United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended:
March 31, 2008
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to _______________
|
Commission File No. |
|
Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone No. |
|
IRS Employer Identification No. |
|
000-49965 |
|
MGE Energy, Inc. (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mgeenergy.com |
|
39-2040501 |
|
000-1125 |
|
Madison Gas and Electric Company (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mge.com |
|
39-0444025 |
Indicate by check mark whether the registrants (1) have 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) have been subject to such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
|
|
Large Accelerated Filer |
Accelerated Filer |
Non-accelerated Filer |
Smaller Reporting Company |
|
MGE Energy, Inc. |
X |
|
|
|
|
Madison Gas and Electric Company |
|
|
X |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
MGE Energy, Inc. and Madison Gas and Electric Company: Yes [ ] No [X]
|
Number of Shares Outstanding of Each Class of Common Stock as of April 30, 2008 | |
|
MGE Energy, Inc. |
Common stock, $1.00 par value, 22,084,352 shares outstanding. |
|
Madison Gas and Electric Company |
Common stock, $1.00 par value, 17,347,889 shares outstanding (all of which are owned beneficially and of record by MGE Energy, Inc.). |
Table of Contents
PART I. FINANCIAL INFORMATION.
Where to Find More Information
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
Consolidated Statements of Income (unaudited)
Consolidated Statements of Cash Flows (unaudited)
Consolidated Balance Sheets (unaudited)
Madison Gas and Electric Company
Consolidated Statements of Income (unaudited)
Consolidated Statements of Cash Flows (unaudited)
Consolidated Balance Sheets (unaudited)
MGE Energy, Inc., and Madison Gas and Electric Company
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Item 4T. Controls and Procedures.
Signatures - Madison Gas and Electric Company
PART I. FINANCIAL INFORMATION.
Filing Format
This combined quarterly report on Form 10-Q is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a majority of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information. The terms "we" and "our" as used in this report refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.
Forward-Looking Statements
This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions—especially as they relate to future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," and other similar words generally identify forward-looking statements. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied.
The factors that could cause actual results to differ materially from the forward-looking statements made by a registrant include (a) those factors discussed in the following sections of the Registrants' 2007 Annual Report on Form 10-K: ITEM 1A. Risk Factors and ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and (b) other factors discussed herein and in other filings with the SEC by the Registrants.
Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this report.
Where to Find More Information
The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the SEC's public reference room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services, the Web site maintained by the SEC at http://www.sec.gov, MGE Energy's Web site at http://www.mgeenergy.com, and MGE's Web site at http://www.mge.com. Copies may be obtained from our Web sites free of charge. Information contained on MGE Energy's and MGE's Web sites shall not be deemed incorporated into, or to be a part of, this report.
Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
|
AFUDC |
allowance for funds used during construction |
|
ALJ |
Administrative Law Judge |
|
Alliant |
Alliant Energy Corporation |
|
ARB |
Accounting Research Bulletin |
|
ATC |
American Transmission Company LLC |
|
ARO |
Asset Retirement Obligation |
|
Blount |
Blount Station |
|
CAIR |
Clean Air Interstate Rule |
|
CAMR |
Clean Air Mercury Rule |
|
Columbia |
Columbia Energy Center |
|
cooling degree days |
Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, increasing demand for cooling |
|
CWDC |
Central Wisconsin Development Corporation |
|
Distribution Agreement |
Distribution Agreement between MGE Energy and J.P. Morgan Securities Inc. |
|
Dth |
dekatherms |
|
EGU |
electric generating unit |
|
EITF |
Emerging Issues Task Force |
|
Elm Road |
Elm Road Generating Station |
|
EPA |
U.S. Environmental Protection Agency |
|
FAS |
Financial Accounting Standard |
|
FASB |
Financial Accounting Standards Board |
|
FERC |
Federal Energy Regulatory Commission |
|
FIN |
FASB Interpretation No. |
|
FSP |
FASB Staff Position |
|
FTR |
Financial Transmission Rights |
|
GCIM |
gas cost incentive mechanism |
|
GHG |
greenhouse gas |
|
GW-hr |
gigawatthour |
|
heating degree days (HDD) |
Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, increasing demand for heating |
|
IBEW |
International Brotherhood of Electric Workers |
|
IRS |
Internal Revenue Service |
|
kV |
kilovolt |
|
kWh |
kilowatt-hour |
|
LIBOR |
London interbank offered rate |
|
LMP |
Locational Marginal Pricing |
|
MACT |
Maximum available control technology |
|
MAGAEL |
MAGAEL, LLC |
|
MGE |
Madison Gas and Electric Company |
|
MGE Construct |
MGE Construct LLC |
|
MGE Energy or MGEE |
MGE Energy, Inc. |
|
MGE Power |
MGE Power LLC |
|
MGE Power Elm Road |
MGE Power Elm Road, LLC |
|
MGE Power West Campus |
MGE Power West Campus, LLC |
|
MGE Transco |
MGE Transco Investment LLC |
|
MISO |
Midwest Independent System Operator (a regional transmission organization) |
|
Moody's |
Moody's Investors Service, Inc. |
|
MW |
megawatt |
|
MWh |
megawatt-hour |
|
Nasdaq |
The Nasdaq National Stock Market |
|
NOx |
nitrogen oxide |
|
NR |
Natural Resources |
|
NSPS |
new source performance standards |
|
NYMEX |
New York Mercantile Exchange |
|
PGA |
Purchased Gas Adjustment clause |
|
PJM |
PJM Interconnection, LLC (a regional transmission organization) |
|
PSCW |
Public Service Commission of Wisconsin |
|
RTO |
Regional Transmission Organization |
|
S&P |
Standard & Poor's Ratings Group, a division of McGraw-Hill Companies |
|
SAB |
Staff Accounting Bulletin |
|
SEC |
Securities and Exchange Commission |
|
SFAS |
Statement of Financial Accounting Standards (issued by the FASB ) |
|
SO2 |
sulfur dioxide |
|
Stock Plan |
Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy |
|
UW |
University of Wisconsin-Madison |
|
VIE |
variable interest entity |
|
WCCF |
West Campus Cogeneration Facility |
|
WDNR |
Wisconsin Department of Natural Resources |
|
WEPCO |
Wisconsin Electric Power Company |
|
working capital |
current assets less current liabilities |
|
WPDES |
Wisconsin Pollutant Discharge Elimination System |
|
WPL |
Wisconsin Power and Light Company |
Item 1. Financial Statements.
Consolidated Statements of Income (unaudited)
(In thousands, except per-share amounts)
|
|
Three Months Ended March 31, | ||
|
|
2008 |
|
2007 |
|
Operating Revenues: |
|
|
|
|
Regulated revenues |
$187,923 |
|
$166,607 |
|
Nonregulated revenues |
2,073 |
|
1,279 |
|
Total Operating Revenues |
189,996 |
|
167,886 |
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
Fuel for electric generation |
16,194 |
|
13,760 |
|
Purchased power |
21,679 |
|
21,481 |
|
Natural gas purchased |
77,943 |
|
67,343 |
|
Other operations and maintenance |
36,096 |
|
31,705 |
|
Depreciation and amortization |
9,397 |
|
8,057 |
|
Other general taxes |
4,379 |
|
3,907 |
|
Total Operating Expenses |
165,688 |
|
146,253 |
|
Operating Income |
24,308 |
|
21,633 |
|
|
|
|
|
|
Other income, net |
576 |
|
1,315 |
|
Interest expense, net |
(3,433) |
|
(3,540) |
|
Income before income taxes |
21,451 |
|
19,408 |
|
Income tax provision |
(7,614) |
|
(7,106) |
|
Net Income |
$ 13,837 |
|
$ 12,302 |
|
|
|
|
|
|
Earnings per Share of Common Stock (basic and diluted) |
$0.63 |
|
$0.59 |
|
|
|
|
|
|
Dividends paid per share of common stock |
$0.355 |
|
$0.348 |
|
|
|
|
|
|
Average Shares Outstanding (basic and diluted) |
21,989 |
|
21,026 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
MGE Energy, Inc.
