MGEE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, for MGE Energy, Inc. (MGE Energy) and its principal subsidiary, Madison Gas and Electric Company (MGE). MGE Energy operates as a holding company with three segments: regulated electric utility operations, regulated gas utility operations, and nonutility energy operations. The nonutility segment focuses on the development of the West Campus Cogeneration Facility (WCCF) on the University of Wisconsin-Madison campus, which is currently under construction and has no operating revenues.

Key Financial Metrics (Nine Months Ended Sept 30, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18.8% to $299.1 million from $251.7 million in the prior year. This was driven by a 42.2% increase in gas operating revenues (due to higher natural gas costs passed through to customers and increased volumes) and an 8.2% increase in electric operating revenues (due to rate increases effective March 1, 2003).
• Net Income: Net income decreased slightly by 2.4% to $25.3 million from $25.9 million, despite revenue growth. This was primarily due to a $1.0 million donation to the MGE Foundation and increased operating expenses.
• Operating Expenses: Total operating expenses rose 23.5% to $250.3 million. Significant increases included natural gas purchased costs (up 62.2% due to commodity price spikes) and other operations and maintenance expenses (up 22.7% due to higher health care costs and transmission wheeling expenses).
• Depreciation: Depreciation and amortization decreased 19.3% to $17.6 million, largely due to the sale of MGE's interest in the Kewaunee Nuclear Power Plant, which reduced decommissioning depreciation.
• Cash Flow: Cash provided by operating activities increased 42.8% to $69.6 million, while cash used for investing activities increased significantly to $84.4 million, primarily due to $40.7 million in capital expenditures for the WCCF.

Guidance, Outlook, and Risks

• Capital Projects: The WCCF is estimated to cost $180 million total, with MGE Power West Campus responsible for $103 million. Construction commenced in October 2003, with completion expected in spring 2005. MGE Energy plans to finance these expenditures through debt and equity issuances.
• Regulatory Matters:
  • Rate Cases: MGE filed a request in May 2003 for a 7.7% electric rate increase and a 1.9% gas rate increase. Hearings are expected in November 2003, with an order anticipated in early 2004.
  • Fuel Credits: The Public Service Commission of Wisconsin (PSCW) approved an interim fuel cost credit of $0.00099 per kWh. A final order regarding fuel credits is expected in Q4 2003.
• Environmental Risks: MGE faces potential capital and operating cost increases due to proposed EPA standards (eight-hour ozone, utility MACT, mercury emissions) and a citizen suit regarding the Columbia plant. Estimated potential costs for compliance range up to $5.5 million in 2006.
• Legal Contingency: A citizen group (FORE) filed a petition for judicial review regarding the WCCF approvals. Management believes this is unlikely to materially affect the project schedule.
• Market Risks: The company is exposed to commodity price volatility (natural gas, electricity) and weather risks. MGE utilizes derivatives and regulatory pass-through mechanisms to mitigate these risks.

Investor Verification Checklist

• Verify the status and timeline of the pending rate case filed in May 2003, as it impacts future revenue recovery.
• Monitor the outcome of the PSCW fuel credit review and the final order expected in Q4 2003.
• Track the progress and cost overruns of the West Campus Cogeneration Facility (WCCF), which represents a significant portion of capital expenditures.
• Assess the potential financial impact of environmental regulations (ozone, MACT, mercury) and the citizen suit against the Columbia plant.
• Review the company's ability to refinance short-term debt used for WCCF construction into long-term capital as the project progresses.