Madison Gas and Electric Company

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Madison Gas and Electric Company

133 South Blair Street
Madison, Wisconsin 53703
U.S.A.
Telephone: (608) 252-7000
Fax: (608) 252-4714
Web site: http://www.mge.com

Public Company
Incorporated: 1896
Employees: 700
Sales: $274.1 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: MDSN
NAIC: 221122 Electric Power Distribution; 221112 Fossil Fuel Electric Power Generation; 221119 Other Electric Power Generation; 22121 Natural Gas Distribution

Madison Gas and Electric Company (MGE) is a relatively small power company that has remained independent and profitable in the face of rapid changes and consolidation in the energy industry. MGE provides electrical power to a base of about 250,000 customers in Madison, Wisconsin and surrounding areas and provides natural gas to approximately 340,000 customers in seven Wisconsin counties. MGE’s home territory includes the University of Wisconsin, and MGE has long held that Madison’s unique economy makes the company virtually “recession-proof.” In the late 1990s, southeastern Wisconsin was one of the most vibrant regional economies in the nation, and MGE likewise did well. In 1995 Standard & Poor’s ranked the company second in the United States for its competitive position, and MGE also had ranked second nationwide among electric utilities in 1993 for financial stability. The company generates power through fossil-fueled plants and also has developed a wind power program. MGE sold its 18 percent share in the Kewaunee, Wisconsin nuclear power plant in 1998.

19th-Century Beginnings

Madison Gas and Electric was formed out of two smaller companies in 1896. M.E. Fuller and Emerson McMillin were jointly the first presidents of the new utility, which merged Madison’s existing electric company, Four Lakes Light and Power, with Madison City Gas Light and Coke Co. The new company was headquartered on Main Street and served a population of just 17,000 people. At the time of the company’s founding, gas was used for Madison’s streetlights, and to light some stores and homes. It was just beginning to be used as heating oil, replacing wood. The city had an electric trolley system, and some commercial and residential buildings also were lit by electricity. But electric lighting surpassed gas by the end of the century. In 1899, the new utility became a subsidiary of a larger firm, American Light and Traction Company. Three years later, MGE built the first gas engine electricity generating station in the country. This replaced an earlier plant, which used steam-driven dynamos. By 1915, the company returned to using steam, freeing up gas for use as fuel.

The city of Madison grew, and MGE with it. Madison was not only the state capital, but home to the state’s public university, and so its population included a high proportion of government and education workers who had a fairly high standard of living. By 1920, Madison’s population had reached 31,000, and MGE had to build more power generating capacity. It installed a 5000 kilowatt turbo-generator in 1923 and, in 1928, enlarged its electric plant again. The company also enlarged its gas works. By 1930, Madison had added another 25,000 people, and more and more customers were using appliances. When the company began, street lighting and the trolley system had been the major uses of gas and electricity. By 1930, residential customers enjoyed electric lighting, as well as electrically powered home appliances such as vacuum cleaners and washing machines. Most houses were equipped with a gas water heater and a gas range, and the use of gas for heating became more and more common throughout the 1930s. MGE encouraged the use of electric appliances. In the mid-1930s company operatives set out for rural areas around Madison to demonstrate different appliances, and the company itself sold appliances until the mid-1970s. MGE also put out a newsletter, Today’s Home, that promoted such products as the gas refrigerator. In the late 1930s, despite the Depression, MGE spent almost $2 million on construction. By 1942, the company served 24,000 electric meters and 18,500 gas meters, and the city of Madison had grown to roughly 74,000 people.

Postwar Development

Just before the close of World War II, in 1944, MGE broke away from its parent company, American Light and Traction. Madison voters rejected a plan for the city to take over the utility and, instead, the company was taken public. The demand for both gas and electricity increased rapidly over the next decade. Residential use of electricity came close to doubling, and use of gas doubled and then some. MGE had to plan ahead to meet the accelerating demand for its products. Starting in 1949, MGE began buying natural gas from a pipeline in Michigan. Natural gas was cleaner burning than manufactured gas, so this change was good for the environment. The company also had begun installing devices to collect airborne ash from its boilers at its electrical plants in the late 1940s. Despite continued updating of its equipment, MGE was able to keep prices low. In the mid-1950s, Madison was ranked as having one of the lowest electric rates in the United States. MGE had to limit the amount of natural gas heating it could provide, however, because it could not get all the gas it could sell. By 1960, the utility resolved this problem when the Michigan pipeline brought in additional sources for gas. MGE added gas service areas to the north and west of Madison around that time. The company also added on to its main electricity generating station, boosting its total capacity by about 25 percent. MGE’s service territory totaled almost 200 square miles around this time, up from just 25 square miles, encompassing only downtown Madison, when the company started out. Throughout the 1960s, MGE added nearby communities to its service territory. Some of these small towns were hotly disputed between MGE and a rival power company, Wisconsin Power and Light, later in the company’s history.

