the depreciation adjustment is an increase to deferred tax expense and a corresponding decrease in the current tax provision in the amount of $38.6 million.


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. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Year Ended

 

 

 

 

December 31,

 

 

(in millions)

 

2012

 

2011

 

 

MGE Power Elm Road

$

14.8

$

14.6

 

 

MGE Power West Campus

$

7.5

$

7.5

 

 

MGE Transco

$

2.1

$

1.9

 


Results of Operations


Year Ended December 31, 2011, Versus the Year Ended December 31, 2010


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)

 

2011

 

2010

 

% Change

 

2011

 

2010

 

% Change

 

 

Residential

$

124,524

$

122,237

 

1.9 %

 

821,543

 

826,020

 

(0.5)%

 

 

Commercial

 

197,621

 

190,265

 

3.9 %

 

1,826,636

 

1,811,474

 

0.8 %

 

 

Industrial

 

19,427

 

20,125

 

(3.5)%

 

263,224

 

267,939

 

(1.8)%

 

 

Other-retail/municipal

 

36,990

 

34,795

 

6.3 %

 

442,066

 

421,931

 

4.8 %

 

 

    Total retail

 

378,562

 

367,422

 

3.0 %

 

3,353,469

 

3,327,364

 

0.8 %

 

 

Sales to the market

 

1,711

 

2,005

 

(14.7)%

 

61,034

 

40,593

 

50.4 %

 

 

Other revenues

 

1,584

 

1,915

 

(17.3)%

 

-

 

-

 

- %

 

 

Adjustments to revenues

 

(5,999)

 

(10,613)

 

43.5 %

 

-

 

-

 

- %

 

 

    Total

$

375,858

$

360,729

 

4.2 %

 

3,414,503

 

3,367,957

 

1.4 %

 

 

 

 

 

 

 

 

  

 

 

 

 

 

  

 

 

Cooling degree days (normal 629)

 

 

 

 

 

  

 

814

 

829

 

(1.8)%

 


Electric operating revenues increased $15.1 million or 4.2% for the year ended December 31, 2011, due to the following:


 

(In millions)

 

 

 

 

Rate changes

$

8.2

 

 

Adjustments to revenues

 

4.6

 

 

Volume

 

2.9

 

 

Sales to the market

 

(0.3)

 

 

Other revenues

 

(0.3)

 

 

Total

$

15.1

 




30




·

Rates changes. Rates charged to retail customers for the year ended December 31, 2011, were 2.2% or $8.2 million higher than those charged during the same period in the prior year.


In January 2011, the PSCW authorized MGE to increase 2011 rates for retail electric customers by 2.3% or $8.0 million. The increase in retail electric rates is driven by costs for MGE's share of the Elm Road Units.


·

Adjustments to revenues. The adjustments to revenues amount includes the elimination of carrying costs for Elm Road Units and WCCF that were collected in electric rates, which are recognized as nonregulated energy operating revenues in our Nonregulated Energy Operations segment. The amount eliminated was $6.0 million and $7.0 million for the years ended December 31, 2011 and 2010, respectively.


During the year ended December 31, 2010, MGE recovered in electric rates the costs associated with the estimated commencement of lease payments for Elm Road Unit 2, which did not commence until the commercial operation of the Unit in 2011. These amounts were deferred on MGE's balance sheet. At December 31, 2010, $3.6 million was included in adjustments to revenues to defer these revenues and will be returned to customers in MGE's next base rate case.


·

Volume. During the year ended December 31, 2011, there was a 0.8% increase in total retail sales volumes compared to the same period in the prior year, reflecting increased commercial customer demand.


·

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 or 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 is needed for its own system demand. The excess electricity is then sold to others in the market. For the year ended December 31, 2011, market volumes increased compared to the prior year, reflecting increased opportunities for sales, however, market settlement resulted in lower revenue per kWh for the year ended December 31, 2011, reflecting lower market prices. Also included in the sales to the market is a decrease in revenues pertaining to the ancillary services and capacity markets, which have no corresponding market volumes.


·

Other Revenues. Other revenues decreased a total of $0.3 million compared to the same period in the prior year.


Electric fuel and purchased power


The expense for fuel for electric generation increased $8.9 million or 21.2% during the year ended December 31, 2011, compared to the same period in the prior year, reflecting higher generation at the Elm Road Units. Elm Road Unit 1 and Unit 2 entered commercial operation in February 2010 and January 2011, respectively.


Purchased power expense decreased by $7.2 million or 10.0% during the year ended December 31, 2011, compared to the same period in the prior year. This decrease in expense reflects a $7.8 million or 10.9% decrease in the volume of power purchased from third parties, driven by Elm Road Unit 2 becoming operational in January 2011.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $0.6 million during the year ended December 31, 2011, compared to the same period in 2010. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased production costs

$

0.7

 

 

Increased distribution costs

 

0.7

 

 

Decreased transmission costs

 

(0.6)

 

 

Decreased customer service costs

 

(0.2)

 

 

Total

$

0.6

 


For the year ended December 31, 2011, increased production costs largely reflect increased maintenance at the Blount plant and increased production at the Elm Road Units. Increased distribution costs are primarily due to increased tree trimming expenses. These increases were partially offset by decreased transmission costs, primarily due to a decrease in network service fees pertaining to ATC.




31




Electric depreciation expense


Electric depreciation expense increased $0.8 million for the year ended December 31, 2011, compared to the same period in the prior year. This increase is related to higher levels of electric assets.


Gas Utility Operations - MGE Energy and MGE


Gas deliveries and revenues


The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the periods indicated:


 

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

 

Revenues

 

Therms Delivered

 

 

 

2011

 

2010

 

% Change

 

2011

 

2010

 

% Change

 

 

Residential

$

93,373

$

92,947

 

0.5 %

 

91,663

 

87,780

 

4.4 %

 

 

Commercial/Industrial

 

68,729

 

69,919

 

(1.7)%

 

104,254

 

100,954

 

3.3 %

 

 

    Total retail

 

162,102

 

162,866

 

(0.5)%

 

195,917

 

188,734

 

3.8 %

 

 

Gas transportation

 

2,586

 

2,488

 

3.9 %

 

35,531

 

35,871

 

(0.9)%

 

 

Other revenues

 

583

 

561

 

3.9 %

 

-

 

-

 

- %

 

 

    Total

$

165,271

$

165,915

 

(0.4)%

 

231,448

 

224,605

 

3.0 %

 

 

Heating degree days (normal 7,096)

 

 

 

 

 

  

 

6,993

 

6,798

 

2.9 %

 

 

Average rate per therm of

 

 

 

 

 

  

 

 

 

 

 

  

 

 

retail customer

$

0.827

$

0.863

 

(4.2)%

 

 

 

 

 

  

 


Gas revenues decreased $0.6 million or 0.4% for the year ended December 31, 2011. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Gas costs/rates

$

(7.0)

 

 

Gas deliveries

 

6.2

 

 

Transportation and other effects

 

0.2

 

 

Total

$

(0.6)

 


·

Gas costs/rates. The average retail rate per therm for the year ended December 31, 2011, decreased 4.2% compared to the same period in 2010. The primary contributor to this decrease is significantly lower natural gas commodity costs.


·

Retail gas deliveries. For the year ended December 31, 2011, retail gas deliveries increased 3.8% compared to the same period in 2010, reflecting colder weather during the winter months.


