United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM
10-K  [X] Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934  For the fiscal year ended: December 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

39-2040501000-1125

Madison Gas and Electric Company
(a Wisconsin Corporation)
133 South Blair Street
Madison, Wisconsin 53703
(608) 252-7000
www.mge.com

39-0444025   SECURITIES REGISTERED PURSUANT TO SECTION
12(b) OF THE ACT:  Title of
Class
Name of Each
Exchange on which RegisteredMGE Energy,
Inc.
Common Stock,
$1 Par Value Per Share
The Nasdaq
Stock Market   SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT:  Title of
ClassMadison Gas and Electric
Company
Cumulative
Preferred Stock, $25 Par Value Per Share   1    Indicate by checkmark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  MGE Energy, Inc.
Yes [X] No [  ]Madison Gas and Electric Company
Yes [  ] No [X]  Indicate by checkmark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Act.  MGE Energy, Inc.
Yes [  ] No [X]Madison Gas and Electric Company
Yes [  ] No [X]  Indicate by checkmark 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 registrants were required to file such reports) and
(2) have been subject to such filing requirements for the past 90 days. Yes
[X] No [  ]  Indicate by checkmark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]  Indicate by checkmark if the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:  MGE Energy, Inc.
Madison Gas and Electric
CompanyLarge accelerated filer
X
-Accelerated filer
-
-Non-accelerated filer
-
XSmaller Reporting Company
-
-  Indicate by checkmark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).  MGE Energy, Inc.
Yes [  ] No [X]Madison Gas and Electric Company
Yes [  ] No [X]  The aggregate market value of the voting and nonvoting
common equity held by nonaffiliates of each registrant as of June 30, 2008,
was as follows:  MGE Energy, Inc.
$720,745,946Madison Gas and Electric Company
$0  The number of shares outstanding of each registrant's
common stock as of February 1, 2009, were as follows:  MGE Energy, Inc.
22,929,677Madison Gas and Electric Company
17,347,889   DOCUMENTS INCORPORATED BY
REFERENCE  Portions of MGE Energy, Inc.'s definitive proxy
statement to be filed on or before April 9, 2009, relating to its annual
meeting of shareholders, are incorporated by reference into Part III of
this annual report on Form 10-K.  Madison Gas and Electric Company meets the conditions set
forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is
therefore omitting (i.) the information otherwise required by Item 601
of Regulation S-K relating to a list of subsidiaries of the registrant as
permitted by General Instruction (I)(2)(b), (ii.) the information otherwise
required by Item 6 relating to Selected Financial Data, (iii.) the
information otherwise required by Item 10 relating to Directors and
Executive Officers as permitted by General Instruction (I)(2)(c), (iv.) the
information otherwise required by Item 11 relating to executive
compensation as permitted by General Instruction (I)(2)(c), (v.) the
information otherwise required by Item 12 relating to Security Ownership of
Certain Beneficial Owners and Management, and (vi.) the information otherwise
required by Item 13 relating to Certain Relationships and Related
Transactions.   2    Table of Contents   Filing Format Forward-Looking Statements Where to Find More Information Definitions, Abbreviations, and Acronyms Used in the Text
and Notes of this Report PART I. Item 1. Business. Item 1A. Risk Factors. Item 1B. Unresolved Staff Comments. Item 2. Properties. Item 3. Legal Proceedings. Item 4. Submission of Matters to a Vote of Security
Holders. PART II. Item 5. Market for Registrants' Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity Securities. Item 6. Selected Financial Data. Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. Item 7A. Quantitative and Qualitative Disclosures About
Market Risk Item 8. Financial Statements and Supplementary
Data. Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. Item 9A. Controls and Procedures. Item 9B. Other Information. PART III. Item 10. Directors, Executive Officers, and Corporate
Governance. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters. Item 13. Certain Relationships and Related Transactions,
and Director Independence. Item 14. Principal Accounting Fees and
Services. PART IV. Item 15. Exhibits and Financial Statement
Schedules. Signatures - MGE Energy, Inc. Signatures - Madison Gas and Electric
Company    3    Filing Format  This combined Form 10-K 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.   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. 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 a) include those factors
discussed in Item 1A. Risk Factors, Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations, and Item 8.
Financial Statements and Supplementary Data, and b) other factors discussed in
filings made by that registrant with the SEC.  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 and the Web site maintained by the SEC at
http://www.sec.gov.  Our Internet site addresses are
http://www.mgeenergy.com and http://www.mge.com. On our sites, we
have made available, free of charge, our most recent annual report on Form 10-K
and proxy statement. We also provide, free of charge, our other filings with the
SEC as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. 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.    4    Definitions, Abbreviations,
and Acronyms Used in the Text and Notes of this Report  Abbreviations, acronyms, and definitions used in the text
and notes of this report are defined below.  AFUDC
Allowance for Funds Used During
ConstructionALJ
Administrative Law JudgeAlliant
Alliant Energy CorporationANPR
Advance Notice of Proposed RulemakingANR
ANR Pipeline CompanyAPBO
Accumulated Postretirement Benefit
ObligationARB
Accounting Research BulletinARO
Asset Retirement ObligationASM
Ancillary Services MarketATC
American Transmission Company LLCBACT
Best Available Control TechnologyBART
Best Available Retrofit TechnologyBechtel
Bechtel Power CorporationBlount
Blount StationCAIR
Clean Air Interstate RuleCAMR
Clean Air Mercury RuleCAVR
Clean Air Visibility RuleCO2
Carbon DioxideColumbia
Columbia Energy Centercooling degree days
Measure of the extent to which the average daily
temperature is above 65 degrees Fahrenheit, which is considered an
indicator of possible increased demand for energy to provide
coolingCWDC
Central Wisconsin Development CorporationDistribution Agreement
Distribution Agreement between MGE Energy and
JP MorganDth
DekathermsEGU
Electric Generating UnitEITF
Emerging Issues Task ForceElm Road
Elm Road Generating StationEPA
United States Environmental Protection
AgencyEPC
Engineering, Procurement, and
ConstructionERISA
Employee Retirement Income Security ActERS
Elm Road Services, LLCFAS
Financial Accounting StandardFASB
Financial Accounting Standards BoardFERC
Federal Energy Regulatory CommissionFIN
FASB Interpretation No.FSP
FASB Staff Position No.FTR
Financial Transmission RightsGAAP
Generally Accepted Accounting PrinciplesGCIM
Gas Cost Incentive MechanismGHG
Greenhouse Gasheating degree days (HDD)
Measure of the extent to which the average daily
temperature is below 65 degrees Fahrenheit, which is considered an
indicator of possible increased demand for energy to provide
heatingIBEW
International Brotherhood of Electric
Workersinterconnection agreement
Generation-Transmission Interconnection
AgreementJP Morgan
J.P. Morgan Securities Inc.kV
KilovoltkVA
Kilovolt AmperekWh
Kilowatt-hourLIBOR
London Inter Bank Offer RateLIFO
Last-in-first-out pricingMACT
Maximum achievable control technologyMAGAEL
MAGAEL, LLCMGE
Madison Gas and Electric CompanyMGE Construct
MGE Construct LLCMGE Energy
MGE Energy, Inc.MGE Power
MGE Power LLC  5     MGE Power Elm Road
MGE Power Elm Road, LLCMGE Power West Campus
MGE Power West Campus, LLCMGE Transco
MGE Transco Investment LLCMISO
Midwest Independent System Operator (a regional
transmission organization)Moody's
Moody's Investors Service, Inc.MRO
Midwest Reliability OrganizationMW
MegawattNAAQS
National Ambient Air Quality StandardsNasdaq
The Nasdaq Stock MarketNERC
National Electric Reliability CouncilNNG
Northern Natural Gas CompanyNOx
Nitrogen OxideNR
Natural ResourcesNSPS
New Source Performance StandardsNYMEX
New York Mercantile ExchangeOPEIU
Office and Professional Employees International
UnionPGA
Purchased Gas Adjustment clausePJM
PJM Interconnection, LLC (a regional transmission
organization)PM
Particulate MatterPSCW
Public Service Commission of WisconsinRE
Regional EntitiesRFC
Reliability First CorporationRTO
Regional Transmission OrganizationSEC
Securities and Exchange CommissionSECA
Seams Elimination Cost AdjustmentsSFAS
Statement of Financial Accounting Standards (issued
by the FASB)SIP
State Implementation PlanSO2
Sulfur Dioxidethe State
State of WisconsinStock Plan
Direct Stock Purchase and Dividend Reinvestment
Plan of MGE EnergyUSW
United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial, and Service Workers
International UnionUW
University of Wisconsin at MadisonVIE
Variable Interest EntityWCCF
West Campus Cogeneration FacilityWDNR
Wisconsin Department of Natural ResourcesWEPCO
Wisconsin Electric Power CompanyWorking capital
Current assets less current liabilitiesWPDES
Wisconsin Pollutant Discharge Elimination
SystemWPL
Wisconsin Power and Light CompanyWPSC
Wisconsin Public Service CorporationWRERA
Worker, Retiree and Employer Recovery Act of
2008WUMS
Wisconsin and Upper Peninsula of Michigan
System    6    PART
I.   Item 1.
Business.  MGE Energy operates in the following business
segments:   Electric utility operations 
generating, purchasing, and distributing electricity through MGE.   Gas utility operations  purchasing
and distributing natural gas through MGE.   Nonregulated energy operations 
constructing, owning, and leasing new electric generating capacity that will
assist MGE through MGE Energy's wholly owned subsidiaries MGE Power, MGE
Power Elm Road and MGE Power West Campus.   Transmission Investments  investing
in companies engaged in the business of providing electric transmission
services, such as ATC.   All Other  investing in companies
and property which relate to the regulated operations, financing the regulated
operations, or providing construction services to the other subsidiaries through
its wholly owned subsidiaries MGE Construct, MAGAEL and CWDC, and Corporate
functions.  MGE's utility operations represent a majority of the
assets, liabilities, revenues, expenses, and operations of MGE Energy.
MGE Energy's nonregulated energy operations currently include an undivided
interest in the assets of the West Campus Cogeneration Facility. MGE Power West
Campus owns 55% of the facility, which represents its interest in the electric
generating assets, and the UW owns 45% of the facility, which represents their
interest in the steam and chilled water assets. The UW's share of the plant and
portion of the earnings from the WCCF are not reflected in the consolidated
financial statements of MGE and MGE Energy. Nonregulated energy operations
also include an undivided 8.33% ownership interest in each of two 615 MW
generating units being constructed in Oak Creek, Wisconsin.  As a public utility, MGE is subject to regulation by the
PSCW and the FERC. The PSCW has authority to regulate most aspects of MGE's
business including rates, accounts, issuance of securities, and plant and
transmission line siting. The PSCW also has authority over certain aspects of
MGE Energy as a holding company of a public utility. FERC has jurisdiction,
under the Federal Power Act, over certain accounting practices and certain other
aspects of MGE's business.  MGE Energy's subsidiaries are also subject to
regulation under local, state, and federal laws regarding air and water quality
and solid waste disposal. See "Environmental" below.  MGE Energy was organized as a Wisconsin corporation
in 2001. MGE was organized as a Wisconsin corporation in 1896. Their principal
offices are located at 133 South Blair Street, Madison, Wisconsin 53703, and
their telephone number is (608) 252-7000.  Electric Utility Operations  MGE generates and distributes electricity in a service
area covering a 316 square-mile area of Dane County, Wisconsin. The service area
includes the city of Madison, Wisconsin.  At December 31, 2008, MGE supplied electric service
to approximately 137,000 customers, with approximately 89% located in the cities
of Fitchburg, Madison, Middleton, and Monona and 11% in adjacent areas. Of the
total number of customers, approximately 86% were residential and 14% were
commercial or industrial. Electric revenues for 2008, 2007, and 2006 were
comprised of the following:  7     Twelve Months Ended
December 31,2008

2007

2006Residential
33.9%

33.8%

34.2%Commercial
54.0%

51.9%

51.8%Industrial
5.6%

5.4%

5.5%Public authorities (including the UW)
9.2%

8.0%

8.4%Other utilities and other*
(2.7)%

0.9%

0.1%Total
100.0%

100.0%

100.0%  *See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations, Results of
Operations, Electric Utility Operations, Electric sales and revenues, Other
revenues section for additional information.  Electric operations accounted for approximately 58.8%,
62.8%, and 63.3% of MGE's total 2008, 2007, and 2006 regulated revenues,
respectively.  See Item 2. Properties, for a description of MGE's
electric utility plant.  MGE is registered with two Regional Entities (RE), The
Midwest Reliability Organization (MRO) and Reliability First Corporation (RFC).
The essential purposes of the RE are: (1) the development and implementation of
regional and NERC reliability standards, and (2) determining compliance with
those standards, including enforcement mechanisms.  Transmission  Reliability 2000 legislation enacted in Wisconsin
mandated, among other things, the creation of a statewide transmission company
to own the investor-owned utilities' transmission assets. Pursuant to these
provisions, effective January 1, 2001, MGE transferred all of its electric
utility transmission assets to ATC in exchange for an ownership interest in ATC.
At December 31, 2008, MGE Transco held a 3.6% ownership interest in ATC as
a result of the aforementioned assets transferred and subsequent additional
capital contributions made.  ATC is owned by the utilities that contributed facilities
or capital in accordance with Wisconsin law. ATC's purpose is to provide
reliable, economic transmission service to all customers in a fair and equitable
manner. ATC plans, constructs, operates, maintains, and expands transmission
facilities that it owns to provide adequate and reliable transmission of power.
ATC is regulated by FERC for all rate terms and conditions of service and is a
transmission-owning member of the MISO.  Regional Transmission Organizations  MGE is a nontransmission owning member of the MISO. On
February 1, 2002, MGE started taking network transmission service from the
MISO. MISO is a nonprofit RTO approved by FERC. The MISO is responsible for
monitoring the electric transmission system that delivers power from generating
plants to wholesale power transmitters. MISO's role is to ensure equal access to
the transmission system and to maintain or improve electric system reliability
in the Midwest.  As a FERC approved RTO, MISO is required to provide a
real-time market-based mechanism for congestion management. On April 1,
2005, MISO implemented its bid-based energy market. At that time, 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. In January 2009, MISO implemented and MGE began participating in
the ancillary services market (ASM). The ASM is an extension of the existing
energy market in which MISO assumes the responsibility of maintaining sufficient
generation reserves. Previously, MGE was responsible for providing its own
reserves, however in the ASM, MISO will provide the reserves for MGE's load, and
MGE may offer to sell reserves from its generating units. In addition to this
market change, MISO took on various Balance Authority functions.  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 impacted
by this market.   8    Fuel supply and
generation  MGE satisfies its customers' electric demand with
internal generation and purchased power. During the years ended
December 31, 2008, 2007, and 2006, MGE's electric energy delivery
requirements were satisfied by the following sources:  Twelve Months Ended
December 31,2008

2007

2006Coal
51.9%

51.3%

48.7%Natural gas
6.1%

8.2%

6.8%Fuel oil
0.1%

0.1%

0.1%Renewable sources
2.7%

0.8%

0.7%Purchased power
39.2%

39.6%

43.7%Total
100.0%

100.0%

100.0%  Sources used depend on market prices, generating unit
availability, weather, and customer demand.  Coal MGE and two other utilities jointly own Columbia, a
coal-fired generating facility, which accounts for 29% (225 MW) of MGE's
net summer rated capacity. Power from this facility is shared in proportion to
each owner's ownership interest. MGE has a 22% ownership interest in Columbia.
The other owners are WPL (a subsidiary of Alliant), which operates Columbia, and
WPSC. The Columbia units burn low-sulfur coal obtained (pursuant to long-term
contracts) from the Powder River Basin coal fields located in Wyoming and
Montana.  MGE's share of the coal inventory supply for the units
decreased from approximately 33 days on December 31, 2007, to approximately
13 days on December 31, 2008, primarily due to rail transportation issues
caused by weather conditions. The co-owners' current goal is to maintain
approximately a 35 day inventory and the inventory is expected to return to that
level over the next several months, primarily as a result of increases in the
coal inventory during scheduled annual maintenance outages.  MGE also owns the Blount Generating Facility located in
Madison, Wisconsin, which is fueled by coal, gas, and other alternative
renewable sources. 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.  Natural gas and oil MGE owns gas fired combustion turbines. These turbines
are primarily located in Madison and Marinette, Wisconsin and have a total of
174 MW of net summer rated capacity.  See discussion above regarding gas-fired generation at
Blount Generating Facility and see below discussion under Nonregulated
Operations for MGE's interest in a natural gas-fired cogeneration facility on
the UW campus.  Renewable generation sources MGE owns 30 MW or 18 turbines in a wind-powered
electric generating facility in Worth County, Iowa. The turbines were placed
into service in February 2008. MGE began recovering the cost of this
project in rates in 2008.  Purchased power As mentioned under the discussion on "Regional
Transmission Organizations" above, at the time MISO implemented its bid-based
energy market, 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. Accordingly, the MISO market is the source of
the vast majority of MGE's purchased power needs.  MGE also has purchase power contracts with two companies
located in the PJM market. These agreements allow MGE to request certain
transmission rights in the PJM market. Under these agreements MGE has the
contractual right to 65 MW of power.  On October 8, 2008, MGE entered into a ten-year
purchase power agreement to help meet future electric supply requirements. Under
this agreement, MGE has agreed to purchase 50 MW of wind power from Osceola
Windpower II, LLC which is located in Iowa. This facility became operational in
October 2008. MGE does not have any capacity payment commitments under this
agreement. However, MGE is obligated to purchase its ratable share of the energy
produced by the project.  9    On September 21, 2007,
MGE entered into a ten-year purchase power agreement which provides MGE with
firm capacity, energy, and a pro-rata share of the counterparty's rights to
renewable attributes beginning on June 1, 2012, and ending on May 31,
2022 (the "base term"). This agreement obligates MGE to purchase a minimum of
50 MW of capacity each year and a fixed amount of energy. Pursuant to the
terms of this agreement, MGE has the option to extend the ten year term and/or
purchase additional energy and capacity during the base term. MGE has not
exercised either of these options at this time.  On April 23, 2007, MGE entered into a 20-year
purchase power agreement for wind generation. Under this agreement, MGE has
agreed to purchase 30 MW of wind power from the Top of Iowa II project
which is located in Iowa. This facility became operational in January 2008.
MGE does not have any capacity payment commitments under this agreement.
However, MGE is obligated to purchase its ratable share of the energy produced
by the project.  On February 21, 2007, MGE and Invenergy signed an
amendment to an existing purchase power agreement. Under this amended agreement,
MGE has agreed to purchase for a 20-year term approximately 15 MW of wind
power at a facility located near Brownsville, Wisconsin. This facility became
operational in March 2008. MGE does not have any capacity payment
commitments under this agreement. However, MGE is obligated to purchase its
ratable share of the energy produced by the unit.  Gas Utility Operations  MGE transports and distributes natural gas in a service
area covering 1,631 square miles in seven south-central Wisconsin counties. The
service area includes the city of Madison, Wisconsin.  On December 31, 2008, MGE supplied natural gas
service to approximately 141,000 customers in the cities of Elroy, Fitchburg,
Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24
villages; and all or parts of 45 townships. Of the total number of customers,
approximately 89% were residential and 11% were commercial or industrial. Gas
revenues for 2008, 2007, and 2006 were comprised of the following:  Twelve Months Ended
December 31,2008

