Item 1. Business.
General Description of Business
The registrant, Madison Gas and Electric Company (the Company), a Wisconsin corporation organized as such in 1896, is a public utility engaged in the generation and transmission of electric energy and in its distribution in Madison and its environs (250 square miles) and in the purchase, transportation, and distribution of natural gas in Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon counties, Wisconsin (1,325 square miles). See Exhibit No. 21 herein for a description of the Company's wholly owned subsidiaries.
The Company is subject to regulation by the Public Service Commission of Wisconsin (PSCW) as to rates, accounts, issuance of securities, plant and transmission line siting, and in other respects. The Federal Energy Regulatory Commission (FERC) has jurisdiction, under the Federal Power Act, over certain accounting practices of the Company and in certain other respects. The Nuclear Regulatory Commission has jurisdiction over the operation of the Kewaunee Nuclear Power Plant (Kewaunee). The Company has a 17.8 percent ownership interest in Kewaunee. The other owners are Wisconsin Public Service Corporation (WPSC), which operates Kewaunee, and Wisconsin Power and Light Company (WPL).
The Company is also subject to regulation with regard to air quality, water quality, and solid waste (see I-5 and I-6) and may be subject to regulation with regard to other environmental matters by various federal, state, and local authorities including the Wisconsin Department of Natural Resources (DNR), which has jurisdiction over air and water quality, solid and hazardous waste standards, and regulates the electric generating operations of the Company with respect to pollution and environmental control matters. The Company has met the requirements of current environmental regulations. Unknown additional expenditures may be required for pollution control equipment and for the modification of existing plants to comply with future unknown environmental regulations.
For example, the emerging issue of global warming could result in significant compliance cost for carbon dioxide emission controls. Except as set forth below, the amounts of such expenditures and the period of time over which they may be required to be made are not known. The Company is unable to predict whether compliance with future pollution control regulations would involve curtailments of operations or reductions in generating capacity or efficiency of present generating facilities or delays in the construction and operation of future generating facilities.
Under both the National Environmental Policy Act and the Wisconsin Environmental Policy Act, the Company must obtain the necessary authorizations or permits from regulatory agencies for any new projects or other major actions significantly affecting the quality of the human environment after all aspects of the proposed project or action are subjected to a complete environmental review and a detailed environmental impact statement is issued.
Electric Operations
At December 31, 1994, the Company supplied electric service to 118,693 customers, of whom 106,087 were located in the cities of Fitchburg, Madison, Middleton, and Monona, and 12,606 in adjacent areas. Of the total number of customers, 103,083 were residential and 15,474 were commercial. For 1994, residential and commercial electric service revenues comprised 35 percent and 53 percent, respectively, of total electric revenues. The remaining electric revenues during 1994 were from industrial sales (6 percent), sales to public authorities including the University of Wisconsin (5 percent), and sales to other utilities (less than 1 percent). The electric operations accounted for 60 percent of the total revenues of the Company.
See Item 2
Item 2. Properties.
The following table presents the generating capability in service at December 31, 1994:
Commercial Net Capability No. of Plants Operation Date Fuel (Megawatt ) Units Steam Plants Columbia 1975 & 1978 Low-Sulfur Coal 231(1)(2) 2 Kewaunee 1974 Nuclear 94(1)(3) 1 Blount 1957 & 1961 Coal/Gas 99 2 (Madison) 1938 & 1942 Gas/Coal 38 2 1949 Coal/Gas 22 1 1964 - 1968 Gas/Oil 34 4 Combustion Turbines 1964 - 1973 Gas/Oil 90 5 Total 608
(1) Base load generation. (2) Company's 22% share of two 525-mw units located near Portage, Wis. (3) Company's 17.8% share of 525-mw unit located near Kewaunee, Wis.
Major electric transmission and distribution lines and substations in service at December 31, 1994, are as follows:
Miles Lines Overhead Lines Underground Lines Transmission: 345 kV 124 - 138 kV 96 3 69 kV 66 18 Distribution: 13.8 kV and under 1,076 636
Substations Installed Capacity (KVA) Transmission (22) 4,132,350 Distribution (33) 361,700
Gas facilities include 1,750 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.
Item 3. Legal Proceedings.
None.
Item 4.
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.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.
The principal market in which the common stock of the Company is traded is the NASDAQ National Market System (NASDAQ) under the symbol MDSN. The approximate number of stockholders of record on February 1, 1995, was 16,238. The Company's transfer agent and registrar is Harris Trust and Savings Bank, Chicago, Illinois. The high and low sales prices for the common stock on NASDAQ and the dividends paid per common share for each quarter for the past two fiscal years are shown below:
Common Stock Price Range Dividends Per Share 1994 1994 High Low
First quarter ........ $34 1/4 $31 $0.465 Second quarter ....... $33 3/4 $31 3/4 $0.465 Third quarter ........ $35 $31 3/4 $0.47 Fourth quarter ....... $33 3/4 $31 3/4 $0.47
Common Stock Price Range Dividends Per Share 1993 1993 High Low
First quarter ........ $35 1/2 $30 1/4 $0.455 Second quarter ....... $35 1/4 $32 3/4 $0.455 Third quarter ........ $36 3/4 $32 3/4 $0.465 Fourth quarter ....... $36 1/2 $32 3/4 $0.465
Item 6.
