SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. For the transition period
from: _____________ to _____________.
Commission File Number 0-1125
MADISON GAS AND ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin
(State or other jurisdiction of incorporation or organization)
39-0444025
(IRS Employer Identification No.)
133 South Blair Street, Madison, Wisconsin 53703
(Address of principal executive offices and ZIP code)
(608) 252-7000
(Registrant's telephone number including area code)
Common Stock Outstanding at August 13, 1998: 16,079,718 Shares
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
<PAGE>
PART I. FINANCIAL INFORMATION
==============================
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
Madison Gas and Electric Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED INCOME
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF INCOME
Operating Revenues
Electric $42,444 $40,653 $ 80,837 $ 78,083
Gas 12,118 12,599 48,840 60,081
------- ------- -------- --------
Total operating revenues 54,562 53,252 129,677 138,164
------- ------- -------- --------
Operating Expenses
Fuel for electric generation 7,825 7,982 14,671 15,492
Purchased power 3,640 4,322 5,342 8,636
Natural gas purchased 6,145 6,261 28,926 39,436
Other operations 16,381 16,098 32,226 31,456
Maintenance 4,527 4,083 7,054 6,623
Depreciation and amortization 8,278 6,403 16,536 12,767
Other general taxes 2,361 2,233 4,691 4,447
Income tax items 844 1,129 5,436 5,215
------- ------- -------- --------
Total operating expenses 50,001 48,511 114,882 124,072
------- ------- -------- --------
Net operating income 4,561 4,741 14,795 14,092
AFUDC - equity funds 30 13 54 24
Other income, net 323 259 1,014 791
Nonutility operating income, net 83 123 216 910
------- ------- -------- --------
Income before interest expense 4,997 5,136 16,079 15,817
------- ------- -------- --------
Interest expense:
Interest on long-term debt 2,425 2,416 4,848 4,820
Other interest 135 161 392 409
AFUDC - borrowed funds (16) (7) (29) (13)
------- ------- -------- --------
Net interest expense 2,544 2,570 5,211 5,216
------- ------- -------- --------
Net Income $ 2,453 $ 2,566 $ 10,868 $ 10,601
======= ======= ======== ========
Earnings per share of common
stock (basic and diluted)
(Note 3) $0.15 $0.16 $0.68 $0.66
======= ======= ======== ========
STATEMENTS OF RETAINED INCOME
Balance - beginning of period $55,501 $53,341 $ 52,285 $ 50,451
Earnings on common stock 2,453 2,566 10,868 10,601
Cash dividends on common stock
(Note 3) (5,199) (5,146) (10,398) (10,291)
------- ------- -------- --------
Balance - end of period $52,755 $50,761 $ 52,755 $ 50,761
======= ======= ======== ========
<FN>
The accompanying notes are an integral part of the above statements.
