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Pension Plans and Other Postretirement Benefits
 12 Months Ended
Dec. 31, 2014
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 defined contribution 401(k) benefit plans for its employees and retirees. MGE's costs for the 401(k) plans were $2.5 million, $2.3 million, and $2.1 million in 2014, 2013, and 2012, 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 and Plan Assets.

(In thousands)Pension BenefitsOther Postretirement Benefits
Change in benefit obligations:2014201320142013
Net benefit obligation at beginning of year$283,958 $315,505 $66,100 $92,605
Service cost6,179 7,705 1,339 2,380
Interest cost13,574 12,656 3,166 3,871
Plan participants' contributions--708 665
Plan amendments(a)---(20,915)
Actuarial (gain) loss(b)48,162 (40,335)10,090 (9,687)
Gross benefits paid(11,640)(11,573)(3,113)(2,998)
Less: federal subsidy on benefits paid(c)--188 179
Benefit obligation at end of year$340,233 $283,958 $78,478 $66,100
Change in plan assets:
Fair value of plan assets at beginning of year$277,398 $212,277 $37,602 $32,124
Actual return on plan assets21,907 45,816 2,558 5,000
Employer contributions883 30,878 1,197 2,811
Plan participants' contributions--708 665
Gross benefits paid(11,640)(11,573)(3,113)(2,998)
Fair value of plan assets at end of year$288,548 $277,398 $38,952 $37,602
Funded Status at December 31$(51,685)$(6,560)$(39,526)$(28,498)

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

(b) In 2014, lower discount rates and mortality table updates were the main drivers to the actuarial loss.

(c) 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 years ended December 31, 2014 and 2013, the subsidy due to MGE was $0.2 million.

The accumulated benefit obligation for the defined benefit pension plans at the end of 2014 and 2013 was $304.0 million and $254.5 million, respectively.

The amounts recognized in the consolidated balance sheets to reflect the funded status of the plans at December 31 are as follows:

Pension BenefitsOther Postretirement Benefits
(In thousands)2014201320142013
Long-term asset$-$15,071 $-$-
Current liability(1,025)(945)(65)(13)
Long-term liability(50,660)(20,686)(39,461)(28,485)
Net liability$(51,685)$(6,560)$(39,526)$(28,498)

The following table shows the amounts that have not yet been recognized in our net periodic benefit cost as of December 31 and are recorded as regulatory assets in our consolidated balance sheets:

Pension BenefitsOther Postretirement Benefits
(In thousands)2014201320142013
Net actuarial loss$85,102 $37,499 $17,657 $7,761
Prior service cost(413)(209)(17,827)(20,495)
Transition obligation--32 35
Total$84,689 $37,290 $(138)$(12,699)

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 assets20142013
Projected benefit obligation, end of year$340,233 $21,631
Fair value of plan assets, end of year288,548 -

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 assets20142013
Projected benefit obligation, end of year$340,233 $21,631
Accumulated benefit obligation, end of year304,023 19,795
Fair value of plan assets, end of year288,548 -

b. 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 BenefitsOther Postretirement Benefits
Components of net periodic (benefit) cost:201420132012201420132012
Service cost$6,179 $7,705 $7,139 $1,339 $2,380 $2,528
Interest cost13,574 12,656 12,704 3,166 3,871 4,431
Expected return on assets(22,051)(19,027)(15,182)(2,615)(2,176)(1,741)
Amortization of:
Transition obligation---3 3 425
Prior service (benefit) cost204 314 430 (2,669)110 110
Actuarial loss703 8,014 8,288 252 1,236 2,346
Net periodic (benefit) cost$(1,391)$9,662 $13,379 $(524)$5,424 $8,099

c. Plan Assumptions.

The weighted-average assumptions used to determine the benefit obligations were as follows for the years ended December 31:

Pension BenefitsOther Postretirement Benefits
2014201320142013
Discount rate4.11%4.88%3.96%4.69%
Rate of compensation increase3.85%3.90%N/AN/A
Assumed health care cost trend rates:
Health care cost trend rate assumed for next year N/AN/A6.5%7.0%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) N/AN/A5.0%5.0%
Year that the rate reaches the ultimate trend rate N/AN/A20212018

The weighted-average assumptions used to determine the net periodic cost were as follows for the years ended December 31:

Pension BenefitsOther Postretirement Benefits
201420132012201420132012
Discount rate4.88%4.09%4.50%4.69%4.14%4.55%
Expected rate of return on plan assets8.10%8.10%8.10%7.07%6.79%7.26%
Rate of compensation increase3.93%4.60%4.59%N/AN/AN/A

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 2014 dollars:

(In thousands)1% Increase1% Decrease
Effect on other postretirement benefit obligation$1,465 $(1,852)
Effect on total service and interest cost components75 (101)

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.

