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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, 2010


[ ] 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

Cumulative Preferred Stock, $25 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 [   ] No [X]


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 its corporate Web site, 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 registrant was 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. [X]


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 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, 2010, was as follows:


MGE Energy, Inc.

$830,046,005

Madison Gas and Electric Company

$0


The number of shares outstanding of each registrant's common stock as of February 1, 2011, 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 23, 2011, 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

PART I.

7

Item 1. Business.

7

Item 1A. Risk Factors.

16

Item 1B. Unresolved Staff Comments.

19

Item 2. Properties.

20

Item 3. Legal Proceedings.

21

Item 4. (Removed and Reserved)

21

PART II.

22

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

22

Item 6. Selected Financial Data.

25

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

26

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

49

Item 8. Financial Statements and Supplementary Data.

52

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

69

Item 9A. Controls and Procedures.

69

Item 9B. Other Information.

69

PART III.

69

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

69

Item 11. Executive Compensation.

69

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

69

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

69

Item 14. Principal Accounting Fees and Services.

69

PART IV.

69

Item 15. Exhibits and Financial Statement Schedules.

69

Signatures - MGE Energy, Inc.

69

Signatures - Madison Gas and Electric Company

69




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 identified 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 (a) include 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 in 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.

 

 

AFUDC

Allowance for Funds Used During Construction

Alliant

Alliant Energy Corporation

ANPR

Advanced Notice of Proposed Rulemaking

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

CA

Certificate of Authority

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

CWA

Clean Water Act

CWDC

Central Wisconsin Development Corporation

DOE

U.S. Department of Energy

Dth

Dekatherms

EEI

Edison Electric Institute

Elm Road Units

Elm Road Generating Station

EPA

United States Environmental Protection Agency

ERISA

Employee Retirement Income Security Act

ERS

Elm Road Services, LLC

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

FIP

Federal Implementation Plan

FTR

Financial Transmission Rights

GAAP

Generally Accepted Accounting Principles

GCIM

Gas Cost Incentive Mechanism

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

ICI Boilers

Industrial, Commercial, or Institutional Boilers

ICR

Information Collection Request

ICF

Insurance Continuance Fund

interconnection agreement

Generation-Transmission Interconnection Agreement

IRS

Internal Revenue Service

kV

Kilovolt

kVA

Kilovolt Ampere

kWh

Kilowatt-hour

LIBOR

London Inter Bank Offer Rate

M34

West Marinette Combustion Turbine

MACT

Maximum Achievable Control Technology

MAGAEL

MAGAEL, LLC

MGE

Madison Gas and Electric Company



5





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

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

National Electric Reliability Council

NNG

Northern Natural Gas Company

NO2

Nitrogen Oxide

NOV

Notice of Violation

NOx

Nitrogen Oxide

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

PSCW

Public Service Commission of Wisconsin

PSD

Prevention of Significant Deterioration

REC

Renewable Energy Credit

RTO

Regional Transmission Organization

SEC

Securities and Exchange Commission

SF6

Sulfur Hexafluoride

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:


·

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


·

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


·

Nonregulated energy operations – constructing, owning, and leasing new electric generating capacity that will assist 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 (ATC), a company engaged in the business of providing electric transmission services primarily in Wisconsin.


·

All Other – investing in companies and property which relate to the regulated operations, financing the regulated operations, or providing construction services to the other subsidiaries through its wholly owned subsidiaries MGE Construct, 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 a cogeneration facility located on the Madison campus of the University of Wisconsin, which we refer to as the West Campus Cogeneration Facility and an undivided 8.33% ownership interest in two 615 MW coal-fired generating units located in Oak Creek, Wisconsin, which we refer to as the Elm Road Units.


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 and transmission line 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, 2010, MGE supplied electric service to approximately 139,000 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 2010, 2009, and 2008 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2010 

 

2009 

 

2008 

 

 

Residential

 

33.2%

 

32.9%

 

33.0%

 

 

Commercial

 

51.8%

 

52.8%

 

52.6%

 

 

Industrial

 

5.5%

 

5.0%

 

5.5%

 

 

Public authorities (including the UW)

 

9.5%

 

9.3%

 

8.9%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Electric operations accounted for approximately 68.5%, 63.3%, and 58.8% of MGE's total 2010, 2009, and 2008 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: (1) the development and implementation of regional and NERC reliability standards, and (2) determining compliance with those standards, including enforcement mechanisms.


Transmission


American Transmission Company is owned by the utilities that contributed facilities or capital 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. At December 31, 2010, MGE Transco held a 3.6% ownership interest in ATC.


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. In January 2009, MISO implemented and MGE began participating in the ancillary services market (ASM). 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 will provide the reserves for MGE's load, and MGE may offer to sell reserves from its generating units.


In June 2009, MISO implemented and MGE began participating in the voluntary capacity auction. The voluntary capacity auction 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 to potentially obtain the necessary aggregate planning resource credits to meet their planning reserve margin requirement. Generator owners may participate to sell any excess aggregate planning resource credits that are not needed.


PJM

MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation of the region's transmission grid, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. MGE has one purchase power agreement, for a total of 50 MW, that is affected by this market.


Fuel supply and generation


MGE satisfies its customers' electric demand with internal generation and purchased power. During the years ended December 31, 2010, 2009, and 2008, MGE's electric energy delivery requirements were satisfied by the following sources:


 

 

 

Year Ended December 31,

 

 

 

 

2010 

 

2009 

 

2008 

 

 

Coal

 

50.4%

 

41.5%

 

51.9%

 

 

Natural gas

 

4.2%

 

2.9%

 

6.1%

 

 

Fuel oil

 

0.1%

 

0.0%

 

0.1%

 

 

Renewable sources

 

2.6%

 

3.1%

 

2.7%

 

 

Purchased power

 

 

 

 

 

 

 

 

    Renewable

 

7.2%

 

8.2%

 

4.9%

 

 

    Other

 

35.5%

 

44.3%

 

34.3%

 

 

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 28% (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 long-term contracts) from the Powder River Basin coal fields located in Wyoming and Montana.


MGE's share of the coal inventory supply for the units decreased from approximately 47 days on December 31, 2009, to approximately 21 days on December 31, 2010. The co-owners' current goal is to maintain approximately a 35 day inventory. The inventory is expected to return to that level over the next several months, as coal inventory increases during scheduled annual maintenance outages.


MGE also owns the Blount Generating Facility located in Madison, Wisconsin, which is fueled by gas, coal and other alternative renewable sources. In 2006, MGE announced a plan to reduce capacity at Blount from 190 MW to 100 MW by the end of 2011. In March 2009, MGE received notification from MISO that in order to meet national electric system reliability standards, MGE will need to keep Blount available at its full capacity until MISO declares that the 90 MW are no longer needed for system reliability. Currently, MGE estimates the reduction in capacity will occur in 2013. In January 2010, MGE announced it will change its primary fuel at Blount from coal to natural gas. Coal will become the secondary fuel at Blount. This switch to natural gas as a primary fuel occurred in March 2010. The transition from burning coal to burning only natural gas will still occur by the end of 2011. After the transition, the entire plant will be operated exclusively on natural gas.


See discussion below under Nonregulated Operations for 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 156 MW of net summer rated capacity.


See discussion above regarding gas-fired generation at Blount Generating Facility and see discussion below under Nonregulated Operations for 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 to meet a portion of its anticipated electric energy supply needs. The following table identifies purchase power commitments at December 31, 2010 with unaffiliated parties for the next five years.


 

 

MWs Under Purchase Power Commitments

 

 

Year

 

 

2011 

227.1 

 

 

2012 

227.1 

 

 

2013 

252.1 

 

 

2014 

152.1 

 

 

2015 

152.1 

 


Wind Development Rights

During 2009, MGE Energy, through its subsidiary MAGAEL, LLC, entered into agreements to purchase land development rights, including land option agreements, electrical interconnection rights, wind data, engineering plans, licenses, permits, and governmental approvals for two wind development sites. These wind development rights may potentially be used to develop wind farms in three counties in Iowa up to approximately 175 MWs; however, neither MAGAEL nor MGE Energy has any obligation to build any wind generators at these sites.


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.




9




On December 31, 2010, MGE supplied natural gas service to approximately 143,000 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. Gas revenues for 2010, 2009, and 2008 were comprised of the following:


 

 

 

Year Ended December 31,

 

 

 

 

2010 

 

2009 

 

2008 

 

 

Residential

 

56.0%

 

54.9%

 

53.6%

 

 

Commercial

 

34.3%

 

34.5%

 

36.4%

 

 

Industrial

 

7.9%

 

7.8%

 

7.5%

 

 

Transportation service and other

 

1.8%

 

2.8%

 

2.5%

 

 

Total

 

100.0%

 

100.0%

 

100.0%

 


Gas operations accounted for approximately 31.5%, 36.7%, and 41.2% of MGE's total 2010, 2009, and 2008 regulated revenues, respectively.


MGE can curtail gas deliveries to its interruptible customers. Approximately 14% of retail gas deliveries in 2010 and 15% in 2009 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 5,419,478 Dth 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 include winter maximum daily quantities of:


166,150 Dth (including 96,078 Dth of storage withdrawals) on ANR.

60,108 Dth on NNG.


Nonregulated Energy Operations


MGE Energy, through its subsidiaries, seeks to develop generation sources that will assist MGE in meeting the electricity needs of its customers. Decisions on the type of energy source and its size, timing, ownership, and financing depend upon a number of factors including the growth of customer demand in MGE's service area and surrounding areas, the effectiveness of customer demand management efforts, the costs and availability of alternative power sources, mandates regarding renewable energy resources, the availability of transmission capacity, issues associated with siting power generation sources, available financing and ownership structures, regulatory treatment and recovery, construction lead times and risks, environmental regulations, and other factors. The decisions tend to involve long-time horizons due to the lead time involved in siting and constructing new generation sources and the associated transmission infrastructure.


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



10




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.


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 on February 2, 2010, and has the capacity to produce 615 MW of electricity. Unit 2 entered commercial operation on January 12, 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.


MGE Power Elm Road's estimated share of capital costs for its ownership interest in the Elm Road Units is approximately $180 million (excluding capitalized interest). These costs have been financed primarily through funds received from MGE Energy, which came from the sale of common stock (via the Stock Plan), short-term debt, and operating cash flows. On February 4, 2010, MGE Power Elm Road issued $50 million of 5.04% senior secured notes due 2040 to reimburse MGE Energy for a portion of its funds. As of December 31, 2010, $122.6 million related to this project was placed in-service and $55.1 million (excluding capitalized interest) related to this project is reflected in the construction work in progress balance on MGE Energy's and MGE's consolidated balance sheets.


On November 1, 2005, MGE received approval from the PSCW to defer payments made to MGE Power Elm Road for carrying costs during construction of the facility, management fees, and community impact mitigation costs. MGE began collecting the carrying costs in rates in 2006. MGE estimates total carrying costs to be approximately $62.6 million. Of these costs, $17.1 million is estimated to relate to the capitalized interest on the debt portion of the facility. These costs will be recognized over the period in which the facility will be depreciated. The remaining $45.5 million is estimated to represent the equity portion and is being recognized over the period recovered in rates.


See Footnote 21 of Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data of this Form 10-K for more information regarding the Elm Road Units.


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 installation approval of pollution controls.


Air quality


Air quality regulations promulgated by the EPA and 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) 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 electric generating units.



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Clean Air Interstate Rule (CAIR) and the Proposed Transport Rule

The CAIR requires NOx and SO2 emission reductions, from Midwest and eastern U.S. fossil fuel-fired electric generating units (EGUs) in two phases and includes a regional cap-and-trade system. The first phase began in 2009 for NOx and in 2010 for SO2, and contemplates reductions from 2003 levels of 55% and 40%, respectively, increasing in the second phase (in 2015) to 65% and 70%, respectively (from 2003 levels). MGE owns or has partial ownership in several generation units currently subject to the CAIR: Blount Generating Station, Columbia, the Elm Road Units, M34 (West Marinette Combustion Turbine) and Fitchburg Combustion Turbines.


In December 2008, the D.C. Circuit Court remanded the CAIR to the EPA for further review. In July 2010, the EPA introduced the proposed "Transport Rule" to replace CAIR. Similar to the CAIR, the Transport Rule is intended to reduce NOx and/or SO2 air emissions from fossil fuel-fired EGUs in the Midwest and eastern U.S. The proposed rule includes three alternative approaches to reducing emissions. Two of the proposed approaches allow limited allowance trading; one does not permit allowance trading. The EPA is seeking comments on these approaches. The EPA is targeting 2012 for implementation of the first phase of the Transport Rule. The CAIR remains in effect until the Transport Rule is in place. MGE anticipates that it may need to purchase NOx and SO2 allowances, install central equipment or implement other strategies to meet these requirements for its generation fleet. See Columbia subsection in Footnote 18.d for more information on the pending application to install environmental controls at Columbia.


Wisconsin State Mercury Rule

Wisconsin has adopted a phased approach to mercury emission reductions. Under phase one, as of January 2010, "major utilities," such as the operators of Columbia and the Elm Road Units, must achieve a 40% fleet-wide mercury emissions reduction (as compared to an average of 2002, 2003, and 2004 baseline mercury emissions).


Under phase two, beginning January 1, 2015, large coal-fired electric generating units (larger than 150 MW) must reduce mercury emissions by 90%, or follow a multi-pollutant reduction approach, which allows a stepped approach to mercury reduction while also reducing NOx and SO2 emissions at prescribed rates. See Footnote 18.d for a discussion of these rules and their effects.


Maximum Achievable Control Technologies (MACT) Standards for Hazard Air Pollutants

In January 2010, as part of the EPA's process for developing MACT standards related to emissions of hazardous air pollutants for electric utilities, the EPA sent out an Information Collection Request (ICR) to hundreds of utilities across the United States that have coal and oil-burning EGUs. Information collected from the ICR will help the EPA develop a Utility MACT rule which the EPA has indicated they plan to publish by November 2011. Although we cannot predict the outcome of the Utility MACT Rule at this time, our coal and oil-burning EGUs may need to incur additional capital expenditures and install additional pollution controls to meet the Utility MACT standard(s).


In April 2010, the EPA issued a draft MACT standard regarding hazardous air pollutant emission standards for industrial, commercial and institutional boilers (ICI Boiler MACT) in response to a court ruling that vacated a prior standard.

 

Pending adoption of a final rule, the EPA has determined that case-by-case determinations be applied to all ICI boilers regardless of whether or not they were exempt under the vacated rule. The WDNR, following the EPA's interpretation, has required that all facilities with ICI boilers submit initial applications.


MGE has boilers at Blount and Columbia classified as ICI boilers and has submitted the required initial applications to the WDNR. The WDNR has granted several extensions in anticipation of the EPA's ICI Boiler MACT rule being finalized. The latest extension granted by the WNDR lasts until March 15, 2011.


If the boilers at Blount and Columbia are ultimately covered by the EPA ICI Boiler MACT rule when finalized, it may be necessary to test or limit emissions and/or install additional pollution controls. Because of the uncertainty with this rule at this time, we cannot predict when or if we will need additional resources or capital to comply.