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
|
|
Three Months Ended March 31, | ||
|
|
2008 |
|
2007 |
|
Operating Activities: |
|
|
|
|
Net income |
$13,837 |
|
$12,302 |
|
Items not affecting cash: |
|
|
|
|
Depreciation and amortization |
9,397 |
|
8,057 |
|
Deferred income taxes |
(2,502) |
|
(2,188) |
|
Amortization of investment tax credits |
(88) |
|
(103) |
|
Amortization of debt issuance costs and discount |
139 |
|
142 |
|
Provision for doubtful accounts receivable |
1,098 |
|
625 |
|
AFUDC - equity funds |
(532) |
|
(245) |
|
Employee benefit plan expenses |
2,026 |
|
2,040 |
|
Equity earnings in ATC |
(1,606) |
|
(1,445) |
|
Gain on sale of property |
(287) |
|
- |
|
Other items |
614 |
|
217 |
|
Changes in working capital: |
|
|
|
|
Decrease in current assets |
21,370 |
|
19,346 |
|
Increase (decrease) in current liabilities |
5,833 |
|
(164) |
|
Dividend income from ATC |
1,117 |
|
920 |
|
Cash contributions to pension and other postretirement plans |
(5,942) |
|
(4,760) |
|
Other noncurrent items, net |
1,303 |
|
584 |
|
Cash Provided by Operating Activities |
45,777 |
|
35,328 |
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
Capital expenditures |
(28,541) |
|
(23,875) |
|
Capital contributions to investments |
(50) |
|
(123) |
|
Advance to WEPCO for ATC work related to Elm Road |
(67) |
|
(156) |
|
Proceeds from sale of property |
294 |
|
724 |
|
Other |
255 |
|
900 |
|
Cash Used for Investing Activities |
(28,109) |
|
(22,530) |
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
Issuance of common stock |
3,553 |
|
6,036 |
|
Cash dividends paid on common stock |
(7,805) |
|
(7,317) |
|
Decrease in short-term debt, net |
(14,000) |
|
(10,000) |
|
Cash Used for Financing Activities |
(18,252) |
|
(11,281) |
|
|
|
|
|
|
Change in Cash and Cash Equivalents |
(584) |
|
1,517 |
|
Cash and cash equivalents at beginning of period |
3,789 |
|
3,003 |
|
Cash and cash equivalents at end of period |
$ 3,205 |
|
$ 4,520 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
MGE Energy, Inc.
Consolidated Balance Sheets (unaudited)
(In thousands)
|
|
March 31, 2008 |
|
Dec. 31, 2007 |
|
ASSETS |
|
|
|
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
$ 3,205 |
|
$ 3,789 |
|
Restricted cash |
215 |
|
2,896 |
|
Accounts receivable, less reserves of $3,947 and $3,709, respectively |
58,166 |
|
43,668 |
|
Other accounts receivable, less reserves of $115 and $114, respectively |
2,842 |
|
3,397 |
|
Unbilled revenues |
25,858 |
|
30,370 |
|
Materials and supplies, at lower of average cost or market |
15,051 |
|
14,809 |
|
Fossil fuel |
5,369 |
|
5,136 |
|
Stored natural gas, at lower of average cost or market |
4,629 |
|
28,483 |
|
Prepaid taxes |
10,063 |
|
14,696 |
|
Regulatory assets - current |
- |
|
189 |
|
Other current assets |
11,749 |
|
8,242 |
|
Total Current Assets |
137,147 |
|
155,675 |
|
Other long-term receivables |
6,350 |
|
6,166 |
|
Special billing projects |
740 |
|
999 |
|
Regulatory assets |
52,146 |
|
53,375 |
|
Other deferred charges |
6,023 |
|
5,881 |
|
Property, Plant, and Equipment, Net |
700,589 |
|
638,774 |
|
Construction work in progress |
161,121 |
|
205,214 |
|
Total Property, Plant, and Equipment |
861,710 |
|
843,988 |
|
Other Property and Investments |
45,255 |
|
45,503 |
|
Total Assets |
$1,109,371 |
|
$1,111,587 |
|
|
|
|
|
|
LIABILITIES AND CAPITALIZATION |
|
|
|
|
Current Liabilities: |
|
|
|
|
Long-term debt due within one year |
$ 30,000 |
|
$ 30,000 |
|
Short-term debt |
89,500 |
|
103,500 |
|
Accounts payable |
56,211 |
|
58,498 |
|
Accrued interest and taxes |
11,565 |
|
3,964 |
|
Deferred income taxes |
782 |
|
4,153 |
|
Regulatory liabilities - current |
7,189 |
|
2,924 |
|
Pension liability - current |
607 |
|
607 |
|
Other current liabilities |
16,125 |
|
16,466 |
|
Total Current Liabilities |
211,979 |
|
220,112 |
|
Other Credits: |
|
|
|
|
Deferred income taxes |
108,475 |
|
107,393 |
|
Investment tax credit - deferred |
2,999 |
|
3,087 |
|
Regulatory liabilities |
20,084 |
|
20,885 |
|
Accrued pension and other postretirement benefits |
69,923 |
|
74,056 |
|
Other deferred liabilities |
26,814 |
|
25,982 |
|
Total Other Credits |
228,295 |
|
231,403 |
|
Capitalization: |
|
|
|
|
Common shareholders' equity |
436,736 |
|
427,726 |
|
Long-term debt |
232,361 |
|
232,346 |
|
Total Capitalization |
669,097 |
|
660,072 |
|
Commitments and contingencies (see Footnote 10) |
- |
|
- |
|
Total Liabilities and Capitalization |
$1,109,371 |
|
$1,111,587 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
Madison Gas and Electric Company
Consolidated Statements of Income (unaudited)
(In thousands)
|
|
Three Months Ended March 31, | ||
|
|
2008 |
|
2007 |
|
Operating Revenues: |
|
|
|
|
Regulated electric revenues |
$ 82,439 |
|
$ 76,764 |
|
Regulated gas revenues |
105,484 |
|
89,843 |
|
Nonregulated revenues |
2,073 |
|
1,279 |
|
Total Operating Revenues |
189,996 |
|
167,886 |
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
Fuel for electric generation |
16,194 |
|
13,760 |
|
Purchased power |
21,679 |
|
21,481 |
|
Natural gas purchased |
77,943 |
|
67,343 |
|
Other operations and maintenance |
36,032 |
|
31,606 |
|
Depreciation and amortization |
9,397 |
|
8,057 |
|
Other general taxes |
4,379 |
|
3,906 |
|
Income tax provision |
7,209 |
|
6,540 |
|
Total Operating Expenses |
172,833 |
|
152,693 |
|
Operating Income |
17,163 |
|
15,193 |
|
|
|
|
|
|
Other Income and Deductions: |
|
|
|
|
AFUDC - equity funds |
532 |
|
245 |
|
Equity earnings in ATC |
1,606 |
|
1,445 |
|
Income tax provision |
(145) |
|
(464) |
|
Other deductions, net |
(1,561) |
|
(379) |
|
Total Other Income and Deductions |
432 |
|
847 |
|
Income before interest expense |
17,595 |
|
16,040 |
|
|
|
|
|
|
Interest Expense: |
|
|
|
|
Interest on long-term debt |
3,995 |
|
3,893 |
|
Other interest, net |
369 |
|
94 |
|
AFUDC - borrowed funds |
(221) |
|
(104) |
|
Net Interest Expense |
4,143 |
|
3,883 |
|
Net Income Before Minority Interest |
$ 13,452 |
|
$ 12,157 |
|
Minority interest, net of tax |
(3,146) |
|
(2,713) |
|
Net Income |
$ 10,306 |
|
$ 9,444 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
Madison Gas and Electric Company
Consolidated Statements of Cash Flows (unaudited)
(In thousands)
|
|
Three Months Ended March, | ||
|
|
2008 |
|
2007 |
|
Operating Activities: |
|
|
|
|
Net income |
$ 10,306 |
|
$ 9,444 |
|
Items not affecting cash: |
|
|
|
|
Depreciation and amortization |
9,397 |
|
8,057 |
|
Deferred income taxes |
(2,502) |
|
(2,189) |
|
Amortization of investment tax credits |
(88) |
|
(103) |
|
Amortization of debt issuance costs and discount |
139 |
|
142 |
|
Provision for doubtful accounts receivable |
1,098 |
|
625 |
|
AFUDC - equity funds |
(532) |
|
(245) |
|
Employee benefit plan expenses |
2,026 |
|
2,040 |
|
Equity earnings in ATC |
(1,606) |
|
(1,445) |
|
Minority interest, net of tax |
