SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common, Par Value $1 Per Share
(Title of Class)
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 (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. Yes X No
State the aggregate market value of the voting stock held by
nonaffiliates of the Registrant: $307,524,607 based on a closing bid
price of $19.125 on March 1, 1999 (the record date for the Annual
Meeting of Shareholders).
The number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report, was
16,079,718 of Common Stock, Par Value $1 Per Share.
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2)
Any proxy or information statement; and (3) Any prospectus filed
pursuant to Rule 424(b) or (c) under the Securities Act of 1933.
- - 1998 Annual Report to Shareholders (Parts I, II, and IV)
- - Definitive Proxy Statement filed on March 29, 1999 (Parts I and III)
TABLE OF CONTENTS
PART I
1. BUSINESS I-1
2. PROPERTIES I-9
3. LEGAL PROCEEDINGS I-10
4. RESULTS OF VOTES OF SECURITY HOLDERS I-10
PART II
5. MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS II-1
6. SELECTED FINANCIAL DATA II-2
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS II-3
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA II-13
9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE II-13
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT III-1
11. EXECUTIVE COMPENSATION III-2
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT III-2
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS III-2
PART IV.
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON 8-K IV-1
SIGNATURES IV-3
PART I.
Item 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
Madison Gas and Electric Company (MGE), a Wisconsin corporation
organized in 1896, is a public utility that generates, transmits and
distributes electricity in Dane County, Wisconsin (250 square miles).
MGE also purchases, transports and distributes natural gas in seven
Wisconsin counties: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and
Vernon (1,325 square miles). Exhibit No. 21 describes MGE's wholly owned
subsidiaries.
In December 1998, MGE's two gas marketing subsidiaries, Great Lakes
Energy Corp. (GLENCO) and American Energy Management, Inc. (AEM), sold
their remaining assets in National Energy Management, L.L.C. (NEM) for
$1.8 million. NEM was formed in January 1997 as a joint venture between
GLENCO, AEM and a Houston-based gas marketing company. (See Item 7,
page II-5, and Item 8, page F-16, for further discussion.)
The Public Service Commission of Wisconsin (PSCW) has authority to
regulate MGE's rates, accounts, issuance of securities, plant and
transmission line siting, and other aspects of its business. The Federal
Energy Regulatory Commission (FERC) has jurisdiction, under the Federal
Power Act, over certain accounting practices and certain other aspects
of MGE's business. The Nuclear Regulatory Commission (NRC) has
jurisdiction over operation of the Kewaunee Nuclear Power Plant
(Kewaunee). MGE has a 17.8% ownership interest in Kewaunee. The other
owners are Wisconsin Public Service Corporation (WPSC), which operates
Kewaunee, and Wisconsin Power and Light Company (WPL) a subsidiary of
Alliant Energy.
MGE is also subject to state and federal regulations concerning air
quality, water quality, and solid waste (see I-6 and I-7). MGE may be
subject to other environmental regulations set by various federal, state
and local authorities including the Wisconsin Department of Natural
Resources (DNR), which regulates pollution and environmental control
matters at MGE's electric generating plants. The DNR has jurisdiction
over air and water quality, and solid waste and hazardous waste
standards. MGE has met the requirements of current environmental
regulations. It is not known if additional expenditures may be required
for pollution control equipment and/or modifying existing plants to
comply with future unknown environmental regulations.
For example, the ongoing issue of global warming could result in
significant compliance cost for reducing carbon dioxide emissions. MGE
does not yet know the amounts of these expenditures or the period of
time over which they may be required. MGE is unable to predict if
complying with future pollution control regulations could involve: (1)
curtailing operations, (2) reducing capacity or efficiency at existing
plants, or (3) delaying the construction and operation of future
generating facilities.
The National Environmental Policy Act and Wisconsin Environmental Policy
Act require MGE to conduct a complete environmental review and issue a
detailed environmental impact statement before obtaining necessary
authorizations or permits from regulatory agencies. This applies to any
new projects or other major actions that could significantly affect the
environment.
ELECTRIC OPERATIONS
At December 31, 1998, MGE supplied electric service to approximately
124,000 customers, of whom 110,706 were located in the cities of
Fitchburg, Madison, Middleton, and Monona, and 13,371 in adjacent areas.
Of the total number of customers, 114,133 were residential and 17,601
were commercial. For 1998, residential and commercial electric service
revenues comprised 35% and 49%, respectively, of total electric
revenues. Other 1998 electric revenues were from industrial sales (7%),
sales to public authorities including the University of Wisconsin (8%)
and sales to other utilities (1%). Electric operations accounted for 68%
of MGE's total 1998 revenues.
See Item 2, page I-10, Properties, for a description of MGE's electric
utility plant.
MGE is a member of Mid-America Interconnected Network, Inc. (MAIN), a
regional reliability group. MAIN members work together to better utilize
reserve generating capacity and coordinate long-range system planning
and day-to-day operations. MAIN seeks to maintain adequate planning
generation reserve margins in the region, ranging from 15% to 22%. MGE
is also a member of the Mid-Continent Area Power Pool (MAPP) Regional
Transmission Committee (RTC). RTC members pool their transmission
systems allowing each member to easily access economical energy across
the Upper Midwest. Each member is then compensated for the energy flows
on their individual transmission system.
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 when a number of nuclear plants,
including Kewaunee, were out of service in Illinois and Wisconsin. The
electric reliability crisis caused the PSCW to revise its previous plans
for restructuring the electric industry. In October 1997, the PSCW
stated that retail competition cannot occur until all the safeguards are
in place to protect consumers and reliability concerns are addressed.
This conclusion was consistent with plans proposed by MGE and a broad
coalition of customers. (See Item 7, pages II-8 and II-9, Business and
Regulatory Environment.)
Fuel supply and generation
MGE estimates its net kilowatt-hour requirements for 1999 will be
provided from the following sources: 63% from fossil-fueled steam
plants, 25% from a nuclear-fueled steam plant, 10% from low-cost power
purchases and 2% from a combination of wind turbines and natural gas-
and oil-fired combustion turbines.
MGE has a 22% ownership interest in the Columbia Energy Center
(Columbia). The other owners are WPL, which operates Columbia, and WPSC.
The first (Columbia I) and second (Columbia II) units at Columbia were
placed in commercial operation in 1975 and 1978, respectively. The
Columbia co-owners' coal inventory supply for Columbia I and Columbia II
increased from 55 days on December 31, 1997, to 61 days on December 31,
1998. The co-owners' goal is to maintain approximately a 40-day
inventory. Columbia, with two 527-megawatt units, uses coal from the
Wyoming-Montana coal fields. All the low-sulfur coal supply for these
units (100%) comes from Powder River Basin sources in Montana and
Wyoming.
About 200 megawatts of MGE's electric generating capacity is provided by
the Blount Generating Station (Blount) (see Item 2, page I-10,
Properties). MGE is able to burn a variety of coals, natural gas and
other fuels.
The Kewaunee plant is a pressurized water reactor plant with a name
plate capacity of 562 megawatts. It began commercial operation in 1974.
The Kewaunee operating license expires in 2013.
On April 7, 1998, the PSCW approved WPSC's application to replace two
steam generators at Kewaunee for a total cost of approximately $90.7
million (MGE's share would be 17.8% or $16.1 million). The replacement
work, scheduled for the spring of 2000, will take approximately 60 days.
On September 29, 1998, MGE finalized an agreement to sell its ownership
of Kewaunee to WPSC ("the Agreement"). MGE believes it can secure
electric capacity and energy more cost effectively from other sources
than Kewaunee, as well as eliminate the risk of future stranded costs.
Under the Agreement, this transaction is scheduled to close upon
regulatory approval and commencement of the replacement of steam
generators at Kewaunee.
Under the Agreement, MGE's decommissioning liability has been limited to
the current fund balances plus all decommissioning collections through
2002. For up to two years after the closing of the Agreement, MGE will
have an option to buy from WPSC electric capacity and energy up to MGE's
approximate current capacity in Kewaunee.
Additionally, WPSC has agreed to build for MGE an 83-megawatt natural
gas-fired combustion turbine near Marinette, Wisconsin. MGE will own
this unit upon completion. WPSC has agreed to credit the book value of
MGE's share of Kewaunee against the purchase price of the combustion
turbine. If, for some reason, the Marinette unit is not completed, WPSC
will pay MGE for its book value of Kewaunee.
On October 17, 1998, Kewaunee was shut down for a planned maintenance
and refueling outage. Inspection of the plant's two steam generators
showed that 1997 repairs are holding up well and few additional repairs
were needed. A major overhaul also was performed on the main turbine
generator. The plant was back on line November 27, 1998.
The PSCW had approved deferring anticipated 1998 Kewaunee steam
generator repair costs. However, inspections during the 1998 refueling
outage found little additional steam generator degradation. A change in
the NRC technical specifications also required minimal repairs at this
time since the steam generators will likely be replaced in 2000. The
PSCW is reviewing possible recovery of these costs, which were minimal.
Kewaunee has achieved the Institute of Nuclear Power Operations' top
ranking for the seventh time. The Institute of Nuclear Power Operations
was formed in 1979 to promote excellence in the nuclear industry.
The federal government is ultimately responsible for disposing of or
permanently storing spent nuclear fuel. Spent nuclear fuel is currently
being stored at Kewaunee. Minor plant modifications planned for 2001
will allow Kewaunee to have sufficient fuel storage capacity until its
license expires in 2013. Federal legislation is being considered to
create an interim storage facility.
On January 31, 1998, the United States Department of Energy (DOE) failed
to comply with its obligation to begin removing spent nuclear fuel as
required by the Nuclear Waste Policy Act of 1982. The Kewaunee co-owners
joined other utilities in a motion to enforce the July 1996 mandate of
the United States Court of Appeals for the District of Columbia that the
DOE had an unconditional obligation to begin accepting, transporting and
disposing of spent nuclear fuel by January 31, 1998.
On May 5, 1998, the United States Court of Appeals for the District of
Columbia issued a decision denying the motion to enforce the court's
1996 mandate. The denial centered on two points: (1) questions about
whether or not the Nuclear Waste Fund could be used as a source to pay
damages the utilities have incurred as a result of the DOE's breach of
its obligation; and (2) the fact that the question is not ready for
review. The court also indicated that certain items fall outside the
scope of the court's mandate including (1) compelling the DOE to submit
a detailed program for disposing of spent fuel from utilities, and (2)
declaring that the utilities are relieved of their obligation to pay
fees to the Nuclear Waste Fund for a permanent spent fuel repository and
are authorized to place such fees into escrow until the DOE commences
with disposing of spent fuel pursuant to its obligation. The scope of
the court's mandate was limited to defining the nature of the DOE's
statutory obligations and did not extend to requiring the DOE to perform
under its contracts with the utilities. The Kewaunee co-owners are
currently evaluating the decision to determine how to proceed with
contract remedies.