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). Units that are subject to BART and shown to affect Class I Scenic Areas may be required to install pollution controls to combat their contribution to visibility at those locations. BART is applied on a case-by-case basis.


Under CAIR, both the EPA and WDNR concluded that compliance with CAIR emissions limitations would serve as compliance with BART requirements for SO2 and NOx emissions. Thus owners subject to BART obligations had the



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option of purchasing allowances under the CAIR rather than installing pollution controls. However, with the introduction of the EPA's Transport Rule, the future of BART regulation and compliance strategies and costs is uncertain.


The CAVR also requires states to submit a State Implementation Plan (SIP) that outlines how states will achieve reductions in visibility impairments over time. In January 2009, the EPA found Wisconsin proposed CAVR SIP deficient. Wisconsin has until January 2011 to submit a revised CAVR SIP. If no CAVR SIP is submitted within that two year period (which ends in January 2011), then the EPA must promulgate a Federal Implementation Plan (FIP) for the State of Wisconsin. Without a proposed CAVR implementation rule in place, it is unclear to what extent MGE's generation plants will be affected.


Nitrogen Oxide Emission Budget

In 1998, the EPA issued a rule that imposed a NOx emission budget for emission sources in Wisconsin (NOx SIP Call). In 2000, the United States Court of Appeals for the District of Columbia invalidated a portion of the NOx SIP Call concerning Wisconsin's alleged impacts on downwind, 1-hour ozone nonattainment areas. The EPA has also stated that portion of the NOx SIP Call concerning Wisconsin's alleged impacts on downwind 8-hour ozone nonattainment areas. If that portion of the rule concerning 8-hour ozone nonattainment areas is upheld, the resulting NOx emission budget for Wisconsin could potentially affect the level of permissible NOx emissions from Blount, Columbia, and WCCF.


National Ambient Air Quality Standards (NAAQS)

The EPA has developed National Ambient Air Quality Standards (NAAQS) for six compounds currently identified as criteria pollutants: nitrogen dioxide (NO2), particulate matter (PM), ozone, SO2, lead and carbon monoxide. The NAAQS for criteria pollutants establish acceptable ambient air levels based on effects to human health and the environment. The EPA is required to review NAAQS every five years. Monitoring data is used to determine whether areas are in compliance with NAAQS. For areas found in noncompliance, states must develop plans to bring those areas into compliance. The plans can require emissions reductions and/or pollution controls. Changes in NAAQS standards can affect whether an area is in compliance and thus affect compliance costs for activities in those areas, including capital, operational and maintenance expenses at MGE generating facilities. See Footnote 18.d for discussion of recent developments affecting the NAAQS for particular matter, ozone, nitrogen dioxide and sulfur dioxide.


Columbia


Columbia is a coal-fired generating station operated by WPL in which WPL, WPSC and MGE have ownership interests. 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.d for additional information regarding these matters.


Water quality


EPA and WDNR water quality regulations promulgated in accordance with the Federal Water Pollution Control Act, or more commonly known as the Clean Water Act (CWA), restrict emissions of pollutants into surface waters and regulate surface water quality issues that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA also sets discharge standards requiring the use of effluent-treatment processes equivalent to categorical "best practicable" or "best available" technologies. The CWA regulates discharges from "point sources" (such as power plants) through discharge limits in water discharge permits. MGE's power plants operate under the Wisconsin Pollution Discharge Elimination System (WPDES) permits to ensure compliance with these discharge limits. The WDNR has recently published regulations for phosphorus, mercury and thermal discharges from electric-steam generating plants. See Footnote 18.d for information regarding these regulations.


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

In 2004, the EPA promulgated final rules under Section 316(b) of the CWA addressing cooling water intake structures for existing large power plants. In a January 2007 court decision, significant parts of the rule were remanded to the EPA for further consideration. In July 2007, the EPA suspended the rule in its entirety and directed states to use their "best professional judgment" in evaluating intake systems. In December 2010, the EPA entered a settlement agreement which commits them to propose revised 316(b) rules by March 2011 and finalize requirements by June 2012. It is not known at this time whether and to what extent MGE's plants will be affected by this rule.


WPDES permit – Elm Road


Under a settlement agreement reached in July of 2008, the joint owners of Elm Road are committed to various environmental projects, including projects designed to address greenhouse gas emissions and water quality. MGE's share of those commitments involved a payment of $0.4 million for greenhouse gas reduction efforts. Additional payments of approximately $0.3 million, subject to regulatory approval, will be made annually over 24 years (2011-



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2034) to address water quality issues in Lake Michigan. In December 2009, the PSCW authorized recovery of the 2011 payment to address water quality issues.


Solid waste


Lenz Oil Site

MGE is listed as a potentially responsible party for a site on the EPA's national priorities Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing and processing waste oil for several years. This site requires cleanup under the Comprehensive Environmental Response, Compensation and Liability Act. As of December 31, 2009, the EPA has agreed on a remedy for the Lenz Oil site. The remedy included a five year $2.2 million implementation plan. The EPA has asked all potentially responsible parties to pay upfront for this five year implementation plan. MGE has provided money for site cleanup, however, the cleanup process has not begun. We will not know if additional costs exist at the site until cleanup is completed. At December 31, 2010, MGE's portion is less than $0.1 million. Management believes that its share of the final cleanup costs for the Lenz Oil site will not result in any materially adverse effects on MGE's operations, cash flows, or financial position. Insurance may cover a portion of the cleanup costs. Management believes that the cleanup costs not covered by insurance will be recovered in current and future rates.


Proposed Regulation of Coal Combustion Byproducts

The EPA published a proposed rule on May 4, 2010, that regulates coal combustion byproducts from the electric generating sector. The proposed 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. It is not possible to estimate the potential costs associated with the implementation of any of these initiatives at this time.


Other Environmental Issues


Polychlorinated Biphenyls (PCBs) Regulations

On April 7, 2010, the EPA published an Advanced Notice of Proposed Rulemaking (ANPR) for the additional regulation of polychlorinated biphenyls (PCBs). The EPA intends to reassess the use, distribution, marking, and storage for reuse of liquid PCBs in electric and nonelectric equipment. The rule may require additional testing and potentially a phase-out of PCBs in electrical and nonelectrical equipment. MGE has electrical equipment that contains liquid PCBs, thus any rule that is developed has a potential to affect our capital or operational costs. We cannot predict the extent of this rule's impact until the rule is proposed and/or finalized.


Wisconsin Listing of Four Bat Species as Threatened in the State

On December 8, 2010, the Wisconsin Board of Natural Resources approved modifications to existing rules to give four cave bat species threatened species status in Wisconsin. The cave bat threatened status designation may affect some MGE projects, specifically wind power projects and electric or natural gas distribution projects near wetlands. MGE will continue to monitor this rule and WDNR guidance that is developed to fully understand how it may affect our capital and operational projects.


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. The probability and specific impact of such regulation cannot be reasonably estimated until final legislation and/or regulations are passed. 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. Implementation of our Energy 2015 Plan is well underway and we are committed to achieving its goals. However, a number of factors, including but not limited to, changes in economic conditions, regulatory actions, customer response, energy supply issues and transmission delays, may require us to update and perhaps refine certain aspects of our Energy 2015 Plan accordingly. The cost of implementing our Energy 2015 Plan is not expected to result in any materially adverse effects on MGE's operations, cash flows, or financial position. Management believes that costs to implement the Energy 2015 Plan will be recoverable through rates.



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EPA Rule on Greenhouse Gas Reporting

In September 2009, the EPA issued its GHG mandatory reporting rule. MGE is collecting the data needed to file the required report on 2010 GHG emissions by March 31, 2011. Beginning on January 1, 2011 with a March 31, 2012 reporting requirement, the EPA added sulfur hexafluoride (SF6) used in electrical transmission and GHG releases from natural gas transport to the reporting rule, two items that have the potential to affect MGE. MGE continues to monitor the EPA's evolving GHG reporting rule.


EPA's Determination of Endangerment from Greenhouse Gases

In December 2009, the EPA found that six GHGs, when emitted from new motor vehicles, contribute to greenhouse gas air pollution and endanger public health and welfare under CAA Section 202(a). This endangerment finding allowed for the creation of GHG emission standards from mobile sources, which were finalized by the EPA on March 31, 2010. This in turn paves the way for stationary source emissions of GHGs to be regulated under the CAA. See our discussion on the EPA's Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule, and our discussion on the EPA's schedule to develop GHG emissions standards for utilities for additional information on how the EPA has begun regulating GHG emissions from stationary sources.


EPA's Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule

On May 13, 2010, the EPA released its Greenhouse Gas "Tailoring Rule" to address the regulation of stationary sources for GHG emissions. Through this Tailoring Rule, the regulation of GHGs will be accomplished using the EPA's two principal stationary source CAA permitting programs: the pre-construction permitting Prevention of Significant Deterioration (PSD) program and the operations permitting (Title V) program.


Beginning in January 2011,the EPA's Tailoring Rule has been designed to "phase in" facilities subject to PSD or Title V permitting (i.e. new facilities and existing facilities with certain qualifying modifications). Under the Tailoring Rule, it is understood that PSD requirements for covered new or modified sources include the requirement that a plant meet Best Available Control Technology (BACT) requirements for emissions that trigger PSD, including GHG emissions. The EPA has provided draft guidelines on conducting a BACT Analysis. MGE facilities may become subject to this rule if modifications at any facilities trigger PSD or if MGE invests in new facilities that trigger PSD. In addition, MGE's facilities will likely need to include GHG emissions information in their Title V permits as they are renewed.


EPA's Plan to Establish Greenhouse Gas Emission Standards for Fossil-Fuel Fired Utilities

On December 30, 2010, the EPA announced a proposed schedule for regulating GHGs under Section 111 of the Clean Air Act. As part of a settlement agreement with several states and environmental nongovernmental organizations, the EPA agreed to propose by July 26, 2011, New Source Performance Standards (NSPS) for new and/or modified fossil-fuel burning EGUs and proposed guidelines for states' GHG emissions standards for existing EGUs. The EPA also agreed to take final action on both of these by May 26, 2012. As part of this notice, the EPA has not indicated at what level emissions standards will be set. Given the uncertainties associated with this initiative, we cannot estimate the effect that compliance may have on our generating operations, cash flows, and financial position.


Proposed Climate Change Legislation


Federal Actions on Climate Change

The 111th Congress ended without enactment of comprehensive climate change legislation in spite of significant activity. The U.S. House of Representatives in the 112th Congress has introduced several bills related to GHG regulation including bills to prevent the EPA from receiving funding for a cap-and-trade program for greenhouse gases as well as bills to prevent or delay the EPA's regulation of GHGs under the current Clean Air Act.


State and Regional Actions on Climate Change

Wisconsin Governor Doyle's Global Warming Task Force issued a July 2008 report with numerous recommendations to address GHG emissions. MGE participated as an active member of the Task Force. Several PSCW proceedings were commenced as a result of Task Force recommendations. Many of the recommendations made by the Task Force were included in state legislation in early 2010, but no legislation was enacted. It is unlikely the Wisconsin Senate or Assembly will push for broad GHG regulation in 2011.


In addition, in November 2007, Wisconsin, along with Illinois, Iowa, Kansas, Michigan, Minnesota, and Manitoba, Canada signed on to the Midwestern GHG Accord – an accord designed to develop a Midwestern GHG reduction program. The Advisory Group recommended numerous regional actions be taken to help reduce GHGs. Wisconsin has not developed rules or legislation to implement these recommendations.




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Employees


As of December 31, 2010, MGE had 701 employees. MGE employs 222 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers and 98 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, 2012. There are also 5 employees covered by a collective bargaining agreement with Local Union No. 2-111 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, 2012.


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.


Executive Officers of the Registrants

Executive

Title

Effective

Date

Service

Years as

an Officer

Gary J. Wolter(a)

Age: 56

Chairman of the Board, President and Chief Executive Officer

02/01/2002

21

Lynn K. Hobbie(b)

Age: 52

Senior Vice President

02/01/2000

16

James G. Bidlingmaier(b)

Age: 64

Vice President - Admin. and Chief Information Officer

02/01/2000

10

Kristine A. Euclide(b)

Age: 58

Vice President and General Counsel

11/15/2001

9

Scott A. Neitzel(b)

Age: 50

Vice President – Energy Supply

Vice President – Energy Supply Policy

09/01/2006

07/01/2002

13

Jeffrey C. Newman(a)

Age: 48

Vice President, Chief Financial Officer, Secretary and Treasurer

Vice President and Treasurer

01/01/2009

01/01/2001

13

Peter J. Waldron(b)

Age: 53

Vice President and Operations Officer

Vice President – Energy Supply Operations

09/01/2006

07/01/2002

14


Note: Ages, years of service, and positions as of December 31, 2010.

(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.




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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 be required to make a refund to customers if the fuel rules costs fall outside the lower end of the range and would be allowed to request a surcharge if the fuel rules costs exceeded the upper end of the range. The range is defined by the PSCW and is currently plus or minus 2%. MGE assumes the risks and benefits of variances that are within the bandwidth.


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 projects, 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, particularly with regard to enforcement efforts focused on power plant emissions obligations. These effects can be seen not only with respect to new construction, such as our participation in the Elm Road generating units, but could also require the installation of additional control equipment or other compliance measures such as altered operating conditions at existing facilities such as Columbia or Blount.


In addition, we may be a responsible party for environmental clean-up at current or future sites identified as containing hazardous materials. 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, if adopted, legislative and regulatory GHG initiatives 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 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,



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·

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


·

Failure to perform on the part of any party from which we purchase capacity or energy.


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.


Our financial performance depends on the equipment and facilities in our distribution system being operational.


Weather conditions, accidents, catastrophic events, and failures of equipment or facilities can disrupt or limit our ability to deliver electricity and gas. Efforts to repair or replace equipment and facilities may not be successful, or we may be unable to make the necessary improvements to our distribution system, causing service interruptions. The resulting interruption of services could result in lost revenues and additional costs.


We face construction risk in connection with the completion of generating units.


We have assumed risks under the agreements related to our ownership interest in two 615 MW coal-fired generating units in Oak Creek, Wisconsin. If the units' final construction costs exceed the fixed costs allowed in the PSCW order, this excess will not be recoverable from MGE or its customers unless specifically allowed by the PSCW. Any Oak Creek project costs above the authorized amount will be subject to a prudence determination made by the PSCW.


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. MGE Energy had $22.5 million of variable-rate debt outstanding at December 31, 2010, including $3.5 million for MGE. 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. Also, interest rates affect discount rates which are a key assumption for our defined benefit pension plans and may impact the amount of expense and timing of contributions to the plan.


Market performance affects our employee benefit plan asset values.


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.




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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, 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 may affect our ability to finance at a reasonable cost and in accordance with our planned schedule.


The credit markets have experienced some recent disruption and uncertainty. 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.


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.


Item 1B. Unresolved Staff Comments.


MGE Energy and MGE


None.




19




Item 2. Properties.