Item 6. Selected Financial Data.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Earnings overview
In 1994, earnings per share of Madison Gas and Electric Company's (the Company) common stock were $2.29, an increase of 1.3 percent compared to the $2.26 earned in 1993. The colder weather conditions during the first quarter of 1994 contributed to increases in natural gas deliveries. Gas and electric sales were positively impacted by an increase in customer base. Other factors that led to improved earnings were holding operating expenses to 1993 levels and a reduction in interest costs from 1993.
Electric sales and revenues
Electric retail sales for 1994 increased 4.0 percent from 1993. The electric sales breakdown by customer class is shown in the table below. The increase in electric sales for 1994 over 1993 is attributable to a 1.4 percent increase in electric retail customers. Also, the addition of a large, base-load industrial customer helped increase sales. As a result, revenues increased 1.7 percent in 1994 as compared to 1993. Electric base rates were reduced in June 1993 by 2.9 percent on an annual basis.
In 1993, electric retail sales increased 5.2 percent from 1992, due in part to warmer weather experienced in the third quarter of 1993. Total electric revenues increased 3.2 percent in 1993 versus 1992, which reflects the June 1993 rate decrease.
Gas sales and revenues
Gas delivered to the customers for 1994 increased 6.3 percent from 1993. The breakdown of gas deliveries by customer class is shown in the table below. The extremely cold first quarter of 1994 helped bolster gas deliveries. The average temperature for the first quarter of 1994 was 5 degrees (Fahrenheit) colder than the first quarter of 1993, and 4 degrees colder than normal. Also contributing to the increase in gas deliveries is the increase in the gas customer base, due in part to the Company's expansion of its gas service territory in western Wisconsin. The customer base increased 3.1 percent in 1994 when compared to 1993. Gas base rates were reduced in June 1993 by 1.6 percent on an annual basis.
In 1993, both gas deliveries and revenues increased from 1992 due to cooler weather conditions, a shift in a major customer from transportation rates (which is not counted as a system sale) to system rates, and an increase in customers as a result of the acquisition of two gas utilities in western Wisconsin. 1994 1994 Electric Sales Gas Deliveries Residential.......... 26.6% 40.7% Commercial........... 56.7% 35.6% Industrial........... 8.7% 3.9% Other................ 8.0% 9.0% Transport............ - 10.8% Total............... 100.0% 100.0%
Electric fuel and natural gas costs
The Company relied more on its generating units and purchased less energy in 1994 versus 1993 due to lower fuel costs. This resulted in an increase of 13.2 percent in fuel used for 1994 when compared to 1993 and a decrease in purchased energy of 10.5 percent for the same period (see net generation table below). During June 1994, the Company set a record for peak demand at 551 megawatts for one hour.
Natural gas costs decreased 4.5 percent in 1994 as compared to 1993. The decrease is mainly attributed to lower natural gas costs per therm in the fourth quarter of 1994, resulting from the unseasonably warm weather experienced. A shift in a major customer from system service to transportation service, which is only recorded on a margin basis, also contributed to the decrease in natural gas costs.
1994 1994 Net Generation Distribution of Revenues
Coal.............. 55.6% O&M Expenses................. 28% Nuclear........... 26.2% Purchased Gas................ 24% Purchased Power... 16.4% Fuel - Electric Generation Gas............... 1.6% and Purchased Power......... 15% Other............. 0.2% Taxes and Other.............. 10% Total............ 100.0% Net Income................... 10% Depreciation................. 9% Interest..................... 4% Total....................... 100%
Other items
Operations and maintenance expenses for 1994, in aggregate, remained at the same approximate level as last year, while depreciation expense increased 2.7 percent in 1994 from 1993. The increase in depreciation expense is mainly due to additional plant-in-service.
Income taxes charged to operations increased 6.1 percent in 1994 from 1993 because of higher taxable income combined with decreased income statement benefits from amortization of excess deferred taxes, previously collected from customers, at tax rates higher than the current statutory rate (35 percent).
Interest on long-term debt decreased 5.7 percent in 1994 from 1993, which is attributable to the Company's repurchase of its 8 percent, 1999 series, First Mortgage Bonds in October 1993. Other interest increased in 1994 when compared to 1993 due to a higher level of commercial paper outstanding throughout 1994 (see Notes 1i and 2c).
