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Pension Plans and Other Postretirement Benefits
 12 Months Ended
Dec. 31, 2013
Compensation and Retirement Disclosure [Abstract]  
Pension Plans and Other Postretirement Benefits

Pension Plans and Other Postretirement Benefits - MGE Energy and MGE.

MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits, and two defined contribution 401(k) benefit plans for its employees and retirees. MGE's costs for the 401(k) plans were $2.3 million, $2.1 million, and $1.8 million in 2013, 2012, and 2011, respectively. A measurement date of December 31 is utilized for all pension and postretirement benefit plans.

All employees hired after December 31, 2006, have been enrolled in the defined contribution pension plan, rather than the defined benefit pension plan previously in place.

a.       Benefit Obligations.

        Other Postretirement  
 (In thousands) Pension Benefits  Benefits 
 Change in benefit obligations: 2013 2012  2013 2012 
 Net benefit obligation at beginning of year$315,505$283,668 $92,605$97,644 
 Service cost 7,705 7,139  2,380 2,528 
 Interest cost 12,656 12,704  3,871 4,431 
 Plan participants' contributions 0 0  665 718 
 Plan amendments(a) 0 (912)  (20,915) 0 
 Actuarial (gain) loss (40,335) 22,266  (9,687) (9,748) 
 Gross benefits paid (11,573) (9,360)  (2,998) (3,155) 
  Less: federal subsidy on benefits paid 0 0  179 187 
 Benefit obligation at end of year$283,958$315,505 $66,100$92,605 

  • In 2013, MGE capped the amount it pays each year toward retiree medical premiums at 175% of the 2013 employer contribution for qualified employees.

 

The accumulated benefit obligation for the defined benefit pension plans at the end of 2013 and 2012 was $254.5 million and $272.5 million, respectively.

      Other Postretirement  
   Pension Benefits Benefits 
 Weighted-average assumptions used to       
 determine end of year benefit obligations: 20132012 20132012 
 Discount rate 4.88%4.09% 4.69%4.14% 
 Rate of compensation increase 3.90%4.60% N/AN/A 

The following table shows assumed health care cost trend rates at December 31:

   20132012 
 Health care cost trend rate assumed for next year 7.0%7.5% 
 Rate to which the cost trend rate is assumed to     
 decline (the ultimate trend rate) 5.0%5.0% 
 Year that the rate reaches the ultimate trend rate 20182018 

The assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.

 

The following table shows how an assumed 1% increase or 1% decrease in health care cost trends could impact postretirement benefits in 2013 dollars:

 (In thousands) 1% Increase  1% Decrease 
 Effect on other postretirement benefit obligation$1,286 $(1,840) 

In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law authorizing Medicare to provide prescription drug benefits to retirees. For the year ended December 31, 2013, the subsidy due to MGE was $0.2 million.

 

b.       Plan Assets.

        Other Postretirement  
 (In thousands) Pension Benefits  Benefits 
 Change in plan assets: 2013 2012  2013 2012 
 Fair value of plan assets at beginning of year$212,277$173,311 $32,124$23,456 
 Actual return on plan assets 45,816 27,511  5,000 3,046 
 Employer contributions 30,878 20,815  2,811 8,059 
 Plan participants' contributions 0 0  665 718 
 Gross benefits paid (11,573) (9,360)  (2,998) (3,155) 
 Fair value of plan assets at end of year$277,398$212,277 $37,602$32,124 

The expected long-term rate of return on the pension plan assets is 8.10% for both 2013 and 2012.

c.       Explanation of Long-Term Rate of Return.

 

MGE employs a building-block approach in determining the expected long-term rate of return for asset classes. Historical markets are studied and long-term historical relationships among asset classes are analyzed, consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as interest rates and dividend yields, are evaluated before long-term capital market assumptions are determined.

 

The expected long-term nominal rate of return for plan assets is primarily a function of expected long-term real rates of return for component asset classes and the plan's target asset allocation in conjunction with an inflation assumption. Peer data and historical returns are reviewed to check for appropriateness.

 

The asset allocation for MGE's pension plans at the end of 2013 and 2012, and the target allocation for 2014, by asset category, follows:

      Percentage of Plan
   Target  Assets at Year End
   Allocation  2013 2012
 Equity securities 63.0%  66.0% 64.0%
 Debt securities 30.0%  28.0% 29.0%
 Real estate 7.0%  6.0% 7.0%
 Total 100.0%  100.0% 100.0%

d.       Investment Strategy.

 

MGE employs a total return investment approach whereby a mix of equities, fixed income, and real estate investments are used to maximize the expected long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan-funded status, and corporate financial condition. The investment portfolio contains a diversified blend of equity, fixed income, and real estate investments. Target asset allocations are as follows: 45.5% United States equity, 17.5% non-United States equity, 30.0% fixed income, and 7.0% real estate. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews and liability measurements.

e.       Concentrations of Credit Risk.