3,146 |
|
2,713 |
|
Gain on sale of property |
(287) |
|
- |
|
Other items |
614 |
|
217 |
|
Changes in working capital: |
|
|
|
|
Decrease in current assets |
19,812 |
|
18,363 |
|
Increase in current liabilities |
7,423 |
|
1,004 |
|
Dividend income from ATC |
1,117 |
|
920 |
|
Cash contributions to pension and other postretirement plans |
(5,942) |
|
(4,760) |
|
Other noncurrent items, net |
1,284 |
|
552 |
|
Cash Provided by Operating Activities |
45,405 |
|
35,335 |
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
Capital expenditures |
(28,541) |
|
(23,875) |
|
Advance to WEPCO for ATC work related to Elm Road |
(67) |
|
(156) |
|
Proceeds from sale of property |
294 |
|
724 |
|
Other |
195 |
|
900 |
|
Cash Used for Investing Activities |
(28,119) |
|
(22,407) |
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
Cash dividends paid to parent by MGE |
- |
|
(6,561) |
|
Cash dividend paid to parent from Power West Campus and Transco |
(3,108) |
|
(2,120) |
|
Equity contributions received by Power Elm Road |
12,159 |
|
11,177 |
|
Decrease in short-term debt, net |
(27,000) |
|
(14,500) |
|
Cash Used for Financing Activities |
(17,949) |
|
(12,004) |
|
|
|
|
|
|
Change in Cash and Cash Equivalents |
(663) |
|
924 |
|
Cash and cash equivalents at beginning of period |
1,859 |
|
1,246 |
|
Cash and cash equivalents at end of period |
$ 1,196 |
|
$ 2,170 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
Madison Gas and Electric Company
Consolidated Balance Sheets (unaudited)
(In thousands)
|
ASSETS |
March 31, 2008 |
|
Dec. 31, 2007 |
|
Utility Plant (At Original Cost, in Service): |
|
|
|
|
Electric |
$ 755,638 |
|
$ 691,162 |
|
Gas |
271,953 |
|
268,032 |
|
Nonregulated |
110,040 |
|
110,020 |
|
Gross plant in service |
1,137,631 |
|
1,069,214 |
|
Less accumulated provision for depreciation |
(437,172) |
|
(430,572) |
|
Net plant in service |
700,459 |
|
638,642 |
|
Construction work in progress |
161,121 |
|
205,214 |
|
Total Utility Plant |
861,580 |
|
843,856 |
|
Other property and investments |
2,053 |
|
2,777 |
|
Investment in ATC |
41,288 |
|
40,799 |
|
Total Other Property and Investments |
43,341 |
|
43,576 |
|
Current Assets: |
|
|
|
|
Cash and cash equivalents |
1,196 |
|
1,859 |
|
Restricted cash |
215 |
|
2,896 |
|
Accounts receivable, less reserves of $3,947 and $3,709, respectively |
58,166 |
|
43,668 |
|
Affiliate receivables |
4 |
|
4 |
|
Other receivables, less reserves of $115 and $114, respectively |
2,840 |
|
3,295 |
|
Unbilled revenues |
25,858 |
|
30,370 |
|
Materials and supplies, at lower of average cost or market |
15,051 |
|
14,809 |
|
Fossil fuel |
5,369 |
|
5,136 |
|
Stored natural gas, at lower of average cost or market |
4,629 |
|
28,483 |
|
Prepaid taxes |
10,063 |
|
13,249 |
|
Regulatory assets - current |
- |
|
189 |
|
Other current assets |
11,734 |
|
8,216 |
|
Total Current Assets |
135,125 |
|
152,174 |
|
Other long-term receivables |
5,729 |
|
5,485 |
|
Special billing projects |
740 |
|
999 |
|
Affiliate receivable long-term |
10,676 |
|
10,676 |
|
Regulatory assets |
52,146 |
|
53,375 |
|
Other deferred charges |
5,902 |
|
5,751 |
|
Total Assets |
$1,115,239 |
|
$ 1,115,892 |
|
|
|
|
|
|
CAPITALIZATION AND LIABILITIES |
|
|
|
|
Common stockholder's equity |
$ 339,708 |
|
$ 329,944 |
|
Minority interest |
149,225 |
|
137,028 |
|
Long-term debt |
232,361 |
|
232,346 |
|
Total Capitalization |
721,294 |
|
699,318 |
|
Current Liabilities: |
|
|
|
|
Long-term debt due within one year |
30,000 |
|
30,000 |
|
Short-term debt - commercial paper |
34,000 |
|
61,000 |
|
Accounts payable |
56,210 |
|
58,263 |
|
Affiliate payables |
2,125 |
|
2,115 |
|
Accrued interest and taxes |
19,173 |
|
10,148 |
|
Accrued payroll related items |
5,869 |
|
6,980 |
|
Deferred income taxes |
782 |
|
4,153 |
|
Regulatory liabilities - current |
7,189 |
|
2,924 |
|
Pension liability - current |
607 |
|
607 |
|
Other current liabilities |
10,142 |
|
9,450 |
|
Total Current Liabilities |
166,097 |
|
185,640 |
|
Other Credits: |
|
|
|
|
Deferred income taxes |
108,028 |
|
106,924 |
|
Investment tax credit - deferred |
2,999 |
|
3,087 |
|
Regulatory liabilities |
20,084 |
|
20,885 |
|
Accrued pension and other postretirement benefits |
69,923 |
|
74,056 |
|
Other deferred liabilities |
26,814 |
|
25,982 |
|
Total Other Credits |
227,848 |
|
230,934 |
|
Commitments and contingencies (see Footnote 10) |
- |
|
- |
|
Total Capitalization and Liabilities |
$1,115,239 |
|
$ 1,115,892 |
The accompanying notes are an integral part of the above unaudited consolidated financial statements.
MGE Energy, Inc., and Madison Gas and Electric Company
Notes to Consolidated Financial Statements (unaudited)
March 31, 2008
1.
Basis of Presentation - MGE Energy and MGE.
This report is a combined report of MGE Energy and MGE. References in this report to "MGE Energy" are to MGE Energy, Inc., and its subsidiaries. References in this report to "MGE" are to Madison Gas and Electric Company.
In accordance with FIN 46R, Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51, MGE is required to consolidate MGE Power West Campus and MGE Power Elm Road. Both entities own electric generating assets and lease those assets to MGE. MGE is considered the primary beneficiary of the variable interest entities as a result of these leasing arrangements.
The accompanying consolidated financial statements as of March 31, 2008, and for the three months then ended are unaudited, but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in MGE Energy's and MGE's annual reports on Form 10-K for the year ended December 31, 2007, but does not include all disclosures required by generally accepted accounting principles. These notes should be read in conjunction with the financial statements and the notes on pages 53 through 102 of the 2007 Annual Report on Form 10-K.
2.
Equity and Financing Arrangements.
a.
Common Stock - MGE Energy.
MGE Energy sells shares of its common stock through its Stock Plan. Those shares may be newly-issued shares or shares that MGE Energy has purchased in the open market for resale to participants in the Stock Plan.
For the three months ended March 31, 2008, MGE Energy issued 109,146 new shares of common stock under the Stock Plan for net proceeds of $3.6 million. For the three months ended March 31, 2007, MGE Energy issued 98,606 new shares of common stock under the Stock Plan for net proceeds of $3.4 million.
On November 9, 2006, MGE Energy entered into a Distribution Agreement with J.P. Morgan under which MGE Energy may offer and sell up to 1,500,000 shares of its common stock. During the three months ended March 31, 2008, MGE Energy did not issue any shares of its common stock under this agreement. During the three months ended March 31, 2007, MGE Energy issued 80,000 shares of its common stock for $2.6 million in net proceeds under this agreement.
b.