2007

2006Residential
53.6%

55.6%

55.0%Commercial
36.4%

38.3%

38.3%Industrial
7.5%

4.0%

3.6%Transportation service and other
2.5%

2.1%

3.1%Total
100.0%

100.0%

100.0%  Gas operations accounted for approximately 41.2%, 37.2%,
and 36.7% of MGE's total 2008, 2007, and 2006 regulated revenues,
respectively.  MGE can curtail gas deliveries to its interruptible
customers. Approximately 12% of retail gas deliveries in 2008 and 7% in 2007
were to interruptible customers.  Gas supply  MGE has physical interconnections with ANR and NNG. MGE's
primary service territory, which includes Madison and the surrounding area,
receives deliveries at one NNG and four ANR gate stations. MGE also receives
deliveries at NNG gate stations located in Elroy, Prairie du Chien, Viroqua, and
Crawford County. Interconnections with two major pipelines provide competition
in interstate pipeline service and a more reliable and economical gas supply
mix, which includes gas from Canada and from the mid-continent and Gulf/offshore
regions in the United States.  During the winter months, when customer demand is high,
MGE is primarily concerned with meeting its obligation to firm customers. MGE
meets customer demand by using firm supplies under contracts finalized before
the heating season, supplies in storage (injected during the summer), and other
firm supplies purchased during the winter period.  By contract, a total of 5,414,600 Dth can be injected
into ANR's storage fields in Michigan from April 1 through October 31.
These gas supplies are then available for withdrawal during the subsequent
heating season, November 1 through March 31. Using storage allows MGE
to buy gas supplies during the summer season, when prices are normally lower,
and withdraw these supplies during the winter season, when prices are typically
higher. Storage also gives MGE more flexibility in meeting daily load
fluctuations.   10    MGE's contracts for firm
transportation service include winter maximum daily quantities of:   161,150 Dth (including 96,078 Dth of
storage withdrawals) on ANR.  59,608 Dth on NNG.  Nonregulated Energy Operations  MGE Energy, through its subsidiaries, seeks to
develop generation sources that will assist MGE in meeting the electricity needs
of its customers. Decisions on the type of energy source and its size, timing,
ownership, and financing depend upon a number of factors including the growth of
customer demand in MGE's service area and surrounding areas, the effectiveness
of customer demand management efforts, the costs and availability of alternative
power sources, mandates regarding renewable energy resources, the availability
of transmission capacity, issues associated with siting power generation
sources, available financing and ownership structures, regulatory treatment and
recovery, construction lead times and risks, and other factors. The decisions
tend to involve long-time horizons due to the lead time involved in siting and
constructing new generation sources and the associated transmission
infrastructure.  WCCF  MGE Power West Campus and the UW jointly own undivided
interests in a natural gas-fired cogeneration facility on the UW campus. The
facility has the capacity to produce 20,000 tons of chilled water, 500,000
pounds per hour of steam, and approximately 150 MW of electricity. The UW
owns 45% of the facility, which represents its interest in the chilled-water and
steam assets. These assets are used to meet the UW's growing need for
air-conditioning and steam-heat capacity. MGE Power West Campus owns 55% of the
facility, which represents its interest in the electric generating assets. These
assets are used to provide electricity to MGE's customers. The UW's share of the
plant and portion of the earnings from the WCCF are not reflected in the
consolidated financial statements of MGE or MGE Energy. MGE Power West
Campus' share of the cost of this project is reflected in property, plant, and
equipment on MGE's and MGE Energy's consolidated balance sheets.  MGE leases the electric generating assets owned by MGE
Power West Campus and is responsible for operating the entire facility. The
financial terms of the facility lease include a capital structure of 53% equity
and 47% long-term debt, return on equity of 12.1%, and a lease term of 30 years.
At the end of the lease term in 2035, MGE may, at its option, renew the facility
lease for an additional term, purchase the generating facility at fair market
value or allow the lease contract to end. Under the Joint Ownership Agreement
for WCCF, the State has an option to acquire at the higher of book or market
cost, a 45 MW interest in WCCF or enter into a purchase power agreement for
45 MW of capacity.  Elm Road  MGE Power Elm Road owns an undivided 8.33% ownership
interest in each of two 615 MW advanced technology, coal-fired generating
units being constructed by Wisconsin Energy Corporation in Oak Creek, Wisconsin.
MGE Power Elm Road's estimated share of capital costs for its 8.33% ownership
interest in both units is approximately $172 million (excluding capitalized
interest), which it intends to finance primarily through funds received from
MGE Energy. MGE Energy expects that these funds will be raised through
the sale of common stock (via the Stock Plan), short-term debt, and operating
cash flows. At December 31, 2008, MGE Power Elm Road had incurred
$146.0 million (excluding capitalized interest) of costs on the project.  In December 2008, we received notice from Elm Road
Services, LLC (ERS) that it had received a letter from Bechtel Power Corporation
(Bechtel) containing Bechtel's formal claim for schedule and cost relief on the
construction of the Elm Road units. Bechtel has asserted two claims for cost and
schedule relief in its letter to ERS. Although ERS is in the process of
analyzing the claims and its responses to them, it has stated its belief that
both claims are without merit. It has also stated its view that the only
circumstances and events for which the Elm Road units owners currently retain
price adjustment risk under the contract are force majeure, wage escalation in
excess of 4% annually as measured by published wage bulletins, delays caused by
ERS, changes in scope or performance requested by ERS, and unforeseen
sub-surface ground conditions. ERS has invoked the dispute resolution process
provided for in the contract in order to address the claims made by Bechtel
under the contract. That process involves an informal resolution process,
followed by mediation and then binding arbitration. ERS is currently in the
mediation phase with respect to determining the rights of the parties under the
contract and the disposition of Bechtel's claims. ERS has expressed its
inability to predict the length or ultimate outcome of the claims. As a result,
we are unable to predict the results of these claims or their effect on the
costs recoverable under the existing facility leases, in the event that the
outcome of the claims should cause total construction costs of the Elm Road
units to exceed the amounts authorized in the PSCW order. Bechtel continues to
target an in-service date for Elm Road unit 1 three months beyond the guaranteed
contract date of September 29, 2009, and an in-service date for Elm Road
unit 2 one month earlier than the guaranteed contract date of September 29,
2010.  11    However, Bechtel does request
schedule relief that would result in six months of relief from liquidated
damages beyond the guaranteed contract date for unit 1 and three months of
relief from liquidated damages beyond the guaranteed contract date for unit 2.
See Footnote 21 for additional information.  MGE Energy and its
subsidiaries entered into various agreements regarding the Elm Road generating
units, including a facility lease agreement. This facility lease agreement is
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% rent reduction in the first five years. On November 1, 2005, MGE
received approval from the PSCW to defer payments made to MGE Power Elm Road for
carrying costs during construction of the facility, management fees, and
community impact mitigation costs. MGE began collecting the carrying costs in
rates in 2006. MGE estimates total carrying costs to be approximately
$61.3 million. Of these costs, $22.4 million is estimated to relate 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 $38.9 million is estimated to represent the equity portion and is
being recognized over the period recovered in rates. Environmental  MGE is subject to local, state, and federal regulations
concerning air quality, water quality, and solid waste disposal. The EPA
administers certain federal statutes relating to such matters. The WDNR
administers certain state statutes as to such matters and has primary
jurisdiction over standards relating to air and water quality and solid and
hazardous waste. Those regulations affect the manner in which MGE conducts its
operations, the costs of those operations, as well as some capital and operating
expenditures. It can also affect the siting, timing, and cost of new projects or
other significant actions affecting the environment. MGE is not able to predict
the direction of future regulations or if compliance with any such regulations
will involve additional expenditures for pollution control equipment, plant
modifications, or curtailment of operations. Such actions could reduce capacity
or efficiency at existing plants or delay the construction and operation of
future generating facilities.  Based upon current available information, compliance with
various environmental requirements and initiatives is expected to result in
significant additional operating and capital expenditures at Columbia and may
affect those expenditures at other MGE generating facilities. MGE's share of the
Columbia capital expenditures currently estimated by the plant operator is
between $130 million and $170 million, and on-going operating
expenditures are also expected to increase. The Columbia owners are continuing
to explore various alternatives to comply with these standards, which may affect
the timing and amount of the actual capital expenditures that are incurred.  MGE expects that the Columbia compliance costs 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.  Air quality  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. Various initiatives, including
the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), maximum
achievable control technology (MACT) standards, new source performance standards
(NSPS) and the Clean Air Visibility Rule (also known as the Regional Haze Rule),
as well as state mercury emissions limits, which are expected to result in
additional operating and capital expenditure costs.  CAIR The CAIR requires NOx and SO2
emission reductions in two phases and includes a regional cap-and-trade system.
The first phase begins in 2009 for NOx and 2010 for SO2,
and contemplates reductions of 55% and 40%, respectively, increasing in the
second phase by 2015 to 65% and 70%, respectively; in each case over 2003
levels. MGE owns several generation units currently subject to CAIR: Blount
Generating Station, Columbia, M34 (West Marinette Combustion Turbine) and
Fitchburg Combustion Turbines. In future years, Elm Road will be, and WCCF may
be, affected by the CAIR. MGE anticipates that it may need to purchase
NOx and SO2 allowances and /or install equipment at
Columbia to meet CAIR allocations for its generation fleet. The exact cost of
the allowances and/or equipment installation is not known at this time.   12    The long-term design and
implementation of the CAIR, however, is uncertain at this time. On
December 23, 2008, the D.C. Circuit Court remanded the CAIR to the EPA.
This is a change from its previous ruling on July 11, 2008 to vacate and
remand the rule. The court's remand to the EPA did not include a deadline, but
did indicate that the EPA must modify CAIR consistent with the court's July 2008
opinion. The CAIR remains in effect until it is modified by the EPA. Based on
this remand it is likely that the current cap-and-trade system will be
modified.  CAMR/Wisconsin State Mercury Rule The CAMR is designed to reduce mercury emissions from
coal-fired power plants through a system of monitoring and several compliance
options, including equipment installations and allowance trading options through
a cap-and-trade system originally scheduled to commence in 2009. The ultimate
fate of the CAMR is uncertain at this time. On February 8, 2008, U.S. Court
of Appeals vacated and remanded the CAMR. Requests for rehearing were denied. On
October 17, 2008, the US Solicitor General, however, filed a petition for a
writ of certiorari with the U.S. Supreme Court on the underlying decision.  Wisconsin has revised its state mercury rule (NR 446,
effective December 1, 2008). The state's rule is significantly different
from the federal CAMR. The revised NR 446 will require large coal-fired electric
generating units (EGUs larger than 150 MW) to reduce mercury emissions by
90% beginning in 2015, or choose a multi-pollutant reduction approach, which
allows a stepped approach to mercury reduction while reducing NOX and
SO2 emissions at prescribed rates. Smaller coal-fired EGUs, those
between 25  150 MW in size, will need to apply Best Available Control
Technology (BACT) to achieve mercury reductions.  BART/CAVR Air modeling indicates that SO2 and
NOX emission (and to a lesser extent particulate matter, or PM) from
Columbia may impair visibility at certain Class I Scenic Areas and may therefore
be subject to the Best Available Retrofit Technology (BART) regulations, a
subsection of the EPA's Clean Air Visibility Rule (CAVR). The state of Vermont
has asserted that Wisconsin emissions sources contribute to visibility
impairment in its state. The State of Minnesota has asserted that Wisconsin
emission sources significantly contribute to visibility impairment at the
Boundary Water Canoe Wilderness Area and Voyageurs National Park. Minnesota has
asked Wisconsin to evaluate reducing the Wisconsin statewide average
SO2 and NOx emission rates for electric generating units
to offset those effects.  Wisconsin has promulgated a BART implementation rule
which clarifies that fossil fuel fired electric plants subject to the CAIR
trading programs are not required to conduct a BART analysis for SO2
or NOX emissions, and the determination of BART shall be made for PM
emissions only. However, a remanded CAIR has left open the potential for
revisions to Wisconsin's rule. The WDNR is exploring potential revisions. The
revisions have a potential to affect capital and operating expenses, but exact
costs cannot be determined at this time.  National Ambient Air Quality Standards In 1998, the EPA issued a rule that imposed a
NOx emission budget for emission sources in Wisconsin. In 2000, the
Court of Appeals for the District of Columbia invalidated a portion of the rule
as applied to Wisconsin; however, the Court stayed that portion of the challenge
concerning Wisconsin's alleged impacts on downwind, eight-hour ozone
nonattainment areas. EPA has also stayed that portion of the rule concerning
Wisconsin's alleged impacts on downwind eight-hour ozone nonattainment areas. If
that portion of the rule concerning eight-hour ozone nonattainment areas is
upheld, the resulting NOx emission budget for Wisconsin could
potentially affect the level of permissible NOx emissions from
Blount, Columbia, and WCCF.  In 2006, the EPA lowered the acceptable 24-hour National
Ambient Air Quality Standard (NAAQS) for fine particulate matter, or PM2.5 
i.e., a particulate matter air pollutant that is 2.5 microns or smaller in size.
States monitor and collect data on PM2.5 levels and recommend counties/areas
within their state for attainment or nonattainment with the NAAQS. The EPA makes
the final decision on attainment/nonattainment areas. In mid-December 2008,
the EPA designated several areas of the state, including Dane County (where
Blount and WCCF are located), a portion of Columbia County (where Columbia is
located), and the Milwaukee/Racine area (where Elm Road is located) as
nonattainment areas for the 24-hour PM2.5 standard. The EPA made these initial
determinations based on monitoring data for the years 2005-2007 data. In early
2009, the EPA is expected to reconsider these final designation decisions using
2006-2008 data which may result in Dane and Columbia Counties reverting to an
attainment status based upon monitoring results for 2006-2008 which show the
NAAQS being met. The State of Wisconsin will need to develop a State
Implementation Plan (SIP) by early 2012 for those counties that remain
designated as nonattainment. Implementation of the fine particulate NAAQS could
affect capital, operational and maintenance expenses at generating facilities.   13    On March 12, 2008, the
U.S. EPA announced a new NAAQS for ozone that is more stringent than the current
standard (standard lowered from 0.08 to 0.075 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, Columbia and Milwaukee 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 all 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), Blount and WCCF
(located in Dane County) and Elm Road (located in Milwaukee County).  Boiler MACT Some boilers at Blount and Columbia may need to meet
emission standards for hazardous air pollutants for industrial boilers under
Section 112(j) of the Clean Air Act (the "Boiler MACT Hammer"). It may be
necessary to submit permit applications to the WDNR requesting that case
specific MACT standards be developed for certain boilers at Blount and Columbia.
MGE is exploring whether or not boilers in our operations are subject to these
requirements. If any of our boilers are subject to Boiler MACT Hammer, it may
require that we limit emissions and/or install additional pollution controls.
Whether or not additional compliance steps are needed and the cost of such
compliance is unclear at this time.  Columbia Air Operating Permit Citizen groups have pursued claims against utilities and
permitting agencies for alleged air permitting violations. WPL, the operator of
Columbia, is aware of certain public comments or petitions from citizen groups
that have been submitted to the WDNR regarding the renewal of an air operating
permit at Columbia. WPL has since received a renewal air permit for Columbia,
which contains changes to permit conditions that resulted from WDNR's review of
the comments or petitions. In December 2008, a citizen group submitted a
notice of intent to sue the EPA for failure to respond to its petition
encouraging EPA to challenge this permit. We are unable to predict what actions,
if any, the WDNR, EPA, or the public commenters may take in response to any
public comments, petitions for existing permits or draft renewal permits.  Water quality  MGE is subject to water quality regulations issued by the
WDNR. These regulations include categorical-effluent discharge standards, which
require the use of effluent-treatment processes equivalent to categorical "best
practicable" or "best available" technologies under compliance schedules
established under the Federal Water Pollution Control Act. The WDNR has
published categorical regulations for chemical and thermal discharges from
electric-steam generating plants. The regulations limit discharges from MGE's
plants into Lake Monona and other Wisconsin waters.  Proposed Thermal Discharge Rules in Wisconsin The WDNR is promulgating revised rules to regulate
thermal effluent discharges from point sources in Wisconsin. The current draft
rules apply strict standards for thermal discharges into inland lakes, streams,
rivers, and the Great Lakes. While dischargers can apply for variances, MGE may
incur additional capital expenditures, such as equipment upgrades at Blount and
Columbia, if the variances are not granted. Costs at Blount have not been fully
determined, however, capital expenditures may include cooling towers, which in
past analyses have been shown to be cost prohibitive. Potential costs at
Columbia have not been determined at this time. Based on initial reviews of the
current revised rules, we do not expect Elm Road to be impacted by this
rule.  EPA Cooling Water Discharge Rules (Section
316(b)) In 2004, the EPA promulgated final rules under Section
316(b) of the Clean Water Act addressing cooling water intake structures for
existing large power plants (Phase II rule). A challenge to this rule was upheld
in a January 2007 court decision and significant parts of the rule were
remanded to the EPA for further consideration. In July 2007, EPA suspended the
Phase II rule in its entirety and directed states to use their "best
professional judgment" in evaluating intake systems. The ruling, and EPA's
actions in response, which may change the compliance requirements, may affect
the timing and costs associated with MGE's WPDES permit for Blount and possibly
the WPDES permit for the Oak Creek/Elm Road facility. At this time, MGE is
unable to determine the timing or amount of that impact.   14    WPDES permit  Elm
Road  On November 29, 2007, the Administrative Law Judge
(the "ALJ") in the proceeding related to the previously issued Wisconsin
Pollutant 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.  On May 8, 2008, WDNR issued its public notice that
it intended to reissue the WPDES permit to allow for the once-through cooling
system that was under construction by Wisconsin Energy Corporation. On
June 6, 2008, EPA issued its concurrence letter on the draft permit
indicating it would not object to the modification of the WPDES permit as
drafted. A public information hearing on the intended reissued WPDES permit was
held on June 9, 2008 and the public comment period closed on June 16,
2008. On July 31, 2008, the WDNR issued the final modified permit, with no
substantive changes from the previously issued draft permit. The deadline for a
legal challenge to the permit has expired without appeal.  On July 31, 2008, the joint owners of the Oak Creek
expansion reached an agreement with Clean Wisconsin, Inc. and Sierra Club, the
groups opposing the WPDES permit. Under the settlement agreement, these groups
agreed to withdraw their opposition to the modified WPDES permit for the
expansion units at Oak Creek. The joint owners committed to various
environmental projects, including projects designed to address greenhouse gas
emissions and water quality. MGE's share of those commitments would involve a
payment of approximately $0.4 million in 2009 for greenhouse gas reduction
efforts and, subject to regulatory approval, further payments of approximately
$0.3 million annually over 25 years (2010-2034) to address water quality
issues in Lake Michigan.  Solid waste  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 for the Lenz Oil site 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. As of December 31, 2008, a $0.1 million
gross liability was accrued for this matter.  Global climate change  Although GHG is not currently regulated in the United
States, there is public concern (including among many of our customers) about
global climate change. MGE shares that concern and is working to address GHG
emissions. MGE also recognizes that these gasesparticularly carbon dioxide
(CO2), which is released in the burning of fossil fuelsmay face
future legislative or regulatory restrictions. Environmental-related legislation
(including GHG regulation) is regularly introduced in Congress and in the
Wisconsin legislature. The myriad of legislative and regulatory options under
consideration typically include various compliance dates and limits. They
include efforts to reduce and cap and/or tax the emission of greenhouse gases,
primarily from power plants, industrial sources and the transportation sector.
Bills are also considering releases associated with natural gas pipelines and
company fleets. In addition, there could be national, regional, and state
mandates to produce increasing percentages of electricity from renewable forms
of energy.   15    On March 27, 2008, the
U.S. EPA sent letters to various environmental committees in the U.S. Senate and
House of Representatives announcing EPA's plans to address its obligations under
the U.S. Supreme Court's ruling in Massachusetts v. EPA. The letters to
Congress indicated that the EPA sees any greenhouse gas regulations that they
might develop to be far-reaching and likely to include both mobile and
stationary sources. In July 2008, the EPA issued an Advance Notice of
Proposed Rulemaking (ANPR) seeking comment on a large array of possible
regulatory actions that might be possible under the federal Clean Air Act to
regulate greenhouse gas emissions. The options would affect virtually all
aspects of the economy including electric and natural gas utilities. The ANPR
follows the Massachusetts Supreme Court decision, which requires the EPA
to regulate greenhouse gas emissions under the Clean Air Act if it finds that
such emissions cause, or contribute to, air pollution which may reasonably be
anticipated to endanger public health or welfare. It is unknown at this time
what specific effect such regulation would have on MGE's operations and future
competitive position. It appears likely that GHG regulation will be proposed
under the new federal administration either through the Clean Air Act or through
separate legislation.  Wisconsin is also participating in the development of a
regional GHG Reduction Program through the Midwest Governor's Association. This
group continues to work on developing this program and is expected to report
back in the fall of 2009.  At the state level, a final report from Governor Doyle's
Global Warming Task Force was approved on July 24, 2008, concluding over a
year's work by the task force. MGE participated as an active member of the Task
Force. The report contained over 50 recommendations. Some specific
recommendations of particular relevance to the utility industry include: (i) a
significant increase in required energy efficiency efforts and funding; (ii) a
State renewable portfolio standard that would require 10% renewables by 2013 and
25% by 2025; (iii) creation of a broad-based multi-sector carbon cap and trade
program by 2012 at either the federal or regional level; (iv) investigation and
possible adoption of new rate making approaches and innovative rate designs to
promote state and utility energy efficiency programs and provide more
information to customers; and (v) modification of Wisconsin's current
restrictions on nuclear plant construction. Several PSCW proceedings have been
commenced as a result of Task Force recommendations. It is also likely that
state legislation will be proposed to enact some portion of the Task Force
recommendations or otherwise address climate change at the state level. It is
unknown at this time the extent to which the Task Force recommendations will
actually be adopted and implemented in Wisconsin. Thus the full effect of these
recommendations on MGE cannot be reasonably estimated at this time.  MGE is a producer of GHG emissions, primarily from the
fossil fuel generating facilities it utilizes to meet customers' energy needs,
as well as from leakage from natural gas pipeline system and fleet vehicles.
Climate change and the regulatory response to it could significantly affect our
operations in a number of ways, including but not limited to, increased
operating costs and capital expenditures, restrictions on energy supply options,
permitting difficulties and emission limits. However, the financial consequences
of this compliance cannot be determined until final legislation is passed. MGE
management would expect to seek and receive rate recovery of such compliance
costs, yet the probability and specific impact of such regulation cannot be
reasonably estimated at this time. MGE will continue to monitor proposed GHG
legislation and regulation.  MGE is already addressing GHG emissions through voluntary
actions. In 2005, MGE announced its Energy 2015 Plan which commits to ensuring a
balanced, economic energy supply with reduced environmental emissions. The Plan
emphasizes increased renewable energy, energy efficiency and new cleaner
generation  three strategies that reduce GHG emissions. Under MGE's Energy 2015
Plan, our CO2 emissions are projected to decline from 2005 to 2015
even though total system energy is estimated to increase. We are already well
under way with implementing our Energy 2015 Plan strategies and are committed to
achieving its goals. However, a number of factors, including but not limited to,
changes in economic conditions, regulatory actions, customer response, energy
supply issues and transmission delays, may require us to update and perhaps
refine certain aspects of our Energy 2015 Plan accordingly. The cost of
implementing our Energy 2015 Plan is not expected to result in any materially
adverse effects on MGE's operations, cash flows, or financial position.
Management believes that costs to implement the Energy 2015 Plan will be
recoverable through rates.  Employees  As of December 31, 2008, MGE had 722 employees. MGE
employs 239 employees who are covered by a collective bargaining agreement with
Local Union 2304 of the International Brotherhood of Electrical Workers and 98
employees who are covered by a collective bargaining agreement with Local Union
No. 39 of the Office and Professional Employees International Union. Both
of these collective bargaining agreements expire on April 30, 2009. There
are also five employees covered by a collective bargaining agreement with Local
Union No. 2-111 of the United Steel, Paper and Forestry, Rubber,
Manufacturing, Energy, Allied Industrial, and Service Workers International
Union. This collective bargaining agreement expires on November 1,
2009.   16    Financial Information About
Segments  See Footnote 24 of the Notes to Consolidated
Financial Statements for financial information relating to MGE Energy's and
MGE's business segments.  Executive Officers of the Registrants  Executive
Title
Effective
Date
Service
Years as
an
OfficerGary J. Wolter(a)
Age: 54
Chairman of the Board, President and Chief
Executive Officer
02/01/2002
19Lynn K. Hobbie(b)
Age: 50
Senior Vice President
02/01/2000
14James G. Bidlingmaier(b)
Age: 62
Vice President - Admin. and Chief Information
Officer
02/01/2000
8Kristine A. Euclide(b)
Age: 56
Vice President and General Counsel
11/15/2001
7Terry A. Hanson(a, c)
Age: 57
Vice President, Chief Financial Officer and
Secretary
10/01/2001
17Scott A. Neitzel(b)
Age: 48
Vice President - Energy Supply
Vice President  Energy Supply Policy
09/01/2006
07/01/2002
11Jeffrey C. Newman(a, d)
Age: 46
Vice President and Treasurer
01/01/2001
11Peter J. Waldron(b)
Age: 51
Vice President and Operations Officer
Vice President  Energy Supply Operations
09/01/2006
07/01/2002
12  Note: Ages, years of service, and positions as of
December 31, 2008. (a) Executive officer of MGE Energy and
MGE. (b) Executive officer of MGE. (c) Retired as of January 1, 2009. (d) Assumed title of Vice President, Chief Financial
Officer, Secretary and Treasurer as of January 1, 2009.   Item 1A. Risk
Factors.  MGE Energy and its subsidiaries, including MGE,
operate in a market environment that involves significant risks, many of which
are beyond their control. The following risk factors may adversely affect their
results of operations, cash flows and market price for their publicly traded
securities. While MGE Energy and MGE believe they have identified and
discussed below the key risk factors affecting their business, there may be
additional risks and uncertainties that are not presently known or that are not
currently believed to be significant that may adversely affect their performance
or financial condition in the future.  Regulatory Risk  We are subject to extensive government regulation
in our business, which affects our costs and responsiveness to changing events
and circumstances.  Our business is subject to regulation at the State and
Federal levels. We are subject to regulation as a holding company by the PSCW.
MGE is regulated by the PSCW as to its rates, terms and conditions of service;
various business practices and transactions; financing; and transactions between
it and its affiliates, including MGE Energy. MGE is also subject to
regulation by the FERC, which regulates certain aspects of its business. The
regulations adopted by the State and Federal agencies affect the manner in which
we do business, our ability to undertake specified actions since pre-approval or
authorization may be required, the costs of operations, and the level of rates
charged to recover such costs. Our ability to attract capital is also dependent
in part, upon our ability to obtain a fair return from the PSCW.   17    We face risk for the
recovery of fuel and purchased power costs when they exceed the base rate
established in MGE's current rate structure.  MGE burns natural gas in several of its peak electric
generation facilities, and in many cases, the cost of purchased power is tied to
the cost of natural gas. MGE bears significant regulatory risk for the recovery
from customers of such fuel and purchased power costs when they are higher than
the base rate established in its current rate structure.  We are subject to environmental laws and
regulations that affect our costs and business plans.  Our subsidiaries are subject to environmental laws and
regulations that affect the manner in which they conduct business, including
capital expenditures, operating costs and potential liabilities. Changes and
developments in these laws and regulations may change or limit our business
plans, make them more costly to implement, or expose us to liabilities for past
or current operations.  Numerous environmental regulations govern many aspects of
our present and future operations, including air emissions, water quality,
wastewater discharges, solid waste, and hazardous waste; and continue to evolve
in response to real or perceived concerns, regulatory initiatives,
nongovernmental organizational initiatives and private parties and legal
process. The development of these regulations can introduce uncertainty into the
planning and implementation process for long-lead time projects, such as
generating stations, and can introduce costly delays if previous decisions need
to be revisited as a result of judicial mandate or regulatory change. These
regulations generally require us to obtain and comply with a wide variety of
environmental licenses, permits, inspections, and other approvals, and can
result in increased capital, operating, and other costs, particularly with
regard to enforcement efforts focused on power plant emissions obligations.
These effects can be seen not only with respect to new construction, such as our
participation in the Elm Road generating units, but could also require the
installation of additional control equipment or the implementation of other
compliance measures such as altered operating conditions.  In addition, we may be a responsible party for
environmental clean-up at sites identified as containing hazardous materials. It
is difficult to predict the costs potentially associated with a site clean-up
due to the potential joint and several liability for all potentially responsible
parties, the nature of the clean-up required and the availability of recovery
from other potentially responsible parties.  We may incur material costs of compliance if
federal and/or state legislation is adopted to address climate
change.  Various persons, including legislators, regulators,
litigants, and private parties, have increasingly expressed concern about the
effects of global warming and the effects of greenhouse gases (GHG). These
concerns have prompted active discussion on federal and state legislation, as
well as regional initiatives, that would regulate or cap such emissions. There
have been several proposed versions of legislation pending in the U.S. Congress
and in the Wisconsin legislature to address global climate changes, including
efforts to reduce and control and/or tax the emission of GHG, such as carbon
dioxide, created in the combustion of fossil fuels, including coal, natural gas,
and oil. Bills are also considering releases associated with natural gas
pipelines and company fleets. These initiatives are sometime paired with efforts
to mandate increasing percentages of electricity from renewable forms of energy,
such as wind, or to reduce the demand for electricity. Such legislative and
regulatory initiatives could have the potential for a significant financial
impact on MGE, including the cost to install new emission control equipment,
purchase allowances, or do fuel switching. However, the financial consequences
of this compliance cannot be determined until final legislation is passed.  Operating Risk  We are affected by weather, which affects customer
demand and can affect the operation of our facilities.  The demand for electricity and gas is affected by
weather. Very warm and very cold temperatures, especially for prolonged periods,
can dramatically increase the demand for electricity for cooling and heating,
respectively, as opposed to the softening effect of more moderate temperatures.
Our electric revenues are sensitive to the summer cooling season and, to a
lesser extent, the winter heating season. Similarly, very cold temperatures can
dramatically increase the demand for gas for heating. A significant portion of
our gas system demand is driven by heating. Extreme summer conditions or storms
may stress electric transmission and distribution systems, resulting in
increased maintenance costs and limiting the ability to meet peak customer
demand.  We are affected by economic activity within our
service area.  Higher levels of development and business activity
generally increase the numbers of customers and their use of electricity and
gas. Likewise, periods of recessionary economic conditions generally adversely
affect our results of operations.  18    Our ability to manage
our purchased power costs is influenced by a number of uncontrollable
factors.  We are exposed to additional purchased power costs to the
extent that our power needs cannot be fully covered by the supplies available
from our existing facilities and contractual arrangements. Those needs, and our
costs, could be affected by:   Increased demand due to, for example,
weather, customer growth, or customer obligations,   The inability to transmit our
contracted power from its generation source to our customers due to transmission
line constraints, outages, or equipment failures,   Reductions in the availability of
power from our owned or contracted generation sources due to equipment failures,
shortages of fuel or environmental limitations on operations, and   Failure to perform on the part of any
party from which we purchase capacity or energy.  An unexpected change in demand or the availability of
generation or transmission facilities can expose us to increased costs of
sourcing electricity in the short-term market where pricing may be more
volatile.  Our financial performance depends on the equipment
and facilities in our distribution system being operational.  Weather conditions, accidents, catastrophic events, and
failures of equipment or facilities can disrupt or limit our ability to deliver
electricity and gas. Efforts to repair or replace equipment and facilities may
not be successful, or we may be unable to make the necessary improvements to our
distribution system, causing service interruptions. The resulting interruption
of services could result in lost revenues and additional costs.  We face construction risk in connection with the
completion of generating units.  We have assumed risks under the agreements related to our
ownership interest in two 615 MW coal-fired generating units being
constructed in Oak Creek, Wisconsin. The completion of this project is subject
to construction risks over which we will have limited or no control and which
might adversely affect project costs and completion time. These risks include
but are not limited to the failure of the general contractor or subcontractors
to perform under their contracts; strikes; adverse weather conditions; the
inability to obtain necessary permits in a timely manner, legal challenges and
appeals to granted permits, changes in applicable laws or regulations;
governmental actions; and events in the global economy. In addition, in the case
of the units being constructed in Oak Creek, if the units' final construction
costs exceed the fixed costs allowed in the PSCW order, this excess will not be
recoverable from MGE or its customers unless specifically allowed by the PSCW.
Any Oak Creek project costs above the authorized amount, but below a 5% cap,
will be subject to a prudence determination made by the PSCW.  In December 2008, we received notice from Elm Road
Services, LLC (ERS) that it had received a letter from Bechtel Power Corporation
(Bechtel) containing Bechtel's formal claim for schedule and cost relief on the
construction of the Elm Road units. Bechtel has asserted two claims for cost and
schedule relief in its letter to ERS. Although ERS is in the process of
analyzing the claims and its responses to them, it has stated its belief that
both claims are without merit. It has also stated its view that the only
circumstances and events for which the Elm Road units owners currently retain
price adjustment risk under the construction contract are force majeure, wage
escalation in excess of 4% annually as measured by published wage bulletins,
delays caused by ERS, changes in scope or performance requested by ERS, and
unforeseen sub-surface ground conditions. ERS has invoked the dispute resolution
process provided for in the contract in order to address the claims made by
Bechtel under the contract. That process involves an informal resolution
process, followed by mediation and then binding arbitration. ERS is currently in
the mediation phase with respect to determining the rights of the parties under
the contract and the disposition of Bechtel's claims. ERS has expressed its
inability to predict the length or ultimate outcome of the claims. As a result,
we are unable to predict the results of these claims or their effect on the
costs recoverable under the existing facility leases, in the event that the
outcome of the claims should cause total construction costs of the Elm Road
units to exceed the amounts authorized in the PSCW order. Bechtel continues to
target an in-service date for Elm Road unit 1 three months beyond the guaranteed
contract date of September 29, 2009, and an in-service date for Elm Road
unit 2 one month earlier than the guaranteed contract date of September 29,
2010. However, Bechtel does request schedule relief that would result in six
months of relief from liquidated damages beyond the guaranteed contract date for
unit 1 and three months of relief from liquidated damages beyond the guaranteed
contract date for unit 2. See Footnote 21 for additional information.   19    Financial Risk  We are exposed to commodity price risk relating to
our purchases of natural gas, electricity, coal and oil.  We face commodity price risk exposure with respect to our
purchases of natural gas, electricity, coal and oil, SO2 allowances
and risk through our use of derivatives, such as futures, forwards and swaps, to
manage that commodity price risk. We could experience increased costs as a
result of volatility in the market values of those commodities. We could also
experience losses on our derivative contracts as a result of that market value
volatility or if a counterparty fails to perform under a contract. In the
absence of actively quoted market prices and pricing information from external
sources, the valuation of these derivative contracts involves our exercise of
judgment and use of estimates. As a result, changes in the underlying
assumptions or use of alternative valuation methods could affect the reported
fair value of these contracts.  We are exposed to interest rate risk.  We are exposed to interest rate risk on our variable rate
financing. MGE Energy had $124.5 million of variable-rate debt
outstanding at December 31, 2008, including $51.0 million for MGE.
Borrowing levels under commercial paper arrangements vary from period to period
depending upon capital investments and other factors. Such interest rate risk
means that we are exposed to increased financing costs and associated cash
payments as a result of changes in the short-term interest rates. Also, interest
rates affect discount rates which are a key assumption for our defined benefit
pension plans and may impact the amount of expense and timing of contributions
to the plan.  Market performance affects our employee benefit
plan asset values.  The performance of the capital markets affects the values
of the assets that are held in trust to satisfy the future obligations under our
pension and postretirement benefit plans. We have significant obligations in
these areas and hold significant assets in these trusts. A decline in the market
value of those assets may increase our current and longer-term funding
requirements for these obligations. The market value of the investments within
the employee benefit plans trusts declined by approximately 27.5% during the
twelve months ended December 31, 2008. Changes in the value of trust fund
assets may affect the level of required contributions to these trusts to meet
benefit obligations. Changes in the value of plan assets did not have an impact
on the income statement for 2008; however, reduced benefit plan assets could
result in increased benefit costs in future years and may increase the amount
and accelerate the timing of required future funding contributions.  We are exposed to credit risk primarily through our
regulated energy business.  Credit risk is the loss that may result from counterparty
nonperformance. We face credit risk primarily through MGE's regulated energy
business. Failure of contractual counterparties to perform their obligations
under purchase power agreements, commodity supply arrangements or other
agreements may result in increased expenses for MGE as a result of being forced
to cover the shortfall in the spot or short-term market, where prices may be
more volatile.  As a holding company, we are dependent on upstream
cash flows from our subsidiaries for the payment of dividends on our common
stock.  As a holding company, we have no operations of our own,
our ability to pay dividends on our common stock is dependent on the earnings
and cash flows of our operating subsidiaries and their ability to pay upstream
dividends or to repay funds to us. Prior to funding us, our subsidiaries have
financial obligations that must be satisfied, including among others, debt
service and obligations to trade creditors, and are subject to contractual and
regulatory restrictions on the payment of dividends.  Disruptions in the financial markets as a result of
the effects of sub-prime financing and related matters may affect our ability to
finance at a reasonable cost and in accordance with our planned
schedule.  The credit markets have experienced some disruption and
uncertainty as a result of the developments associated with sub-prime mortgage
issues. To the extent that such issues affect the ability or willingness of
credit providers or investors to participate in the credit markets or particular
types of investments, or affect their perception of the risk associated with
particular types of investments, our cost of borrowing could be affected.   20    General economic
conditions may affect our operating revenues, our capital costs and our
counterparty risks.  Operational MGE Energy's and MGE's operations are affected by
local, national and worldwide economic conditions. The consequences of a
prolonged recession may include a lower level of economic activity, uncertainty
regarding energy prices and the capital and commodity markets, and increased
credit risk. A lower level of economic activity might result in a decline in
energy consumption, which may adversely affect our revenues and future growth.
Increased credit risk reflects the risk that our retail customers will not pay
their bills in a timely manner or at all, which may lead to a reduction in
liquidity and an eventual increase in bad debt expense.  Liquidity Long-term instability in the financial markets, as a
result of recession or otherwise, also may affect the cost of capital and our
ability to raise capital. Although MGE Energy and MGE believe they have
sufficient liquidity despite the disruption of capital and credit markets, the
costs of such funds may increase.  Counterparty creditworthiness Credit risk also includes the risk that trading
counterparties that owe us money or product will breach their obligations. MGE's
risk management policy is to limit transactions to a group of high quality
counterparties. Should the counterparties to these arrangements fail to perform,
we may be forced to enter into alternative arrangements. In that event, our
financial results could be adversely affected and we could incur losses.   Item 1B.
Unresolved Staff Comments.  MGE Energy and MGE  None.   21    Item
2. Properties.  Electric Generation  Net summer rated capacity in service at December 31,
2008, was as follows:  Plants

Location

Commercial
Operation Date

Fuel

Net
Summer Rated Capacity (1)
(MW)

No. of
UnitsSteam
plants:Columbia

Portage,
WI

1975 & 1978

Low-sulfur
coal

225(2,3)

2Blount

Madison,
WI

1957 & 1961

Coal/gas

97(4,9)

21938 & 1943

Gas

39(9)

21949

Coal/gas

22(4,9)

11964-1968

Gas/oil

29(9)

4WCCF

Madison,
WI

2005

Gas/oil

130(5,6)

2Combustion
turbines

Madison, WI
Marinette,
WI

1964-2000

Gas/oil

174(9)

6Portable
generators

Madison,
WI

1998-2001

Diesel

50(9)

54Wind turbines

Townships of
Lincoln and Red River, WI

1999

Wind

2(7,9)

17Township of
Brookfield, IA

2008

Wind

4(8,9)

18Total
772  (1) Net summer rated capacity is determined by annual
testing and may vary from year to year as a result of, but not limited to, the
operating and physical conditions of the units.  (2) Baseload generation.  (3) MGE's 22% share of two 512-MW units. The other
owners are WPL (a subsidiary of Alliant), which operates Columbia, and
WPSC.  (4) On January 19, 2006, MGE announced that it
would cease coal-fired generation at Blount in 2011, subject to certain
conditions, including regulatory approvals.  (5) Facility is jointly owned. MGE Power West Campus
owns a controlling interest in the electric generation plant and the UW owns a
controlling interest in the chilled-water and steam plants. MGE leases the
electric generating assets owned by MGE Power West Campus and is responsible for
operating the facility. Amounts shown represent MGE's share of the net summer
rated capacity.  (6) Based on the terms of the joint plant agreement
between MGE and the UW, the UW has the ability to reduce net capability of these
units by approximately 17 MW in the summer. The net summer rated capacity
shown reflects this decrease.  (7) Nameplate capacity rating is 11MW.  (8) Nameplate capacity rating is 30 MW.  (9) These facilities are owned by MGE.   22    Electric and Gas
Distribution Facilities  Major electric distribution lines and substations in
service at December 31, 2008, which are owned by MGE, are as follows:  MilesDistribution lines:
Overhead

Underground13.8 kV and under
917

1,066Distribution:
Substations

Installed Capacity (kVA)69-13.8 kV
26

979,00013.8-4 kV
30

290,967  Gas facilities include 2,427 miles of distribution mains,
which are owned by MGE.  A significant portion of MGE's electric and gas
distribution facilities is located above or underneath highways, streets, other
public places or property that others own. MGE believes that it has satisfactory
rights to use those places or property in the form of permits, grants, easements
and licenses; however, it has not necessarily undertaken to examine the
underlying title to the land upon which the rights rest.  Encumbrances  The principal plants and properties of MGE are subject to
the lien of its Indenture of Mortgage and Deed of Trust dated as of
January 1, 1946, as amended and supplemented, under which MGE's first
mortgage bonds are issued. As of December 31, 2008, there were
$1.2 million of first mortgage bonds outstanding. See Footnote 9d for
additional information regarding MGE's first mortgage bonds.  MGE Power West Campus has collaterally assigned its right
to lease payments from MGE for the WCCF in order to secure the repayment of
$50 million of senior secured notes issued by MGE Power West Campus. See
Footnote 9c for additional information regarding these senior notes.   Item 3. Legal
Proceedings.  MGE Energy and MGE  MGE Energy and its subsidiaries, including MGE, from
time to time are involved in various legal proceedings that are handled and
defended in the ordinary course of business. While MGE Energy and MGE are
unable to predict the outcome of these matters, management does not believe,
based upon currently available facts, that the ultimate resolution of any of
such proceedings would have a material adverse effect on their overall financial
condition or results of operations.  Also see "Environmental" under Item 1, Business, and
Footnotes 18d and 18i for a description of several environmental
proceedings involving MGE.   Item 4. Submission
of Matters to a Vote of Security Holders.  MGE Energy and MGE  None.    23    PART
II.   Item 5. Market for
Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities.  Market for Common Equity  MGE Energy  MGE Energy common stock is traded on Nasdaq under
the symbol MGEE. On February 1, 2009, there were approximately 35,475
shareholders of record, including registered and beneficial shareholders. The
following table shows high and low sale prices for the common stock on Nasdaq
for each quarter over the past two years.  Common stock price range
2008

Common stock price range
2007High

Low

High

LowFourth quarter
$36.50

$27.87

$37.24

$32.06Third quarter
$36.40

$31.64

$35.50

$29.40Second quarter
$36.35

$32.60

$37.02

$31.46First quarter
$36.00

$29.85

$36.82

$33.05  MGE  As of February 1, 2009, there were 17,347,889
outstanding shares of common stock, all of which were held by MGE Energy.
There is no market for shares of common stock of MGE.  Dividends  MGE Energy  The following table sets forth MGE Energy's
quarterly cash dividends declared during 2008 and 2007:  (Per share)
2008

2007Fourth quarter
$0.362

$0.355Third quarter
$0.362

$0.355Second quarter
$0.355

$0.348First quarter
$0.355

$0.348  MGE  The following table sets forth MGE's quarterly cash
dividends declared during 2008 and 2007:  (In thousands)
2008

2007Fourth quarter
$ -

$2,500Third quarter
$ -

$
       -Second quarter
$ -

$6,560First quarter
$ -

$6,561  See discussion below as well as the "Liquidity and
Capital Resources - Financing Activities" under Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, for a description
of restrictions applicable to dividend payments by MGE.   24    Dividend
Restrictions  Dividend payments by MGE to MGE Energy are subject
to restrictions arising under a PSCW rate order and, to a lesser degree, MGE's
first mortgage bonds. The PSCW order limits the amount of dividends that MGE may
pay MGE Energy when its common equity ratio, calculated in the manner used
in the rate proceeding, is less than 55%. Under those circumstances, MGE may not
pay dividends in excess of $26.8 million plus dividends on shares issued in
excess of the shares issued in the rate proceeding forecast if the proceeds are
invested in MGE. MGE's 13-month rolling average common equity ratio at
December 31, 2008, is estimated to be 50.4% as determined under the
calculation used in the rate proceeding. While MGE was not restricted from
paying cash dividends in 2008, in order to build additional common stock equity
in MGE, no cash dividends were paid to MGE Energy. The rate proceeding
calculation includes as indebtedness imputed amounts for MGE's outstanding
purchase power capacity payments and other PSCW adjustments, but does not
include the indebtedness associated with MGE Power West Campus, which is
consolidated in accordance with FIN 46(R) into MGE's financial statements.  MGE has covenanted with the holders of its first mortgage
bonds not to declare or pay any dividend or make any other distribution on or
purchase any shares of its common stock unless, after giving effect thereto, the
aggregate amount of all such dividends and distributions and all amounts applied
to such purchases, after December 31, 1945, shall not exceed the earned
surplus (retained earnings) accumulated subsequent to December 31, 1945. As
of December 31, 2008, approximately $218.7 million was available for
the payment of dividends under this covenant.  Issuer Purchases of Equity Securities  MGE Energy and MGE  None.   25    Item
6. Selected Financial Data.  MGE Energy (In thousands, except per-share
amounts)  For
the years ended December 31,Summary of Operations
2008

2007

2006

2005

2004Operating
revenues:Regulated
electric
$345,962

$334,488

$318,912

$310,984

$250,386Regulated
gas
242,598

197,925

185,226

200,533

171,763Nonregulated
7,433

5,181

3,408

1,853

2,732Total
595,993

537,594

507,546

513,370

424,881Operating
expenses
491,418

438,156

413,150

439,629

350,213Other general
taxes
16,793

15,771

15,402

13,269

12,715Operating
income
87,782

83,667

78,994

60,472

61,953Other income,
net
8,044

6,069

4,329

4,938

3,927Interest
expense, net
(14,002)

(13,056)

(15,001)

(13,448)

(11,384)Income
before taxes
81,824

76,680

68,322

51,962

54,496Income tax
provision
(29,056)

(27,855)

(25,899)

(19,871)

(20,656)Net
income
$52,768

$48,825

$42,423

$32,091

$33,840Average shares
outstanding
22,197

21,520

20,564

20,436

19,119Basic
and diluted earnings per share
$2.38

$2.27

$2.06

$1.57

$1.77Dividends
declared per share
$1.43

$1.41

$1.39

$1.37

$1.36AssetsElectric
$677,540

$614,949

$547,150

$533,896

$466,897Gas
284,211

234,002

228,639

233,841

205,738Assets not
allocated
14,642

14,876

10,472

19,868

25,226Nonregulated
energy operations
271,568

227,415

177,234

143,101

98,751Transmission
investments
46,292

40,808

38,470

35,239

32,542All
others
381,433

342,491

298,261

276,565

272,211Eliminations
(407,411)

(362,954)

(319,792)

(326,046)

(273,262)Total
$1,268,275

$1,111,587

$980,434

$916,464

$828,103Capitalization
including Short-Term DebtCommon
shareholders' equity
$478,202