</TABLE>
<PAGE>
<TABLE>
Madison Gas and Electric Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,453 $2,566 $10,868 $10,601
Items not affecting working
capital:
Depreciation and amortization 8,278 6,403 16,536 12,767
Deferred income taxes (1,257) (727) (2,695) (710)
Amortization of nuclear fuel 685 98 1,303 98
Amortization of investment tax
credits (187) (187) (373) (378)
AFUDC - equity (30) (13) (54) (24)
Other 935 295 891 474
------- ------ ------- -------
Net funds provided from
operations 10,877 8,435 26,476 22,828
Changes in working capital,
excluding cash, sinking funds,
maturities, and interim loans:
(Increase)/decrease in current
assets 539 (74) 15,382 22,727
(Decrease)/increase in current
liabilities (833) (2,688) 3,050 (16,500)
Other noncurrent items, net 955 (1,790) 7,497 5,306
------- ------ ------- -------
Cash provided by operating
activities 11,538 3,883 52,405 34,361
------- ------ ------- -------
FINANCING ACTIVITIES
Cash dividends on common and
preferred stock (5,199) (5,146) (10,398) (10,291)
Maturities/redemptions of First
Mortgage Bonds 0 (3,800) 0 (3,800)
Increases in long-term debt 0 5,000 0 5,000
Other decreases in First Mortgage
Bonds 9 10 19 19
Increase/(decrease) in interim
loans 3,000 5,000 (21,750) (16,250)
------- ------ ------- -------
(Cash used for)/provided by
financing activities (2,190) 1,064 (32,129) (25,322)
------- ------ ------- -------
INVESTING ACTIVITIES
Additions to utility plant and
nuclear fuel (9,184) (5,910) (14,360) (9,227)
AFUDC - borrowed funds (16) (7) (29) (13)
Increase in decommissioning fund (2,459) (1,017) (4,976) (2,158)
------- ------ ------- -------
Cash used for investing
activities (11,659) (6,934) (19,365) (11,398)
------- ------ ------- -------
CHANGE IN CASH AND EQUIVALENTS (2,311) (1,987) 911 (2,359)
Cash and equivalents at beginning
of period 5,330 4,916 2,108 5,288
------- ------ ------- -------
Cash and equivalents at end of
period $ 3,019 $2,929 $ 3,019 $ 2,929
======= ====== ======= =======
<FN>
The accompanying notes are an integral part of the above statements.
</TABLE>
<PAGE>
<TABLE>
Madison Gas and Electric Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
June 30, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
ASSETS
Utility plant, at original cost, in service
Electric $514,980 $510,405
Gas 184,246 181,861
-------- --------
Gross plant in service 699,226 692,266
Less accumulated provision for depreciation (427,794) (407,602)
-------- --------
Net plant in service 271,432 284,664
Construction work in progress 15,156 10,995
Nuclear decommissioning fund (Note 2) 69,881 59,179
Nuclear fuel, net 7,085 8,255
-------- --------
Total utility plant 363,554 363,093
-------- --------
Other property and investments 7,760 8,252
-------- --------
Current assets:
Cash and cash equivalents 3,019 2,108
Accounts receivable, less reserves of $1,058
and $1,626, respectively 21,646 28,395
Unbilled revenue 8,137 13,580
Materials and supplies, at average cost 5,775 5,557
Fossil fuel, at average cost 4,214 3,605
Stored natural gas, at average cost 7,170 9,851
Prepaid taxes 6,366 7,190
Other prepayments 1,569 2,081
-------- --------
Total current assets 57,896 72,367
-------- --------
Deferred charges 22,222 28,078
-------- --------
Total Assets $451,432 $471,790
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see statement) $311,335 $310,846
-------- --------
Current liabilities:
Long-term debt sinking fund requirements 200 200
Interim loans - commercial paper outstanding 11,750 33,500
Accounts payable 11,555 14,528
Accrued taxes 2,573 79
Accrued interest 2,208 2,206
Accrued nonregulated items 4,736 4,837
Other 8,875 5,247
-------- --------
Total current liabilities 41,897 60,597
-------- --------
Other credits:
Deferred income taxes 43,186 45,572
Regulatory liability - SFAS 109 24,336 24,875
Investment tax credit - deferred 10,312 10,685
Other regulatory liabilities 20,366 19,215
-------- --------
Total other credits 98,200 100,347
-------- --------
Commitments - -
-------- --------
Total Capitalization and Liabilities $451,432 $471,790
======== ========
<FN>
The accompanying notes are an integral part of the above balance sheets.