Electric and gas operations outlook
Over the next five-year period ending December 31, 1999, the Company anticipates electric sales to grow at a compound annual rate of approximately 1.5 percent assuming moderate growth in the service territory and normal weather. The Company is in a favorable position for a deregulated market because of its competitive electric rates and its low percentage of industrial customers.
Natural gas deliveries are estimated to grow at a compound annual rate of 2.0 percent, subject to variables such as weather and the economy. The Company will continue efforts to expand its gas service territory and its unregulated gas marketing activities.
Liquidity and Capital Resources
Capital resources
The Company's liquidity is primarily affected by the requirements of its ongoing construction program. During 1994, all of the Company's construction and nuclear fuel expenditures were provided for by internally generated cash. A portion of the electric construction program during 1994 was satisfied through construction fund draw-downs. For the five-year period ending December 31, 1999, the Company estimates that internally generated cash will provide, on average, over 100 percent of the utilities plant and nuclear fuel expenditures.
Capital requirements
In 1994, capital expenditures increased approximately $3 million as compared to 1993. This is due in part to the significant increased capital expenditures for the new gas service territories in western Wisconsin. It is anticipated that 1995 construction and nuclear fuel expenditures will be $25 million, and the expenditures for the years 1996 through 1999 are expected to remain at similar levels. Through these expenditures, the Company will have efficient, up-to-date facilities for providing reliable service to customers and for meeting their future energy needs.
The Company has been able to delay building any new generating facilities through efficient Demand-Side Management Programs and aggressively pursuing purchase power contracts to meet future energy demands. The Company negotiated a purchased power agreement with Dairyland Power Cooperative that provides for the purchase of 40 megawatts of electric capacity during the years 1996 to 2000.
Expenditures for construction and nuclear fuel estimated for 1995, actual for 1994, and the average for the three-year period 1991 to 1993 are shown below:
For the years ended December 31: (Thousands of dollars) 1995 Annual Average Estimated 1994 1991 - 1993 Electric Production................ $ 3,446 13.8% $ 1,777 6.7% $ 3,018 15.1% Transmission.............. 1,078 4.3 2,045 7.7 1,726 8.7 Distribution and General.. 9,284 37.1 8,680 32.9 7,316 36.7 Nuclear Fuel.............. 3,616 14.5 3,427 13.0 2,550 12.8 Total Electric......... 17,424 69.7 15,929 60.3 14,610 73.3 Gas........................ 4,382 17.5 9,072 34.3 3,737 18.7 Common..................... 3,194 12.8 1,428 5.4 1,602 8.0 Total.................. $25,000 100.0% $26,429 100.0% $19,949 100.0%
Inflation
The current financial statements report operating results in terms of historical cost. Even though the statements provide a reasonable, objective, quantifiable statement of financial results, they do not evaluate the impact of inflation. For ratemaking purposes, projected normal operating costs include impacts of inflation which are recoverable in revenues. However, electric and gas utilities, in general, are adversely impacted by inflation because depreciation of utility plant is limited to the recovery of historical costs. Thus, cash flows from the recovery of existing utility plant may, to a certain extent, not be adequate to provide replacement of plant investment.
Environmental and legislative issues
The Federal Clean Air Act as amended in 1990 will have a major impact on many electric utilities. However, the Company does not anticipate that Phase I of the Act, effective in 1995, will have any major impact on operations. The Company is also confident that if capital investments are required at some future date, the Company will receive timely recovery of such costs. The Company believes that fuel switching will be the effective strategy to follow to meet Phase II of the Act.
In 1992, the National Energy Policy Act (Act) was enacted. Generally, the Act promotes energy efficiency, a clean environment, and increased competition in the electric generation and bulk transmission areas. The Company is actively engaged in each of these areas. Wisconsin is a world leader in promoting energy efficiency, adherence to strict environmental principles, and competition for both generation and transmission. The utilities industry is expected to see changes through increased competition. New regulations have encouraged competition and are leading the way toward a deregulated market. This competition could have a significant impact on the Company. The Company is positioning itself to succeed in such an environment.
On April 8, 1992, the FERC issued Order 636. Order 636 requires all companies with natural gas pipelines to separate natural gas sales service from transmission service. It also requires these pipelines to offer flexibility to parties contracting for service.
Following the issuance of Order 636, ANR Pipeline Company (ANR) and Northern Natural Gas Company (NNG), the Company's pipeline suppliers, made filings at FERC to comply with Order 636. The Company played an active role negotiating with both pipelines to achieve the greatest benefit for its customers. Effective November 1, 1993, ANR and NNG's services that comply with Order 636 went into effect. The services that the Company has contracted for have met the needs of its customers reliably and economically.
Capitalization matters
At December 31, 1994, bank lines of credit available to the Company were $32 million. The bank lines are generally used to support commercial paper issued, which represents a primary source of short-term financing. The Company's dealer-issued commercial paper carries the highest ratings assigned by Moody's Investors Service and Standard & Poor's Corporation.