$427,726

$375,348

$343,883

$338,197Long-term
debt*
272,408

262,346

252,284

222,312

202,257Short-term
debt
124,500

103,500

57,000

82,500

53,275Total
Capitalization
$875,110

$793,572

$684,632

$648,695

$593,729  *Includes current maturities.   26    Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.  General  MGE Energy is an investor-owned public utility
holding company operating through subsidiaries in five business segments:  · Electric utility operations,
conducted through MGE, · Gas utility operations, conducted
through MGE, · Nonregulated energy operations,
conducted through MGE Power and its subsidiaries, · Transmission investments,
representing our equity investment in ATC, and · All other, which includes corporate
operations and services as well as certain construction services.  Our principal subsidiary is MGE, which generates and
distributes electric energy, distributes natural gas, and represents a majority
portion of our assets, liabilities, revenues, and expenses. MGE generates and
distributes electricity to approximately 137,000 customers in Dane County,
Wisconsin, including the city of Madison, and purchases and distributes natural
gas to approximately 141,000 customers in the Wisconsin counties of Columbia,
Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.  Our nonregulated energy operations lease and own new
electric generating capacity to assist MGE. The nonregulated energy operations
include partial ownership of a cogeneration project on the UW-Madison campus and
an undivided 8.33% ownership interest in each of two 615 MW generating
units being constructed in Oak Creek, Wisconsin. These ownership interests are
leased to MGE pursuant to long-term leases. MGE operates the cogeneration
project, and a third party will operate the Oak Creek units. The
ownership/leasing structure was adopted to capture some advantages under then
applicable state regulatory guidelines for MGE's participation in these
generation facilities. Due to the nature of MGE's participation in these
facilities, the results of our nonregulated operations are also consolidated
into MGE's consolidated financial position and results of operations under
applicable accounting standards.  Our primary focus today and for the foreseeable future is
our core utility customers at MGE as well as creating long term value for
shareholders. MGE continues to face the challenge of providing its customers
with reliable power at competitive prices. MGE plans to meet this challenge by
investing in more efficient generation projects, including renewable energy
sources. In the future, MGE will continue to focus on growing earnings while
controlling operating and fuel costs. MGE will continue to maintain safe and
efficient operations in addition to providing customer value. We believe it is
critical to maintain a strong credit standing consistent with financial strength
in MGE as well as the parent company in order to accomplish these goals.  Overview  We earn our revenue and generate cash from operations by
providing electric and natural gas utility services, including electric power
generation and electric power and gas distribution. The earnings and cash flows
from the utility business are sensitive to various external factors, including,
but not limited to:  · Weather, and its impact on customer
sales of electricity and gas, · Economic conditions, including
current business and financing conditions, · Regulation and regulatory issues, · Energy commodity prices, · Equity price risk pertaining to
pension related assets, · Interest rates and our debt credit
rating, · Environmental laws and regulations,
including pending environmental rule changes, · Construction risk in connection with
the Elm Road generating units,  and other factors listed in "Item 1A. Risk Factors."  For the year ended December 31, 2008,
MGE Energy's earnings were $52.8 million or $2.38 per share compared
to $48.8 million or $2.27 per share for the same period in the prior year.
MGE's earnings for the year ended December 31, 2008, were
$37.6 million compared to $37.1 million for the same period in the
prior year.   27    That income was derived from
our business segments as follows:  (In millions)
Year Ended December 31,Business Segment:
2008

2007Electric Utility
$25.7

$29.5Gas Utility
9.8

5.9Nonregulated Energy
10.1

8.8Transmission Investments
4.3

3.6All Other
2.9

1.0Net Income
$52.8

$48.8  Our net income during 2008 primarily reflects the effects
of the following factors:  · A 3.4% increase in electric revenues,
reflecting a 4.8% rate increase approved by the PSCW, effective January 1,
2008, offset by lower demand due to cooler summer weather and lower sales for
resale due to decreased sales opportunities.  · Higher gas revenues, reflecting a
14.8% increase in delivered retail gas volumes due to colder winter weather and
a 2.8% rate increase approved by the PSCW, effective January 1, 2008,
partially offset by a $1.3 million expense (excludes premium) in 2008 on a
settlement of a weather hedge (heating degree day collar) as a result of the
colder weather. The weather hedge obligated MGE to pay additional costs if the
weather was colder than a prescribed ceiling or would have compensated MGE if
weather was warmer than a prescribed floor.  · Higher nonregulated energy revenues
primarily attributable to higher carrying costs, due to the greater capital
investment, recognized for the Elm Road project. Carrying costs during
construction of the nonregulated energy projects, related to the equity portion,
are recognized over the period of time the costs are recovered in rates.  · A $0.7 million increase in
earnings from our interest in ATC.  · $2.9 million in earnings due to
interdepartmental interest income recognized as a result of capitalized interest
on the Elm Road project and gains on sales of certain investments.  Our income during 2007 primarily reflects the effects of
the following factors:  · A $15.6 million increase in
electric revenues, reflecting in large part an increase in sales volumes,
$5.6 million of electric revenues attributable to a fuel surcharge
authorized by the PSCW in late April 2007 and in effect through the end of
2007, and an increase in sales for resale; partially offset by a
$7.5 million, or 15.2%, increase in cost of fuel used for electric
generation due to increased internal generation and an increase in the per-unit
cost of fuel and, to a lesser degree, a $0.4 million, or 0.6%, increase in
purchased power expense due to an increase in the per-unit-cost offset by a
decrease in volume of power purchased. Additionally, the electric rates for the
twelve months ended December 31, 2007, were higher in comparison to those
for the same period in the prior year, which reflected a $19.1 million
reduction ordered as a result of a PSCW reconciliation between MGE's lower
actual fuel costs during 2006, than those costs provided in the applicable rate
order.  · A $12.7 million increase in gas
revenues attributable to increased sales volumes, partially offset by a decline
in the costs of gas, which are recovered and included in revenues, and a
decrease in other gas revenues. The cost of gas sold increased
$11.5 million as a result of an increase in volumes and an increase in the
per therm cost.  During 2008, the following events occurred:  · Top of Iowa III wind generation
project: The construction was completed, and the project was placed in service,
during the first quarter of 2008. As of December 31, 2008, MGE has incurred
approximately $56 million of costs on the 30 MW wind-powered electric
generating facility located in Iowa.   28    · Elm Road electric generation
construction project: Capital expenditures during 2008 totaled
$49.9 million. A modified WPDES permit for the project, which had been the
subject to legal challenges, was issued in final form, with no substantive
changes from the previously issued draft permit, and has now become final. In
connection with the resolution of that permit issuance, the Elm Road joint
owners entered into a settlement agreement whereunder they committed to various
environmental projects, including projects designed to address greenhouse gas
emissions and water quality. See Footnote 21d for further information.
Also, on December 23, 2008, the project contractor notified the project
operator of its claims for additional costs and schedule relief related to
severe weather and specified labor-related matters, in the case of one claim,
and the alleged effects of operator-directed changes and operator-caused delays,
in the case of the other claim. MGE Energy's share of the increased costs,
if the claims are sustained in full, would be $34.4 million and
$6.0 million, respectively. See Footnote 21a for more information.  · ATC: MGE Transco contributed
$3.4 million for voluntary capital contributions to ATC in the year ended
December 31, 2008. An additional voluntary capital contribution of
$0.9 million was made in January 2009.  · Additional Lines of Credit:
MGE Energy and MGE each added revolving lines of credit in order to provide
additional access to liquidity should such access be needed. On August 29,
2008 and December 30, 2008, MGE Energy entered into additional
revolving lines of credit expiring August 28, 2009 and September 30,
2009, respectively, each for $20 million. On August 29, 2008, MGE
entered into a $20 million additional line of credit expiring
March 31, 2009.  · Issuance of Securities:
MGE Energy issued 954,238 shares of its common stock under the Stock Plan
for net proceeds of $31.0 million. On September 11, 2008, MGE issued
$40 million of unsecured 5.59% senior notes due September 11, 2018,
the proceeds of which were used to repay $30 million of its 6.02%
medium-term notes that matured on September 15, 2008 and $10 million
of short-term indebtedness consisting of commercial paper.  During 2009, several items may affect us, including:  · General economic conditions: Economic
conditions both inside and outside our service area may affect, among other
things, the level of demand for our utility services, the collection of our
accounts receivable and the creditworthiness of counterparties with whom we do
business. We have in place lines of credit aggregating $195 million for
MGE Energy (including MGE) and $75 million for MGE to address our
liquidity needs.  · Elm Road Construction Claim: As
noted, the project contractor for the Elm Road units has made claims for
additional costs and for relief from the construction schedule. The project
operator, ERS, is addressing these claims, although it is expected that the
claims may ultimately be resolved through formal arbitration as provided in the
construction contract.  · Environmental Initiatives: Various
environmental rules or initiatives are in a state of flux as a result of court
decisions and the change in the Presidential Administration. Such rules and
initiatives involve matters related to air emissions, water effluent and
greenhouse gases, all of which affect generation plant capital expenditures and
operating costs as well as future operational planning.  The following discussion is based on the business
segments as discussed in Footnote 24.   29    Results
of Operations  Year Ended December 31, 2008, Versus the Year
Ended December 31, 2007  Electric Utility Operations - MGE Energy and
MGE  Electric sales and revenues  The following table compares MGE's electric revenues and
electric kWh sales by customer class for each of the periods indicated:  Revenues

kWh Sales(In
thousands, except cooling degree days)
2008
2007
%
Change

2008
2007
%
ChangeResidential
$117,241
$113,161
3.6%

810,414
833,549
(2.8)%Commercial
186,910
173,500
7.7%

1,838,080
1,846,335
(0.4)%Industrial
19,463
17,905
8.7%

273,657
284,637
(3.9)%Other -
retail/municipal
31,685
26,859
18.0%

405,008
379,785
6.6%Total
retail
355,299
331,425
7.2%

3,327,159
3,344,306
(0.5)%Sales for
resale
5,303
7,076
(25.1)%

53,733
87,203
(38.4)%Other
revenues
(14,640)
(4,013)
(264.8)%

-
-
-Total
$345,962
$334,488
3.4%

3,380,892
3,431,509
(1.5)%Cooling degree
days (normal 641)




538
781
(31.1)%  Electric operating revenues increased $11.5 million
or 3.4% for the year ended December 31, 2008, due to the following:  (In millions)2008Rate changes
$25.7Volume
(1.8)Sales for resale
(1.8)Other revenues
(10.6)Total
$11.5  Rates changes. Rates charged to retail customers
for the year ended December 31, 2008, were 7.8% or $25.7 million
higher than those charged during the same period in the prior year. This
increase includes the 4.8% rate increase by the PSCW as well as the surcharge
described below.  On December 14, 2007, the PSCW authorized MGE to
increase 2008 electric revenue by $16.2 million to 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.  On May 5, 2008, the PSCW approved a $0.00239 per kWh
interim fuel surcharge on MGE's electric rates to cover increased fuel and
purchased power expenses. During the year ended December 31, 2008, this
surcharge resulted in a $5.1 million increase to electric rates. A
stipulation between MGE and the intervenors allowed the interim surcharge to
remain in effect until the end of the year, but required MGE to review its 2008
monitored fuel costs at year-end and to refund to customers, with interest at
10.8%, any amount by which its actual fuel costs fell short of the monitored
fuel costs collected in rates. See "Other revenues" below.  On April 24, 2007, when the PSCW completed their
audit of 2006 electric fuel costs and issued a final order on the 2006 fuel
credit, $2.4 million (related to 2006 fuel costs and including interest)
was applied to customers' accounts.  Electric rates from April 26, 2007 to
August 31, 2007, were subject to a $0.00339 per kWh interim fuel surcharge
and subject to refund. On August 31, 2007, MGE received a final decision
from the PSCW that reduced the fuel surcharge to $0.00242 per kWh effective the
date of the order. This fuel surcharge resulted in a $5.6 million increase
to electric rates charged to customers during the twelve months ended
December 31, 2007.  On December 18, 2008, under a limited reopener, the
PSCW authorized MGE to decrease 2009 rates for retail electric customers by
0.74% or $2.7 million from 2008. The decrease in retail electric rates is
driven by a decrease in fuel and purchased power costs, decrease in Elm Road
costs and a decrease in ATC transmission costs. The PCSW also approved deferred
accounting for incremental pension and other postretirement benefit costs above
the levels currently included in rates.  30    Volume. During the year
ended December 31, 2008, total retail sales volumes were comparable to the
same period in the prior year. Higher usage by other-retail/municipal customers
was offset by a decline in residential, commercial and industrial usage.  Sales for resale. Sales
for resale represent wholesale sales made to third parties who are not ultimate
users of the electricity. These sales may include spot market transactions on
the markets operated by MISO or PJM. These sales may also include bilateral
sales to other utilities or power marketers. Generating units are dispatched by
MISO based on cost considerations as well as reliability of the system. Sales
for resale typically occur when MGE has more generation and purchases online
than is needed for its own system demand. The excess electricity is then sold to
others in the market. For the year ended December 31, 2008, sales for
resale decreased $1.8 million when compared to the same period in the prior
year. The decrease is primarily due to increased natural gas costs. During 2008,
natural gas prices increased fairly rapidly until July before returning to
previous levels. Electric prices on the MISO market did not experience the same
price movement. MGE's sales for resale into the MISO market were lower as a
result of the higher cost of gas fired generation relative to the market prices
of electricity. Other revenues. Other electric revenues decreased
$10.6 million for the year ended December 31, 2008, compared to the
same period in the prior year.  During the years ended December 31, 2008 and 2007,
MGE recovered in electric rates carrying costs and other fees related to WCCF
and Elm Road. During the years ended December 31, 2008 and 2007, MGE
recorded a $11.0 million and $8.2 million reduction, respectively, to
other electric revenues to transfer the revenues from the electric segment to
the nonregulated energy operations segment. See discussion of these revenues in
the "nonregulated energy operating revenues" section.  As a result of the refund provisions in the interim fuel
surcharge order, MGE has recognized an estimated refund to customers totaling
$5.5 million (includes interest) during the year ended December 31,
2008 and has reflected this reduction in other electric revenues.  During the year ended December 31, 2007, other
electric revenues included a $2.3 million (excludes interest) upward
adjustment to negate the impact on overall electric revenues for the 2006 fuel
refund provided to customers in April 2007. Note that this refund was
accrued in revenues during 2006, and was returned to customers via a reduction
in rates in April 2007. See "Rate changes" above for more information on
this refund.  Electric fuel and purchased power  The expense for fuel used for electric generation
decreased $1.9 million or 3.4% during the year ended December 31,
2008, compared to the same period in the prior year. Lower fuel costs between
the two periods resulted in a $1.5 million decrease of this expense and a
decline in internal generation resulted in a $0.4 million decrease of this
expense.  Purchased power expense decreased by $2.9 million or
3.8% during the year ended December 31, 2008, compared to the same period
in the prior year. This decrease in expense reflects a $1.1 million or 1.5%
decrease in the per-unit cost of purchased power and a $1.8 million or 2.3%
decrease in the volume of power purchased.  Electric operating and maintenance
expenses  Electric operating and maintenance expenses increased
$14.8 million during the year ended December 31, 2008, compared to the
same period in 2007. The following changes contributed to the net change:  (In millions)2008Increased production costs
$1.9Increased transmission costs
4.3Increased distribution expenses
0.3Increased customer service costs
4.4Increased customer accounts costs
0.5Increased other general and administrative
expenses
1.7Increased maintenance expenses
1.7Total
$14.8   31    As a result of the 2005
Wisconsin Act 141, each Wisconsin utility is required to pay 1.2% of its annual
operating revenues to the statewide energy efficiency and renewable resource
programs. MGE is allowed to recover these costs in rates through its
conservation escrow. For the year ended December 31, 2008, costs associated
with funding these programs increased customer service expense by
$5.1 million. Transmission costs increased primarily due to network service
fees pertaining to ATC.  Electric depreciation expense  Depreciation expense at the electric segment increased by
$6.4 million for the year ended December 31, 2008, when compared to
the same period in the prior year. This increase is related to higher levels of
electric assets, including the Top of Iowa III wind-powered electric
generating facility which was placed in service in the first quarter of 2008.
Also contributing to the increase is the accelerated depreciation of certain
Blount assets. For additional information on the Blount accelerated
depreciation, see Footnote 19.  Gas Utility Operations - MGE Energy and
MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:  Revenues

Therms Delivered(In
thousands, except HDD and average rate per therm)
2008
2007
%
Change

2008
2007
%
ChangeResidential
$130,012
$110,046
18.1%

100,014
92,218
8.5%Commercial/industrial
106,582
83,799
27.2%

107,329
88,330
21.5%Total
retail
236,594
193,845
22.1%

207,343
180,548
14.8%Gas
transportation
2,903
2,623
10.7%

37,053
34,645
7.0%Other
revenues
3,101
1,457
112.8%

-
-
-Total
$242,598
$197,925
22.6%

244,396
215,193
13.6%Heating degree
days (normal 7,119)




7,716
6,935
11.3%Average rate per
therm of retail customer




$1.141
$1.074
6.2%  Gas revenues increased $44.7 million or 22.6% for
the year ended December 31, 2008. These changes are related to the
following factors:  (In millions)2008Gas costs/rates
$12.2Gas deliveries
30.6Transportation and other effects
1.9Total
$44.7  Gas costs/rates. The average retail rate per therm
for the year ended December 31, 2008, increased 6.2% compared to the same
period in 2007. The PSCW authorized a 2.8% increase in MGE's gas distribution
rates effective January 1, 2008, to cover increased system demands and
funding statewide energy programs. Also contributing to this increase is higher
natural gas costs.  Retail gas deliveries. The 14.8% increase in
retail gas deliveries for the year ended December 31, 2008, was
attributable to cooler than normal weather, reflected in an 11.3% increase in
the heating degree days between the periods, and increased use by a large
commercial/industrial customer.  Transportation and other revenues. Transportation
and other revenues increased a total of $1.9 million primarily due to an
increase in income realized under the GCIM.  Under MGE's GCIM, if actual gas commodity savings and
capacity release revenues are above or below a benchmark set by the PSCW, then
MGE's gas sales service customers and shareholders share in any increased costs
or savings per percentages set by the PSCW. For the years ended
December 31, 2008 and 2007, shareholders received the benefit of
$2.4 million and $0.9 million, respectively, from capacity release
revenues and commodity savings under the GCIM.   32    Cost of Gas
Sold  For the year ended December 31, 2008, cost of gas
sold increased by $30.7 million, compared to the same period in the prior
year. The volume of gas purchased increased 13.4% which resulted in
$18.9 million of additional expense. In addition, the cost per therm of
natural gas increased 7.4% which resulted in $11.8 million of additional
expense.  Gas operating and maintenance expenses  Gas operating and maintenance expenses increased
$5.5 million for the year ended December 31, 2008, compared to the
same period a year ago. The following changes contributed to the net change:  (In millions)2008Increased distribution costs
$0.4Increased customer accounts costs
0.8Increased customer service costs
3.1Increased general and administrative costs
0.6Increased maintenance costs
0.6Total
$5.5  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the year ended
December 31, 2008, costs associated with funding these programs increased
customer service expense by $3.6 million.  Gas depreciation expense  Gas depreciation expense increased $0.6 million for
the year ended December 31, 2008, compared to the same period in the prior
year.  Other Income (Deductions), Net  During the year ended December 31, 2008, the gas and
electric segments incurred $1.7 million in other deductions. The other
deductions included a $1.5 million expense for a heating degree day collar,
$1.8 million in charitable contributions, a $0.3 million loss related
to an equity investment and $0.1 million of net miscellaneous expenses. See
Footnote 16 for further discussion of the HDD collar. These deductions were
partially offset by income of $0.9 million in AFUDC-equity, a
$0.3 million gain on the sale of property, and a $0.8 million gain on
investments.  For the year ended December 31, 2007, the gas and
electric segments recognized a total of $1.9 million in AFUDC-equity,
$0.2 million in equity earnings from miscellaneous investments, and a
$0.8 million gain on the sale of investments. This income was offset by
$0.3 million in premium expense for a HDD collar, $2.1 million in
charitable contributions, and $0.4 million in net miscellaneous expenses.  Interest Expense, Net  For the year ended December 31, 2008, total interest
expense for the electric and gas segments increased $1.4 million when
compared to the same period in the prior year. For the year ended
December 31, 2008, there was a $0.5 million decrease in AFUDC-debt
(which is an increase to interest expense), a $0.5 million increase in
interest expense on long-term debt, and a $0.6 million increase in net
miscellaneous interest expense. These increases in interest expense were offset
by a $0.2 million decrease in interest expense on short-term debt.  Nonregulated Energy Operations - MGE Energy and
MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $2.3 million for the year ended December 31, 2008, when
compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for both the years ended December 31, 2008
and 2007 include $14.9 million in interdepartmental revenues related to a
leasing arrangement between MGE and MGE Power West Campus which commenced on
April 26, 2005. Upon consolidation, these interdepartmental revenues are
eliminated.  33    MGE also received approval
from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm
Road during construction of the Elm Road project. MGE estimates that the total
carrying costs on the Elm Road project will be $61.3 million. A portion of
this amount is being recognized over the period recovered in rates and a portion
is being deferred and will be recognized over the period in which the facility
is depreciated. For the years ended December 31, 2008 and 2007, MGE Power
Elm Road recognized $6.4 million and $4.1 million, respectively,
related to carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For the years ended December 31, 2008 and 2007,
interest expense, net at the nonregulated energy operations segment was
$2.6 million and $2.5 million, respectively. Interest expense at the
nonregulated energy segment for both the years ended December 31, 2008 and
2007, includes $2.8 million in interest expense incurred on
$50 million of long-term, fixed-rate borrowings at MGE Power West
Campus.  Also included in the nonregulated interest expense is
interdepartmental interest expense and capitalized interest at MGE Power Elm
Road. During the year ended December 31, 2008 and 2007, MGE Power Elm Road
was charged $4.8 million and $3.9 million, respectively, in interest
expense by Corporate on funds borrowed for the Elm Road Project. This expense is
eliminated upon consolidation for MGE Energy only. The interest expense at
MGE Power Elm Road is offset by $4.8 million and $3.9 million,
respectively, in capitalized interest. MGE Power Elm Road is capitalizing
interest on the Elm Road project.  During the years ended December 31, 2008 and 2007,
MGE Power Elm Road recorded $0.1 million and $0.2 million,
respectively, in interest income on cash advanced to Elm Road Services, LLC for
construction of transmission equipment and work done by ATC related to the Elm
Road project.  Transmission Investment Operations - MGE Energy
and MGE  For the years ended December 31, 2008 and 2007,
other income at the transmission investment segment was $7.2 million and
$6.0 million, respectively. The transmission investment segment holds our
interest in ATC, and its income reflects our equity in the earnings of ATC.  All Other Nonregulated Operations -
MGE Energy  All other - other income, net  The all other segment recorded $2.5 million in other
income for the year ended December 31, 2008, primarily due to gains on
sales of certain investments.  All other interest income, net  All other interest income, net for the years ended
December 31, 2008 and 2007, was $2.8 million and $2.3 million,
respectively. Interest income for the year ended December 31, 2008,
represents $4.8 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $2.0 million in interest expense on
short-term debt. Interest income for the year ended December 31, 2007,
represents $3.9 million in interdepartmental interest income from MGE Power
Elm Road and $0.2 million in miscellaneous interest income, partially
offset by $1.8 million in interest expense on short-term debt. The
interdepartmental interest income is eliminated upon consolidation.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$1.0 million or 6.5% in 2008. This increase is primarily attributable to an
increase in MGE's license fee tax. The annual license fee tax expense is based
on adjusted operating revenues of the prior year.  Consolidated Income Taxes  MGE Energy's effective income tax rate for the year
ended December 31, 2008, is 35.5% compared to 36.3% for the same period in
2007. This decrease is primarily attributable to the increased federal wind
energy tax credit from the Top of Iowa III wind farm which was placed in
service in 2008.  MGE's effective income tax rate for the year ended
December 31, 2008, is 35.2% compared to 36.2% for the same period in the
prior year. The decrease is also primarily attributable to the increased wind
energy tax credit.   34    Minority Interest, Net of
Tax  For the year ended December 31, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$7.6 million and $3.9 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy earned $0.8 million, net of tax for its interest in MGE
Transco. These amounts are recorded as minority interest expense, net of tax, on
MGE's consolidated statement of income.  For the year ended December 31, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$7.7 million and $2.6 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy had earned $0.5 million, net of tax, for its interest in
MGE Transco. These amounts are recorded as minority interest expense, net of
tax, on MGE's consolidated statement of income.  Year Ended December 31, 2007, Versus the Year
Ended December 31, 2006  The following discussion is based on the business
segments as discussed in Footnote 24.  Electric Utility Operations  Electric sales and revenues  The following table compares MGE's electric retail
revenues and electric kWh sales by customer class during the years ended
December 31, 2007 and 2006:  (In thousands, except cooling degree days)
Revenues

kWh
Sales2007

2006

%
Change

2007

2006

%
ChangeResidential
$113,161

$109,178

3.6%

833,549

809,560

3.0%Commercial
173,500

165,147

5.1%

1,846,335

1,772,385

4.2%Industrial
17,905

17,765

0.8%

284,637

286,546

(0.7)%Other
- retail/municipal
26,859

26,710

0.6%

379,785

384,222

(1.2)%Total
retail
331,425

318,800

4.0%

3,344,306

3,252,713

2.8%Sales
for resale
7,076

5,585

26.7%

87,203

94,988

(8.2)%Other
revenues
(4,013)

(5,473)

26.7%

-

-

-Total
$334,488

$318,912

4.9%

3,431,509

3,347,701

2.5%Cooling
degree days (normal 641)
781

637

22.6%  Electric operating revenues were up 4.9% in 2007 due to
the following:  (In millions)
2007Rate changes
$3.5Volume
9.1Sales for resale
1.5Other revenues
1.5Total
$15.6   Rates. Rates charged to retail
customers for the twelve months ended December 31, 2007, were 1.1% or
$3.5 million higher than those charged during the same period in the prior
year.  On May 25, 2006, the PSCW
approved a fuel credit to reduce 2006 electric rates by $0.00454 per kWh and
stated that electric rates set in the final 2006 order are subject to refund. As
a result of these provisions, customers' bills were credited $16.8 million
during the twelve months ended December 31, 2006. Additionally, on
April 24, 2007, when the PSCW completed their audit of 2006 electric fuel
costs and issued a final order, $2.4 million (related to 2006 fuel costs
including interest) was applied to customers' accounts.  On December 22, 2006, the PSCW
approved a limited scope rate case reopener related to MGE's current electric
rates. This order was expected to result in a net 0.15% decrease, on average, in
retail electric rates for 2007 when compared to those in place for the year
ended December 31, 2006 (assuming the 2006 fuel credit was in place for the
entire year). Electric rates were subsequently increased from those presented in
this order as a result of a $0.00339 per kWh fuel surcharge approved by the PSCW
and in effect from April 26, 2007, to August 31, 2007, and a $0.00242
per kWh fuel surcharge approved by the PSCW and in effect from August 31,
2007, to December 31, 2007. These surcharges resulted in a
$5.6 million increase to electric rates charged to customers during the
twelve months ended December 31, 2007.  35      Volume. During 2007, there was
a 2.8% increase in total retail sales volumes. This increase represents
increased usage by residential and commercial.   Sales for resale. Sales for
resale represent wholesale sales made to third parties who are not ultimate
users of the electricity. These sales may include spot market transactions on
the markets operated by MISO or PJM. These sales may also include bilateral
sales to other utilities or power marketers. Generating units are dispatched by
MISO based on cost considerations as well as reliability of the system. Sales
for resale typically occur when MGE has more generation and purchases online
than is needed for its own system demand. The excess electricity is then sold to
others in the market. During 2007, sales for resale increased $1.5 million.
The increase in sales for resale for the year ended December 31, 2007, when
compared to the same period in the prior year was largely attributable to a
change in the relationship between the cost of purchased power and the cost of
internal generation.   Other Revenues. Other electric
revenues increased $1.5 million for the twelve months ended
December 31, 2007, compared to the same period in the prior year. To
account for the effects of the fuel credit and refund described above under
"Rates", during the twelve months ended December 31, 2006, MGE recognized a
net $2.3 million reduction to other electric revenues.  In April 2007, the 2006 fuel
credit of $2.3 million was provided to customers. As a result, MGE
increased other revenues by the same amount to offset this credit reflected in
"Rates" above.  During the twelve months ended
December 31, 2007 and 2006, MGE recovered in electric rates carrying costs
and other fees related to WCCF and Elm Road. MGE recorded an $8.2 million
and $5.2 million reduction, respectively, to other electric revenues to
eliminate the recognition of revenue related to these costs in the electric
segment as revenue related to these costs is recorded by MGE Power Elm Road and
MGE Power West Campus (see discussion of these revenues in the "nonregulated
operations revenues" section).  For the twelve months ended
December 31, 2007, MGE also experienced a $0.1 million decrease in
other miscellaneous electric revenues.  Electric fuel and purchased power  In 2007, fuel used for electric generation increased
$7.5 million, or 15.2%, compared to 2006. The per-unit cost of internal
generation increased 4.5% for the year ended December 31, 2007, when
compared to the same period in the prior year, reflecting the increased cost of
natural gas.  The volume of internal generation also increased during
this period reflecting a shift between internal generation and purchased power.  For the year ended December 31, 2007, purchased
power expense increased by $0.4 million, or 0.6%. This increase reflected a
$6.2 million or 8.1% increase in the per-unit-cost, offset by a
$5.8 million or 7.0% decrease in volume of power purchased.  MGE has recorded transactions on the PJM and MISO markets
in which we are buying and selling power within the same hour to meet our
electric energy delivery requirements on a net basis.  Electric operating and maintenance
expenses  Electric operating and maintenance expense increased
$4.0 million in 2007. The following changes contributed to the net change
in electric operating and maintenance expenses for 2007:  (In millions)
2007Increased production costs
$2.0Decreased transmission costs
(0.1)Increased distribution costs
0.3Increased customer services, promotions, and
account costs
0.2Increased other general and administrative expenses
0.8Increased maintenance expenses
0.8Total
$4.0  36    Included in the decrease in
transmission costs was a $0.9 million cash benefit received for SECA
revenues related to prior years. SECA revenues are through and out rates
previously charged to MGE by PJM for transactions between RTOs which were
subsequently eliminated by FERC.  Electric depreciation  Electric depreciation expense increased $0.7 million
in 2007. This increase was attributable to additions to electric assets.  Gas Utility Operations  Gas deliveries and revenues  The following table compares MGE's gas retail revenues
and gas delivered by customer class during each of the years ended
December 31, 2007 and 2006:  (In thousands, except HDD and average rate per
therm)
Revenues