</TABLE>
<PAGE>
<TABLE>
Madison Gas and Electric Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands of Dollars)
(Unaudited)
<CAPTION>
June 30, 1998 Dec. 31, 1998
------------- -------------
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY
Common stock - par value $1 per share:
Authorized 50,000,000 shares
Outstanding 16,079,718 shares $ 16,080 $ 16,080
Amount received in excess of par value 112,558 112,558
Retained income 52,755 52,285
-------- --------
Total common shareholders' equity 181,393 180,923
-------- --------
FIRST MORTGAGE BONDS
6 1/2%, 2006 series:
Pollution Control Revenue Bonds 6,675 6,675
8.50%, 2022 series 40,000 40,000
6.75%, 2027A series:
Industrial Development Revenue Bonds 28,000 28,000
6.70%, 2027B series:
Industrial Development Revenue Bonds 19,300 19,300
7.70%, 2028 series 21,200 21,200
-------- --------
First Mortgage Bonds outstanding 115,175 115,175
Unamortized discount and premium on bonds, net (1,033) (1,052)
Long-term debt sinking fund requirements (200) (200)
-------- --------
Total First Mortgage Bonds 113,942 113,923
-------- --------
OTHER LONG-TERM DEBT
6.01%, due 2000 11,000 11,000
6.91%, due 2004 5,000 5,000
-------- --------
Total capitalization $311,335 $310,846
======== ========
<FN>
The accompanying notes are an integral part of the above statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of Company
management, all adjustments (consisting of only normal recurring
adjustments) necessary to fairly present results have been made.
It is suggested that these consolidated financial statements be
read in conjunction with the financial statements and the notes
thereto set forth on pages 18 through 27 of the Company's 1997
Annual Report to Shareholders and in the Company's 1997 Annual
Report on Form 10-K.
1. Summary of significant accounting policies
The accounting and financial policies relative to the following
items have been described in the "Notes to Consolidated Financial
Statements" in the Company's 1997 Annual Report to Shareholders
and have been omitted herein because they have not changed
materially through the date of this report.
a. General
b. Utility plant
c. Nuclear fuel
d. Joint plant ownership
e. Depreciation
f. Income taxes
g. Pension plans
h. Postretirement benefits other than pensions
i. Fair value of financial instruments
j. Capitalization matters: First Mortgage Bonds and other
long-term debt; preferred stock; and notes payable to banks,
commercial paper, and lines of credit
k. Gas marketing subsidiaries
l. Commitments
m. Segments of business
n. Regulatory assets and liabilities
2. Nuclear decommissioning
Nuclear decommissioning costs are currently accrued to an
end-of-service life of 2002 for the Kewaunee Nuclear Power Plant
(Kewaunee). These costs are currently recovered from customers in
rates and are deposited in external trusts. The Company is
presently funding decommissioning costs at the $8.1 million
annual level. These trusts are shown on the balance sheet in the
utility plant section, and as of June 30, 1998, these trusts
totaled $69.9 million (fair market value).
Decommissioning costs are currently being recovered through
depreciation expense, exclusive of earnings on the trusts. Net
earnings on the trusts are included in other income. The
long-term, after-tax earnings assumption on these trusts is
5.6 percent.
The Company's share of Kewaunee decommissioning costs is
estimated to be $81.0 million in current dollars based on a
site-specific study performed in 1992 using immediate
dismantlement as the method of decommissioning. Decommissioning
costs are assumed to inflate at an average rate of 6.0 percent.
Physical decommissioning is expected to occur during the period
2014 through 2021, with additional expenditures being incurred
during the period 2022 through 2039 related to the storage of
spent nuclear fuel at the site. The Company's obligations
regarding decommissioning and spent nuclear fuel are
significantly changed if an agreement in principal is
consummated with Wisconsin Public Service Corporation (WPSC)
to transfer the Company's ownership in Kewaunee to WPSC (also
discussed in Item 2, Management's Discussion and Analysis).
3. Per-share amounts
Earnings per share of common stock, basic and diluted, are
computed on the basis of the weighted average of the daily
number of shares outstanding. For the three and six months
ended June 30, 1998 and 1997, there were 16,079,718 shares.
Dividends declared and paid per share of common stock for the
periods ended June 30, 1998 and 1997 were, respectively, for the
three months $0.323 and $0.32; for the six months $0.647 and
$0.64.
4. Rate matters
The Company received approval from the Public Service Commission
of Wisconsin (PSCW) on March 19, 1998, to recover approximately
$1.8 million (excluding carrying costs) of deferred expenses
related to the 1997 repairs to the Kewaunee steam generator
tubes. The deferred expenses are being recovered through a
four-month customer surcharge effective April through July of
1998.