Electric Generation


Net summer rated capacity in service at December 31, 2010, 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)

 

   Blount

 

Madison, WI

 

1957 & 1961

 

Gas/coal

 

101 (4,8)

 

 

 

 

 

1938 & 1943

 

Gas

 

39 (8)

 

 

 

 

 

1949 

 

Gas/coal

 

21 (4,8)

 

 

 

 

 

1964-1968

 

Gas

 

27 (8)

 

   WCCF

 

Madison, WI

 

2005 

 

Gas/oil

 

130 (5)

 

   Elm Road Units

 

Oak Creek, WI

 

2010 

 

Coal

 

50 (2,6)

 

Combustion turbines

 

Madison, WI

 

1964-2000

 

Gas/oil

 

156 (7)

 

 

 

Marinette, WI

 

 

 

 

 

  

 

 

Portable generators

 

Madison, WI

 

1998-2001

 

Diesel

 

50 (8)

 

54 

Wind turbines

 

Townships of Lincoln

 

 

 

 

 

  

 

 

 

 

and Red River, WI

 

1999 

 

Wind

 

(8, 9)

 

17 

 

 

Township of

 

 

 

 

 

  

 

 

 

  

Brookfield, IA

 

2008 

 

Wind

 

(8,10)

 

18 

                 Total

 

 

 

 

  

 

 

802 

 

 


(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) On January 19, 2006, MGE announced that it would cease coal-fired generation at Blount in 2011, subject to certain conditions, including regulatory approvals. In March 2010, natural gas became the primary fuel and coal became the secondary fuel.


(5) 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.


(6) MGE's 8.33% share in each of two 615 MW coal-fired generating units. MGE leases the electric generating assets owned by MGE Power Elm Road. Unit 1 entered commercial operation in February 2010. Amounts shown represent MGE's share of the net summer rated capacity of Unit 1. Unit 2 entered commercial operation in January 2011.


(7) Three facilities are owned by MGE and three facilities are leased.


(8) These facilities are owned by MGE.


(9) Nameplate capacity rating is 11 MW.


(10) Nameplate capacity rating is 30 MW.




20




Electric and Gas Distribution Facilities


Major electric distribution lines and substations in service at December 31, 2010, which are owned by MGE, are as follows:


 

Miles

Distribution lines:

Overhead

 

Underground

13.8 kV and under

905

 

1,110

 

 

 

 

Distribution:

Substations

 

Installed Capacity (kVA)

69-13.8 kV

27

 

1,019,000

13.8-4 kV

29

 

294,967


Gas facilities include 2,547 miles of distribution mains, which are owned by MGE.


A significant portion of MGE's electric and gas distribution facilities is 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, 2010, there were $1.2 million of first mortgage bonds outstanding. See Footnote 9 for additional information regarding MGE's first mortgage bonds.


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 million of senior secured notes issued by MGE Power West Campus. See Footnote 9 for additional information regarding these senior notes.


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 $50 million of senior secured notes issued by MGE Power Elm Road. 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 18d for a description of several environmental proceedings involving MGE. See Footnote 18i for a description of other legal matters.


Item 4. (Removed and Reserved)



21




PART II.


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


Market for Common Equity


MGE Energy


MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On February 1, 2011, there were approximately 35,536 shareholders of record, including registered and beneficial shareholders. 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

 

 

 

 

2010 

 

 

2009 

 

 

 

 

High

 

Low

 

 

High

 

Low

 

 

Fourth Quarter

$

43.62 

$

39.13 

 

$

36.97 

$

33.41 

 

 

Third Quarter

$

39.92 

$

35.52 

 

$

38.23 

$

33.40 

 

 

Second Quarter

$

38.40 

$

34.15 

 

$

34.00 

$

29.42 

 

 

First Quarter

$

36.19 

$

32.06 

 

$

33.49 

$

27.27 

 


MGE


As of February 1, 2011, 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 2010 and 2009:


 

(Per share)

 

2010 

 

2009 

 

 

Fourth quarter

$

0.375 

$

0.368 

 

 

Third quarter

$

0.375 

$

0.368 

 

 

Second quarter

$

0.368 

$

0.362 

 

 

First quarter

$

0.368 

$

0.362 

 


MGE


The following table sets forth MGE's quarterly cash dividends declared during 2010 and 2009:


 

(In thousands)

 

2010 

 

2009 

 

 

Fourth quarter

$

6,596 

$

6,478 

 

 

Third quarter

$

6,596 

$

6,478 

 

 

Second quarter

$

6,478 

$

6,361 

 

 

First quarter

$

6,478 

$

 


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.




22




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 $28.8 million plus dividends on 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, 2010, is estimated to be 58.5% as determined under the calculation used in the rate proceeding. MGE paid cash dividends of $26.2 million to MGE Energy in 2010.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 West Campus and MGE Power Elm Road, which are consolidated into MGE's financial Statements.


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, 2010, approximately $248.6 million was available for the payment of dividends under this covenant.


Issuer Purchases of Equity Securities


MGE Energy


 

 

 

 

 

 

  

 

Maximum number (or

 

 

 

 

 

 

  

 

Approximate Dollar

 

 

Total

 

 

 

Total Number

 

Value) of Shares That

 

 

Number

 

Average

 

of Shares

 

May Yet Be

 

 

of

 

Price

 

Purchased as Part of

 

Purchased

 

 

Shares

 

Paid

 

Publicly Announced

 

Under the Plans or

Period

 

Purchased

 

per Share

 

Plans or Programs*

 

Programs*

October 1-31, 2010

 

39,225 

$

40.49 

 

 

November 1-30, 2010

 

28,650 

 

41.58 

 

 

December 1-31, 2010

 

66,845 

 

42.50 

 

 

Total

 

134,720 

$

41.72 

 

 


* 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.




23




Stock Performance Graph


The performance graph below illustrates a five-year comparison of cumulative total returns based on an initial investment of $100 in MGE Energy common stock, as compared with the Russell 2000 and the EEI Index for the period 2006 through 2010.


This performance chart assumes:


·

$100 invested on December 31, 2005, in MGE Energy common stock, in the Russell 2000 and the EEI Index; and

·

All dividends are reinvested.


[f10k_20101231002.gif]



Value of Investment at December 31,


 

 

 

2005 

 

2006 

 

2007 

 

2008 

 

2009 

 

2010 

 

 

MGEE

$

100 

$

112 

$

114 

$

110 

$

125 

$

156 

 

 

Russell 2000

 

100 

 

118 

 

117 

 

77 

 

98 

 

124 

 

 

EEI Index

 

100 

 

121 

 

141 

 

104 

 

115 

 

124 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




24




Item 6. Selected Financial Data.


MGE Energy

(In thousands, except per-share amounts)


  

 

For the years ended December 31,

  

 

2010 

 

2009 

 

2008 

 

2007 

 

2006 

  

 

 

 

 

 

 

 

 

 

 

Summary of Operations

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

 

    Regulated electric

$

360,729 

$

332,324 

$

345,962 

$

334,488 

$

318,912 

    Regulated gas

 

165,915 

 

192,334 

 

242,598 

 

197,925 

 

185,226 

    Nonregulated

 

5,947 

 

9,161 

 

7,433 

 

5,181 

 

3,408 

        Total

 

532,591 

 

533,819 

 

595,993 

 

537,594 

 

507,546 

Operating expenses

 

418,931 

 

431,296 

 

491,418 

 

438,156 

 

413,150 

Other general taxes

 

17,058 

 

17,858 

 

16,793 

 

15,771 

 

15,402 

Operating income

 

96,602 

 

84,665 

 

87,782 

 

83,667 

 

78,994 

Other income, net

 

11,093 

 

8,096 

 

8,044 

 

6,069 

 

4,329 

Interest expense, net

 

(16,157)

 

(13,594)

 

(14,002)

 

(13,056)

 

(15,001)

    Income before taxes

 

91,538 

 

79,167 

 

81,824 

 

76,680 

 

68,322 

Income tax (provision) benefit

 

(33,820)

 

(28,170)

 

(29,056)

 

(27,855)

 

(25,899)

    Net income

$

57,718 

$

50,997 

$

52,768 

$

48,825 

$

42,423 

Average shares outstanding

 

23,114 

 

23,070 

 

22,197 

 

21,520 

 

20,564 

    Basic and diluted earnings per share

$

2.50 

$

2.21 

$

2.38 

$

2.27 

$

2.06 

    Dividends declared per share

$

1.49 

$

1.46 

$

1.43 

$

1.41 

$

1.39 

  

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Electric

$

721,721 

$

695,897 

$

677,540 

$

614,949 

$

547,150 

Gas

 

257,505 

 

249,610 

 

284,211 

 

234,002 

 

228,639 

Assets not allocated

 

22,079 

 

22,342 

 

14,642 

 

14,876 

 

10,472 

Nonregulated energy operations

 

300,862 

 

292,101 

 

271,568 

 

227,415 

 

177,234 

Transmission investments

 

54,241 

 

51,728 

 

46,292 

 

40,808 

 

38,470 

All others

 

376,219 

 

389,744 

 

381,433 

 

342,491 

 

298,261 

Eliminations

 

(414,734)

 

(419,537)

 

(407,411)

 

(362,954)

 

(319,792)

    Total

$

1,317,893 

$

1,281,885 

$

1,268,275 

$

1,111,587 

$

980,434 

  

 

 

 

 

 

 

 

 

 

 

Capitalization including Short-Term Debt

 

 

 

 

 

 

 

 

 

 

Common shareholders' equity

$

525,080 

$

501,795 

$

478,202 

$

427,726 

$

375,348 

Long-term debt*

 

336,018 

 

322,470 

 

272,408 

 

262,346 

 

252,284 

Short-term debt

 

22,500 

 

64,500 

 

124,500 

 

103,500 

 

57,000 

    Total capitalization and short-term debt

$

883,598 

$

888,765 

$

875,110 

$

793,572 

$

684,632 

  

 

 

 

 

 

 

 

 

 

 

*Includes current maturities

 

 

 

 

 

 

 

 

 

 




25





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


General


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


·

Electric utility operations, conducted through MGE,

·

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 as well as certain construction 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 139,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 143,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.


Our nonregulated energy operations own interests in new 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 partial ownership of a cogeneration project on the UW-Madison campus and an undivided 8.33% ownership interest in two 615 MW coal-fired generating units in Oak Creek, Wisconsin, one of which entered commercial operation on February 2, 2010 and the other of which entered commercial operation on January 12, 2011. MGE operates the cogeneration project, and a third party operates the units in Oak Creek. 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 shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE plans to meet 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,

·

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 pending environmental rule changes,


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


For the year ended December 31, 2010, MGE Energy's earnings were $57.7 million or $2.50 per share compared to $51.0 million or $2.21 per share for the same period in the prior year. MGE's earnings for the year ended December 31, 2010, were $37.7 million compared to $35.9 million for the same period in the prior year.




26




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


 

(In millions)

 

 

Year Ended December 31,

 

 

Business Segment:

 

 

2010 

 

2009 

 

2008 

 

 

    Electric Utility

$

30.2 

$

23.9 

$

25.7 

 

 

    Gas Utility

 

7.4 

 

9.9 

 

9.8 

 

 

    Nonregulated Energy

 

15.8 

 

11.1 

 

10.1 

 

 

    Transmission Investments

 

5.1 

 

4.9 

 

4.3 

 

 

    All Other

 

(0.8)

 

1.2 

 

2.9 

 

 

    Net Income

$

57.7 

$

51.0 

$

52.8 

 


Our net income during 2010 compared to 2009 primarily reflects the effects of the following factors:


·

A 10.0% increase in retail electric revenues reflecting increased customer demand primarily as a result of warmer-than-normal summer weather, particularly when compared to the cooler-than-normal weather of the prior period. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 125% compared to the prior period.


·

An 8.2% 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 8% compared to the prior period. In addition, the 2009 results reflect the receipt by the gas utility of the benefit of $1.9 million (pretax) from capacity release revenues and commodity savings as a result of GCIM.


·

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


·

Higher nonregulated energy revenues are attributable to Elm Road Unit 1 entering commercial operation in February 2010.


Our net income during 2009 compared to 2008 primarily reflects the effects of the following factors:


·

A 3.9% decrease in electric revenue, reflecting lower customer demand primarily as a result of cooler-than-normal summer weather. According to the National Weather Service, July 2009 was the coolest on record in Madison, where MGE's primary service territory resides. Cooling degree days (a measure for determining the impact of weather during the cooling season) for 2009 decreased by 32% compared to 2008. Reduced economic activity also contributed to the reduced demand for service.


·

Retail gas sales were relatively flat compared to the prior year. In 2008, the gas utility had expensed a $1.3 million settlement (excludes premium) associated with a weather hedge (heating degree collar) as a result of colder-than-normal weather. The gas utility had no weather hedges during 2009.


·

Higher nonregulated energy revenues primarily attributable to higher carrying costs being recognized for the Elm Road Units. Carrying costs during construction of the nonregulated energy projects, related to the equity portion, are recognized over the period of time the costs are recovered in rates.


·

A $0.6 million increase in earnings from our interest in ATC.


·

A decline in the All Other segment is primarily attributable to gains on sales of investments recognized in the year ended December 31, 2008.


During 2010, the following events occurred:


Elm Road Units: Elm Road Unit 1 entered commercial operation on February 2, 2010. On February 4, 2010, our subsidiary, MGE Power Elm Road, which owns an ownership interest in those Units, issued $50 million of its 5.04% senior secured notes to refinance a portion of the costs of those Units. The proceeds of those notes were used to repay borrowings under MGE Energy's credit facilities.


ATC: MGE Transco contributed $0.7 million for voluntary capital contributions to ATC for the year ended December 31, 2010.




27




Smart Grid Investment Grant: MGE has been approved 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 proposed projects to more than $11 million. The proposed projects will install technologies to boost efficiency, enhance service and improve reliability for customers. The stimulus grant will help fund the following projects: advanced metering infrastructure, plug-in hybrid electric vehicles support, and distribution management. As of December 31, 2010, MGE has spent $2.5 million related to these projects.


During 2011, several items may affect us, including:


2011 Rate Filing: In January 2011, the PSCW authorized MGE to increase 2011 rates for retail electric customers by 2.3% and increase rates for gas customers by 1.0%. The increase in retail electric rates was primarily driven by costs for MGE's share of the Elm Road Units.


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 million for MGE Energy (including MGE) and $75 million for MGE to address our liquidity needs.

 

Elm Road Unit: Elm Road Unit 2 entered commercial operation on January 12, 2011.


Environmental Initiatives: There are proposed legislation, rules and initiatives involving matters related to air emissions, water effluent, hazardous materials and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and Elm Road Unit 1, from which we derive approximately 34% 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 activities previously undertaken at Columbia. MGE and the other co-owners are defending against these claims. MGE is currently unable to predict the impact of these claims on its financial condition or results of operations at this time. However, should there ultimately be an adverse outcome, MGE believes it could have a significant effect.