Dilutive Shares Calculation - MGE Energy.
MGE Energy does not have any dilutive securities.
c.
Accumulated Other Comprehensive Income - MGE Energy and MGE.
The accumulated other comprehensive income balance at March 31, 2008, includes the unrealized gains and losses on available-for-sale securities and certain hedging transactions. The following table illustrates the changes in Accumulated Other Comprehensive Income, net of taxes, from December 31, 2007, to March 31, 2008, for MGE Energy and MGE:
|
(In thousands) |
MGEE |
|
MGE |
|
Balance, December 31, 2007 |
$1,643 |
|
$898 |
|
Change in unrealized gain on available for sale securities, net of tax ($208 and $186) |
(311) |
|
(278) |
|
Change in cash flow hedges, net of tax ($177 and $177) |
(264) |
|
(264) |
|
Balance, March 31, 2008 |
$1,068 |
|
$356 |
3.
Comprehensive Income - MGE Energy and MGE.
The reporting of other comprehensive income is required under the provisions of SFAS 130, Reporting Comprehensive Income. Total comprehensive income represents the change in equity during a period from transactions and other events and circumstances from nonowner sources. MGE Energy and MGE's total comprehensive income is:
|
(In thousands) |
Three Months Ended March 31, | ||
|
MGE Energy |
2008 |
|
2007 |
|
Net income |
$13,837 |
|
$12,302 |
|
Unrealized loss on cash flow hedges, net of tax ($177 and $236) |
(264) |
|
(351) |
|
Unrealized loss on available-for-sale securities, net of tax ($208 and $ -) |
(311) |
|
- |
|
Total comprehensive income |
$13,262 |
|
$11,951 |
|
|
|
|
|
|
MGE |
|
|
|
|
Net income |
$10,306 |
|
$9,444 |
|
Unrealized loss on cash flow hedges, net of tax ($177 and $236) |
(264) |
|
(351) |
|
Unrealized (loss) gain on available-for-sale securities, net of tax ($186 and $3) |
(278) |
|
4 |
|
Total comprehensive income |
$ 9,764 |
|
$9,097 |
4.
Investment in ATC - MGE Energy and MGE.
ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC. That interest is presently held by MGE Transco, which is jointly owned by MGE and MGE Energy.
MGE Transco, through MGE, has a seat on the Board of Directors of ATC and has a 20% ownership interest in ATC Management, Inc. Due to MGE Transco's ability to exercise significant control over management activities, MGE Transco has accounted for its investment in ATC under the equity method of accounting. For the three months ended March 31, 2008 and 2007, MGE Transco recorded equity earnings from the investment in ATC of $1.6 million (pretax) and $1.4 million (pretax), respectively. Dividend income received from ATC was $1.1 million and $0.9 million for the three months ended March 31, 2008 and 2007, respectively. During both the three months ended March 31, 2008 and 2007, MGE Transco made no cash contributions to ATC. However, on February 15, 2007, MGE (through MGE Transco) transferred $1.4 million in additional transmission assets to ATC. In exchange, MGE Transco received an additional $0.7 million investment in ATC and $0.7 million in cash consideration.
At March 31, 2008, MGE is the majority owner and MGE Energy, the holding company, is the minority owner of MGE Transco. MGE Energy's proportionate share of the equity and net income of MGE Transco is classified within the MGE financial statements as minority interest.
5.
Taxes - MGE Energy and MGE.
a.
FIN 48.
On January 1, 2007, MGE Energy and MGE adopted FIN 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. The interpretation applies to all tax positions accounted for in accordance with SFAS No. 109 and requires a recognition threshold and measurement standard for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in an income tax return. FIN 48 defines the threshold for recognizing tax return positions in the financial statements as "more likely than not" that the position is sustainable, based on its merits. Subsequent recognition, derecognition, and measurement is based on management's best judgement given the facts, circumstances and information available at the reporting date.
For both MGE Energy and MGE, there have been no changes to unrecognized tax benefits existing at December 31, 2007, nor any additions for new tax positions, during the quarter ended March 31, 2008.
b.
Effective Tax Rate.
MGE Energy's effective income tax rate for the three months ended March 31, 2008, is 35.5% compared to 36.6% for the same period in 2007. This decrease is primarily attributable to an increased federal tax credit for production of electricity from wind energy, as a result of placing the Top of Iowa III wind project into production in February 2008. Electricity generated from wind energy produces a two cents per kilowatt hour federal tax credit. The Top of Iowa III wind project will substantially increase the wind energy tax credit.
The decrease in the effective tax rate for MGE from 36.6% in the first quarter of 2007 to 35.3% for the first quarter of 2008 is also primarily attributable to the increased wind energy tax credit.
6.
Elm Road - MGE Energy and MGE.
a.
Construction.
On November 4, 2005, MGE Power Elm Road acquired a 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin (Oak Creek expansion). MGE Power Elm Road's sole principal asset is the 8.33% undivided ownership interest in the aforementioned coal-fired generating plants. The estimated share of capital costs for that ownership interest in both units is approximately $172 million (excluding capitalized interest). The operator has informed MGE Power Elm Road that adverse weather during the 2007-2008 winter season presented difficulties for the construction contractor. However, the contractor continues to forecast that the units will be completed on schedule. At this time we cannot predict what impact there will be on the project's construction costs and schedule.
At March 31, 2008, $118.4 million (excluding capitalized interest) related to this project is reflected in the Construction Work In Progress balance on MGE and MGE Energy's consolidated balance sheets. MGE Power Elm Road calculates capitalized interest in accordance with SFAS 34, Capitalization of Interest Cost, on the Elm Road project. At March 31, 2008, MGE Power Elm Road recorded a total of $7.2 million in capitalized interest related to the Elm Road project.
b.
Consolidation.
In connection with this project, MGE Energy and its subsidiaries entered into various agreements, including a facility lease agreement between MGE Power Elm Road (a nonregulated subsidiary of MGE Energy) and MGE. The financial terms of the facility lease include a capital structure of 55% equity and 45% long-term debt, and return on equity of 12.7%, a lease term of 30 years, and a 5% lease payment reduction in the first five years.
Based on the nature and terms of the leasing agreement and the relationship it establishes, MGE absorbs a majority of the expected losses, residual value, or both, associated with the ownership of MGE Power Elm Road. MGE also is the party most closely associated with MGE Power Elm Road. As a result, MGE is the primary beneficiary and MGE Power Elm Road is a VIE under FIN 46R. Accordingly, MGE Power Elm Road has been consolidated in the financial statements of MGE.
MGE Energy's share of the equity and net income (through its wholly owned subsidiary MGE Power) of MGE Power Elm Road is classified within the MGE financial statements as minority interest.
c.
Nonregulated Revenues.
MGE has approval from the PSCW to defer the recovery of the payments made to MGE Power Elm Road for carrying costs during construction of the facility, management fees, and community impact mitigation costs. MGE estimates that the total carrying costs on the Elm Road project will be $55.9 million. This estimate is subject to change based on changes in interest rates, timing of capital expenditures, and the total project cost. During 2008, MGE will recover $12.1 million in electric rates for its investment in MGE Power Elm Road. Of this amount, $9.6 million relates to carrying costs and $2.5 million relates to management fees, community impact mitigation costs, and other related costs.
MGE began collecting the carrying costs in rates in 2006. These amounts are being collected over multiple years. Of these costs, MGE estimates that $20.5 million relates to the capitalized interest and the debt portion of the facility. These costs will be recognized over the period in which the facility will be depreciated. The remaining $35.4 million is estimated to represent the equity portion and is being recognized over the period allowed for recovery in rates. For the three months ended March 31, 2008, $2.4 million related to the carrying costs were recovered in rates. Of this amount, $0.6 million relates to the debt portion of the facility and was deferred on the consolidated financial statements of MGE and MGE Energy. The remaining $1.8 million represents the equity portion and was recognized as nonregulated revenues in the consolidated financial statements of MGE and MGE Energy.
d.
WPDES Permit.
On November 29, 2007, the Administrative Law Judge (the "ALJ") in the proceeding related to the previously issued Wisconsin Pollution Discharge Elimination System ("WPDES") permit determined that the two additional coal units that are part of the Oak Creek expansion are "new facilities" under Section 316(b) of the Federal Clean Water Act.