 

       MGE evaluated its pension and other postretirement benefit plans' asset portfolios for the existence of significant concentrations of credit risk as of December 31, 2013. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, and foreign country. As of December 31, 2013, there were no significant concentrations (defined as greater than 10 percent of plan assets) of risk in MGE pension and postretirement benefit plan assets.

f.        Fair Value Measurements of Plan Assets.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:

 

Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.

 

Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.

 

Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.

 

The following is a description of the valuation methodologies used for assets measured at fair value as of December 31, 2013:

 

Cash and Cash Equivalents – This category includes highly liquid investments with maturities of less than three months which are traded in active markets.

 

Equity Securities – These securities consist of U.S. and international stock funds. The U.S. stock funds are primarily invested in domestic equities. Securities in these funds are typically priced using the closing price from the applicable exchange, NYSE, NASDAQ, etc. The international funds are composed of international equities. Securities are priced using the closing price from the appropriate local stock exchange.

 

Fixed Income Securities – These securities consist of U.S. bond funds and short-term funds. U.S. bond funds are priced by a pricing agent using inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. The short-term funds are valued initially at cost and adjusted for amortization of any discount or premium.

 

Real Estate – The fair value of real estate properties is determined through an external appraisal process.

 

Insurance Continuance Fund (ICF) – The fair value of the ICF is based on largely unobservable inputs, which are based on a commingled interest.

 

The fair value of MGE's plan assets, by asset category are as follows:

  Fair Value as of December 31, 2013 
 (In thousands) Total Level 1 Level 2 Level 3 
 Cash and Cash Equivalents$5,109$5,109$0$0 
 Equity Securities:         
  U.S. Large Cap 96,258 0 96,258 0 
  U.S. Mid Cap 22,741 0 22,741 0 
  U.S. Small Cap 28,854 0 28,854 0 
  International Blend 54,873 0 54,873 0 
 Fixed Income Securities:         
  Short-Term Fund 4,789 0 4,789 0 
  High Yield Bond 15,127 0 15,127 0 
  Long Duration Bond 66,193 0 66,193 0 
 Real Estate 19,628 0 0 19,628 
 Insurance Continuance Fund 1,428 0 0 1,428 
  Total$315,000$5,109$288,835$21,056 
           
  Fair Value as of December 31, 2012 
 (In thousands) Total Level 1 Level 2 Level 3 
 Cash and Cash Equivalents$5,627$5,627$0$0 
 Equity Securities:         
  U.S. Large Cap 68,671 0 68,671 0 
  U.S. Mid Cap 16,741 0 16,741 0 
  U.S. Small Cap 21,222 0 21,222 0 
  International Blend 44,200 0 44,200 0 
 Fixed Income Securities:         
  Short-Term Fund 4,231 0 4,231 0 
  High Yield Bond 11,587 0 11,587 0 
  Long Duration Bond 53,515 0 53,515 0 
 Real Estate 17,141 0 0 17,141 
 Insurance Continuance Fund 1,466 0 0 1,466 
  Total$244,401$5,627$220,167$18,607 

No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2013.

 

The following table summarizes the changes in the fair value of the Level 3 plan assets.

   Level 3 Assets 
     Insurance 
     Continuance 
 (In thousands) Real Estate Fund 
 Balance as of January 1, 2012$15,565$906 
  Actual return on plan assets:     
  Relating to assets still held at the reporting date 682 33 
  Purchases, sales, and settlements 894 527 
  Transfers in and/or out of Level 3 0 0 
 Balance as of December 31, 2012$17,141$1,466 
  Actual return on plan assets:     
  Relating to assets still held at the reporting date 1,565 42 
  Purchases, sales, and settlements 922 (80) 
  Transfers in and/or out of Level 3 0 0 
 Balance as of December 31, 2013$19,628$1,428 

g.        Other Postretirement Benefits.

 

The fair value of plan assets for the postretirement benefit plans is $37.6 million and $32.1 million at the end of 2013 and 2012, respectively. The expected long-term rate of return on these plan assets is 6.79% and 7.26% for 2013 and 2012, respectively.

 

Of the above amounts, $31.1 million and $25.0 million at the end of 2013 and 2012, respectively, were held in the master pension trust and are allocable to postretirement health expenses. The target asset allocation and investment strategy for the portion of assets held in the master pension trust are the same as that explained for MGE's pension plans.

 

The remainder of postretirement benefit assets are held either in an insurance continuance fund for the payment of retiree life benefits or a health benefit trust for payment of retiree health claims. There is no formal target asset allocation for these assets, but the intent is to seek interest income and maintain stability of principal.

 

h.       Funded Status.