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


Results of Operations


Year Ended December 31, 2010, Versus the Year Ended December 31, 2009


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

(in thousands, except cooling degree days)

 

2010 

 

2009 

 

% Change

 

2010 

 

2009 

 

% Change

Residential

$

122,237 

$

109,788 

 

11.3 %

 

826,020 

 

772,724 

 

6.9 %

Commercial

 

190,265 

 

176,231 

 

8.0 %

 

1,811,474 

 

1,765,831 

 

2.6 %

Industrial

 

20,125 

 

16,906 

 

19.0 %

 

267,939 

 

253,590 

 

5.7 %

Other-retail/municipal

 

34,795 

 

31,010 

 

12.2 %

 

421,931 

 

402,994 

 

4.7 %

    Total retail

 

367,422 

 

333,935 

 

10.0 %

 

3,327,364 

 

3,195,139 

 

4.1 %

Sales to the market

 

2,005 

 

2,086 

 

(3.9)%

 

40,593 

 

14,993 

 

170.7 %

Other revenues

 

1,915 

 

7,231 

 

(73.5)%

 

 

 

- %

Adjustments to revenues

 

(10,613)

 

(10,928)

 

2.9 %

 

 

 

- %

    Total

$

360,729 

$

332,324 

 

8.5 %

 

3,367,957 

 

3,210,132 

 

4.9 %

 

 

 

 

 

 

  

 

 

 

 

 

  

Cooling degree days (normal 617)

 

 

 

 

 

  

 

829 

 

368 

 

125.3 %




28




Electric operating revenues increased $28.4 million or 8.5% for the year ended December 31, 2010, due to the following:


 

(In millions)

 

 

 

 

Volume

$

14.6 

 

 

Rate changes

 

13.4 

 

 

Fuel refund (2009)

 

5.5 

 

 

Adjustments to revenues

 

0.3 

 

 

Other revenues

 

(5.4)

 

 

Total

$

28.4 

 


·

Volume. During the year ended December 31, 2010, there was a 4.1% increase in total retail sales volumes compared to the same period in the prior year, reflecting the warmer-than-normal weather experienced in the current period compared to the cooler-than-normal weather experienced in the prior period.


·

Rates changes. Rates charged to retail customers for the year ended December 31, 2010, were 3.9% or $13.4 million higher than those charged during the same period in the prior year.


In December 2009, the PSCW authorized MGE to increase 2010 rates for retail electric customers by 3.3% or $11.9 million. The increase in retail electric rates is driven by costs for MGE's share of the Elm Road Units and transmission reliability enhancements.


In May 2009, MGE implemented a credit of $0.00204 per kWh, due to a decrease in actual electric fuel costs. During the year ended December 31, 2009, $4.1 million had been credited to electric customers.


·

Fuel refund. As a result of lower than expected fuel and purchased power costs in 2008, a fuel refund was approved. The PSCW issued a final order approving the refund amount of $5.5 million, which was applied to customers' accounts in March 2009. This refund reduced revenues for the year ended December 31, 2009, but was offset in other revenues as described below.


·

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, 2010, market volumes increased due to more internal generation available for sale to the market compared to the prior year, reflecting increased opportunities for sales.


·

Other revenues. Other electric revenues decreased $5.4 million for the year ended December 31, 2010, compared to the same period in the prior year. This is primarily a result of MGE recording $5.5 million in other electric revenues during the year ended December 31, 2009, to offset the impact of the 2008 fuel refund returned to customers in 2009.


·

Adjustments to revenues. Included in rates for 2010 is a full year of lease payments associated with Elm Road Unit 1 and four months of lease payments associated with Elm Road Unit 2. However, the lease payments for Elm Road Unit 1 did not begin until February 2010 when the unit went into service and no lease payments were made for Elm Road Unit 2, since the unit was not in service until January 12, 2011. As a result, $3.6 million was included in adjustments to revenues to defer and return to customers the lease payments collected in rates.


The adjustments to revenues amount also includes the elimination of carrying costs for WCCF and the Elm Road Units that were collected in electric rates, which are recognized as nonregulated energy operating revenues in our Nonregulated Energy Operations segment. The amount eliminated was $7.0 million and $10.7 million for the years ended December 31, 2010 and 2009, respectively.


Electric fuel and purchased power


The expense for fuel for electric generation increased $5.1 million or 13.7% during the year ended December 31, 2010, compared to the same period in the prior year, reflecting higher generation at Elm Road and Columbia. Elm Road Unit 1 entered commercial operation on February 2, 2010.




29




Purchased power expense decreased by $13.9 million or 16.3% during the year ended December 31, 2010, compared to the same period in the prior year. This decrease in expense reflects a $12.4 million or 14.8% decrease in the volume of power purchased from third parties and a $1.5 million or 1.8% decrease in the per-unit cost of purchased power, driven by Elm Road Unit 1 becoming operational in February 2010 and increased production at Columbia.


Electric operating and maintenance expenses


Electric operating and maintenance expenses increased $15.9 million during the year ended December 31, 2010, compared to the same period in 2009. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

6.2 

 

 

Increased transmission costs

 

4.9 

 

 

Increased production costs

 

3.4 

 

 

Increased distribution costs

 

1.4 

 

 

Total

$

15.9 

 


For the year ended December 31, 2010, increased administrative and general costs were primarily due to increased pension costs and the amortization of deferred pension expenses from 2009. These pension costs were deferred and recovery in rates began in 2010. Transmission costs increased primarily due to an increase in network service fees pertaining to ATC. Production costs increased due to Elm Road Unit 1 becoming operational in February 2010. Distribution costs increased mainly as a result of increased overhead and underground line expenses.


Electric depreciation expense


Electric depreciation expense decreased $1.3 million for the year ended December 31, 2010, compared to the same period in the prior year. This decrease was a result of new depreciation rates becoming effective for 2010.


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

 

2010 

 

2009 

 

% Change

 

2010 

 

2009 

 

% Change

Residential

$

92,947 

$

105,624 

 

(12.0)%

 

87,780 

 

95,718 

 

(8.3)%

Commercial/Industrial

 

69,919 

 

81,335 

 

(14.0)%

 

100,954 

 

111,276 

 

(9.3)%

    Total retail

 

162,866 

 

186,959 

 

(12.9)%

 

188,734 

 

206,994 

 

(8.8)%

Gas Transportation

 

2,488 

 

2,903 

 

(14.3)%

 

35,871 

 

37,611 

 

(4.6)%

Other revenues

 

561 

 

2,472 

 

(77.3)%

 

 

 

- %

    Total

$

165,915 

$

192,334 

 

(13.7)%

 

224,605 

 

244,605 

 

(8.2)%

Heating degree days (normal 7,080)

 

 

 

 

 

  

 

6,798 

 

7,357 

 

(7.6)%

Average Rate Per Therm of

 

 

 

 

 

  

 

 

 

 

 

  

Retail Customer

$

0.863 

$

0.903 

 

(4.4)%

 

 

 

 

 

  


Gas revenues decreased $26.4 million or 13.7% for the year ended December 31, 2010. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Gas deliveries

$

(15.8)

 

 

Gas costs/rates

 

(8.3)

 

 

Transportation and other effects

 

(2.3)

 

 

Total

$

(26.4)

 


·

Retail gas deliveries. For the year ended December 31, 2010, retail gas deliveries decreased 8.8% compared to the same period in 2009 as a result of milder weather during the winter months.




30




·

Gas costs/rates. The average retail rate per therm for the year ended December 31, 2010, decreased 4.5% compared to the same period in 2009. The primary contributor to this decrease is significantly lower natural gas commodity costs. In December 2009, the PSCW authorized MGE to decrease gas rates 0.74% or $1.5 million.


·

Transportation and other revenues. Transportation and other revenues decreased a total of $2.3 million primarily due to a decrease in income realized under the GCIM.


Under MGE's GCIM which ended in 2010, if actual gas commodity savings and capacity release revenues are above or below a benchmark set by the PSCW, then MGE's gas sales service customers and shareholders share in any increased costs or savings per percentages set by the PSCW. For the year ended December 31, 2009, shareholders received a benefit from capacity release revenues and commodity savings under GCIM of $1.9 million.


Cost of gas sold


For the year ended December 31, 2010, cost of gas sold decreased by $19.3 million, compared to the same period in the prior year. The volume of gas purchased decreased 7.9% which resulted in $9.7 million of reduced expense. In addition, an 8.4% decrease in the cost per therm of natural gas resulted in $9.6 million of reduced expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses increased $2.8 million for the year ended December 31, 2010, compared to the same period a year ago. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Increased administrative and general costs

$

3.9 

 

 

Decreased production costs

 

(0.2)

 

 

Decreased distribution costs

 

(0.2)

 

 

Decreased customer accounts costs

 

(0.3)

 

 

Decreased customer service costs

 

(0.4)

 

 

Total

$

2.8 

 


For the year ended December 31, 2010, increased administrative and general costs were primarily due to increased pension costs and the amortization of deferred pension expenses from 2009. The incremental pension costs were deferred in 2009 and rate recovery of these costs began in 2010.


Gas depreciation expense


Gas depreciation expense decreased $4.3 million for the year ended December 31, 2010, compared to the same period in the prior year. This decrease was a result of new depreciation rates becoming effective for 2010.


Other Income (deductions), Net


For the year ended December 31, 2010, other income, net for the electric and gas segments increased by $3.2 million, compared to the same period in the prior year. This increase is primarily due to a one-time $2.6 million pretax gain on a sale of property to ATC during March 2010 and a one-time $0.5 million pretax gain on a sale of property during September 2010.


Nonregulated Energy Operations - MGE Energy and MGE


Nonregulated energy operating revenues


Operating revenues from nonregulated energy operations increased $10.3 million for the year ended December 31, 2010, when compared to the same period in the prior year, reflecting the commencement of commercial operations at Elm Road Unit 1 in February 2010.




31




MGE also received approval from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm Road during construction of the Elm Road Units. MGE estimates that the total carrying costs on the Elm Road Units will be approximately $62.6 million. A portion of this amount is being recognized over the period recovered in rates and a portion is being deferred and will be recognized over the period in which the Units are depreciated. See Footnote 21 for additional information regarding these carrying charges. For the years ended December 31, 2010 and 2009, MGE Power Elm Road recognized $4.8 million and $8.1 million, respectively, related to carrying costs on the Elm Road Units.


Nonregulated depreciation expense


Nonregulated depreciation expense increased $2.5 million for the year ended December 31, 2010, compared to the same period in the prior year. This additional depreciation is related to the commencement of commercial operations at Elm Road Unit 1 in February 2010.


Nonregulated energy interest expense, net


For the years ended December 31, 2010 and 2009, interest expense, net at the nonregulated energy operations segment was $2.7 million. Interest expense at the nonregulated energy segment for both the years ended December 31, 2010 and 2009, includes interest expense incurred on $50 million of borrowings at MGE Power West Campus, which were long-term and fixed-rate during both periods, and $50 million of borrowings at MGE Power Elm Road, which were long-term and fixed-rate during 2010.


Included in the nonregulated interest expense is interdepartmental interest expense and capitalized interest at MGE Power Elm Road. During the years ended December 31, 2010 and 2009, MGE Power Elm Road was charged $0.3 million and $3.4 million, respectively, in interest expense by Corporate on funds borrowed for the Elm Road Units. This expense is eliminated upon consolidation for MGE Energy only. The interest expense at MGE Power Elm Road is offset in capitalized interest.


During the year ended December 31, 2009, MGE Power Elm Road recorded $0.1 million in net interest income on cash advanced to ERS for construction of transmission equipment and work done by ATC related to the Elm Road Units. No interest income on cash advanced to ERS was recorded during the year ended December 31, 2010.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the years ended December 31, 2010 and 2009, other income at the transmission investment segment was $8.5 million and $8.2 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.


All Other Nonregulated Operations - MGE Energy


All other interest income, net


All other interest income, net for the years ended December 31, 2010 and 2009, was less than $0.1 million and $2.8 million, respectively. Interest income for the year ended December 31, 2010, represents $0.3 million in interdepartmental interest income from MGE Power Elm Road, offset by $0.3 million in interest expense on short-term debt. Interest income for the year ended December 31, 2009, represents $3.4 million in interdepartmental interest income from MGE Power Elm Road, partially offset by $0.6 million in interest expense on short-term debt.


Consolidated Other General Taxes


MGE Energy's and MGE's other general taxes decreased $0.8 million or 4.5% for the year ended December 31, 2010, when compared to the same period in 2009, due to decreased 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.




32




Consolidated Income Taxes – MGE Energy and MGE


MGE Energy's effective income tax rate for the year ended December 31, 2010, is 37.0% compared to 35.6% for the same period in 2009, and MGE's effective income tax rate for the year ended December 31, 2010, is 37.0% compared to 35.4% for the same period in 2009. The effective income tax rate differences for both MGE Energy and MGE are primarily due to a decrease in the federal wind energy credit. The 10-year tax credit attributable to the Kewaunee wind farm lapsed during 2009.


For 2009 tax return purposes, MGE Energy and MGE changed its income tax methods 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 the WCCF and Elm Road Units. MGE Energy owns 100% of MGE Power West Campus and MGE Power Elm Road; 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.


For the year ended December 31, 2010, MGE Energy (through its wholly owned subsidiary MGE Power) earned $7.7 million and $11.3 million, net of tax, for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy earned $1.8 million, net of tax, for its interest in MGE Transco for the year ended December 31, 2010. These amounts are recorded as noncontrolling interest expense, net of tax, on MGE's consolidated statement of income.


For the year ended December 31, 2009, MGE Energy (through its wholly owned subsidiary MGE Power) had earned $7.6 million and $4.9 million, net of tax, for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy had earned $1.5 million, net of tax, for its interest in MGE Transco for the year ended December 31, 2009. These amounts are recorded as noncontrolling interest expense, net of tax, on MGE's consolidated statement of income.


Year Ended December 31, 2009, Versus the Year Ended December 31, 2008


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

(in thousands, except cooling degree days)

 

2009 

 

2008 

 

% Change

 

2009 

 

2008 

 

% Change

Residential

$

109,788 

$

117,241 

 

(6.4)%

 

772,724 

 

810,414 

 

(4.7)%

Commercial

 

176,231 

 

186,910 

 

(5.7)%

 

1,765,831 

 

1,838,080 

 

(3.9)%

Industrial

 

16,906 

 

19,463 

 

(13.1)%

 

253,590 

 

273,657 

 

(7.3)%

Other-retail/municipal

 

31,010 

 

31,685 

 

(2.1)%

 

402,994 

 

405,008 

 

(0.5)%

    Total retail

 

333,935 

 

355,299 

 

(6.0)%

 

3,195,139 

 

3,327,159 

 

(4.0)%

Sales to the market

 

2,086 

 

5,303 

 

(60.7)%

 

14,993 

 

53,733 

 

(72.1)%

Other revenues

 

(3,697)

 

(14,640)

 

74.7 %

 

 

 

- %

    Total

$

332,324 

$

345,962 

 

(3.9)%

 

3,210,132 

 

3,380,892 

 

(5.1)%

 

 

 

 

 

 

  

 

 

 

 

 

  

Cooling degree days (normal 626)

 

 

 

 

 

  

 

368 

 

538 

 

(31.6)%




33




Electric operating revenues decreased $13.6 million or 3.9% for the year ended December 31, 2009, due to the following:


 

(In millions)

 

 

 

 

Volume

$

(13.8)

 

 

Rate changes

 

(7.6)

 

 

Sales to the market

 

(3.2)

 

 

Other revenues

 

11.0 

 

 

Total

$

(13.6)

 


·

Volume. During the year ended December 31, 2009, there was a 4% decrease in total retail sales volumes when compared to the same period in the prior year, as a result of cooler-than-normal weather. The demand for electricity is affected by weather conditions. According to the National Weather Service, July 2009 was the coolest on record in Madison, where MGE's primary service territory resides. Cooling degree days for 2009 decreased by 32% compared to 2008. Reduced economic activity also contributed to the reduced demand for service.