Therms delivered2007

2006

%
Change

2007

2006

%
ChangeResidential
$110,046

$101,771

8.1%

92,218

84,354

9.3%Commercial/industrial
83,799

77,681

7.9%

88,330

82,255

7.4%Total
retail
193,845

179,452

8.0%

180,548

166,609

8.4%Gas
transportation
2,623

2,644

(0.8)%

34,645

36,385

(4.8)%Other
revenues
1,457

3,130

(53.5)%

-

-

-Total
$197,925

$185,226

6.9%

215,193

202,994

6.0%Heating
degree days (normal 7,076)
6,935

6,520

6.4%Average
rate per therm of retail customers
$1.074

$1.077

(0.3)%  Gas revenues increased 6.9% in 2007 due to the
following:  (In millions)
2007Gas costs/rates
$(0.6)Gas deliveries
15.0Other revenues
(1.7)Total
$12.7   Gas costs/rates. Gas costs
decreased for the year ended December 31, 2007, from those costs
experienced for the year ended December 31, 2006. MGE's natural gas rates
are subject to a purchased gas adjustment clause designed to recover or refund
the difference between the actual cost of purchased gas and the amount included
in rates. Differences between the amounts billed to customers and the actual
costs recoverable are deferred and recovered or refunded in future periods by
means of prospective monthly adjustments to rates. As a result of a decrease in
gas prices, MGE's average rate per therm for retail customers in 2007 decreased
0.3%.   Retail gas deliveries. In
2007, retail gas deliveries increased 8.4%. This increase was primarily
attributable to an increase in heating degree days. Heating degree days for the
year ended December 31, 2007, were 6,935 compared to 6,520 for the same
period in the prior year.   Other gas revenues. In 2007,
there was a $1.7 million decrease in other gas revenues. Under MGE's GCIM,
if actual gas commodity costs were above or below a benchmark set by the PSCW,
then MGE's gas sales service customers and shareholders shared equally in any
increased costs or savings. The PSCW allowed MGE to resell gas pipeline capacity
reserved to meet peak demands but not needed every day to serve customers.
Revenues from capacity release that exceeded or fell short of PSCW-targeted
levels were shared equally. In 2007 and 2006, MGE shareholders received the
benefit of $0.9 million and $2.5 million from capacity release
revenues and commodity savings under the GCIM, respectively.   37    Cost of gas
sold  In 2007, cost of gas sold increased $11.5 million,
or 8.9%. Due primarily to higher retail sales volumes, the volume of gas
purchased increased $10.8 million for the year ended December 31,
2007, when compared to the prior year. Additionally, a decrease in the gas
purchase price coupled with an increase in the PGA provision provided for an
overall increase in the cost per therm of 0.5% in 2007, which resulted in a
$0.7 million overall increase in expense when compared to the prior
year.  Gas operating and maintenance expenses  Gas operating and maintenance expense increased
$0.8 million in 2007. The following changes contributed to the net change
in gas operating and maintenance expense for the year:  (In millions)
2007Decreased production costs
$(0.1)Increased distribution costs
0.4Increased customer services, promotions, account
costs
0.3Decreased other administrative and general expenses
(0.2)Increased maintenance expenses
0.4Total
$0.8  Gas depreciation  Gas depreciation expense increased $0.2 million in
2007 as a result of additional gas plant assets.  Other Income (Deductions), net  Other income for the year ended December 31, 2007,
for the electric and gas segments was $0.1 million, compared to other
expense of $1.0 million for the same period in the prior year. During 2007,
the gas and electric segments recognized $1.9 million in AFUDC-equity,
$0.2 million in equity earnings from miscellaneous investments, and a
$0.8 million gain on the sale of investments. This income was offset
partially by $0.3 million in premium expense for a HDD collar,
$2.1 million in charitable contributions and $0.4 million in net
miscellaneous expenses.  During 2006, the gas and electric segments recognized a
total of $2.2 million in charitable contributions. This expense was
partially offset by $0.6 million in AFUDC-equity and $0.6 million in
other miscellaneous income. The other miscellaneous income includes a
$0.6 million gain on our heating degree day financial instrument.  Interest Expense, net  For the year-ended December 31, 2007, total interest
expense for the electric and gas segments decreased $0.4 million when
compared to the same period in the prior year. For the year ended
December 31, 2007, there was a $1.0 million decrease in interest
expense on short-term debt, a $0.6 million increase in AFUDC-debt (which is
a reduction to interest expense), and a $0.5 million increase in interest
income. These decreases in interest expense were offset by a $1.7 million
increase in interest expense on long-term debt. This increase relates to
interest incurred on the 5.25% medium-term notes, issued on December 29,
2006.  Nonregulated Energy Operations  Nonregulated Energy operating revenues  Operating revenues from nonregulated energy operations
were $20.0 million and $18.4 million for the years ended
December 31, 2007 and 2006. These amounts included $14.9 million and
$15.0 million, respectively, in interdepartmental revenues. The
interdepartmental revenues related to the leasing arrangement between MGE and
MGE Power West Campus which commenced on April 26, 2005. In accordance with
the provisions of this leasing arrangement, the Nonregulated Energy Operations,
via MGE Power West Campus, recorded $14.9 million and $15.0 million in
lease revenue for the years ended December 31, 2007 and 2006, respectively.
Upon consolidation, this interdepartmental amount was eliminated.   38    Also included in operating
revenues was the recognition of revenues related to carrying costs for MGE Power
West Campus and MGE Power Elm Road. MGE received approval from the PSCW to
collect approximately $12.1 million in carrying costs incurred by MGE Power
West Campus during construction of the WCCF facility. MGE is collecting these
costs in rates over a period of ten years beginning in 2005. For each of the
years ended December 31, 2007 and 2006, MGE Power West Campus recognized
$1.1 million related to carrying costs on WCCF, management, demolition, and
removal fees.  MGE also received approval from the PSCW to collect
carrying costs expected to be incurred by MGE Power Elm Road during construction
of the Elm Road project. For the years ended December 31, 2007 and 2006,
MGE Power Elm Road recognized $4.1 million and $2.3 million related to
carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For the twelve months ended December 31, 2007,
interest expense, net at the nonregulated energy operations segment was
$2.5 million compared to $2.7 million for the same period in the prior
year.  Interest expense for both 2007 and 2006 related to
long-term borrowings at MGE Power West Campus was $2.8 million. In 2007,
this interest expense was offset by a $0.1 million of miscellaneous
interest income.  Also included in the nonregulated interest expense was
interdepartmental interest expense at MGE Power Elm Road. During the twelve
months ended December 31, 2007 and 2006, MGE Power Elm Road was charged
$3.9 million and $1.9 million, respectively, in interest expense by
MGE Energy on funds borrowed for the Elm Road Project. Under the provision
of SFAS 34, Capitalization of Interest Cost, MGE Power Elm Road
capitalized all interest expense on the Elm Road Project during 2007 and 2006.
For the years ended December 31, 2007 and 2006, MGE Power Elm Road recorded
$0.2 million and $0.1 million in interest income on the cash advanced
to Elm Road Services, LLC for construction of transmission equipment and work
done by ATC related to Elm Road.  Transmission Investment Operations  For the year ended December 31, 2007, other income
at the transmission investment segment was $6.0 million, compared to
$5.3 million for the same period in the prior year. The transmission
investment segment holds our interest in ATC, and its income reflects our equity
earnings in ATC.  All Other Operations  All other interest income, net  All other interest income for the year ended
December 31, 2007, was $2.3 million compared to $0.8 million for
the year ended December 31, 2006. Interest income for the twelve months
ended December 31, 2007 and 2006, included $3.9 million and
$1.9 million, respectively, in interdepartmental income from MGE Power Elm
Road. Additionally, there was $0.2 million in miscellaneous interest income
for the year ended December 31, 2007. In 2007 and 2006, this interest
income was offset in part by $1.8 million and $1.1 million,
respectively, in interest expense on short-term debt.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$0.4 million or 2.4% in 2007. This increase was primarily attributable to
an increase in MGE's license fee tax and an increase in MGE's payroll taxes. The
annual license fee tax expense is based on adjusted operating revenues of the
prior year. These increases were slightly offset by a tax refund received for
overpayment of license fees in prior years.  Consolidated Income Taxes  MGE Energy's effective income tax rate was 36.3% for
the year ended December 31, 2007, compared to 37.9% for the year ended
December 31, 2006. This decrease was primarily attributable to the
completion of tax recovery for prior year flow through. The PSCW has allowed
rate recovery of deferred taxes on all temporary differences since June 1991
when the FERC Uniform System of Accounts was adopted. Unrecovered deferred taxes
in existence at the time of adoption were authorized for rate recovery over 15
years. Recovery of these amounts was completed on December 31, 2006.   39    Other factors contributing to
a decrease in the effective tax rate included the favorable settlement of an
income tax examination for which a FIN 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS NO. 109, Accounting for
Income Taxes, liability had been recorded, an increase in the domestic
manufacturing tax deduction provided by the American Jobs Creation Act of 2004,
a federal research tax credit under the alternative simplified credit method,
and an increase in AFUDC-equity primarily related to the Top of Iowa III
project.  Minority Interest, Net of Tax  For the year ended December 31, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$7.7 million and $2.6 million for its interest in MGE Power West
Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy
earned $0.5 million, net of tax for its interest in MGE Transco.  For the year ended December 31, 2006,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$7.8 million and $1.4 million for its interest in MGE Power West
Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy
earned $0.4 million, net of tax for its interest in MGE Transco.  Liquidity and
Capital Resources  Cash Flows  The following summarizes cash flows for MGE Energy
and MGE during the twelve months ended 2008, 2007, and 2006:  MGE Energy

MGE(In thousands)
2008

2007

2006

2008

2007

2006Cash provided by/(used for):Operating activities
$74,712

$76,586

$101,039

$74,307

$78,542

$97,224Investing activities
(104,282)

(134,791)

(94,441)

(106,849)

(134,137)

(94,382)Financing activities
29,887

58,991

(6,926)

32,001

56,208

(2,418)  Cash Provided by Operating Activities  MGE Energy  MGE Energy's consolidated net cash provided by
operating activities is derived mainly from the electric and gas operations of
its principal subsidiary, MGE.  2008 vs. 2007  Cash provided by operating activities for the twelve
months ended December 31, 2008, was $74.7 million, a decrease of
$1.9 million when compared to the same period in the prior year primarily
as a result of changes in working capital.  MGE Energy's net income increased $3.9 million
for the twelve months ended December 31, 2008, when compared to the same
period in the prior year.  Depreciation for the twelve months ended
December 31, 2008, was $39.3 million compared to $32.2 million in
the same period in the prior year. This increase is primarily attributable to
higher levels of assets, including the Top of Iowa III wind-powered
electric generating facility which was placed in service in the first quarter of
2008 as well as accelerated depreciation of certain Blount assets. For
additional information on the Blount accelerated depreciation, see
Footnote 19. Depreciation expense associated with Top of Iowa III and
the Blount accelerated depreciation is being recovered in rates.  Deferred taxes increased $7.8 million for the twelve
months ended December 31, 2008 compared to the twelve months ended
December 31, 2007, primarily due to bonus tax depreciation as a result of
the Economic Stimulus Act of 2008.  Working capital accounts resulted in $37.6 million
in cash used by operating activities for the twelve months ended
December 31, 2008, compared to $8.5 million in cash used by operating
activities during the same period in the prior year. Contributing to this change
is a higher restricted cash balance as a result of additional margin calls
associated with MGE Energy's financial and hedging instruments and a higher
balance of stored natural gas.   40    During the twelve months ended
December 31, 2007, MGE Energy received $2.5 million in cash
proceeds as a result of a Congestion Cost and Line Loss Allocation Services
Agreement. In 2007, MGE, along with several other load serving entities in
Wisconsin and Upper Michigan, signed a five year agreement in which the parties
agreed to aggregate and equitably allocate specified costs that have not been
perfectly allocated by the MISO Day 2 electricity market. Amounts collected in
2007 related to this agreement were returned to customers in 2008.  During the twelve months ended December 31, 2008 and
2007, MGE Energy made $7.7 million and $6.3 million,
respectively, in discretionary contributions to the pension and other
postretirement plans. See Footnote 13 for further discussion of
MGE Energy's Pension and Other Postretirement Benefits.  During the twelve months ended December 31, 2008,
MGE Energy's other noncurrent items, net contributed to $6.0 million
of operating inflows compared to $1.8 million of operating outflows for the
twelve months ended December 31, 2007. Factors contributing to this change
include regulatory assets for the conservation costs, debt related costs and Elm
Road related costs, which are recovered through rates.  2007 vs. 2006  Cash provided by operating activities decreased
$24.5 million for the twelve months ended December 31, 2007, when
compared to the same period in the prior year. This decrease was primarily
attributable to increases in accounts receivable and unbilled revenues.
MGE Energy's working capital accounts contributed to $8.5 million in
cash used for operating activities for the twelve months ended December 31,
2007, compared to $8.7 million in cash provided by operating activities
during the same period in the prior year.  During the twelve months ended December 31, 2007 and
2006, MGE Energy made $6.3 million and $5.8 million,
respectively, in discretionary contributions to the pension and other
postretirement benefit plans.  MGE Energy recorded $1.9 million in
AFUDC-equity funds for the twelve months ended December 31, 2007, compared
to $0.6 million for the same period in the prior year. This increase was
primarily attributable to the construction of the Top of Iowa III wind
generation project.  During the twelve months ended December 31, 2007,
MGE Energy recorded a $3.1 million provision for doubtful accounts.
This represents a $0.2 million decrease from the amount recorded during the
same period in the prior year. The provision during 2006 was higher due to the
atypically high fuel costs experienced in the latter portion of 2005 and the
effects these costs had on the composition of the aging.  During the twelve months ended December 31, 2007,
MGE Energy also recorded a $0.8 million gain on the sale of equity
investments.  During the twelve months ended December 31, 2007,
more working capital was used to support higher receivables and unbilled
revenues, partially offset by an increase in payables and a decrease in
inventories. In addition, there was a decrease in short term liabilities
reflecting, in part, the payment of a $2.3 million refund to customers on
April 24, 2007. That refund was the result of the interim fuel credit and
subject to refund provision instituted by the PSCW in 2006. This payment had no
impact on net income for the twelve months ended December 31, 2007.
Included in the December 31, 2006, operating cash flows was the collection
of the $2.4 million of the retainage receivable from the State under the
EPC agreement related to the construction of WCCF. Cash outflows related to
other noncurrent items, net were $1.8 million for the twelve months ended
December 31, 2007, compared to cash inflows of $4.4 million in the
twelve months ended December 31, 2006.  During the twelve months ended December 31, 2007,
MGE Energy received $2.5 million in cash proceeds as a result of a
Congestion Cost and Line Loss Allocation Services Agreement. In 2007, MGE, along
with several other load serving entities in Wisconsin and Upper Michigan, signed
a five year agreement in which the parties agreed to aggregate and equitably
allocate specified costs that have not been perfectly allocated by the MISO Day
2 electricity market. Amounts collected in 2007 related to this agreement were
returned to customers in 2008.  For the twelve months ended December 31, 2007,
MGE Energy recorded $6.0 million in equity earnings from ATC and
received $4.4 million in cash dividends from ATC. For the same period in
the prior year, MGE Energy recorded $5.3 million in equity earnings
from ATC and received $4.0 million in cash dividends from ATC.   41    MGE  2008 vs. 2007  Cash provided by operating activities for the twelve
months ended December 31, 2008, was $74.3 million, a decrease of
$4.2 million when compared to the same period in the prior year primarily
as a result of changes in working capital.  MGE's net income increased $0.5 million for the
twelve months ended December 31, 2008, when compared to the same period in
the prior year.  Depreciation for the twelve months ended
December 31, 2008, was $39.3 million compared to $32.2 million in
the same period in the prior year. This increase is primarily attributable to
higher levels of assets, including the Top of Iowa III wind-powered
electric generating facility which was placed in service in the first quarter of
2008 as well as accelerated depreciation of certain Blount assets. For
additional information on the Blount accelerated depreciation, see
Footnote 19. Depreciation expense associated with Top of Iowa III and
the Blount accelerated depreciation is being recovered in rates.  Deferred taxes increased $7.7 million for the twelve
months ended December 31, 2008 compared to the twelve months ended
December 31, 2007, primarily due to bonus tax depreciation as a result of
the Economic Stimulus Act of 2008.  Working capital accounts resulted in $39.2 million
in cash used by operating activities for the twelve months ended
December 31, 2008, compared to $7.6 million in cash used by operating
activities during the same period in the prior year. Contributing to this change
is a higher restricted cash balance as a result of additional margin calls
associated with MGE's financial and hedging instruments and a higher balance of
stored natural gas.  During the twelve months ended December 31, 2007,
MGE received $2.5 million in cash proceeds as a result of a Congestion Cost
and Line Loss Allocation Services Agreement. In 2007, MGE, along with several
other load serving entities in Wisconsin and Upper Michigan, signed a five year
agreement in which the parties agreed to aggregate and equitably allocate
specified costs that have not been perfectly allocated by the MISO Day 2
electricity market. Amounts collected in 2007 related to this agreement were
returned to customers in 2008.  During the twelve months ended December 31, 2008 and
2007, MGE made $7.7 million and $6.3 million, respectively in
discretionary contributions to the pension and other postretirement plans. See
Footnote 13 for further discussion of MGE's Pension and Other
Postretirement Benefits.  During the twelve months ended December 31, 2008,
MGE's other noncurrent items, net contributed to $6.0 million of operating
inflows compared to $2.0 million of operating outflows for the twelve
months ended December 31, 2007. Factors contributing to this change include
regulatory assets for the conservation costs, debt related costs and Elm Road
related costs.  2007 vs. 2006  Cash provided by operating activities decreased
$18.7 million for the twelve months ended December 31, 2007, when
compared to the same period in the prior year. This decrease was primarily
attributable to increases in accounts receivable and unbilled revenues. MGE's
working capital accounts contributed $7.6 million in cash used for
operating activities for the twelve months ended December 31, 2007,
compared to $5.5 million in cash provided by operating activities during
the same period in the prior year.  During the twelve months ended December 31, 2007 and
2006, MGE made $6.3 million and $5.8 million, respectively, in
discretionary contributions to the pension and other postretirement benefit
plans.  MGE recorded $1.9 million in AFUDC-equity funds for
the twelve months ended December 31, 2007, compared to $0.6 million
for the same period in the prior year. This increase is primarily attributable
to the construction of the Top of Iowa III wind generation project.  During the twelve months ended December 31, 2007,
MGE recorded a $3.1 million provision for doubtful accounts. This
represents a $0.2 million decrease from the amount recorded during the same
period in the prior year. The provision during 2006 was higher due to the
atypically high fuel costs experienced in the latter portion of 2005 and the
effects these costs had on the composition of the aging.  During the twelve months ended December 31, 2007,
MGE also recorded a $0.8 million gain on the sale of equity
investments.  42    MGE's working capital accounts
contributed to $7.6 million in cash used for operating activities for the
twelve months ended December 31, 2007, compared to $5.5 million in
cash provided by operating activities during the same period in the prior year.
During the twelve months ended December 31, 2007, more working capital was
used to support higher receivable and unbilled revenues balances, partially
offset by an increase in payables and a decrease in inventories. In addition,
there was a decrease in short term liabilities reflecting, in part, the payment
of a $2.3 million refund to customers on April 24, 2007. That refund
was the result of the interim fuel credit and subject to refund provision
instituted by the PSCW in 2006. This payment had no impact on net income for the
twelve months ended December 31, 2007. Cash outflows related to other
noncurrent items, net were $2.0 million for the twelve months ended
December 31, 2007, compared to cash inflows of $4.4 million in the
twelve months ended December 31, 2006.  During the twelve months ended December 31, 2007,
MGE received $2.5 million in cash proceeds as a result of a Congestion Cost
and Line Loss Allocation Services Agreement. In 2007, MGE, along with several
other load serving entities in Wisconsin and Upper Michigan, signed a five year
agreement in which the parties agreed to aggregate and equitably allocate
specified costs that have not been perfectly allocated by the MISO Day 2
electricity market. Amounts collected in 2007 related to this agreement were
returned to customers in 2008.  For the twelve months ended December 31, 2007, MGE
recorded $6.0 million in equity earnings from ATC and received
$4.4 million cash dividends from ATC. For the same period in the prior
year, MGE recorded $5.3 million in equity earnings from ATC and received
$4.0 million in cash dividends from ATC.  Minority interest, net of tax was $10.7 million for
the twelve months ended December 31, 2007, compared to $9.6 million
for the same period in the prior year. This increase primarily relates to an
increase in carrying cost revenue recorded by MGE Power Elm Road.  Capital Requirements and Investing Activities  MGE Energy  2008 vs. 2007  MGE Energy's cash used for investing activities
decreased $30.5 million for the twelve months ended December 31, 2008,
when compared to the same period in the prior year.  Capital expenditures for the twelve months ended
December 31, 2008, were $105.8 million. This amount represents a
$30.5 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to decreased construction activity for the
Top of Iowa III wind generation project of $28.5 million and a
decrease of $3.1 million for capital expenditures related to Elm Road.
These decreases were partially offset by increased construction activity in
other utility capital expenditures of $1.2 million.  During the twelve months ended December 31, 2008,
MGE Energy made a cash capital contribution of $3.4 million to ATC.
During the twelve months ended December 31, 2007, MGE Energy did not
make any cash capital contributions to ATC. However, during the twelve months
ended December 31, 2007, MGE (through MGE Transco) transferred
$1.4 million in certain transmission assets to ATC. In exchange for this
transfer, MGE Transco received $0.7 million in cash proceeds and
$0.7 million in an additional investment in ATC.  During the twelve months ended December 31, 2008,
proceeds from the sale of property were $0.3 million. These proceeds
primarily relate to the sale of nonutility property.  During the twelve months ended December 31, 2008,
MGE Energy received $3.6 million in cash proceeds from the sale of
equity investments compared to $0.9 million received during the twelve
months ended December 31, 2007.  2007 vs. 2006  In 2007, MGE Energy's cash used for investing
activities increased $40.4 million. Capital expenditures for the year ended
December 31, 2007, were $136.3 million. This amount represents a
$43.7 million increase in capital expenditures from those made in the prior
year. This increase was related to the construction activity for the Elm Road
project ($23.3 million) and the Top of Iowa III wind project
($25.8 million). These increases were partially offset by a
$1.6 million decrease in capital expenditures related to WCCF and a
$3.8 million decrease in other MGE utility plant additions.   43    During 2007, MGE Energy
made $0.3 million in capital contributions to miscellaneous investments.
MGE Energy did not make any cash capital contributions to ATC. However, MGE
(through MGE Transco) transferred $1.4 million in certain transmission
assets to ATC in 2007. In exchange for this transfer, MGE Transco received
$0.7 million in cash proceeds and $0.7 million in an additional
investment in ATC. During the year ended December 31, 2006, MGE Energy
made $2.0 million in capital contributions to ATC and other equity
investments.  In 2007 and 2006 in connection with the Elm Road project,
MGE Power Elm Road advanced $0.1 million and $0.8 million in funds to
the WEPCO, who in turn provided these funds to ATC, respectively. These funds
will be used by ATC for transmission system upgrades related to the Elm Road
project. The majority of these funds are expected to be repaid when the first
unit at Elm Road achieves commercial operation.  During the year ended December 31, 2007,
MGE Energy's cash provided by other cash investing activities was
$0.2 million compared to $0.9 million in the prior year.  During the twelve months ended December 31, 2007,
MGE Energy received $0.9 million in cash proceeds from the sale of
equity investments.  MGE  2008 vs. 2007  MGE's cash used for investing activities decreased
$27.3 million for the twelve months ended December 31, 2008, when
compared to the same period in the prior year.  Capital expenditures for the twelve months ended
December 31, 2008, were $105.8 million. This amount represents a
$30.5 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to decreased construction activity for the
Top of Iowa III wind generation project of $28.5 million and a
decrease of $3.1 million for capital expenditures related to Elm Road.
These decreases were partially offset by increased construction activity for
other utility capital expenditures of $1.2 million.  During the twelve months ended December 31, 2008,
MGE (through MGE Transco) made a cash capital contribution of $3.4 million
to ATC. During the twelve months ended December 31, 2007, MGE did not make
any cash capital contributions to ATC. However, during the twelve months ended
December 31, 2007, MGE (through MGE Transco) transferred $1.4 million
in certain transmission assets to ATC. In exchange for this transfer, MGE
Transco received $0.7 million in cash proceeds and $0.7 million in an
additional investment in ATC.  During the twelve months ended December 31, 2008,
proceeds from the sale of property were $0.3 million. These proceeds
primarily relate to the sale of nonutility property.  2007 vs. 2006  In 2007, MGE's cash used for investing activities
increased $39.8 million. Capital expenditures for the year ended
December 31, 2007, were $136.3 million. This amount represents a
$43.7 million increase in capital expenditures from those made in the prior
year. This increase was related to the construction activity for the Elm Road
project ($23.3 million) and the Top of Iowa III wind project
($25.8 million). These increases were partially offset by a
$1.6 million decrease in capital expenditures related to WCCF and a
$3.8 million decrease in other MGE utility plant additions.  During 2007, MGE made $0.1 million in capital
contributions to miscellaneous investments. MGE did not make any cash capital
contributions to ATC. However, MGE (through MGE Transco) transferred
$1.4 million in certain transmission assets to ATC in 2007. In exchange for
this transfer, MGE Transco received $0.7 million in cash proceeds and
$0.7 million in an additional investment in ATC. During the year ended
December 31, 2006, MGE made $1.9 million in capital contributions to
ATC and other equity investments.  In 2007 and 2006 in connection with the Elm Road project,
MGE Power Elm Road advanced $0.1 million and $0.8 million in funds to
the WEPCO, who in turn provided these funds to ATC, respectively. These funds
will be used by ATC for transmission system upgrades related to the Elm Road
project. The majority of these funds are expected to be repaid when the first
unit at Elm Road achieves commercial operation.  During the year ended December 31, 2007, MGE's cash
provided by other cash investing activities was $0.7 million compared to
$0.9 million in the prior year.  44    During the twelve months ended
December 31, 2007, MGE received $0.9 million in cash proceeds from the
sale of equity investments.  Capital expenditures  The following table shows MGE Energy's budgeted
capital expenditures for 2009 and actual capital expenditures for both 2008 and
2007:  (In thousands)
For the years ended December 31,
2009

2008

2007(Budget)
(Actual)
(Actual)Electric
$42,586

$47,033

$70,687Gas
18,414

8,441

12,091Utility plant total
61,000

55,474

82,778Nonregulated
22,834

50,303

53,480MGE Energy total
$83,834

$105,777

$136,258  As of December 31, 2008, MGE Energy had a
working capital deficit (current liabilities exceeded current assets). This
deficit is in part due to MGE Energy funding the majority of its capital
commitments for the Elm Road project with short-term debt. MGE Energy
intends to fund future capital commitments for the Elm Road project with funds
generated from normal operations, through the issuance of equity, the issuance
of long-term debt, and short-term debt. MGE Energy's and MGE's liquidity is primarily
affected by their construction requirements. MGE Energy's major 2008
capital projects include Elm Road and the Top of Iowa III wind project.
During 2008, $49.9 million in capital expenditures were incurred for the
construction of Elm Road. Included in this amount is $4.8 million of
interest capitalized in accordance with the provisions set forth in
SFAS No. 34. During 2008, MGE expended $7.9 million on capital
additions for the construction of the Top of Iowa III wind project and
recorded an additional $0.6 million in AFUDC.  As of December 31, 2008, MGE Power Elm Road's
remaining capital commitments for the Elm Road project are estimated to be
$27.2 million. Included in this amount is $1.7 million, which has been
accrued and recorded as construction work in progress at December 31, 2008.
Based on current forecasts, capital expenditures for this project are expected
to be $22.3 million in 2009, $4.8 million in 2010, and
$0.1 million in 2011. These amounts may change as a result of modifications
to the project cost estimate or timing differences. See Footnote 21a for
additional information regarding a claim for additional costs filed by the Elm
Road project contractor.  MGE Energy used funds received as dividend payments
from MGE Power West Campus as well as short and long-term external financing to
meet its 2008 capital requirements and cash obligations, including dividend
payments. External financing included short-term financing under existing lines
of credit and proceeds from equity issued under the Stock Plan.  Financing Activities  MGE Energy  2008 vs. 2007  Cash provided by MGE Energy's financing activities
was $29.9 million for the twelve months ended December 31, 2008,
compared to $59.0 million for the twelve months ended December 31,
2007. MGE Energy's major capital expenditures (Top of Iowa III wind
project and Elm Road project) were primarily funded with short-term debt, the
issuance of common stock and additional long-term debt.  MGE Energy received $31.0 million and
$32.8 million in cash proceeds as the result of stock issued during the
twelve months ended December 31, 2008 and 2007, respectively.  For the twelve months ended December 31, 2008,
dividends paid were $31.8 million compared to $30.3 million for same
period in the prior year. This increase was a result of a higher dividend per
share ($1.43 vs. $1.41) and an increase in the number of shares outstanding.  MGE Energy repaid $30.0 million of long-term
debt in the twelve months ended December 31, 2008, compared to
$15.0 million in the twelve months ended December 31, 2007.
MGE Energy issued $40.0 million of long-term debt in the twelve months
ended December 31, 2008, compared to $25.0 million in the twelve
months ended December, 2007.  45    For the twelve months ended
December 31, 2008, net short-term debt borrowings were $21.0 million
compared to $46.5 million for the same period in the prior year.  2007 vs. 2006  Cash provided by MGE Energy's financing activities
was $59.0 million for 2007, compared to cash used for financing activities
of $6.9 million for 2006. For the year ended December 31, 2007, net
short term debt borrowings were $46.5 million compared to net short term
debt repayments of $25.5 million for the same period in the prior year.
During the year ended December 31, 2007, MGE Energy's major capital
expenditures (Top of Iowa III wind project and Elm Road project) were
primarily funded with short-term debt, the issuance of common stock and
additional long-term debt.  MGE Energy received $32.8 million and
$17.1 million in cash proceeds as the result of stock issued during the
twelve months ended December 31, 2007 and 2006, respectively. This increase
was attributable to stock issued under the Stock Plan and stock issued pursuant
under the Distribution Agreement.  Cash dividends paid on common stock during the year ended
December 31, 2007, were $30.3 million compared to $28.5 million
for the same period in the prior year. This increase was a result of a higher
dividend per share ($1.41 vs. $1.39) and an increase in the number of shares
outstanding.  During the twelve months ended December 31, 2007,
MGE Energy repaid $15.0 million of its 7.49% medium-term notes which
came due September 20, 2007, and issued $25.0 million in 6.247%
medium-term notes due September 15, 2037.  MGE  2008 vs. 2007  During the twelve months ended December 31, 2008,
cash provided by MGE's financing activities was $32.0 million compared to
of $56.2 million in the same period in the prior year.  No cash dividends were paid from MGE to MGE Energy
for the twelve months ended December 31, 2008. For the twelve months ended
December 31, 2007, cash dividends made from MGE to MGE Energy were
$15.6 million.  MGE repaid $30.0 million of long-term debt in the
twelve months ended December 31, 2008, compared to $15.0 million in
the twelve months ended December 31, 2007.  MGE issued $40.0 million of long-term debt in the
twelve months ended December 31, 2008, compared to $25.0 million in
the twelve months ended December 31, 2007.  For the twelve months ended December 31, 2008, net
short-term debt repayments were $10.0 million compared to net short-term
issuance of $31.5 million for the same period in the prior year.  2007 vs. 2006  During 2007, cash provided by MGE's financing activities
was $56.2 million compared to cash used for financing activities of
$2.4 million in 2006. During 2007, MGE had net short term borrowings of
$31.5 million compared to net short term debt repayments of
$36.5 million for the same period in the prior year. During the year ended
December 31, 2007, MGE's major capital expenditures (Top of Iowa III
wind project and Elm Road project) were primarily funded with short-term debt,
equity contributions from MGE Energy and additional long-term debt.  During 2007, equity and affiliate financing received from
MGE Energy by MGE Power West Campus and MGE Power Elm Road was
$43.4 million compared to $27.3 million for the same period in the
prior year. These equity contributions received by the aforementioned
subsidiaries from MGE Energy are included in minority interest on the MGE
consolidated balance sheet.  For the year ended December 31, 2007, cash dividends
made by MGE, MGE Transco, and MGE Power West Campus were $28.7 million
compared to $23.1 million for the same period in the prior year.  During the twelve months ended December 31, 2007,
MGE repaid $15.0 million of its 7.49% medium-term notes which came due
September 20, 2007 and issued $25.0 million in 6.247% medium-term
notes due September 15, 2037.   46    Dividend
Restrictions  Dividend payments by MGE to
MGE Energy are subject to restrictions arising under a PSCW rate order and,
to a lesser degree, MGE's first mortgage bonds. The PSCW order limits the amount
of dividends that MGE may pay MGE Energy when its common equity ratio,
calculated in the manner used in the rate proceeding, is less than 55%. Under
those circumstances, MGE may not pay dividends in excess of $26.8 million
and $26.1 million for 2008 and 2007, respectively, plus dividends on shares
issued in excess of the shares issued in the rate proceeding forecast if the
proceeds are invested in MGE. MGE's 13-month rolling average common equity ratio
at December 31, 2008 and 2007, is estimated to be 50.4% and 53.1%,
respectively, as determined under the calculation used in the rate proceeding.
While MGE was not restricted from paying cash dividends in 2008, in order to
build additional common stock equity in MGE, no cash dividends were paid to
MGE Energy. MGE paid cash dividends of $15.6 million to
MGE Energy in 2007. The rate proceeding calculation includes as
indebtedness imputed amounts for MGE's outstanding purchase power capacity
payments and other PSCW adjustments, but does not include the indebtedness
associated with MGE Power West Campus, which is consolidated in accordance with
FIN 46(R) into MGE's financial statements. MGE has covenanted with the holders of its first mortgage
bonds not to declare or pay any dividend or make any other distribution on or
purchase any shares of its common stock unless, after giving effect thereto, the
aggregate amount of all such dividends and distributions and all amounts applied
to such purchases, after December 31, 1945, shall not exceed the earned
surplus (retained earnings) accumulated subsequent to December 31, 1945. As
of December 31, 2008, approximately $218.7 million was available for
the payment of dividends under this covenant.  Credit Facilities  At December 31, 2008, MGE Energy and MGE had
the following aggregate bank commitments and available capacity under the credit
agreements and the indicated amounts of outstanding commercial paper:  Borrower
Aggregate Bank
Commitments
(in millions)
Outstanding
Commercial Paper
Outstanding
Lines of Credit
Available Capacity under
Revolving Credit
AgreementsMGE Energy
$80.0
(1, 2)
$ -
$73.5
$   6.5$20.0
(3)
$ -
$ -
$20.0$20.0
(4)
$ -
$ -
$20.0MGE
$55.0
(1, 2)
$51.0
$ -
$ 4.0$20.0
(5)
$ -
$ -
$20.0  (1) Expires December 21, 2010. (2) Borrowings bear interest based on
either prime or LIBOR plus, in the case of the LIBOR-based rate, an adder, not
to exceed 0.750%, based on the senior unsecured credit rating of MGE. (3) Expires August 28, 2009.
Borrowings bear interest based on either prime or a LIBOR-based rate plus, in
the case of the LIBOR-based rate, an adder, not to exceed 1.0% per annum, based
on the senior unsecured credit rating of MGE. (4) Expires September 30, 2009.
Borrowings bear interest based on either (1) a "floating rate," calculated on a
daily basis as the highest of a prime rate, a Federal Funds effective rate plus
1/2% per annum, or a Eurodollar Rate for a one month interest plus 1.0% or (2) a
"Eurodollar Rate," calculated as provided in the agreement for the selected
interest period, plus 1.0%. (5) Expires March 31, 2009.
Borrowings bear interest based on either prime or a LIBOR-based rate plus, in
the case of the LIBOR-based rate, 0.4%.  The agreements require the borrower to maintain a ratio
of consolidated debt to consolidated total capitalization not to exceed a
maximum of 65%. The ratio calculation excludes assets, liabilities, revenues and
expenses included in MGE's financial statements as a result of the application
of FIN 46(R). At December 31, 2008, the ratio of consolidated debt to
consolidated total capitalization for each of MGE Energy and MGE were 45.3%
and 42.2%, respectively. See Footnote 10, for additional information
regarding the credit facilities.   47    Capitalization and
Credit Ratings  MGE Energy's capitalization ratios were as
follows:  MGE Energy2008

2007Common shareholders' equity
54.7%

53.9%Long-term debt*
31.1%

33.1%Short-term debt
14.2%

13.0%*Includes the current portion of long-term
debt  Below is a table of MGE's current credit ratings.
MGE Energy is not rated because it has not issued any debt securities.  Standard & Poor's

Moody'sFirst Mortgage Bonds
AA-

Aa2Unsecured debt
AA-

Aa3Commercial paper
A1+

P1  A security rating is not a recommendation to buy, sell,
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. MGE's access to the capital markets, including the
commercial paper market, and its financing costs in those markets are dependent
on its securities' ratings. None of MGE's borrowing is subject to default or
prepayment due to downgrading of securities' ratings, although such a down
grading could increase fees and interest charges under MGE's and
MGE Energy's credit facilities.  Recent Developments in the Capital and Credit
Markets  The recent uncertainty in the capital and credit markets
has adversely affected the United States and global economies. These events have
the potential to create additional risks for businesses, including
MGE Energy and MGE, during 2009. MGE Energy and MGE have performed
additional analyses to determine the potential impact, if any, of recent market
conditions on its financial statements. These analyses and assessments include
counterparty creditworthiness, value of our investments, access to liquidity in
the capital and credit markets, and exposure to operational risk.  Operational MGE Energy's and MGE's operations are affected by
local, national and worldwide economic conditions. The consequences of a
prolonged recession may include a lower level of economic activity, uncertainty
regarding energy prices and the capital and commodity markets, and increased
credit risk. A lower level of economic activity might result in a decline in
energy consumption, which may adversely affect our revenues and future growth.
Increased credit risk reflects the risk that our retail customers will not pay
their bills in a timely manner or at all, which may lead to a reduction in
liquidity and an eventual increase in bad debt expense.  Liquidity Long-term instability in the financial markets, as a
result of recession or otherwise, also may affect the cost of capital and our
ability to raise capital. MGE Energy and MGE believe they have sufficient
liquidity despite the disruption of capital and credit markets. MGE Energy
and MGE do not anticipate a need for further long-term financing until the third
quarter of 2009.  Counterparty creditworthiness Credit risk also includes the risk that trading
counterparties that owe us money or product will breach their obligations. MGE's
risk management policy is to limit transactions to a group of high quality
counterparties. Should the counterparties to these arrangements fail to perform,
we may be forced to enter into alternative arrangements. In that event, our
financial results could be adversely affected and we could incur losses.  Pension MGE sponsors defined benefit pension plans and
postretirement benefits plans for our employees. The oversight on the
investments held in the plans is substantial, and we followed established
investment policies and practices. Nonetheless, the broad market declines have
affected the value of our employee benefit plans trusts' assets, which declined
in value by approximately 27.5% during the twelve months ended December 31,
2008. Substantial changes in the value of trust fund assets, such as those
experienced, are expected to affect the level of required contributions to these
trusts to meet benefit obligations. Changes in the value of plan assets did not
have an impact on the income statement for 2008; however, reduced benefit plan
assets are expected to result in increased benefit costs in future years and may
increase the amount and accelerate the timing of required future funding
contributions.  48    Insurance MGE Energy has reviewed its exposure to insurance
risk and has concluded that there are no material changes related to the cost or
availability of liability, property and other forms of insurance. Management
continues to monitor closely events and the ratings for insurance companies
associated with insurance programs.  Contractual Obligations and Commercial Commitments for
MGE Energy and MGE  MGE Energy's and MGE's contractual obligations as of
December 31, 2008, representing cash obligations that are considered to be
firm commitments, are as follows:  (In thousands)