The ALJ did not vacate the WPDES permit or any other permit necessary to continue construction of the two additional coal units, pointing out that, based upon the present record, the water intake system currently under construction as part of the Oak Creek expansion may be permittable under the standards that apply to new facilities.
The ALJ remanded the WPDES permit to the Wisconsin Department of Natural Resources (the "WDNR") and directed the WDNR to reissue or modify the permit to reflect "best technology available" to comply with the standards applicable to new facilities under Wisconsin state law. As part of the decision, the ALJ restated his prior opinion that the water intake system currently under construction may not be operated so long as it remains a contested matter. The ALJ's ruling was appealed to circuit court, but the court dismissed the appeal on February 11, 2008, on the grounds that the ALJ decision was not a final order and further ruled that all issues decided by the ALJ may be judicially reviewed when there is a final decision.
The plant operator has advised us that there are alternatives under the United States Environmental Protection Agency's (the "EPA") rule for new facilities that would permit the use of the once-through cooling system rather than the use of cooling towers. The operator has requested the WDNR to issue a modified permit and has submitted additional information to the WDNR supporting the request for approval of the once-through cooling system under this rule. The operator anticipates the WDNR will complete the WPDES permit modification process in the first half of 2008. A reissued permit would be subject to public comment and possible administrative and legal review. We cannot predict the timing or results, or the effect upon construction schedule or costs, of any decision by the WDNR or any administrative or legal process that may follow.
While the process for modifying the WPDES permit proceeds, construction of the additional coal units continues on the current schedule.
7.
Top of Iowa III Wind Project - MGE Energy and MGE.
MGE has constructed a 29.7 MW (18 turbines) wind-powered electric generating facility in Iowa. In February 2008, the project was placed into service.
At March 31, 2008, MGE had incurred $56.1 million of costs on the project and $2.9 million in AFUDC, which are reflected in the property, plant, and equipment balance on MGE and MGE Energy's consolidated balance sheets. During the three months ended March 31, 2008 and 2007, MGE had recorded $0.6 million and $0.3 million, respectively, in AFUDC related to this project. MGE was permitted to recover 100% AFUDC on the Top of Iowa III wind project during construction of the facility.
8.
Pension and Postretirement Plans - MGE Energy and MGE.
MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits. Additionally, MGE has deferred contribution 401(k) benefit plans.
a.
Net Periodic Cost.
The following table presents the components of MGE and MGE Energy's net periodic benefit costs recognized for the three months ended March 31, 2008 and 2007. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.
|
Pension Benefits (In thousands) |
Three Months Ended March 31, | ||
|
|
2008 |
|
2007 |
|
Components of net periodic benefit cost: |
|
|
|
|
Service cost |
$ 1,304 |
|
$ 1,311 |
|
Interest cost |
2,829 |
|
2,655 |
|
Expected return on assets |
(3,345) |
|
(3,085) |
|
Amortization of: |
|
|
|
|
Transition obligation |
36 |
|
36 |
|
Prior service cost |
111 |
|
111 |
|
Actuarial loss |
99 |
|
218 |
|
Net periodic benefit cost |
$ 1,034 |
|
$ 1,246 |
|
Postretirement Benefits (In thousands) |
Three Months Ended March 31, | ||
|
|
2008 |
|
2007 |
|
Components of net periodic benefit cost: |
|
|
|
|
Service cost |
$ 466 |
|
$ 435 |
|
Interest cost |
949 |
|
762 |
|
Expected return on assets |
(324) |
|
(288) |
|
Amortization of: |
|
|
|
|
Transition obligation |
107 |
|
107 |
|
Prior service cost |
72 |
|
52 |
|
Actuarial loss |
76 |
|
44 |
|
Net periodic benefit cost |
$1,346 |
|
$1,112 |
b.
Expected Cash Flows.
There are no required contributions for the 2008 plan year. Likewise, there were no required contributions for the 2007 plan year. MGE elected to make discretionary deductible contributions of $5.9 million during the three months ended March 31, 2008. MGE may elect to make additional discretionary deductible contributions.
c.
Pension Protection Act.
During the third quarter of 2006, President Bush signed into law the Pension Protection Act of 2006, which will affect the manner in which companies, including MGE and MGE Energy, administer their pension plans. This legislation will require companies to, amongst other things, increase the amount by which they fund their pension plans, pay higher premiums to the Pension Benefit Guaranty Corporation if they sponsor defined benefit plans, amend plan documents, and provide additional plan disclosures in regulatory filings and to plan participants. This legislation became effective on January 1, 2008. The U.S. Treasury Department's interim guidance indicates that further guidance is forthcoming. MGE does not expect significant changes in expected cash flows as a result of the Act. Absent changes in plan design as a result of the Act, the Act is not expected to materially impact MGE and MGE Energy's results of operations.
9.
Share Based Compensation - MGE Energy and MGE.
The MGE Energy Board approved a Performance Unit Plan (the "Plan") on December 15, 2006. Under the Plan, eligible participants may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period.
On January 1, 2007, the Board of Directors granted 22,479 units based on the MGE Energy December 31, 2006, closing stock price. On January 18, 2008, the Board of Directors granted 18,538 units based on the MGE Energy closing stock price as of that date. These units are subject to either a four or five year graded vesting schedule. Based on the provisions of SFAS 123R, Share Based Payment, on the grant date, MGE Energy and MGE measured the cost of the employee services received in exchange for the award based on current market value of MGE Energy common stock. The fair value of the awards has been subsequently re-measured at March 31, 2008. Changes in fair value as well as the original grant have been recognized as compensation cost. Because this amount will be remeasured throughout the vesting period, the compensation cost is subject to variability.
For nonretirement eligible employees, stock based compensation costs are accrued and recognized using the graded vesting method. Pursuant to the provisions of SFAS 123R and the terms of the plan, compensation cost for retirement eligible employees or employees that will become retirement eligible during the vesting schedule, are recognized on an abridged horizon also using the graded vesting method.
During each of the three months ended March 31, 2008 and 2007, MGE recorded $0.1 million in compensation expense as a result of this plan. No forfeitures or cash settlements occurred during the aforementioned period.
10.
Commitments and Contingencies.
a.
Environmental - MGE Energy and MGE.
MGE is listed as a potentially responsible party for a site the EPA has placed on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing and processing waste oil for several years. This site requires clean up under the Comprehensive Environmental Response, Compensation and Liability Act. A group of companies, including MGE, is currently working on cleaning up the site. Management believes that its share of the final cleanup costs will not result in any materially adverse effects on MGE's operations, cash flows, or financial position. Insurance may cover a portion of the cleanup costs. Management believes that the cleanup costs not covered by insurance will be recovered in current and future rates. At March 31, 2008, MGE accrued a $0.1 million gross liability for this matter. The expected range of loss for this item is estimated to be between $0.1 million and $0.2 million.
Effective March 31, 2006, Wisconsin adopted the Energy Efficiency and Renewables Act that focuses on three areas: increasing the use of renewable energy in Wisconsin, promoting the development of renewable energy technologies, and strengthening the state's energy efficiency programs. This new legislation requires that by 2015, 10% of the state's electricity be generated from renewable resources. As part of this initiative, MGE plans to add additional renewable energy resources, such as wind farms. MGE expects the cost to comply with regulations will be recoverable through current and future rates.
Air quality regulations promulgated by the EPA and WDNR in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), and other pollutants and require permits for operation of emission sources. These permits have been obtained by MGE and must be renewed periodically.
On March 12, 2008, the U.S. EPA announced a new national ambient air quality standard for ozone which is more stringent than the current standard (standard lowered from 0.08 to 0.0750 parts per million). States (including Wisconsin) must monitor and collect data on ozone levels in order to determine attainment or nonattainment status on a county and/or area basis. Currently available monitoring data for Dane and Columbia counties demonstrates attainment with this new standard. However, final attainment designations will not be made until 2010 using the monitoring data collected during the period 2007 through 2009. There is a possibility that future monitoring data for one or both of these counties will demonstrate nonattainment for this new ozone standard which could result in additional operating and capital expenditures at Columbia (located in Columbia county) and Blount (located in Dane county). Similarly, new standards for particulate emissions under 2.5 microns and monitoring data may result in a nonattainment designation for Dane county for particulate emissions which could also result in increased expenditures at Blount.
