MGEE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2008, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy is a holding company operating through five segments: electric utility, gas utility, nonregulated energy, transmission investments, and all other. MGE serves approximately 136,000 electric customers and 140,000 gas customers in Wisconsin. The report is unaudited but includes all normal recurring adjustments.

Key Financial Metrics

Liquidity: As of March 31, 2008, MGE Energy reported a working capital deficit (current liabilities exceeded current assets), primarily due to funding capital commitments for the Top of Iowa III wind project and the Elm Road project with short-term debt, and the reclassification of $30.0 million of long-term debt maturing in September 2008 to current liabilities. Cash and cash equivalents totaled $3.2 million.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 13.2% to $189.9 million. Electric revenues rose 7.4% due to a 4.8% rate increase approved by the Public Service Commission of Wisconsin (PSCW) and a 1.9% increase in retail sales. Gas revenues surged 17.4% driven by a 12.9% increase in gas deliveries (due to colder weather) and higher rates.
• Profitability: Net income increased 12.5% to $13.8 million. The effective income tax rate decreased to 35.5% from 36.6%, primarily due to increased federal tax credits from the Top of Iowa III wind project placed in service in February 2008.
• Cost Increases: Natural gas purchased costs increased $10.6 million (15.7%) due to higher volumes and costs. Fuel for electric generation increased $2.4 million (17.7%).
• Capital Spending: Capital expenditures increased $4.7 million to $28.5 million, driven by construction activity for the Elm Road project ($15.6 million) and the Top of Iowa III wind project.

Guidance, Outlook, and Risks

• Regulatory Actions: On May 5, 2008 (subsequent to period end), the PSCW approved an interim fuel surcharge of $0.00239 per kWh to cover increased fuel and purchased power costs, estimated to increase annual electric revenues by $8.0 million. This is subject to refund if collections exceed actual costs.
• Environmental Compliance: Significant capital expenditures ($130 million to $200 million share) are anticipated for Columbia, Elm Road, and Blount facilities to comply with CAIR, CAMR, and state mercury rules. A WPDES permit for the Elm Road project is under modification; construction continues on schedule pending final approval.
• Restructuring: MGE plans to discontinue coal use at the Blount Station by the end of 2011, reducing capacity from 190 MW to 100 MW. Severance costs are being deferred and recovered in rates.
• Weather Risk: Gas margins are sensitive to weather. A $1.5 million expense was recorded for a heating degree day collar due to colder-than-expected weather.
• Capital Requirements: MGE intends to refinance the $30 million medium-term note maturing in September 2008 and fund future capital commitments through operations, long-term debt, and equity issuance.

Investor Verification Checklist

• Fuel Surcharge Recovery: Verify the final determination of the interim fuel surcharge and potential refunds with interest.
• Elm Road Project Status: Monitor the resolution of the WPDES permit modification and any potential cost overruns or schedule delays due to weather or regulatory changes.
• Environmental Capital Costs: Track the actual capital expenditures required for Columbia, Blount, and Elm Road to meet evolving mercury and ozone emission standards.
• Debt Refinancing: Confirm the successful refinancing of the $30 million note maturing in September 2008 to address the working capital deficit.
• Weather Derivatives: Assess the impact of future weather volatility on gas margins and the effectiveness of hedging instruments.