Payment due within:

Due
afterTotal

1
Year

2-3
Years

4-5
Years

5
YearsMGE EnergyLong-term debt
(a)
$273,500

$
-

$
-

$34,647

$238,853Short-term debt
(b)
124,500

124,500

-

-

-Interest expense
(c)
264,895

15,870

31,741

30,012

187,272Operating leases
(d)
20,439

2,446

3,951

3,007

11,035Purchase
obligations (e)
535,060

100,796

127,640

84,188

222,436Other
obligations (f)
6,539

3,099

751

513

2,176Purchase
obligations-Elm Road (g)
27,182

22,327

4,855

-

-Purchase
obligations -
Environmental
(i)
1,246

1,246

-

-

-Total
MGE Energy contractual obligations
$1,253,361

$270,284

$168,938

$152,367

$661,772MGELong-term debt
(a)
$273,500

$
-

$
-

$34,647

$238,853Short-term debt
(h)
51,000

51,000

-

-

-Interest expense
(c)
264,895

15,870

31,741

30,012

187,272Operating leases
(d)
20,439

2,446

3,951

3,007

11,035Purchase
obligations (e)
535,060

100,796

127,640

84,188

222,436Other
obligations (f)
5,328

1,888

751

513

2,176Purchase
obligations-Elm Road (g)
27,182

22,327

4,855

-

-Purchase
obligations -
Environmental
(i)
1,246

1,246

-

-

-Total
MGE contractual obligations
$1,178,650

$195,573

$168,938

$152,367

$661,772  For additional information about:  (a) Long-term debt consisting of secured first mortgage
bonds, unsecured medium-term notes, Industrial Development Revenue Bonds issued
by MGE, and private placement debt issued by MGE and MGE Power West Campus. See
Footnote 9 of the Notes to Consolidated Financial Statements.  (b) Short-term debt consisting of commercial paper for
MGE and borrowings under MGE Energy lines of credit, see Footnote 10
of the Notes to Consolidated Financial Statements.  (c) Amount represents interest expense on long-term
facilities. See Footnote 9 of the Notes to Consolidated Financial
Statements for further discussion of the long term debt outstanding at
December 31, 2008.  (d) Operating leases. See Footnote 18 of the Notes
to Consolidated Financial Statements.  (e) Purchase obligations for MGE consist primarily of the
purchase of electricity and natural gas, electric transmission, natural gas
storage capacity, natural gas pipeline transportation, and the purchase and
transport of coal. See Footnote 18 of the Notes to Consolidated Financial
Statements for additional discussion.  (f) Other obligations are primarily related to investment
commitments, easements, and charitable donations. Also included is the liability
related to FIN 48. For additional information on the unrecognized tax benefit,
see Footnote 12 of the Notes to Consolidated Financial Statements.  (g) Purchase obligations for MGE and MGE Energy
related to contracts for equipment and services related to the construction of
Elm Road. See Footnotes 18 and 21 of the Notes to Consolidated Financial
Statements.  (h) Short-term debt consisting of commercial paper. See
Footnote 10 of the Notes to Consolidated Financial Statements.  49    (i) Contractual commitments
for certain services and capital at the jointly owned Columbia plant that will
be acquired to ensure compliance with certain environmental initiatives. Also
included is a commitment related to greenhouse gas reduction efforts as a result
of a settlement agreement with Clean Wisconsin, Inc. and Sierra Club over the
ERGS WPDES permit.  The above amounts do not include any contributions for
MGE's pension and postretirement plans. In January 2009, a
$6.0 million discretionary contribution was made to the pension plans in
order to fund the plans to an 80% funding target level as of January 1,
2009 under the Employee Retirement Income Security Act (ERISA) and the Pension
Protection Act of 2006. Subsequent required contributions to the plans for 2009
through 2013 are expected to be between $9.0 million to $11.0 million
each year. The required contributions for years after 2013 are currently not yet
estimated. MGE has adopted the asset smoothing as permitted in accordance with
the Pension Protection Act of 2006, including modifications made by WRERA. Due
to uncertainties in the future economic performance of plan assets, discount
rates, and other key assumptions, required estimated contributions are subject
to change. MGE may also elect to make additional discretionary
contributions.  The above amounts, also, do not include future voluntary
capital calls to ATC. On January 30, 2009, MGE Transco made a voluntary
$0.9 million capital contribution to ATC. The amount and timing of future
voluntary capital calls is uncertain and primarily dependent on the operations
and expansion of ATC.  MGE Energy's and MGE's commercial commitments as of
December 31, 2008, representing commitments triggered by future events and
including financing arrangements to secure obligations of MGE Energy and
MGE, and guarantees by MGE, are as follows:  Expiration within:

Due after(In thousands)
Total

1 Year

2-3 Years

4-5 Years

5 YearsMGE EnergyAvailable lines of credit (a)
$195,000

$60,000

$135,000

$-

$-Guarantees (b)
3,849

648

1,478

769

954MGEAvailable lines of credit (c)
$75,000

$20,000

$55,000

$-

$-Guarantees (b)
3,849

648

1,478

769

954  For additional information about:  (a) Amount includes those facilities discussed in (c)
plus three additional line of credits. MGE Energy has available at any time
an $80.0 million committed revolving credit agreement, expiring in
December 2010, a $20.0 million revolving credit facility, expiring at
the end of August 2009, and another $20.0 million revolving credit
facility, expiring at the end of September 2009. At December 31, 2008,
MGE Energy had borrowed $73.5 million under these credit facilities.
Accordingly, MGE Energy's available credit under these credit facilities
were $46.5 million at December 31, 2008.  (b) MGE has guaranteed repayment of certain receivables
it sold to a financial institution under a chattel paper agreement. See
Footnote 18 of the Notes to Consolidated Financial Statements.  (c) Amounts include a five-year, $55.0 million
committed revolving credit agreement expiring in December 2010, and an
additional $20.0 million line of credit that matures on March 31,
2009. Each credit facility is used to support commercial paper issuances. At
December 31, 2008, there were no borrowings under either credit facility.
At December 31, 2008, there was $51.0 million of commercial paper
outstanding.  Restructuring Activities  In January 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 entered into severance agreements providing severance
benefits to the employees affected by the exit plan. The benefits are expected
to be paid as follows: $0.1 million in 2010 and $1.2 million in 2011.
MGE will recover in rates the costs associated with the discontinuance of coal
at Blount.   50    Critical
Accounting Policies - MGE Energy and MGE  The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to unbilled revenues, pension obligations,
income taxes, derivatives, and regulatory assets and liabilities. We base our
estimates on historical experience and on various assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements.  Unbilled Revenues  Revenues from the sale of electricity and gas to
customers are recorded when electricity/gas is delivered to those customers. The
quantity of those sales is measured by customers' meters. Due to the large
volume of those meters, it is impractical to read all of them at month end.
Meters are read on a systematic basis throughout the month based on established
meter-reading schedules. Consequently, at the end of any month, there exists a
quantity of electricity and gas that has been delivered to customers but has not
been captured by the meter readings. As a result, management must estimate
revenue related to electricity and gas delivered to customers between their
meter-read dates and the end of the period. These estimates include:   The amount of electricity expected to
be lost in the process of its transmission and distribution to customers (line
loss) and the amount of electricity actually delivered to customers.   The amount of gas expected to be lost
in the process of its distribution to customers and the amount of gas actually
delivered to customers.   The mix of sales between customer
rate classes, which is based upon historical utilization assumptions.  MGE monitors the reasonableness of the unbilled revenue
estimate through the review of ratios such as unbilled electric consumption
compared to billed electric sales. In the case of unbilled gas, the estimated
unbilled consumption is compared to various other statistics, including percent
of billed sales, change in unbilled month to month and change in unbilled
compared to the prior year in order to confirm its reasonableness.  Allowance for Doubtful Accounts  MGE maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. It determines the allowance based on historical write-off experience,
regional economic data, and review of the accounts receivable aging. The Company
reviews its allowance for doubtful accounts monthly. To be more consistent with
general utility practice, during the fourth quarter of 2008, MGE changed its
policy of writing off certain accounts from six months to three months which
resulted in a decrease to both accounts receivable and allowance for doubtful
accounts of approximately $0.9 million. Although management believes that
the allowance for doubtful accounts is the Company's best estimate of the amount
of probable credit losses, if the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.  Pension and Other Postretirement Benefit Plans  MGE provides employees with certain retirement (pension)
and postretirement (health care and life insurance) benefits. In order to
measure the expense and obligations associated with these benefits, management
must make a variety of estimates, including discount rates used to value certain
liabilities, the expected return on plan assets set aside to fund these costs,
the rate of compensation increase, employee turnover rates, retirement rates,
health care trends, mortality rates, and other factors. These accounting
estimates bear the risk of change due to the uncertainty attached to the
estimate as well as the fact that these estimates are difficult to measure.
Different estimates used by us could result in recognizing different amounts of
expense over different periods of time.  We use third-party specialists to assist us in evaluating
our assumptions as well as appropriately measure the costs and obligations
associated with these retirement benefits. The discount rate and expected return
on plan assets are based primarily on investment yields available and the
historical performance of our plan assets. They are critical accounting
estimates because they are subject to management's judgment and can materially
affect net income.  51      Assumed return on assets. This
assumption represents the rate of return on plan assets reflecting the average
rate of earnings expected on the funds invested (or to be invested) to provide
for the benefits included in the projected benefit obligation. For 2008, MGE
used an assumed return on assets of 9.0% for pension and 7.85% for other
postretirement benefits. One of the approaches MGE used in determining its
assumed return on assets is based on historical returns. As of December 31,
2008, the ten-year historical annualized return was 4.81%. Holding other
assumptions constant, for every 1% reduction in the expected rate of return on
plan assets, annual pension and other postretirement cost would increase by
approximately $1.5 million, before taxes.   Discount rate. The discount
rate represents the rate at which pension obligations could effectively be
settled on a present-value basis. MGE uses high-grade bond yields as a benchmark
for determining the appropriate discount rate.   Medical trend assumptions. The
health care cost trend rate is the assumed rate of increase in per-capita health
care charges.  See Footnote 13 for additional discussion of these
plans.  Income Tax Provision  MGE Energy's and MGE's income tax provisions,
including both current and deferred components, are based on estimates,
assumptions, calculations, and interpretation of tax statutes for the current
and future years. Determination of current-year federal and state income tax
will not be settled for years.  Management regularly makes assessments of tax return
outcomes relative to financial statement tax provisions and adjusts the tax
provisions in the period when facts become final.  Additionally, in determining our current income tax
provision we assess temporary differences resulting from differing treatments of
items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities, which are recorded in our balance sheets. When we
maintain deferred tax assets, we assess the likelihood that these assets will be
recovered through adjustments to future taxable income. To the extent we believe
recovery is not more likely than not, we establish a valuation allowance. We
record an allowance reducing the asset to a value we believe will be recoverable
based on our expectation of future taxable income. We believe the accounting
estimate related to the valuation allowance is a critical accounting estimate
because it is highly susceptible to change from period to period as it requires
management to make assumptions about our future income over the lives of the
deferred tax assets, and the impact of increasing or decreasing the valuation
allowance is potentially material to our results of operations.  In June 2006, the FASB issued FIN 48. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. 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 judgment given the
facts, circumstances and information available at the reporting date.
MGE Energy and MGE adopted the provisions of FIN 48 on January 1,
2007.  Accounting for Derivative Instruments  MGE accounts for derivative financial instruments under
SFAS No. 133, Accounting for Derivatives and Hedging
Activities, and SFAS No. 149, Amendment of
SFAS No. 133 on Derivative Instruments and Hedging Activities.
Under the provisions of SFAS No. 133, all derivatives except those
qualifying for the normal purchase normal sale exception are recognized on the
balance sheet at their fair value. Fair value is determined using current quoted
market prices, except for the ten-year PPA which is valued utilizing an
internally-developed pricing model. This model includes observable and
unobservable inputs.  MGE received approval from the PSCW to establish a
regulatory asset or liability for the deferral of the effects of mark-to-market
accounting as required by SFAS No. 133 on contracts related to MGE's
regulated operations.   52    Regulatory
Assets/Liabilities  Regulatory assets represent costs that have been deferred
to future periods when it is probable that the regulator will allow future
recovery of those costs through rates. MGE bases its assessment of recovery by
precedents established by the regulatory body. Regulatory liabilities represent
previous collections from customers that are expected to be refunded to
customers in future periods. Regulatory assets and regulatory liabilities
typically include deferral of energy costs, the normalization of income taxes,
the deferral of certain operating expenses, and non-SFAS No. 143
removal cost. The accounting for these regulatory assets and liabilities is in
accordance with the provisions of SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation.  MGE continually assesses whether the regulatory assets
and liabilities meet the criteria for probability of future recovery. This
assessment considers factors such as changes in the regulatory environment,
recent rate orders to other regulated entities under the same jurisdiction, and
the status of any pending or potential deregulation legislation. If future
recovery of costs becomes no longer probable, the assets and liabilities would
be recognized as current-period revenues or expenses.  Amortization of regulatory assets and liabilities is
provided over the recovery period as allowed in the related regulatory
agreement.  ARO  MGE has adopted SFAS No. 143, Accounting for
Asset Retirement Obligations, and FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations (FIN 47).  The ability to reasonably estimate an ARO was a matter of
management judgment, based upon management's ability to estimate a settlement
date or range of settlement dates and a method or potential method of settlement
of its AROs. In determining whether our AROs could be reasonably estimated,
management considered past practices, industry practices, management's intent,
and the estimated economic life of the assets. The fair value of the AROs was
then estimated using an expected present value technique. Changes in
management's assumptions regarding settlement dates, settlement methods, or
assigned probabilities could have a material effect on the liability recorded at
December 31, 2008, as well as the regulatory asset recorded. The
liabilities associated with AROs will be adjusted on an ongoing basis due to the
passage of time and revisions to either the timing or the amount of the original
estimates of undiscounted cash flows. These adjustments could have a significant
impact on the Consolidated Balance Sheets. For more information regarding
FAS 143/FIN 47, see Footnote 20 of the Notes to Consolidated Financial
Statements.  Inflation  The current financial statements report operating results
in terms of historical cost, but they do not evaluate the impact of inflation.
Because utilities can depreciate only the original cost of utility plant, there
may not be adequate cash flows from existing plant to replace this investment.
Under PSCW rate treatment, projected operating costs, including the impacts of
inflation, are recovered in revenues.  Adoption of Accounting Principles and Recently Issued
Accounting Pronouncements - MGE Energy and MGE  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 and will affect the presentation of
the minority interest on MGE's financial statements.  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 and will not have any material impact
on MGE Energy and MGE.  53    FSP
FAS No. 157-2  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, will not have any material impact on MGE Energy and
MGE.  FSP FAS 140-4 and FIN 46(R)-8  In December 2008, the FASB issued FSP
FAS 140-4 and FIN 46(R)-8 which amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, to provide additional disclosures about
transfers of financial assets. It also amends FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, to require
public enterprises to provide additional disclosures about their involvement
with variable interest entities. The adoption of FSP FAS 140-4 and FIN
46(R)-8 is effective for the reporting period ending December 31, 2008, and
did not have any material impact on MGE Energy and MGE.  FSP FAS 132(R)-1  In December 2008, the FASB issued FSP
FAS 132(R)-1, which amends FASB Statement No. 132 Employers'
Disclosures about Pensions and Other Postretirement Benefits. This amendment
provides guidance on employer's disclosures about plan assets of a defined
benefit pension or other postretirement plan. The adoption of FSP FAS 132
(R)-1 is effective for fiscal years ending after December 15, 2009.
MGE Energy and MGE are currently assessing the impact this pronouncement
will have on their financial statements.   Item 7A.
Quantitative and Qualitative Disclosures About Market Risk  MGE Energy and MGE are potentially exposed to market
risk associated with interest rates, commodity prices, weather, and equity
returns. MGE currently has no exposure to foreign currency risk. MGE manages
some risk exposure through risk management policies and the use of derivative
instruments. MGE's risk management policy prohibits speculative trading
transactions.  Weather Risk  MGE's sales forecasts, used to establish rates, are set
by the PSCW based upon estimated temperatures, which approximate 20-year
historical averages. MGE's electric revenues are sensitive to the summer cooling
season and, to some extent, to the winter heating season. A significant portion
of MGE's gas system demand is driven by heating. MGE's gas margin (revenues less
cost of gas sold) is collected under a combination of fixed and volumetric rates
set by the PSCW based on "normal weather." As a result of weather-sensitive
demand and volumetric rates, a portion of MGE's gas margin is at risk for
warmer-than-normal weather. MGE may use weather derivatives, pursuant to its
risk management program, to reduce the impact of weather volatility on its gas
margin.  MGE may also be impacted by extreme weather conditions.
Such conditions may damage critical operating assets or may negatively impact
the price of commodity and other costs.  A summary of actual weather information in the utility
segment's service territory during 2008, 2007, and 2006, as measured by degree
days, may be found in Results of Operations.  Gas margin (regulated gas revenues less cost of gas sold)
is not a measurement defined under GAAP. MGE Energy and MGE believe this
measurement is useful in analyzing the gas utility segment. However, it may not
be comparable to measurements of other companies. In addition, this measurement
may not be more useful than the GAAP information regarding the gas utility
segment provided elsewhere in this report.   54    Commodity Price
Risk  MGE has commodity price risk exposure with respect to the
price of natural gas, electricity, coal, emission credits, and oil. MGE employs
established policies and procedures to reduce the market risks associated with
changing commodity prices. MGE's commodity risks are somewhat mitigated by the
current ratemaking process in place for recovering electric fuel cost, purchased
energy costs, and the cost of natural gas. MGE's electric fuel costs are subject
to fuel rules established by the PSCW. Under the electric fuel rules, MGE may be
required to refund to customers if the fuel rules costs fall outside the lower
end of the range and would be allowed to request a surcharge if the fuel rules
costs exceeded the upper end of the range. The range is defined by the PSCW and
has been modified throughout the years based on market conditions and other
relevant factors. MGE is subject to a plus or minus 2% range. MGE's gas segment
is governed by the purchased gas adjustment clause (PGA). Under the PGA, MGE is
able to pass through to customers the cost of gas, subject to certain limited
incentives. Under both the electric fuel rules and PGA clause, MGE may include
in the cost of fuel (natural gas or power) the costs and benefits of fuel price
risk management tools implemented under the risk management plan approved by the
PSCW.  MGE also reduces price risk caused by market fluctuations
via physical contracts and financial derivative contracts, including futures,
swaps, options, forwards, and other contractual commitments. Under MGE's risk
management plan, the maximum length of time over which cash flows related to
energy commodities are currently being cash-flow hedged is primarily one year.
MGE's energy contracts are accounted for under SFAS 133, Accounting for
Derivatives and Hedging Activities. Many of the contracts qualify for the
normal purchase and sales exemption to SFAS 133. Those that do not qualify
for this exemption are recorded as assets or liabilities on the balance sheet at
fair value. Changes in the fair value of derivative instruments are 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 No. 71, Accounting for the
Effects of Certain Types of Regulation, the derivatives are marked to fair
value pursuant to SFAS No. 133 and are offset with a corresponding
regulatory asset or liability.  At December 31, 2008, MGE has financial gas and
electric commodity contracts to hedge commodity price risk in the gas and
electric segments. These contracts are primarily comprised of exchange-traded
option and future contracts to manage the cost of gas. MGE also holds FTRs which
are used to hedge the risk of increased congestion charges. At December 31,
2008, the cost basis of these instruments exceeded their fair value by
$10.0 million. Under the PGA clause and electric fuel rules, MGE may
include in the costs of fuel (natural gas or power) the costs and benefits of
the aforementioned fuel price risk management tools. Because these
costs/benefits are recoverable, the related unrealized loss/gain has been
deferred on the balance sheet as a regulatory asset/liability.  During 2008, MGE has also entered into futures and basis
swaps to take advantage of physical and financial arbitrage opportunities
between supply basins and pricing spreads between future months' gas supply.
Until thresholds have been achieved, ratepayers receive 100% of the benefits or
loss from these deals. If certain thresholds are achieved, MGE shareholders have
the ability to receive 40% of the benefits or loss from these deals whereas
ratepayers have the ability to receive 60% of the benefits or loss from these
deals. At December 31, 2008, these positions were in an unrealized gain
position of $0.1 million.  MGE's energy contracts are valued using readily available
NYMEX pricing data.  Interest Rate Risk  Both MGE and MGE Energy have short term borrowings
at varying interest rates. MGE issues commercial paper for its short-term
borrowings, while MGE Energy draws from its current credit facility to meet
its short term borrowing needs (see Footnote 10 of the Notes to
Consolidated Financial Statements). Borrowing levels vary from period to period
depending upon capital investments and other factors. Future short-term interest
expense and payments will reflect both future short-term interest rates and
borrowing levels. MGE Energy and MGE manage interest rate risk by limiting
their variable rate exposure and continually monitoring the effects of market
changes on interest rates. MGE is not exposed to changes in interest rates on a
substantial portion of its long-term debt until that debt matures and is
refinanced at market rates. Assuming the current level of variable rate
borrowings and assuming a 1% change in the 2008 average interest rate under
these borrowings, it is estimated that our 2008 interest expense and net income
would have changed by $0.5 million for MGE and $1.2 million for
MGE Energy.   55    Equity Price Risk -
Pension-Related Assets  MGE currently funds its liabilities related to employee
benefits through trust funds. These funds, which include investments in debt and
equity securities, are managed by various investment managers. Changes in market
value of these investments can have an impact on the future expenses related to
these liabilities. Holding other assumptions constant, for every 1% reduction in
the expected rate of return on plan assets, annual pension and other
postretirement cost would increase by approximately $1.5 million, before
taxes. MGE's risk of expense and annuity payments, as a result of changes in the
market value of the trust funds, is mitigated in part through future rate
actions by the PSCW.  Regulatory Recovery Risk  MGE's electric operations burn natural gas in several of
its peak power plants or as a supplemental fuel at several coal-fired plants
and, in many cases, the cost of purchased power is tied to the cost of natural
gas. MGE bears significant regulatory risk for the recovery of such fuel and
purchased power costs when costs are higher than the base rate established in
its current rate structure.  As noted above in Commodity Price Risk, the electric
operations of MGE operate under a "fuel rules" adjustment clause for fuel and
purchased power costs associated with the generation and delivery of
electricity. This clause establishes a base rate for fuel and purchased power.
MGE is subject to a fuel rules bandwidth of -2% to +2%. MGE may be required to
refund to customers if the fuel rules costs fall outside the lower end of the
range (-2%), and would be allowed to request a surcharge if the fuel rules costs
exceeded the upper end of the range (+2%). MGE assumes the risks and benefits of
variances that are within the 2% bandwidth. For 2009, fuel and purchased power
costs included in MGE's base fuel rates are $123.2 million.  Credit Risk - Counterparty  Credit risk is the loss that may result from counterparty
nonperformance. MGE is exposed to credit risk primarily through its merchant
energy business. MGE uses credit policies to manage its credit risk, which
includes utilizing an established credit approval process, monitoring
counterparty limits, employing credit mitigation measures such as collateral or
prepayment arrangements, and using netting agreements.  Due to the possibility of extreme volatility in the
prices of energy commodities and derivatives, the market value of contractual
positions with individual counterparties could exceed established credit limits
or collateral provided by those counterparties. If such a counterparty were then
to fail to perform its obligations under its contract (for example, fail to
deliver the electricity MGE originally contracted for), MGE could sustain a loss
that could have a material impact on its financial results.  Additionally, if a counterparty were to default and MGE
were to liquidate all contracts with that entity, MGE's credit loss would
include the loss in value of mark-to-market contracts; the amount owed for
settled transactions; and additional payments, if any, to settle unrealized
losses on accrual contracts.  MGE is obligated to provide service to all electric and
gas customers within its respective franchised territories. MGE's franchised
electric territory includes a 316 square-mile area in Dane County, Wisconsin,
and MGE's franchised gas territory includes a service area covering 1,631 square
miles in Wisconsin. For the year ended December 31, 2008, no one customer
constituted more than 9% of total operating revenues for MGE and
MGE Energy. Credit risk for electric and gas is managed by MGE's credit and
collection policies, which are consistent with state regulatory
requirements.  Cash, cash equivalents, and customer accounts receivable
are the financial instruments that potentially subject MGE Energy and MGE
to concentrations of credit risk. MGE Energy and MGE place their cash and
cash equivalents with high credit-quality financial institutions. MGE has
limited concentrations of credit risk from customer accounts receivable because
of the large number of customers and strong economy in its service
territory.    56    Item
8. Financial Statements and Supplementary Data.  MGE Energy  Management's Report on Internal Control Over
Financial Reporting  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15f. Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee Sponsoring Organizations
of the Treadway Commission. Based on our assessment under the framework in
Internal Control - Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008.  Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.  The effectiveness of the Company's internal control over
financial reporting as of December 31, 2008, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.  February 26, 2009  MGE  Management's Report on Internal Control Over
Financial Reporting  Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15f. Under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, we conducted an assessment of the effectiveness of
our internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee Sponsoring Organizations
of the Treadway Commission. Based on our assessment under the framework in
Internal Control - Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008.  Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.  February 26, 2009   57    Report of Independent
Registered Public Accounting Firm  To the Board of Directors and Shareholders of
MGE Energy, Inc.:  In our opinion, the consolidated financial statements
listed in the accompanying index appearing under Item 15(a)(1) present fairly,
in all material respects, the financial position of MGE Energy, Inc. and
its subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index appearing under
Item 15(a)(2) presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for these
financial statements and financial statement schedule, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements, on the
financial statement schedule, and on the Company's internal control over
financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.  A company's internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.  Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.  /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 26, 2009   58    Report of Independent
Registered Public Accounting Firm  To the Board of Directors and Shareholder of Madison Gas
and Electric Company:  In our opinion, the accompanying consolidated balance
sheets and the related consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Madison Gas and Electric Company and its subsidiaries at
December 31, 2008 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.  /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 26, 2009   59    MGE Energy, Inc. Consolidated Statements of Income (In thousands, except per-share
amounts)  For the years ended
December 31,2008

2007

2006Operating Revenues:Regulated revenues
$588,560

$532,413

$504,138Nonregulated revenues
7,433

5,181

3,408Total Operating Revenues
595,993

537,594

507,546Operating Expenses:Fuel for electric generation
54,748

56,694

49,227Purchased power
74,676

77,594

77,164Cost of gas sold
171,545

140,838

129,331Other operations and maintenance
151,176

130,831

126,086Depreciation and amortization
39,273

32,199

31,342Other general taxes
16,793

15,771

15,402Total Operating Expenses
508,211

453,927

428,552Operating Income
87,782

83,667

78,994Other income, net
8,044

6,069

4,329Interest expense, net
(14,002)

(13,056)

(15,001)Income before income taxes
81,824

76,680

68,322Income tax provision
(29,056)

(27,855)

(25,899)Net Income
$ 52,768

$48,825

$42,423Earnings Per Share of Common Stock
(basic and diluted):
$ 2.38

$2.27

$2.06Dividends paid per share of common stock
$1.43

$1.41

$1.39Average Shares Outstanding
(basic and diluted)
22,197

21,520

20,564  The accompanying notes are an integral
part of the above consolidated financial statements.  60    MGE Energy, Inc. Consolidated Statements of Cash Flows (In thousands) For the years ended
December 31,2008

2007

2006Operating Activities:Net income
$52,768

$48,825

$42,423Items not affecting cash:Depreciation and
amortization
39,273

32,199

31,342Deferred income taxes
8,583

750

5,241Amortization of investment tax
credits
(351)

(410)

(432)Amortization of debt issuance
costs and discount
545

543

595Provision for doubtful accounts
receivable
4,273

3,080

3,230AFUDC-equity funds
(858)

(1,927)

(554)Employee benefit plan
expenses
7,891

8,101

10,178Equity earnings in ATC
(7,241)

(6,047)

(5,317)Reserve for fuel refund
5,506

-

2,312Gain on sale of investments
(3,113)

(778)

-Gain on sale of property
(295)

-

-Other items
1,663

1,950

653Changes in working capital
items:Restricted cash - margin account
(12,478)

694

(1,080)Trade and other receivables, net
(6,912)

(12,574)

14,791Inventories
(12,538)

4,099

(3,717)Unbilled revenues
(4,331)

(4,332)

4,394Other current assets
(2,943)

(274)

(3,771)Retainage receivable
-

75

2,425Accounts payable
1,202

3,608

(4,226)Accrued interest and taxes
106

667

101Other current liabilities
308

(457)

(174)Proceeds from Congestion Cost
and Line Loss
Allocation Agreement
-

2,545

-Dividend income from ATC
5,272

4,441

4,003Cash contributions to pension
and other postretirement plans
(7,665)

(6,346)

(5,779)Other noncurrent items, net
6,047

(1,846)

4,401Cash Provided by Operating
Activities
74,712

76,586

101,039Investing Activities:Capital expenditures
(105,777)

(136,258)

(92,575)Capital contributions to ATC and
other investments
(3,678)

(255)

(1,974)Advance to WEPCO for ATC work
related to Elm Road
(330)

(138)

(808)Proceeds from sale of
investments
3,612

910

-Proceeds from sale of
property
304

724

-Other
1,587

226

916Cash Used for Investing
Activities
(104,282)

(134,791)

(94,441)Financing Activities:Issuance of common stock, net
30,997

32,786

17,050Issuance of treasury stock
-

-

119Cash dividends paid on common
stock
(31,780)

(30,295)

(28,513)Repayment of long-term debt
(30,000)

(15,000)

-Issuance of long-term debt
40,000

25,000

30,000Increase (decrease) in
short-term debt
21,000

46,500

(25,500)Other
(330)

-

(82)Cash Provided by (Used for)
Financing Activities
29,887

58,991

(6,926)Change in Cash and Cash
Equivalents:
317

786

(328)Cash and cash equivalents at
beginning of period
3,789

3,003

3,331Cash and cash equivalents at
end of period
$4,106

$3,789

$3,003Supplemental disclosures of cash flow
information:Interest paid
$18,709

$13,736

$16,693Income taxes paid
$21,129

$27,902

$20,530Income taxes received
$(185)

$(333)

$ -  The accompanying notes are an integral
part of the above consolidated financial statements.  61    MGE Energy, Inc. Consolidated Balance Sheets (In thousands)  At December 31,ASSETS
2008

2007Current Assets:Cash and cash equivalents
$4,106

$3,789Restricted cash
4,805

2,896Accounts receivable, less
reserves of $4,076 and $3,709, respectively
45,266

43,668Other accounts receivable, less
reserves of $200 and $114, respectively
7,659

3,397Unbilled revenues
34,701

30,370Materials and supplies, at
average cost
15,592

14,809Fossil fuel
3,228

5,136Stored natural gas, at average
cost
42,146

28,483Prepaid taxes
15,671

14,696Regulatory assets - current
9,876

189Other current assets
10,828

8,242Total Current Assets
193,878

155,675Other long-term receivables
3,005

6,166Special billing projects
464

999Regulatory assets
116,165

53,375Other deferred charges
5,620

5,881Property, Plant, and Equipment, Net
702,549

638,774Construction work in progress
198,694

205,214Total Property, Plant, and
Equipment
901,243

843,988Other Property and Investments
47,900

45,503Total Assets
$1,268,275

$1,111,587LIABILITIES AND CAPITALIZATIONCurrent Liabilities:Long-term debt due within one
year
$-

$30,000Short-term debt
124,500

103,500Accounts payable
47,229

58,498Accrued interest and taxes
4,070

3,964Deferred income taxes
3,306

4,153Regulatory liabilities - current
5,974

2,924Pension liability - current
813

607Other current liabilities
19,349

16,466Total Current Liabilities
205,241

220,112Other Credits:Deferred income taxes
117,505

107,393Investment tax credit - deferred
2,736

3,087Regulatory liabilities
18,814

20,885Accrued pension and other
postretirement benefits
137,286

74,056Other deferred liabilities
36,083

25,982Total Other Credits
312,424

231,403Capitalization:Common shareholders' equity
478,202

427,726Long-term debt
272,408

232,346Total Capitalization
750,610

660,072Commitments and contingencies (see
Footnote 18)
-

-Total Liabilities and
Capitalization
$1,268,275

$1,111,587  The accompanying notes are an integral
part of the above consolidated financial statements.  62    MGE Energy, Inc. Consolidated Statements of Capitalization (In thousands)  At December 31,2008

2007Common Shareholders' Equity:Common stock - par value $1 per
share:Authorized 50,000,000
sharesIssued 22,904,573 and 21,950,335
shares, respectively
$22,905

$21,950Additional paid-in capital
310,202

280,217Retained earnings
144,904

123,916Accumulated other comprehensive
income, net of tax
191

1,643Total Common Shareholders'
Equity
478,202

427,726Redeemable Preferred Stock,Cumulative, $25 par value,
1,175,000 authorized, but unissued
-
-First Mortgage Bonds:7.70%, 2028 Series
1,200