Rate Hikes and Stock Sales in the 1970s

MGE continued to add new customers throughout the 1970s. Its customer base grew at a little less than three percent a year, and sales and revenues for both the electric and gas divisions of the company increased annually. The company was part of a consortium of power companies that built a nuclear power plant in Kewaunee, Wisconsin beginning in 1967. That plant started operating in 1974 and provided about 26 percent of MGE’s electric generating capacity by the end of the decade. In 1974 MGE began burning refuse-derived fuel at some of its Madison generating plants, in a recycling project it entered with the city. This unique program lasted until the early 1990s, when concerns about toxic emissions shut it down. The company bought almost half of its power from a coal-fired generating plant that it partly owned, Columbia Energy Center. Although MGE’s sales and revenues increased steadily, the company paid heavily for construction during the decade. The firm borrowed money, owing $16 million by 1975. More than half of its funds came from borrowed sources, putting the utility over the limit set by its state regulatory body, the Public Service Commission. The utility was closely regulated by this state agency, which had to be appealed to for rate hikes. In 1972 and then twice in 1975, MGE sold stock to raise cash to retire debt. The company also repeatedly asked the Public Service Commission to approve rate increases. MGE raised its electricity rates three times between 1974 and 1976, bringing them up by more than 50 percent in the process. The Public Service Commission had to balance the needs of MGE’s customers for affordable power with the desire of its stockholders for enjoyable profit. The company wanted to be allowed a profit level of 15 percent, to keep MGE attractive to investors. The Public Service Commission, which also regulated other area utilities including Wisconsin Power and Light, often compromised with MGE, not granting all of its wishes. The commission also mandated other changes, such as making the utility switch to a so-called time-of-use rate, where customers were charged different rates according to time of day. This allowed customers a cheaper electricity rate for drying their clothes after midnight, for example, but MGE complained about the cost of installing new and more sophisticated meters.

Another financial factor affecting MGE in the 1970s was inflation. Because of the time-consuming process of appealing for rate hikes, it was often months or years before the company could raise the price of its services enough to keep up with inflation. MGE executives complained about the burden of regulation, feeling that in some situations the Public Service Commission’s recommendations did not help either the company or the public. Yet MGE acknowledged that some regulation was desirable. Lack of regulation would be chaotic.

Takeover Battle in the 1980s

MGE continued to benefit from its relationship with Michigan Wisconsin Pipe Line (Mich-Wis), the pipeline company that supplied it with natural gas. The oil embargo in the 1970s had encouraged domestic oil exploration, and Mich-Wis was active in searching out natural gas in the continental United States. Through its parent company, it was a partner in the Alaskan pipeline, and it also obtained natural gas from offshore Louisiana, Texas, and other states. Mich-Wis promised MGE a plentiful supply of natural gas for the early 1980s, as more of its exploration paid off. In the mid-1980s, oil costs began to sink, and interest rates also went down, making for excellent cash flow and profits for the utility industry in general. But because the level of profit was regulated by government bodies, utility companies had to find something to do with excess cash, lest they be asked to lower rates to consumers. Bigger power companies began buying smaller ones. An article in the May 19, 1986 Business Week speculated that MGE might be an attractive takeover target by its larger neighbor, Wisconsin Power and Light. The magazine was correct, although the bid did not come in until three years later.

Company Perspectives:

As a community-based energy company, MGE will: provide quality service at competitive rates; meet all of our customers’ gas, electric and related energy needs; earn a reasonable return for investors; maintain the highest standards of corporate citizenship and fair treatment for all employees.

Wisconsin Power and Light (WPL) also was headquartered in Madison, and its service area in southern and central Wisconsin totally surrounded MGE’s. While MGE supplied the lucrative, economically stable Madison metropolitan area, with its university, hospitals, state government, and industries, WPL furnished gas and electricity to 35 counties, covering more than 600 cities and villages. WPL had about three times as many electricity customers as MGE. It owned nine small generating plants and had part or whole interest in several large ones, including a share of more than 40 percent in the Kewaunee nuclear plant. WPL was nearly as old as MGE, founded in 1917, and altogether about three times as large as its rival. The two companies competed directly over some of the small towns on the outskirts of Madison where their territories overlapped. WPL had been interested in a merger with MGE for several years, but finally made an unsolicited offer in the spring of 1989. The deal was to be a stock swap, with no cash changing hands. The final bid was valued at around $268 million, with WPL offering 1.75 of its shares for each MGE share. Although questions remained over whether WPL could afford the premium it was offering to get the smaller company, and whether the excess cost eventually would be passed to the utility’s customers, MGE’s board and shareholders overwhelmingly rejected the offer. On May 31, MGE conveyed to WPL that its bid was too low for any further consideration, and no further talks on the merger went forward.

