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Pension Plans and Other Postretirement Benefits | 12 Months Ended
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Dec. 31, 2015
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 $2.8 million, $2.5 million, and $2.3 million in 2015, 2014, and 2013, 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 Benefits |  | Other Postretirement Benefits |
| Change in Benefit Obligations: |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
| Net benefit obligation at beginning of year | $ | 340,233 | $ | 283,958 | $ | 78,478 | $ | 66,100 |
| Service cost |  | 7,263 |  | 6,179 |  | 1,559 |  | 1,339 |
| Interest cost |  | 13,766 |  | 13,574 |  | 3,075 |  | 3,166 |
| Plan participants' contributions |  | - |  | - |  | 741 |  | 708 |
| Actuarial (gain) loss(a) |  | (17,576) |  | 48,162 |  | (5,828) |  | 10,090 |
| Gross benefits paid |  | (11,121) |  | (11,640) |  | (3,280) |  | (3,113) |
| Less: federal subsidy on benefits paid(b) |  | - |  | - |  | 190 |  | 188 |
| Benefit obligation at end of year | $ | 332,565 | $ | 340,233 | $ | 74,935 | $ | 78,478 |
| Change in Plan Assets: |  |  |  |  |  |  |  |  |
| Fair value of plan assets at beginning of year | $ | 288,548 | $ | 277,398 | $ | 38,952 | $ | 37,602 |
| Actual return on plan assets |  | 4,153 |  | 21,907 |  | 603 |  | 2,558 |
| Employer contributions |  | 9,136 |  | 883 |  | 3,154 |  | 1,197 |
| Plan participants' contributions |  | - |  | - |  | 741 |  | 708 |
| Gross benefits paid |  | (11,121) |  | (11,640) |  | (3,280) |  | (3,113) |
| Fair value of plan assets at end of year | $ | 290,716 | $ | 288,548 | $ | 40,170 | $ | 38,952 |
| Funded Status at December 31 | $ | (41,849) | $ | (51,685) | $ | (34,765) | $ | (39,526) |
(a) In 2014, lower discount rates and mortality table updates were the main drivers to 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, 2015 and 2014, the subsidy due to MGE was $0.2 million. The accumulated benefit obligation for the defined benefit pension plans at the end of 2015 and 2014 was $302.5 million and $304.0 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 Benefits |  | Other Postretirement Benefits |
| (In thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
| Current liability | $ | (966) | $ | (1,025) | $ | (52) | $ | (65) |
| Long-term liability |  | (40,883) |  | (50,660) |  | (34,713) |  | (39,461) |
| Net liability | $ | (41,849) | $ | (51,685) | $ | (34,765) | $ | (39,526) |
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 Benefits |  | Other Postretirement Benefits |
| (In thousands) |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
| Net actuarial loss | $ | 80,660 | $ | 85,102 | $ | 13,086 | $ | 17,657 |
| Prior service benefit |  | (436) |  | (413) |  | (15,158) |  | (17,827) |
| Transition obligation |  | - |  | - |  | 29 |  | 32 |
| Total | $ | 80,224 | $ | 84,689 | $ | (2,043) | $ | (138) |
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 |  | 2015 |  | 2014 |
| Projected benefit obligation, end of year | $ | 332,565 | $ | 340,233 |
| Fair value of plan assets, end of year |  | 290,716 |  | 288,548 |
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 Assets |  | 2015 |  | 2014 |
| Projected benefit obligation, end of year | $ | 332,565 | $ | 340,233 |
| Accumulated benefit obligation, end of year |  | 302,471 |  | 304,023 |
| Fair value of plan assets, end of year |  | 290,716 |  | 288,548 |
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 Benefits |  | Other Postretirement Benefits |
| Components of Net Periodic Cost (Benefit): |  | 2015 |  | 2014 |  | 2013 |  | 2015 |  | 2014 |  | 2013 |
| Service cost | $ | 7,263 | $ | 6,179 | $ | 7,705 | $ | 1,559 | $ | 1,339 | $ | 2,380 |
| Interest cost |  | 13,766 |  | 13,574 |  | 12,656 |  | 3,075 |  | 3,166 |  | 3,871 |
| Expected return on assets |  | (22,682) |  | (22,051) |  | (19,027) |  | (2,812) |  | (2,615) |  | (2,176) |