On April 15, 1998, the Company announced its intention to
increase electric rates for the test year beginning January 1,
1999, by $14.6 million, or 8.9 percent annually, and increase
natural gas rates by $4.6 million, or 4.5 percent annually, for
the same time period. The proposed changes are based on a
requested return on common stock equity of 12.5 percent and would
remain in effect through the year 2000. The rising cost of fuel
coupled with increased transmission and generation costs to
improve electric reliability are the primary reasons for the
requested increase in electric rates. Both rate requests include
costs to implement technology to ensure computer system
compatibility with the year 2000. Hearings are scheduled for
September with a final rate order expected by year end.
5. Supplemental cash flow information
For purposes of the Consolidated Statements of Cash Flows, the
Company considers cash equivalents to be those investments that
are highly liquid with maturity dates of less than three months.
Cash payments for interest, net of amounts capitalized, and
income taxes were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Thousands of dollars) 1998 1997 1998 1997
------ ------ ------ ------
Interest, net of
amounts capitalized $3,890 $3,908 $5,240 $5,247
Income taxes paid $7,102 $7,422 $6,208 $7,166
6. Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (FAS 133).
FAS 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000, for the Company).
FAS 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that,
due to its limited use of derivative instruments, the adoption of
FAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ---------------------------------------------------------
GENERAL
Certain matters that are discussed in the Management's
Discussion and Analysis are forward-looking statements and
can generally be identified by words such as "believes,"
"anticipates," or "expects." These forward-looking statements
are subject to certain risks or uncertainties which could
cause actual results to differ materially from those
currently anticipated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's internally-generated funds were greater than the
funds used for construction and nuclear fuel expenditures for the
six-month period ended June 30, 1997. The Company experienced
decreased additions to utility plant and nuclear fuel
expenditures during the first half of 1998 compared to 1997. It
is anticipated that 1998 construction and nuclear fuel
expenditures will be approximately $46.4 million.
Cash provided by operating activities increased $18.0 million
during the first half of 1998 compared to 1997. The increase was
caused primarily by two factors. First, there was an increase in
depreciation expense due to the acceleration of the Kewaunee
plant to an end-of-service life of 2002, which was included in
the Company's most recent rate case. Second, for the six months
ended June 30, 1997, there was a substantial decrease in current
liabilities due to a reduction in current payables of the
Company's gas marketing subsidiaries, GLENCO and AEM. Cash
provided by operating activities during the second quarter of
1998 increased $7.7 million compared to last year's second
quarter. This was also attributable to the decrease in net
working capital due to the timing of the Company's payables and
the accelerated depreciation expense as stated above.
Bank lines of credit available to the Company as of June 30,
1998, were $45 million.
The Company's capitalization ratios were as follows:
June 30, 1998 Dec. 31, 1997
------------- -------------
Common shareholders' equity 56.1% 52.5%
Long-term debt* 40.3% 37.8%
Short-term debt 3.6% 9.7%
*Includes current maturities and current sinking fund
requirements.
The Company's bonds are currently rated Aa2 by Moody's Investors
Service, Inc., and AA by Standard & Poor's Corporation. The
Company's dealer-issued commercial paper carries the highest
ratings assigned by Moody's and Standard & Poor's.
Business and regulatory environment
- -----------------------------------
In February 1996, the PSCW submitted a report to the State
Legislature on electric utility restructuring in Wisconsin.
Included in the report was a 32-step work plan and time line
summarizing expected restructuring activities. During the summer
of 1997, Wisconsin and Illinois experienced electric supply
shortages due to outages of a number of nuclear plants in
Illinois and Wisconsin, including Kewaunee. The electric
reliability crisis caused the PSCW to revise its previous plans
for restructuring the electric industry. In October 1997, the
PSCW revised the plan to seven steps and stated that retail
competition cannot occur until all the safeguards are in place to
protect consumers. Also, prior to any significant restructuring,
reliability concerns must be addressed. This conclusion was
consistent with plans proposed by the Company and a broad
coalition of customers.
