MGEE

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007, 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 135,000 electric customers and 138,000 gas customers in Wisconsin.

Key Financial Metrics (Six Months Ended June 30, 2007)

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 7.8% year-over-year. Electric revenues rose 6.6% due to a 3.5% increase in retail sales volumes and higher sales for resale. Gas revenues increased 8.9%, driven by a 16.9% increase in retail gas deliveries due to higher heating degree days.
• Profitability: Net income increased 20% to $22.3 million. The effective income tax rate decreased to 35.8% from 38.2%, attributed to the completion of prior year tax recovery and favorable tax settlements.
• Operating Expenses: Fuel for electric generation increased 33.6% ($6.8 million) due to higher internal generation volumes and per-unit fuel costs. Natural gas purchased increased 10.6% ($8.2 million) due to volume increases, partially offset by lower per-therm costs in the first quarter.
• Capital Spending: Capital expenditures increased 27% to $48.4 million, primarily driven by construction activity for the Elm Road generating units ($14.0 million) and the Top of Iowa III wind project ($1.7 million).
• Working Capital: Cash provided by operating activities decreased $14.8 million compared to the prior year, largely due to the absence of a significant interim fuel credit and refund recorded in 2006.

Guidance, Outlook, Risks, and Unusual Items

• Rate Matters: On May 7, 2007, MGE filed an application with the Public Service Commission of Wisconsin (PSCW) requesting a 5.7% increase in electric rates and a 3.7% increase in gas rates for 2008 to fund new wind projects, transmission improvements, and the discontinuance of coal at Blount Station.
• Fuel Surcharge: The PSCW approved a $0.00339 per kWh fuel surcharge on April 26, 2007, to cover increased fuel costs. Revenues from this surcharge are subject to refund and interest at 11% based on actual costs.
• Elm Road Project: Construction continues on the Oak Creek/Elm Road generating units. A WPDES permit challenge was remanded to an Administrative Law Judge in March 2007; however, the permit was not vacated, and construction continues. If invalidated, the project could face significant delays and costs.
• Restructuring: MGE continues to execute a plan to discontinue coal use at Blount Station by the end of 2011, involving the elimination of 60 positions. Severance costs are being deferred as regulatory assets.
• Environmental Risks: Proposed state mercury rules may be more restrictive than federal rules, potentially increasing compliance costs for Columbia, Blount, and Elm Road facilities. MGE is also a potentially responsible party for the Lenz Oil Superfund site, with an accrued liability of $0.1 million.
• Financing: MGE entered into a $25 million swap lock in July 2007 to fix interest rates for debt expected to be issued in Q3 2007 and secured a $20 million unsecured line of credit in August 2007.

Investor Verification Checklist

• Regulatory Approvals: Verify the status of the May 2007 rate case filing for 2008 electric and gas rate increases.
• Elm Road Permit Status: Monitor the outcome of the WPDES permit remand proceedings and any potential impact on construction timelines or cost recovery.
• Fuel Cost Recovery: Track the reconciliation of the April 2007 fuel surcharge to determine the final refund amount owed to customers.
• Capital Expenditure Execution: Confirm progress and cost adherence for the Elm Road ($97 million remaining) and Top of Iowa III ($44.6 million remaining) projects.
• Environmental Compliance Costs: Assess the financial impact of proposed state mercury rules and the Lenz Oil site cleanup obligations.