On June 26, 1997, the Midwest Compact Commission, on June 26, 1997,
halted development in Ohio of a six-state, regional facility for
disposing of low-level radioactive waste. The Midwest Compact Commission
cited dwindling regional waste volumes, continued access to existing
disposal facilities and potentially high development costs as the
primary reasons for its decision. The Midwest Compact Commission
monitors the availability of disposal sites for the low-level
radioactive waste created by all utilities in this region. Kewaunee has
sufficient on-site capacity to store the amount of low-level radioactive
waste expected to be generated over 10 years. This is due to technology
advances, waste compaction and generating less waste. Waste from
Kewaunee could be stored at a low-level radioactive site in Barnwell,
South Carolina, if needed.
The PSCW has directed the owners of Kewaunee to develop depreciation and
decommissioning cost levels based on full recovery by the end of 2002,
versus full recovery when the plant's license expires in 2013. This was
prompted by uncertainty about the expected useful life of the plant
without steam generator replacement. On December 31, 1998, the net
carrying amount of MGE's investment in Kewaunee was approximately $15.8
million. MGE's share of Kewaunee decommissioning costs is an estimated
$83.2 million in current dollars based on a site-specific study
performed in 1992 using immediate dismantlement as the method of
decommissioning. The decommissioning trust assets at December 31, 1998,
totaled $79.1 million. In accordance with the Agreement between WPSC and
MGE regarding the sale of Kewaunee, MGE's decommissioning liability has
been limited to the current fund balances plus all decommissioning
contributions through 2002. The study assumed decommissioning costs will
increase an average of 6.0% per year. Physical decommissioning is
expected to occur from 2014 through 2021. It is expected that additional
expenditures will be incurred from 2022 through 2039 for storing spent
nuclear fuel at the plant site.
Nuclear decommissioning costs are currently recovered from customers in
rates and are deposited in external trusts. For 1998, the
decommissioning costs recovered in rates were $8.1 million. (See Item 7,
pages II-7 and II-8 for further discussion of Kewaunee.)
The Kewaunee co-owners purchase uranium concentrates, conversion
services, enrichment services and fabrication services for nuclear fuel
assemblies at Kewaunee. New fuel assemblies replace used assemblies that
are removed from the reactor every 18 months and placed in storage at
the plant site pending removal by the DOE.
Uranium concentrates, conversion services and enrichment services are
purchased at spot market prices, through a bid process or using existing
contracts.
A uranium inventory policy requires that sufficient inventory exist for
up to two reactor reloads of fuel. Kewaunee held 947,000 pounds of
yellowcake or its equivalent in inventory as of December 31, 1998.
Two contracts are in place to provide conversion services for nuclear
fuel reloads in 2000 and 2001.
A fixed quantity of enrichment services are contracted through the year
2004. Additional enrichment services will be acquired under a contract
which is in effect for the life of Kewaunee or by purchases on the spot
market.
Fuel fabrication services are contracted well into the next decade and
contain contractual clauses covering force majeure and termination
provisions.
If, for any reason, Kewaunee was forced to suspend operations
permanently, fuel-related obligations are as follows: (1) there are no
financial penalties associated with the present uranium supply,
conversion service and enrichment agreements, and (2) the fuel
fabrication contract contains force majeure and termination for
convenience provisions. As of the end of 1998, the maximum exposure
would not be expected to exceed $274,000. Uranium inventories could be
sold on the spot market.
On June 26, 1998, the United States Supreme Court declined to review a
May 1997 decision by the United States Court of Appeals for the Federal
Circuit that was adverse to Yankee Atomic Electric Company. As a result,
it let stand a provision in the Energy Policy Act of 1992 that requires
nuclear power companies to pay a retroactive surcharge on enrichment
services purchased from the DOE. The surcharge was imposed to help fund
the decontamination and decommissioning of certain DOE facilities.
Yankee Atomic Energy Company had argued that the government should not
have the power to impose retroactive financial liability, stating it was
a breach of the fixed-price enrichment contracts that the company signed
prior to the Energy Policy Act of 1992.
Following the United States Supreme Court action, the Kewaunee co-owners
joined with a number of other nuclear power companies to challenge the
constitutionality of the Energy Policy Act of 1992 in a Federal District
Court in New York.
Under the existing law, Kewaunee co-owners are required to pay a
surcharge on uranium enrichment services purchased from the federal
government prior to October 23, 1992. MGE's obligation amounts to
approximately $250,000 per year (adjusted for inflation) through the
year 2007.
Air quality
Phase II of the 1990 Federal Clean Air Act amendments sets limits for
allowable emissions of sulfur dioxides (SO2) and nitrogen oxides (NOx)
that will take effect January 1, 2000. Modifications have already been
completed at all MGE generating units to meet year 2000 NOx
requirements. In addition, early modifications at Blount will allow MGE
to delay meeting more stringent NOx requirements at this plant until
2007. In addition to these requirements, the Environmental Protection
Agency (EPA) has recently issued stricter NOx emission limits that will
likely take effect in May 2003. MGE is considering potential strategies
for complying with new SO2 and NOx requirements including fuel
switching, emissions trading, purchased power agreements, new emission
control devices, or installation of new fuel-burning and clean-coal
technologies. Implementing new measures will likely increase capital,
operating and maintenance expenditures.
Wisconsin's acid rain law imposes limitations of SO2 emissions. Blount
and MGE's share of Columbia are required to meet a combined SO2 emission
rate of 1.20 pounds of SO2 per million Btu. No capital costs are
anticipated to comply with this standard.
The 1990 Federal Clean Air Act amendments require the EPA to perform
certain studies concerning hazardous air emissions from electric
utilities. The EPA recently completed a study for mercury and is in the
process of collecting coal and mercury emissions data from utilities.
These studies may lead to new power plant regulations for mercury and
other hazardous air emissions.
MGE believes all of its plants to be in full compliance with all
material aspects of present air-pollution control regulations.
Water quality
MGE is subject to water quality regulations by the DNR. These
regulations include both categorical-effluent discharge standards and
general water quality standards. The regulations limit discharges from
MGE's plants into Lake Michigan and other Wisconsin waters.
The categorical-effluent discharge standards require each discharger to
use effluent treatment processes equivalent to categorical "best
practicable" or "best available" technologies under compliance schedules
established pursuant to the federal Water Pollution Control Act. The DNR
has published categorical regulations for chemical discharges from steam
electric generating plants. MGE is in compliance with applicable
standards.
Solid waste
MGE is listed as a potentially responsible party for clean up at two
sites that the EPA has placed on the national priorities Superfund list:
(1) the Refuse Hideaway Landfill in Middleton, Wisconsin, where MGE
disposed of fly-ash sludge from 1980 to 1984, and (2) the Lenz Oil site
in Lemont, Illinois, which was used for storing and processing waste oil
for several years. These sites require clean up under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA). A group
of companies is currently negotiating with the EPA on the cleanup of
these two sites.
MGE's management believes the Company's share of the final cleanup costs
will not result in any materially adverse effects on the operations,
cash flows or financial position of MGE. Insurance may cover a
significant amount of the cleanup costs. Management believes the cleanup
costs not covered by insurance will be recovered in current and future
rates.
From 1855 through the 1950s, MGE and its predecessors operated a
manufactured gas plant at the present site of Blount. The plant used
coal and oil to produce a low-Btu gas used primarily for residential
cooking and heating. Wastes from the gas manufacturing process included
light oils and tars. Residual tars and oils from operating the plant may
have impacted the site near the gas holders. MGE has been monitoring the
groundwater and soils for several years in cooperation with the DNR. In
the opinion of management and legal counsel, the resolution of this
matter will not result in any materially adverse effect on the
operations or financial position of MGE.
The City of Madison has identified MGE as a potentially responsible
party for remediation of the Demetral Landfill. MGE used this site in
the early 1950s to dispose of fly-ash and bottom-ash that was produced
from burning coal to generate electricity. Many other companies also
disposed of waste at this site. MGE has the potential to incur liability
costs associated with its use of this landfill. In the opinion of
management, the resolution of this matter will not result in any
materially adverse effect on the operations or financial position of
MGE.
GAS OPERATIONS
On December 31, 1998, MGE supplied natural gas service to approximately
110,000 customers in the cities of Elroy, Madison, Middleton, Monona,
Fitchburg, Lodi, Verona and Viroqua; 22 villages; and all or parts of 41
townships. Revenues received from residential and commercial customers
accounted for 56% and 32%, respectively, of the total gas revenues for
1998. Gas operations accounted for 32% of MGE's total revenues.
Transportation service accounted for about 3% of the total 1998 gas
revenues.
MGE can curtail gas deliveries to its interruptible customers.
Approximately 6% of gas sold in 1998 was sold to interruptible
customers.
Gas supply
MGE has physical interconnections with both ANR Pipeline Company (ANR)
and Northern Natural Gas Company (NNG). MGE's primary service territory,
which includes Madison and the surrounding area, receives deliveries at
four ANR gate stations and one NNG gate station. MGE also receives
deliveries at NNG gate stations located in the communities of Viroqua,
Elroy, and in Crawford County. Interconnections with two major pipelines
provide competition in interstate pipeline service and a more reliable
and economical supply mix, which includes gas from Canada and the United
States Mid-Continent and Gulf/Offshore regions.
By contract, a total of 5,576,600 dekatherms can be injected into ANR's
storage fields from April 1 through October 31. These gas supplies are
then available to withdraw during the subsequent heating season
November 1 through March 31. ANR's storage fields are located in
Michigan. Using storage allows MGE to buy gas supplies during the summer
season, when prices are normally lowest, and withdraw these supplies
during the winter season, when gas prices are typically higher. Storage
also gives MGE more flexibility in meeting daily load fluctuations.
During the winter months, when customer demand is highest, MGE is
primarily concerned with meeting its obligation to firm customers. MGE
meets customer demand by using long-term firm supply contracts, supplies
in storage (injected during the summer) and firm supplies purchased for
the winter period. Contracts for these gas supplies are finalized before
the heating season so price levels can be locked in to assure reliable
deliveries and stable prices.
The prior heating season (November 1997 through March 1998) was warmer
than normal. Demand for natural gas was near forecasted amounts during
the summer (April 1998 through October 1998) as gas was injected into
storage to replenish inventories. The beginning of the current heating
season (November 1998 through March 1999) has been much warmer than
normal and caused storage levels to be somewhat higher than normal.
MGE has firm transportation service on ANR for a maximum daily quantity
of 33,618 dekatherms. MGE's NNG maximum daily quantity for firm
transportation service is 48,719 dekatherms. MGE also holds 2,457
dekatherms of firm transportation service into Viroqua's NNG gate
station and firm transportation service of 1,432 dekatherms into
Crawford County's NNG gate station.
GENERAL
MGE's business is seasonal to the same extent as other Upper Midwest
electric and natural gas utilities.
MGE had 675 permanent employees at December 31, 1998.
Information regarding MGE executive officers is included under Item 10,
page III-1, Directors and Executive Officers of the Registrant, of this
report, which information is incorporated herein by reference.