1,200Other Long-Term Debt:6.02%, due 2008
-

30,0004.875% 2012 Series, Industrial
Development Revenue Bonds
19,300

19,3005.875% 2034 Series, Industrial
Development Revenue Bonds
28,000

28,0006.58%, due 2012
15,000

15,0005.26%, due 2017
20,000

20,0005.25%, due 2017
30,000

30,0005.59%, due 2018
40,000

-7.12%, due 2032
25,000

25,0006.12%, due 2028
20,000

20,0005.68%, due 2033
30,000

30,0005.19%, due 2033
20,000

20,0006.247%, due 2037
25,000

25,000Total Other Long-Term
Debt
272,300

262,300Long-term debt due within one
year
-

(30,000)Unamortized discount
(1,092)

(1,154)Total Long-Term Debt
272,408

232,346Total Capitalization
$750,610

$660,072  The accompanying notes are an integral
part of the above consolidated financial statements.  63    MGE Energy, Inc. Consolidated Statements of Common Equity and Comprehensive
Income (In thousands, except per-share
amounts)  Accumulated Other Comprehensive (Loss)/IncomeAdditionalCommon Stock
Treasury
Paid-in
Retained
ComprehensiveShares
Value
Stock
Capital
Earnings
Income
Total2006Beginning
balance  Dec. 31, 2005
20,454
$20,454
$(119)
$231,877
$91,476
$195

$343,883Net
income




42,423

$42,423
42,423Other
comprehensive income/(loss):Net
unrealized gain on investments, net of $155 tax





231
231
231Net
unrealized gain on cash flow hedges, net of $104 tax





155
155
155Total
comprehensive income






$42,809Treasury stock,
at cost


119




119Common
stock dividends declared ($1.39 per share)




(28,513)


(28,513)Common stock
issued, net
521
521

16,529



17,050Ending Balance 
Dec. 31, 2006
20,975
$20,975
$-
$248,406
$105,386
$581

$375,3482007Net
income




48,825

$48,825
48,825Other
comprehensive income/(loss):Net
unrealized gain on investments, net of $782 tax





1,167
1,167
1,167Net
unrealized loss on cash flow hedges, net of $71 tax





(105)
(105)
(105)Total
comprehensive income






$49,887Common
stock dividends declared ($1.41 per share)




(30,295)


(30,295)Common stock
issued, net
975
975

31,811



32,786Ending Balance 
Dec. 31, 2007
21,950
$21,950
$-
$280,217
$123,916
$1,643

$427,7262008Net
income




52,768

$52,768
52,768Other
comprehensive income/(loss):Net
unrealized loss on investments, net of $189 tax





(282)
(282)
(282)Net
realized gain on investments, net of $751 tax





(1,120)
(1,120)
(1,120)Net
unrealized loss on cash flow hedges, net of $34 tax





(50)
(50)
(50)Total
comprehensive income






$51,316Common
stock dividends declared ($1.43 per share)




(31,780)


(31,780)Common stock
issued, net
955
955

29,985



30,940Ending Balance 
Dec. 31, 2008
22,905
$22,905
$-
$310,202
$144,904
$191

$478,202  The accompanying notes are an integral
part of the above consolidated financial statements.  64    Madison Gas
and Electric Company Consolidated Statements of Income (In thousands)  For years ended
December 31,2008

2007

2006Operating Revenues:Regulated electric revenues
$345,962

$334,488

$318,912Regulated gas revenues
242,598

197,925

185,226Nonregulated revenues
7,433

5,181

3,408Total Operating Revenues
595,993

537,594

507,546Operating Expenses:Fuel for electric generation
54,748

56,694

49,227Purchased power
74,676

77,594

77,164Cost of gas sold
171,545

140,838

129,331Other operations and maintenance
150,677

130,390

125,573Depreciation and amortization
39,273

32,199

31,342Other general taxes
16,793

15,771

15,399Income tax provision
24,837

24,932

24,066Total Operating Expenses
532,549

478,418

452,102Operating Income
63,444

59,176

55,444Other Income and Deductions:AFUDC - equity funds
858

1,927

554Equity in earnings in ATC
7,241

6,047

5,317Income tax provision
(2,289)

(2,153)

(1,719)Other deductions, net
(2,556)

(1,874)

(1,545)Total Other Income and
Deductions
3,254

3,947

2,607Interest Expense:Interest on long-term debt
16,133

15,664

14,034Other interest, net
1,044

485

2,036AFUDC  borrowed funds
(356)

(818)

(235)Net Interest Expense
16,821

15,331

15,835Net Income Before Minority Interest
$49,877

$47,792

$42,216Minority interest, net of tax
(12,304)

(10,721)

(9,610)Net Income
$37,573

$37,071

$32,606  The accompanying notes are an integral
part of the above consolidated financial statements. .  65    Madison Gas
and Electric Company Consolidated Statements of Cash Flows (In thousands)  For the years ended December 31,Operating
Activities:
2008

2007

2006Net
income
$37,573

$37,071

$32,606Items
not affecting cash:Depreciation
and amortization
39,273

32,199

31,342Deferred
income taxes
8,454

714

4,839Amortization
of investment tax credits
(351)

(410)

(432)Amortization
of debt issuance costs and discount
545

543

595Provision
for doubtful accounts receivable
4,273

3,080

3,230AFUDC
- equity funds
(858)

(1,927)

(554)Employee
benefit plan expenses
7,891

8,101

10,178Equity
earnings in ATC
(7,241)

(6,047)

(5,317)Minority
interest, net of tax
12,304

10,721

9,610Reserve
for fuel refund
5,506

-

2,312Gain
on sale of investments
(765)

(778)

-Gain
on sale of property
(295)

-

-Other
items
3,570

4,197

653Changes
in working capital items:Restricted
cash - margin account
(12,478)

694

(1,080)Trade
and other receivables, net
(6,973)

(12,511)

12,877Inventories
(12,538)

4,099

(3,717)Unbilled
revenues
(4,331)

(4,332)

4,394Other
current assets
(2,734)

177

(3,835)Accounts
payable
(658)

3,968

(1,611)Accrued
interest and taxes
159

698

(1,360)Other
current liabilities
362

(401)

(146)Proceeds
from Congestion Cost and Line Loss Allocation Agreement
-

2,545

-Dividend
income from ATC
5,272

4,441

4,003Cash
contributions to pension and other postretirement plans
(7,665)

(6,346)

(5,779)Other
noncurrent items, net
6,012

(1,954)

4,416Cash
Provided by Operating Activities
74,307

78,542

97,224Investing
Activities:Capital
expenditures
(105,777)

(136,258)

(92,575)Capital
contributions to ATC and other investments
(3,518)

(55)

(1,915)Advance
to WEPCO for ATC work related to Elm Road
(330)

(138)

(808)Proceeds
from sale of investments
1,070

910

-Proceeds
from sale of property
304

724

-Other
1,402

680

916Cash
Used for Investing Activities
(106,849)

(134,137)

(94,382)Financing
Activities:Cash
dividends paid to parent by MGE
-

(15,621)

(12,997)Cash
dividends paid to parent from Power West Campus and Transco
(12,702)

(13,044)

(10,119)Capital
contribution from parent
7,500

-

-Equity
contribution received by Transco, Power Elm Road,
and
Power West Campus
37,527

43,373

27,280Repayment
of long-term debt
(30,000)

(15,000)

-Issuance
of long-term debt
40,000

25,000

30,000(Decrease)
increase in short-term debt
(10,000)

31,500

(36,500)Other
(324)

-

(82)Cash
Provided by (Used for) Financing Activities
32,001

56,208

(2,418)Change
in Cash and Cash Equivalents
(541)

613

424Cash
and cash equivalents at beginning of period
1,859

1,246

822Cash
and cash equivalents at end of period
$1,318

$1,859

$1,246Supplemental
disclosures of cash flow information:Interest
paid
$16,660

$15,673

$15,793Income
taxes paid
$4,514

$4,901

$3,850Income
taxes received
$(185)

$(33)

$
-  The accompanying notes are an integral
part of the above consolidated financial statements.  66    Madison Gas
and Electric Company Consolidated Balance Sheets (In thousands)  At December 31,ASSETS
2008

2007Utility
Plant (At Original Cost, In Service):Electric
$773,605

$691,162Gas
279,483

268,032Nonregulated
110,317

110,020Gross
plant in service
1,163,405

1,069,214Less
accumulated provision for depreciation
(461,037)

(430,572)Net
plant in service
702,368

638,642Construction
work in progress
198,694

205,214Total
Utility Plant
901,062

843,856Other property
and investments
965

2,777Investment in
ATC
46,217

40,799Total
Other Property and Investments
47,182

43,576Current
Assets:Cash
and cash equivalents
1,318

1,859Restricted
cash
4,805

2,896Accounts
receivable, less reserves of $4,076 and $3,709, respectively
45,266

43,668Affiliate
receivables
2,547

4Other
accounts receivable, less reserves of $200 and $114, respectively
7,575

3,295Unbilled
revenues
34,701

30,370Materials
and supplies, at average cost
15,592

14,809Fossil
fuel
3,228

5,136Stored
natural gas, at average cost
42,146

28,483Prepaid
taxes
14,013

13,249Regulatory
assets - current
9,876

189Other
current assets
10,804

8,216Total
Current Assets
191,871

152,174Other long-term
receivables
2,390

5,485Special billing
projects
464

999Affiliate
receivable long-term
6,433

10,676Regulatory
assets
116,165

53,375Other deferred
charges
5,555

5,751Total
Assets
$1,271,122

$1,115,892CAPITALIZATION
AND LIABILITIESCommon
stockholder equity
$374,253

$329,944Minority
interest
174,157

137,028Long-term
debt
272,408

232,346Total
Capitalization
820,818

699,318Current
Liabilities:Long-term
debt due within one year
-

30,000Short-term
debt - commercial paper
51,000

61,000Accounts
payable
47,186

58,263Affiliate
payables
63

2,115Accrued
interest and taxes
10,307

10,148Accrued
payroll - related items
7,380

6,980Deferred
income taxes
3,305

4,153Regulatory
liabilities - current
5,974

2,924Pension
liability - current
813

607Other
current liabilities
11,987

9,450Total
Current Liabilities
138,015

185,640Other
Credits:Deferred
income taxes
117,369

106,924Investment
tax credit - deferred
2,736

3,087Regulatory
liabilities
18,814

20,885Accrued
pension and other postretirement benefits
137,286

74,056Other
deferred liabilities
36,084

25,982Total
Other Credits
312,289

230,934Commitments and
contingencies (see Footnote 18)
-

-Total
Capitalization and Liabilities
$1,271,122

$1,115,892  The accompanying notes are an integral
part of the above consolidated financial statements.  67    Madison Gas
and Electric Company Consolidated Capitalization Statement (In thousands)  At December 31,2008

2007Common Stockholder Equity:Common stock - par value $1 per
share:Authorized 50,000,000
sharesOutstanding 17,347,889
$17,348

$17,348Additional paid-in capital
192,417

184,917Retained earnings
164,354

126,781Accumulated other comprehensive
income, net of tax
134

898Total Common Stockholder
Equity
374,253

329,944Minority Interest
174,157

137,028Redeemable Preferred Stock,Cumulative, $25 par value,
1,175,000 authorized, but unissued
-
-First Mortgage Bonds:7.70%, 2028 Series
1,200

1,200Other Long-Term Debt:6.02%, due 2008
-

30,0004.875% 2012 Series, Industrial
Development Revenue Bonds
19,300

19,3005.875% 2034 Series, Industrial
Development Revenue Bonds
28,000

28,0006.58%, due 2012
15,000

15,0005.26%, due 2017
20,000

20,0005.25%, due 2017
30,000

30,0005.59%, due 2018
40,000

-7.12%, due 2032
25,000

25,0006.12%, due 2028
20,000

20,0005.68%, due 2033
30,000

30,0005.19%, due 2033
20,000

20,0006.247%, due 2037
25,000

25,000Total Other Long-Term
Debt
272,300

262,300Long-term debt due within one year
-

(30,000)Unamortized discount
(1,092)

(1,154)Total Long-Term Debt
272,408

232,346Total Capitalization
$820,818

$699,318  The accompanying notes are an integral
part of the above consolidated financial statements.  68    Madison Gas
and Electric Company Consolidated Statements of Common Equity and Comprehensive
Income (In thousands)  Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss)/Income
Comprehensive
Income
TotalCommon StockShares
Value2006Beginning
balance  Dec. 31, 2005
17,348
$17,348
$184,917
$85,722
$(21)

$287,966Net income



32,606

$32,606
32,606Other
comprehensive income/(loss):Net
unrealized gain on investments, net of $36 tax54
54
54Net
unrealized gain on cash flow hedges, net of $104 tax155
155
155Total
comprehensive income





$32,815Common stock
dividends declared



(12,997)


(12,997)Ending balance 
Dec. 31, 2006
17,348
$17,348
$184,917
$105,331
$188

$307,7842007Net income



37,071

$37,071
37,071Other
comprehensive income/(loss):Net
unrealized gain on investments, net of $546 tax815
815
815Net
unrealized loss on cash flow hedges, net of $71 tax(105)
(105)
(105)Total
comprehensive income





$37,781Common stock
dividends declared



(15,621)


(15,621)Ending balance 
Dec. 31, 2007
17,348
$17,348
$184,917
$126,781
$898

$329,9442008Net income



37,573

$37,573
37,573Other
comprehensive income/(loss):Net
unrealized loss on investments, net of $285 tax




(425)
(425)
(425)Net
realized gain on investments, net of $194 tax




(289)
(289)
(289)Net
unrealized loss on cash flow hedges, net of $34 tax




(50)
(50)
(50)Total
comprehensive income





$36,809Capital
contribution from parent


7,500



7,500Ending balance 
Dec. 31, 2008
17,348
$17,348
$192,417
$164,354
$134

$374,253  The accompanying notes are an integral
part of the above consolidated financial statements.  69    Notes to Consolidated Financial Statements December 31, 2008, 2007, and
2006  This report is a combined report of MGE Energy and
MGE. The notes to the consolidated financial statements that follow include
consolidated MGE Energy footnotes and certain footnotes related to MGE as
signified below.  1. Summary of Significant Accounting
Policies.  a. Regulation and System of Accounts
- MGE Energy and MGE.  Accounting policies for regulated
operations are in accordance with those policies prescribed by the regulatory
authorities having jurisdiction, principally the PSCW and FERC. MGE's accounting
records conform to the FERC uniform system of accounts.  b. Principles of Consolidation -
MGE Energy and MGE.  MGE, a wholly owned subsidiary of
MGE Energy, is a regulated electric and gas utility headquartered in
Madison, Wisconsin. MGE is the majority owner of MGE Transco. MGE Transco is a
nonregulated entity formed to manage the investment in ATC.  Wholly owned subsidiaries of
MGE Energy include CWDC, MAGAEL, MGE Construct, and MGE Power. MGE Power
owns 100% of MGE Power West Campus and MGE Power Elm Road. MGE Power and its
subsidiaries are part MGE Energy's nonregulated energy operations, which
were formed to own and lease new electric generation projects to assist MGE.  MGE consolidates the financial
statements of entities in which it has a controlling financial interest,
pursuant to the requirements of FIN 46(R), Consolidation of Variable Interest
Entities (revised December 2003)  an interpretation of ARB
No. 51. In accordance with these provisions, MGE has consolidated MGE
Power West Campus and MGE Power Elm Road. See Footnotes 2 and 21 to the
Consolidated Financial Statements for more discussion of these entities.  The consolidated financial statements
reflect the application of certain accounting policies described in this note.
All significant intercompany accounts and transactions have been eliminated in
consolidation.  c. Use of Estimates - MGE Energy
and MGE.  In order to prepare consolidated
financial statements in conformity with generally accepted accounting
principles, management must make estimates and assumptions. These estimates
could affect reported amounts of assets, liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from management's estimates.  d. Cash Equivalents - MGE Energy
and MGE.  MGE Energy and MGE consider all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.  e. Restricted Cash - MGE Energy
and MGE.  MGE has certain cash accounts that
are restricted to uses other than current operations and designated for a
specific purpose. MGE's restricted cash accounts include amounts held as margin
for certain financial transactions and cash held by trustees for certain
employee benefits.   70    f. Trade Receivables, Allowance for
Doubtful Accounts, and Concentration Risk - MGE Energy and MGE.  Trade accounts receivable are
recorded at the invoiced amount and do not bear interest. However, a 1% late
payment charge is recorded on all receivables unpaid after the due date. The
allowance for doubtful accounts associated with these receivables represents our
best estimate of the amount of probable credit losses in our existing accounts
receivable. We determine our allowance for doubtful accounts based on historical
write-off experience, regional economic data, and review of the accounts
receivable aging. To be more consistent with general utility practice, during
the fourth quarter of 2008, MGE changed its policy of writing off certain
accounts from six months to three months which resulted in a decrease to both
accounts receivable and allowance for doubtful accounts of approximately
$0.9 million.  MGE is obligated to provide service
to all electric and gas customers within its franchised territories. MGE's
franchised electric territory includes a 316 square-mile area in Dane County,
Wisconsin, and MGE's franchised gas territory includes a service area covering
1,631 square miles in Wisconsin. MGE manages this concentration and the related
credit risk through its credit and collection policies, which are consistent
with state regulatory requirements.  g. Inventories - MGE Energy and
MGE.  Inventories consist of natural gas in
storage, fossil fuels, materials and supplies and SO2 allowances. MGE
values natural gas in storage, coal at the Columbia facility, and materials and
supplies using average cost. MGE values coal at Blount using last-in-first-out
pricing (LIFO).  At December 31, 2008 and 2007,
$0.8 million and $0.9 million, respectively, of the fossil fuel
inventory at Blount was valued using LIFO. This inventory at current cost
exceeds the LIFO stated value by $0.7 million and $1.0 million at
December 31, 2008 and 2007, respectively. Additionally, during 2008 and
2007, liquidation of LIFO layers, carried at costs that were lower than current
purchases, resulted in a decrease to costs of goods sold of $0.4 million
and $0.6 million, respectively.  SO2 emission allowances
are included in inventory and are recorded at weighted average cost. These
allowances are charged to fuel expense as they are used in operations. MGE's
emission allowance balances as of December 31, 2008 and 2007, were
$0.8 million and $1.6 million, respectively.  h. Regulatory Assets and Liabilities
- MGE Energy and MGE.  Pursuant to SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, MGE
capitalizes as regulatory assets incurred costs that are expected to be
recovered in future electric and natural gas rates. MGE also records as
regulatory liabilities obligations to customers to refund previously collected
revenue or to spend revenue collected from customers on future costs.  i. Debt Issuance Costs -
MGE Energy and MGE.  Premiums, discounts, and expenses
incurred with the issuance of outstanding long-term debt are amortized over the
life of the debt issue. Any call premiums or unamortized expenses associated
with refinancing higher-cost debt obligations used to finance utility-regulated
assets and operations are amortized consistent with regulatory treatment of
those items.  j. Property, Plant, and Equipment -
MGE Energy and MGE.  Property, plant, and equipment is
recorded at original cost. Cost includes indirect costs consisting of payroll
taxes, pensions, postretirement benefits, other fringe benefits, and
administrative and general costs. Also, included in the cost is AFUDC for
utility property and capitalized interest for nonregulated property. Additions
for significant replacements of property are charged to property, plant, and
equipment at cost; minor items are charged to maintenance expense. The cost of
removal of utility property less salvage value is charged to accumulated
depreciation when property is retired. Depreciation rates on utility property
are approved by the PSCW, are based on the estimated economic lives of property,
and include estimates for salvage value and removal costs. Depreciation rates on
nonregulated property are based on the estimated economic lives of the property.   71    Provisions
at composite straight-line depreciation rates approximate the following
percentages for the cost of depreciable property:  2008

2007

2006Electric
3.7%

3.1%

3.1%Gas
3.3%

3.3%

3.3%Nonregulated
2.5%

2.5%

2.5%  k. Repairs and Maintenance Expense -
MGE Energy and MGE.  MGE utilizes the direct expensing
method for planned major maintenance projects. Under this method, MGE expenses
all costs associated with major planned maintenance activities as incurred.  l. Purchased Gas Adjustment Clause -
MGE Energy and MGE.  MGE's natural gas rates are subject
to a fuel adjustment clause designed to recover or refund the difference between
the actual cost of purchased gas and the amount included in rates. Differences
between the amounts billed to customers and the actual costs recoverable are
deferred and recovered or refunded in future periods by means of prospective
monthly adjustments to rates. At December 31, 2008 and 2007, MGE had over
collected $6.1 million and $4.5 million, respectively. These amounts
were recorded in other current liabilities on the Consolidated Balance
Sheet.  m. Revenue Recognition -
MGE Energy and MGE.  Operating revenues are recorded as
service is rendered or energy is delivered to customers. At the end of the
month, MGE accrues an estimate for the unbilled amount of energy delivered to
customers. See Footnote 1w for further discussion of unbilled revenues.  MGE's rates include a provision for
fuel costs. MGE records an adjustment to revenues for a fuel credit at the time
MGE's actual fuel costs fall below the bandwidth prescribed by the PSCW and MGE
concludes that it is probable that the credit will be approved by the PSCW
staff. MGE will also record an adjustment to revenue when the PSCW institutes a
"subject to refund" provision in an order. See Footnote 17 for further
discussion of the fuel rules.  n. Capitalized Interest -
MGE Energy and MGE.  MGE Energy, through its
subsidiary MGE Power Elm Road, calculates capitalized interest in accordance
with SFAS No. 34, Capitalization of Interest Cost, on
construction projects for periods where financing is provided by MGE Energy
through interim debt.  o. Allowance for Funds Used During
Construction - MGE Energy and MGE.  Allowance for funds used during
construction is included in utility plant accounts and represents the cost of
borrowed funds used during plant construction and a return on shareholders'
capital used for construction purposes. In the Consolidated Income Statements,
the cost of borrowed funds (AFUDC-debt) is presented as an offset to interest
expense and the return on shareholders' capital (AFUDC- equity funds) is shown
as an item within other income. As approved by the PSCW, MGE capitalized
AFUDC-debt and equity on 50% of applicable average construction work in progress
(excluding the Top of Iowa III wind project) during 2008 at 8.77%. Also,
MGE received specific approval to recover 100% AFUDC on the Top of Iowa III
wind project. Although the allowance does not represent current cash income, it
is recovered under the ratemaking process over the service lives of the related
properties.  p. Investments - MGE Energy and
MGE.  Investments in the common stock of
companies in which MGE or MGE Energy's ownership interest is 50% or less
and in which MGE or MGE Energy exercises significant influence over
operating and financial policies are accounted for using the equity method. All
other investments are carried at fair value or at cost, as appropriate.   72    q. Capitalized Software Costs -
MGE Energy and MGE.  Property, plant and equipment
includes the capitalized costs of internal use software totaling
$8.5 million at December 31, 2008, and $7.4 million at
December 31, 2007. During 2008 and 2007, MGE recorded $1.2 million and
$1.0 million, respectively, of amortization expense related to these costs.
These costs are amortized on a straight-line basis over the estimated useful
lives of the assets. For internal use software, the useful lives range from five
to ten years.  r. Impairment of Long-Lived Assets -
MGE Energy and MGE.  MGE reviews plant and equipment and
other property for impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. MGE's policy for
determining when long-lived assets are impaired is to recognize an impairment
loss if the sum of the expected future cash flows (undiscounted and without
interest charges) from an asset are less than the carrying amount of that asset.
If an impairment loss is recognized, the amount that will be recorded will be
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. MGE believes there is no impairment of long-lived
assets in accordance with SFAS No. 144 at December 31, 2008.  s. Income Taxes and Excise Taxes -
MGE Energy and MGE.  Income taxes Under the liability method prescribed
by SFAS No. 109, Accounting for Income Taxes, income taxes are
deferred for all temporary differences between pretax financial and taxable
income and between the book and tax basis of assets and liabilities using the
tax rates scheduled by law to be in effect when the temporary differences
reverse. Future tax benefits are recognized to the extent that realization of
such benefits is more likely than not. A valuation allowance is recorded for
those benefits that do not meet this criterion.  Regulation and SFAS No. 109
have resulted in a regulatory liability related to income taxes. Excess deferred
income taxes result from past taxes provided at rates higher than current rates.
The SFAS No. 109 regulatory liability and deferred investment tax
credit reflects the revenue requirement associated with the return of these tax
benefits to customers.  Investment tax credits from regulated
operations are amortized over related property service lives.  The 2008, 2007, and 2006 tax credits
for the generation of electricity from wind are based on kWh produced and sold
during the years at the statutory tax credit rate of 2.1 cents per kWh or
$2.0 million for 2008, 2.0 cents per kWh or $0.5 million for 2007 and
1.9 cents per kWh or $0.4 million for 2006.  In June 2006, the FASB issued
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 judgment given the facts, circumstances and information available at the
reporting date. MGE Energy and MGE adopted the provisions of FIN 48 on
January 1, 2007. For further discussion, refer to Footnote 12.  Excise taxes MGE Energy, through its utility
operations, pays a state license fee tax in lieu of property taxes on property
used in utility operations. License fee tax is calculated as a percentage of
adjusted operating revenues of the prior year. The electric tax rate is 3.19%
for retail sales and 1.59% for sales of electricity for resale by the purchaser.
The tax rate on sales of natural gas is 0.97%. The tax is required to be
estimated and prepaid in the year prior to its computation and expensing.
License fee tax expense, included in other general taxes, was
$12.7 million, $11.8 million, and $11.6 million for the years
ended December 31, 2008, 2007, and 2006, respectively.  Operating income taxes, including tax
credits, and license fee tax are included in rates for utility related
items.   73    t. Share-Based Compensation -
MGE Energy and MGE.  The MGE Energy Board approved a
Performance Unit 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 vesting period. Per the plan's provisions, these awards are
subject to a prescribed vesting schedule and must be settled in cash.
Accordingly, no new shares of common stock will be issued in connection with the
plan. MGE and MGE Energy have adopted the provisions of SFAS 123R,
Share-Based Payment. This guidance establishes standards for the
accounting of transactions in which an entity exchanges equity instruments for
goods and services. Additionally, this standard addresses the accounting for
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity
instruments.  Based on the provisions of
SFAS 123R, MGE Energy and MGE will initially measure 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 award will be
subsequently re-measured at each reporting date through the settlement date.
Changes in fair value during the requisite period will be recognized as
compensation cost over that period.  u. Treasury Stock -
MGE Energy.  Treasury shares are recorded at cost.
Any shares of common stock repurchased are held as treasury shares unless
cancelled or reissued.  v. Comprehensive Income -
MGE Energy and MGE.  The reporting of other comprehensive
income is required under the provisions of SFAS No. 130, Reporting
Comprehensive Income. Total Comprehensive income includes all changes in
equity during a period except those resulting from investments by and
distributions to shareholders. Comprehensive income is reflected in the
Consolidated Statements of Common Equity and Comprehensive Income.  w. Unbilled Revenues -
MGE Energy and MGE.  Revenues from the sale of electricity
and gas to customers are recorded when electricity/gas is delivered to those
customers. The quantity of those sales is measured by customers' meters, and
customers' bills are based on readings of those meters. However, due to the
large number of those meters, it is impractical to read all of the meters at
month-end. Meters are therefore read on a systematic basis throughout the month
based on established meter-reading schedules. At the end of any month, there
exists a quantity of electric and gas service that has been delivered but not
metered or billed. Management must estimate this usage and related revenue. This
estimate represents electricity and gas delivered to customers between their
meter-read date and the end of the period.  In order to estimate unbilled
revenues as of the end of a particular period, MGE performs a series of
calculations based upon actual and estimated numbers and assumptions. MGE begins
by calculating the amount of electricity and gas available for sale within its
system during that period based upon known inputs (i.e., electricity and gas
purchases from third parties, gas from storage, and MGE-generated electricity).
These amounts are then adjusted to deduct the amounts actually included in
customers' bills for that period.  In the case of electricity, the
amount is further reduced by estimating the quantity of electricity lost in the
process of transmitting and distributing it to customers. The resulting
available-for-sale quantities are then allocated to various customer classes
based upon historical utilization patterns for those customers. MGE applies
published tariffs to determine the associated revenues. Utilization patterns are
based upon assumptions regarding weather, economic conditions, and consistency
of use over the period in question. Actual use can be affected by variations in
those items. The resulting estimate is then compared to other available
statistics, including billed sales for the particular period, in order to
confirm its reasonableness. MGE monitors the reasonableness of the unbilled
revenue estimate through the review of ratios such as unbilled electric
consumption compared to billed electric sales.   74    In the
case of gas, the gross amount available for sale is adjusted by the estimated
gas loss factor, which reflects an estimate of distribution system losses and
heat content differentials between pipeline and distribution delivered volumes.
The resulting available for sale to consumers amount is then compared against
the sales billed for the month, with the remainder equaling the estimated amount
unbilled for the month. The estimated unbilled consumption for the month is then
allocated across the applicable customer categories where an average per unit
rate is applied to calculate the unbilled gas revenue. The estimated unbilled
consumption is compared to various other statistics, including percent of billed
sales, change in unbilled month to month and change in unbilled compared to the
prior year in order to confirm its reasonableness. Additionally on an annual
basis the estimated gas loss factor is reviewed to determine if it is reasonable
or whether a change in estimate should be made.  x. Derivative and Hedging Instruments
- MGE Energy and MGE.  As part of 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 No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted. SFAS No. 133
requires the Company to recognize all 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 on the type of hedge transaction. Derivative
activities are in accordance with the company's risk management policy.  If the derivative qualifies for
regulatory deferral subject to the provisions of SFAS No. 71, the
derivatives are marked to fair value pursuant to SFAS No. 133 and any
resulting loss or gain is offset with a corresponding regulatory asset or
liability. Cash flows from such derivative instruments are classified on a basis
consistent with the nature of the underlying hedged item.  2. Variable Interest Entities -
MGE Energy and MGE.  In January 2003, the
FASB issued FIN 46, Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51. In December 2003, the
FASB issued the updated and final interpretation FIN 46(R). FIN 46 was
applicable immediately to VIEs created or obtained after January 31, 2003.
FIN 46(R) was effective on December 31, 2003, for interests in entities
that were previously considered special-purpose entities under then existing
authoritative guidance.  a. MGE Power West Campus.  MGE Power West Campus is not a
subsidiary of MGE; however, it has been consolidated in the financial statements
of MGE due to the adoption of FIN 46(R). MGE Power West Campus was created for
the purpose of owning new generating assets. MGE Power West Campus' sole
principal asset is the WCCF, which it leases to MGE pursuant to a long-term
lease. MGE is responsible for operation of the plant during the term of the
lease. Based on the nature and terms of these contractual relationships, MGE
absorbs a majority of the expected losses, residual value, or both, associated
with the ownership and operation of the WCCF. MGE is also the party most closely
associated with MGE Power West Campus. As a result, MGE is the primary
beneficiary and MGE Power West Campus is a VIE under FIN 46(R). At
December 31, 2008, MGE has included the following significant accounts on
its balance sheet related to its interest in the VIE:  (In thousands)Net plant in service, nonregulated
$99,078Affiliate receivables
$8,933Accrued interest and taxes
$4,158Deferred income taxes
$18,275Long-term debt
$50,000Minority interest
$32,276  Long-term debt includes
$50 million of senior secured notes which require that MGE Power West
Campus maintain a projected debt service coverage ratio of not less than 1.25 to
1.00, and debt to total capitalization ratio of not more than .65 to 1.00. The
debt is secured by a collateral assignment of lease payments that MGE is making
to MGE Power West Campus for use of the cogeneration facility pursuant to the
long-term agreement.  75    MGE has
been and will continue to recover lease payments made to MGE Power West Campus
in rates. Also, MGE received approval from the PSCW to collect approximately
$12.1 million in carrying costs incurred by MGE Power West Campus during
construction of the facility. The carrying costs are being recovered in rates
over a 10 year period starting in 2005.  b. MGE Power Elm Road.  MGE Power Elm Road is not a
subsidiary of MGE; however, it has been consolidated in the financial statements
of MGE due to the adoption of FIN 46(R). MGE Power Elm Road was created for the
purpose of owning new generating assets. MGE Power Elm Road's sole principal
assets are an 8.33% undivided ownership interest in two 615 MW coal-fired
generating plants being constructed in Oak Creek, Wisconsin, which it leases to
MGE pursuant to long-term leases. Based on the nature and terms of this
contractual relationship, MGE is expected to absorb a majority of the expected
losses, residual value, or both, associated with MGE Power Elm Road's ownership
interest in these plants. MGE is also 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 46(R). At December 31, 2008, MGE has included the
following significant accounts on its balance sheet related to its interest in
the VIE:  (In thousands)Construction work in progress
$156,871Other accounts receivable
$3,221Deferred income taxes
$5,091Minority interest
$135,294  Once the units become operational,
MGE will recover in rates the lease payments made to MGE Power Elm Road. Also,
MGE received approval from the PSCW to collect in rates the carrying costs
incurred by MGE Power Elm Road. See footnote 21 for additional discussion.  c. Shared Savings Program.  FIN 46(R) also requires MGE to assess
whether the participants within its Shared Savings program constitute VIEs in
which MGE might be considered to be the consolidating entity. MGE has reviewed
94.1% of the total current Shared Savings program balance and has determined
that the provisions of FIN 46(R) are not applicable via the "business scope
exception." For the remaining 5.9% of the total current Shared Savings program
balance, these entities are not legally obligated to provide the financial
information to MGE that is necessary to determine whether MGE must consolidate
these entities. MGE will continue to attempt to obtain information from these
customers in order to determine whether they should be consolidated by MGE.  3. Property, Plant, and Equipment -
MGE Energy and MGE.  Property, plant,
and equipment consisted of the following at December 31:  MGE Energy

MGE(In thousands)
2008
2007

2008
2007Utility:Electric
$773,588
$691,146

$773,605
$691,162Gas
279,472
268,021

279,483
268,032Total utility
plant
1,053,060
959,167

1,053,088
959,194Less:
Accumulated depreciation and amortization
450,334
422,584

450,334
422,584In-service
utility plant, net
602,726
536,583

602,754
536,610Nonregulated:Nonregulated
110,526
110,179

110,317
110,020Less:
Accumulated depreciation and amortization
10,703
7,988

10,703
7,988In service
nonregulated plant, net
99,823
102,191

99,614
102,032Construction
work in progress:Utility
construction work in progress
41,817
95,448

