| MGE ENERGY INC registrant include those factors discussed in a) Item 1A Risk Factors, b) Item 7 |
| Managementapstas Discussion and Analysis of Financial Condition and Results of Operations, c) Item 8 |
| Financial Statements and Supplementary Data, d) other factors discussed in filings made by MGE Energy and MGE 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 SECapstas public reference room at 100 F Street, NE, Washington, DC 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 are also available to the public from commercial document retrieval services and the web site maintained by the SEC at http://www |
| Our Internet site addresses are www |
| mgeenergy |
| On our sites, we have made available, free of charge, our most recent annual report on Form 10-K and proxy statement |
| We also provide, free of charge, our other filings with the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC Information contained on MGE Energyapstas and MGEapstas web sites shall not be deemed incorporated into, or to be a part of, this report |
| Definitions 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 AMR automated meter reading ANR ANR Pipeline Company APB Accounting Principles Board APBO Accumulated Postretirement Benefit Obligation ARB Accounting Research Bulletin ARC Asset Retirement Cost ATC American Transmission Company LLC ARO Asset Retirement Obligation Blount Blount Station BOCM Banc One Capital Markets, Inc |
| CO[2] carbon dioxide Columbia Columbia Energy Center ComEd Commonwealth Edison Company, a unit of Chicago-based Exelon Corp |
| cooling degree days Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, increasing demand for cooling CPCN Certificate of Public Convenience and Necessity CWDC Central Wisconsin Development Corporation DNR Wisconsin Department of Natural Resources Dth dekatherms EITF Emerging Issues Task Force Elm Road Elm Road Generating Station EPA US Environmental Protection Agency EPC Engineering, Procurement, and Construction FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission FIN FASB Interpretation Nodtta FSP FASB Staff Position Nodtta FTR Financial Transmission Rights GCIM gas cost incentive mechanism heating degree days (HDD) Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, increasing demand for heating interconnection agreement Generation-Transmission Interconnection Agreement Kewaunee Kewaunee Nuclear Power Plant kV kilovolt kWh kilowatt-hour LIBOR London Inter Bank Offer Rate LMP Locational Marginal Pricing MACT Maximum available control technology MAGAEL MAGAEL, LLC MAIN Mid-America Interconnected Network, 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) Moodyapstas Moodyapstas Investors Service, Inc |
| MRO Midwest Reliability Organization MW megawatt MWh megawatt-hour Nasdaq The Nasdaq Stock Market NNG Northern Natural Gas Company NO[x] nitrogen oxide NO[x] SIP Call Nitrogen oxide State Implementation Plan (federal rule 40 CFR Part 96, commonly known as the NO[x] SIP Call) PGA Purchased Gas Adjustment clause PJM PJM Interconnection, LLC (a regional transmission organization) PSCW Public Service Commission of Wisconsin RTO Regional Transmission Organization S&P Standard & Poorapstas Ratings Group, a division of McGraw-Hill Companies SAB Staff Accounting Bulletin SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards (issued by the FASB) SO[2] sulfur dioxide the State State of Wisconsin Stock Plan Dividend Reinvestment and Direct Stock Purchase Plan of MGE Energy Super Critical Super Critical, LLC UW University of Wisconsin at Madison VIE Variable Interest Entity WCCF West Campus Cogeneration Facility 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 PART I Item 1 |
| 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 through its wholly owned subsidiaries MGE Power, MGE Power Elm Road and MGE Power West Campus |
| • Transmission Investments- investing in companies in the business of providing electric transmission services, such as ATC In the 4^th quarter of 2005, the investment in ATC was transferred from the electric utility to MGE Transco |
| • 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 Corporate, MGE Construct, MAGAEL and CWDC MGEapstas utility operations represent a substantial portion of the assets, liabilities, revenues, expenses, and operations of MGE Energy |
| MGE Energyapstas nonregulated energy operations currently relate to the ownership of a controlling interest in the electric generation plant of a natural gas-fired cogeneration facility on the UW campus, and an undivided 8dtta33prca ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin |
| As a public utility, MGE is subject to regulation by the PSCW and the FERC The PSCW has authority to regulate most aspects of MGEapstas 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 MGEapstas business |
| MGE Energyapstas subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal |
| See "e Environmental "e 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 |