Item 2. Properties
The following table presents the generating capability in service at
December 31, 1998:
Net
Commercial Capability No. of
Plants Operation Date Fuel (Megawatt) Units
------ -------------- ----- ---------- ------
Steam plants
Columbia 1975 & 1978 Low-sulfur 232 (1,2) 2
coal
Kewaunee 1974 Nuclear 93 (1,3) 1
Blount (Madison) 1957 & 1961 Coal/gas 99 2
1938 & 1942 Gas 39 2
1949 Coal/gas 22 1
1964-1968 Gas/oil 35 4
Combustion turbines 1964-1973 Gas/oil 91 5
Portable generators 1998-1999 Diesel 10 10
---------
Total 621
(1) Base load generation
(2) MGE's 22% share of two 527-mw units located near Portage, Wisconsin
(3) MGE's 17.8% share of 525-mw unit located near Kewaunee, Wisconsin
Major electric transmission and distribution lines and substations in
service at December 31, 1998, are as follows:
Miles
------------------------------------
Lines Overhead Lines Underground Lines
- ----------------- --------------- -----------------
Transmission
345 kV 124 -
138 kV 96 3
69 kV 63 20
Distribution
13.8 kV and under 1,017 762
Installed Capacity
Substation (kVA)
----------------- ------------------
Transmission (22) 4,165,000
Distribution (33) 363,000
Gas facilities include 1,911 miles of distribution mains and one propane
air plant capable of producing a maximum daily capacity of 9,000
dekatherms of natural gas equivalent.
Item 3. Legal Proceedings
See Item 8, page F-16 and F-17.
Item 4. Results of Votes of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MGE common stock is traded on The Nasdaq National Stock Market (Nasdaq)
under the symbol MDSN. On January 31, 1999, there were approximately
18,513 stockholders of record. MGE's transfer agent and registrar is
Harris Trust and Savings Bank, Chicago, Illinois.
The tables below show the following: (1) high and low sales prices for
the common stock on Nasdaq, and (2) dividends paid per common share for
each quarter over the past two years.
Common stock price range
1998 Dividends per Share
High Low 1998
------- ------- -------------------
First quarter $23-1/2 $21-3/4 $0.323
Second quarter $22-7/8 $20-7/8 $0.323
Third quarter $23-1/2 $22-1/4 $0.326
Fourth quarter $23-11/16 $22-1/4 $0.326
Common stock price range
1997 Dividends per share
High Low 1997
------- ------- -------------------
First quarter $21-3/4 $18-1/2 $0.320
Second quarter $21-1/4 $19-1/2 $0.320
Third quarter $21-1/4 $19-7/8 $0.323
Fourth quarter $23-3/4 $19-5/8 $0.323
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
For the years ended December 31,
(In thousands of dollars, except per-share amounts)
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Operating Revenues:
Electric $169,563 $163,123 $152,747 $153,554 $149,665
Gas 80,189 101,525 100,544 95,036 95,307
-------- --------- -------- -------- --------
Total 249,752 264,648 253,291 248,590 244,972
Operating expenses 199,954 212,921 200,486 191,725 187,469
Other general taxes 9,263 8,797 8,736 8,709 8,619
Income tax items 10,723 11,940 12,553 14,285 14,822
-------- --------- -------- -------- -------
Net operating income 29,812 30,990 31,516 33,871 34,062
Other (loss)/income
(including allowance
for funds used during
construction) 3,339 2,272 (14,177) 1,635 2,146
-------- --------- -------- -------- -------
Income before
interest expense 33,151 33,262 17,339 35,506 36,208
Interest expense 10,921 10,739 10,912 11,536 11,197
Net income 22,230 22,523 6,427 23,970 25,011
Preferred dividends - - - 64 471
-------- --------- -------- -------- -------
Earnings on common
stock $ 22,230 $ 22,523 $ 6,427 $ 23,906 $ 24,540
======== ========= ======== ======== ========
Average shares
outstanding 16,080 16,080 16,080 16,080 16,080
Earnings per share $1.38 $1.40 $0.40 $1.49 $1.53
Dividends paid per
share $1.298 $1.287 $1.273 $1.260 $1.247
Ratio of earnings to
fixed charges* 3.84 4.02 2.71 4.23 4.49
At December 31,
Assets
Electric $311,563 $313,855 $315,022 $327,053 $323,870
Gas 111,762 118,339 116,723 119,968 118,210
Assets not allocated 42,940 39,596 52,424 46,855 45,679
-------- --------- -------- -------- --------
Total $466,265 $471,790 $484,169 $493,876 $487,759
======== ========= ======== ======== ========
Capitalization
Common shareholders'
equity $182,275 $180,923 $179,089 $193,137 $189,489
Redeemable preferred
stock - - - - 5,100
Long-term debt 159,761 129,923 128,886 129,048 130,800
Short-term debt - 33,500 29,750 20,500 28,600
--------- -------- -------- -------- --------
Total Capitalization $342,036 $344,346 $337,725 $342,685 $353,989
========= ======== ======== ======== ========
*For the purpose of computing the ratio of earnings to fixed charges,
earnings have been calculated by adding to income before interest
expense, current and deferred federal and state income taxes, investment
tax credits deferred and restored charged (credited) to operations, and
the estimated interest component of rentals. Fixed charges represent
interest expense, amortization of debt discount, premium and expense,
and the estimated interest component of rentals.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
Madison Gas and Electric Company's (MGE) consolidated results of
operations and financial condition. This discussion should be read in
conjunction with the consolidated financial statements and notes.
This report, and certain other MGE public documents, contain forward-
looking statements that reflect management's current assumptions and
estimates of future performance and economic conditions, especially as
they relate to future revenues, expenses, financial resources and
regulatory matters. These forward-looking statements are made pursuant
to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. MGE cautions investors that forward-looking
statements are subject to known and unknown risks and uncertainties that
may cause MGE's actual results to differ materially from those
projected, expressed or implied. Some of those risks and uncertainties
include the following:
- - economic and market conditions in MGE's service territory;
- - magnitude and timing of capital expenditures;
- - regulatory environment (including restructuring the electric utility
industry in Wisconsin);
- - availability and cost of power supplies; and
- - MGE's ability to become Year 2000 (Y2K) compliant at a reasonable
cost.
RESULTS OF OPERATIONS
Earnings Overview
In 1998, MGE produced consolidated earnings of $1.38 per share, despite
having the warmest heating season since 1931. Management's actions to
control costs helped minimize the impact of weather on earnings. MGE
increased nonutility income by: (1) selling its remaining assets in
National Energy Management and (2) buying weather "insurance" to manage
the risk of lost gas revenue due to abnormal weather conditions.
In 1997, MGE earned $1.40 per share despite an extended outage at the
Kewaunee Nuclear Power Plant (Kewaunee). MGE's expenses were higher for:
(1) replacement power while Kewaunee was out of service and prior to the
interim rate surcharge and (2) actions taken to prevent outages when
regional power supplies were tight in the summer.
In 1996, earnings from core utility operations were $1.48 per share.
Earnings were negatively impacted by one-time charges totaling $12.0
million (after tax), which reflected: (1) the current value of MGE's
investment in its gas marketing subsidiaries at that time and (2) a
refund to natural gas customers under a sharing mechanism between Great
Lakes Energy Corp. (GLENCO) and MGE. Operating losses of $5.4 million
(after tax) from MGE's gas marketing subsidiaries also impacted
consolidated earnings. MGE's consolidated earnings totaled $0.40 per
share.
Electric Sales and Revenues
In 1998, warm summer weather contributed to a 2.5% increase in electric
retail sales. Electric revenues were up $6.4 million or 3.9% mainly due
to sales growth and a customer surcharge for deferred expenses on the
1997 Kewaunee repairs (see Item 3, page F-15, Rate Matters). The
electric sales breakdown by customer class is shown in the table below:
Electric Sales
------------------------------------
Megawatt-hours 1998 1997 % Change
--------- ---------- ---------
Residential 750,831 720,576 4.2
Commercial 1,481,315 1,420,347 4.3
Industrial 306,022 307,485 (0.5)
Other 312,684 332,995 (6.1)
--------- ----------
Total Retail 2,850,852 2,781,403 2.5
Resale - Utilities 76,889 64,914 18.4
--------- ----------
Total Sales 2,927,741 2,846,317 2.9
========= ==========
In 1997, electric revenues rose $10.4 million or 6.8% due to growth in
electric sales, a 3.1% increase in electric rates effective August 20,
1997, and an interim rate surcharge of 0.507 cents per kilowatt-hour
effective March through June 1997. The interim rate surcharge covered
higher costs incurred during the extended outage at Kewaunee.
Gas Sales and Revenues
In 1998, one of the warmest winters on record, total gas therms
delivered by MGE dropped 14.8%. As a result, gas revenues were down
$21.3 million or 21.0%. Total heating degree days (as measured by the
number of degrees that the mean daily temperature is below 65 degrees
Fahrenheit) fell 19.3%. The table below shows total gas deliveries by
customer class.
Gas Sales
--------------------------------
Megawatt-hours 1998 1997 % Change
-------- -------- --------
Residential 75,283 87,664 (14.1)
Commercial and Industrial 68,109 87,717 (22.4)
------- -------
Total Retail System 143,392 175,381 (18.2)
------- -------
Transport 40,926 40,947 (0.1)
------- -------
Total Gas Deliveries 184,318 216,328 (14.8)
======= =======
In 1997, mild winter weather resulted in a 4.9% decrease in total gas
therms delivered by MGE, compared to 1996. However, gas revenues were up
1.0%. A 3.5% gas rate increase, effective in August, contributed to
higher revenues.
Electric Fuel and Natural Gas Costs
In 1998, lower purchased power costs due to the availability of
Kewaunee, contributed to a $2.9 million or 6.4% decrease in electric
fuel and purchased power costs. MGE's electric margin (revenues less
fuel and purchased power) for 1998 was up $9.3 million or 7.9%. However,
the increase in margin was due in part to the interim rate surcharge.
In 1997, electric fuel and purchased power costs increased $6.4 million
or 16.7%. MGE incurred higher costs to replace power normally produced
at Kewaunee. A regional electric supply shortage also drove up purchased
power costs in July 1997.
In 1998, an unusually warm winter resulted in a $19.6 million or 30.1%
decrease in natural gas costs. Lower gas deliveries reduced MGE's gas
margin (revenues less natural gas purchased) by $1.7 million or 4.7%.
The impact of the lower deliveries was offset somewhat by continued
customer growth and a gas rate increase of 3.5%.
In 1997, a mild winter also caused natural gas costs to drop $0.9
million or 1.4%, compared to 1996.
Other Operating Expenses
In 1998, operating and maintenance (O&M) expenses increased $4.6 million
or 6.2% over 1997. Factors contributing to this increase include:
- - Amortization of deferred 1997 expenses for repairing the steam
generator at Kewaunee (offset by the customer surcharge MGE collected in
1998).
- - Amortization of deferred costs associated with industry restructuring
and regional power shortages.
In 1997, O&M expenses increased $4.2 million or 5.9%. MGE incurred
higher costs for accelerating repairs at other generating plants because
of the extended outage at Kewaunee.