·

Rates changes. Rates charged to retail customers for the year ended December 31, 2009, were 2.1% or $7.6 million lower than those charged during the same period in the prior year.


On December 18, 2008, under a limited reopener, the PSCW authorized MGE to decrease 2009 rates for retail electric customers by 0.74% or $2.7 million from 2008. The decrease in retail electric rates is driven by a decrease in fuel and purchased power costs, a decrease in costs associated with the Elm Road Units and a decrease in ATC transmission costs. The PSCW also approved deferred accounting for incremental pension and other postretirement benefit costs above the levels currently included in rates.


As a result of lower than expected fuel and purchased power costs in 2008, a fuel refund was approved by the PSCW. In March 2009, the PSCW completed their audit of 2008 electric fuel costs and issued a final order approving the amount to be refunded to customers. A refund of $5.7 million (includes interest) was applied to customers' accounts in March 2009. See "Other revenues" discussion below for more information on this refund.


In May 2009, the PSCW approved an interim order authorizing MGE to implement a credit of $0.00204 per kWh, due to a decrease in actual electric fuel costs, when compared to those fuel costs projected in MGE's most recent rate order. During the year ended December 31, 2009, $4.1 million had been credited to electric customers. See "Other revenues" discussion below for more information on this interim order.


In 2008, the PSCW approved a $0.00239 per kWh interim fuel surcharge subject to refund, with interest, on MGE's electric rates to cover increased fuel and purchased power expenses. For the year ended December 31, 2008, this interim surcharge resulted in a $5.1 million increase to electric rates. See "Other revenues" below for additional information on this interim fuel surcharge.


·

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, 2009, sales to the market decreased $3.2 million when compared to the same period in the prior year, reflecting decreased opportunities for sales.


·

Other revenues. Other electric revenues increased $11.0 million for the year ended December 31, 2009, compared to the same period in the prior year.


As a result of the refund provision in the May 2008 interim fuel surcharge order, MGE recognized an estimated refund to customers totaling $5.5 million during the year ended December 31, 2008, and reflected this reduction in other electric revenues. During the year ended December 31, 2009, MGE recorded $5.5 million in other electric revenues to offset the impact of the 2008 fuel refund.


Also included in other revenues for the year ended December 31, 2009, is a $0.3 million projected refund which was accrued related to the May 2009 interim order.




34




Other electric revenues reflect the elimination of carrying costs for WCCF and the Elm Road Units that were collected in electric rates, which are recognized as nonregulated energy operating revenues in our Nonregulated Energy Operations segment. The amount eliminated was $10.7 million and $11.0 million for the years ended December 31, 2009 and 2008, respectively.


Electric fuel and purchased power


As a result of more favorable prices for purchased power as compared to internal generation, power purchases were increased, and internal generation reduced, causing fuel for electric generation to decrease and purchased power expense to increase.


The expense for fuel for electric generation decreased $17.9 million or 32.6% during the year ended December 31, 2009, compared to the same period in the prior year. This decrease in expense reflects a $12.8 million decrease related to the lower electric generation and a $5.1 million decrease related to fuel cost.


Purchased power expense increased by $10.4 million or 14.0% during the year ended December 31, 2009, compared to the same period in the prior year. This increase in expense reflects an $18.2 million or 27.3% increase in the volume of power purchased offset by a $7.8 million or 10.5% decrease in the per-unit cost of purchased power.


Electric operating and maintenance expenses


Electric operating and maintenance expenses decreased $4.6 million during the year ended December 31, 2009, compared to the same period in 2008. The following changes contributed to the net change:


 

(In millions)

 

 

 

 

Decreased production costs

$

(2.8)

 

 

Decreased maintenance expenses

 

(2.2)

 

 

Decreased customer accounts costs

 

(0.6)

 

 

Decreased distribution costs

 

(0.3)

 

 

Decreased general and administrative costs

 

(0.2)

 

 

Increased transmission costs

 

1.5 

 

 

Total

$

(4.6)

 


For the year ended December 31, 2009, production costs and maintenance costs decreased due to lower internal generation, compared to the same period in the prior year. In addition, customer accounts costs decreased due to lower uncollectible accounts expense. Transmission costs increased primarily due to network service fees pertaining to ATC.


Electric depreciation expense


Electric depreciation expense increased $1.4 million for the year ended December 31, 2009, compared to the same period in the prior year as a result of additional electric plant 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

 

Sales

 

2009 

 

2008 

 

% Change

 

2009 

 

2008 

 

% Change

Residential

$

105,624 

$

130,012 

 

(18.8)%

 

95,718 

 

100,014 

 

(4.3)%

Commercial/Industrial

 

81,335 

 

106,582 

 

(23.7)%

 

111,276 

 

107,329 

 

3.7 %

    Total retail

 

186,959 

 

236,594 

 

(21.0)%

 

206,994 

 

207,343 

 

(0.2)%

Gas Transportation

 

2,903 

 

2,903 

 

- %

 

37,611 

 

37,053 

 

1.5 %

Other revenues

 

2,472 

 

3,101 

 

(20.3)%

 

 

 

- %

    Total

$

192,334 

$

242,598 

 

(20.7)%

 

244,605 

 

244,396 

 

0.1 %

Heating degree days (normal 7,107)

 

 

 

 

 

  

 

7,357 

 

7,716 

 

(4.7)%

Average Rate Per Therm of

 

 

 

 

 

  

 

 

 

 

 

  

Retail Customer

$

0.903 

$

1.141 

 

(20.9)%

 

 

 

 

 

  




35




Gas revenues decreased $50.3 million or 20.7% for the year ended December 31, 2009. These changes are related to the following factors:


 

(In millions)

 

 

 

 

Gas costs/rates

$

(49.3)

 

 

Transportation and other effects

 

(0.7)

 

 

Gas deliveries

 

(0.3)

 

 

Total

$

(50.3)

 


·

Gas costs/rates. The average retail rate per therm for the year ended December 31, 2009, decreased 20.9% compared to the same period in 2008. The primary contributor to this decrease is significantly lower natural gas costs.


·

Transportation and other revenues. Transportation and other revenues decreased a total of $0.7 million primarily due to a decrease in income realized under the GCIM.


Under MGE's GCIM, if actual gas commodity savings and capacity release revenues are above or below a benchmark set by the PSCW, then MGE's gas sales service customers and shareholders share in any increased costs or savings per percentages set by the PSCW. For the year ended December 31, 2009 and 2008, shareholders received the benefit of $1.9 million and $2.4 million, respectively, from capacity release revenues and commodity savings under the GCIM.


Cost of gas sold


For the year ended December 31, 2009, cost of gas sold decreased by $48.5 million, compared to the same period in the prior year. The cost per therm of natural gas decreased 27.6%, which resulted in $46.9 million of reduced expense. In addition, a 0.9% decrease in the volume of gas purchased resulted in $1.6 million less expense.


Gas operating and maintenance expenses


Gas operating and maintenance expenses decreased $1.7 million for the year ended December 31, 2009, compared to the same period a year ago. The following changes contributed to the net change.


 

(In millions)

 

 

 

 

Decreased customer accounts costs

$

(0.7)

 

 

Decreased distribution costs

 

(0.3)

 

 

Decreased maintenance costs

 

(0.3)

 

 

Decreased general and administrative costs

 

(0.2)

 

 

Decreased production costs

 

(0.1)

 

 

Decreased customer service costs

 

(0.1)

 

 

Total

$

(1.7)

 


Customer accounts costs decreased due to lower uncollectible accounts expense.


Gas depreciation expense


Gas depreciation expense increased $0.4 million for the year ended December 31, 2009, compared to the same period in the prior year as a result of additional gas plant assets.


Other Income (deductions), Net


Other income, net for the gas and electric segments increased $1.6 million for the year ended December 31, 2009, compared to the same period in the prior year. In 2008, the gas utility had expensed a $1.5 million settlement (includes premium) associated with a weather hedge (heating degree collar) as a result of colder-than-normal weather. The gas utility had no weather hedges during 2009. In addition, charitable contributions decreased by $1.5 million for the year ended December 31, 2009, compared to the prior year. Offsetting this change is a $0.8 million pretax gain on investments recognized in 2008 and a $0.4 million reduction in AFUDC-equity for the year ended December 31, 2009, compared to the prior year.




36




Nonregulated Energy Operations - MGE Energy and MGE


Nonregulated energy operating revenues


Operating revenues from nonregulated energy operations increased $1.7 million for the year ended December 31, 2009, when compared to the same period in the prior year. Operating revenues from nonregulated energy operations for both the year ended December 31, 2009 and 2008, include $14.9 million in interdepartmental revenues related to a leasing arrangement between MGE and MGE Power West Campus. Upon consolidation, these interdepartmental revenues are eliminated.


MGE also received approval from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm Road during construction of the Elm Road Units. MGE estimates that the total carrying costs on the Elm Road Units will be approximately $59.5 million. A portion of this amount is being recognized over the period recovered in rates and a portion is being deferred and will be recognized over the period in which the Units are depreciated. See Footnote 21 for additional information regarding these carrying charges. For the year ended December 31, 2009 and 2008, MGE Power Elm Road recognized $8.1 million and $6.4 million, respectively, related to carrying costs on the Elm Road Units.


Nonregulated energy interest expense, net


For the year ended December 31, 2009 and 2008, interest expense, net at the nonregulated energy operations segment was $2.7 million and $2.6 million, respectively. Interest expense at the nonregulated energy segment for both the year ended December 31, 2009 and 2008, includes $2.8 million in interest expense incurred on $50 million of long-term, fixed-rate borrowings at MGE Power West Campus.


Also included in the nonregulated interest expense is interdepartmental interest expense and capitalized interest at MGE Power Elm Road. During the year ended December 31, 2009 and 2008, MGE Power Elm Road was charged $3.4 million and $4.8 million, respectively, in interest expense by Corporate on funds borrowed for the Elm Road Units. This expense is eliminated upon consolidation for MGE Energy only. The interest expense at MGE Power Elm Road is offset by $3.4 million and $4.8 million, respectively, in capitalized interest.


During the year ended December 31, 2009 and 2008, MGE Power Elm Road recorded $0.1 million in interest income on cash advanced to ERS for construction of transmission equipment and work done by ATC related to the Elm Road Units.


Transmission Investment Operations - MGE Energy and MGE


Transmission investment other income


For the year ended December 31, 2009 and 2008, other income at the transmission investment segment was $8.2 million and $7.2 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.


All Other Nonregulated Operations - MGE Energy


All other - other income


Other income in the all other segment decreased $2.4 million for the year ended December 31, 2009, compared to the same period in the prior year primarily due to a $2.5 million pretax gain on investments recognized in the prior year.


All other interest income, net


All other interest income, net for the year ended December 31, 2009 and 2008, was $2.8 million. Interest income for the year ended December 31, 2009, represents $3.4 million in interdepartmental interest income from MGE Power Elm Road, partially offset by $0.6 million in interest expense on short-term debt. Interest income for the year ended December 31, 2008, represents $4.8 million in interdepartmental interest income from MGE Power Elm Road, partially offset by $2.0 million in interest expense on short-term debt. The interdepartmental interest income is eliminated upon consolidation.




37




Consolidated Other General Taxes


MGE Energy's and MGE's other general taxes increased $1.1 million or 6.3% for the year ended December 31, 2009, when compared to the same period in 2008, 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 increased.


Consolidated Income Taxes


MGE Energy's effective income tax rate for the year ended December 31, 2009, is 35.6% compared to 35.5% for the same period in 2008. MGE's effective income tax rate for the year ended December 31, 2009, is 35.4% compared to 35.2% for the same period in the prior year. The effective income tax rate differences for both MGE Energy and MGE for 2009 compared to 2008 are insignificant, as the effective income tax rate components are substantially equivalent.


Under 2009 Wisconsin Act 2, effective for years beginning on or after January 1, 2009, Wisconsin requires corporations to use combined reporting to compute their Wisconsin income for income tax purposes. Formerly, Wisconsin law required each corporation in a combined group to file separate returns. The combined reporting statute in Wisconsin did not have a significant impact on the effective income tax rates of MGE Energy and MGE.


For 2009 tax return purposes, MGE Energy and MGE changed its income tax methods of accounting for repairs based on current Treasury Regulations and case law. The change in income tax methods of accounting involves, among other things, identification of appropriate units of property for repair work and computation of a cumulative one-time tax deduction able to be claimed in 2009. The effect on the 2009 financial statements of the cumulative adjustment is an increase to deferred tax expense and a corresponding decrease in the current tax provision in the amount of about $9.2 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


The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in the WCCF and Elm Road Units. MGE Energy owns 100% of MGE Power West Campus and MGE Power Elm Road; 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.


For the year ended December 31, 2009, MGE Energy (through its wholly owned subsidiary MGE Power) earned $7.6 million and $4.9 million, net of tax, for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy earned $1.5 million, net of tax, for its interest in MGE Transco. These amounts are recorded as noncontrolling interest expense, net of tax, on MGE's consolidated statement of income.


For the year ended December 31, 2008, MGE Energy (through its wholly owned subsidiary MGE Power) had earned $7.6 million and $3.9 million, net of tax, for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy had earned $0.8 million, net of tax, for its interest in MGE Transco. These amounts are recorded as noncontrolling interest expense, net of tax, on MGE's consolidated statement of income.


Liquidity and Capital Resources


Cash Flows


The following summarizes cash flows for MGE Energy and MGE during the year ended 2010, 2009, and 2008:


 

 

 

MGE Energy

 

MGE

 

 

(In thousands)

 

2010 

 

2009 

 

2008 

 

 

2010 

 

2009 

 

2008 

 

 

Cash provided by/(used for):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

$

124,033 

$

117,909 

$

74,712 

 

$

115,192 

$

121,264 

$

74,307 

 

 

    Investing activities

 

(57,385)

 

(79,975)

 

(104,282)

 

 

(57,436)

 

(78,344)

 

(106,849)

 

 

    Financing activities

 

(64,242)

 

(37,336)

 

29,887 

 

 

(55,736)

 

(41,764)

 

32,001 

 




38




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.


2010 vs. 2009


Cash provided by operating activities for the year ended December 31, 2010, was $124.0 million, an increase of $6.1 million when compared to the same period in the prior year, primarily due to the benefit of less taxes paid as a result of a tax method change in accounting for repairs and higher net income.


MGE Energy's net income increased $6.7 million for the year ended December 31, 2010, when compared to the same period in the prior year.


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. Working capital accounts resulted in $12.6 million in cash provided by operating activities for the year ended December 31, 2009, primarily due to decreased receivables, decreased inventories (due to lower natural gas costs), and decreased unbilled revenues, partially offset by decreased accounts payable.


The cash flows for the year ended December 31, 2010, reflect a $7.7 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the finalization of the income tax method change in accounting for electric repairs.