Various initiatives including, but not limited to, the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), maximum achievable control technology (MACT) standards, new source performance standards (NSPS), and existing and proposed state mercury emissions limits, are expected to result in significant additional operating and capital expenditures at Columbia, Elm Road, and Blount. There is some uncertainty concerning the mercury emission reduction requirements in light of a February 8, 2008, U.S. Court of Appeals decision vacating CAMR. Further, in February 2008, the WDNR proposed new revisions to the state mercury rules under NR 446 that are significantly different than CAMR and if finalized, will further increase mercury control compliance costs at these facilities.
The Columbia operator's current estimates show that MGE's share of the capital expenditures required to comply with these environmental initiatives will be between $130 million and $200 million. According to current estimates, compliance with these initiatives is also expected to result in an increase to MGE's pro-rata share of Columbia's on-going operating expenses. The operator and MGE management are continuing to explore various alternatives to comply with these standards. Accordingly, actual capital expenditures may fall above or below the range provided. These standards and initiatives may also result in additional capital and operating expenditures at MGE's other generating facilities. MGE expects that the costs to comply with these standards will be fully recoverable through rates. The PSCW is permitting MGE to defer pre-certification and pre-construction costs related to compliance with CAIR and CAMR regulations at Columbia. Additionally, MGE is entitled to 100% AFUDC on the related pre-construction costs. As of March 31, 2008, MGE had incurred $0.9 million in costs at Columbia related to these initiatives.
As of March 31, 2008, Columbia entered into various contractual commitments with vendors for a small portion of the aforementioned expenditures as well as other Columbia environmental projects. MGE is indirectly a party to these agreements as a result of its joint ownership of Columbia and is also contractually obligated, under the applicable ownership and operating agreements, with respect to any commitments made. MGE has a 22% ownership interest in Columbia. MGE's share of these commitments is estimated to be $0.6 million for the remainder of 2008. These costs are expected to be capitalized and included in the consolidated balance sheet of MGE.
On April 30, 2008, the Circuit Court in Columbia County, Wisconsin entered judgment and approved a Stipulation and Order for Judgment (Stipulation) entered into by the State of Wisconsin and WPL, the operating owner of Columbia and the other Columbia owners, including MGE, to address a failure by the plant operator to file with the WDNR a timely application to renew an air permit for Columbia. The Stipulation was agreed to in response to a referral of enforcement action from the WDNR to the Wisconsin Attorney General following the previously announced notice of intent to sue alleging that the operator did not timely file its application for renewal of an air permit for Columbia and, thus, alleging that Columbia was operating without the necessary air permit. The Stipulation requires the operator to pay $285,000 in penalties and charges and to establish an environmental management system at Columbia to address environmental compliance matters, but allows the continued operation of Columbia in accordance with the terms and conditions of the expired air permit until a renewed permit is issued. The Stipulation bars any further action against the Columbia owners by the State of Wisconsin on this matter.
b.
Chattel Paper Agreement and Other Guarantees - MGE Energy and MGE.
MGE makes available to qualifying customers a financing program for purchasing and installing energy-related equipment that will provide more efficient use of utility service at the customer's property. MGE is party to a chattel paper purchase agreement with a financial institution under which it can sell or finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until August 31, 2008. At March 31, 2008, MGE had sold an outstanding $4.3 million interest in these receivables, which MGE accounted for as a sale under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - A Replacement of FASB Statement No. 125. MGE retains the servicing responsibility for these receivables.
On January 1, 2007, MGE adopted SFAS 156, Accounting for Servicing of Financial Assets, an amendment of SFAS 140. SFAS 156 clarified when to separately account for servicing rights, requires these rights to be initially measured at fair value, and provides the option to subsequently account for those servicing rights at either fair value or under the amortization method previously required under SFAS 140. MGE continues to account for servicing rights under the amortization method. Initial determination of the servicing asset fair value is based on the present value of the estimated future cash flows. The discount rate is based on the PSCW authorized weighted cost of capital.
MGE would be required to perform under its guarantee if a customer defaulted on its loan. The energy-related equipment installed at the customer sites is used to secure the customer loans. The loan balances outstanding at March 31, 2008, approximate the fair value of the energy-related equipment acting as collateral. The length of the MGE guarantee to the financial institution varies from one to ten years depending on the term of the customer loan. Principal payments for the next five years on the loans are $0.8 million in 2008, $0.6 million in 2009, $0.9 million in 2010, $0.5 million in 2011, and $0.3 million in 2012.
MGE Energy also has guaranteed debt service payments on a development project. This guarantee is a two year commitment ending in 2009 with a maximum financial exposure of $0.2 million for the remaining term of the guarantee.
c.
Other Legal Matters - MGE Energy and MGE.
MGE is involved in various other legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. As of March 31, 2008, MGE has a total of $1.5 million accrued in the financial statements for such matters. The ultimate outcome of such matters is uncertain and may have an adverse effect on MGE's results of operations or cash flows.
d.
Venture Debt Commitment - MGE Energy.
On January 15, 2008, MGE Energy entered into a three year agreement with a venture debt fund. As a result of this agreement, MGE Energy has committed $0.5 million to this venture debt fund. The timing of infusions is dependent on the needs of the venture debt fund and is therefore uncertain at this time.
e.
ATC Capital Commitment - MGE Energy and MGE.
On March 18, 2008, MGE Transco elected to participate in a voluntary capital call for ATC. As a result, MGE Transco contributed $1.3 million to ATC in April 2008.
11.
Restructuring Activities - MGE Energy and MGE.
On January 19, 2006, MGE announced a plan, subject to certain conditions, that includes discontinuing coal use at the end of 2011 at Blount. The plant will continue to run on natural gas but will be reduced from its current approximate 190 MW capacity to 100 MW when coal burning is discontinued. MGE has determined that certain employee positions will be eliminated in 2011 as a result of this exit plan.
MGE has entered into severance agreements providing severance benefits to the nonunion employees affected by the exit plan. Additionally, MGE ratified a labor agreement with the IBEW providing those union employees affected by the exit plan with involuntary and voluntary severance benefits. MGE has accounted for the involuntary union and nonunion severance benefits in accordance with the provisions of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. These benefits were recognized initially at the respective communication dates based on the fair value of the liability as of the termination date and are being recognized ratably over the future service period of the employees. Benefits are expected to be paid as follows: $0.2 million in 2010 and $1.3 million in 2011.
MGE will recover in rates the costs associated with the discontinuance of coal at Blount. As such, the severance charges for the nonunion and union employees have been deferred and recognized on the consolidated balance sheet of MGE Energy and MGE as a regulatory asset.
The following table presents the activity in the restructuring accrual from December 31, 2007, through March 31, 2008:
|
(In thousands) |
|
|
Balance at December 31, 2007 |
$609 |
|
Additional expense, net (deferred) |
67 |
|
Cash payments during the period |
(149) |
|
Balance, March 31, 2008 |
$527 |
The aforementioned exit plan has also resulted in accelerated depreciation for the Blount assets expected to be retired in 2011. These assets will be recovered in rates over a four year period starting in 2008. For the three months ended March 31, 2008, $0.8 million of accelerated depreciation expense had been recognized and recovered in rates.
12.
Derivative and Hedging Instruments - MGE Energy and MGE.
As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to interest rates, commodity prices, and gas margin. MGE evaluates its derivative contracts in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts in which this exclusion can not be applied, SFAS 133 requires MGE Energy and MGE to recognize such derivatives in the consolidated balance sheets at fair value, with changes in the fair value of derivative instruments to be recorded in current earnings or deferred in accumulated other comprehensive income (loss), depending on whether a derivative is designated as, and is effective as, a hedge and depending on the type of hedge transaction. If the derivative qualifies for regulatory deferral subject to the provisions of SFAS 71, Accounting for the Effects of Certain Types of Regulation, the derivatives are marked to fair value pursuant to SFAS 133 and are offset with a corresponding regulatory asset or liability.