In 1998, depreciation and amortization expenses increased $4.9 million.
Accelerating both the depreciation and the collection of decommissioning
funds for the Kewaunee plant accounted for $3.4 million of this total
increase.
Other Nonoperating Items
In 1998, MGE's nonutility operating income increased $1.0 million. MGE
sold its remaining assets in National Energy Management, L.L.C. (NEM)
for $1.8 million. NEM was formed in January 1997 as a joint venture
between MGE's gas marketing subsidiaries, GLENCO and American Energy
Management Inc. (AEM), and another gas marketing company (see Item 4,
F-16, Gas Marketing Subsidiaries).
MGE's 1997 nonutility income was $0.8 million compared to operating
losses of $5.4 million in 1996. MGE recorded a one-time charge in 1996
of $10.4 million (after tax) to reflect the current value of MGE'S
investment in its gas marketing subsidiaries.
Electric and Gas Operations Outlook
MGE anticipates electric and gas sales will grow at a compounded rate of
1% to 2% through December 31, 2003. MGE expects its:
- - Service territory will remain well insulated against economic
downturns.
- - Low percentage of industrial customers, competitive distribution costs
and lower risk of stranded investments will allow MGE to maintain a
competitive advantage in a deregulated electric industry.
- - Size to be an asset, allowing employees to respond more quickly and
offer more flexibility in meeting customers' needs.
MGE entered into an agreement with Wisconsin Public Service Corp. (WPSC)
to sell its ownership (17.8%) in Kewaunee to help eliminate future risk
of stranded investment (see further discussion on page II-7, Kewaunee
Nuclear Power Plant). MGE continues to offer competitive rates and
services to meet the needs of its customers in a deregulated natural gas
market.
LIQUIDITY AND CAPITAL RESOURCES
Capital Requirements and Investing Activities
MGE's liquidity is primarily affected by its construction requirements.
1998 capital expenditures were $30.8 million. It is anticipated that
1999 capital expenditures will be $62.5 million. Major projects include:
- - a wind energy farm;
- - improvements at MGE's Blount Generating Station;
- - a gas pipeline expansion; and
- - MGE-owned backup generators, located at customers' sites, to help meet
their energy needs.
These projects either comply with new legislation or help maintain the
reliability of MGE'S distribution system. Capital expenditures for the
years 2000 through 2003 will average an estimated $40 million per year.
Capital expenditures and nuclear fuel estimates for 1999, actual for
1998 and an average for the three-year period 1995 to 1997, are shown on
page II-7.
Cash Provided by Operating Activities
In 1998, cash provided by operating activities increased to $70.5
million, up from $40.8 million. Cash increased mainly due to collecting
(through rates) the continued amortization of demand-side management
programs and the acceleration of both depreciation and the collection of
decommissioning funds for Kewaunee.
In 1997, cash provided by operating activities decreased $7.5 million or
15.5%, after reducing current payables for GLENCO and AEM.
Expenditures for Construction and Nuclear Fuel
For the years 1999 Annual Average
ended December 31: Estimated 1998 1995 to 1997
-------------- -------------- ---------------
Thousands of dollars
Electric
Production $32,446 51.9% $10,938 35.5% $ 2,987 13.0%
Transmission 2,133 3.4 1,256 4.1 1,003 4.4
Distribution and 10,709 17.1 10,358 33.6 8,834 38.6
General
Nuclear Fuel 4,134 6.6 2,152 7.02 2,075 9.0
------- ------ ------- ------ ------- ------
Total Electric 49,422 79.0 24,704 80.2 14,899 65.0
Gas 8,536 13.7 4,046 13.1 5,836 25.5
Common 4,542 7.3 2,079 6.7 2,172 9.5
------- ------ ------- ------ ------- ------
Total $62,500 100.0% $30,829 100.0% $22,907 100.0%
======= ====== ======= ====== ======= =====
Financing Activities and Capitalization Matters
In 1998, cash used for financing activities increased $8.6 million or
54.3%. In September 1998, MGE issued $30 million in unsecured Medium
Term Notes to reduce short-term debt and to finance capital spending.
In 1998, MGE's internally generated funds exceeded the funds used for
construction and nuclear fuel expenditures. MGE increased its cash used
in investing activities by $12.7 million or 45.1%. This is due to plant
additions increasing by $9.2 million and accelerating the collection of
decommissioning funds ($3.4 million) for the Kewaunee plant, which
assumes an end-of-service life of 2002.
Kewaunee Nuclear Power Plant
Kewaunee has been operated since 1974 by WPSC. The plant's license will
expire in 2013. Kewaunee is jointly owned by MGE (17.8%), WPSC and
Wisconsin Power and Light Company (a subsidiary of Alliant Energy).
On April 7, 1998, the Public Service Commission of Wisconsin (PSCW)
approved WPSC's application to replace two steam generators at Kewaunee
for a total cost of approximately $90.7 million (MGE's share would be
17.8% or $16.1 million). The replacement work, scheduled for the spring
of 2000, will take approximately 60 days.
On September 29, 1998, MGE finalized an agreement to sell its ownership
of Kewaunee to WPSC. MGE believes it can secure electric capacity and
energy more cost effectively from other sources than its Kewaunee
investment as well as eliminate future stranded costs. This agreement is
scheduled to close pending regulatory approval and the replacement of
the steam generators at Kewaunee.
MGE's decommissioning liability has been limited to the current fund
balances plus all decommissioning collections through 2002. For up to
two years after the closure of the agreement, MGE will have an option to
buy from WPSC electric capacity and energy up to MGE's current capacity
in Kewaunee.
Additionally, WPSC has agreed to build for MGE an 83-megawatt natural
gas-fired combustion turbine near Marinette, Wisconsin. MGE will own
this unit upon completion. WPSC has agreed to credit the book value of
MGE'S share of Kewaunee against the purchase price of the combustion
turbine. If, for some reason, the Marinette unit is not completed, WPSC
will pay MGE for its book value of Kewaunee.
On October 17, 1998, Kewaunee was shut down for a planned maintenance
and refueling outage. Inspection of the plant's two steam generators
showed that 1997 repairs are holding up well and few additional repairs
were needed. A major overhaul was also performed on the main turbine
generator. The plant was back on line November 27, 1998.
Business and Regulatory Environment
In February 1996, the PSCW submitted a report to the State Legislature
on electric utility restructuring in Wisconsin. The report included 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 a number of nuclear plant
outages in the region (including Kewaunee). The electric reliability
crisis caused the PSCW to revise its plans for restructuring the
electric industry. In October 1997, the PSCW developed a seven-step plan
and stated that retail competition could not occur until reliability
concerns were addressed and all safeguards were in place to protect
consumers. The PSCW's revised position was consistent with plans
proposed by MGE and a broad coalition of customers.
The PSCW's new plan:
- - Focuses on all Wisconsin utilities building new power plants and
transmission lines to increase generating capacity in the state and
improve the state's ability to import electricity from other regions.
- - Removes current barriers to open transmission access and moves forward
in developing a strong state and regional Independent System Operator
(ISO). This would assure the transmission system is operated safely,
reliably and with open/nondiscriminatory access.
- - Explores new ways to promote the development of renewable energy
sources.
The PSCW will decide in the future if and when it is appropriate for
retail competition to proceed in the electric industry. MGE cannot
predict what impact future PSCW actions may have on its future financial
condition, cash flows, or results of operations. However, MGE believes
it is well-positioned to compete in a deregulated market.
Restructuring the electric industry could affect MGE's ability to
continue to establish certain regulatory asset and liability amounts
allowed under Statement of Financial Accounting Standard (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." MGE is
unable to predict whether any adjustments to regulatory assets and
liabilities will occur in the future. However, the PSCW'S restructuring
plan specifically recognizes the need to allow recovery for commitments
made under prior regulatory regimes.
On April 28, 1998, Governor Tommy Thompson signed into law the 1997
Wisconsin Act 204 - the Wisconsin Electric Reliability Act (the Act).
The Act seeks to guarantee a reliable electric supply in Wisconsin for
future generations. It received widespread support from consumer groups,
legislators, and utilities (including MGE).
The Act:
- - Streamlines the regulatory process, requiring the PSCW and the
Department of Natural Resources to expedite the review process and
permitting necessary to construct electric generating facilities and
transmission lines.
- - Requires utilities to voluntarily transfer transmission operations by
June 30, 2000, to an ISO approved by the Federal Energy Regulatory
Commission (FERC).
- - Allows construction of "merchant" power plants that would sell
electricity to utilities. A merchant plant can be built without prior
commitments from utilities or customers to buy the power it will
produce.
- - Requires 50 megawatts (MW) of new generation to be built using
renewable energy sources such as wind or solar. Pursuant to the
requirements of the Act, MGE is building a $15 million wind project that
helps fulfill this requirement. The Act allows MGE to recover costs for
this project through customers' rates.
- - Directed the PSCW to study constraints in the intrastate and
interstate transmission system that have hurt electric reliability in
Wisconsin. The PSCW reported the results to the State Legislature on
September 1, 1998.
The Act allowed MGE to receive timely approval on an 83-MW gas
combustion turbine that will start operating June 1, 2000. This turbine
will cost approximately $33 million. WPSC will build this unit for MGE
near Marinette, Wisconsin.
A gas cost recovery mechanism (GCRM) allows MGE to recover appropriate
pipeline capacity costs, commodity costs, and FERC-approved/mandated
charges. Under the GCRM, gas commodity costs are compared to a monthly
benchmark. If actual costs are below the benchmark, full recovery is
allowed. If actual costs are above the benchmark, they are reviewed by
the PSCW. Starting November 1, 1999, any savings or increases in gas
commodity costs, up to $1.5 million, will be shared 50% with customers
and 50% with shareholders. Any additional savings or costs will be
passed on to customers.
The PSCW also sets a target for capacity release. Starting November 1,
1999, capacity release above or below the target amount will be shared
50% with customers and 50% with shareholders.
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which takes effect for MGE starting January 1, 2000. SFAS
133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Due to its limited use of derivative
instruments, SFAS 133 is not expected to have a significant effect on
MGE's results of operations or its financial position.
In November 1998, the FASB's Emerging Issues Task Force (EITF) issued
98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." EITF 98-10 outlines attributes that may be
indicative of an energy trading operation and gives further guidance on
the accounting for contracts entered into by an energy trading
operation. This accounting guidance requires mark-to market accounting
for contracts considered to be a trading activity, and is applicable for
fiscal years beginning after December 15, 1998. The adoption of EITF 98-
10 will not have a material impact on MGE'S financial position or
results of operation. MGE will continue to evaluate the impacts of
EITF 98-10.
Inflation
The current financial statements report operating results in terms of
historical cost, but they do not evaluate the impact of inflation. Since
utilities can depreciate only the historical cost of utility plant,
there may not be adequate cash flows from the existing plant to replace
this investment. Projected operating costs include the impacts of
inflation, which are recovered in revenues through the ratemaking
process.