The Company's existing bonds are rated AA by Standard & Poor's and Aa2 by Moody's Investors Service.
Capitalization ratios are shown in the Summary of Selected Financial and Operating Data on page 29. Under the Company's Automatic Dividend Reinvestment and Stock Purchase Plan, in 1993 and 1994 the Company has purchased all of its shares of common stock on the open market. The Company anticipates it will be able to meet its construction requirements, reduce short-term debt, and meet sinking fund debt requirements with internally generated funds and construction fund draw-downs over the next three years.
Acquisition of American Energy Management, Inc.
On January 3, 1995, the Company purchased American Energy Management, Inc. (AEM), a national energy marketing firm that provides gas marketing, energy management, energy auditing, and conservation services to customers in ten states. AEM, a subsidiary of Great Lakes Energy Corp. (GLENCO), serves mostly small- to medium-sized companies. GLENCO, a wholly-owned subsidiary of the Company, markets excess gas supplies and pipeline capacity to commercial and industrial customers.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Index of Consolidated Financial Statements, Footnotes, and Supplementary Data
- Responsibility for Financial Statements . . . . . . . . . . . . . . .
- Report of Independent Accountants . . . . . . . . . . . . . . . . . .
- Report of Independent Public Accountants . . . . . . . . . . . . . . .a
- Consolidated Statements of Income and Retained Income . . . . . . . .
- Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . . .
- Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . .
- Consolidated Statements of Capitalization . . . . . . . . . . . . . .
- Notes to Consolidated Financial Statements . . . . . . . . . . . -
Item 9.
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 the preparation and presentation of 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 Coopers & Lybrand L.L.P. appears on page. 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, comprised of all Board members who are not employees or officers of the Company, also meets periodically with the independent accountants and the Company's internal audit staff who have complete access to and meet with the Audit Committee, 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 David C. Mebane Chairman, President and Chief Executive Officer
/s/ Joseph T. Krzos Joseph T. Krzos Vice President - Finance
Report of Independent Accountants
To the Shareholders and Board of Directors, Madison Gas and Electric Company:
We have audited the accompanying consolidated balance sheets and statements of capitalization of MADISON GAS AND ELECTRIC COMPANY and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income and retained income and cash flows for the years ended December 31, 1994 and 1993. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Madison Gas and Electric Company and subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles.
Milwaukee, Wisconsin February 10, 1995 COOPERS & LYBRAND L.L.P.
Report of Independent Public Accountants
To the Shareholders and Board of Directors, Madison Gas and Electric Company:
We have audited the accompanying consolidated balance sheet and statement of capitalization (not presented herein) of MADISON GAS AND ELECTRIC COMPANY (a Wisconsin Corporation) and subsidiaries as of December 31, 1992, and the related consolidated statements of income, retained income, and cash flows for the year ended December 31, 1992. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Madison Gas and Electric Company and subsidiaries as of December 31, 1992, and the consolidated results of their operations and their cash flows for the year ended December 31, 1992, in conformity with generally accepted accounting principles.
Chicago, Illinois February 12, 1993 ARTHUR ANDERSEN LLP
Consolidated Statements of Income and Retained Income
Consolidated Statements of Cash Flow
Consolidated Balance Sheets
Consolidated Statements of Capitalization
Notes to Consolidated Financial Statements
December 31, 1994, 1993, and 1992
1. Summary of Significant Accounting Policies
The consolidated financial statements reflect the application of certain accounting policies described in this note. Certain reclassifications, not affecting income, have been made to amounts reported in prior years to conform with presentations used in 1994.
a. Basis of consolidation
The financial statements include the accounts of Madison Gas and Electric Company and its subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.
b. Revenue recognition
The Company records unbilled revenue on the basis of service rendered. Gas revenues are subject to adjustment clauses related to periodic changes in the cost of gas.
c. Utility plant
Utility plant is stated at the original cost of construction, which includes indirect costs consisting of payroll taxes, pensions, post retirement 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. The Company presently capitalizes AFUDC at a rate of 10.62 percent on 50 percent of construction work in progress. The AFUDC rate approximates the Company'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.
Substantially, all of the Company's utility plant is subject to a first mortgage lien.
d. 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 the generation of electric energy by the Kewaunee. Such cost includes a provision for estimated future disposal costs of spent nuclear fuel. The Company currently pays disposal fees to the Department of Energy based on net nuclear generation. The Company has recovered through rates and satisfied its known fuel disposal liability for past nuclear generation.