The new plan focuses on the construction of a generation and
transmission infrastructure by all Wisconsin utilities to
increase the amount of power in the state and the state's ability
to obtain electricity from other regions. The PSCW plans to
remove any barriers to open access to the transmission system
that currently exist and to move forward in its efforts to
develop a strong state and regional Independent System Operator
(ISO). This would assure that the transmission system is operated
safely, reliably, and with open and nondiscriminatory access.
Also in its revised plan, the PSCW plans to explore new ways to
promote the development of renewable energy sources. The PSCW has
not set a date for retail competition and has concluded that any
decision to go to retail competition in the electric industry
remains to be made in the future. The Company cannot predict what
impact future PSCW actions may have on its future financial
condition, cash flows, or results of operations. However, the
Company believes it is well-positioned to compete in a
deregulated market.
The restructuring of the electric industry could affect the
eligibility of the Company to continue applying Statement of
Financial Accounting Standard (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." Under this situation,
continued deferral of certain regulatory asset and liability
amounts on the Company's books may no longer be appropriate as
allowed under SFAS No. 71. The Company is unable to predict
whether any adjustments to regulatory assets and liabilities will
occur in the future. The PSCW's restructuring plan specifically
recognizes the need to allow recovery for commitments made under
prior regulatory regimes.
The Company's recent rate order authorized a gas cost recovery
mechanism that allows recovery of pipeline capacity, Federal
Energy Regulatory Commission (FERC)-approved/mandated charges,
and supply demand costs. Under the new mechanism, gas commodity
costs will be compared to a monthly benchmark equal to the
first-of-the-month index plus adders reflecting the effects on
pricing for reliability, flexibility, weather, and variable
transportation costs. If actual costs are below the benchmark,
full recovery is allowed. Gas commodity costs above the benchmark
will be reviewed by the PSCW. A target will also be determined
for capacity release. Capacity release above the target will be
shared 60 percent with the ratepayers and 40 percent with the
shareholders. Any shortfalls in capacity release will be shared
40 percent with the ratepayers and 60 percent with the
shareholders.
Electric Reliability Act
- ------------------------
On April 28, 1998, Governor Tommy Thompson signed into law the
1997 Wisconsin Act 204 (the Act) - the Electric Reliability Plan.
The Act seeks to guarantee the reliable provision of electricity
in Wisconsin for future generations. It received widespread
support from consumer groups, legislators, and utilities
(including the Company).
Among the many provisions included in the Act are those
streamlining the regulatory process. For instance, the Act
requires the PSCW to prepare a strategic energy assessment, and
calls for expediting the PSCW and the Department of Natural
Resources deadlines to grant certificates of public convenience
and necessity needed to construct electric generating facilities
and transmission lines. The Act also calls for utilities to
voluntarily transfer transmission operations to an ISO approved
by the FERC by June 30th of the year 2000.
The Act also includes the following:
- Allows for the construction of "merchant" power plants that
would sell their power to utilities. A merchant plant is built
without prior commitments to buy the power it will produce.
- Requires a total of 50 megawatts of new generation to come
from renewable power sources, such as wind or solar. The
Company is in the process of building a $14 million wind
generation project which will allow its customers to purchase
blocks of energy produced with renewable resources. Pursuant
to the Act, these costs will be recovered from the companies'
customers through rates.
- Directs the PSCW to conduct a study of constraints in the
intrastate and interstate transmission system that hurt the
reliability of electric service in Wisconsin. The PSCW must
report the results to the state legislature by September 1,
1998.
In response to the Act, the Company issued Request for Proposals
and has entered into a letter of intent to have a nominal
90 MW gas combustion turbine built. The capital cost of this
turbine would be approximately $30 million, and its targeted
date of operation is June 1, 2000. Ownership of the facility
is one of the options being considered by the Company.