Environmental Issues
Phase II of the 1990 Federal Clean Air Act amendments sets limits for
allowable emissions of sulfur dioxides (SO2) and nitrogen oxides (NOx)
that will take effect January 1, 2000. MGE's generating units have
already been modified to meet year 2000 NOx requirements. Early
modifications at Blount will allow MGE to delay meeting more stringent
NOx requirements at this plant until 2007.
In addition to these requirements, the Environmental Protection Agency
(EPA) issued new NOx emission limits which are even more stringent than
Phase II and will likely take effect in May 2003. MGE is considering the
following options to comply with more stringent NOx requirements: fuel
switching, emissions trading, purchased power agreements, new emission
control devices or installing new fuel-burning and clean-coal
technologies. MGE is evaluating compliance strategies and their costs.
Implementing new measures will likely increase capital, operating and
maintenance expenditures.
MGE is listed as a potentially responsible party for two sites that the
EPA has placed on the national priorities Superfund list: (1) the Refuse
Hideaway Landfill in Middleton, Wisconsin, where MGE disposed of fly ash
sludge from 1980 to 1984; and (2) the Lenz Oil site in Lemont, Illinois,
which was used for storing and processing waste oil for several years.
These sites require cleanup under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA). A group of companies
is currently negotiating with the EPA on the cleanup of these two sites.
In addition, MGE is negotiating with the City of Madison for cleanup
costs at the Demetral Landfill. MGE used this site for coal ash disposal
from 1954-1959.
MGE's management believes that the Company's share of the final cleanup
costs will not result in any materially adverse effects on the
operations, cash flows or financial position of MGE. Insurance may cover
a significant amount of the cleanup costs. Management believes that the
cleanup costs not covered by insurance will be recovered in current and
future rates.
Year 2000
The Year 2000 (Y2K) issue is the result of computer programs that were
written using two digits rather than four to define the applicable year.
A failure due to the Y2K issue could cause disruptions in normal
business operations. MGE is making system modifications to reduce the
risk of a material impact on MGE.
Although MGE has not experienced any significant Y2K failure to date,
the most conscientious efforts cannot guarantee that every problem will
be found and corrected prior to January 1, 2000. MGE expects to have
contingency plans in place by June 30, 1999, for its critical operating
and business systems.
MGE estimates its total Y2K costs to be $4.3 million, of which
approximately $2.6 million has been spent. These costs are being
expensed as incurred and funded through operating cash flow. Costs
incurred for the replacement of computerized systems, if any, will be
capitalized.
Y2K Approach and Status
MGE's Y2K project team, created in 1997, developed a work plan that
includes the following phases:
Percentage Complete
as of 12/31/98 Information Systems Embedded Systems
------------------- ----------------
Project organization
and awareness 100% 100%
Assessment 99 99
Remediation 75 90
Verification and testing 75 90
Auditing 5 5
Contingency Planning
and Preparedness 10 25
MGE has completed its assessment of the Y2K impact on its business. MGE
prioritized critical systems and developed action plans accordingly.
Approximately 80% of MGE's Y2K work is in the information systems area.
MGE expects testing and auditing of all critical systems to be completed
by June 30, 1999. Independent consultants have reviewed MGE's
guidelines, project methodology and project organization to become Y2K
ready.
MGE has identified its major suppliers and is assessing their Y2K
readiness through surveys and interviews. Our two most critical vendors
are operators of our jointly owned power plants. Kewaunee is following
the Y2K readiness guidelines and methods that have been established by
the Nuclear Energy Institute (NEI). An evaluation of Kewaunee's Y2K
readiness plans, processes, and progress was made by an independent
consultant. It is expected that Columbia will be Y2K ready by June 30,
1999. MGE will follow up with its critical suppliers in early 1999, as
needed.
The failure of vendors or other utilities to properly address Y2K issues
could impact MGE. While MGE cannot predict the full impact of Y2K, MGE
believes its efforts minimize the risk of any significant impact on
operations. The most likely worst case scenario for MGE is a short-term
loss of electric or gas service to its customers.
Y2K operational contingency planning is underway. MGE's contingency
plans follow guidelines issued by the North American Electric
Reliability Council (NERC). These plans are being coordinated with other
electric and gas utilities in the region as well as local emergency
management agencies. Through the Mid-America Interconnected Network
(MAIN), MGE is participating in NERC's industry-wide Y2K preparedness
and contingency planning efforts. This effort includes monthly readiness
assessments and two industry-wide Y2K drills scheduled for April and
September 1999.
MGE participates in quarterly assessments of the gas utility industry
coordinated by the American Gas Association to communicate Y2K readiness
of the industry.
MGE subsidiaries are being assessed for Y2K issues, but those systems
are not critical and therefore will not have a material effect on normal
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index of Consolidated Financial Statements, Footnotes, and Supplementary
Data
Responsibility for Financial Statements F-1
Report of Independent Accountants F-2
Consolidated Statements of Income and Retained Income F-3
Consolidated Statements of Cash Flows F-4
Consolidated Balance Sheets F-5
Consolidated Statements of Capitalization F-6
Notes to Consolidated Financial Statements F-7 - F-20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Madison Gas and Electric Company is responsible for
preparing and presenting the financial information in this Annual
Report. The following financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied and reflect management's best estimates and informed judgments
as required.
To fulfill these responsibilities, management has developed and
maintains a comprehensive system of internal operating, accounting and
financial controls. These controls provide reasonable assurance that the
Company's assets are safeguarded, transactions are properly recorded and
the resulting financial statements are reliable. An internal audit
function assists management in monitoring the effectiveness of the
controls.
The Report of Independent Accountants on the financial statements by
PricewaterhouseCoopers LLP appears below. The responsibility of the
independent accountants is limited to the audit of the financial
statements presented and the expression of an opinion as to their
fairness.
The Board of Directors maintains oversight of the Company's financial
situation through its monthly review of operations and financial
condition and its selection of the independent accountants. The Audit
Committee is comprised of all Board members who are not employees or
officers of the Company. The Audit Committee meets periodically with the
independent accountants and the Company's internal audit staff--without
management representatives present--to review accounting, auditing and
financial matters. Pertinent items discussed at the meetings are
reviewed with the full Board of Directors.
/s/ David C. Mebane
Chairman, President and
Chief Executive Officer
/s/ Terry A. Hanson
Vice President - Finance
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Madison Gas and Electric
Company:
In our opinion, the accompanying consolidated balance sheets and
statements of capitalization and the related consolidated statements of
income, retained income and cash flows present fairly, in all material
respects, the financial position of MADISON GAS AND ELECTRIC COMPANY and
subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 8, 1999
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED INCOME
(Thousands of dollars, except per-share amounts)
<CAPTION>
For the years ended December 31, 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME
Operating Revenues:
Electric $169,563 $163,123 $152,747
Gas 80,189 101,525 100,544
-------- -------- --------
Total Operating Revenues 249,752 264,648 253,291
-------- -------- --------
Operating Expenses:
Fuel for electric generation 32,289 30,764 26,676
Purchased power 9,624 14,008 11,687
Natural gas purchased 45,458 65,079 66,021
Other operations 64,231 62,018 58,178
Maintenance 15,167 12,735 12,414
Depreciation and amortization 33,185 28,317 25,510
Other general taxes 9,263 8,797 8,736
Income tax items 10,723 11,940 12,553
-------- -------- --------
Total Operating Expenses 219,940 233,658 221,775
-------- -------- --------
Net Operating Income 29,812 30,990 31,516
AFUDC - equity funds 122 28 40
Other income, net 1,413 1,445 1,517
Writedown of nonregulated gas
subsidiaries, net - - (10,400)
Non-utility operating
(loss)/income, net 1,738 784 (5,355)
-------- -------- --------
Income Before Interest Expense 33,085 33,247 17,318
Interest Expense:
Interest on long-term debt 10,234 9,641 9,815
Other interest 687 1,098 1,097
AFUDC - borrowed funds (66) (15) (21)
-------- -------- --------
Net Interest Expense 10,855 10,724 10,891
-------- -------- --------
Net Income $ 22,230 $ 22,523 $ 6,427
======== ======== ========
Earnings Per Share of Common
Stock (basic and diluted)
(Average shares outstanding
16,079,718 for all years) $1.38 $1.40 $0.40
======== ======== ========
CONSOLIDATED STATEMENTS OF
RETAINED INCOME
Balance - Beginning of Year $52,285 $50,451 $64,499
Add - Net income 22,230 22,523 6,427
Deduct - Cash dividends on common
stock (dividends per share were
$1.30, $1.29, and $1.27,
respectively) (20,878) (20,689) (20,475)
------- ------- -------
Balance - End of Year $53,637 $52,285 $50,451
======= ======= =======
The accompanying notes are an integral part of the above statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars, except per-share amounts)
<CAPTION>
For the years ended December 31, 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $22,230 $22,523 $ 6,427
Items not affecting cash:
Depreciation and amortization 33,185 28,317 25,510
Deferred income taxes (1,229) (1,400) (7,181)
Amortization of nuclear fuel 2,321 1,517 2,098
Amortization of investment tax
credits (747) (753) (792)
AFUDC - equity funds (122) (28) (40)
Writedown of nonregulated gas
subsidiaries - - 15,741
Other (562) 431 1,146
------- ------- -------
Net Funds Provided from Operations 55,076 50,607 42,909
Changes in working capital,
excluding cash equivalents, sinking
funds, maturities, and interim loans:
Decrease/(increase) in current
assets 3,577 6,162 (3,445)
(Decrease)/increase in current
liabilities (783) (21,174) 2,458
Other noncurrent items, net 12,617 5,244 6,386
------- ------- -------
Cash Provided by Operating Activities 70,487 40,839 48,308
------- ------- -------
FINANCING ACTIVITIES:
Cash dividends on common and
preferred stock (20,878) (20,689) (20,475)
Maturities/redemptions of First
Mortgage Bonds - (3,800) (7,840)
Increase in long-term debt 30,000 5,000 -
Other decreases in First Mortgage
Bonds (162) (163) (162)
Increase/(decrease) in interim loans (33,500) 3,750 9,250
------- ------- -------
Cash Used for Financing Activities (24,540) (15,902) (19,227)
------- ------- -------
INVESTING ACTIVITIES:
Additions to utility plant and
nuclear fuel (30,829) (21,635) (21,906)
AFUDC - borrowed funds (66) (15) (21)
Increase in nuclear decommissioning
fund (9,910) (6,467) (4,710)
------- ------- -------
Cash Used for Investing
Activities (40,805) (28,117) (26,637)
------- ------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 5,142 (3,180) 2,444
Cash and cash equivalents at
beginning of period 2,108 5,288 2,844
------- ------- -------
Cash and cash equivalents at
end of period $7,250 $2,108 $ 5,288
======= ======= =======
The accompanying notes are an integral part of the above statements.