The National Energy Policy Act enacted in 1992 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, and the Company has accrued and deferred an estimate of $2.7 million for the Company's portion of the special assessment. The Company believes all costs will be recovered in future rates.
e. Joint plant ownership
The Company and two other Wisconsin investor-owned utilities jointly own two electric generating facilities, which account for 54 percent (325 mw) of the Company's net generating capability. Power from the facilities is shared in proportion to the companies' ownership interests. The Company's interests are 22 percent (232 mw) of the coal-fired Columbia Energy Center (Columbia) and 17.8 percent (93 mw) of Kewaunee. Each owner provides its own financing and reflects its respective portion of facilities and operating costs in its financial statements. The Company'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) 1994 1993 1994 1993
Utility plant.............. $ 85,092 $ 84,620 $ 57,534 $ 56,872 Accumulated depreciation... (44,238) (41,550) (32,793) (31,405) Net Plant............... $ 40,854 $ 43,070 $ 24,741 $ 25,467
f. Cash and cash equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying amount approximates fair value because of the short maturity of these items.
g. Depreciation
Provisions at composite straight-line depreciation rates, excluding decommissioning costs as discussed as follows, approximate the following percentages of the cost of depreciable property: electric, 3.3 percent in 1994, 3.5 percent in 1993, and 3.3 percent in 1992; gas, 3.5 percent in 1994 through 1992, respectively. Depreciation rates are approved by the PSCW and are generally based on the estimated economic lives of property.
External trust funds have been established for costs associated with the future decommissioning of Kewaunee. It is estimated that the Company's share of decommissioning, which includes the cost of decontamination, dismantling, and site restoration, will be $57 million (1992 dollars) based on a site-specific study completed in 1992. Decommissioning costs (net of trust fund income), recovered through rates, are $3.1 million annually starting in January 1995. The Company's costs accrued to date, which are recorded in accumulated depreciation, are $28 million.
h. Income taxes
The Company has adopted Statement of Financial Accounting Standard No. 109 (SFAS 109), "Accounting for Income Taxes," effective January 1, 1993. This statement replaced the deferred method of income tax accounting with the liability method. The liability method requires the recognition of deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts. The statement was adopted prospectively and the cumulative effect of implementation on 1993 net income was insignificant. The principal effects on the Company's 1993 financial statements of adoption were a decrease in accumulated deferred income taxes and the establishment of a corresponding regulatory liability in the amount of $25,264,000.
In 1993, accumulated deferred income taxes were increased by approximately $2.6 million as the result of the increase in the federal statutory income tax rate from 34 to 35 percent effective January 1, 1993.
Investment tax credits from regulated operations are amortized over the service lives of the property to which they relate.
Total income taxes in the Consolidated Statements of Income are as follows:
(Thousands of dollars) 1994 1993 1992
Income taxes charged to operations............ $14,822 $13,964 $12,784 Income taxes charged to other income.......... 612 491 602 Total income taxes............................ $15,434 $14,455 $13,386
Total income taxes consist of the following provision (benefit) components for the years ended December 31:
(Thousands of dollars) 1994 1993 1992
Currently payable Federal..................................... $10,985 $ 9,485 $ 9,126 State....................................... 2,804 2,518 2,456 Net deferred Federal..................................... 1,756 2,432 1,826 State....................................... 672 823 737 Amortized investment tax credits.............. (783) (803) (759) Total income taxes............................ $15,434 $14,455 $13,386
The differences between the federal statutory income tax rate and the Company's effective rate are as follows: 1994 1993 1992
Statutory federal income tax rate............. 35.0% 35.0% 34.0% Restoration of investment tax credit.......... (1.9) (2.1) (2.0) State income taxes, net of federal benefit.... 5.6 6.3 6.3 Amortization of excess deferred taxes......... (1.1) (1.3) (1.2) Other, individually insignificant............. 0.6 (1.0) (1.1)
Effective income tax rate..................... 38.2% 36.9% 36.0%
The significant components of deferred tax liabilities (assets) that appear on the Consolidated Balance Sheets as of December 31, 1994 and 1993, are as follows:
(Thousands of dollars) 1994 1993
Property-related.............................. $ 60,295 $ 58,914 Energy conservation expenses.................. 6,168 5,262 Automated mapping and facilities management system...................................... 860 1,262 Bond transactions............................. 2,131 1,027 Nuclear fuel.................................. 412 958 Other, individually insignificant............. 25 305
Gross deferred income tax liabilities.... $ 69,891 $ 67,728
Allowance for bad debts....................... (370) (393) Deferred compensation......................... (1,061) (1,030) Vacation pay.................................. (772) (718) Stored natural gas............................ (977) (1,280) Deferred tax regulatory account............... (10,116) (10,140)
Gross deferred income tax assets......... (13,296) (13,561)
Accumulated deferred income taxes........ $ 56,595 $ 54,167
Valuation allowances for deferred tax assets as of December 31, 1994 and 1993, were deemed unnecessary. Deferred income tax expense for 1992 results principally from property-related timing differences due to different depreciation methods and lives used for income tax and financial reporting purposes.
i. Accounts receivable
On June 30, 1994, the Company bought back $15 million of its accounts receivable from a wholly owned subsidiary of The First National Bank of Chicago. The Company sold $15 million of its accounts receivable in December 1990. The Company used short-term borrowings for the buy-back of its receivables.
j. Pension plans
The Company maintains two defined benefit plans for its employees. The pension benefit formula used in the determination of pension costs is based upon the average compensation earned during the last five years of employment for the salaried plan and career earnings for the nonsalaried plan subject to a monthly maximum.