Year 2000
- ---------
In 1997, the Company established a Year 2000 project coordinator
and project team made up of members from all areas of the
Company. This team completed a Company-wide assessment in 1997 of
Company systems, equipment, and operations that will be impacted
by the year 2000. System remediation and testing began in early
1998. The majority of the Company's systems are projected to be
year 2000 ready by January 1, 1999, and the remaining systems
ready shortly thereafter. MGE is working with its critical
suppliers and business partners to coordinate year 2000
conversion efforts. Year 2000 costs incurred during 1997 were
$286,000. The Company is estimating total costs of $4.3 million
to become year 2000 compliant.
Environmental matters
- ---------------------
The Company received a notice of violation from the Department
of Natural Resources (DNR) regarding fugitive dust and coal
emissions at its Blount Generating Station. The Company and the
DNR have worked out a solution in which the Company will make
certain capital improvements over the next two years. The cost
of these improvements are included in the Company's currently
filed rate case. In the opinion of management, the improvements
will meet the Company's obligation to fully comply with the
notice.
Kewaunee Nuclear Power Plant
- ----------------------------
Kewaunee is operated by WPSC. The Company has a 17.8 percent
ownership interest in Kewaunee. Kewaunee is operating with a
license that expires in 2013.
On April 7, 1998, the PSCW approved WPSC's application for
replacement of the two steam generators at Kewaunee. The total
cost of replacing the steam generators would be approximately
$90.7 million (the Company's share would be 17.8 percent or
$16.1 million). The replacement work is tentatively planned
for the spring of 2000 and will take approximately 60 days.
The Company has a letter of intent with WPSC to transfer
ownership of Kewaunee to WPSC. The two companies are currently
negotiating an asset swap in which WPSC will assume the
Company's ownership interest in Kewaunee (17.8%) in exchange
for assets yet to be determined. Pursuant to the letter of intent,
WPSC will assume the decommissioning liability for the plant,
exclusive of spent fuel attributable to the Company's generation,
and the Company will effectively transfer the decommissioning
funds already collected to WPSC in exchange for the assumption
of this obligation. The Company will have an option to purchase
capacity and energy up to the Company's current capacity in
Kewaunee from WPSC for up to two years following the closing
of the transaction.
The Company believes it can secure capacity and energy more
cost effectively than from its Kewaunee investment. The
transaction is scheduled to close prior to the installation
of the new steam generators.
Kewaunee has been in operation since 1974 and is jointly owned
by the Company, WPSC, and Wisconsin Power and Light Company.
Background information regarding Kewaunee steam generator repair
issues is set forth in the registrant's Annual Report on
Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Electric sales and revenues
- ---------------------------
Electric retail sales increased 2 percent for the six-month
period and 5 percent for the three-month period ending June 30,
1998, over the comparable periods last year (see table below).
<TABLE>
Electric sales in megawatt-hours
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -----------------------------
1998 1997 %Change 1998 1997 %Change
------- ------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential 166,045 154,519 7.46% 351,848 343,423 2.45%
Large commercial
and industrial 255,318 242,723 5.19 500,615 473,533 5.72
Small commercial
and industrial 196,149 183,333 6.99 366,120 356,174 2.79
Other 74,614 77,130 (3.26) 149,668 164,199 (8.85)
------- ------- --------- ---------
Total retail 692,126 657,705 5.23 1,368,251 1,337,329 2.31
Sales for resale 21,833 14,268 53.02 4,802 19,852 145.83
------- ------- --------- ---------
Total sales 713,959 671,973 6.25 1,417,053 1,357,181 4.41
======= ======= ========= =========
</TABLE>
Electric operating revenues increased about $2.8 million, or
3.4 percent, for the first half of 1998 and $1.8 million, or
4 percent, for the second quarter of 1998 versus the same
comparable periods in 1997. The increases were due in part to an
increase in the electric retail sales and a 3.1 percent electric
rate increase in August 1997.