Cost of gas sold


For the year ended December 31, 2011, cost of gas sold decreased by $4.3 million, compared to the same period in the prior year. The cost per therm of natural gas decreased 7.4%, which resulted in $8.0 million of reduced expense. This decrease was partially offset by a 3.5% increase in the volume of gas purchased, which resulted in $3.7 million of increased expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $1.1 million for the year ended December 31, 2011, compared to the same period a year ago. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

0.6

 

 

Increased distribution costs

 

0.3

 

 

Increased customer accounts costs

 

0.2

 

 

Total

$

1.1

 




32




For the year ended December 31, 2011, increased administrative and general costs were primarily due to increased use of outside services.


Gas depreciation expense


Gas depreciation expense increased $0.4 million for the year ended December 31, 2011, compared to the same period in the prior year. This increase is related to higher levels of gas assets.


Other Income (Deductions), Net - MGE Energy and MGE


For the year ended December 31, 2011, other income, net for the electric and gas segments decreased by $2.9 million, compared to the same period in the prior year. This decrease is primarily due to a one-time $2.6 million pretax gain on a sale of property to ATC during March 2010.


Nonregulated Energy Operations - MGE Energy and MGE


Nonregulated energy operating revenues


Operating revenues from nonregulated energy operations increased $9.0 million for the year ended December 31, 2011, when compared to the same period in the prior year, reflecting the commencement of commercial operations at Elm Road Unit 2 in January 2011.


MGE received approval from the PSCW to collect from customers the carrying costs incurred by MGE Power Elm Road during construction of the Elm Road Units. The total carrying costs on the Elm Road Units is $62.2 million. A portion of this amount is being recognized over the period in which Elm Road Units costs are recovered in rates and a portion is being deferred and will be recognized over the period in which the Units are depreciated. See Footnote 2 for additional information regarding these carrying charges. For the years ended December 31, 2011 and 2010, MGE Power Elm Road recognized $3.9 million and $4.8 million, respectively, related to carrying costs on the Elm Road Units.


Nonregulated depreciation expense


Nonregulated depreciation expense increased $1.8 million for the year ended December 31, 2011, compared to the same period in the prior year. This additional depreciation is related to the commencement of commercial operations at Elm Road Unit 2 in January 2011.


Nonregulated energy interest expense, net


For the years ended December 31, 2011 and 2010, interest expense, net at the nonregulated energy operations segment was $6.3 million and $2.7 million, respectively. Interest expense at the nonregulated energy segment for both the years ended December 31, 2011 and 2010, includes interest expense incurred on $50 million of borrowings at MGE Power West Campus, and $50 million of borrowings at MGE Power Elm Road, which were long-term and fixed-rate during both periods. Interest expense at the nonregulated energy segment for the year ended December 31, 2011, also includes interest incurred on $30 million of additional borrowings at MGE Power Elm Road, which were issued in late February 2011, and were long-term and fixed-rate during 2011.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the years ended December 31, 2011 and 2010, other income at the transmission investment segment was $8.6 million and $8.5 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 4.b for additional information concerning ATC and summarized financial information regarding ATC.


Consolidated Other General Taxes - MGE Energy and MGE


MGE Energy's and MGE's other general taxes increased $0.3 million or 1.7% for the year ended December 31, 2011, when compared to the same period in 2010, due to increased Wisconsin license fee tax. The annual license fee tax expense is based on the prior year's adjusted operating revenues. Tax rates have not changed.




33




Consolidated Income Taxes - MGE Energy and MGE


MGE Energy's effective income tax rate for the year ended December 31, 2011, was 37.1% compared to 37.0% for the same period in 2010, and MGE's effective income tax rate for the years ended December 31, 2011 and 2010, was 37.0%.


For 2009 tax return purposes, MGE Energy and MGE changed their income tax method of accounting for electric repairs. The effect on the 2010 financial statements of the finalization pertaining to the electric repairs adjustment is an increase to deferred tax expense and a corresponding decrease in the current tax provision in the amount of approximately $6.0 million.


The tax method change did not have an impact on income before income tax expense in the income statements of MGE Energy and MGE.


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. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


 

 

 

Year Ended

 

 

 

 

December 31,

 

 

(in millions)

 

2011

 

2010

 

 

MGE Power Elm Road

$

14.6

$

11.2

 

 

MGE Power West Campus

$

7.5

$

7.7

 

 

MGE Transco

$

1.9

$

1.8

 


Liquidity and Capital Resources


Cash Flows


The following summarizes cash flows for MGE Energy and MGE during the years ended 2012, 2011, and 2010:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2012

 

2011

 

2010

 

 

2012

 

2011

 

2010

 

 

Cash provided by/(used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

$

146,004

$

130,772

$

124,033

 

$

138,772

$

129,683

$

115,192

 

 

    Investing activities

 

(101,353)

 

(66,351)

 

(57,385)

 

 

(101,083)

 

(65,722)

 

(57,436)

 

 

    Financing activities

 

(39,463)

 

(30,362)

 

(64,242)

 

 

(45,237)

 

(54,557)

 

(55,736)

 


Cash Provided by Operating Activities


MGE Energy


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


2012 vs. 2011


Cash provided by operating activities for the year ended December 31, 2012, was $146.0 million, an increase of $15.2 million when compared to the same period in the prior year, primarily related to lower income taxes and fuel related cost savings to be returned to customers.


MGE Energy's net income increased $3.5 million for the year ended December 31, 2012, when compared to the same period in the prior year.




34




The cash flows for the year ended December 31, 2012, reflect an $11.1 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.


Working capital accounts resulted in $0.3 million in cash used for operating activities for the year ended December 31, 2012, primarily due increased accounts receivable and increased unbilled revenues, partially offset by a decreased receivable – margin account and decreased prepaid taxes. Working capital accounts resulted in $7.0 million in cash provided by operating activities for the year ended December 31, 2011, primarily due to decreased inventories (due to lower natural gas costs), decreased unbilled revenues and increased accounts payable, partially offset by an increased receivable – margin account.


An increase in pension contribution resulted in an additional $5.2 million in cash used for operating activities for the year ended December 31, 2012, when compared to the same period in the prior year. These contributions reflect amounts required by law and discretionary amounts. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.


MGE Energy's other noncurrent items, net resulted in $7.0 million of operating cash inflows for the year ended December 31, 2012, compared to $3.9 million of operating cash outflows in the prior year. This increase in cash inflows is a result of fuel related cost savings to be returned to customers.


2011 vs. 2010


Cash provided by operating activities for the year ended December 31, 2011, was $130.8 million, an increase of $6.7 million when compared to the same period in the prior year, primarily due to working capital changes and the benefit of less taxes paid as a result of a tax method change in accounting for repairs and bonus depreciation that was available in 2011 for capital improvements placed in service during that year.


MGE Energy's net income increased $3.2 million for the year ended December 31, 2011, when compared to the same period in the prior year.


The cash flows for the year ended December 31, 2011, reflect an $8.3 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.


Working capital accounts resulted in $7.0 million in cash provided by operating activities for the year ended December 31, 2011, primarily due to decreased inventories (due to lower natural gas costs), decreased unbilled revenues and increased accounts payable, partially offset by an increased receivable – margin account. Working capital accounts resulted in $3.8 million in cash used by operating activities for the year ended December 31, 2010, primarily due to increased receivables and decreased payables, partially offset by decreased prepaid taxes (a result of a tax method change in accounting for repairs) and decreased inventories.