The Company's funding policy is to make such contributions as are necessary to finance the benefits provided under the plans. The Company's contributions meet the funding standards set forth in the Employee Retirement Income Security Act of 1974. Ratemaking practice has historically allowed the accrued pension funding amount in rates.
The Company has recorded 1994 pension costs equal to the funding amount. The funding amounts were $1,094,000 in 1994, $1,075,000 in 1993, and $988,000 in 1992. Of these amounts, $810,000, $861,000, and $805,000 were charged to operating expenses for the years 1994 through 1992, respectively. The plans' assets consist primarily of pooled funds invested with the Prudential Asset Management Group.
The funded status of the plans at December 31 is as follows:
(Thousands of dollars) 1994 1993
Fair value of plan assets.................. $41,230 $41,905
Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $36,066 and $36,332, respectively.................... 36,895 37,376 Additional benefits based on estimated future salary levels..................... 7,010 7,693 Projected benefit obligation............... $43,905 $45,069
Plan assets less than projected benefit obligation............................... (2,675) (3,164)
Unrecognized net asset at date of initial application...................... (40) (79) Unrecognized net (gain)/loss............... (156) 295 Unrecognized prior service cost............ 1,256 1,340 Net liability.............................. $(1,615) $(1,608)
Components of net pension costs for the years ended December 31 are:
(Thousands of dollars) 1994 1993 1992
Service costs (benefits earned during the period)................................... $ 1,462 $ 1,596 $ 1,381 Interest costs on projected benefit obligation................................ 3,462 3,196 2,867 Actual loss/(return) on plan assets......... 412 (3,663) (2,933) Net amortization and deferral............... (4,056) 347 (168) Regulatory effect based on funding.......... (186) (401) (159) Net pension costs........................... $ 1,094 $ 1,075 $ 988
The net pension costs at December 31, 1994 through 1992, respectively, were based on an assumed long-term rate of return on plan assets of 9.0 percent. The weighted average discount rate was 8.25 percent in 1994 and 7.50 percent for 1993 and 1992, while the assumed rate of increase in future compensation levels is 5 percent for 1994 through 1992, respectively.
In addition to the noted plans, the Company also maintains two defined contribution 401(k) benefit plans for its employees. The Company's costs of the 401(k) plan for the years 1994, 1993, and 1992 were $199,000, $186,000, and $180,000, respectively.
k. Postretirement benefits other than pensions
The Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993. This statement requires that postretirement benefits be accrued over the period in which employees provide services to the Company. The Company provides health care and life insurance benefits for its retired employees and substantially all of the Company's employees may become eligible for these benefits upon retirement. Prior to adoption of SFAS 106, the Company recognized the costs of these benefits by expensing the benefits as paid.
The Company 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. The Company's SFAS 106 obligation and costs are based on a discount rate of 8.25 percent in 1994 and 7.50 percent in 1993. The assumed rate of increase in health care costs (health care cost trend rate) is 13 percent in 1994 and 1993, decreasing gradually to 5 percent in 2003, and remaining constant thereafter. Increasing the health care cost trend rates of future years by one percentage point would increase the accumulated postretirement benefit obligation by $1.8 million and would increase annual aggregate service and interest costs by $262,000.
The PSCW ruled that Wisconsin utilities are required to implement SFAS 106 for ratemaking purposes. The Company is phasing-in, over a four-year period, the effect of implementing SFAS 106, which resulted in a regulatory asset of $497,000 at December 31, 1994, and $382,000 at December 31, 1993.
The Company's policy is to fund the SFAS 106 obligation through tax-advantaged vehicles. The plan's assets consist primarily of funds on reserve with an insurance company.