Gas sales and revenues
- ----------------------
For the six months ended June 30, 1998, gas operating revenues
decreased $11.2 million, or 19 percent, compared to the same
period in 1997. This decrease in revenues is due to a decrease in
gas deliveries of 19 percent (see table below). The decrease in
gas deliveries was due to the extremely warm weather experienced
in the first quarter of this year. The average temperature for
the three months ended March 31, 1998, was 34 percent warmer than
the same three months ended a year ago.
For the three months ended June 30, 1998, gas revenues decreased
$0.5 million, or 4 percent, compared to last year, despite a
decrease in retail gas deliveries of 28 percent. A 3.5 percent
natural gas rate increase helped offset the decrease in gas
deliveries. Also, unit gas costs were much higher for the second
quarter of 1998 compared to last year's second quarter. These
increased costs are generally passed on to customers through the
Gas Cost Recovery Mechanism.
The following table illustrates gas deliveries as compared to the
previous year:
<TABLE>
Gas deliveries in thousands of therms
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 %Change 1998 1997 %Change
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Residential 10,436 13,723 (23.95)% 45,942 54,684 (15.99)%
Commercial and
industrial 9,322 13,857 (32.72) 38,619 50,256 (23.16)
------ ------ ------- -------
Total retail 19,758 27,580 (28.36) 84,561 104,940 (19.42)
Transport 7,491 9,752 (23.18) 18,767 19,093 (1.71)
------ ------ ------- -------
Total deliveries 27,249 37,332 (27.01) 103,328 124,033 (16.69)
====== ====== ======= =======
</TABLE>
Electric fuel and natural gas costs
- -----------------------------------
Fuel costs for electric generation and purchased power decreased
17 percent, or $4.1 million, for the first six months of 1998
compared to the same time period last year. Electric margin
(revenues less fuel and purchased power costs) increased
$6.9 million, or 13 percent, for this same time period. The
primary factor for the increased electric margin is lower
purchased power costs. During the first half of 1997, the Company
had higher replacement power costs due to the extended outage of
Kewaunee. Fuel costs and purchased power decreased 7 percent, or
$0.8 million, for the second quarter of 1998 as compared to last
year's second quarter. As mentioned above, the decrease is due to
the higher cost of replacement power in 1997 due to the extended
outage.
Natural gas costs for the six-month period ended June 30, 1998,
decreased $10.5 million, or 27 percent, compared to the same
period a year ago. This is mainly due to the decrease in retail
gas deliveries of 19 percent. Natural gas costs for the second
quarter of 1998 decreased slightly versus the comparative 1997
period.
Other operating expenses
- ------------------------
Income taxes for the three months ending June 30, 1998, decreased
$0.3 million, or 25 percent, and increased $0.2 million, or
4 percent, for the six months ended June 30, 1998. The six-month
increase was mainly attributable to an increase in pretax
operating income.
Operations and maintenance costs increased $0.7 million, or
3.6 percent, for the second quarter of 1998 and increased
$1.2 million, or 3.15 percent, for the first half of the year
compared to the same periods a year ago. The primary reason for
the increases is the costs associated with maintenance on our
generating facilities in preparation of summer power demand to
ensure power reliability.
Depreciation and amortization expense increased $1.9 million, or
30 percent, for the three months ended June 30, 1998, and
$3.8 million, or 30 percent for the second quarter of 1998 versus
the comparable periods a year ago. The increases are mainly
attributable to the accelerated depreciation and decommission
funding of Kewaunee. The PSCW approved the accelerated
depreciation and decommissioning funding for Kewaunee based on
its service life ending at the end of 2002.
PART II. OTHER INFORMATION
==========================
ITEM 1 - LEGAL PROCEEDINGS
The Company has filed a case with the Dane County Circuit Court,
"Madison Gas and Electric Co. vs Public Service Commission of
Wisconsin." The case involves the Company's appeal of the PSCW's
order granting Wisconsin Public Service Corporation (WPSC)
authority to replace the steam generators at Kewaunee. The owners
of Kewaunee have differing views on the desirability of
proceeding with the steam generator replacement project. The
Company has not favored replacement of the steam generators and
believes the record does not support replacement. The case is
being held in abeyance pending consummation of the agreement to
transfer ownership of Kewaunee.