An increase in pension contribution resulted in an additional $6.8 million in cash used for operating activities for the year ended December 31, 2011, when compared to the same period in the prior year. These contributions reflect amounts required by law and discretionary amounts. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.


MGE Energy's other noncurrent items, net resulted in $3.9 million of operating cash outflows for the year ended December 31, 2011, compared to $8.9 million of operating cash inflows in the prior year. This decrease in cash inflows is a result of the regulatory liability for Elm Road Units related costs. In 2010, MGE started collecting lease payments based on the expected commercial operation dates of the Elm Road Units. The difference between the expected start date and the actual start date of the lease payments on those Units will be returned to customers in the next base rate case.


MGE


2012 vs. 2011


Cash provided by operating activities for the year ended December 31, 2012, was $138.8 million, an increase of $9.1 million when compared to the same period in the prior year, primarily related to lower income taxes and fuel related cost savings to be returned to customers.




35




Net income increased $4.1 million for the year ended December 31, 2012, when compared to the same period in the prior year.


The cash flows for the year ended December 31, 2012, reflect an $11.3 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.


Working capital accounts resulted in $7.9 million in cash used for operating activities for the year ended December 31, 2012, primarily due to increased accounts receivable, increased unbilled revenues, and increased prepaid taxes, partially offset by decreased receivable – margin account and decreased accounts payable. Working capital accounts resulted in $6.0 million in cash provided by operating activities for the year ended December 31, 2011, primarily due to decreased inventories (due to lower natural gas costs), decreased unbilled revenues, and increased accounts payable, partially offset by decreased accrued taxes and an increased receivable – margin account.


An increase in pension contribution resulted in an additional $5.2 million in cash used for operating activities for the year ended December 31, 2012, when compared to the same period in the prior year. These contributions reflect amounts required by law and discretionary amounts. See Footnote 13 for further discussion of MGE's pension and other postretirement benefits.


MGE's other noncurrent items, net resulted in $6.7 million of operating cash inflows for the year ended December 31, 2012, compared to $3.9 million of operating cash outflows in the prior year. This increase in cash inflows is a result of fuel related cost savings to be returned to customers.


2011 vs. 2010


Cash provided by operating activities for the year ended December 31, 2011, was $129.7 million, an increase of $14.5 million when compared to the same period in the prior year, primarily due to working capital changes and the benefit of less taxes paid as a result of a tax method change in accounting for repairs and bonus depreciation that was available in 2011 for capital improvements placed in service during that year.


Net income increased $2.8 million for the year ended December 31, 2011, when compared to the same period in the prior year.


The cash flows for the year ended December 31, 2011, reflect an $8.4 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.


Working capital accounts resulted in $6.0 million in cash provided by operating activities for the year ended December 31, 2011, primarily due to decreased inventories (due to lower natural gas costs), decreased unbilled revenues and increased accounts payable, partially offset by decreased accrued taxes and an increased receivable – margin account. Working capital accounts resulted in $10.9 million in cash used by operating activities for the year ended December 31, 2010, primarily due to increased receivables, increased prepaid taxes (a result of a tax method change in accounting for repairs), and decreased payables, partially offset by decreased inventories.


An increase in pension contribution resulted in an additional $6.8 million in cash used by operating activities for the year ended December 31, 2011, when compared to the same period in the prior year. These contributions reflect amounts required by law and discretionary amounts. See Footnote 13 for further discussion of MGE's pension and other postretirement benefits.


MGE's other noncurrent items, net resulted in $3.9 million of operating cash outflows for the year ended December 31, 2011, compared to $6.8 million of operating cash inflows in the prior year. This decrease in cash inflows is a result of the regulatory liability for Elm Road Units related costs. In 2010, MGE started collecting lease payments based on the expected commercial operation dates of the Elm Road Units. The difference between the expected start date and the actual start date of the lease payments on those Units will be returned to customers in the next base rate case.




36




Capital Requirements and Investing Activities


MGE Energy


2012 vs. 2011


MGE Energy's cash used for investing activities increased $35.0 million for the year ended December 31, 2012, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2012, were $98.4 million. This amount represents a $33.3 million increase from the expenditures made in the same period in the prior year. This increase is due to increased expenditures on the Columbia environmental project of $43.0 million offset by a decrease in electric utility capital expenditures in 2012.


Cash used for investment activities increased $1.4 million for the year ended December 31, 2012, when compared to the same period in the prior year as a result of increased capital contributions to ATC and other investments.


Cash used for investing activities was decreased by land purchased for investing purposes of $2.2 million in 2011.


2011 vs. 2010


MGE Energy's cash used for investing activities increased $9.0 million for the year ended December 31, 2011, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2011, were $65.2 million. This amount represents a $5.1 million increase from the expenditures made in the same period in the prior year. This increase is related to increased utility expenditures of $15.7 million, partially offset by $10.6 million in decreased construction activity related to the Elm Road Units.


Cash used for investing activities was further increased by land purchased for investing purposes of $2.2 million in 2011.


Additionally, proceeds of $2.7 million were received for a one time sale of property to ATC in March 2010 and $0.6 million was received for a one time sale of property in September 2010.


MGE


2012 vs. 2011


MGE's cash used for investing activities increased $35.4 million for the year ended December 31, 2012, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2012, were $98.4 million. This amount represents a $33.3 million increase from the expenditures made in the same period in the prior year. This increase is due to increased expenditures on the Columbia environmental project of $43.0 million offset by a decrease in electric utility capital expenditures in 2012.


Cash used for investment activities increased $1.3 million for the year ended December 31, 2012, when compared to the same period in the prior year as a result of increased capital contributions to ATC and other investments.


2011 vs. 2010


MGE's cash used for investing activities increased $8.3 million for the year ended December 31, 2011, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2011, were $65.2 million. This amount represents a $5.1 million increase from the expenditures made in the same period in the prior year. This increase is related to increased utility expenditures of $15.7 million, partially offset by $10.6 million in decreased construction activity related to the Elm Road Units.




37




Additionally, proceeds of $2.7 million were received for a one time sale of property to ATC in March 2010 and $0.6 million was received for a one time sale of property in September 2010.


Capital expenditures


The following table shows MGE Energy's budgeted capital expenditures for 2013 and actual capital expenditures for both 2012 and 2011:


 

(In thousands)

 

2013

 

2012

 

2011

 

 

For the years ended December 31,

 

(Budget)

(Actual)

(Actual)

 

 

Electric

$

116,740

$

81,965

$

47,206

 

 

Gas

 

21,547

 

13,812

 

15,830

 

 

    Utility plant total

 

138,287

 

95,777

 

63,036

 

 

Nonregulated

 

4,920

 

2,658

 

2,140

 

 

    MGE Energy total

$

143,207

$

98,435

$

65,176

 


In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. MGE's estimated share of the capital expenditures required to complete this project is approximately $140 million. MGE expects to incur capital expenditures as follows: $68 million in 2013 and $12 million in 2014. MGE Energy intends to fund any remaining capital commitments for Columbia with funds generated from normal operations, and the issuance of long-term and short-term debt. As of December 31, 2012, MGE had incurred $51.6 million (excluding carrying costs) in construction expenditures at Columbia related to the project and had accrued $8.3 million in incurred, but unpaid capital expenditures. MGE has recognized $1.4 million (after tax) in AFUDC equity related to this project for the year ended December 31, 2012.