 

The funded status at the end of the year, and the related amounts recognized on the consolidated balance sheet are as follows:

        Other Postretirement  
 (In thousands) Pension Benefits  Benefits 
 Funded status, end of year 2013 2012  2013 2012 
 Fair value of plan assets$277,398$212,277 $37,602$32,124 
 Benefit obligations 283,958 315,505  66,100 92,605 
 Funded status$(6,560)$(103,228) $(28,498)$(60,481) 

At December 31, 2013, MGE Energy and MGE included a $15.1 million long-term asset, a $1.0 million current liability, a $49.2 million long-term liability, and a $24.6 million regulatory asset in the consolidated balance sheets to reflect the unfunded status of the plans.

 

At December 31, 2012, MGE Energy and MGE included a $0.9 million current liability, a $162.8 million long-term liability, and a $134.8 million regulatory asset in the consolidated balance sheets to reflect the unfunded status of the plans.

      Other Postretirement 
 (In thousands) Pension Benefits  Benefits 
 Amounts recognized as regulatory asset 2013 2012  2013 2012 
 Net actuarial loss$37,499$112,637 $7,761$21,529 
 Prior service cost (209) 105  (20,495) 530 
 Transition obligation 0 0  35 38 
 Total$37,290$112,742 $(12,699)$22,097 

The projected benefit obligation and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets were as follows:

 (In thousands) Pension Benefits 
 Projected benefit obligation in excess of plan assets 2013 2012 
 Projected benefit obligation, end of year$21,631$315,505 
 Fair value of plan assets, end of year 0 212,277 

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with a projected benefit obligation in excess of plan assets and an accumulated benefit obligation in excess of plan assets were as follows:

 (In thousands) Pension Benefits 
 Accumulated benefit obligation in excess of plan assets 2013 2012 
 Projected benefit obligation, end of year$21,631$315,505 
 Accumulated benefit obligation, end of year 19,795 272,462 
 Fair value of plan assets, end of year 0 212,277 

i.       Expected Cash Flows.

 

MGE does not expect to make contributions to the plans for 2014 or 2015. The contributions for years after 2015 are not yet currently estimated. MGE has adopted the asset smoothing as permitted in accordance with the Pension Protection Act of 2006, including modifications made by WRERA.

 

Due to uncertainties in the future economic performance of plan assets, discount rates, and other key assumptions, estimated contributions are subject to change. MGE may also elect to make additional discretionary contributions.

 

In 2013, MGE made $34.8 million in employer contributions to its pension and postretirement plans.

 

j.       Benefit Payments.

 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

   Pension Other Postretirement 
     Gross Expected Net 
   Pension Postretirement Medicare Part D Postretirement 
 (In thousands) Benefits Benefits Subsidy Benefits 
 2014$11,474 2,924 (191)$2,733 
 2015 12,223 3,056 (219) 2,837 
 2016 12,844 3,308 (246) 3,062 
 2017 13,633 3,740 (266) 3,474 
 2018 14,755 4,198 (289) 3,909 
 2019 - 2023 87,676 27,110 (1,866) 25,244 

k.       Net Periodic Cost.

 

MGE has elected to recognize the cost of its transition obligation (the accumulated postretirement benefit obligation as of January 1, 1993) by amortizing it on a straight-line basis over 20 years.

 (In thousands) Pension Benefits Other Postretirement Benefits
 Components of net periodic benefit cost 2013 2012 2011 2013 2012 2011
 Service cost$7,705$7,139$6,013$2,380$2,528$1,920
 Interest cost 12,656 12,704 12,281 3,871 4,431 3,980
 Expected return on assets (19,027) (15,182) (14,034) (2,176) (1,741) (1,584)
 Special termination benefits 0 0 13 0 0 0
 Amortization of:            
  Transition obligation 0 0 0 3 425 427
  Prior service cost 314 430 433 110 110 110
  Actuarial loss 8,014 8,288 3,771 1,236 2,346 566
 Net periodic benefit cost$9,662$13,379$8,477$5,424$8,099$5,419
 Weighted-average assumptions used to             
 determine net periodic cost:            
 Discount rate 4.09% 4.50% 5.36% 4.14% 4.55% 5.42%
 Expected return on plan assets 8.10% 8.10% 8.25% 6.79% 7.26% 7.39%
 Rate of compensation increase 4.60% 4.59% 4.59% N/A N/A N/A

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in the assumed health care cost trend rates would have had the following effect:

 (In thousands) 1% Increase  1% Decrease 
 Effect on total service and interest cost components$1,104 $(879) 

The PSCW has allowed MGE to defer the 2009 incremental pension and OPRB costs above the amounts recovered in rates. During both the years ended December 31, 2013 and 2012, $1.2 million has been recovered in rates.