41,817
95,448Nonregulated
construction work in progress
156,877
109,766

156,877
109,766Total property,
plant, and equipment
$901,243
$843,988

$901,062
$843,856  MGE's utility plant is subject to the
lien of its Indenture of Mortgage and Deed of Trust. As of December 31,
2008, there was $1.2 million of bonds outstanding under that indenture. See
Footnote 9 for further discussion of the mortgage indenture.  76    4. Investments - MGE Energy and
MGE.  a. Equity Method Investments and
Available for Sale Securities.  (In
thousands)
2008

2007MGE Energy

MGE

MGE Energy

MGEAvailable for
sale securities:Cost
basis
$1,254

$632

$1,540

$857Gross
unrealized gains
332

236

2,660

1,416Gross
unrealized losses
(13)

(13)

-

-Fair
Value
$1,573

$855

$4,200

$2,273Equity
method investments:ATC
$
46,217

$46,217

$40,799

$40,799Other
110

110

504

504Total
equity method investments
$
46,327

$46,327

$41,303

$41,303Total
$
47,900

$47,182

$45,503

$43,576  MGE's and MGE Energy's available
for sale securities represent publicly traded securities and private equity
investments in common stock of companies in various industries.  During the year ended
December 31, 2008, certain investments were liquidated. As a result of
these liquidations, MGE Energy and MGE received $3.6 million and
$1.1 million, respectively, in cash proceeds and recorded a
$3.1 million and $0.8 million, respectively, gain on the sale of
investments.  During the year ended
December 31, 2007, certain investments were liquidated. As a result of
these liquidations, MGE Energy and MGE received $0.9 million in cash
proceeds and recorded a $0.8 million gain on the sale of investments.  b. ATC.  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.  On September 30, 2008, the PSCW
approved an amendment to the Operating Agreement of ATC. The amendment, which
became retroactively effective to January 1, 2008, effected changes in the
allocation of profits and losses among the various members, which include both
taxpaying and tax-exempt entities, in order to allocate more appropriately
revenues to all participants, based on invested capital and FERC mandated rate
recovery for each participant. The earnings allocation methodology change will
result in the taxpaying members receiving additional earnings and less being
allocated to the tax-exempt members, reflecting the difference in their tax
status. As part of the amendment process, the taxpaying members transferred a
portion of their equity interests to the tax-exempt members. MGE Transco's
ownership in ATC changed by 0.08% as a result of the member unit transfer.  MGE Transco, through MGE, has a seat
on the Board of Directors of ATC and has a 20% voting 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 twelve months ended
December 31, 2008, 2007, and 2006, MGE Transco recorded equity earnings
from the investment in ATC of $7.2 million, $6.0 million, and
$5.3 million, respectively. Dividend income received from ATC was
$5.3 million, $4.4 million, and $4.0 million for the twelve
months ended December 31, 2008, 2007, and 2006, respectively. During the
twelve months ended December 31, 2008 and 2006, MGE Transco made
$3.4 million and $1.9 million, respectively, in cash contributions to
ATC. During the twelve months ended December 31, 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 December 31, 2008, MGE
Transco held a 3.6% ownership interest in ATC. MGE Transco's investment balance
is different from the amount of the underlying equity in the net assets of ATC.
This difference is attributable to the allocation of certain tax impacts related
to the initial asset transfer.  77    At
December 31, 2008, MGE is the majority owner, and MGE Energy 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.  ATC's summarized financial data for
the twelve months ended December 31, 2008, 2007, and 2006 is as
follows:  (In thousands)Income statement data for the twelve
months ended Dec. 31,
Unaudited 2008

2007

2006Operating revenues
$466,571

$408,019

$340,745Operating expenses
(208,960)

(198,179)

(179,406)Other (expense) income
(514)

78

1,971Interest expense, net
(69,052)

(55,829)

(41,395)Earnings before members' income taxes
$188,045

$154,089

$121,915MGE's and MGE Energy's equity earnings in
ATC
$7,241

$6,047

$5,317Balance sheet data as of
December 31,
2008

2007

2006Current assets
$50,791

$48,329

$33,487Noncurrent assets
2,480,034

2,188,970

1,853,674Total assets
$2,530,825

$2,237,299

$1,887,161Current liabilities
$252,035

$317,105

$305,287Long-term debt
1,109,397

899,127

648,919Other noncurrent liabilities
120,171

108,494

125,645Members' equity
1,049,222

912,573

807,310Total members' equity and liabilities
$2,530,825

$2,237,299

$1,887,161  5. Joint Plant Ownership -
MGE Energy and MGE.  a. Columbia.  MGE and two other utilities jointly
own Columbia, a coal-fired generating facility, which accounts for 29%
(225 MW) of MGE's net summer rated capacity. Power from this facility is
shared in proportion to each company's ownership interest. MGE has a 22%
ownership interest in Columbia. The other owners are WPL (a subsidiary of
Alliant), which operates Columbia, and WPSC. MGE's share of fuel, operating, and
maintenance expenses for Columbia were $32.6 million, $31.3 million,
and $29.7 million for the years ended December 31, 2008, 2007, and
2006, respectively. See Footnote 18 for discussion of MGE's future capital
commitments as a result of this ownership interest.  Each owner provides its own financing
and reflects its respective portion of facilities and operating costs in its
financial statements. MGE's interest in Columbia, included in its gross utility
plant in service, and the related accumulated depreciation reserves at
December 31 were as follows:  (In thousands)
2008

2007Utility plant
$113,592

$112,079Accumulated depreciation
(71,173)

(70,562)Net plant
$42,419

$41,517  b. WCCF.  MGE Power West Campus and the UW
jointly own the West Campus Cogeneration Facility located on the UW campus. MGE
Power West Campus owns 55% of the facility and UW owns 45% of the facility. The
UW owns a controlling interest in the chilled-water and steam plants, which are
used to meet the growing needs for air-conditioning and steam-heat capacity for
the UW campus. MGE Power West Campus owns a controlling interest in the electric
generation plant, which is leased and operated by MGE.   78    Each owner
provides its own financing and reflects its respective portion of the facility
and operating costs in its financial statements. MGE Power West Campus' interest
in WCCF and the related accumulated depreciation reserves at December 31
were as follows:  (In thousands)
2008

2007Nonregulated plant
$109,111

$108,757Accumulated depreciation
(10,033)

(7,289)Net plant
$99,078

$101,468  Operating charges are allocated to
the UW based on formulas contained in the operating agreement. Under the
provisions of this arrangement, the UW is required to reimburse MGE for their
allocated portion of fuel and operating expenses. For the years ended
December 31, 2008, 2007, and 2006, the State was allocated
$4.8 million, $3.0 million, and $2.6 million, respectively, in
fuel and operating costs.  c. Elm Road.  See Footnote 21 for a discussion
of MGE Energy's joint ownership interest in Elm Road.  6. Regulatory Assets and Liabilities
- MGE Energy and MGE.  The following regulatory assets and
liabilities are reflected in MGE's consolidated balance sheet as of
December 31:  (In thousands)
2008

2007Regulatory AssetsEnvironmental costs
$1,097

$1,268Deferred charges related to interest - 2027A Series
638

672Regulatory asset - SFAS No. 133
14,007

189Tax recovery related to AFUDC equity
4,443

4,124Asset retirement obligation -
SFAS No. 143 and FIN 47
4,389

4,247Unfunded pension and other postretirement liability
95,231

33,672Debt related costs
3,685

3,829Regulatory assets - Elm Road
213

1,025Conservation costs
1,124

2,815Blount restructuring costs
718

770Other
496

953Total regulatory assets
$126,041

$53,564Regulatory LiabilitiesRegulatory liability - SFAS No. 109
$4,680

$5,549Regulatory liability - SFAS 158 Medicare
subsidy
1,090

1,558Non-SFAS No. 143 removal cost
12,799

13,204Regulatory liability - customer fuel credit
5,506

-Deferred charges related to ATC
468

78Congestion Cost and Line Loss Allocation Agreement
-

2,845Other
245

575Total regulatory
liabilities
$24,788

$23,809  MGE expects to recover its regulatory
assets and return its regulatory liabilities through rates charged to customers
based on PSCW decisions made during the ratemaking process or based on PSCW
long-standing policies and guidelines. The adjustments to rates for these
regulatory assets and liabilities will occur over the periods either specified
by the PSCW or over the corresponding period related to the asset or liability.
We believe it is probable that MGE will continue to recover from customers the
regulatory assets described above based on prior and current ratemaking
treatment for such costs. MGE is earning a return on all regulatory assets net
of any related liabilities, except for amounts expended for environmental costs
and $1.5 million in debt related costs. MGE expects to earn a return on the
debt related item in its next base rate case.   79    Environmental
Costs MGE has received regulatory treatment
on environmental costs including clean up of two landfill sites and a substation
site and certain environmental costs at Columbia. As it relates to the landfills
and substation, the regulators have only allowed MGE to recover actual
environmental expenditures incurred excluding any carrying cost. As of
December 31, 2008, MGE has recorded $0.5 million in regulatory assets
for these environmental costs, including $0.1 million for accrual for
estimated future site remediation and $0.4 million of deferrals for actual
remediation costs incurred. These costs are being recovered over a four year
period.  In addition, MGE has been allowed to
defer actual costs plus carrying costs on certain Columbia environmental
expenditures. As of December 31, 2008, MGE has recorded $0.6 million
in regulatory assets related to these costs. The pre-construction portion of the
costs will be transferred to construction work in progress once a Certificate of
Authority is received from the PSCW. MGE expects recovery of these costs over
the life of the installed equipment.  Deferred Charges Related to
Interest - 2027A Series Deferred charges on the interest
expense of the 2027A Series relates to the incremental difference in the
interest that MGE earned on its construction bond fund and the actual interest
that MGE paid out on the related bonds. That incremental difference between
interest earned and interest expensed is currently being amortized over the
remaining life of the bonds as part of the rate recovery allowed by the PSCW.  Regulatory Asset (Liability) -
SFAS No. 133 MGE has physical and financial
contracts that are defined as derivatives under SFAS No. 133. The
amounts recorded for the net mark-to-market value of the commodity based
contracts is offset with a corresponding regulatory asset or liability because
these transactions are part of the PGA or fuel rules clause authorized by the
PSCW.  Tax Recovery Related to AFUDC
Equity AFUDC equity represents the after-tax
equity cost associated with utility plant construction and results in a
temporary difference between the book and tax basis of such plant. Deferred
income taxes are provided on this temporary difference in accordance with
SFAS No. 109. It is probable under PSCW regulation that MGE will
recover in future rates the future increase in taxes payable represented by the
deferred income tax liability. The amounts will be recovered in rates over the
depreciable life of the asset for which AFUDC was applied. Tax recovery related
to AFUDC equity represents the revenue requirement related to recovery of these
future taxes payable, calculated at current statutory tax rates.  Asset Retirement Obligation -
SFAS No. 143 and FIN 47 See Footnote 20 for further
discussion.  Unfunded Pension and Other
Postretirement Liability As of December 31, 2006, MGE and
MGE Energy adopted SFAS 158, Employers' Accounting for Pension and
Other Postretirement Plans. Under SFAS 158, MGE is required to
recognize the unfunded status of defined benefit pension and other
postretirement pension plans as a net liability or asset on the balance sheet
with an offset to other comprehensive income. The amount normally charged to
other comprehensive income for the unfunded status represents future expenses
that are expected to be recovered in rates. Accordingly, MGE has recorded such
adjustments as a regulatory asset.  Debt Related Costs This balance includes debt issuance
costs of extinguished debt and other debt related expenses. See Footnote 9
for further discussion related to the swap lock. The PSCW has allowed rate
recovery on unamortized issuance costs for extinguished debt facilities. When
the facility replacing the old facility is deemed by the PSCW to be more
favorable for the ratepayers, the PSCW will allow rate recovery of any
unamortized issuance costs related to the old facility. These amounts are
recovered over the term of the new facility and are classified as regulatory
assets within the consolidated financial statements.  Regulatory Assets - Elm
Road On November 1, 2005, MGE
received approval from the PSCW to defer payments made to MGE Power Elm Road for
carrying costs during construction of the facility, management fees, community
impact mitigation, and transition costs. MGE anticipates collection in rates of
carrying costs over a four year period beginning in the year of payment. All
other costs are collected in rates over a one to two year period.   80    Conservation
Costs MGE has received regulatory treatment
for certain conservation expenditures. The expenditures are used for demand-side
management programs to promote energy efficiency on the customer's premises.
Costs for demand-side management programs are estimated in MGE's rates utilizing
escrow accounting. The escrow accounting allows the utility to true-up its
actual costs incurred and reflect the amount of the true-up in its next rate
case filing and amortize the amount over the rate case period.  Blount Restructuring
Costs 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 certain
employee positions will be eliminated in 2011 as a result of this exit plan.
Accordingly, this plan has resulted in certain involuntary and voluntary
severance benefits. Additionally, this exit plan resulted in a curtailment under
SFAS 88, Employers' Accounting for Settlements and Curtailments of
Defined Pension Plans and for Termination Benefits, and retention bonus
payments. Recovery of these amounts began in 2008 and will continue through
2011. Costs will be recovered in rates in the year cash payments are expected to
be made.  Regulatory Liability -
SFAS No. 109 Regulation and SFAS No. 109
have resulted in a regulatory liability related to income taxes. Excess deferred
income taxes result from past taxes provided at rates higher than current rates.
The SFAS No. 109 regulatory liability and deferred investment tax
credit reflects the revenue requirement associated with the return of these tax
benefits to customers.  Regulatory Liability -
SFAS 158 Medicare Subsidy This amount relates to the difference
in treatment of the Medicare Part D Subsidy for tax and book purposes under the
provisions of SFAS 158. For SFAS 109 purposes, the benefit of this
subsidy is excluded from the computation of the unfunded liability. However, for
financial statement purposes, the unfunded liability includes (or is reduced by)
the benefit of the Medicare Part D Subsidy. Such tax benefits will be returned
to customers in rates in future periods.  Non-SFAS No. 143
Removal Costs In connection with the adoption of
SFAS No. 143, Accounting for Asset Retirement Obligations,
companies are required to reclassify cumulative collections for non-ARO removal
costs as a regulatory liability, with an offsetting entry to accumulated
depreciation. Under the current rate structure, these removal costs are being
recovered as a component of depreciation expense.  Regulatory Liability - Customer
Fuel Credit See Footnote 17 for further
discussion.  Congestion Cost and Line Loss
Allocation Agreement On February 14, 2007, MGE signed
a five year Congestion Cost and Line Loss Allocation Service Agreement. Under
the provisions of this agreement, certain load serving entities in the Wisconsin
and Upper Peninsula of Michigan System (WUMS) agreed to aggregate and equitably
allocate certain costs that have not been perfectly allocated by the MISO Day 2
market. Specifically, this agreement achieves a uniform line loss percentage and
socializes the costs incurred as a result of shortages in the FTR allocation
process. The benefit received or expense incurred under the agreement is
required to be returned to or collected from customers. The amounts collected in
2007 related to this agreement were returned to customers in 2008.  7. Common Equity.  a. Common Stock -
MGE Energy.  On November 9, 2006,
MGE Energy entered into a Distribution Agreement with JP Morgan under which
MGE Energy may offer and sell up to 1,500,000 shares of its common stock.
This agreement expired in December 2008. During 2008, MGE Energy did
not issue any shares of its common stock under this agreement. During 2007,
MGE Energy issued 383,500 shares of its common stock for $12.7 million
in net proceeds under this agreement. These sales were made pursuant to an
effective shelf registration statement MGE Energy filed with the SEC in
March 2003.   81    MGE Energy
also 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. All sales are covered by a
shelf registration statement that MGE Energy filed with the SEC. During the
period from March 2005 to May 2006, MGE Energy generally purchased
shares in the open market for Stock Plan participants. In June 2006,
MGE Energy switched from purchasing shares on the open market to issuing
new shares of its common stock for the Stock Plan. For the twelve months ended
December 31, 2008 and 2007, MGE Energy issued 954,238 and 591,443 new
shares of common stock under the Stock Plan for net proceeds of
$31.0 million and $20.1 million, respectively.  During the twelve months ended
December 31, 2008 and 2007, MGE Energy paid $31.8 million (or
$1.43 per share) and $30.3 million (or $1.41 per share), respectively, in
cash dividends on its common stock. Dividends on common stock at MGE are subject
to restrictions imposed by the PSCW and the covenants of MGE's outstanding first
mortgage bonds. See Footnote 9 and the "Liquidity and Capital Resources -
Financing Activities-Dividend Restrictions" under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further discussion of these covenants.  b. Preferred Stock - MGE Energy
and MGE.  MGE has 1,175,000 shares of $25 par
value redeemable preferred stock (cumulative) that is authorized but unissued at
December 31, 2008 and 2007.  c. Dilutive Shares Calculation -
MGE Energy.  MGE Energy does not hold any
dilutive securities.  8. Minority Interest - MGE.  a. MGE Power West Campus.  MGE Power West Campus is not a
subsidiary of MGE; however, it has been consolidated in the consolidated
financial statements of MGE, due to the adoption of FIN 46(R) (see
Footnote 2). MGE Power West Campus is 100% owned by MGE Power and MGE Power
is 100% owned by MGE Energy. MGE Energy's proportionate share of the
equity and net income (through its wholly owned subsidiary MGE Power) of MGE
Power West Campus is classified within the MGE financial statements as minority
interest. Minority interest on the balance sheet related to MGE Power West
Campus at December 31, 2008 and 2007, is $32.3 million and
$36.4 million, respectively. For the years ended December 31, 2008,
2007, and 2006, MGE Power had earned $7.6 million, $7.7 million, and
$7.8 million, net of tax, from its interest in MGE Power West Campus,
respectively. This amount is recorded as minority interest expense, net of tax,
on MGE's consolidated statement of income.  b. MGE Transco.  At December 31, 2008, MGE is the
majority owner, and MGE Energy 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.
Minority interest on the balance sheet related to MGE Transco at
December 31, 2008 and 2007, is $6.6 million and $3.2 million,
respectively. For the years ended December 31, 2008, 2007, and 2006,
MGE Energy had earned $0.8 million, $0.5 million, and
$0.4 million, net of tax, from its interest in MGE Transco, respectively.
These amounts are recorded as minority interest expense, net of tax, on MGE's
consolidated statement of income.  c. MGE Power Elm Road.  Similar to MGE Power West Campus, MGE
Power Elm Road is not a subsidiary of MGE; however, it has been consolidated in
the consolidated financial statements of MGE, due to the adoption of FIN 46(R)
(see Footnote 2). MGE Power Elm Road is 100% owned by MGE Power and MGE
Power is 100% owned by MGE Energy. MGE Energy's proportionate 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. Minority interest on the balance sheet related to MGE Power Elm Road
at December 31, 2008 and 2007, is $135.3 million and
$97.4 million, respectively. For the years ended December 31, 2008,
2007, and 2006, MGE Power recognized earnings of $3.9 million,
$2.6 million, and $1.4 million, net of tax, from its interest in MGE
Power Elm Road, respectively. These amounts are recorded as minority interest
expense, net of tax, on MGE's consolidated statement of income.  82    9. Long-Term Debt.  a. 5.59% Senior Notes - MGE and
MGE Energy.  On
September 11, 2008, MGE issued $40 million of unsecured 5.59% senior
notes due September 11, 2018. MGE used the net proceeds from the sale of
the notes to repay $30 million of its 6.02% Medium-Term Notes that matured
on September 15, 2008 and to repay $10 million of its short-term
indebtedness consisting of commercial paper. Holders of the notes have the right
to require MGE to repurchase their notes at par in the event of an acquisition
of beneficial ownership of 30% or more of the outstanding voting stock of
MGE Energy, Inc. The Note Purchase Agreement requires MGE to maintain a
ratio of its consolidated indebtedness to consolidated total capitalization not
to exceed a maximum of 65%. The Note Purchase Agreement also restricts MGE from
issuing "Priority Debt" in an amount exceeding 20% of its consolidated assets.
Priority Debt is defined as any indebtedness of MGE secured by liens other than
specified liens permitted by the Note Purchase Agreement and certain unsecured
indebtedness of certain subsidiaries.  b. 6.247% Medium-Term Notes - MGE and
MGE Energy.  On September 19, 2007, MGE
issued $25 million of unsecured 6.247% medium-term notes due
September 15, 2037. The notes were issued pursuant to an Indenture dated as
of September 1, 1998, between MGE and The Bank of New York Mellon Trust
Company, N.A. (as successor to Bank One, N.A.), as Trustee.  The net proceeds from the sale of the
notes were used to refinance $15 million of MGE's 7.49% medium-term notes
which became due on September 20, 2007, and short-term indebtedness. The
notes are redeemable at any time at MGE's option at a redemption price equal to
the greater of (i) 100% of the principal amount of the notes to be redeemed,
plus accrued interest to the redemption date, or (ii) the discounted present
value of the remaining scheduled payments of principal and interest on the Notes
to be redeemed (as provided in the Notes), plus accrued interest to the
redemption date.  On July 20, 2007, MGE had
entered into a $25 million swap lock with a financial institution to fix a
portion of the interest rate related to the aforementioned debt issuance. Under
the terms of the swap lock, MGE agreed to pay a fixed rate of 5.813% per annum
and receive from the financial institution a floating rate equal to six months
U.S. LIBOR (London Interbank Offered Rate). On September 14, 2007, MGE
terminated the swap lock and was obligated to make a $1.7 million payment
as a result of the difference between these two rates. Of this amount,
$1.5 million of the cost has been deferred on the December 31, 2007,
balance sheet as a regulatory asset in accordance with the provisions of
SFAS 71. This amount is expected to be collected in rates ratably over the
term of the 6.247% medium-term notes beginning in 2010. The remaining
$0.2 million of the cost of this instrument was reflected as an expense in
MGE and MGE Energy's income statement for the twelve months ended
December 31, 2007.  c. 5.68% and 5.19% Senior Secured
Notes - MGE and MGE Energy.  The 5.68% and the 5.19% senior
secured notes require that MGE Power West Campus maintain a projected debt
service coverage ratio of not less than 1.25 to 1.00, and debt to total
capitalization ratio of not more than .65 to 1.00.  The debt is secured by a collateral
assignment of lease payments that MGE is making to MGE Power West Campus for use
of the cogeneration facility pursuant to a long-term agreement.  d. First Mortgage Bonds -
MGE Energy and MGE.  MGE's utility plant is subject to the
lien of its Indenture of Mortgage and Deed of Trust, under which its first
mortgage bonds are issued.  MGE's outstanding first mortgage
bonds contain certain debt covenant restrictions with respect to dividends. The
covenant restricts the payment of dividends or any other distribution or
purchase of shares to the existing earned surplus (retained earnings) on MGE
common stock. MGE's earned surplus exceeded all such payments for all years
covered under this report.   83    e. Other Long-Term Debt -
MGE Energy and MGE.  MGE has $15 million of 6.58%
medium-term notes due in 2012 and $19.3 million of 4.875% Industrial
Development Revenue Bonds, refinanced in 2012, due in 2027.  The indenture under which the
medium-term notes were issued provides that they will be entitled to be equally
and ratably secured in the event that MGE issues any additional first mortgage
bonds.  Below is MGE Energy's and MGE's
aggregate maturities for all long-term debt for years following the
December 31, 2008, balance sheet.  (In thousands)
Amount2009
$ -2010
-2011
-2012
34,3002013
347Future years
238,853Total*
$273,500  *Includes $30 million and
$20 million maturity for MGE Power West Campus, which is consolidated with
MGE's debt in accordance with FIN 46(R) (see Footnote 2).  10. Notes Payable to Banks, Commercial
Paper, and Lines of Credit - MGE Energy and MGE.  a. MGE Energy.  On December 30, 2008,
MGE Energy entered into an agreement with a group of lenders providing
MGE Energy with a $20 million revolving credit facility. The revolving
credit facility expires on September 30, 2009. This facility carries
interest at either (1) a "floating rate," calculated on a daily basis as the
highest of a prime rate, a Federal Funds effective rate plus 1⁄2% per annum, or a
Eurodollar Rate for a one month interest plus 1% or (2) a "Eurodollar Rate,"
calculated as provided in the agreement for the selected interest period, plus
1%. Interest based upon a floating rate is payable monthly. Interest based upon
a Eurodollar Rate is payable on the last day of the selected interest period,
unless that interest period exceeds three months, in which case it is also
payable on the three-month anniversary of the first day of the selected interest
period. No borrowings were outstanding under this facility at December 31,
2008.  On August 29, 2008,
MGE Energy entered into a separate agreement establishing a
$20 million revolving credit facility. The revolving credit facility
expires on August 28, 2009. This facility carries an interest rate based on
prime or a LIBOR-based rate plus, in the case of the LIBOR-based rate, an adder,
not to exceed 1.0% per annum, based on the credit rating of MGE's senior
unsecured debt. Interest is payable monthly, if based upon prime, and on the
last day of each interest period if less than three months or the three-month
anniversary of the first day of the interest period, if based upon the
LIBOR-based rate. No borrowings were outstanding under this facility at
December 31, 2008.  On December 21, 2005,
MGE Energy entered into a five-year unsecured revolving credit facility
under which it may borrow up to $80 million from a group of lenders.
Interest rates on borrowings under the credit facility are based on either prime
or LIBOR plus, in the case of the LIBOR-based rate, an adder, not to exceed
0.750% per annum, based on the senior unsecured credit rating of MGE. Interest
is payable monthly. Amounts borrowed may be repaid and reborrowed from time to
time until maturity.  The agreements require
MGE Energy to maintain a ratio of its consolidated indebtedness to
consolidated total capitalization not to exceed a maximum of 65%. A change in
control constitutes a default under the agreements. Change in control events are
defined as (i) a failure by MGE Energy to hold 100% of the outstanding
voting equity interest in MGE or (ii) the acquisition of beneficial ownership of
30% or more of the outstanding voting stock of MGE Energy by one person or
two or more persons acting in concert.   84    b. MGE.  For short-term borrowings, MGE
generally issues commercial paper (issued at the prevailing discount rate at the
time of issuance), which is supported by unused committed bank lines of credit.
On December 21, 2005, MGE entered into an amended and restated unsecured
revolving credit facility under which it may borrow up to $55 million from
a group of lenders. The credit facility is available for the issuance of letters
of credit. The credit facility matures December 21, 2010. Interest rates on
borrowings under the credit facility are based on either prime or LIBOR plus, in
the case of the LIBOR-based rate, based on the credit rating of MGE's senior
unsecured debt an adder, not to exceed 0.750% per annum. Interest is payable
monthly.  On August 29, 2008, MGE entered
into an agreement establishing a $20 million committed unsecured revolving
credit facility. The agreement expires on March 31, 2009. This facility
carries an interest rate based on either prime or a LIBOR-type rate for each
applicable interest period plus, in the case of the LIBOR-type rate, 0.40%.
Interest is payable on the last day of each calendar quarter, if based upon
prime, and on the last day of each interest period if less than three months or
the three-month anniversary of the first day of the interest period, if based
upon the LIBOR-type rate . The facility is expected to be used as a backup
facility to MGE's commercial paper program. No borrowings were outstanding under
this facility at December 31, 2008.  The agreements require MGE to
maintain a ratio of consolidated debt to consolidated total capitalization not
to exceed a maximum of 65%. The ratio calculation excludes assets, liabilities,
revenues and expenses included in MGE's financial statements as a result of the
application of FIN 46(R). A change in control constitutes a default under the
agreements. Change in control events are defined as (i) a failure by
MGE Energy to hold 100% of the outstanding voting equity interest in MGE or
(ii) the acquisition of beneficial ownership of 30% or more of the outstanding
voting stock of MGE Energy by one person or two or more persons acting in
concert.  c. MGE Energy and MGE.  Information
concerning short-term borrowings for the past three years is shown below:  As of December 31,(In thousands)
2008

2007

2006MGE EnergyAvailable lines of credit
$195,000

$155,000

$155,000Short-term debt outstanding
$124,500

$103,500

$57,000Weighted-average interest rate
1.31%

4.71%

5.56%During the year:Maximum short-term borrowings
$139,000

$108,500

$90,000Average short-term
borrowings
$110,803

$59,113

$67,026Weighted-average interest rate
2.88%

5.39%

5.20%MGEAvailable lines of credit
$75,000

$75,000

$75,000Commercial
paper outstanding
$51,000

$61,000

$29,500Weighted-average interest rate
0.91%

4.47%

5.32%During the year:Maximum short-term borrowings
$64,000

$64,000

$70,250Average short-term
borrowings
$46,210

$27,954

$46,452Weighted-average interest rate
2.44%

5.08%

5.02%  11. Fair Value of Financial
Instruments - MGE Energy and MGE.  At December 31, 2008 and 2007,
the carrying amount of cash, cash equivalents, and outstanding commercial paper
approximates fair market value due to the short maturity of those investments
and obligations. The estimated fair market value of MGE's long-term debt is
based on quoted market prices at December 31. The estimated fair market
value of MGE Energy's and MGE's financial instruments are as follows: 2008

2007(In thousands)
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueMGE EnergyAssets:Cash and cash equivalents
$4,106

$4,106

$3,789

$3,789Restricted cash*
4,805

4,805

2,896

2,896Liabilities:Short-term debt - bank loans
73,500

73,500

42,500

42,500Short-term debt - commercial
paper
51,000

51,000

61,000

61,000Long-term debt**
273,500

261,315

263,500

260,787MGEAssets:Cash and cash equivalents
1,318

1,318

1,859

1,859Restricted cash*
4,805

4,805

2,896

2,896Liabilities:Short-term debt - commercial
paper
51,000

51,000

61,000

61,000Long-term debt**
273,500

261,315

263,500

260,787  *The restricted cash amount for
2008 is shown net of $10.5 million of cash collateral that was netted
against net derivatives positions as well as other liabilities with
counterparties. **Includes long-term debt due
within one year.  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, will not have any material
impact on MGE Energy and MGE.  On October 10, 2008, the
FASB issued FSP FAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active, which
clarifies the application of SFAS No. 157 and was effective upon
issuance. This standard provides guidance on determination of the fair value of
a financial asset in a market where that financial asset is inactive. The
adoption of this standard did not have any material impact on MGE Energy
and MGE.   85    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 December 31,
2008Total
Level 1
Level 2
Level 3MGE EnergyAssets:Cash and cash equivalents
$4,106
$4,106
$-
$-Restricted cash
(a)
15,297
15,297
-
-Exchange-traded
investments
511
511
-
-Total Assets
$19,914
$19,914
$-
$-Liabilities:Derivatives, net
(b)
$14,007
$4,788
$-
$9,219Deferred compensation
1,171
1,171
-
-Total Liabilities
$ 15,178
$5,959
$-
$9,219MGEAssets:Cash and cash equivalents
$1,318
$1,318
$-
$-Restricted cash
(a)
15,297
15,297
-
-Exchange-traded
investments
364
364
-
-Total Assets
$16,979
$16,979
$-
$-Liabilities:Derivatives, net
(b)
$14,007
$4,788
$-
$9,219Deferred compensation
1,171
1,171
-
-Total Liabilities
$15,178
$5,959
$-
$9,219  (a) These amounts are shown gross and
exclude $10.5 million of cash collateral that was netted against net
derivative positions as well as other liabilities with counterparties.  (b) These amounts are shown gross and
exclude $4.8 million and $5.1 million of cash collateral that was
netted against net derivative positions with counterparties for Level 1 and
Level 3, respectively.  Derivatives
include exchange-traded derivative contracts, a ten-year purchased power
agreement, and 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 derivative contracts are valued using
quoted market pricing in markets with insufficient volumes and are therefore
classified as Level 3. Transactions done with an over-the-counter party are on
inactive markets and are therefore classified as Level 3. These transactions are
valued based on quoted prices with markets with similar exchange traded
transactions. The ten-year purchased power agreement (see Footnote 16) was
valued using an internally-developed pricing model and therefore classified as
Level 3. The model includes both observable and unobservable inputs. Inputs to
the model require significant management judgment and estimation. The model uses
a forward power pricing curve based on exchange-traded contracts in the electric
futures market. As described above, the market prices from this source have
insufficient volumes and are classified as Level 3 in the fair value hierarchy.
To project future prices beyond the period in which these quoted market prices
are available, MGE calculates the price based on forward gas prices and an
implied heat rate. MGE considers the assumptions that market participants would
use in valuing the asset or liability. This consideration includes assumptions
about market risk such as liquidity, volatility and contract duration. The fair
value model incorporates discounting, credit, and model risks. 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.  Cash and cash equivalents include
investments with maturities of less than three months which are traded in active
markets and deposit accounts, and are therefore classified as Level 1.  Restricted cash primarily includes
cash collateral related to derivative and hedging instruments and is therefore
classified as Level 1.  Investments include exchange-traded
investment securities valued using quoted prices on active exchanges and are
therefore classified as Level 1.  86    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)Twelve Months Ended December 31,
2008Balance as of January 1, 2008
$(444)Realized and unrealized gains (losses):Included in regulatory
liabilities (assets)
(8,801)Included in other comprehensive
income
26Included in earnings
21Included in current
assets
-Purchases, sales, issuances, and settlements,
net
(21)Transfers in and/or out of Level 3
-Balance as of December 31, 2008
$(9,219)Total gains (losses) included in earnings
attributed to the change in unrealized gains (losses) related to assets
and liabilities held at December 31, 2008 (c)
$-  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 twelve months
ended December 31, 2008, for both MGE Energy and MGE. (c).   (In
thousands)
Purchased
Power Expense
Cost of Gas Sold
Expense
Regulated Gas
RevenuesTotal gains
(losses) included in earnings for the
twelve
months ended December 31, 2008
$139
$(59)
$(59)  (c) 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 a set percentage of the benefit or loss
from these deals if certain thresholds are achieved. Under these derivatives,
only the gains or losses associated with customers are subject to regulatory
deferral under SFAS 71. The remaining 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.  12. Income Taxes.  a. MGE Energy Income
Taxes.  MGE Energy files a consolidated
federal income tax return that includes the operations of all subsidiary
companies. The consolidated income tax provision consists of the following
provision (benefit) components for the years ended December 31:  (In thousands)
2008