MGE Energy used funds received as dividend payments from MGE Power West Campus and MGE Power Elm Road as well as internally generated cash to meet its 2012 capital requirements and cash obligations, including dividend payments.


Financing Activities


MGE Energy


2012 vs. 2011


Cash used for MGE Energy's financing activities was $39.5 million for the year ended December 31, 2012, compared to $30.4 million of cash used for the year ended December 31, 2011.


For the year ended December 31, 2012, dividends paid were $36.0 million compared to $35.0 million in the prior year. This increase was a result of a higher dividend per share ($1.56 vs. $1.52).


During the year ended December 31, 2012, MGE issued and retired $28.0 million of long-term debt. During the year ended December 31, 2011, MGE Power Elm Road issued $30.0 million of long-term debt.


For the year ended December 31, 2011, net short-term debt repayments were $22.5 million reflecting the use of proceeds from the MGE Power Elm Road long-term debt issue.


2011 vs. 2010


Cash used for MGE Energy's financing activities was $30.4 million for the year ended December 31, 2011, compared to $64.2 million of cash used for the year ended December 31, 2010.


For the year ended December 31, 2011, dividends paid were $35.0 million compared to $34.4 million in the prior year. This increase was a result of a higher dividend per share ($1.52 vs. $1.49).


During the years ended December 31, 2011 and 2010, MGE Energy issued $30 million and $80 million of long-term debt, respectively.




38




For the year ended December 31, 2011, net short-term and long-term debt repayments were $22.5 million and $2.5 million, respectively. For the year ended December 31, 2010, net short-term and long-term debt repayments were $92.0 million and $16.5 million, respectively. These repayments reflect the use of proceeds from the MGE Power Elm Road long-term debt issues.


MGE


2012 vs. 2011


During the year ended December 31, 2012, cash used for MGE's financing activities was $45.2 million compared to $54.6 million of cash used for MGE's financing activities in the prior year.


Dividends paid from MGE to MGE Energy were $20.4 million for the year ended December 31, 2012, compared to $26.6 million in the prior year.


During the year ended December 31, 2012, MGE issued and retired $28.0 million of long-term debt. During the year ended December 31, 2011, MGE Power Elm Road issued $30.0 million of long-term debt.


Distributions to parent from noncontrolling interest decreased $29.0 million for the year ended December 31, 2012. As a result of long-term debt financing by MGE Power Elm Road, distributions to parent from noncontrolling interest were $43.0 million for the year ended December 31, 2011. The proceeds from the financing were used to repay MGE Energy, which had been using its short-term credit facilities to help finance the Elm Road Units.


In addition, for the year ended December 31, 2011, net short-term debt repayments were $3.5 million.


2011 vs. 2010


During the year ended December 31, 2011, cash used for MGE's financing activities was $54.6 million compared to $55.7 million of cash used by MGE's financing activities in the prior year.


Dividends paid from MGE to MGE Energy were $26.6 million for the year ended December 31, 2011, compared to $26.2 million in the prior year.


During the years ended December 31, 2011 and 2010, MGE issued $30 million and $80 million of long-term debt, respectively.


Distributions to parent from noncontrolling interest decreased $5.9 million as a result of long-term debt financing by MGE Power Elm Road. The proceeds from the financing were used to repay MGE Energy, which had been using its short-term credit facilities to help finance the Elm Road Units.


For the year ended December 31, 2011, net short-term and long-term debt repayments were $3.5 million and $2.5 million, respectively. For the year ended December 31, 2010, net short-term and long-term debt repayments were $30.0 million and $16.5 million, respectively. These repayments reflect the use of proceeds from the MGE Power Elm Road long-term debt issues.


Dividend Restrictions


Dividend payments by MGE to MGE Energy are subject to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's first mortgage bonds. The PSCW order limits the amount of dividends that MGE may pay MGE Energy when its common equity ratio, calculated in the manner used in the rate proceeding, is less than 55%. Under those circumstances, MGE may not pay dividends in excess of $39.8 million for both 2012 and 2011, plus dividends on MGE Energy shares issued in excess of the shares issued in the rate proceeding forecast if the proceeds are invested in MGE. MGE's thirteen month rolling average common equity ratio at December 31, 2012 and 2011, is 58.3% and 57.3%, respectively, as determined under the calculation used in the rate proceeding. MGE was not restricted from paying cash dividends in 2012. Cash dividends of $20.4 million and $26.6 million were paid by MGE to MGE Energy in 2012 and 2011, respectively. The rate proceeding calculation includes as indebtedness imputed amounts for MGE's outstanding purchase power capacity payments and other PSCW adjustments, but does not include the indebtedness associated with MGE Power Elm Road and MGE Power West Campus, which are consolidated into MGE's financial statements but are not direct obligations of MGE.




39




MGE has covenanted with the holders of its first mortgage bonds not to declare or pay any dividend or make any other distribution on or purchase any shares of its common stock unless, after giving effect thereto, the aggregate amount of all such dividends and distributions and all amounts applied to such purchases, after December 31, 1945, shall not exceed the earned surplus (retained earnings) accumulated subsequent to December 31, 1945. As of December 31, 2012, approximately $281.6 million was available for the payment of dividends under this covenant.


Credit Facilities


At December 31, 2012, MGE Energy and MGE had the following aggregate bank commitments and available capacity under their credit agreements and the indicated amounts of outstanding commercial paper:


 

 

Aggregate Bank Commitments

 

Outstanding Commercial Paper

 

Outstanding Borrowings

 

Available Capacity

 

 

Borrower

 

 

 

 

 

Expiration Date

 

 

(Dollars in millions)

 

 

MGE Energy

$

40.0

$

-

$

-

$

40.0

 

July 31, 2015

 

 

 

 

 

 

 

 

 

 

 

MGE

$

75.0

$

-

$

-

$

75.0

 

July 31, 2015


Borrowings under each credit agreement may bear interest at a rate that floats daily based upon a prime rate or at a rate fixed for a specified interest period based upon a LIBOR-based index, plus an adder. In the case of the LIBOR-based rates, the adder is based upon the senior unsecured credit rating for MGE and does not exceed 0.85%.


The agreements require the borrower to maintain a ratio of consolidated debt to consolidated total capitalization not to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities, revenues, and expenses included in MGE's financial statements as a result of the consolidation of VIEs, such as MGE Power Elm Road and MGE Power West Campus. At December 31, 2012, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE, as calculated under the credit agreements' covenant, were 38.4% and 35.5%, respectively. See Footnote 10, for additional information regarding the credit facilities.


Capitalization Ratios


MGE Energy's capitalization ratios were as follows:


 

 

MGE Energy

 

 

 

2012  

 

2011  

 

 

Common shareholders' equity

61.6 %

 

60.2 %

 

 

Long-term debt*

38.4 %

 

39.8 %

 

 

*Includes the current portion of long-term debt.