Pension contribution resulted in an additional $1.6 million in cash used by operating activities for the year ended December 31, 2010, when compared to the same period in the prior year. These contributions were made to comply with the Employee Retirement Income Security Act (ERISA) and the Pension Protection Act of 2006, and additional contributions were at management's discretion. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.


MGE Energy's other noncurrent items, net contributed $8.9 million of operating cash inflows for the year ended December 31, 2010, compared to $0.6 million in the prior year. This increase 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. Any difference between the expected start date and the actual start date of the lease payments will be returned to customers in the next base rate case.


2009 vs. 2008


Cash provided by operating activities for the year ended December 31, 2009, was $117.9 million, an increase of $43.2 million when compared to the same period in the prior year, primarily due to working capital changes.


Working capital accounts resulted in $12.6 million in cash provided by operating activities for the year ended December 31, 2009, compared to $32.2 million in cash used for operating activities during the same period in the prior year. The increase in cash provided by working capital accounts is primarily attributable to decreased inventory (due to lower natural gas costs), lower accounts receivable (due to lower sales and commodity costs), and reduced collateral postings in the derivative portfolio.


MGE Energy's net income decreased $1.8 million for the year ended December 31, 2009, when compared to the same period in the prior year.


Cash flows related to tax effects increased $9.1 million for the year ended December 31, 2009, compared to the year ended December 31, 2008, primarily due to tax depreciation differences associated with bonus depreciation and the income tax method change in accounting for repairs.


Pension contribution resulted in an additional $7.6 million in cash used by operating activities for the year ended December 31, 2009, when compared to the same period in the prior year. These contributions were made to comply with the ERISA and the Pension Protection Act of 2006, and additional contributions were at management's discretion. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.




39




MGE


2010 vs. 2009


Cash provided by operating activities for the year ended December 31, 2010, was $115.2 million, a decrease of $6.1 million when compared to the same period in the prior year, primarily due to working capital changes.


Net income increased $8.7 million for the year ended December 31, 2010, when compared to the same period in the prior year.


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. Working capital accounts resulted in $17.8 million in cash provided by operating activities for the year ended December 31, 2009, primarily due to decreased receivables, decreased inventories (due to lower natural gas costs), and decreased unbilled revenues, partially offset by decreased accounts payable.


The cash flows for the year ended December 31, 2010, reflect a $7.8 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the finalization of the income tax method change in accounting for electric repairs.


Pension contribution resulted in an additional $1.6 million in cash used by operating activities for the year ended December 31, 2010, when compared to the same period in the prior year. These contributions were made to comply with the ERISA and the Pension Protection Act of 2006, and additional contributions were at management's discretion. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.


MGE Energy's other noncurrent items, net contributed $6.8 million of operating cash inflows for the year ended December 31, 2010, compared to $0.6 million in the prior year. This increase 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. Any difference between the expected start date and the actual start date of the lease payments will be returned to customers in the next base rate case.


2009 vs. 2008


Cash provided by operating activities for the year ended December 31, 2009, was $121.3 million, an increase of $47.0 million when compared to the same period in the prior year primarily due to working capital changes.


Working capital accounts resulted in $17.8 million in cash provided by operating activities for the year ended December 31, 2009, compared to $33.7 million in cash used for operating activities during the same period in the prior year. The increase in cash provided by working capital accounts is primarily attributable to decreased inventory (due to lower natural gas costs), lower accounts receivable (due to lower sales and commodity costs), and reduced collateral postings in the derivative portfolio.


Net income decreased $1.7 million for the year ended December 31, 2009, when compared to the same period in the prior year.


Cash flows related to tax effects increased $8.1 million for the year ended December 31, 2009, compared to the year ended December 31, 2008, primarily due to tax depreciation differences associated with bonus depreciation and the income tax method change in accounting for repairs.


Pension contribution resulted in an additional $7.6 million in cash used by operating activities for the year ended December 31, 2009, when compared to the same period in the prior year. These contributions were made to comply with the ERISA and the Pension Protection Act of 2006, and additional contributions were at management's discretion. See Footnote 13 for further discussion of MGE Energy's pension and other postretirement benefits.




40




Capital Requirements and Investing Activities


MGE Energy


2010 vs. 2009


MGE Energy's cash used for investing activities decreased $22.6 million for the year ended December 31, 2010, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2010, were $60.1 million. This amount represents a $17.8 million decrease from the expenditures made in the same period in the prior year. This decrease is related to decreased construction activity of $14.8 million related to the Elm Road Units and a decrease of $3.3 million in other utility capital expenditures.


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


2009 vs. 2008


MGE Energy's cash used for investing activities decreased $24.3 million for the year ended December 31, 2009, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2009, were $77.9 million. This amount represents a $27.8 million decrease from the expenditures made in the same period in the prior year. This decrease is related to lower construction activity of $22.8 million related to the Elm Road Units and a $7.8 million decrease of capital expenditures due to the completion in February 2008 of the Top of Iowa III wind generation project. These decreases were partially offset by an increase of $3.1 million in other utility capital expenditures.


During the year ended December 31, 2009, MGE Energy received cash proceeds from the sale of equity investments of $0.1 million compared to the $3.6 million received for the same period in the prior year.


MGE


2010 vs. 2009


MGE's cash used for investing activities decreased $20.9 million for the year ended December 31, 2010, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2010, were $60.1 million. This amount represents a $17.8 million decrease from the expenditures made in the same period in the prior year. This decrease is related to decreased construction activity of $14.8 million related to the Elm Road Units and a decrease of $3.3 million in other utility capital expenditures.


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


2009 vs. 2008


MGE's cash used for investing activities decreased $28.5 million for the year ended December 31, 2009, when compared to the same period in the prior year.


Capital expenditures for the year ended December 31, 2009, were $77.9 million. This amount represents a $27.8 million decrease from the expenditures made in the same period in the prior year. This decrease is related to lower construction activity of $22.8 million related to the Elm Road Units and a $7.8 million decrease of capital expenditures due to the completion in February 2008 of the Top of Iowa III wind generation project. These decreases were partially offset by an increase of $3.1 million in other utility capital expenditures.


During the year ended December 31, 2009, MGE did not receive cash proceeds from the sale of equity investments compared to the $1.1 million received for the same period in the prior year.




41




Capital expenditures


The following table shows MGE Energy's budgeted capital expenditures for 2011 and actual capital expenditures for both 2010 and 2009:


 

(In thousands)

 

2011 

 

2010 

 

2009 

 

 

For the years ended December 31,

 

(Budget)

(Actual)

(Actual)

 

 

Electric

$

47,970 

$

33,655 

$

37,014 

 

 

Gas

 

15,430 

 

13,719 

 

13,734 

 

 

    Utility plant total

 

63,400 

 

47,374 

 

50,748 

 

 

Nonregulated

 

3,520 

 

12,708 

 

27,181 

 

 

    MGE Energy total

$

66,920 

$

60,082 

$

77,929 

 


MGE Energy intends to fund any remaining capital commitments for the Elm Road Units with funds generated from normal operations, the issuance of long-term debt, and short-term debt. MGE Energy's and MGE's liquidity is primarily affected by their construction requirements. On February 4, 2010, MGE Power Elm Road issued $50 million of its 5.04% senior secured notes due 2040, the proceeds of which were used to repay short-term debt. Based upon an oral understanding with a prospective note purchaser, which is subject to the completion and execution of definitive agreements, MGE Power Elm Road expects to issue an additional $30 million of 4.74% senior secured notes due 2041 in the first quarter of 2011. The proceeds from this additional financing are expected to be used to payoff the outstanding bank loans under MGE Energy's line of credit, which were used as short-term financing during the construction of Elm Road. MGE Energy's major 2010 capital projects included the Elm Road Units. During 2010, $12.4 million in capital expenditures were incurred for the construction of the Elm Road Units. Included in this amount is $2.7 million of interest capitalized.


As of December 31, 2010, MGE Power Elm Road's remaining capital commitments for the Elm Road Units are estimated to be $2.2 million in 2011. See Footnote 21a for additional information.


MGE Energy used funds received as dividend payments from MGE Power West Campus as well as short and long-term external financing to meet its 2010 capital requirements and cash obligations, including dividend payments. External financing included short-term financing under existing lines of credit and proceeds from equity issued under the Stock Plan.


Financing Activities


MGE Energy


2010 vs. 2009


Cash used for MGE Energy's financing activities was $64.2 million for the year ended December 31, 2010, compared to $37.3 million of cash used for the year ended December 31, 2009.


MGE Energy received $6.3 million in cash proceeds as the result of stock issued pursuant to the Stock Plan during the year ended December 31, 2009.


As of June 1, 2009, MGE Energy began purchasing stock in the open market for its Stock Plan rather than issuing new shares. All MGE Energy common stock shares under the Stock Plan are sold pursuant to a registration statement that has been filed with the SEC and is currently effective.


For the year ended December 31, 2010, dividends paid were $34.4 million compared to $33.7 million in the prior year. This increase was a result of higher dividend per share ($1.49 vs. $1.46).


For the year ended December 31, 2010, MGE Energy repaid $16.5 million of long-term debt and issued $80.0 million of long-term debt, including the issuance of $50 million of senior secured notes by MGE Power Elm Road, the proceeds of which were used to repay short-term debt.


For the year ended December 31, 2010, net short-term debt repayments were $92.0 million compared to $60.0 million for the same period in the prior year.




42




2009 vs. 2008


Cash used for MGE Energy's financing activities was $37.3 million for the year ended December 31, 2009, compared to $29.9 million of cash provided by MGE Energy's financing activities for the year ended December 31, 2008.


MGE Energy received $6.3 million and $31.0 million in cash proceeds as the result of stock issued pursuant to the Stock Plan during the years ended December 31, 2009 and 2008, respectively.


As of June 1, 2009, MGE Energy is purchasing stock in the open market for its Stock Plan rather than issuing new shares. All MGE Energy common stock shares under the Stock Plan are sold pursuant to a registration statement that has been filed with the SEC and is currently effective.


For the year ended December 31, 2009, dividends paid were $33.7 million compared to $31.8 million in the prior year. This increase was a result of higher dividend per share ($1.46 vs. $1.43) and an increase in the number of shares outstanding.


For the year ended December 31, 2009, net short-term debt repayments were $10.0 million compared to net short-term borrowings of $21.0 million in the prior year.


In the year ended December 31, 2008, MGE Energy repaid $30.0 million of long-term debt and issued $40.0 million of long-term debt.


MGE


2010 vs. 2009


During the year ended December 31, 2010, cash used for MGE's financing activities was $55.7 million compared to $41.8 million of cash used by MGE's financing activities in the prior year.


Dividends paid from MGE to MGE Energy were $26.2 million for the year ended December 31, 2010 compared to $19.3 million in the prior year.  


On February 4, 2010, MGE Power Elm Road issued $50.0 million of long-term debt. The proceeds from the financing were distributed to MGE Energy, which had been using its short-term credit facilities to help finance the Elm Road Units. As a result, distributions to parent from noncontrolling interest increased $45.8 million for the year ended December 31, 2010.


Cash used by financing activities for affiliate financing of the Elm Road Units decreased by $8.3 million for the year ended December 31, 2010, compared to the prior year.


In the year ended December 31, 2010, MGE repaid $16.5 million of long-term debt and issued $80.0 million of long-term debt.  


In addition, for the year ended December 31, 2010, net short-term debt repayments were $30.0 million compared to $17.5 million in the prior year.


2009 vs. 2008


During the year ended December 31, 2009, cash used for MGE's financing activities was $41.8 million compared to $32.0 million of cash provided by MGE's financing activities in the prior year.


For the year ended December 31, 2009, net short-term debt repayments were $17.5 million compared to $10.0 million in the prior year.


Dividends paid from MGE to MGE Energy were $19.3 million for the year ended December 31, 2009. No cash dividends were paid from MGE to MGE Energy for the year ended December 31, 2008.


Equity contributions received by noncontrolling interest decreased $34.0 million as a result of MGE Power Elm Road requiring less funding for construction of property, plant and equipment. This decrease is slightly offset by $4.2 million of affiliate financing on the Elm Road Units received in the year ended December 31, 2009.




43




In the year ended December 31, 2008, MGE repaid $30.0 million of long-term debt and issued $40.0 million of long-term debt.


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 $28.8 million and $31.4 million for 2010 and 2009, respectively, plus dividends on 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, 2010 and 2009, is estimated to be 58.5% and 57.5%, respectively, as determined under the calculation used in the rate proceeding. MGE was not restricted from paying cash dividends in 2010. Cash dividends paid to MGE Energy were reduced in 2009 in order to build additional common stock equity in MGE. Cash dividends of $26.2 million and $19.3 million were paid to MGE Energy in 2010 and 2009, 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 West Campus and MGE Power Elm Road, which are consolidated into MGE's financial statements.


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, 2010, approximately $248.6 million was available for the payment of dividends under this covenant.


Credit Facilities


At December 31, 2010, MGE Energy and MGE had the following aggregate bank commitments and available capacity under the 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 

$

$

19.0 

$

21.0 

 

July 30, 2013

 

 

 

 

 

 

 

 

 

 

 

MGE

$

75.0 

$

3.5 

$

$

71.5 

 

July 30, 2013


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 1.25%.


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 West Campus and MGE Power Elm Road. At December 31, 2010, the ratio of consolidated debt to consolidated total capitalization for each of MGE Energy and MGE were 40.6% and 37.3%, respectively. See Footnote 10, for additional information regarding the credit facilities.


Capitalization Ratios


MGE Energy's capitalization ratios were as follows:


 

 

MGE Energy

 

 

 

2010 

 

2009 

 

 

Common shareholders' equity

59.4 %

 

56.4 %

 

 

Long-term debt*

38.0 %

 

36.3 %

 

 

Short-term debt

2.6 %

 

7.3 %

 

 

*Includes the current portion of long-term debt.

 




44




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 results of a downgrading of credit ratings, although a downgrading of MGE's credit ratings could increase fees and interest charges under both MGE Energy's and MGE's credit agreements.


Contractual Obligations and Commercial Commitments for MGE Energy and MGE


MGE Energy's and MGE's contractual obligations as of December 31, 2010, 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)

$

336,973 

$

1,667 

$

22,980 (j)

$

6,284 

$

306,042 

Short-term debt(b)

 

22,500 

 

22,500 

 

 

 

Interest expense(c)

 

296,252 

 

18,584 

 

36,914 

 

36,390 

 

204,364 

Operating leases(d)

 

18,478 

 

2,443 

 

4,011 

 

2,032 

 

9,992 

Purchase obligations (e)

 

575,173 

 

86,699 

 

125,608 

 

86,394 

 

276,472 

Other obligations(f)

 

9,849 

 

1,926 

 

4,371 

 

1,597 

 

1,955 

Purchase obligations - Elm Road(g)

 

2,250 

 

2,250 

 

 

 

Purchase obligations - Environmental(h)

 

38,829 

 

31,166 

 

666 

 

666 

 

6,331 

Total MGE Energy contractual obligations  

$

1,300,304 

$

167,235 

$

194,550 

$

133,363 

$

805,156 

  

 

 

 

 

 

  

 

 

 

 

MGE

 

 

 

 

 

  

 

 

 

 

Long-term debt(a)

$

336,973 

$

1,667 

$

22,980 (j)

$

6,284 

$

306,042 

Short-term debt(i)

 

3,500 

 

3,500 

 

 

 

Interest expense (c)

 

296,252 

 

18,584 

 

36,914 

 

36,390 

 

204,364 

Operating leases(d)

 

18,478 

 

2,443 

 

4,011 

 

2,032 

 

9,992 

Purchase obligations(e)

 

575,173 

 

86,699 

 

125,608 

 

86,394 

 

276,472 

Other obligations(f)

 

9,134 

 

1,211 

 

4,371 

 

1,597 

 

1,955 

Purchase obligations - Elm Road(g)

 

2,250 

 

2,250 

 

 

 

Purchase obligations - Environmental(h)

 

38,829 

 

31,166 

 

666 

 

666 

 

6,331 

Total MGE contractual obligations  

$

1,280,589 

$

147,520 

$

194,550 

$

133,363 

$

805,156 


For additional information about:


(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 and MGE Power West Campus and MGE and MGE Power Elm Road.