</TABLE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
<CAPTION>
At December 31, 1998 1997
-------- --------
<S> <C> <C>
ASSETS
Utility Plant, at original cost,
in service:
Electric $520,753 $510,405
Gas 184,868 181,861
-------- --------
Gross Plant in Service 705,621 692,266
Less accumulated provision for depreciation (446,984) (407,602)
-------- --------
Net Plant in Service 258,637 284,664
Construction work in progress 21,490 10,995
Nuclear decommissioning fund 79,089 59,179
Nuclear fuel, net 8,086 8,255
-------- --------
Total Utility Plant 367,302 363,093
-------- --------
Other Property and Investments 6,700 8,252
-------- --------
Current Assets:
Cash and cash equivalents 7,250 2,108
Accounts receivable, less reserves of
$1,281 and $1,235, respectively 26,812 28,395
Unbilled revenue 13,113 13,580
Materials and supplies, at lower of average
cost or market 5,936 5,557
Fossil fuel, at lower of average cost or
market 3,509 3,605
Stored natural gas, at lower of average
cost or market 9,709 9,851
Prepaid taxes 6,573 7,190
Other prepayments 1,030 2,081
-------- --------
Total Current Assets 73,932 72,367
-------- --------
Deferred Charges 18,331 28,078
-------- --------
Total Assets $466,265 $471,790
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see statement) $342,036 $310,846
-------- --------
Current Liabilities:
Long-term debt sinking fund requirements
(Note 4) 200 200
Interim loans - commercial paper outstanding - 33,500
Accounts payable 15,364 14,528
Accrued taxes 549 -
Accrued interest 2,734 2,206
Accrued nonregulated items 2,771 4,837
Other 4,696 5,326
-------- --------
Total Current Liabilities 26,314 60,597
-------- --------
Other Credits:
Deferred income taxes 44,343 45,572
Regulatory liability - SFAS 109 23,745 24,875
Investment tax credit - deferred 9,938 10,685
Other regulatory liabilities 19,889 19,215
-------- --------
Total Other Credits 97,915 100,347
-------- --------
Commitments - -
-------- --------
Total Capitalization and Liabilities $466,265 $471,790
======== ========
The accompanying notes are an integral part of the above balance sheets.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands of dollars)
<CAPTION>
At December 31, 1998 1997
-------- --------
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY
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 53,637 52,285
-------- --------
Total Common Shareholders' Equity 182,275 180,923
======== ========
First Mortgage Bonds:
6 1/2%, 2006 Series:
Pollution Control Revenue Bonds 6,475 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 114,975 115,175
Unamortized discount and premium on
bonds, net (1,014) (1,052)
Long-term debt sinking fund requirements (200) (200)
-------- --------
Total First Mortgage Bonds 113,761 113,923
Other Long-Term Debt:
6.01%, due 2000 11,000 11,000
6.91%, due 2004 5,000 5,000
6.02%, due 2008 30,000 -
-------- --------
Total Capitalization $342,036 $310,846
======== ========
The accompanying notes are an integral part of the above statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. General
Madison Gas and Electric Company (MGE) is an investor-owned public
utility headquartered in Madison, Wisconsin. The Company generates,
transmits and distributes electricity to more than 124,000 customers in
a 250-square-mile area of Dane County. MGE also transports and
distributes natural gas to nearly 110,000 customers in 1,325 square
miles of service territory in seven counties.
The consolidated financial statements reflect the application of certain
accounting policies described in this note. The financial statements
include the accounts of MGE and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Revenues are recorded based on services rendered or
energy delivered to customers. MGE accrues an estimate on a monthly
basis for unbilled revenue on the same basis. Gas revenues are subject
to an adjustment clause related to periodic changes in the cost of gas.
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reported periods. They also
affect the disclosure of contingencies. Actual results could differ from
those estimates.
b. Utility Plant
Utility plant is stated at the original cost of construction, which
includes indirect costs consisting of payroll taxes, pensions,
postretirement benefits, other fringe benefits, administrative and
general costs, and an allowance for funds used during construction
(AFUDC).
AFUDC represents the approximate cost of debt and equity capital devoted
to plant under construction. MGE presently capitalizes AFUDC at a rate
of 10.52% on 50.0% of construction work in progress. The AFUDC rate
approximates MGE's cost of capital. The portion of the allowance
applicable to borrowed funds is presented in the Consolidated Statements
of Income as a reduction of interest expense, while the portion of the
allowance applicable to equity funds is presented as other income.
Although the allowance does not represent current cash income, it is
recovered under the ratemaking process over the service lives of the
related properties.
c. Nuclear Fuel
The cost of nuclear fuel used for electric generation is being amortized
to fuel expense and recovered in rates based on the quantity of heat
produced for generating electricity at Kewaunee Nuclear Power Plant
(Kewaunee).
Such cost includes a provision for estimated future disposal costs of
spent nuclear fuel. MGE currently pays disposal fees to the Department
of Energy based on net nuclear generation. MGE has recovered through
rates and satisfied its known fuel disposal liability for past nuclear
generation.
The 1992 National Energy Policy Act contains a provision for all
utilities that have used federal enrichment facilities to pay a special
assessment for decontamination and decommissioning for these facilities.
This special assessment will be based on past enrichment. MGE has
accrued and deferred an estimate of $2.0 million for its portion of the
special assessment. MGE believes all costs will be recovered in future
rates.
d. Joint Plant Ownership
MGE and two other utilities jointly own two electric generating
facilities, which account for 54% (325 MW) of MGE's net generating
capability. Power from these facilities is shared in proportion to the
companies' ownership interests. MGE's interests are 22% (232 MW) of the
coal-fired Columbia Energy Center (Columbia) and 17.8% (93 MW) of
Kewaunee. On September 29, 1998, MGE finalized an agreement to sell its
ownership of Kewaunee to the operating partner, Wisconsin Public Service
Corp. (WPSC). Each owner provides its own financing and reflects its
respective portion of facilities and operating costs in its financial
statements. MGE's portions of these facilities, included in its gross
utility plant in service, and the related accumulated depreciation
reserves at December 31, were as follows:
Columbia Kewaunee
(Thousands of dollars) 1998 1997 1998 1997
------- ------- ------- -------
Utility plant.............. $86,175 $85,183 $58,364 $57,883
Accumulated depreciation... (51,108) (48,762) (42,520) (38,799)
------- ------- ------- -------
Net plant.................. $35,067 $36,421 $15,844 $19,084
======= ======= ======= =======
e. Depreciation
Provisions at composite straight-line depreciation rates, excluding
decommissioning costs discussed as follows, approximate the following
percentages of the cost of depreciable property: electric - 3.6% in
1998, 3.4% in 1997 and 3.3% in 1996; gas - 3.4% in 1998, 1997 and 1996.
Depreciation rates are approved by the Public Service Commission of
Wisconsin (PSCW) and are generally based on the estimated economic lives
of property.
Nuclear decommissioning costs are being accrued to an end-of-service
life of 2002 for Kewaunee. These costs are currently recovered from
customers in rates and are deposited in external trusts. For 1998, the
decommissioning costs recovered in rates were $8.1 million.
Decommissioning costs are recovered through depreciation expense. Net
earnings on the trusts are included in other income. The long-term,
after-tax earnings assumption on the assets held by the trusts is 5.6%.
As of December 31, 1998, the decommissioning trusts, totaling $79.1
million, are shown on the balance sheet in the utility plant section and
are offset by an equal amount under accumulated provision for
depreciation.
MGE's share of Kewaunee decommissioning costs is an estimated $83.2
million in current dollars based on a site-specific study performed in
1992 using immediate dismantlement as the method of decommissioning. In
accordance with the agreement between WPSC and MGE regarding the sale of
Kewaunee, MGE's decommissioning liability has been limited to the
current fund balances plus all decommissioning contributions through
2002. Decommissioning costs as studied are assumed to inflate at an
average rate of 6.0% per year. Physical decommissioning is expected to
occur from 2014 through 2021. It is expected that additional
expenditures will be incurred from 2022 through 2039 related to the
storage of spent nuclear fuel at the plant site.
f. Income Taxes
Total income taxes in the Consolidated Statements of Income are as
follows:
(Thousands of dollars) 1998 1997 1996
------- ------- -------
Income taxes charged to operations..... $10,723 $11,940 $12,553
Income taxes charged to other income... 2,384 1,571 (7,942)
------- ------- -------
Total income taxes..................... $13,107 $13,511 $ 4,611
======= ======= =======
Total income taxes consist of the following provision (benefit)
components for the years ended December 31:
(Thousands of dollars) 1998 1997 1996
------- ------- ------
Currently payable
Federal............................... $11,832 $12,229 $9,317
State................................. 3,251 3,435 3,267
Net deferred
Federal............................... (1,092) (1,308) (7,079)
State................................. (137) (92) (102)
Amortized investment tax credits....... (747) (753) (792)
------- ------- ------
Total income taxes..................... $13,107 $13,511 $4,611
======= ======= ======
Deferred income taxes are provided to reflect the expected tax
consequences of temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial statements.
Investment tax credits from regulated operations are amortized over the
related service life of each property.
The differences between the federal statutory income tax rate and MGE's
effective rate are as follows:
1998 1997 1996
----- ----- ----
Statutory federal income tax rate............ 35.0% 35.0% 35.0%
Amortized investment tax credits............. (2.1) (2.1) (7.2)
State income taxes, net of federal benefit... 5.7 5.9 7.3
Valuation allowance.......................... (0.4) (0.2) 10.9
Other, individually insignificant............ (1.1) (1.1) (4.2)
----- ----- ----
Effective income tax rate.................... 37.1% 37.5% 41.8%
===== ===== =====
The significant components of deferred tax liabilities (assets) that
appear on the Consolidated Balance Sheets as of December 31 are as
follows:
(Thousands of dollars) 1998 1997
------- -------
Property-related.......................... $55,560 $57,951
Other..................................... 5,598 6,026
------- -------
Gross deferred income tax liabilities.... 61,158 63,977
Accrued expenses.......................... (5,339) (6,344)
Other..................................... (2,896) (3,166)
Deferred tax regulatory account........... (9,530) (9,983)
------- -------
Gross deferred income tax assets......... (17,765) (19,493)
Less valuation allowance................. 950 1,088
------- -------
Net deferred income tax assets........... (16,815) (18,405)
------- -------
Deferred income taxes.................... $44,343 $45,572
======= =======
Excess deferred income taxes, resulting chiefly from taxes provided at
rates higher than current rates, have been recorded as a net regulatory
liability ($23.7 million and $24.9 million at December 31, 1998 and
1997, respectively), refundable through future rates.
As discussed in Note 4, MGE has sold its remaining assets in the gas
marketing joint venture formerly owned by its two subsidiaries.
Realization of state deferred tax assets including net operating loss
carryforwards of these subsidiaries is dependent on future income in
states where the subsidiaries file separate tax returns. Due to the
circumstances associated with these temporary differences, a valuation
allowance was established at December 31, 1998 and 1997, for these
deferred tax assets.