 


Credit Ratings


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


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




40




Contractual Obligations and Commercial Commitments for MGE Energy and MGE


MGE Energy's and MGE's contractual obligations as of December 31, 2012, representing cash obligations that are considered to be firm commitments, are as follows:


  

 

 

 

Payment due within:

 

Due after

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

MGE Energy

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

361,805

$

3,013

$

8,284

$

58,624

$

291,884

Short-term debt(b)

 

-

 

-

 

-

 

-

 

-

Interest expense(c)

 

274,802

 

18,997

 

37,413

 

34,764

 

183,628

Operating leases(d)

 

14,741

 

2,026

 

2,639

 

1,470

 

8,606

Purchase obligations(e)

 

580,460

 

100,194

 

147,460

 

110,948

 

221,858

Other obligations(f)

 

27,642

 

8,743

 

10,009

 

1,494

 

7,396

Purchase obligations - Columbia(g)

 

73,386

 

73,386

 

-

 

-

 

-

Total MGE Energy contractual obligations  

$

1,332,836

$

206,359

$

205,805

$

207,300

$

713,372

  

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

Long-term debt(a)

$

361,805

$

3,013

$

8,284

$

58,624

$

291,884

Short-term debt(b)

 

-

 

-

 

-

 

-

 

-

Interest expense(c)

 

274,802

 

18,997

 

37,413

 

34,764

 

183,628

Operating leases(d)

 

14,741

 

2,026

 

2,639

 

1,470

 

8,606

Purchase obligations(e)

 

579,853

 

99,587

 

147,460

 

110,948

 

221,858

Other obligations(f)

 

25,167

 

6,268

 

10,009

 

1,494

 

7,396

Purchase obligations - Columbia(g)

 

73,386

 

73,386

 

-

 

-

 

-

Total MGE contractual obligations  

$

1,329,754

$

203,277

$

205,805

$

207,300

$

713,372


(a)

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


(b)

No short-term debt outstanding. See Footnote 10 of the Notes to Consolidated Financial Statements.


(c)

Amount represents interest expense on long-term facilities. See Footnote 9 of the Notes to Consolidated Financial Statements for further discussion of the long-term debt outstanding at December 31, 2012.


(d)

Operating leases. See Footnote 18 of the Notes to Consolidated Financial Statements.


(e)

Purchase obligations for MGE Energy and MGE consist primarily of the purchase of electricity and natural gas, electric transmission, natural gas storage capacity, natural gas pipeline transportation, and the purchase and transport of coal. See Footnote 18 of the Notes to Consolidated Financial Statements.


(f)

Other obligations are primarily related to investment commitments, easements, maintenance and service agreements, smart grid projects, green energy projects, water quality environmental projects, fuel credit, and uncertain tax positions.


(g)

Purchase obligations for MGE Energy and MGE related to contracts for equipment and services related to the construction of the Columbia environmental project. See Footnote 18 of the Notes to Consolidated Financial Statements.


The above amounts do not include any contributions for MGE's pension and postretirement plans. Contributions to the plans for 2013 are expected to be approximately $32 million, of which $30 million was paid in January 2013. For 2014 and 2015, contributions are expected to be between $11 million to $13 million each year. The contributions for years after 2015 are not yet currently estimated. MGE has adopted the asset smoothing as permitted in accordance with the Pension Protection Act of 2006, including modifications made by WRERA. Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions.


The above amounts do not include future voluntary capital calls to ATC. On January 31, 2013, MGE Transco made a voluntary $0.2 million capital contribution to ATC. The amount and timing of future voluntary capital calls is uncertain and primarily dependent on the operations and expansion of ATC.



41




MGE Energy's and MGE's commercial commitments as of December 31, 2012, representing commitments triggered by future events and including financing arrangements to secure obligations of MGE Energy and MGE, and guarantees by MGE, are as follows:


 

  

 

 

 

Expiration within:

 

Due after

 

 

(In thousands)

 

Total

 

1 Year

 

2-3 Years

 

4-5 Years

 

5 Years

 

 

MGE Energy

 

 

 

 

 

 

 

 

 

 

 

 

Available Lines of Credit(a)

$

115,000

$

-

$

115,000

$

-

$

-

 

 

Guarantees(b)

 

4,459

 

689

 

1,409

 

1,166

 

1,195

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

 

Available Lines of Credit(c)

$

75,000

$

-

$

75,000

$

-

$

-

 

 

Guarantees(b)

 

4,459

 

689

 

1,409

 

1,166

 

1,195

 


(a)

Amount includes the facility discussed in (c) plus an additional line of credit. MGE Energy has available at any time a $40.0 million committed revolving credit agreement, expiring in July 2015. At December 31, 2012, MGE Energy had no borrowings under this credit facility.


(b)

MGE has guaranteed repayment of certain receivables it sold to a financial institution under a chattel paper agreement. See Footnote 18 of the Notes to Consolidated Financial Statements.


(c)

Amount includes a $75.0 million committed revolving credit agreement expiring in July 2015. This credit facility is used to support commercial paper issuances. At December 31, 2012, there were no borrowings under this facility.


Other Matters


Elm Road


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 these costs. In addition, the PSCW deferred the final decision regarding the $1.8 million fuel flexibility project (MGE Power Elm Road's share) until a future rate proceeding.


The warranty periods for both of the Elm Road Units have expired. WEPCO and Bechtel (the construction contractor for the Elm Road Units) are working through outstanding warranty claims. According to WEPCO, the warranty claim for the costs incurred to repair steam turbine corrosion damage identified on both units will be resolved through a binding arbitration hearing scheduled for October 2013. In accordance with the contract with Bechtel, final acceptance of the units cannot occur until, among other things, all disputes have been settled.


ATC


In April 2011, ATC and Duke Energy announced the creation of a joint venture, Duke-American Transmission Company (DATC), that seeks to build, own and operate new electric transmission infrastructure in North America to address increasing demand for affordable, reliable transmission capacity. DATC has announced various transmission projects to be constructed over the next 10 years. These projects are subject to approval by various regulatory agencies. At December 31, 2012, MGE Transco held a 3.6% ownership interest in ATC. Additional capital contributions by MGE Transco to ATC may be required.


PJM Resettlement


MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. In 2009, PJM determined certain market participants, including MGE, were not eligible to receive transmission loss credits. In September 2009, MGE paid PJM $1.2 million at that time as part of this resettlement.


In July 2011, FERC reversed the 2009 decision and determined PJM should refund certain amounts back to market participants, including MGE. In May 2012, FERC denied rehearing requests by financial marketers and ordered the resettlement. In July 2012, MGE received a $1.2 million refund from PJM related to the resettlement, which was credited to purchased power.



42




There continues to be an open rehearing request at FERC and a petition at the U.S. Court of Appeals. There is potential that MGE would have to pay back the refund received from PJM.


Critical Accounting Estimates - MGE Energy and MGE


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


Unbilled Revenues


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


·

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


·

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


·

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


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


Allowance for Doubtful Accounts


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


Pension and Other Postretirement Benefit Plans


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




43




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


·

Assumed return on assets. This assumption represents the rate of return on plan assets reflecting the average rate of earnings expected on the funds invested (or to be invested) to provide for the benefits included in the projected benefit obligation. For 2012, MGE used an assumed return on assets of 8.10% for pension and 7.26% for other postretirement benefits. In 2013, the pension asset assumption will remain at 8.10%. MGE will lower the postretirement benefit assumption from 7.26% to 6.79% in 2013. The annual expected rate of return is based on projected long-term equity and bond returns, maturities and asset allocations. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $2.1 million, before taxes.


·

Discount rate. The discount rate represents the rate at which pension obligations could effectively be settled on a present-value basis. MGE uses high-grade bond yields as a benchmark for determining the appropriate discount rate.