ITEM 4 - RESULTS OF VOTES OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 5,
1998, in Madison, Wisconsin. Proxies for the meeting were
solicited pursuant to Regulation 14A of the Securities Exchange
Act. The election of three persons to serve as Class III
Directors to hold office until 2001 was voted on by the
shareholders at the meeting. Listed below are the nominees for
Class III Director, with the three nominees receiving the
greatest number of votes being elected to serve as director.
The election of three members of the Board of Directors of
Class III to hold office until 2001 are:
For Withhold Authority
---------- -------------------
Richard E. Blaney 13,407,127 206,906
Frederic E. Mohs 13,399,371 214,662
Phillip C. Stark 13,381,749 232,284
Joel B. Winnig 78 13,613,955
ITEM 6(a) - EXHIBITS
Exh. No. 4. - Indenture of Mortgage and Deed of Trust Between the
Company and Firstar Trust Company, as Trustee (and supplements).
Reference was provided in the Company's 1994 Annual Report on
Form 10-K (Commission File No. 0-1125).
Exh. No. 12. - Ratio of Earnings to Fixed Charges
Exh. No. 27. - Appendix E to Item 601(c) of Regulation S-K:
Public Utility Companies Financial Data Schedule UT
ITEM 6(b) - REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MADISON GAS AND ELECTRIC COMPANY
(Registrant)
Date: August 13, 1998 /s/ David C. Mebane
---------------------------------
Chairman, President and Chief
Executive Officer
(Duly Authorized Officer)
Date: August 13, 1998 /s/ Terry A. Hanson
---------------------------------
Vice President - Finance
(Chief Financial and Accounting
Officer)
RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
(Thousands of dollars) Six Months
Ended
June 30, 1998
-------------
EARNINGS
Income before interest expense $16,079
Add:
Income tax items 5,436
Income tax on other income 916
Amortization of debt discount,
premium expense 144
Allowance for funds used during
construction - borrowed funds 29
Interest on rentals 457
-------
Total Earnings $23,061
=======
FIXED CHARGES
Interest on long-term debt $4,848
Other interest 392
Amortization of debt discount, premium
expense 144
Interest on rentals 457
-------
Total Fixed Charges $5,841
=======
RATIO OF EARNINGS TO FIXED CHARGES 3.95x
=======
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q. Items 1 through 22 are as of June 30, 1998. Items 23 through
38 are for the six months ended June 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 363,554
<OTHER-PROPERTY-AND-INVEST> 7,760
<TOTAL-CURRENT-ASSETS> 57,896
<TOTAL-DEFERRED-CHARGES> 22,222
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 451,432
<COMMON> 16,080
<CAPITAL-SURPLUS-PAID-IN> 112,558
<RETAINED-EARNINGS> 52,755
<TOTAL-COMMON-STOCKHOLDERS-EQ> 181,393
0
0
<LONG-TERM-DEBT-NET> 129,942
<SHORT-TERM-NOTES> 11,750
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 200
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 129,168
<TOT-CAPITALIZATION-AND-LIAB> 451,432
<GROSS-OPERATING-REVENUE> 129,677
<INCOME-TAX-EXPENSE> 5,436
<OTHER-OPERATING-EXPENSES> 109,446
<TOTAL-OPERATING-EXPENSES> 114,882
<OPERATING-INCOME-LOSS> 14,795
<OTHER-INCOME-NET> 1,284
<INCOME-BEFORE-INTEREST-EXPEN> 16,079
<TOTAL-INTEREST-EXPENSE> 5,211
<NET-INCOME> 10,868
0
<EARNINGS-AVAILABLE-FOR-COMM> 10,868
<COMMON-STOCK-DIVIDENDS> 10,398
<TOTAL-INTEREST-ON-BONDS> 9,656
<CASH-FLOW-OPERATIONS> 52,405
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