Battles for Deregulation in the 1990s

The soured takeover bid did nothing to help relations between MGE and its much larger rival. Both companies fought for the small communities that straddled both their territories, apparently letting workers go in 1990 to keep costs and, therefore, rates down. A bigger battle than that over towns like Black Earth was over deregulation of electrical utilities. WPL and other large power companies were in favor of looser regulations inside Wisconsin, allowing more direct competition between providers. MGE wanted a cautious approach to deregulation, fearing adverse effects to the state’s economy. WPL and other firms hired lobbyists in the mid-1990s to push the state legislature and the Public Service Commission toward freeing up restraints on competition. MGE also hired a lobbyist to handle its side of the story and joined a consortium of other municipal utilities, electric co-ops, and labor and environmental groups to ask the PSC to go slow. But things became more fierce in 1996, when WPL announced that it would pursue an unusual three-way corporate merger. The new company, which became Interstate Energy, later renamed Alliant Energy Corp., put together WPL, IBS Industries, and a third firm, Interstate Power Company. Soon after, Wisconsin Energy Corp., based in Milwaukee, merged with the Minneapolis-based Northern States Power Co. to form Primergy Corp. Primergy became the tenth largest utility in the nation. In response to the mergers around it, MGE took out newspaper ads featuring “Big Boris,” a pig who claimed to crave “Radical Electric Deregulation.” Big Boris claimed that deregulation would let the “big guys” get all the electricity they wanted and the ad’s readers, presumably residential customers or little guys, would get only the leftovers. WPL responded with ads portraying MGE as a dinosaur. Both firms became more embroiled in state politics, backing opposing candidates for the Madison area representative to congress. In 1996 the state Public Service Commission adopted a proposal to open up the utility industry to competition, but it ordered a 32-step plan that would be enacted over the next three to seven years. So although it seemed that things would change, it would not be as abrupt as MGE had perhaps feared.

MGE geared for change, but nevertheless it found itself in a strong position. In a 1996 presentation to stockholders, MGE Chairman David Mebane told his audience that the company had frozen or reduced rates since 1991, at the same time achieving historic financial highs. MGE was one of only four utilities in the country to receive the highest credit rating from the New York investment firm Bear Stearns, and the company’s return to investors over the first half of the 1990s was more than twice the industry average. The company had acquired two small subsidiaries in the 1990s, Great Lakes Energy Corp., known as Glenco, and American Energy Management Inc., of Chicago. In 1997 MGE announced that these two subsidiaries would form a joint venture with National Gas and Electric, a Houston company, to investigate marketing natural gas and energy services in the Great Lakes region. Another change MGE made was to sell off its part ownership in the Kewaunee nuclear plant. It sold its 17.8 percent share in 1998, to the Wisconsin Public Service Corp.

Key Dates:

1896:: MGE is formed out of merger of existing gas and electric companies.
1944:: MGE becomes public company.
1960:: Plentiful supply of natural gas is made available to MGE through Mich-Wis pipeline.
1974:: Kewaunee nuclear plant begins operation.
1989:: MGE rejects takeover bid.
1996:: Wisconsin legislature adopts 32-step utility deregulation plan.

In 1999, MGE had total revenues of more than $274 million, a rise of almost ten percent over 1998. Earnings also rose. The firm’s annual report boasted that the vibrant and diverse economy of the Madison area made it “virtually recession-proof.” The strengths of its small service area continued to be one of MGE’s major advantages. Supplies of electricity tightened statewide in the late 1990s, and MGE responded by improving its own generating capacity in 1999. In 2000, the company turned on an 83-megawatt gas-fueled generating plant that upped its total generating capacity by 14 percent. The company made additional plans for more improvements over the next few years. MGE also began making electricity from wind power, catching a trend that had advanced rapidly nationwide beginning in the late 1990s. MGE ended the first quarter of 2000 with the highest per share earnings in its history. MGE’s Chairman Mebane assured shareholders that MGE was a safe, secure investment that was not prone to take risks. MGE seemed much smaller in 2000, since its nearest neighbors had grown so much, but Mebane downplayed the possibility of a merger or takeover. He envisioned the company remaining a municipal utility that would continue to do well in the thriving Madison-area economy.