XML 51 R26.htm IDEA: XBRL DOCUMENT v3.8.0.1
Pension Plans and Other Postretirement Benefits
 12 Months Ended
Dec. 31, 2017
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 $3.5 million, $3.1 million, and $2.8 million for the years ended December 31, 2017, 2016, and 2015, 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:2017201620172016
Net benefit obligation at beginning of year$349,556$332,565$78,842$74,935
Service cost5,3835,3651,2311,271
Interest cost12,62512,3932,6662,681
Plan participants' contributions--894767
Actuarial loss(a)37,68911,4122,7492,638
Gross benefits paid(13,984)(12,179)(4,262)(3,637)
Less: federal subsidy on benefits paid(b)--170187
Benefit obligation at end of year$391,269$349,556$82,290$78,842
Change in Plan Assets:
Fair value of plan assets at beginning of year$311,933$290,716$43,177$40,170
Actual return on plan assets56,98724,1817,1043,236
Employer contributions6,7159,2151,5572,641
Plan participants' contributions--894767
Gross benefits paid(13,984)(12,179)(4,262)(3,637)
Fair value of plan assets at end of year$361,651$311,933$48,470$43,177
Funded Status at December 31$(29,618)$(37,623)$(33,820)$(35,665)

(a) In 2017 and 2016, lower discount rates were the main driver of the actuarial loss.

(b) 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, 2017 and 2016, the subsidy due to MGE was $0.2 million.

The accumulated benefit obligation for the defined benefit pension plans as of December 31, 2017 and 2016 was $356.0 million and $319.9 million, respectively.

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

Pension BenefitsOther Postretirement Benefits
(In thousands)2017201620172016
Long-term asset$7,336$2,020$-$-
Current liability(1,726)(972)--
Long-term liability(35,228)(38,671)(33,820)(35,665)
Net liability$(29,618)$(37,623)$(33,820)$(35,665)

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)2017201620172016
Net actuarial loss$81,969$84,656$12,600$14,728
Prior service benefit(429)(446)(9,821)(12,489)
Transition obligation--2326
Total$81,540$84,210$2,802$2,265

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 Assets20172016
Projected benefit obligation, end of year$36,954$227,739
Fair value of plan assets, end of year-188,096

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

(In thousands)Pension Benefits
Accumulated Benefit Obligation in Excess of Plan Assets20172016
Accumulated benefit obligation, end of year$32,813$26,927
Fair value of plan assets, end of year--

b. Net Periodic Benefit Cost.

(In thousands)Pension BenefitsOther Postretirement Benefits
Components of Net Periodic Benefit Cost:201720162015201720162015
Service cost$5,383$5,365$7,263$1,231$1,271$1,559
Interest cost12,62512,39313,7662,6662,6813,075
Expected return on assets(22,963)(22,365)(22,682)(2,887)(2,829)(2,812)
Amortization of:
Transition obligation---333
Prior service (credit) cost(17)1023(2,669)(2,669)(2,669)
Actuarial loss6,3525,6005,395660589953
Net periodic benefit cost (credit)$1,380$1,003$3,765$(996)$(954)$109

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
2017201620172016
Discount rate3.73%4.29%3.58%4.11%
Rate of compensation increase3.67%3.71%N/AN/A
Assumed health care cost trend rates:
Health care cost trend rate assumed for next year N/AN/A6.00%6.25%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate) N/AN/A5.00%5.00%
Year that the rate reaches the ultimate trend rate N/AN/A20222022

MGE uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components of net periodic benefit cost.

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

Pension BenefitsOther Postretirement Benefits
201720162015201720162015
Discount rate4.30%4.51%4.11%4.09%4.32%3.96%
Expected rate of return on plan assets7.40%7.65%7.80%6.80%6.96%7.06%
Rate of compensation increase3.76%3.76%3.84%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 2017 dollars:

(In thousands)1% Increase1% Decrease
Effect on other postretirement benefit obligation$740$(1,076)
Effect on total service and interest cost components19(31)

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 as of December 31, 2017 and 2016, and the target allocation for 2018, by asset category, follows:

Target AllocationPercentage of Plan Assets at Year End
20172016
Equity securities(a)63.0 %65.0 %65.0 %
Fixed income securities30.0 %29.0 %27.0 %
Real estate7.0 %6.0 %8.0 %
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 $48.5 million and $43.2 million as of December 31, 2017 and 2016, respectively. Of this amount, $43.1 million and $37.0 million as of December 31, 2017 and 2016, 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 health benefit trusts for payment of retiree health premiums. The asset allocation for the insurance continuance fund is determined by the life insurer. The target asset allocation for the health benefit trusts are established based on a similar investment strategy as assets held in the master pension trust, with consideration for liquidity needs in the health benefit trusts.

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, 2017. 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, 2017, 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 descriptions are the categories of underlying plan assets held within the pension and other postretirement benefit plans as of December 31, 2017:

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 – Real estate funds are funds with a direct investment in pools of real estate properties. These funds are valued by investment managers on a periodic basis using pricing models that use independent appraisals. The fair value of real estate investments is determined using net asset value.

Insurance Continuance Fund (ICF) – The ICF is a supplemental retirement plan that includes assets that have been segregated and restricted to pay retiree term life insurance premiums.

Fixed Rate Fund – The Fixed Rate fund is supported by an underlying portfolio of fixed income securities, including public bonds, commercial mortgages, and private placement bonds. Public market data and GAAP reported market values are used when available to determine fair value.

All of the fair values of MGE's plan assets are measured using net asset value, except for cash and cash equivalents which are considered level 1 investments. The fair values of MGE's plan assets by asset category as of December 31 are as follows:

(In thousands)20172016
Cash and Cash Equivalents$488$284
Equity Securities:
U.S. Large Cap124,594107,406
U.S. Mid Cap29,13825,966
U.S. Small Cap37,78233,836
International Blend71,51459,054
Fixed Income Securities:
Short-Term Fund4,6414,318
High Yield Bond19,40017,978
Long Duration Bond91,67871,512
Real Estate25,99529,441
Insurance Continuance Fund1,5001,514
Fixed Rate Fund3,3913,801
Total$410,121$355,110

g. Expected Cash Flows.

MGE does not expect to need to make any required contributions to the qualified plans for 2018 and 2019. The contributions for years after 2019 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 2017, MGE made $11.3 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
2018$15,011$3,828$(215)$3,613
201916,0094,233(234)3,999
202016,8304,678(259)4,419
202117,7175,157(280)4,877
202218,8695,481(305)5,176
2023 - 2027107,40229,636(1,941)27,695