(b) Short-term debt consisting of commercial paper for MGE and borrowings under MGE Energy lines of credit, 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, 2010.


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


(e) Purchase obligations for 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 for additional discussion.


(f) Other obligations are primarily related to uncertain tax positions, investment commitments, easements, maintenance and service agreements, and smart grid projects.


(g) Purchase obligations for MGE Energy and MGE related to contracts for equipment and services related to the construction of Elm Road. See Footnotes 18 and 21 of the Notes to Consolidated Financial Statements.



45





(h) Contractual commitments for certain services and capital at the jointly owned Columbia plant that will be acquired to ensure compliance with certain environmental initiatives. Also included is a commitment related to greenhouse gas reduction efforts as a result of a settlement agreement with Clean Wisconsin, Inc. and Sierra Club over the Elm Road Units WPDES permit.


(i) Short-term debt consisting of commercial paper. See Footnote 10 of the Notes to Consolidated Financial Statements.


(j) On April 1, 2012, MGE's $19.3 million, 4.875%, Series B, Industrial Development Revenue Bonds, have a mandatory repurchase date. The actual maturity date for these IRB's is October 1, 2027.


The above amounts do not include any contributions for MGE's pension and postretirement plans. Contributions to the plans for 2011 are expected to be approximately $21 million and for 2012 through 2015 are expected to be between $11 million to $13 million each year. The contributions for years after 2015 are currently not yet 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, also, do not include future voluntary capital calls to ATC. On January 31, 2011, MGE Transco made a voluntary $0.4 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.


MGE Energy's and MGE's commercial commitments as of December 31, 2010, 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)

 

3,578 

 

673 

 

995 

 

974 

 

936 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

MGE

 

 

 

 

 

 

 

 

 

 

 

 

Available Lines of Credit(c)

$

75,000 

$

$

75,000 

$

$

 

 

Guarantees(b)

 

3,578 

 

673 

 

995 

 

974 

 

936 

 


For additional information about:


(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 2013. At December 31, 2010, MGE Energy had borrowed $19.0 million under this credit facility. Accordingly, MGE Energy's available credit under this credit facility was $21.0 million at December 31, 2010.


(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) Amounts include a $75.0 million committed revolving credit agreement expiring in July 2013. This credit facility is used to support commercial paper issuances. At December 31, 2010, there were no borrowings under this facility. At December 31, 2010, there was $3.5 million of commercial paper outstanding.


Blount Station


In 2006, MGE announced a plan, subject to certain conditions, that includes discontinuing coal use by the end of 2011 at Blount. The original plan contemplated that the plant would continue to run on natural gas but would be reduced from its current approximate 190 MW capacity to 100 MW when coal burning is discontinued. MGE determined that certain employee positions would be eliminated as a result of this exit plan.


In March 2009, MGE received notification from MISO that in order to meet national electric system reliability standards, MGE will need to keep Blount available at full capacity until MISO declares that the 90 MW are no longer needed for system reliability. To comply with the MISO directive, MGE will delay plans for retiring 90 MW of generation equipment at Blount. The transition from burning coal to burning only natural gas will still occur by the end



46




of 2011. After 2011, the entire plant will be operated exclusively on natural gas. MGE is working with MISO to develop a detailed agreement for this continued operation, which among other things will include a mechanism for cost recovery.


In January 2010, MGE announced it will change its primary fuel at Blount from coal to natural gas. Coal will become the secondary fuel at Blount. This switch to natural gas as a primary fuel occurred in March 2010. As a result of this change, certain employee positions were eliminated and severance benefits in 2010 totaled $0.5 million. These severance benefits were accelerated into 2010 from 2011, but were offset by lower payroll charges in 2010.


MGE has entered into agreements providing severance benefits to employees affected by the exit plan. Estimated benefits expected to be paid are as follows: $0.3 million in 2012 and $0.3 million in 2013. MGE will recover in rates the costs associated with the capacity reduction at Blount. As such, the severance charges, in 2012 and 2013, for these employees have been deferred and recognized on the consolidated balance sheet of MGE Energy and MGE as a regulatory asset.


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, 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. Actual results 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.




47




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.


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 investment yields available 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 2010, MGE used an assumed return on assets of 8.50% for pension and 7.39% for other postretirement benefits. In 2011, MGE will lower the return on asset assumption from 8.50% to 8.25% for pension. 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 $1.4 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 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.




48




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.


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.


Asset Retirement Obligation


The ability to reasonably estimate an asset retirement obligation (ARO) is a matter of management judgment, based upon management's ability to estimate a settlement date or range of settlement dates and a method or potential method of settlement of its AROs. In determining whether our AROs could be reasonably estimated, management considers past practices, industry practices, management's intent, and the estimated economic life of the assets. The fair value of the AROs is then estimated using an expected present value technique. Changes in management's assumptions regarding settlement dates, settlement methods, or assigned probabilities could have a material effect on the liability recorded at December 31, 2010, as well as the regulatory asset recorded. The liabilities associated with AROs will be adjusted on an ongoing basis due to the passage of time and revisions to either the timing or the amount of the original estimates of undiscounted cash flows. These adjustments could have a significant impact on the consolidated balance sheets. See Footnote 20 of the Notes to Consolidated Financial Statements for more information regarding AROs.


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


See Footnote 22 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, weather, 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.




49




MGE's electric operations burn natural gas in several of its peaking power plants or as a supplemental fuel at several coal-fired 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.


Under the electric fuel rules, MGE would be required to make a refund to customers if the fuel rules costs fall outside the lower end of the range and would be allowed to request a surcharge if the fuel rules costs exceeded the upper end of the range. 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 bandwidth. For 2010, fuel and purchased power costs included in MGE's base fuel rates are $102.0 million. See Footnote 17 for additional information.


The PSCW approved new fuel rules on December 27, 2010, to be effective January 1, 2011. The new rules require the PSCW and Wisconsin utilities to automatically defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the deferred costs is determined on an annual basis and will be adjusted in future billings to its electric retail customers.

 

MGE's gas segment is governed by the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to customers the cost of gas, subject to certain limited incentives.


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 is two years.


MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds FTRs which are used to hedge the risk of increased congestion charges. At December 31, 2010, the cost basis of these instruments exceeded their fair value by $0.2 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 which provides MGE with firm capacity and energy beginning June 1, 2012, and ending on May 31, 2022 (the "base term"). The agreement also allows MGE the option to purchase power during a period of time preceding the base term as well as an option to extend the contract after the base term. The agreement is a derivative contract and is recognized at its fair value on the balance sheet. The fair value of the contract at December 31, 2010, reflects a loss position of $19.0 million.


Interest Rate Risk


Both MGE Energy and MGE 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. Assuming the current level of variable rate borrowings and assuming a 1% change in the 2010 average interest rate under these borrowings, it is estimated that our 2010 interest expense and net income would have changed by $0.2 million for MGE Energy and less than $0.1 million for MGE.


Equity Price Risk - Pension-Related Assets


MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various investment managers. Changes in market value of these investments can have an impact on the future expenses related to these liabilities. Holding other assumptions constant, for every 1% reduction in the expected rate of return on plan assets, annual pension and other postretirement cost would increase by approximately $1.4 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 11.0% during the year ended December 31, 2010. During the year ending December 31, 2009, the value of our employee benefit plans trusts' assets increased by approximately 23.9%.



50





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 includes 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, 2010, 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, 2010, no one customer constituted more than 9% of total operating revenues for MGE Energy and MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.


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




51




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 Rules 13a-15f. 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 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, 2010.


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, 2010, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.


February 24, 2011


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 Rules 13a-15f. 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 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, 2010.


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 24, 2011




52




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 accompanying 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, 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 accompanying 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, 2010, 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 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 24, 2011




53




Report of Independent Registered Public Accounting Firm


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


In our opinion, the accompanying consolidated balance sheets and the related 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, 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 24, 2011



54





MGE Energy, Inc.

 

Consolidated Statements of Income

 

(In thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

 

 

2010 

 

2009 

 

2008 

 

Operating Revenues:

 

 

 

 

 

 

 

    Regulated electric revenues

$

360,729 

$

332,324 

$

345,962 

 

    Regulated gas revenues

 

165,915 

 

192,334 

 

242,598 

 

    Nonregulated revenues

 

5,947 

 

9,161 

 

7,433 

 

        Total Operating Revenues

 

532,591 

 

533,819 

 

595,993 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

41,947 

 

36,879 

 

54,748 

 

    Purchased power

 

71,239 

 

85,098 

 

74,676 

 

    Cost of gas sold

 

103,784 

 

123,062 

 

171,545 

 

    Other operations and maintenance

 

164,001 

 

145,177 

 

151,176 

 

    Depreciation and amortization

 

37,960 

 

41,080 

 

39,273 

 

    Other general taxes

 

17,058 

 

17,858 

 

16,793 

 

        Total Operating Expenses

 

435,989 

 

449,154 

 

508,211 

 

Operating Income

 

96,602 

 

84,665 

 

87,782 

 

 

 

 

 

 

 

 

 

Other income, net

 

11,093 

 

8,096 

 

8,044 

 

Interest expense, net

 

(16,157)

 

(13,594)

 

(14,002)

 

    Income before income taxes

 

91,538 

 

79,167 

 

81,824 

 

Income tax provision

 

(33,820)

 

(28,170)

 

(29,056)

 

Net Income

$

57,718 

$

50,997 

$

52,768 

 

 

 

 

 

 

 

 

 

Earnings Per Share of Common Stock

 

 

 

 

 

 

 

(basic and diluted)

$

2.50 

$

2.21 

$

2.38 

 

 

 

 

 

 

 

 

 

Dividends per share of common stock

$

1.49 

$

1.46 

$

1.43 

 

 

 

 

 

 

 

 

 

Average Shares Outstanding

 

 

 

 

 

 

 

 (basic and diluted)

 

23,114 

 

23,070 

 

22,197 

 

 

 

 

 

 

 

 

 

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

 




55





MGE Energy, Inc.

Consolidated Statements of Cash Flows

(In thousands)

 

 

For the years ended December 31,

 

 

2010 

 

2009 

 

2008 

Operating Activities:

 

 

 

 

 

 

    Net income

$

57,718 

$

50,997 

$

52,768 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

37,960 

 

41,080 

 

39,273 

        Deferred income taxes

 

25,381 

 

17,710 

 

8,583 

        Provision for doubtful receivables

 

2,805 

 

3,409 

 

4,273 

        AFUDC-equity funds

 

(301)

 

(473)

 

(858)

        Employee benefit plan expenses

 

14,748 

 

7,167 

 

7,891 

        Equity earnings in ATC

 

(8,501)

 

(8,173)

 

(7,241)

        Gain on sale of investments

 

(43)

 

(115)

 

(3,113)

        Gain on sale of property

 

(3,153)

 

(69)

 

(295)

        Other items

 

2,598 

 

2,174 

 

1,857 

    Changes in working capital items:

 

 

 

 

 

 

        Receivable – margin account

 

1,159 

 

11,256 

 

(12,478)

        Trade and other receivables, net

 

(8,191)

 

11,188 

 

(6,912)

        Inventories

 

3,755 

 

9,972 

 

(12,538)

        Unbilled revenues

 

(41)

 

5,522 

 

(4,331)

        Prepaid taxes

 

7,540 

 

(14,365)

 

(975)

        Other current assets

 

(977)

 

2,407 

 

(1,968)

        Accounts payable

 

(2,895)

 

(9,037)

 

1,202 

        Reserve for fuel refund

 

 

269 

 

5,506 

        Other current liabilities

 

(4,195)

 

(4,573)

 

308 

    Dividend income from ATC

 

6,667 

 

6,285 

 

5,272 

    Cash contributions to pension and other postretirement plans

 

(16,901)

 

(15,278)

 

(7,665)

    Other noncurrent items, net

 

8,900 

 

556 

 

6,153 

            Cash Provided by Operating Activities

 

124,033 

 

117,909 

 

74,712 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(60,082)

 

(77,929)

 

(105,777)

    Capital contributions to investments

 

(810)

 

(3,701)

 

(3,678)

    Repayment (Advance) to WEPCO for ATC Elm Road Work

 

 

3,300 

 

(330)

    Proceeds from sale of investments

 

161 

 

114 

 

3,612 

    Proceeds from sale of property

 

3,358 

 

82 

 

304 

    Other

 

(12)

 

(1,841)

 

1,587 

            Cash Used for Investing Activities

 

(57,385)

 

(79,975)

 

(104,282)

Financing Activities:

 

 

 

 

 

 

    Issuance of common stock, net

 

 

6,275 

 

30,997 

    Cash dividends paid on common stock

 

(34,370)

 

(33,693)

 

(31,780)

    Repayment of long-term debt

 

(16,527)

 

 

(30,000)

    Issuance of long-term debt

 

80,000 

 

 

40,000 

    Increase (decrease) in short-term debt

 

(92,000)

 

(10,000)

 

21,000 

    Other

 

(1,345)

 

82 

 

(330)

            Cash Provided by (Used for) Financing Activities

 

(64,242)

 

(37,336)

 

29,887 

    Change in Cash and Cash Equivalents:

 

2,406 

 

598 

 

317 

    Cash and cash equivalents at beginning of period

 

4,704 

 

4,106 

 

3,789 

    Cash and cash equivalents at end of period

$

7,110 

$

4,704 

$

4,106 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Interest paid

$

18,643 

$

16,577 

$

18,709 

    Income taxes paid

$

10,373 

$

24,172 

$

21,129 

    Income taxes received

$

(9,043)

$

(1)

$

(185)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



56





MGE Energy, Inc.