·

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


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


Income Tax Provision


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


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


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


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


Accounting for Derivative Instruments


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


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




44




Regulatory Assets/Liabilities


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


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


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


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


See Footnote 22 of the Notes to Consolidated Financial Statements for discussion of new accounting pronouncements.


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


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


Commodity Price Risk


MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE 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.


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 bears regulatory risk for the recovery of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure.


The PSCW approved new fuel rules that became effective January 1, 2011. The new 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 will be 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 would defer costs, less any excess revenues, if the actual electric fuel costs exceeded 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 2012, fuel and purchased power costs included in MGE's base fuel rates are $100.7 million. See Footnote 17 of 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.




45




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 December 31, 2012, the fair value of these instruments exceeded their cost basis by $0.3 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 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 balance sheet. The fair value of the contract at December 31, 2012, reflects a loss position of $72.6 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 (see Footnote 10 of the Notes to Consolidated Financial Statements). 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. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $2.1 million, before taxes. MGE's risk of expense and annuity payments, as a result of changes in the market value of the trust funds, is mitigated in part through future rate actions by the PSCW. The value of employee benefit plans trusts' assets have increased in value by approximately 14.5% during the year ended December 31, 2012, and 2.1% during the year ended December 31, 2011.


Credit Risk - Counterparty


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


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


Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses on accrual contracts. As of December 31, 2012, 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 1,631 square miles in Wisconsin. Based on results for the year ended December 31, 2012, 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.




46




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.




47




Item 8. Financial Statements and Supplementary Data.


MGE Energy


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.


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


The effectiveness of the Company's internal control over financial reporting as of December 31, 2012, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


February 26, 2013


MGE


Management's Report on Internal Control Over Financial Reporting


Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.


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


February 26, 2013




48




Report of Independent Registered Public Accounting Firm


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


In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of MGE Energy, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


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


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


/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 26, 2013




49




Report of Independent Registered Public Accounting Firm


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


In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Madison Gas and Electric Company and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

February 26, 2013




50




MGE Energy, Inc.

Consolidated Statements of Income

(In thousands, except per share amounts)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Operating Revenues:

 

 

 

 

 

 

    Regulated electric revenues

$

392,365

$

375,858

$

360,729

    Regulated gas revenues

 

139,727

 

165,271

 

165,915

    Nonregulated revenues

 

9,231

 

5,253

 

5,947

        Total Operating Revenues

 

541,323

 

546,382

 

532,591

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

    Fuel for electric generation

 

46,499

 

50,819

 

41,947

    Purchased power

 

73,842

 

64,085

 

71,239

    Cost of gas sold

 

78,156

 

99,465

 

103,784

    Other operations and maintenance

 

172,996

 

165,859

 

164,001

    Depreciation and amortization

 

38,707

 

40,942

 

37,960

    Other general taxes

 

18,360

 

17,344

 

17,058

        Total Operating Expenses

 

428,560

 

438,514

 

435,989

Operating Income

 

112,763

 

107,868

 

96,602

 

 

 

 

 

 

 

Other income, net

 

10,069

 

9,214

 

11,093

Interest expense, net

 

(19,467)

 

(20,162)

 

(16,157)

    Income before income taxes

 

103,365

 

96,920

 

91,538

Income tax provision

 

(38,919)

 

(35,992)

 

(33,820)

Net Income

$

64,446

$

60,928

$

57,718

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

(basic and diluted)

$

2.79

$

2.64

$

2.50

 

 

 

 

 

 

 

Dividends per share of common stock

$

1.56

$

1.52

$

1.49

 

 

 

 

 

 

 

Average Shares Outstanding

 

 

 

 

 

 

 (basic and diluted)

 

23,114

 

23,114

 

23,114

 

 

 

 

 

 

 

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


MGE Energy, Inc.

Consolidated Statements of Comprehensive Income

(In thousands)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Net Income

$

64,446

$

60,928

$

57,718

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

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

 

 

 

 

 

 

    tax ($12, $10, and $42)

 

(18)

 

(15)

 

(63)

    Reclassification of realized gain on available-for-sale

 

 

 

 

 

 

    securities, net of tax ($-, $10, and $-)

 

-

 

(15)

 

-

Comprehensive Income

$

64,428

$

60,898

$

57,655

 

 

 

 

 

 

 

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




51




MGE Energy, Inc.

Consolidated Statements of Cash Flows

(In thousands)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Operating Activities:

 

 

 

 

 

 

    Net income

$

64,446

$

60,928

$

57,718

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

38,707

 

40,942

 

37,960

        Deferred income taxes

 

44,797

 

33,698

 

25,381

        Provision for doubtful receivables

 

2,498

 

2,312

 

2,805

        Employee benefit plan expenses

 

18,353

 

13,703

 

14,748

        Equity earnings in ATC

 

(9,079)

 

(8,615)

 

(8,501)

        Gain on sale of property

 

(201)

 

(112)

 

(3,153)

        Other items

 

1,484

 

1,728

 

2,254

    Changes in working capital items:

 

 

 

 

 

 

        Receivable - margin account

 

3,726

 

(2,609)

 

1,159

        Trade and other receivables

 

(6,208)

 

173

 

(8,191)

        Inventories

 

1,457

 

7,438

 

3,755

        Unbilled revenues

 

(2,508)

 

3,466

 

(41)

        Prepaid taxes

 

2,731

 

245

 

7,540

        Other current assets

 

367

 

538

 

(977)

        Accounts payable

 

(272)

 

2,055

 

(2,895)

        Other current liabilities

 

425

 

(4,300)

 

(4,195)

    Dividend income from ATC

 

7,146

 

6,728

 

6,667

    Cash contributions to pension and other postretirement plans

 

(28,857)

 

(23,670)

 

(16,901)

    Other noncurrent items, net

 

6,992

 

(3,876)

 

8,900

            Cash Provided by Operating Activities

 

146,004

 

130,772

 

124,033

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(98,435)

 

(65,176)

 

(60,082)

    Capital contributions to investments

 

(2,419)

 

(1,008)

 

(810)

    Purchase of investment - land

 

(3)

 

(2,152)

 

-

    Proceeds from sale of property

 

201

 

112

 

3,358

    Other

 

(697)

 

1,873

 

149

            Cash Used for Investing Activities

 

(101,353)

 

(66,351)

 

(57,385)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid on common stock

 

(35,951)

 

(35,026)

 

(34,370)

    Repayment of long-term debt

 

(30,668)

 

(2,500)

 

(16,527)

    Issuance of long-term debt

 

28,000

 

30,000

 

80,000

    Decrease in short-term debt

 

-

 

(22,500)

 

(92,000)

    Other

 

(844)

 

(336)

 

(1,345)

            Cash Used for Financing Activities

 

(39,463)

 

(30,362)

 

(64,242)

    Change in Cash and Cash Equivalents:

 

5,188

 

34,059

 

2,406

    Cash and cash equivalents at beginning of period

 

41,169

 

7,110

 

4,704

    Cash and cash equivalents at end of period

$

46,357

$

41,169

$

7,110

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Interest paid

$

19,499

$

19,788

$

18,643

    Income taxes paid

$

3,544

$

5,537

$

10,373

    Income taxes received

$

(12,536)

$

(4,370)

$

(9,043)

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

10,317

$

684

$

762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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




52




MGE Energy, Inc.