| Electric Utility Operations MGE generates and distributes electricity in a service area covering the 250-square-mile area of Dane County, Wisconsin |
| Its service area includes the city of Madison, Wisconsin |
| At December 31, 2005, MGE supplied electric service to nearly 136cmam000 customers, with approximately 121cmam000 located in the cities of Fitchburg, Madison, Middleton, and Monona and 15cmam000 in adjacent areas |
| Of the total number of customers, approximately 86dtta6prca were residential and 13dtta4prca were commercial or industrial |
| Electric revenues for 2005 and 2004 were comprised of the following: Twelve Months Ended December 31, 2005 2004 Residential 33dtta3prca 34dtta9prca Commercial 47dtta7prca 49dtta3prca Industrial 5dtta6prca 5dtta9prca Public authorities (including the UW) 7dtta4prca 7dtta5prca Other utilities and other 6dtta0prca 2dtta4prca Total 100dtta0prca 100dtta0prca Electric operations accounted for approximately 60dtta8prca, 59dtta3prca, and 60dtta2prca of MGEapstas total 2005, 2004, and 2003 regulated revenues, respectively |
| 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, by our ability to obtain a fair return from the PSCW We face risk for the recovery of fuel and purchased power costs when they exceed the base rate established in MGEapstas current rate structure |
| 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 |
| MGE bears significant regulatory risk for the recovery from customers of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure |
| We are subject to environmental laws and regulations which may affects our costs and business plans |
| Our subsidiaries are subject to environmental laws and regulations that may increase our cost of operations, impact or limit our business plans, or expose us to environmental liabilities |
| Numerous environmental regulations govern many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste |
| These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations |
| These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections, and other approvals |
| Both public officials and private individuals may seek to enforce applicable environmental laws and regulations |
| We cannot predict the financial or operational outcome of any related litigation that may arise |
| In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body |
| We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs |
| There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties |
| We cannot assure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us |
| Revised or additional regulations which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have an adverse effect on our results of operations and on our ability to pay dividends on our common stock |
| Our business may be negatively affected by the restructuring of the energy industry |
| MGE cannot predict the impact the new market may ultimately have on its electric operations |
| Also, the ability of MISO to maintain its members is an important factor in the success of its operations |
| 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, • 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 the Elm Road Coal Generating Units We have assumed risks under the agreements related to our undivided 8dtta33prca ownership interest in two 615 MW generating units being constructed in Oak Creek, Wisconsin |
| MGE Power Elm Road is subject to usual construction risks over which we will have limited or no control and which might adversely affect project costs and completion time |
| These risks include, but are not limited to, shortages of, the inability to obtain or the cost of labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions, the inability to obtain necessary permits in a timely manner and changes in applicable laws or regulations, governmental actions and events in the global economy |
| If the final costs for the construction of the Elm Road units exceed the fixed costs allowed in the PSCW order, this excess cannot be recovered from MGE or its customers unless specifically allowed by the PSCW Pr oject costs above the authorized amount, but below the 5prca cap 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, SO[2] allowance 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 value of 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 dlra82dtta5 million of variable-rate debt outstanding at December 31, 2005, including dlra66dtta0 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 may make it more difficult to satisfy our obligations and to pay dividends on our common stock at the current rate |
| 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 funding requirements for these obligations |
| 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 MGEapstas regulated energy business |
| Failure of such counterparties to perform their obligations may result in increased expenses for MGE and may negatively impact the dividend we receive from MGE and, thus, our results of operations and our ability to pay dividends on our common stock |
| 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 |