| Amortization of: |  |  |  |  |  |  |  |  |  |  |  |  |
| Transition obligation |  | - |  | - |  | - |  | 3 |  | 3 |  | 3 |
| Prior service cost (benefit) |  | 23 |  | 204 |  | 314 |  | (2,669) |  | (2,669) |  | 110 |
| Actuarial loss |  | 5,395 |  | 703 |  | 8,014 |  | 953 |  | 252 |  | 1,236 |
| Net periodic cost (benefit) | $ | 3,765 | $ | (1,391) | $ | 9,662 | $ | 109 | $ | (524) | $ | 5,424 |
c. Plan Assumptions. The weighted-average assumptions used to determine the benefit obligations were as follows for the years ended December 31:
|  |  | Pension Benefits |  | Other Postretirement Benefits |
|  |  | 2015 |  | 2014 |  | 2015 |  | 2014 |
| Discount rate(a) |  | 4.51% |  | 4.11% |  | 4.32% |  | 3.96% |
| Rate of compensation increase |  | 3.78% |  | 3.85% |  | N/A |  | N/A |
| Assumed health care cost trend rates: |  |  |  |  |  |  |  |  |
| Health care cost trend rate assumed for next year |  | N/A |  | N/A |  | 6.5% |  | 6.5% |
| Rate to which the cost trend rate is assumed to |  |  |  |  |  |  |  |  |
| decline (the ultimate trend rate) |  | N/A |  | N/A |  | 5.0% |  | 5.0% |
| Year that the rate reaches the ultimate trend rate |  | N/A |  | N/A |  | 2022 |  | 2021 |
(a) In 2015, MGE refined its methodology for using discount rates to measure the components of net periodic benefit cost. The refined methodology uses individual spot rates, instead of a weighted average of the yield curve spot rates, for measuring the service cost and interest cost components. The change in methodology does not alter the measurement of the related benefit obl igation as of December 31, 2015. The weighted-average assumptions used to determine the net periodic cost were as follows for the years ended December 31:
|  |  | Pension Benefits |  | Other Postretirement Benefits |
|  |  | 2015 |  | 2014 |  | 2013 |  | 2015 |  | 2014 |  | 2013 |
| Discount rate |  | 4.11% |  | 4.88% |  | 4.09% |  | 3.96% |  | 4.69% |  | 4.14% |
| Expected rate of return on plan assets |  | 7.80% |  | 8.10% |  | 8.10% |  | 7.06% |  | 7.07% |  | 6.79% |
| Rate of compensation increase |  | 3.84% |  | 3.93% |  | 4.60% |  | N/A |  | N/A |  | N/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 2015 dollars:
| (In thousands) |  | 1% Increase |  | 1% Decrease |
| Effect on other postretirement benefit obligation | $ | 1,391 | $ | (1,753) |
| Effect on total service and interest cost components |  | 80 |  | (92) |
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 expe cted 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 historica l 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 as sets 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 rea l 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 2015 and 2014, and the target al location for 2016, by asset category, follows:
|  | Target Allocation |  | Percentage of Plan Assets at Year End |
|  |  | 2015 |  | 2014 |
| Equity securities(a) | 63.0 % |  | 63.0 % |  | 62.0 % |
| Fixed income securities | 30.0 % |  | 29.0 % |  | 31.0 % |
| Real estate | 7.0 % |  | 8.0 % |  | 7.0 % |
| Total | 100.0 % |  | 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 $40.2 million and $39.0 million at the end of 2015 and 2014, respectively. Of this amount, $34.1 million and $32.8 million at the end of 2015 and 2014, 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 explai ned 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 a sset 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 si gnificant concentrations of credit risk as of December 31, 2015. 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, 2015, ther e 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 po stretirement 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, 2015: 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 fun ds 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 – Th e 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 b ased 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, 2015 |