MGE's gas and electric segments purchased and sold exchange traded and over-the-counter options, swaps, and futures and, in addition, holds FTRs for certain transmission paths in the MISO market. At March 31, 2008, the net market value of all these aforementioned instruments exceeded their cost by $4.6 million.
MGE has also entered into a ten-year purchased power agreement which provides MGE with firm capacity and energy beginning June 12, 2012, and ending on May 31, 2022 (the "base term"). The agreement also allows MGE the option to purchase power during a period of time preceding the base term as well as an option to extend the contract after the base term. The agreement is a derivative contract and is recognized at its fair value on the balance sheet. The fair value of the contract at March 31, 2008, is $0.1 million. Also, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory liability.
Under the PGA clause and electric fuel rules, MGE may include in costs of fuel (natural gas or power) the costs and benefits of the aforementioned fuel price risk management tools. Because these costs and benefits are recoverable, the related unrealized loss/gain is deferred on the balance sheet as a regulatory asset/liability. All of the instruments outstanding as of March 31, 2008, will expire in 12 months or less, except for the aforementioned ten-year purchased power agreement. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected in natural gas purchased, purchased power, or fuel used for electric generation in the delivery month applicable to the instrument.
On September 26, 2007, MGE entered into a non-exchange traded HDD collar. This agreement extended from January 2008 until March 2008 and had a premium of $0.2 million. Under this agreement, MGE was subject to a floor (3,450 HDD) and a ceiling (3,600 HDD), based on forecasted heating degree days during the indicated period. If actual heating degree days were below the floor, MGE was entitled to receive a payment, and if actual heating degree days exceeded the ceiling, MGE was obligated to make a payment. Any payment or receipt was limited to $1.3 million. Actual heating degree days during the aforementioned period were 3,971. Because this number exceeded the ceiling, MGE recorded a $1.5 million expense (includes the $0.2 million premium) on the collar in the three months ended March 31, 2008. MGE accounted for the HDD collar using the intrinsic value method pursuant to the requirements of EITF 99-2, Accounting for Weather Derivatives.
Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines.
13.
Regional Transmission Organizations - MGE Energy and MGE.
On April 1, 2005, the MISO implemented its bid-based energy market. MISO is a FERC approved RTO that is required to provide a real-time market based mechanism for congestion management. MGE is a participant in this market. On April 1, 2005, MGE began offering substantially all of its generation on the MISO market and purchasing much of its load requirement from the MISO market in accordance with the MISO Tariff.
Additionally, on May 1, 2004, MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent party that coordinates and directs the operation of the region's transmission grid, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. MGE has two purchase power agreements, for a total of 65 MW, that are affected by this market.
MGE reports on a net basis transactions on the MISO and PJM markets in which it buys and sells power within the same hour to meet electric energy delivery requirements. This treatment resulted in $42.2 million and $40.8 million reduction to sales for resale and purchased power expense for the three months ended March 31, 2008 and 2007, respectively.
14.
Rate Matters - MGE Energy and MGE.
a.
Rate proceedings.
On December 14, 2007, the PSCW authorized MGE to increase 2008 electric rates by 4.8% or $16.2 million and increase gas rates by 2.8% or $7.8 million. The electric increase will cover costs for MGE's new wind energy projects, statewide energy efficiency and renewable energy programs, transmission improvements by ATC, and accelerated costs to discontinue coal use at the Blount Station. In addition to funding the statewide energy programs, the natural gas rate increase covered costs for area gas construction projects needed to accommodate customer growth. Authorized return on common stock equity was set at 10.8% based on 57.4% utility common equity. The PSCW order allows MGE to eliminate a base rate case proceeding for 2009 and request a limited reopener for certain items. The costs MGE can update in its limited reopener include monitored fuel rules costs, Elm Road lease payments and operation and maintenance costs as a result of Elm Road Unit 1 becoming operational, and ATC network service fees.
Pursuant to the provisions of this rate order, the fuel rules bandwidth effective January 1, 2008, is plus or minus 2%. See description of fuel rules below.
On December 22, 2006, the PSCW approved a limited scope rate case reopener related to MGE's current electric rates. This order approved an update to MGE's electric fuel costs monitored under the fuel rules, an updated estimate of the 2007 Elm Road carrying costs, and a request for recovery of increased ATC-related transmission costs through December 31, 2007. This order resulted in a net 0.15% decrease, on average, in retail electric rates for 2007. The PSCW also approved the recovery of 100% AFUDC on the Top of Iowa III wind project beginning in November 2006 and continuing until construction on the project ceased.
b.
Fuel rules.
Actual electric fuel costs are subject to reconciliation to the amount approved by the PSCW in MGE's rate order covering the applicable period. Known as "fuel rules," the process can produce a fuel surcharge for MGE or require MGE to make a refund in the form of a credit, to the extent that the actual fuel costs are outside a range higher or lower than the level authorized by the PSCW in that rate order.
Under fuel rules effective January 1, 2008, MGE can apply for a fuel surcharge if its actual electric fuel costs exceed 102% of the electric fuel costs allowed in its latest rate order. Conversely, MGE can be required to provide a fuel credit to its customers if actual electric fuel costs are less than 98% of the electric fuel costs allowed in that order.
On March 31, 2008, MGE filed an application with the PSCW requesting a surcharge on its electric rates to cover increased fuel and purchased power costs. In its application to the PSCW, MGE stated that actual January and February fuel costs exceeded the monthly fuel rules bandwidth. Additionally, MGE reported that annual fuel costs per kWh, computed based on actual results for January and February and revised forecasts for the remainder of the year, exceeded the annual fuel rules bandwidth. See Footnote 18b for an update on this filing.
On April 26, 2007, the PSCW approved a $0.00339 per kWh interim fuel surcharge on MGE's electric rates to cover increased fuel and purchased power expenses. On August 31, 2007, MGE received a final decision which reduced the fuel surcharge from $0.00339 per kWh to $0.00242 per kWh. These surcharges resulted in a gross increase to electric rates of $6.9 million for the twelve months ended December 31, 2007. For the interim period April 26, 2007, through August 31, 2007, the difference between the interim surcharge and the final surcharge was required to be refunded to customers. Accordingly, on October 6, 2007, a refund of $1.3 million was applied to customers' accounts.
As a result of a decrease in electric fuel costs during the twelve months ended December 31, 2006, a fuel credit was approved by the PSCW. To account for this credit, MGE recorded a $19.1 million reduction to other electric revenues. During the year ended December 31, 2006, $16.8 million had been credited to electric customers. An additional $2.4 million (includes interest) was applied to customers' accounts in April 2007.
15.
SFAS 157 Fair Value of Assets and Liabilities - MGE Energy and MGE.
As of January 1, 2008, MGE and MGE Energy adopted SFAS 157, Fair Value Measurements. The adoption of this standard requires enhanced disclosures about MGE's and MGE Energy's assets and liabilities carried at fair value.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:
Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.
Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.
Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.
In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. MGE Energy and MGE have elected to defer the adoption of the nonrecurring fair value measurement disclosures of nonfinancial assets and liabilities. The adoption of FSP FAS 157-2, effective January 1, 2009, is not expected to have any material impact on MGE Energy and MGE.
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for MGE Energy and MGE.
|
(In thousands) |
Fair Value as of March 31, 2008 | ||||||
|
MGE Energy |
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
Derivatives, net |
$4,723 |
|
$2,851 |
|
$ - |
|
$1,872 |
|
Exchange-traded investments |
2,825 |
|
2,825 |
|
- |
|
- |
|
Total Assets |
$7,548 |
|
$5,676 |
|
$ - |
|
$1,872 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Deferred compensation |
$1,023 |
|
$1,023 |
|
$ - |
|
$ - |
|
Total Liabilities |
$1,023 |
|
$1,023 |
|
$ - |
|
$ - |
|
MGE |
| ||||||
|
Assets: |
|
|
|
|
|
|
|
|
Derivatives, net |
$4,723 |
|
$2,851 |
|
$ - |
|
$1,872 |
|
Exchange-traded investments |
1,459 |
|
1,459 |
|
- |
|
- |
|
Total Assets |
$6,182 |
|
$4,310 |
|
$ - |
|
$1,872 |
|
Liabilities: |
|
|
|
|
|
|
|
|
Deferred compensation |
$1,023 |
|
$1,023 |
|
$ - |
|
$ - |
|
Total Liabilities |
$1,023 |
|
$1,023 |
|
$ - |
|
$ - |
Derivatives include exchange-traded derivative contracts, a ten-year purchased power agreement, and Financial Transmission Rights (FTRs). Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as level 1. A small number of exchange-traded contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore classified as level 3. The ten-year purchased power agreement (see Footnote 12) was valued using an internally-developed pricing model and therefore classified as level 3. The model includes both observable and unobservable inputs. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as level 3.
Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as level 1.
The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26 week maturity increased by 1% compounded monthly, with a minimum annual rate of 7%, compounded monthly, and are therefore based upon observable market data and classified as level 1.
The following table summarizes the changes in level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE.
|
(In thousands) |
Three months ended March 31, 2008 |
|
Balance as of January 1, 2008 |
$(444) |
|
Realized and unrealized gains (losses): |
|
|
Included in regulatory liabilities (assets) |
2,329 |
|
Included in other comprehensive income |
(13) |
|
Included in earnings |
863 |
|
Included in current assets |
(7) |
|
Purchases, sales, issuances, and settlements, net |
(856) |
|
Transfers in and/or out of level 3 |
- |
|
Balance as of March 31, 2008 |
$1,872 |
|
Total gains (losses) included in earnings attributed to the change in unrealized gains (losses) related to assets and liabilities held at March 31, 2008 (a) |
$ - |
The following
table presents total realized and unrealized gains (losses) included in income
for Level 3 assets and liabilities measured at fair value on a recurring basis
during the three months ended March 31, 2008, for both MGE Energy and MGE.
(a)
|
(In thousands) |
Purchased Power Expense |
|
Natural Gas Purchased Expense |
|
Regulated Ga Revenues |
|
Total gains (losses) included in earnings for the three months ended March 31, 2008 |
$957 |
|
$(47) |
|
$(47) |
(a) MGE's exchange-traded derivative contracts, ten-year purchased power agreement, and FTRs are subject to regulatory deferral under the provisions of SFAS 71. These derivatives are therefore marked to fair value pursuant to SFAS 133 and are offset with a corresponding regulatory asset or liability. A portion of MGE's derivative contracts fall under the incentive mechanism within the PGA clause and shareholders have the ability to receive 50% of the benefit or loss from these deals if certain thresholds are achieved. Under these derivatives, only 50% of the gains or losses are subject to regulatory deferral under SFAS 71. The remaining 50%, the shareholder portion, is reflected in other comprehensive income. As a result of the above described treatment, there are no unrealized gains or losses that flow through earnings.
16.
New Accounting Pronouncements and Legislation - MGE Energy and MGE.
a.
Pension Protection Act.
See Footnote 8 for discussion of this pronouncement.
b.
FSP FIN 39-1.
In April 2007, the FASB issued FSP 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). This pronouncement amends FIN 39, Offsetting of Amounts Related to Certain Contracts, and allows companies to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. MGE and MGE Energy elected the net presentation as prescribed by this pronouncement. FSP FIN 39-1 became effective for MGE and MGE Energy as of January 1, 2008. The effects of applying this pronouncement shall be recognized as a change in accounting principle through retroactive application for all financial statements presented. The adoption of this pronouncement did not have any impact on MGE or MGE Energy's net income. At March 31, 2008, MGE Energy and MGE did not have any cash collateral to net against the net derivative positions with counterparties.
c.
FAS 160 and FAS 141(R).
In December 2007, the FASB issued FAS 160, Non-Controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 and FAS 141(R), Business Combinations. These pronouncements will change the accounting and reporting for business acquisitions and noncontrolling interest in a subsidiary. In addition, FAS 160 will change the accounting and reporting for the deconsolidation of a subsidiary. FAS 160 and FAS 141(R) will be effective for MGE and MGE Energy as of January 1, 2009. MGE and MGE Energy are currently assessing the impact these pronouncements will have on their financial statements.
d.
FAS 161.
In March 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption allowed. MGE and MGE Energy have elected not to early adopt this pronouncement. Therefore, FAS 161 will be effective for MGE and MGE Energy as of January 1, 2009. MGE and MGE Energy are currently assessing the impact this pronouncement will have on their financial statements.
17.
Segment Information - MGE Energy and MGE.
MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See MGE Energy's and MGE's Form 10-K for additional discussion of each of these segments.
The following tables show segment information for MGE Energy's operations for the indicated periods:
|
MGE Energy (In thousands) |
Electric |
Gas |
Non- regulated Energy |
Transmission Investment |
All Others |
Consolidation/ Elimination Entries |
Consolidated Total |
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
Operating revenues |
$ 82,439 |
$105,484 |
$ 2,073 |
$ - |
$ - |
$ - |
$ 189,996 |
|
Interdepartmental revenues |
121 |
8,588 |
3,718 |
- |
- |
(12,427) |
- |
|
Total operating revenues (loss) |
82,560 |
114,072 |
5,791 |
- |
- |
(12,427) |
189,996 |
|
Depreciation and amortization |
(6,482) |
(2,229) |
(686) |
- |
- |
- |
(9,397) |
|
Other operating expenses |
(72,002) |
(96,627) |
(25) |
- |
(64) |
12,427 |
(156,291) |
|
Operating income (loss) |
4,076 |
15,216 |
5,080 |
- |
(64) |
- |
24,308 |
|
Other income (deductions), net |
484 |
(1,513) |
- |
1,606 |
(1) |
- |
576 |
|
Interest (expense) income, net |
(2,699) |
(807) |
(637) |
- |
710 |
- |
(3,433) |
|
Income before taxes |
1,861 |
12,896 |
4,443 |
1,606 |
645 |
- |
21,451 |
|
Income tax benefit (provision) |
189 |
(5,115) |
(1,783) |
(645) |
(260) |
- |
(7,614) |
|
Net income |
$ 2,050 |
$ 7,781 |
$ 2,660 |
$ 961 |
$ 385 |
$ - |
$ 13,837 |
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007 |
|
|
|
|
|
|
|
|
Operating revenues |
$ 76,764 |
$ 89,843 |
$ 1,279 |
$ - |
$ - |
$ - |
$ 167,886 |
|
Interdepartmental revenues |
116 |
6,195 |
3,713 |
- |
- |
(10,024) |
- |
|
Total operating revenues (loss) |
76,880 |
96,038 |
4,992 |
- |
- |
(10,024) |
167,886 |
|
Depreciation and amortization |
(5,243) |
(2,128) |
(686) |
- |
- |
- |
(8,057) |
|
Other operating expenses |
(66,147) |
(81,945) |
(28) |
(1) |
(99) |
10,024 |
(138,196) |
|
Operating income (loss) |
5,490 |
11,965 |
4,278 |
(1) |
(99) |
- |
21,633 |
|
Other income (deductions), net |
167 |
(300) |
- |
1,445 |
3 |
- |
1,315 |
|
Interest (expense) income, net |
(2,531) |
(714) |
(638) |
- |
343 |
- |
(3,540) |
|
Income before taxes |
3,126 |
10,951 |
3,640 |
1,444 |
247 |
- |
19,408 |
|
Income tax provision |
(691) |
(4,272) |
(1,461) |
(580) |
(102) |
- |
(7,106) |
|
Net income |
$ 2,435 |
$ 6,679 |
$ 2,179 |
$ 864 |
$ 145 |
$ - |
$ 12,302 |
The following tables show segment information for MGE's operations for the indicated periods:
|
MGE (In thousands) |
Electric |
Gas |
Non- regulated Energy |
Transmission Investment |
Consolidation/ Elimination Entries |
Consolidated Total |
|
Three months ended March 31, 2008 |
|
|
|
|
|
|
|
Operating revenues |
$ 82,439 |
$ 105,484 |
$ 2,073 |
$ - |
$ - |
$ 189,996 |