Consolidated Balance Sheets

(In thousands)

 

 

At December 31,

ASSETS

 

2010 

 

2009 

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

7,110 

$

4,704 

    Receivable - margin account

 

2,501 

 

3,495 

    Accounts receivable, less reserves of $3,994 and $3,701, respectively

 

40,153 

 

35,309 

    Other accounts receivable, less reserves of $595 and $541, respectively

 

4,082 

 

3,041 

    Unbilled revenues

 

29,220 

 

29,179 

    Materials and supplies, at average cost

 

17,642 

 

15,931 

    Fossil fuel

 

6,758 

 

7,870 

    Stored natural gas, at average cost

 

22,839 

 

27,193 

    Prepaid taxes

 

22,496 

 

30,036 

    Regulatory assets - current

 

1,732 

 

    Other current assets

 

7,769 

 

8,323 

        Total Current Assets

 

162,302 

 

165,081 

Other long-term receivables

 

2,013 

 

2,928 

Regulatory assets

 

121,085 

 

113,375 

Other deferred assets and other

 

8,641 

 

7,282 

Property, Plant, and Equipment:

 

 

 

 

    Property, Plant, and Equipment, Net

 

857,572 

 

719,797 

    Construction work in progress

 

110,435 

 

219,967 

        Total Property, Plant, and Equipment

 

968,007 

 

939,764 

Investments

 

55,845 

 

53,455 

        Total Assets

$

1,317,893 

$

1,281,885 

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

1,667 

$

1,528 

    Short-term debt

 

22,500 

 

64,500 

    Accounts payable

 

32,555 

 

35,839 

    Accrued interest and taxes

 

3,990 

 

4,028 

    Accrued payroll related items

 

8,525 

 

7,870 

    Deferred income taxes

 

2,398 

 

    Other current liabilities

 

9,577 

 

13,371 

        Total Current Liabilities

 

81,212 

 

127,138 

Other Credits:

 

 

 

 

    Deferred income taxes

 

166,774 

 

139,850 

    Investment tax credit - deferred

 

2,081 

 

2,394 

    Regulatory liabilities

 

23,772 

 

18,477 

    Accrued pension and other postretirement benefits

 

123,648 

 

122,946 

    Other deferred liabilities and other

 

60,975 

 

48,343 

        Total Other Credits

 

377,250 

 

332,010 

Capitalization:

 

 

 

 

    Common shareholders' equity:

 

 

 

 

        Common Stock - $1 par value - 50,000 shares authorized; 23,114 shares issued

 

23,114 

 

23,114 

        Additional paid-in capital

 

316,268 

 

316,268 

        Retained earnings

 

185,556 

 

162,208 

        Accumulated other comprehensive income, net of tax

 

142 

 

205 

        Total Common Shareholders' Equity

 

525,080 

 

501,795 

    Long-term debt

 

334,351 

 

320,942 

        Total Capitalization

 

859,431 

 

822,737 

Commitments and contingencies (see Footnote 18)

 

 

        Total Liabilities and Capitalization

$

1,317,893 

$

1,281,885 

 

 

 

 

 

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



57





MGE Energy, Inc.

Consolidated Statements of Common Equity and Comprehensive Income

(In thousands, except per-share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Comprehensive

 

 

 

Shares

 

Value

 

Capital

 

Earnings

 

(Loss)/Income

 

Income

 

Total

2008 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance – Dec. 31, 2007

21,950 

$

21,950 

$

280,217 

$

123,916 

$

1,643 

 

 

$

427,726 

Net income

 

 

 

 

 

 

52,768 

 

 

$

52,768 

 

52,768 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net unrealized loss on investments,

 

 

 

 

 

 

 

 

 

 

 

 

 

    net of $189 tax

 

 

 

 

 

 

 

 

(282)

 

(282)

 

(282)

    Reclassification of realized gain due

 

 

 

 

 

 

 

 

 

 

 

 

 

    to sale of investments, net of $751 tax

 

 

 

 

 

 

 

 

(1,120)

 

(1,120)

 

(1,120)

    Net unrealized loss on cash flow

 

 

 

 

 

 

 

 

 

 

 

 

 

    hedges, net of $34 tax

 

 

 

 

 

 

 

 

(50)

 

(50)

 

(50)

Total comprehensive income

 

 

 

 

 

 

 

 

 

$

51,316 

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.43 per share)

 

 

 

 

 

 

(31,780)

 

 

 

 

 

(31,780)

Common stock issued, net

955 

 

955 

 

29,985 

 

 

 

 

 

 

 

30,940 

Ending Balance – Dec. 31, 2008

22,905 

$

22,905 

$

310,202 

$

144,904 

$

191 

 

 

$

478,202 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

50,997 

 

 

$

50,997 

 

50,997 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net unrealized gain on investments,

 

 

 

 

 

 

 

 

 

 

 

 

 

    net of $10 tax

 

 

 

 

 

 

 

 

14 

 

14 

 

14 

Total comprehensive income

 

 

 

 

 

 

 

 

 

$

51,011 

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.46 per share)

 

 

 

 

 

 

(33,693)

 

 

 

 

 

(33,693)

Common stock issued, net

209 

 

209 

 

6,066 

 

 

 

 

 

 

 

6,275 

Ending Balance – Dec. 31, 2009

23,114 

$

23,114 

$

316,268 

$

162,208 

$

205 

 

 

$

501,795 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

57,718 

 

 

$

57,718 

 

57,718 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net unrealized loss on investments,

 

 

 

 

 

 

 

 

 

 

 

 

 

    net of $42 tax

 

 

 

 

 

 

 

 

(63)

 

(63)

 

(63)

Total comprehensive income

 

 

 

 

 

 

 

 

 

$

57,655 

 

 

Common stock dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

($1.49 per share)

 

 

 

 

 

 

(34,370)

 

 

 

 

 

(34,370)

Ending Balance – Dec. 31, 2010

23,114 

$

23,114 

$

316,268 

$

185,556 

$

142 

 

 

$

525,080 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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



58





Madison Gas and Electric Company

 

Consolidated Statements of Income

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31,

 

 

 

2010 

 

2009 

 

2008 

 

Operating Revenues:

 

 

 

 

 

 

 

    Regulated electric revenues

$

360,729 

$

332,324 

$

345,962 

 

    Regulated gas revenues

 

165,915 

 

192,334 

 

242,598 

 

    Nonregulated revenues

 

5,947 

 

9,161 

 

7,433 

 

        Total Operating Revenues

 

532,591 

 

533,819 

 

595,993 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

    Fuel for electric generation

 

41,947 

 

36,879 

 

54,748 

 

    Purchased power

 

71,239 

 

85,098 

 

74,676 

 

    Cost of gas sold

 

103,784 

 

123,062 

 

171,545 

 

    Other operations and maintenance

 

163,168 

 

144,429 

 

150,677 

 

    Depreciation and amortization

 

37,960 

 

41,080 

 

39,273 

 

    Other general taxes

 

17,058 

 

17,858 

 

16,793 

 

    Income tax provision

 

29,556 

 

23,973 

 

24,837 

 

        Total Operating Expenses

 

464,712 

 

472,379 

 

532,549 

 

Operating Income

 

67,879 

 

61,440 

 

63,444 

 

 

 

 

 

 

 

 

 

Other Income and Deductions:

 

 

 

 

 

 

 

    AFUDC - equity funds

 

301 

 

473 

 

858 

 

    Equity in earnings in ATC

 

8,501 

 

8,173 

 

7,241 

 

    Income tax provision

 

(4,749)

 

(3,338)

 

(2,289)

 

    Other (deductions) income, net

 

2,715 

 

(615)

 

(2,556)

 

        Total Other Income and Deductions

 

6,768 

 

4,693 

 

3,254 

 

    Income before interest expense

 

74,647 

 

66,133 

 

66,698 

 

 

 

 

 

 

 

 

 

Interest Expense:

 

 

 

 

 

 

 

    Interest on long-term debt

 

18,800 

 

16,417 

 

16,133 

 

    Other interest, net

 

(2,500)

 

158 

 

1,044 

 

    AFUDC - borrowed funds

 

(118)

 

(194)

 

(356)

 

        Net Interest Expense

 

16,182 

 

16,381 

 

16,821 

 

Net Income

$

58,465 

$

49,752 

$

49,877 

 

Less Net Income Attributable to Noncontrolling Interest, net of tax

 

(20,740)

 

(13,883)

 

(12,304)

 

Net Income Attributable to MGE

$

37,725 

$

35,869 

$

37,573 

 

 

 

 

 

 

 

 

 

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

 



59





Madison Gas and Electric Company

Consolidated Statements of Cash Flows

(In thousands)

 

 

For the years ended December 31,

 

 

2010 

 

2009 

 

2008 

Operating Activities:

 

 

 

 

 

 

    Net income

$

58,465 

$

49,752 

$

49,877 

    Items not affecting cash:

 

 

 

 

 

 

        Depreciation and amortization

 

37,960 

 

41,080 

 

39,273 

        Deferred income taxes

 

24,354 

 

16,508 

 

8,454 

        Provision for doubtful receivables

 

2,805 

 

3,409 

 

4,273 

        AFUDC-equity funds

 

(301)

 

(473)

 

(858)

        Employee benefit plan expenses

 

14,748 

 

7,167 

 

7,891 

        Equity earnings in ATC

 

(8,501)

 

(8,173)

 

(7,241)

        Gain on sale of investments

 

(39)

 

 

(765)

        Gain on sale of property

 

(3,153)

 

(69)

 

(295)

        Other items

 

3,128 

 

2,633 

 

3,764 

    Changes in working capital items:

 

 

 

 

 

 

        Receivable – margin account

 

1,159 

 

11,256 

 

(12,478)

        Trade and other receivables, net

 

(6,271)

 

11,112 

 

(6,973)

        Inventories

 

3,755 

 

9,972 

 

(12,538)

        Unbilled revenues

 

(41)

 

5,522 

 

(4,331)

        Prepaid taxes

 

(2,667)

 

(4,820)

 

(764)

        Other current assets

 

(978)

 

2,411 

 

(1,970)

        Accounts payable

 

(2,913)

 

(9,004)

 

(658)

        Accrued interest and taxes

 

1,169 

 

(4,182)

 

159 

        Reserve for fuel refund

 

 

269 

 

5,506 

        Other current liabilities

 

(4,065)

 

(4,746)

 

362 

    Dividend income from ATC

 

6,667 

 

6,285 

 

5,272 

    Cash contributions to pension and other postretirement plans

 

(16,901)

 

(15,278)

 

(7,665)

    Other noncurrent items, net

 

6,812 

 

633 

 

6,012 

            Cash Provided by Operating Activities

 

115,192 

 

121,264 

 

74,307 

Investing Activities:

 

 

 

 

 

 

    Capital expenditures

 

(60,082)

 

(77,929)

 

(105,777)

    Capital contributions to investments

 

(710)

 

(3,551)

 

(3,518)

    Repayment (Advance) to WEPCO for ATC Elm Road Work

 

 

3,300 

 

(330)

    Proceeds from sale of investments

 

117 

 

 

1,070 

    Proceeds from sale of property

 

3,358 

 

82 

 

304 

    Other

 

(119)

 

(246)

 

1,402 

            Cash Used for Investing Activities

 

(57,436)

 

(78,344)

 

(106,849)

Financing Activities:

 

 

 

 

 

 

    Cash dividends paid to parent by MGE

 

(26,150)

 

(19,318)

 

    Cash dividends paid to parent from Power Elm Road,

 

 

 

 

 

 

    Power West Campus and Transco

 

(58,400)

 

(12,648)

 

(12,702)

    Capital contribution from parent

 

 

 

7,500 

    Equity contribution received by Power Elm Road,

 

 

 

 

 

 

    Power West Campus and Transco

 

710 

 

3,551 

 

37,527 

    Affiliate Financing of Elm Road

 

(4,193)

 

4,151 

 

    Repayment of long-term debt

 

(16,527)

 

 

(30,000)

    Issuance of long-term debt

 

80,000 

 

 

40,000 

    Decrease in short-term debt

 

(30,000)

 

(17,500)

 

(10,000)

    Other

 

(1,176)

 

 

(324)

            Cash Provided by (Used for) Financing Activities

 

(55,736)

 

(41,764)

 

32,001 

    Change in Cash and Cash Equivalents:

 

2,020 

 

1,156 

 

(541)

    Cash and cash equivalents at beginning of period

 

2,474 

 

1,318 

 

1,859 

    Cash and cash equivalents at end of period

$

4,494 

$

2,474 

$

1,318 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

    Interest paid

$

18,363 

$

15,960 

$

16,660 

    Income taxes paid

$

$

25 

$

4,514 

    Income taxes received

$

(5)

$

(1)

$

(185)

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



60





Madison Gas and Electric Company

Consolidated Balance Sheets

(In thousands)

 

 

At December 31,

ASSETS

 

2010 

 

2009 

Current Assets:

 

 

 

 

    Cash and cash equivalents

$

4,494 

$

2,474 

    Receivable - margin account

 

2,501 

 

3,495 

    Accounts receivable, less reserves of $3,994 and $3,701, respectively

 

40,153 

 

35,279 

    Affiliate receivables

 

638 

 

2,572 

    Other accounts receivable, less reserves of $595 and $541, respectively

 

4,063 

 

3,038 

    Unbilled revenues

 

29,220 

 

29,179 

    Materials and supplies, at average cost

 

17,642 

 

15,931 

    Fossil fuel

 

6,758 

 

7,870 

    Stored natural gas, at average cost

 

22,839 

 

27,193 

    Prepaid taxes

 

21,500 

 

18,833 

    Regulatory assets - current

 

1,732 

 

    Other current assets

 

7,742 

 

8,295 

        Total Current Assets

 

159,282 

 

154,159 

Other long-term receivables

 

1,367 

 

2,149 

Affiliate receivable long-term

 

7,413 

 

5,972 

Regulatory assets

 

121,085 

 

113,375 

Other deferred assets and other

 

6,970 

 

5,963 

Property, Plant, and Equipment:

 

 

 

 

    Property, Plant, and Equipment, Net

 

857,442 

 

719,417 

    Construction work in progress

 

110,435 

 

219,967 

        Total Property, Plant, and Equipment

 

967,877 

 

939,384 

Investments:

 

 

 

 

    Investments in ATC

 

54,200 

 

51,656 

    Other Investments

 

747 

 

897 

        Total Investments

 

54,947 

 

52,553 

        Total Assets

$

1,318,941 

$

1,273,555 

 

 

 

 

 

LIABILITIES AND CAPITALIZATION

 

 

 

 

Current Liabilities:

 

 

 

 

    Long-term debt due within one year

$

1,667 

$

    Short-term debt

 

3,500 

 

33,500 

    Accounts payable

 

32,524 

 

35,826 

    Affiliate payables

 

24 

 

4,217 

    Accrued interest and taxes

 

7,294 

 

6,125 

    Accrued payroll related items

 

8,525 

 

7,870 

    Deferred income taxes

 

2,398 

 

    Other current liabilities

 

9,472 

 

13,174 

        Total Current Liabilities

 

65,404 

 

100,714 

Other Credits:

 

 

 

 

    Deferred income taxes

 

164,399 

 

138,486 

    Investment tax credit - deferred

 

2,081 

 

2,394 

    Regulatory liabilities

 

23,772 

 

18,477 

    Accrued pension and other postretirement benefits

 

123,648 

 

122,946 

    Other deferred liabilities and other

 

60,977 

 

48,343 

        Total Other Credits

 

374,877 

 

330,646 

Capitalization:

 

 

 

 

    Common shareholders' 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

 

192,480 

 

180,905 

        Accumulated other comprehensive income, net of tax

 

71 

 

112 

         Total Common Shareholders' Equity

 

402,316 

 

390,782 

    Noncontrolling interest

 

141,993 

 

178,943 

        Total Equity