The funded status of the plans at December 31 is as follows:
(Thousands of dollars) 1994 1993
Accumulated postretirement benefit obligation (APBO): Retirees...................................... $ (4,064) $ (3,208) Fully eligible active plan participants....... (1,399) (1,287) Other active plan participants................ (6,562) (6,047) Total...................................... (12,025) (10,542)
Plan assets at fair value....................... 1,465 1,338
APBO in excess of plan assets................... (10,560) (9,204)
Unrecognized transition obligation.............. 7,813 8,248 Unrecognized loss/(gain)........................ 605 (86)
Accrued postretirement benefit liability... $ (2,142) $ (1,042)
Components of net periodic benefit costs for the years ended December 31 are as follows:
(Thousands of dollars) 1994 1993
Service cost.................................... $ 402 $ 413 Interest cost on APBO........................... 772 747 Actual return on plan assets.................... (91) (131) Amortization of transition obligation over 20 years....................................... 434 434 Net amortization and deferral................... (7) 56 Regulatory effect based on phase-in............. (497) (382) Net periodic benefit cost....................... $1,013 $1,137
l. Fair value of financial instruments
At December 31, 1994, the carrying amount of cash and cash equivalents approximates fair value. The estimated fair market value of the Nuclear Decommissioning Fund is $28 million, and the estimated fair market value of the Company's First Mortgage Bonds, based on quoted market prices at December 31, is as follows:
(Thousands of dollars) 1994 1993
Carrying amount (includes sinking funds)... $132,388 $121,580 Fair market value ......................... $124,677 $133,592
2. Capitalization Matters
a. Redeemable preferred stock
The Company repurchased all 212,000 shares outstanding of its Series E, 8.70%, preferred stock on February 21, 1995. The total amount of approximately $5.5 million was financed with short-term borrowings.
b. First mortgage bonds
The annual sinking fund requirements of the outstanding first mortgage bonds is $430,000 in 1995 and $350,000 in 1996 through 1999. In addition, approximately $8 million will be required in 1996, to retire at maturity, the 5.45%, 1996 Series, First Mortgage Bonds.
c. Notes payable to banks, commercial paper, and lines of credit
For short-term borrowings, the Company 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, the Company has $32 million in bank lines of credit.
Information concerning short-term borrowings at December 31 is set forth below:
(Thousands of dollars) 1994 1993 1992
Available lines of credit................. $32,000 $25,000 $20,000 Commercial paper outstanding.............. $28,600 $23,500 $17,000 Weighted average interest rate............ 6.06% 3.45% 3.94%
During the year: Maximum short-term borrowings............. $29,500 $26,000 $17,500 Average short-term borrowings............. $16,549 $14,056 $ 3,448 Weighted average interest rate............ 4.57% 3.31% 3.70%
3. Rate Matters
In September 1994, the Company reduced electric rates by $0.9 million on an annual basis due to lower fuel costs. In December 1994, the PSCW issued its rate order that further reduced electric rates by $4.2 million and froze gas rates for the test period ending December 31, 1995. These rates will remain in place until the next test year, which is scheduled to begin January 1, 1997. The current rates are based on a return on common equity of 11.7 percent.
4. Commitments
Utility plant construction expenditures for 1995, including the Company's proportional share of jointly owned electric power production facilities and purchases of fuel for Kewaunee, are estimated to be $25 million, and substantial commitments have been incurred in connection with such expenditures. Significant commitments have also been made for fuel for Columbia.
5. Segments of Business
The table below presents information pertaining to the Company's segments of business.
Information regarding the distribution of net assets between electric and gas for the years ended December 31 is set forth on page II-2.
(Thousands of dollars) 1994 1993 1992
Electric Operations Total revenues............................ $149,665 $147,201 $142,646 Operation and maintenance expenses........ 87,748 86,060 82,439 Depreciation and amortization............. 17,337 16,948 16,573 Other general taxes....................... 6,907 6,651 6,614 Pre-tax Operating Income................ 37,673 37,542 37,020 Income taxes.............................. 11,717 11,104 9,988 Net Operating Income...................... $ 25,956 $ 26,438 $ 27,032
Construction and Nuclear Fuel Expenditures (Electric).................. $ 16,804 $ 18,064 $ 12,548
Gas Operations Operating revenues........................ $ 95,307 $ 96,932 $ 85,356 Revenues from sales to electric utility... 1,671 2,861 860 Total Revenues.......................... 96,978 99,793 86,216 Operation and maintenance expenses........ 79,009 82,727 69,043 Depreciation and amortization............. 5,046 4,843 4,854 Other general taxes....................... 1,712 1,571 1,493 Pre-tax Operating Income................. 11,211 10,652 10,826 Income taxes.............................. 3,105 2,860 2,796 Net Operating Income...................... $ 8,106 $ 7,792 $ 8,030
Construction Expenditures (Gas)........... $ 9,625 $ 5,584 $ 3,816
6. Supplemental Cash Flow Information
For purposes of the Consolidated Statements of Cash Flows, the Company considers cash equivalents to be those investments that are highly liquid with maturity dates of less than three months.
Cash payments for interest and income taxes for the years ended December 31 were as follows:
(Thousands of dollars) 1994 1993 1992
Interest paid, net of amounts capitalized... $11,235 $11,704 $13,103 Income taxes paid........................... $13,602 $10,954 $12,968
PART III
Item 10.
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 21, 1995, with the Securities and Exchange Commission, which is incorporated herein by reference.