| (In thousands) |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |
| Cash and Cash Equivalents | $ | 300 | $ | 300 | $ | - | $ | - |
| Equity Securities: |  |  |  |  |  |  |  |  |
| U.S. Large Cap |  | 98,949 |  | - |  | 98,949 |  | - |
| U.S. Mid Cap |  | 22,446 |  | - |  | 22,446 |  | - |
| U.S. Small Cap |  | 27,561 |  | - |  | 27,561 |  | - |
| International Blend |  | 55,948 |  | - |  | 55,948 |  | - |
| Fixed Income Securities: |  |  |  |  |  |  |  |  |
| Short-Term Fund |  | 3,388 |  | - |  | 3,388 |  | - |
| High Yield Bond |  | 16,225 |  | - |  | 16,225 |  | - |
| Long Duration Bond |  | 73,112 |  | - |  | 73,112 |  | - |
| Real Estate |  | 27,231 |  | - |  | - |  | 27,231 |
| Insurance Continuance Fund |  | 1,518 |  | - |  | - |  | 1,518 |
| Fixed Rate Fund |  | 4,208 |  | - |  | - |  | 4,208 |
| Total | $ | 330,886 | $ | 300 | $ | 297,629 | $ | 32,957 |
|  | Fair Value as of December 31, 2014 |
| (In thousands) |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |
| Equity Securities: |  |  |  |  |  |  |  |  |
| U.S. Large Cap |  | 99,256 |  | - |  | 99,256 |  | - |
| U.S. Mid Cap |  | 22,926 |  | - |  | 22,926 |  | - |
| U.S. Small Cap |  | 29,353 |  | - |  | 29,353 |  | - |
| International Blend |  | 47,650 |  | - |  | 47,650 |  | - |
| Fixed Income Securities: |  |  |  |  |  |  |  |  |
| Short-Term Fund |  | 3,776 |  | - |  | 3,776 |  | - |
| High Yield Bond |  | 15,492 |  | - |  | 15,492 |  | - |
| Long Duration Bond |  | 79,603 |  | - |  | 79,603 |  | - |
| Real Estate |  | 23,480 |  | - |  | - |  | 23,480 |
| Insurance Continuance Fund |  | 1,518 |  | - |  | - |  | 1,518 |
| Fixed Rate Fund |  | 4,446 |  | - |  | - |  | 4,446 |
| Total | $ | 327,500 | $ | - | $ | 298,056 | $ | 29,444 |
No transfers were made in or out of Level 1 or Level 2 for the year ended December 31, 2015. The following table summarizes the changes in the fair value of the Level 3 plan assets.
|  |  | Level 3 Assets |
| (In thousands) |  | Real Estate |  | Insurance Continuance Fund |  | Fixed Rate Fund |
| Balance as of January 1, 2014 | $ | 19,628 | $ | 1,428 | $ | - |
| Actual return on plan assets: |  |  |  |  |  |  |
| Relating to assets still held at the reporting date |  | 1,561 |  | 44 |  | 54 |
| Purchases, sales, and settlements |  | 2,291 |  | 46 |  | 4,392 |
| Transfers in and/or out of Level 3 |  | - |  | - |  | - |
| Balance as of December 31, 2014 |  | 23,480 |  | 1,518 |  | 4,446 |
| Actual return on plan assets: |  |  |  |  |  |  |
| Relating to assets still held at the reporting date |  | 2,749 |  | 46 |  | 103 |
| Purchases, sales, and settlements |  | 1,002 |  | (46) |  | (341) |
| Transfers in and/or out of Level 3 |  | - |  | - |  | - |
| Balance as of December 31, 2015 | $ | 27,231 | $ | 1,518 | $ | 4,208 |
g. Expected Cash Flows. Contributions to the qualified plans for 2016 are expected to be $10.0 million, which was paid in January 2016. MGE does not expect to make c ontributions to the plans for 2017. The contributions for years after 2017 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 e conomic 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 2015, MGE made $13.7 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:
|  |  | Pension |  | Other Postretirement Benefits |
| (In thousands) |  | Pension Benefits |  | Gross Postretirement Benefits |  | Expected Medicare Part D Subsidy |  | Net Postretirement Benefits |
| 2016 | $ | 12,489 | $ | 3,119 | $ | (227) | $ | 2,892 |
| 2017 |  | 13,320 |  | 3,481 |  | (249) |  | 3,232 |
| 2018 |  | 14,506 |  | 3,947 |  | (273) |  | 3,674 |
| 2019 |  | 15,456 |  | 4,453 |  | (296) |  | 4,157 |
| 2020 |  | 16,381 |  | 4,910 |  | (325) |  | 4,585 |
| 2021 - 2025 |  | 95,167 |  | 30,364 |  | (2,121) |  | 28,243 |

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