For tax purposes, these subsidiaries, as of December 31, 1998, had
approximately $9.3 million of state tax net operating loss carryforwards
which expire, if unused, beginning in the year 2012.
g. Pension Plans
MGE maintains two defined benefit plans. MGE also provides health care
and life insurance benefits for its retired employees. Substantially all
of MGE's employees may become eligible for these benefits upon
retirement. The following provides a reconciliation of benefit
obligations, plan assets and funded status of the plans.
Postretirement
Pension Benefits Benefits
---------------- ----------------
(Thousands of dollars) 1998 1997 1998 1997
------- ------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Net benefit obligation at
beginning of year................ $65,110 $55,112 $15,783 $14,380
Service cost...................... 1,655 1,616 510 490
Interest cost..................... 4,750 4,421 1,035 1,062
Plan participants' contributions.. - - 129 118
Plan amendments................... - 279 - -
Actuarial (gain)/loss............. 5,211 5,704 (531) 252
Gross benefits paid............... (2,288) (2,022) (494) (519)
------- ------- ------- -------
Net benefit obligation at
end of year...................... $74,438 $65,110 $16,432 $15,783
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year................ $70,298 $58,770 $ 4,467 $ 3,602
Actual return on plan assets...... 11,508 12,244 555 388
Employer contributions............ 1,600 1,307 836 879
Plan participants' contributions.. - - 129 118
Gross benefits paid............... (2,288) (2,023) (494) (520)
------- ------- ------- -------
Fair value of plan assets at
end of year...................... $81,118 $70,298 $5,493 $4,467
Funded status at end of year...... $ 6,680 $ 5,188 $(10,939)$(11,316)
Unrecognized net actuarial gain... (6,156) (6,466) (2,414) (1,893)
Unrecognized prior service cost... 997 1,140 1,921 2,111
Unrecognized net transition
obligation (asset)............... 114 76 6,078 6,511
------- ------- ------- -------
Net amount recognized at end
of year.......................... $ 1,635 $ (62) $(5,354) $(4,587)
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost.............. $1,635 $ - $ - $ -
Accrued benefit liability......... - (62) (5,354) (4,587)
Postretirement
Pension Benefits Benefits
---------------------- ----------------------
(Thousands of dollars) 1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------ ------
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost........... $1,655 $1,616 $1,715 $ 510 $ 490 $ 546
Interest cost.......... 4,750 4,421 4,090 1,035 1,062 1,062
Expected return on
assets................ (6,580) (5,493) (4,837) (434) (336) (264)
Amortization of:
Transition obligation
(asset).............. (39) (39) (39) 434 434 434
Prior service cost.... 143 144 127 190 189 165
Actuarial gain........ (28) - - (132) (92) -
Regulatory effect
based on phase-in... 103 - - - - 402
------ ------ ------ ------ ------ ------
Net periodic benefit
cost.................. $ 4 $ 649 $1,056 $1,603 $1,747 $2,345
====== ====== ====== ====== ====== ======
WEIGHTED-AVERAGE
ASSUMPTIONS AS OF
DECEMBER 31
Discount rate.......... 6.75% 7.25% 7.75% 6.75% 7.25% 7.75%
Expected return on
plan assets........... 9.50% 9.50% 9.50% 9.50% 9.50% 9.50%
Rate of compensation
increase.............. 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Health care cost trend
on covered charges.... NA NA NA 9.00% 10.00%* 11.00%*
*Decreasing gradually to 5% in 2003 and remaining constant thereafter.
Sensitivity of retiree welfare results: The following table shows how an
assumed 1% increase or 1% decrease in health care cost trends could
impact postretirement benefits in 1998 dollars.
(Thousands of dollars) 1% Increase 1% Decrease
Effect on: ----------- -----------
Total service and interest cost components... $ 313 $ (246)
Postretirement benefit obligation............ $2,874 $(2,296)
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.
MGE maintains two defined contribution 401(k) benefit plans for its
employees. MGE's costs of the 401(k) plans were $0.5 million in 1998,
$0.3 million in 1997 and $0.2 million in 1996.
h. Fair Value of Financial Instruments
At December 31, 1998, the carrying amount of cash and cash equivalents
approximates fair value. The estimated fair market value of MGE's First
Mortgage Bonds and other long-term debt, based on quoted market prices
at December 31, is as follows:
(Thousands of dollars) 1998 1997
-------- --------
Carrying amount (includes sinking funds)... $160,975 $131,175
Fair market value.......................... $173,236 $137,611
2. CAPITALIZATION MATTERS
a. First Mortgage Bonds and Other Long-Term Debt
On September 14, 1998, MGE issued on the open market $30 million in
unsecured Medium Term Notes at 6.02%, maturing September 15, 2008.
Interest on these notes will be paid semiannually on March 1 and
September 1. The proceeds from the issuance of these notes were used to
reduce short-term debt and to finance capital spending.
MGE's utility plant is subject to the lien of its First Mortgage Bonds.
Long-term debt maturities, including mandatory sinking fund requirements
relating to the 6.5%, 2006 Series, First Mortgage Bonds are:
$0.2 million in 1999; $11.2 million in 2000; $0.2 million in 2001 and 2002;
and $0.5 million in 2003.
b. Preferred Stock
MGE has 1,175,000 shares of $25 par value redeemable preferred stock,
cumulative, that is authorized but unissued at December 31, 1998.
c. Notes Payable to Banks, Commercial Paper, and Lines of Credit
For short-term borrowings, MGE generally issues commercial paper (issued
at the prevailing discount rate at the time of issuance) which is
supported by unused bank lines of credit. Through negotiations with
several banks, MGE had $45 million in bank lines of credit.
Information concerning short-term borrowings for the years is shown
below:
(Thousands of dollars) 1998 1997 1996
------- ------- -------
AS OF DECEMBER 31:
Available lines of credit (MGE)...... $45,000 $52,000 $45,000
Available lines of credit (GLENCO)... $ - $ - $10,000
Commercial paper outstanding......... $ - $33,500 $29,750
Weighted average interest rate....... - 6.06% 5.63%
DURING THE YEAR:
Maximum short-term borrowings........ $33,500 $33,500 $29,750
Average short-term borrowings........ $ 9,223 $16,816 $13,805
Weighted average interest rate....... 5.70% 5.68% 5.53%
3. RATE MATTERS
In January 1999, the PSCW's rate order became effective increasing
annual electric rates $8.4 million or 5.1% and natural gas rates
$0.7 million or 0.7%. These rates will remain in place until the next
test year, which is scheduled to begin January 1, 2001. These current
rates are based on an authorized return on common stock equity of 12.2%.
The electric rate increase is needed to cover higher fuel costs and new
investments in transmission and generation projects that will improve
electric reliability. Gas rates rose slightly to help offset the impact
of inflation on operating costs. Both rate increases include costs to
implement technology needed to ensure system compatibility with the
"Year 2000" issue. MGE received approval from the 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. The deferred expenses were recovered through a customer
surcharge effective April through July 1998.
4. GAS MARKETING SUBSIDIARIES
In December 1998, MGE's gas marketing subsidiaries, Great Lakes Energy
Corp. (GLENCO) and American Energy Management Inc. (AEM), sold their
remaining assets in National Energy Management, L.L.C. (NEM)for $1.8
million. NEM was formed in January 1997 as a joint venture between
GLENCO, AEM and a Houston-based gas marketing company.
In December 1996, MGE wrote down its investment in both GLENCO and AEM
to reflect current value. As of December 31, 1998, a $2.8 million
liability remains to account for the remaining contingencies related to
this write down.
5. COMMITMENTS
Coal contracts: MGE does not have any long-term coal contracts that
contain certain demand obligations for Blount Generating Station
(Blount) because this plant is a "system" gas customer. Fuel procurement
for MGE's ownership interest in the Columbia Plant is handled by
Wisconsin Power and Light Company. If any amounts must be paid under the
demand obligations of these contracts, management believes these would
be considered costs of service and recoverable in customer rates.
Purchased power contract: MGE has several firm purchased power contracts
for capacity. Purchase obligations on these contracts over the next five
years are estimated to be: $8.9 million in 1999, $9.5 million in 2000,
$3.7 million in 2001, $3.8 million in 2002 and $3.9 million in 2003.
Management expects to recover these costs in future customer rates.
Purchased gas contracts: MGE has several natural gas supply and
transportation contracts that will require estimated demand payments of
$75 million through 2003. Management expects to recover these costs in
future customer rates.
Environmental: MGE has been listed as a potentially responsible party
for environmental cleanup at three waste sites: Refuse Hideaway
Landfill, Demetral Landfill and Lenz Oil.
These sites were used by MGE for disposing of fly ash sludge and coal
ash, and storing and processing waste oil. It is estimated that MGE's
future exposure to clean up these sites could range from $250,000 to
$750,000. A liability for cleanup of these sites has been established
with an offsetting regulatory asset. Management believes that cleanup
costs not covered by insurance will be recovered in current and future
customer rates. MGE is in compliance with both Phase I and Phase II of
the 1990 Federal Clean Air Act amendments. The EPA has recently issued
new nitrogen oxide (NOx) emission limits which are even more stringent
than the Phase II limits. These new limits will most likely go into
effect in May 2003. MGE is evaluating compliance strategies and their
costs. Implementing new measures will likely increase capital, operating
and maintenance expenditures. Management believes that all costs
incurred for additional NOx compliance will be recoverable in future
customer rates.
Capital commitments: 1999 utility plant construction expenditures will
be an estimated $62.5 million, which includes MGE's share of jointly
owned electric power production facilities and purchase of fuel for
Kewaunee and Columbia. Substantial commitments have been incurred in
connection with these expenditures.
6. SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the Consolidated Statements of Cash Flows, MGE considers
cash equivalents to be those investments that are highly liquid with
maturity dates of less than three months.
Cash payments for interest and income taxes for the years ended December
31 were as follows:
(Thousands of dollars) 1998 1997 1996
------- ------- -------
Interest paid, net of amounts capitalized... $10,227 $10,841 $10,932
Income taxes paid, net...................... $14,188 $15,365 $16,041
7. SEGMENTS OF BUSINESS
MGE has two main business segments - electric and gas - which are both
regulated. The electric business generates, transmits and distributes
electricity. The gas business transports and distributes natural gas.
The following table shows key information about MGE's electric and gas
operations.
(Thousands of dollars) 1998 1997 1996
-------- -------- --------
ELECTRIC OPERATIONS
Total revenues....................... $169,563 $163,123 $152,747
Operation and maintenance expenses... 102,006 100,854 90,862
Depreciation and amortization........ 27,586 22,799 20,094
Other general taxes.................. 7,378 6,937 7,000
-------- -------- --------
Pre-tax operating income............ $ 32,593 $ 32,533 $ 34,791
Income taxes......................... 8,883 9,106 10,221
-------- -------- --------
Net operating income................. $ 23,710 $ 23,427 $ 24,570
======== ======== ========
Construction and nuclear fuel
expenditures (electric).............. $ 25,970 $ 16,849 $ 16,855
======== ======== ========
GAS OPERATIONS
Operating revenues................... $ 80,189 $101,525 $100,544
Revenues from sales to electric
utility............................. 6,362 6,038 2,304
-------- -------- --------
Total revenues...................... 86,551 107,563 102,848
Operation and maintenance expenses... 71,125 89,788 86,418
Depreciation and amortization........ 5,599 5,518 5,416
Other general taxes.................. 1,885 1,860 1,736
-------- -------- --------
Pre-tax operating income............ 7,942 10,397 9,278
Income taxes......................... 1,840 2,834 2,332
-------- -------- --------
Net operating income................. $ 6,102 $ 7,563 $ 6,946
======== ======== ========
Construction expenditures (gas)...... $ 4,859 $ 4,786 $ 5,051
======== ======== ========
Information regarding the distribution of net assets between electric and
gas for the years ended December 31 is presented in Item 6, page II-2,
Selected Financial Data.