Executive Officers of the Registrant (elected annually by Directors) Service Eff. Years as Executive Title Date Officer
David C. Mebane Chairman, President and CEO 05/09/94 14 Age: 61 President CEO and COO 01/01/94 President and COO 10/01/91 Senior V.P. and General Counsel 01/01/88 Vice President and General Counsel 04/17/85
Robert E. Domek Senior V.P. - Human Resources 05/03/93 6 Age: 64 Vice President - Human Resources 12/01/91 Asst. V.P. - Human Resources 10/01/89 Director - Personnel 01/01/69
Burnett F. Adams V.P. - Procurement & Div. Oper. 06/01/94 2 Age: 42 Asst. V.P. - Procurement & Div. Oper. 05/03/93 Exec. Dir. - Materials and Fuel 12/01/91 Director - Gas Rates and Supply 07/01/88
Joseph T. Krzos Vice President - Finance 12/01/92 9 Age: 50 Asst. V.P. - Accounting and Control 12/01/91 Treasurer 05/01/88 Assistant Treasurer 06/01/86
Richard H. Thies V.P. - Gas Systems Operation 07/01/86 9 Age: 53
Mark C. Williamson Vice President - Energy Services 05/03/93 3 Age: 41 Asst. V.P. - Energy Services 06/01/92 Exec. Director - Electric Supply 12/01/91 Corporate Attorney 12/01/89 Senior Staff Attorney 12/01/87
Gary J. Wolter V.P. - Administration and Secretary 12/01/91 4 Age: 40 Secretary and Corporate Attorney 12/01/89 Corporate Attorney 02/13/84
Terry A. Hanson Treasurer 12/01/91 4 Age: 43 Manager - Internal Audit 09/01/84
James C. Boll Asst. V.P. - Law and Corp. Comm. 05/03/93 2 Age: 59 Exec. Dir. - Law and Corp. Comm. 01/13/92 Dir. - Public Affairs and Risk Mgmt. 06/01/91 Director - Risk Management 03/05/90
Deborah L. Burgess Asst. V.P. - Gas Rates and Supply 11/01/94 1 Age: 35 Director - Gas Rates and Supply 04/01/93 Manager - Gas Rates and Supply 03/01/92 Gas Supply Coordinator - Gas Rates and Supply 07/18/88
Lynn K. Hobbie Asst. V.P. - Marketing 11/01/94 1 Age: 36 Senior Director - Marketing 07/01/93 Director - Market Planning and Programs 11/01/92 Manager - Customer Planning and Research 02/01/92 Supervisor - Marketing Planning and Evaluation 06/01/90 Supervisor - Program Planning and Evaluation 03/01/90
Thomas R. Krull Asst. V.P. - Elec. Trans. & Dist. 05/03/93 2 Age: 44 Exec. Dir. - Elec. Trans. & Dist. 12/01/91 Director - Elec. Trans. & Dist. 09/01/89 Asst. Dir. - Elec. Trans. & Dist. 04/01/89 Manager - Elec. Trans. & Dist. 07/01/85
Item 11.
Item 11. Executive Compensation.
See Item 12
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 21, 1995, which is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
1a. Financial Statements (consolidated, as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994). Included in Part II, Item 8, of this report:
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):
No. Description of Document
3.(i) Articles of Incorporation as in effect at December 16, 1994.
3.(ii) By-Laws as in effect at January 1, 1991. (Incorporated by reference to Exhibit 3B with 1991 10-K 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 Exhibit SEC Indenture as of No. File No.
Fifth 06/01/66 4-B-6 2-25244 Seventh 01/15/71 2.08 2-38980 Tenth1 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 with certain key employees amended in 1994.
12 Statement regarding computation of ratios (page II-2). 21 Subsidiaries of the Registrant. 23.1 Consent of Independent Accountants. 23.2 Consent of Independent Public 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, 1994.
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 21, 1995 By /s/ David C. Mebane 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 21, 1995.
SIGNATURE TITLE
/s/ David C. Mebane Chairman, President and Chief David C. Mebane Executive Officer and Director (Principal Executive Officer)
/s/ Joseph T. Krzos Vice President - Finance Joseph T. Krzos (Principal Financial Officer and Principal Accounting Officer)
/s/ Frank C. Vondrasek Vice Chairman and Director Frank C. Vondrasek
/s/ Jean Manchester Biddick Director Jean Manchester Biddick
/s/ Richard E. Blaney Director Richard E. Blaney
/s/ Robert M. Bolz Director Robert M. Bolz
/s/ Donald J. Helfrecht Director Donald J. Helfrecht
/s/ Frederic E. Mohs Director Frederic E. Mohs
/s/ Robert B. Rennebohm Director Robert B. Rennebohm
Director Phillip C. Stark
/s/ H. Lee Swanson Director H. Lee Swanson