Consolidated Balance Sheets

(In thousands)

 

 

At December 31,

ASSETS

 

2012

 

2011

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

46,357

$

41,169

    Receivable - margin account

 

1,818

 

2,477

    Accounts receivable, less reserves of $3,885 and $3,662, respectively

 

41,386

 

36,744

    Other accounts receivable, less reserves of $931 and $439, respectively

 

6,746

 

5,318

    Unbilled revenues

 

28,262

 

25,754

    Materials and supplies, at average cost

 

16,997

 

14,758

    Fossil fuel

 

6,367

 

5,468

    Stored natural gas, at average cost

 

14,980

 

19,575

    Prepaid taxes

 

19,520

 

22,251

    Regulatory assets - current

 

10,327

 

7,347

    Deferred income taxes

 

23,483

 

-

    Other current assets

 

6,694

 

8,270

        Total Current Assets

 

222,937

 

189,131

Other long-term receivables

 

1,102

 

1,494

Regulatory assets

 

218,853

 

205,835

Other deferred assets and other

 

5,973

 

6,524

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

975,053

 

961,511

    Construction work in progress

 

98,411

 

34,055

        Total Property, Plant, and Equipment

 

1,073,464

 

995,566

Investments

 

64,595

 

60,332

        Total Assets

$

1,586,924

$

1,458,882

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

3,013

$

2,667

    Accounts payable

 

43,518

 

34,532

    Accrued interest and taxes

 

4,296

 

4,085

    Accrued payroll related items

 

10,063

 

9,987

    Deferred income taxes

 

-

 

3,020

    Derivative liabilities

 

9,270

 

7,483

    Other current liabilities

 

5,637

 

1,300

        Total Current Liabilities

 

75,797

 

63,074

Other Credits:

 

 

 

 

    Deferred income taxes

 

270,410

 

199,850

    Investment tax credit - deferred

 

1,520

 

1,780

    Regulatory liabilities

 

24,538

 

20,463

    Accrued pension and other postretirement benefits

 

162,835

 

183,622

    Derivative liabilities

 

63,320

 

35,046

    Other deferred liabilities and other

 

50,584

 

43,192

        Total Other Credits

 

573,207

 

483,953

Capitalization:

 

 

 

 

    Common shareholders' equity:

 

 

 

 

        Common Stock - $1 par value - 50,000 shares authorized;

 

 

 

 

        23,114 shares issued and outstanding

 

23,114

 

23,114

        Additional paid-in capital

 

316,268

 

316,268

        Retained earnings

 

239,953

 

211,458

        Accumulated other comprehensive income, net of tax

 

94

 

112

        Total Common Shareholders' Equity

 

579,429

 

550,952

    Long-term debt

 

358,491

 

360,903

        Total Capitalization

 

937,920

 

911,855

Commitments and contingencies (see Footnote 18)

 

-

 

-

        Total Liabilities and Capitalization

$

1,586,924

$

1,458,882

 

 

 

 

 

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




53




MGE Energy, Inc.

Consolidated Statements of Common Equity

(In thousands, except per share amounts)


 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

(Loss)/Income

 

Total

2010

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2009

23,114

$

23,114

$

316,268

$

162,208

$

205

$

501,795

Net income

 

 

 

 

 

 

57,718

 

 

 

57,718

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

(63)

 

(63)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

($1.49 per share)

 

 

 

 

 

 

(34,370)

 

 

 

(34,370)

Ending balance - December 31, 2010

23,114

$

23,114

$

316,268

$

185,556

$

142

$

525,080

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

60,928

 

 

 

60,928

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

(30)

 

(30)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

($1.52 per share)

 

 

 

 

 

 

(35,026)

 

 

 

(35,026)

Ending balance - December 31, 2011

23,114

$

23,114

$

316,268

$

211,458

$

112

$

550,952

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

64,446

 

 

 

64,446

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

(18)

 

(18)

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

($1.56 per share)

 

 

 

 

 

 

(35,951)

 

 

 

(35,951)

Ending balance - December 31, 2012

23,114

$

23,114

$

316,268

$

239,953

$

94

$

579,429

 

 

 

 

 

 

 

 

 

 

 

 

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




54




Madison Gas and Electric Company

Consolidated Statements of Income

(In thousands)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Operating Revenues:

 

 

 

 

 

 

    Regulated electric revenues

$

392,365

$

375,858

$

360,729

    Regulated gas revenues

 

139,727

 

165,271

 

165,915

    Nonregulated revenues

 

9,231

 

5,253

 

5,947

        Total Operating Revenues

 

541,323

 

546,382

 

532,591

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

    Fuel for electric generation

 

46,499

 

50,819

 

41,947

    Purchased power

 

73,842

 

64,085

 

71,239

    Cost of gas sold

 

78,156

 

99,465

 

103,784

    Other operations and maintenance

 

171,965

 

164,903

 

163,168

    Depreciation and amortization

 

38,707

 

40,942

 

37,960

    Other general taxes

 

18,360

 

17,344

 

17,058

    Income tax provision

 

35,334

 

32,287

 

29,556

        Total Operating Expenses

 

462,863

 

469,845

 

464,712

Operating Income

 

78,460

 

76,537

 

67,879

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

    AFUDC - equity funds

 

1,731

 

413

 

301

    Equity in earnings in ATC

 

9,079

 

8,615

 

8,501

    Income tax provision

 

(4,101)

 

(3,752)

 

(4,749)

    Other (deductions) income, net

 

(263)

 

(321)

 

2,715

        Total Other Income and Deductions

 

6,446

 

4,955

 

6,768

    Income before interest expense

 

84,906

 

81,492

 

74,647

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

    Interest on long-term debt

 

20,386

 

20,634

 

18,800

    Other interest, net

 

(82)

 

(226)

 

(2,500)

    AFUDC - borrowed funds

 

(704)

 

(168)

 

(118)

        Net Interest Expense

 

19,600

 

20,240

 

16,182

Net Income

$

65,306

$

61,252

$

58,465

Less Net Income Attributable to Noncontrolling Interest, net of tax

 

(24,489)

 

(23,970)

 

(20,740)

Net Income Attributable to MGE

$

40,817

$

37,282

$

37,725

 

 

 

 

 

 

 

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


Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income

(In thousands)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Net Income

$

65,306

$

61,252

$

58,465

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

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

 

 

 

 

 

 

    tax ($29, $7, and $27)

 

(43)

 

(9)

 

(41)

    Reclassification of realized gain on available-for-sale  

 

 

 

 

 

 

    securities, net of tax ($-, $10, and $-)

 

-

 

(15)

 

-

Comprehensive Income

$

65,263

$

61,228

$

58,424

    Less: Comprehensive Income Attributable to Noncontrolling

 

 

 

 

 

 

    Interest, net of tax

 

(24,489)

 

(23,970)

 

(20,740)

Comprehensive Income Attributable to MGE

$

40,774

$

37,258

$

37,684

 

 

 

 

 

 

 

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




55




Madison Gas and Electric Company

Consolidated Statements of Cash Flows

(In thousands)


 

 

For the years ended December 31,

 

 

2012

 

2011

 

2010

Operating Activities:

 

 

 

 

 

 

    Net income

$

65,306

$

61,252

$

58,465

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

38,707

 

40,942

 

37,960

        Deferred income taxes

 

44,112

 

32,773

 

24,354

        Provision for doubtful receivables

 

2,498

 

2,312

 

2,805

        Employee benefit plan expenses

 

18,353

 

13,703

 

14,748

        Equity earnings in ATC

 

(9,079)