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. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio reviews and liability measurements.

The asset allocation for MGE's pension plans at the end of 2014 and 2013, and the target allocation for 2015, by asset category, follows:

Target AllocationPercentage of Plan Assets at Year End
20142013
Equity securities(a)63.0 %62.0 %66.0 %
Fixed income securities30.0 %31.0 %28.0 %
Real estate7.0 %7.0 %6.0 %
Total100.0 %100.0 %100.0 %

(a) Target allocations for equity securities are broken out as follows: 45.5% United States equity,

17.5% non-United States equity.

The fair value of plan assets for the postretirement benefit plans is $39.0 million and $37.6 million at the end of 2014 and 2013, respectively. Of this amount, $32.8 million and $31.1 million at the end of 2014 and 2013, 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 is 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.

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, 2014. 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, 2014, 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.

Pension and other postretirement benefit plan investments are recorded at fair value. See Footnote 11 for more information regarding the fair value hierarchy.

The following is a description of the valuation methodologies used for assets measured at fair value as of December 31, 2014:

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.

Fixed Rate Fund – The fair value of the Fixed Rate fund is determined based on the type of assets held. Public market data and GAAP reported market values are used when available. For all other assets, discounted cash flows are calculated using treasury rates and spreads based on the cash flow timing and quality of assets.

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

Fair Value as of December 31, 2014
(In thousands)TotalLevel 1Level 2Level 3
Equity Securities:
U.S. Large Cap$99,256 $-$99,256 $-
U.S. Mid Cap22,926 -22,926 -
U.S. Small Cap29,353 -29,353 -
International Blend47,650 -47,650 -
Fixed Income Securities:
Short-Term Fund3,776 -3,776 -
High Yield Bond15,492 -15,492 -
Long Duration Bond79,603 -79,603 -
Real Estate23,480 --23,480
Insurance Continuance Fund1,518 --1,518
Fixed Rate Fund4,446 --4,446
Total$327,500 $-$298,056 $29,444
Fair Value as of December 31, 2013
(In thousands)TotalLevel 1Level 2Level 3
Cash and Cash Equivalents$5,109 $5,109 $-$-
Equity Securities:
U.S. Large Cap96,258 -96,258 -
U.S. Mid Cap22,741 -22,741 -
U.S. Small Cap28,854 -28,854 -
International Blend54,873 -54,873 -
Fixed Income Securities:
Short-Term Fund4,789 -4,789 -
High Yield Bond15,127 -15,127 -
Long Duration Bond66,193 -66,193 -
Real Estate19,628 --19,628
Insurance Continuance Fund1,428 --1,428
Total$315,000 $5,109 $288,835 $21,056

No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2014.

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

Level 3 Assets
(In thousands)Real EstateInsurance Continuance FundFixed Rate Fund
Balance as of January 1, 2013$17,141 $1,466 $-
Actual return on plan assets:
Relating to assets still held at the reporting date1,565 42 -
Purchases, sales, and settlements922 (80)-
Transfers in and/or out of Level 3---
Balance as of December 31, 2013$19,628 $1,428 $-
Actual return on plan assets:
Relating to assets still held at the reporting date1,561 44 54
Purchases, sales, and settlements2,291 46 4,392
Transfers in and/or out of Level 3---
Balance as of December 31, 2014$23,480 $1,518 $4,446

g. Expected Cash Flows.

Contributions to the qualified plans for 2015 are expected to be $10 million, which was paid in January 2015. MGE does not expect to make contributions to the plans for 2016. The contributions for years after 2016 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 2014, MGE made $3.3 million in employer contributions to its pension and postretirement plans.

h. Benefit Payments.

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

PensionOther Postretirement Benefits
(In thousands)Pension BenefitsGross Postretirement BenefitsExpected Medicare Part D SubsidyNet Postretirement Benefits
2015$11,944 3,101 (211)2,890
201612,631 3,338 (237)3,101
201713,408 3,757 (258)3,499
201814,613 4,272 (282)3,990
201915,559 4,776 (306)4,470
2020 - 202492,915 29,871 (2,005)27,866