8. REGULATORY ASSETS AND LIABILITIES
Pursuant to SFAS No. 71 "Accounting for the Effects of Certain Types of
Regulation," MGE capitalizes, as deferred charges, incurred costs that
are expected to be recovered in future electric and natural gas rates.
MGE also records as other credits, obligations to customers to refund
previously collected revenue or to spend revenue collected from customers
on future costs. MGE's regulatory assets and liabilities, included in
deferred charges and credits on the balance sheet, consisted of the
following as of December 31:
1998 1997
-------------------- --------------------
(Thousands of Dollars) Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Demand-side management...... $ 7,820 $ 998 $10,052 $ 759
Decommissioning and
decontamination............ 2,333 1,997 2,300 2,211
Unamortized debt expense.... 5,294 - 5,072 -
Pension and other
postretirement benefits.... 2,607 5,467 58 4,567
Kewaunee outage/repairs..... - - 2,052 933
Summer power shortages...... 90 - 1,704 -
------- ------- ------- -------
Subtotal regulatory
assets/liabilities........ 18,144 8,462 21,238 8,470
Other deferred items........ 187 11,427 6,840 10,745
------- ------- ------- -------
Subtotal deferred items..... 18,331 19,889 28,078 19,215
Regulatory liability -
SFAS 109................... - 23,745 - 24,875
------- ------- ------- -------
Total....................... $18,331 $43,634 $28,078 $44,090
======= ======= ======= =======
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Directors of the Company is contained in the
definitive proxy statement under the section "Election of Directors"
filed on March 29, 1999, with the Securities and Exchange Commission,
which is incorporated herein by reference.
Executive Officers of the Registrant (elected annually by Directors)
Service
Effective Years as
Executive Title Date an Officer
--------- ----- --------- ----------
David C. Mebane Chairman, President and CEO 05/09/94 18
Age: 65 President, CEO and COO 01/01/94
President and COO 10/01/91
Mark C. Williamson Senior Vice President -
Age: 45 Energy Services 05/01/95 7
Vice President - 05/03/93
Energy Services
Assistant Vice President - 11/01/92
Energy Services
Gary J. Wolter Senior Vice President - 05/01/95 8
Age: 44 Administration and Secretary
Vice President - 12/01/91
Administration and Secretary
James C. Boll Group Vice President 04/17/98 6
Age: 63 Vice President - Law and 10/20/95
Corporate Communications
Assistant Vice President - 05/03/93
Law and Corporate Comms.
Executive Director - Law and 01/13/92
Corporate Comms.
Ronald L. Semmann Group Vice President 01/01/98 2
Age: 63 Vice President - Human 07/18/97
Resources
Special Assistant to the 05/12/97
Chairman
Terry A. Hanson Vice President - Finance 11/01/97 8
Age: 47 Vice President and Treasurer 10/01/96
Treasurer 12/01/91
Lynn K. Hobbie Vice President - Marketing 05/01/96 5
Age: 40 Assistant Vice President - 11/01/94
Marketing
Senior Director - Marketing 07/01/93
Director - Market Planning 11/01/92
and Programs
Thomas R. Krull Vice President - Gas and 11/01/97 6
Age: 49 Electric Operations
Vice President - Electric 05/01/96
Transmission and Distribution
Assistant Vice President - 05/03/93
Electric Trans. and Dist.
Executive Director - Electric 12/01/91
Transmission and Dist.
Peter J. Waldron Vice President - Power Supply 04/24/98 3
Age: 41 Vice President - Power Supply 04/23/97
Ops. and Eng.
Assistant Vice President - 05/01/96
Power Supply Ops. and Eng.
Executive Director - Power 10/01/95
Supply Ops. and Eng.
Senior Director - Power 12/01/94
Supply Ops. and Eng.
Director - Power Supply Ops. 04/01/93
and Eng.
Manager - Power Supply Ops. 02/01/92
and Eng.
Jeffrey C. Newman Treasurer 11/01/97 2
Age: 36 Executive Director - 05/01/96
Budgets and Financial
Management
Director - Budgets and 08/01/92
Financial Management
Gregory A. Bollom Assistant Vice President - 04/17/98 1
Age: 38 Electric Marketing
Executive Director - Market 05/01/96
Planning and Electric
Pricing
Director - Market Planning 11/01/94
and Electric Pricing
Manager - Market Planning 11/01/92
and Electric Pricing
Scott A. Neitzel Assistant Vice President - 08/04/97 2
Age: 38 Gas Rates and Fuels
Joe R. Trueblood Assistant Vice President - 11/01/97 2
Age: 64 Gas Operations
Director - Gas System 05/01/92
Planning and Construction
Carol A. Wiskowski Assistant Vice President - 05/01/92 20
Age: 59 Admin. and Assistant
Secretary
ITEM 11. EXECUTIVE COMPENSATION
See Item 12 below.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information for Items 11 and 12 is included in the Company's
definitive proxy statement under the section "Executive Compensation," not
including "Report on Executive Compensation" and "Company Performance," and
under the section "Beneficial Ownership of Common Stock by Directors and
Executive Officers" filed with the Securities and Exchange Commission on
March 29, 1999, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1a. Financial statements (consolidated, as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998).
Included in Part II, Item 8, page II-13 of this report:
- - Responsibility for Financial Statements
- - Report of Independent Accountants
- - Statements of Income and Retained Income
- - Statements of Cash Flows
- - Balance Sheets
- - Statements of Capitalization
- - Notes to Consolidated Financial Statements
b. Financial statement schedules.
None.
2. All exhibits including those incorporated by reference.
Exhibits (an asterisk (*) indicates a management contract or compensatory
plan or arrangement):
3.(i) - Articles of Incorporation as in effect at May 6, 1996. (Incorporated
by reference to Exhibit 3.(i) with 1996 10-K in File No. 0-1125.)
3.(ii) - By-Laws as in effect at October 16, 1998. (Incorporated by
reference to Exhibit 3B with September 30, 1998, 10-Q in File No. 0-1125.)
4A - Indenture of Mortgage and Deed of Trust between the Company and Firstar
Trust Company, as Trustee, dated as of January 1, 1946, and filed as Exhibit
7-D to SEC File No. 0-1125 and the following indentures supplemental thereto
are incorporated herein by reference:
Supplemental Dated
Indenture as of Exhibit No. SEC File No.
Tenth(1) 11/01/76 2.03 2-60227
Fourteenth 04/01/92 4C 0-1125 (1992 10-K)
Fifteenth 04/01/92 4D 0-1125 (1992 10-K)
Sixteenth 10/01/92 4E 0-1125 (1992 10-K)
Seventeenth 02/01/93 4F 0-1125 (1992 10-K)
10A - Copy of Joint Power Supply Agreement with Wisconsin Power and Light
Company and Wisconsin Public Service Corporation dated February 2, 1967.
(Incorporated by reference to Exhibit 4.09 in File No. 2-27308.)
10B - Copy of Joint Power Supply Agreement (Exclusive of Exhibits) with
Wisconsin Power and Light Company and Wisconsin Public Service Corporation
dated July 26, 1973, amending Exhibit 5.04. (Incorporated by reference to
Exhibit 5.04A in File No. 2-48781.)
10D - Copy of revised Agreement for Construction and Operation of Columbia
Generating Plant with Wisconsin Power and Light Company and Wisconsin Public
Service Corporation dated July 26, 1973. (Incorporated by reference to
Exhibit 5.07 in File No. 2-48781.)
10F* - Form of Severance Agreement. (Incorporated by reference to
Exhibit 10F with 1994 10-K in File No. 0-1125.)
12 - Statement regarding computation of ratios (page II-2).
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Accountants.
27 - Appendix E to Item 601(c) of Regulation S-K: Public Utilities
Companies Financial Data Schedule UT.
3. Reports on Form 8-K - No Current Report on Form 8-K was filed for the
quarter ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999 /s/ David C. Mebane
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 29, 1999.
/s/ David C. Mebane Chairman, President and Chief
Executive Officer and Director
(Principal Executive Officer)
/s/ Terry A. Hanson Vice President - Finance
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Frank C. Vondrasek Vice Chairman and Director
Jean Manchester Biddick Director
/s/ Richard E. Blaney Director
/s/ F. Curtis Hastings Director
/s/ Regina M. Millner Director
/s/ Frederic E. Mohs Director
/s/ John R. Nevin Director
/s/ Phillip C. Stark Director
/s/ H. Lee Swanson Director
Exhibit No. 21
Madison Gas and Electric Company and Consolidated Subsidiaries
SUBSIDIARIES OF THE REGISTRANT
As of December 31, 1998, the Company owned 100 percent of the voting
securities of the following subsidiaries (all Wisconsin corporations):
- - MAGAEL INC. - holds title to property acquired by the Company for
future utility plant expansion and nonutility property.
- - Central Wisconsin Development Corporation - assists new and expanding
businesses throughout Central Wisconsin by participating in planning,
financing, property acquisition, joint ventures, and associated
activities.
- - Great Lakes Energy Corp. - Inactive. (See Item 1, page I-1, Item 7,
page II-5, and Item 8, page F-16, for discussion on the sale of GLENCO's
remaining assets.)
- - Wisconsin Resources Corporation - Inactive.
- - North Central Technologies, Inc. - Inactive.
- - Mid America Technologies, Inc. - Inactive.
As of December 31, 1998, Great Lakes Energy Corp. owned 100 percent of
the voting securities of the following subsidiary (a Wisconsin
corporation):
- - American Energy Management, Inc. - Inactive. (See Item 1, page I-1,
Item 7, page II-5, and Item 8, page F-16, for discussion on the sale of
AEM's remaining assets.)
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Madison Gas and Electric Company on Form S-3 (File Nos. 33-24115, 33-52491,
33-64361, and 333-59607) of our report dated February 8, 1999, on our audits
of the consolidated financial statements of Madison Gas and Electric
Company as of December 31, 1998 and 1997, and for the years ended
December 31, 1998, 1997, and 1996, which report is included in this annual
report on Form 10-K.
Philadelphia, Pennsylvania /s/ PricewaterhouseCoopers LLP
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> UT
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This schedule contains summary financial information extracted from SEC Form
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for the twelve months ended December 31, 1998.
</LEGEND>
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