 

(8,615)

 

(8,501)

        Gain on sale of property

 

(201)

 

(112)

 

(3,153)

        Other items

 

2,014

 

2,284

 

2,788

    Changes in working capital items:

 

 

 

 

 

 

        Receivable - margin account

 

3,726

 

(2,609)

 

1,159

        Trade and other receivables

 

(7,219)

 

1,183

 

(6,271)

        Inventories

 

1,457

 

7,438

 

3,755

        Unbilled revenues

 

(2,508)

 

3,466

 

(41)

        Prepaid taxes

 

(1,584)

 

(477)

 

(2,667)

        Other current assets

 

366

 

536

 

(978)

        Accounts payable

 

(1,658)

 

4,214

 

(2,913)

        Accrued interest and taxes

 

211

 

(3,741)

 

1,169

        Other current liabilities

 

(714)

 

(4,027)

 

(4,065)

    Dividend income from ATC

 

7,146

 

6,728

 

6,667

    Cash contributions to pension and other postretirement plans

 

(28,857)

 

(23,670)

 

(16,901)

    Other noncurrent items, net

 

6,696

 

(3,897)

 

6,812

            Cash Provided by Operating Activities

 

138,772

 

129,683

 

115,192

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(98,435)

 

(65,176)

 

(60,082)

    Capital contributions to investments

 

(2,140)

 

(888)

 

(710)

    Proceeds from sale of property

 

201

 

112

 

3,358

    Other

 

(709)

 

230

 

(2)

            Cash Used for Investing Activities

 

(101,083)

 

(65,722)

 

(57,436)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

(20,404)

 

(26,648)

 

(26,150)

    Distributions to parent from noncontrolling interest

 

(23,500)

 

(52,500)

 

(58,400)

    Equity contribution received by noncontrolling interest

 

2,130

 

888

 

710

    Affiliate financing of Elm Road

 

-

 

-

 

(4,193)

    Repayment of long-term debt

 

(30,668)

 

(2,500)

 

(16,527)

    Issuance of long-term debt

 

28,000

 

30,000

 

80,000

    Decrease in short-term debt

 

-

 

(3,500)

 

(30,000)

    Other

 

(795)

 

(297)

 

(1,176)

            Cash Used for Financing Activities

 

(45,237)

 

(54,557)

 

(55,736)

    Change in Cash and Cash Equivalents:

 

(7,548)

 

9,404

 

2,020

    Cash and cash equivalents at beginning of period

 

13,898

 

4,494

 

2,474

    Cash and cash equivalents at end of period

$

6,350

$

13,898

$

4,494

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Interest paid

$

19,499

$

19,731

$

18,363

    Income taxes paid

$

44

$

28

$

3

    Income taxes received

$

(448)

$

(10)

$

(5)

    Significant noncash investing activities:

 

 

 

 

 

 

        Accrued capital expenditures

$

10,317

$

684

$

762

 

 

 

 

 

 

 

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




56




Madison Gas and Electric Company

Consolidated Balance Sheets

(In thousands)

 

 

At December 31,

ASSETS

 

2012

 

2011

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

6,350

$

13,898

    Receivable - margin account

 

1,818

 

2,477

    Accounts receivable, less reserves of $3,885 and $3,662, respectively

 

41,386

 

35,765

    Affiliate receivables

 

634

 

605

    Other accounts receivable, less reserves of $931 and $439, respectively

 

6,732

 

5,301

    Unbilled revenues

 

28,262

 

25,754

    Materials and supplies, at average cost

 

16,997

 

14,758

    Fossil fuel

 

6,367

 

5,468

    Stored natural gas, at average cost

 

14,980

 

19,575

    Prepaid taxes

 

23,561

 

21,977

    Regulatory assets - current

 

10,327

 

7,347

    Deferred income taxes

 

23,305

 

-

    Other current assets

 

6,670

 

8,245

        Total Current Assets

 

187,389

 

161,170

Other long-term receivables

 

696

 

914

Affiliate receivable long-term

 

6,354

 

6,884

Regulatory assets

 

218,853

 

205,835

Other deferred assets and other

 

5,844

 

6,372

Property, Plant, and Equipment:

 

 

 

 

    Property, plant, and equipment, net

 

974,549

 

961,007

    Construction work in progress

 

98,411

 

34,055

        Total Property, Plant, and Equipment

 

1,072,960

 

995,062

Investments

 

61,555

 

57,556

        Total Assets

$

1,553,651

$

1,433,793

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

3,013

$

2,667

    Accounts payable

 

43,517

 

34,532

    Affiliate payables

 

767

 

2,152

    Accrued interest and taxes

 

4,248

 

4,037

    Accrued payroll related items

 

10,063

 

9,987

    Deferred income taxes

 

-

 

3,020

    Derivative liabilities

 

9,270

 

7,483

    Other current liabilities

 

4,491

 

1,082

        Total Current Liabilities

 

75,369

 

64,960

Other Credits:

 

 

 

 

    Deferred income taxes

 

266,231

 

196,550

    Investment tax credit - deferred

 

1,520

 

1,780

    Regulatory liabilities

 

24,538

 

20,463

    Accrued pension and other postretirement benefits

 

162,835

 

183,622

    Derivative liabilities

 

63,320

 

35,046

    Other deferred liabilities and other

 

50,581

 

43,192

        Total Other Credits

 

569,025

 

480,653

Capitalization:

 

 

 

 

    Common shareholder's equity:

 

 

 

 

        Common Stock - $1 par value - 50,000 shares authorized; 17,348 shares outstanding

 

17,348

 

17,348

        Additional paid-in capital

 

192,417

 

192,417

        Retained earnings

 

223,527

 

203,114

        Accumulated other comprehensive income, net of tax

 

4

 

47

         Total Common Shareholder's Equity

 

433,296

 

412,926

    Noncontrolling interest

 

117,470

 

114,351

        Total Equity

 

550,766

 

527,277

    Long-term debt

 

358,491

 

360,903

        Total Capitalization

 

909,257

 

888,180

Commitments and contingencies (see Footnote 18)

 

-

 

-

        Total Liabilities and Capitalization

$

1,553,651

$

1,433,793

 

 

 

 

 

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




57




Madison Gas and Electric Company

Consolidated Statements of Common Equity

(In thousands)


 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Non-

 

 

 

Common Stock

 

Paid-in

 

Retained

Comprehensive

Controlling

 

 

 

Shares

 

Value

 

Capital

 

Earnings

(Loss)/Income

Interest

 

Total

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - December 31, 2009

17,348

$

17,348

$

192,417

$

180,905

$

112

$

178,943

$

569,725

Net income

 

 

 

 

 

 

37,725

 

 

 

20,740

 

58,465

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

(41)

 

 

 

(41)

Cash dividends paid to parent by MGE

 

 

 

 

 

 

(26,150)

 

 

 

 

 

(26,150)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

710

 

710

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(58,400)

 

(58,400)

Ending balance - December 31, 2010

17,348

$

17,348

$

192,417

$

192,480

$

71

$

141,993

$

544,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

37,282

 

 

 

23,970

 

61,252

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

(24)

 

 

 

(24)

Cash dividends paid to parent by MGE

 

 

 

 

 

 

(26,648)

 

 

 

 

 

(26,648)

Equity contribution received by

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

888

 

888

Distributions to parent from

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interest

 

 

 

 

 

 

 

 

 

 

(52,500)