2007

2006Current payable:Federal
$15,764

$22,482

$16,169State
5,060

5,033

4,921Net-deferred:Federal
7,361

37

4,565State
1,222

713

676Amortized investment tax credits
(351)

(410)

(432)Total income tax provision
$29,056

$27,855

$25,899   87    MGE Energy's
consolidated income tax provision differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes, as
follows:  2008

2007

2006Statutory federal income tax rate
35.0%

35.0%

35.0%State income taxes, net of federal benefit
5.0%

4.8%

5.0%Amortized investment tax credits
(0.4)%

(0.5)%

(0.6)%Credit for electricity from wind energy
(2.4)%

(0.6)%

(0.5)%Domestic manufacturing deduction
(0.5)%

(0.6)%

(0.5)%Other, net, individually insignificant
(1.2)%

(1.8)%

(0.5)%Effective income tax rate
35.5%

36.3%

37.9%  The significant components of
deferred tax liabilities (assets) that appear on MGE Energy's consolidated
balance sheets as of December 31 are as follows:  (In thousands)
2008

2007Property-related
$116,492

$105,527Investment in ATC
16,003

15,171Bond transactions
2,133

2,274Pension expense
3,339

1,781Unfunded pension and other postretirement liability
38,547

13,514FAS 133 Derivatives
5,702

406Tax deductible prepayments
6,743

6,579Other
9,031

7,523Gross deferred income tax
liabilities
197,990

152,775Accrued expenses
(18,242)

(13,605)Retirement benefits, other than pension
(9,478)

(8,105)Deferred tax regulatory account
(3,220)

(3,479)Unfunded pension and other postretirement
liability
(39,393)

(14,826)FAS 133 Derivatives
(5,702)

(406)Other
(1,510)

(1,174)Gross deferred income tax assets
(77,545)

(41,595)Less valuation allowance
366

366Net deferred income tax assets
(77,179)

(41,229)Deferred income taxes
$120,811

$111,546  The valuation allowance reduces
MGE Energy's deferred tax assets for state carryforward losses to estimated
realizable value due to the uncertainty of future income estimates in various
state tax jurisdictions.  For tax purposes, as of
December 31, 2008, MGE Energy had approximately $7.5 million of
state tax net operating loss deductions that expire between 2011 to 2019 if
unused.  b. MGE Income Taxes.  MGE Energy files a consolidated
federal income tax return. The subsidiaries calculate their respective federal
income tax provisions as if they were separate taxable entities.  On a separate company basis, the
components of MGE's income tax provision are as follows for the years ended
December 31:  (In thousands)
2008

2007

2006Current payable:Federal
$14,313

$21,899

$16,468State
4,710

4,882

4,910Net-deferred:Federal
7,255

11

4,241State
1,199

703

598Amortized investment tax credits
(351)

(410)

(432)Total income tax provision
$27,126

$27,085

$25,785  88     MGE's income tax provision on as
separate company basis differs from the amount computed by applying the
statutory federal income tax rate to income before minority interest and income
tax provision as follows:  2008

2007

2006Statutory federal income
tax rate
35.0%

35.0%

35.0%State income taxes, net
of federal benefit
5.0%

4.7%

5.0%Amortized investment tax
credits
(0.5)%

(0.5)%

(0.6)%Credit for electricity
from wind energy
(2.5)%

(0.6)%

(0.5)%Domestic manufacturing
deduction
(0.5)%

(0.6)%

(0.5)%Other, net, individually
insignificant
(1.3)%

(1.8)%

(0.5)%Effective income tax rate
35.2%

36.2%

37.9%  The significant components of
deferred tax liabilities (assets) that appear on MGE's consolidated balance
sheets as of December 31 are as follows:  (In thousands)
2008

2007Property-related
$116,492

$105,527Investment in ATC
16,003

15,171Bond transactions
2,133

2,274Pension expense
3,339

1,781Unfunded pension and other postretirement liability
38,547

13,514FAS 133 Derivatives
5,702

406Tax deductible prepayments
6,743

6,579Other
8,780

7,067Gross deferred income tax
liabilities
197,739

152,319Accrued expenses
(18,116)

(13,362)Retirement benefits, other than pension
(9,478)

(8,105)Deferred tax regulatory account
(3,220)

(3,479)FAS 133 Derivatives
(5,702)

(406)Unfunded pension and other postretirement
liability
(39,393)

(14,826)Other
(1,522)

(1,430)Gross deferred income tax assets
(77,431)

(41,608)Less valuation allowance
366

366Net deferred income tax assets
(77,065)

(41,242)Deferred income taxes
$120,674

$111,077  The valuation allowance reduces MGE's
deferred tax assets for state carryforward losses to estimated realizable value
due to the uncertainty of future income estimates in various state tax
jurisdictions.  For tax purposes, as of
December 31, 2008, MGE had approximately $7.5 million of state tax net
operating loss deductions that expire between 2011 to 2019 if unused.  c. FIN 48 - MGE Energy and
MGE.  MGE Energy and MGE adopted the
provisions of FIN 48 on January 1, 2007. Under FIN 48, the difference
between the tax benefit amount taken on prior year tax returns, or expected to
be taken on a current year tax return, and the tax benefit amount recognized in
the financial statements is an unrecognized tax benefit. MGE Energy and MGE
have elected to recognize accrued interest related to unrecognized tax benefits
in interest expense and penalties in operating expenses, although no penalties
have been recorded.   89    A tabular
reconciliation of unrecognized tax benefits and interest under FIN 48 from
January 1, 2007 (date of adoption) to December 31, 2008, is as
follows:  (In thousands)
Tax

InterestAmounts of unrecognized tax benefits,
January 1, 2007, upon
adoption of FIN 48 (Amounts are for years
prior to 2007)
$277

$99Settlements with taxing authorities paid in 2007
(186)

(24)Reductions to beginning balance of unrecognized tax
benefits as
a result of settlements with taxing authorities
(91)

(75)Additions based on tax
positions related to 2007
99

-Unrecognized tax benefits,
December 31, 2007
99

-Additions based on tax
positions related to 2008
77

-Accrued interest on
unrecognized tax benefits
-

9Unrecognized
tax benefits, December 31, 2008 and associated accrued interest
$176

$9  Unrecognized tax benefits are
liabilities shown with Other Deferred Liabilities on the December 31, 2008
and December 31, 2007, balance sheets.  Unrecognized tax benefits included in
the January 1, 2008 balance relate mainly to federal permanent differences
and tax credits, the realization of which would not significantly impact the
effective tax rate. The unrecognized tax benefits arising in 2008 relate mainly
to federal permanent differences and tax credits, the realization of which would
not significantly impact the effective tax rate. The unrecognized tax benefits
at December 31, 2008, are not expected to significantly increase or
decrease within the next twelve months.  Wisconsin requires each corporation
within a consolidated group to file a separate tax return.  The following table shows tax years
that remain subject to examination by major jurisdiction:  Taxpayer
Open YearsMGE Energy and consolidated subsidiaries in
federal return
2005 through 2008MGE Energy Wisconsin separate corporation
return
2004 through 2008MGE Wisconsin separate corporation return
2005 through 2008  13. Pension Plans and Other
Postretirement Benefits - MGE Energy and MGE.  MGE maintains qualified and
nonqualified pension plans, health care and life insurance benefits, and two
defined contribution 401(k) benefit plans for its employees and retirees. MGE's
costs for the 401(k) plans were $1.2 million in 2008 and $1.0 million
in both 2007 and 2006. A measurement date of December 31 is utilized for
all pension and postretirement benefit plans.  At December 31, 2008, MGE
employs 239 individuals who are covered by a collective bargaining agreement
with Local Union No. 2304 of the IBEW, 98 employees who are covered by a
collective bargaining agreement with Local Union No. 39 of the Office and
Professional Employees International Union (OPEIU), and five employees covered
by a collective bargaining agreement with USW Local Union Unit No. 2-0111
(USW). On May 12, 2006, the OPEIU employees ratified a new three-year labor
agreement; on September 21, 2006, the IBEW employees ratified a new
three-year labor agreement; and on October 11, 2006, the USW also ratified
a new three-year labor agreement. Pursuant to these agreements, the OPEIU, IBEW,
and USW have agreed to defined contribution pension plans for employees hired
after December 31, 2006. All new nonunion employees hired after
December 31, 2006, have also been enrolled in the defined contribution
pension plan, rather than the defined benefit pension plan previously in place
for existing nonunion employees.  In September 2006, the
FASB issued SFAS 158, Employers' Accounting for Pension and Other
Postretirement Plans. This pronouncement requires the recognition of the
funded status of defined benefit and postretirement benefit plans on the balance
sheet. Additionally, this statement requires that certain previously disclosed
but unrecognized costs be recognized on the balance sheet. The provisions of
this statement were adopted by MGE as of December 31, 2006, and are
reflected in the following disclosure.   90    a. Benefit Obligations.  (In thousands)
Pension Benefits

Other
Postretirement
BenefitsChange in benefit obligation:
2008

2007

2008

2007Net benefit obligation at beginning of year
$176,938

$176,312

$59,331

$49,986Service cost
5,022

5,165

1,724

1,618Interest cost
11,305

10,421

3,743

3,101Plan participants' contributions
-

-

442

366Plan amendments
-

-

-

793Actuarial (gain) loss
4,904

(9,253)

(354)

4,912Special termination benefits
11

22

-

-Gross benefits paid
(6,382)

(5,729)

(2,233)

(1,570)Less: federal subsidy on
benefits paid
-

-

133

125Benefit obligation at end of year
$191,798

$176,938

$62,786

$59,331  The accumulated benefit obligation
for the defined benefit pension plans at the end of 2008 and 2007 was
$166.2 million and $153.3 million, respectively.  Pension Benefits

Other
Postretirement
BenefitsWeighted-average assumptions used to
determine end of year benefit obligations:
2008

2007

2008

2007Discount rate
6.11%

6.24%

6.11%

6.29%Rate of compensation increase
4.56%

4.55%

N/A

N/A  The following table shows assumed
health care cost trend rates at December 31:  2008

2007Health care cost trend rate assumed for next
year
8%

8%Rate to which the cost trend rate is assumed to
decline
(the ultimate trend rate)
5%

5%Year that the rate reaches the ultimate trend
rate
2015

2012  The assumed health care cost trend
rates have a significant effect on the amounts reported for the health care
plans.  The following table shows how an
assumed 1% increase or 1% decrease in health care cost trends could impact
postretirement benefits in 2008 dollars:  (In thousands)
1% Increase

1% DecreaseEffect on other postretirement benefit
obligation
$8,824

$(7,562)  On December 8, 2003, the
"Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the
Act) was signed into law authorizing Medicare to provide prescription drug
benefits to retirees. The Act introduced a prescription drug benefit under
Medicare as well as a Federal subsidy to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to the
Medicare prescription drug benefit. Management believes the prescription drug
benefit provided under MGE's postretirement benefit plans is at least
actuarially equivalent to the Medicare prescription drug benefit. In response to
the enactment of the Act, on May 19, 2003, FSP 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, was issued, resulting in a remeasurement of
its postretirement benefits and a remeasurement of its postretirement plans'
assets and APBO as of January 1, 2004. For the year ended December 31,
2008, the subsidy due to MGE was $0.1 million.   91    b. Plan Assets.  (In thousands)
Pension Benefits

Other
Postretirement
BenefitsChange in plan assets:
2008

2007

2008

2007Fair value of plan assets at beginning of year
$145,118

$134,372

$16,542

$15,261Actual return on plan assets
(40,774)

10,819

(3,931)

1,795Employer contributions
5,124

5,656

2,586

690Plan participants' contributions
-

-

442

366Gross benefits paid
(6,382)

(5,729)

(2,233)

(1,570)Fair value of plan assets at end of year
$103,086

$145,118

$13,406

$16,542  The expected long-term rate of return
on the pension plan assets was 9.0% in both 2008 and 2007 and has been reduced
to 8.5% for 2009 and beyond.  c. Explanation of Long-Term Rate of
Return.  MGE employs a building-block approach
in determining the expected long-term rate of return for asset classes.
Historical markets are studied and long-term historical relationships among
asset classes are analyzed, consistent with the widely accepted capital market
principle that assets with higher volatility generate a greater return over the
long run. Current market factors such as interest rates and dividend yields are
evaluated before long-term capital market assumptions are determined.  The expected long-term nominal rate
of return for plan assets is primarily a function of expected long-term real
rates of return for component asset classes and the plan's target asset
allocation in conjunction with an inflation assumption. Peer data and historical
returns are reviewed to check for appropriateness.  The asset allocation for MGE's
pension plans at the end of 2008 and 2007, and the target allocation for 2009,
by asset category, follows:  Target
Allocation

Percentage of Plan Assets at Year
End2008

2007Equity securities
75.0%

72.0%

75.6%Debt securities
15.0%

14.7%

13.2%Real estate
10.0%

13.3%

11.2%Total
100.0%

100.0%

100.0%  d. Investment Strategy.  MGE employs a total return investment
approach whereby a mix of equities, fixed income, and real estate investments
are used to maximize the expected long-term return of plan assets for a prudent
level of risk. Risk tolerance is established through careful consideration of
plan liabilities, plan-funded status, and corporate financial condition. The
investment portfolio contains a diversified blend of equity, fixed income, and
real estate investments. Target asset allocations are as follows: 50% United
States equity, 25% non-United States equity, 15% fixed income, and 10% real
estate. Investment risk is measured and monitored on an ongoing basis through
periodic investment portfolio reviews and liability measurements.  e. Other Postretirement
Benefits.  The fair value of plan assets for
these postretirement benefit plans is $13.4 million and $16.5 million
at the end of 2008 and 2007, respectively. The expected long-term rate of return
on these plan assets was 7.11% and 7.85% in 2008 and 2007.  Of the above amounts,
$10.3 million and $13.5 million at the end of 2008 and 2007,
respectively, were held in the master pension trust and are allocable to
postretirement health expenses. The target asset allocation and investment
strategy for the portion of assets held in the master pension trust are the same
as that explained for MGE's pension plans.   92    The
remainder of postretirement benefit assets are held either in an insurance
continuance fund for the payment of retiree life benefits or a health benefit
trust for payment of retiree health claims. There is no formal target asset
allocation for these assets, but the intent is to seek interest income and
maintain stability of principal.  f. Funded Status.  The funded status at the end of the
year, and the related amounts recognized on the Consolidated Balance Sheet are
as follows:  (In thousands)
Pension Benefits

Other
Postretirement
BenefitsFunded status, end of year
2008

2007

2008

2007Fair value of plan assets
$103,086

$145,118

$13,406

$16,542Benefit obligations
191,798

176,938

62,786

59,331Funded status
$(88,712)

$(31,820)

$(49,380)

$(42,789)  At December 31, 2008, MGE and
MGE Energy included a $0.8 million current liability, a
$137.3 million long-term liability, and a $95.2 million regulatory
asset in the balance sheet to properly reflect the unfunded status of the
plans.  At December 31, 2007, MGE and
MGE Energy included a $0.6 million current liability, a
$74.1 million long-term liability, and a $33.7 million regulatory
asset in the balance sheet to properly reflect the unfunded status of the
plans.  (In thousands)
Pension
Benefits

Other
Postretirement
BenefitsAmounts recognized as regulatory asset
2008

2008Net actuarial loss
$75,473

$14,123Prior service cost
2,757

990Transition obligation
143

1,745Total
$78,373

$16,858  The projected benefit obligation and
fair value of plan assets for pension plans with a projected benefit obligation
in excess of plan assets at December 31, 2008 and 2007, were as
follows:  (In thousands)
Pension BenefitsProjected Benefit Obligation in Excess of Plan
Assets
2008

2007Projected benefit obligation, end of year
$191,798

$176,938Fair value of plan assets, end of year
$103,086

$145,118  The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for pension plans
with an accumulated benefit obligation in excess of plan assets at
December 31, 2008 and 2007, were as follows:  (In thousands)
Pension BenefitsAccumulated Benefit Obligation in Excess of Plan
Assets
2008

2007Projected benefit obligation, end of year
$191,798

$16,371Accumulated benefit obligation, end of year
166,232

12,500Fair value of plan assets, end of year
103,086

-  g. Expected Cash Flows.  In January 2009, a
$6.0 million discretionary contribution was made to the pension plans in
order to fund the plans to an 80% funding target level as of January 1,
2009 under the Employee Retirement Income Security Act (ERISA) and the Pension
Protection Act of 2006. Subsequent required contributions to the plans for 2009
through 2013 are expected to be between $9.0 million to $11.0 million
each year. The required contributions for years after 2013 are currently not yet
estimated. MGE has adopted the asset smoothing as permitted in accordance with
the Pension Protection Act of 2006, including modifications made by WRERA.  93    Due to
uncertainties in the future economic performance of plan assets, discount rates,
and other key assumptions, required estimated contributions are subject to
change. MGE may also elect to make additional discretionary contributions.  In 2008, MGE made $7.7 million
in employer contributions to its pension and postretirement plans related to the
2007 and 2008 plan years.  h. Benefit Payments.  The following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid as
follows:  Pension

Other Postretirement(In thousands)
Pension
Benefits

Gross
Postretirement
Benefits

Expected
Medicare Part D
Subsidy

Net
Postretirement
Benefits2009
$7,367

$2,368

$(157)

$2,2112010
8,002

2,657

(180)

2,4772011
8,839

2,998

(200)

2,7982012
9,626

3,187

(235)

2,9522013
10,427

3,539

(262)

3,2772014-2018
65,995

22,451

(1,790)

20,661  i. Net Periodic Cost.  MGE has elected to recognize the cost
of its transition obligation (the accumulated postretirement benefit obligation
as of January 1, 1993) by amortizing it on a straight-line basis over 20
years.  (In thousands)
Pension Benefits

Other Postretirement BenefitsComponents of
net periodic benefit cost:
2008

2007

2006

2008

2007

2006Service cost
$5,022

$5,165

$5,404

$1,724

$1,618

$1,953Interest cost
11,305

10,421

9,758

3,743

3,101

3,000Expected return
on assets
(13,189)

(12,248)

(10,570)

(1,280)

(1,148)

(971)Amortization
of:Transition
obligation
143

143

237

427

427

437Prior
service cost
440

440

461

287

208

224Actuarial
loss
572

804

1,583

295

232

420Curtailment
(gain)/loss
-

-

105

-

-

(150)Net periodic
benefit cost
$4,293

$4,725

$6,978

$5,196

$4,438

$4,913Weighted-average
assumptions used to
determine net
periodic cost:Discount rate
6.24%

5.90%

5.65%

6.29%

5.97%

5.72%Expected return
on plan assets
9.0%

9.00%

9.00%

7.85%

7.78%

7.61%Rate of
compensation increase
4.55%

4.55%

4.52%

N/A

N/A

N/A  On September 21, 2006, certain
voluntary termination benefits were awarded to employees who are members of the
International Brotherhood of Electrical Workers (IBEW) and may be impacted by
the discontinuance of coal use at Blount. These employees were offered certain
supplemental early retirement benefits. As of December 31, 2007, four of
the union employees declared their intent to retire early. The liability
associated with these special termination benefits is reflected at the time they
actually retire.  Additionally, during the twelve
months ended December 31, 2006, a plan curtailment for MGE's bargaining
pension and postretirement plans as defined in SFAS 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits had occurred. For the twelve months ended
December 31, 2006, this resulted in a $0.1 million curtailment loss
for the bargaining pension plan and a $0.2 million curtailment gain for the
bargaining other postretirement plan, respectively. The net impact of the
curtailment was recorded as a decrease to the regulatory asset established for
the exit plan.   94    Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A 1% change in the assumed health care cost trend
rates would have had the following effect:  (In thousands)
1% Increase

1% DecreaseEffect on total service and interest cost
components
$848

$(727)  14. Share-Based Compensation -
MGE Energy and MGE.  The MGE Energy Board approved a
Performance Unit 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 vesting period. Per the plan's provisions, these awards are
subject to a prescribed vesting schedule and must be settled in cash.
Accordingly, no new shares of common stock will be issued in connection with the
plan. MGE and MGE Energy have adopted the provisions of SFAS 123R.
This guidance establishes standards for the accounting of transactions in which
an entity exchanges equity instruments for goods and services. Additionally,
this standard addresses the accounting for transactions in which an entity
incurs liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments.  On January 1, 2007, 22,479 units
were granted based on the MGE Energy December 31, 2006, closing stock
price. On January 18, 2008, 18,538 units were granted based on the
MGE Energy closing stock price as of that date. On January 16, 2009,
18,604 units were granted 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, 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
December 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 the twelve months ended
December 31, 2008 and, 2007, MGE recorded $0.5 million and
$0.3 million, respectively, in compensation expense as a result of this
plan. No compensation expense was recognized in 2006 as there had not been any
grants during that year. A forfeiture of less than $0.1 million, but no
cash settlements, occurred during the twelve months ended December 31,
2008. At December 31, 2008, $0.1 million of these awards were
vested.  15. 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 real-time energy services and a 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. In January 2009, MISO implemented and MGE began
participating in the ancillary services market (ASM). The ASM is an extension of
the existing energy market in which MISO assumes the responsibility of
maintaining sufficient generation reserves. Previously, MGE was responsible for
providing its own reserves, however in the ASM, MISO will provide the reserves
for MGE's load, and MGE may offer to sell reserves from its generating units. In
addition to this market change, MISO took on various Balance Authority
functions.  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 impacted 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 a $163.8 million, $157.3 million, and $154.4 million
reduction to sales for resale and purchased power expense for the years ended
December 31, 2008, 2007, and 2006, respectively.   95    16. Derivative and Hedging Instruments
- MGE Energy and MGE.  As part of our 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 No. 133 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 cannot be applied, SFAS No. 133 requires MGE Energy and
MGE to recognize all 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. MGE's derivative
activities are conducted in accordance with its electric and gas risk management
program.  If the derivative qualifies for
regulatory deferral subject to the provisions of SFAS No. 71, the
derivatives are marked to fair value pursuant to SFAS No. 133 and are
offset with a corresponding regulatory asset or liability.  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's or MGE Energy's net
income. At December 31, 2008, MGE Energy and MGE had $9.9 million
in cash collateral that was netted against the net derivative positions with
counterparties.  During 2008 and 2007, MGE purchased
and sold exchange traded and over the counter options, swaps, and future
contracts. These arrangements are primarily entered into to help stabilize the
price risk associated with gas or power purchases. These transactions are
employed by both MGE's gas and electric segments. Additionally, as a result of
the firm transmission agreements that MGE holds on transmission paths in the
MISO market, at December 31, 2008, MGE holds 2009 FTRs. An FTR is a
financial instrument that entitles the holder to a stream of revenues or charges
based on the differences in hourly day ahead energy prices between two points on
the transmission grid.  At December 31, 2008 and 2007,
the cost basis of these financial instruments exceeded their fair value by
$10.0 million and $0.3 million, respectively. Financial instruments
generally will expire within a one year time period. The fair value of these
instruments is reflected as a regulatory asset. Depending on the nature of the
instrument, the gain or loss associated with these transactions will be
reflected as cost of gas sold, fuel for electric generation, or purchased power
expense in the delivery month applicable to the instrument.  During 2008, MGE has also entered
into futures and basis swaps to take advantage of physical and financial
arbitrage opportunities between supply basins and pricing spreads between future
months' gas supply. Under the incentive mechanism within the PGA clause, MGE
shareholders have the ability to receive a set percentage of the benefits or
loss from these deals if certain thresholds are achieved. At December 31,
2008 and 2007, these positions were in an unrealized gain position of
$0.1 million and $0.2 million, respectively. The portion related to
the shareholders is reflected in other comprehensive income and the portion
related to customers is reflected as a current regulatory asset. These
instruments all expire in 2009.  MGE has also entered into a ten-year
purchased power agreement which provides MGE with firm capacity and energy
beginning June 1, 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
December 31, 2008 reflects a loss position of $4.1 million and at
December 31, 2007 reflects a gain position of $0.1 million. Also, the
derivative qualifies for regulatory deferral and is recognized with a
corresponding regulatory asset or liability depending on whether the fair value
is in a loss or gain position.   96    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 first quarter of 2008. MGE accounted for the HDD collar using
the intrinsic value method pursuant to the requirements of EITF 99-2,
Accounting for Weather Derivatives.  On November 1, 2006, MGE entered
into a non-exchange traded weather derivative. This agreement extended from
January 2007 until March 2007. This agreement had a premium of
$0.3 million. Because heating degree days were in between the prescribed
floor and ceiling, no additional gain or loss beyond the premium was recorded.  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 and monitors these counterparties on an ongoing basis to
mitigate nonperformance risk in its portfolio.  17. Rate Matters - MGE Energy and
MGE.  a. Rate proceedings.  On December 18, 2008, under a
limited reopener, the PSCW authorized MGE to decrease 2009 rates for retail
electric customers by 0.74% or $2.7 million, while gas rates remain
unchanged from 2008. The decrease in retail electric rates is driven by a
decrease in fuel and purchased power costs, decrease in Elm Road costs and a
decrease in ATC transmission costs. The PSCW also approved deferred accounting
for incremental pension and other postretirement benefit costs above the levels
currently included in rates. Pursuant to the provisions of this rate order, the
fuel rules bandwidth effective January 1, 2009, will be plus or minus 2%.
See below for further description of fuel rules.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric rates by 4.8% or $16.2 million and
increase gas distribution rates by 2.8% or $7.8 million. The electric
increase covered 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.  On December 22, 2006, the PSCW
approved a limited scope rate case reopener related to MGE's 2007 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.  On December 12, 2005, the PSCW
authorized MGE to increase 2006 electric revenues by $35.9 million and to
increase gas revenues by $3.8 million. The increase to electric revenues
covered increased fuel and purchased power costs and the costs of additional
facilities needed to meet the rising electric and gas needs of our customers.
Approximately $3.8 million of the increase in electric revenues related to
the recovery of the carrying costs for Elm Road.  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, MGE could apply for
a fuel surcharge if its actual electric fuel costs exceeded 102% of the electric
fuel costs allowed in its latest rate order. Conversely, MGE could be required
to provide a fuel credit to its customers if actual electric fuel costs were
less than 98% of the electric fuel costs allowed in that order.  97    The PSCW
approved a $0.00239 per kWh interim fuel surcharge on MGE's electric rates
effective May 6, 2008, to cover increased fuel and purchased power
expenses. For the twelve months ended December 31, 2008, this interim
surcharge resulted in a $5.1 million increase to electric rates. Pursuant
to a stipulation agreement among MGE and intervenors in the proceeding, which
was approved by the PSCW on October 24, 2008, the interim surcharge
remained in effect until the end of the year. The stipulation agreement however,
requires MGE to review its 2008 monitored fuel costs at year-end and to refund
to customers, with interest at 10.8%, any amount by which its actual fuel costs
fall short of the monitored fuel costs collected in rates. As of
December 31, 2008, MGE accrued and expects to refund $5.5 million,
including interest, to customers as a result of this stipulation and has
reflected this reduction in other electric revenues.  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. Pursuant to the provisions of
the fuel surcharge, MGE's electric revenues resulting from this surcharge were
subject to refund and interest at 11%. 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, as compared to
those in the order, an interim fuel credit was approved by the PSCW. To account
for this credit, MGE recorded a $19.1 million reduction to other electric
revenues. This reduction to other electric revenues reflected MGE's estimated
obligation under the interim fuel credit and subject to refund provision
implemented by the PSCW during 2006. 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.  18. Commitments.  a. Coal Contracts - MGE Energy
and MGE.  MGE has coal supply contracts related
to the Blount plant. As of December 31, 2008, total coal commitments
related to the Blount plant are estimated to be $11.6 million for 2009 and
$7.2 million for 2010. Fuel procurement for MGE's jointly owned Columbia
and Elm Road plants are handled by Alliant and Wisconsin Energy Corporation,
respectively, the operating companies. If any minimum purchase obligations must
be paid under these contracts, management believes these obligations would be
considered costs of service and recoverable in rates. As of December 31,
2008, MGE's share of the total coal commitments for the Columbia and Elm Road
plants are estimated to be $20.2 million in 2009, $30.0 million in
2010, $11.6 million in 2011, $4.2 million in 2012, and
$6.6 million in 2013.  MGE's Blount plant also utilized
paper-derived fuel. MGE has a fixed commitment with a supplier of this
alternative fuel. Commitments under this arrangement are $0.2 million per
year for 2009, 2010, and 2011.  b. Purchased Power Contracts -
MGE Energy and MGE.  MGE has several purchase power
agreements to help meet future electric supply requirements. As of
December 31, 2008, MGE's total commitments for energy and purchase power
agreements for capacity and wind purchase power agreements are estimated to be
$26.1 million in 2009, $25.5 million in 2010, $25.9 million in
2011, $33.7 million in 2012, and $37.2 million in 2013. Management
expects to recover these costs in future customer rates. Included in these
numbers is the estimated commitment related to a purchase power agreement that
is considered a lease. See Footnote 18h for additional information.  On October 8, 2008, MGE entered
into a ten-year purchase power agreement to help meet future electric supply
requirements. Under this agreement, MGE has agreed to purchase 50 MW of
wind power from Osceola Windpower II, LLC, which is located in Iowa. This
facility became operational in October 2008. MGE does not have any capacity
payment commitments under this agreement. However, MGE is obligated to purchase
its ratable share of the energy produced by the project. MGE's commitment
related to its ratable share of energy produced by the project has been
estimated and is included in the above numbers.   98    c. Natural Gas Transportation and
Storage Contracts - MGE Energy and MGE.  MGE's natural gas transportation and
storage contracts require fixed monthly payments for firm supply pipeline
transportation and storage capacity. The pricing components of the fixed monthly
payments for the transportation and storage contracts are established by FERC
but may be subject to change. As of December 31, 2008, these payments are
estimated to be $15.2 million in 2009, $14.3 million in 2010,
$9.5 million in 2011, $0.9 million in 2012, and $0.8 million in
2013. MGE also has natural gas supply commitments. These commitments include
market-based pricing. As of December 31, 2008, total natural gas supply
commitments are estimated to be $26.0 million in 2009 and $1.7 million
in 2010. Management expects to recover these costs in future customer rates.  d. 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 December 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 the Act and its accompanying
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 0.075 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, Columbia
and Milwaukee 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 all 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),
Blount and WCCF (located in Dane County) and Elm Road (located in Milwaukee
County). Similarly, new standards for particulate emissions under 2.5 microns
and monitoring data has resulted in a preliminary nonattainment designation for
Dane, Columbia and Milwaukee counties for PM2.5, which could also result in
increased expenditures at Blount, WCCF, Columbia and Elm Road (see Item 1.
Business, Environmental, Air Quality, National Ambient Air Quality Standards
section for additional details).  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), Clean Air Visibility Rule (CAVR), the protection
of visibility by application of best available retrofit technologies (BART), and
existing and proposed state mercury emissions limits, are expected to result in
significant additional operating and capital expenditures at Columbia, Elm Road,
WCCF, 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 and the potential for the Supreme Court to rule
on this decision. Further, the state of Wisconsin's mercury rule under NR 446
that are significantly different than CAMR have been finalized through state
legislative review process, these will further increase mercury control
compliance costs at these facilities (as compared to CAMR). See Item 1.
Business, Environmental, Air Quality, CAMR/Wisconsin State Mercury Rules section
for additional details. There is also uncertainty concerning the NOx
and SO2 emission reduction requirements of CAIR in light of a
December 23, 2008, U.S. Court of Appeals decision remanding CAIR to
EPA.  99    In 1998,
the EPA issued a rule that imposed NOx emission budget for emission
sources in Wisconsin. In 2000, the Court of Appeals for the District of Columbia
invalidated a portion of the rule as applied to Wisconsin; however, the Court
stayed that portion of the challenge concerning Wisconsin's alleged impacts on
downwind, eight-hour ozone nonattainment areas. EPA has also stayed that portion
of the rule concerning Wisconsin's alleged impacts on downwind eight-hour ozone
nonattainment areas. If that portion of the rule concerning eight-hour ozone
nonattainment areas is upheld, the resulting NOx emission budget for
Wisconsin could potentially affect the level of permissible NOx
emissions from Blount, Columbia, and WCCF.  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
$170 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 environmental regulations at
Columbia. Additionally, MGE is entitled to a carrying cost on the related
pre-construction costs at a 100% AFUDC rate. As of December 31, 2008, MGE
had incurred $1.4 million (excluding carrying costs) in expenditures at
Columbia related to environmental initiatives.  As of December 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's share of these commitments will be $0.8 million for
2009. These costs are expected to be capitalized and included in the
consolidated balance sheet of MGE.  See Footnote 21 for additional
environmental commitments related to the Elm Road, including the WPDES permit
agreement with Clean Wisconsin, Inc. and Sierra Club.  e. Chattel Paper Agreement and Other
Guarantees - MGE Energy and MGE.  MGE makes available to qualifying
customers a financing program for the purchase and installation of
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 28, 2009. At December 31, 2008, 2007, and
2006, respectively, MGE had sold a $3.8 million, $3.8 million, and
$4.8 million interest in these receivables, which MGE accounted for as a
sale under SFAS No. 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 clarifies when to account separately 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 maintains responsibility for
collecting and remitting loan payments from customers to the financial
institution and does not retain any interest in the assets sold to the financial
institution. At each of the years ended December 31, 2008, 2007, and 2006,
MGE had recorded a servicing asset of $0.1 million. MGE recognized gains of
less than $0.1 million in each of the years ended December 31, 2008,
2007, and 2006, in connection with the sale of loan assets. The servicing asset
recognized and the amount amortized in 2008 was less than $0.1 million. The
loan assets are sold to the financial institution at cost, which approximates
fair value in view of their market rates of interest. During 2008, 2007, and
2006, MGE received approximately $0.8 million, $0.5 million, and
$0.7 million, respectively, from the financial institution for the sale of
loan assets. During those same years, payments of $0.9 million,
$1.9 million, and $1.2 million, respectively, were made by MGE to the
financial institution.  100    MGE would
be required to perform under the guarantee if the 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 December 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 $0.6 million in 2009,
$0.9 million in 2010, $0.6 million in 2011, $0.4 million in 2012,
and $0.4 million in 2013.  f. Elm Road Purchase Commitments -
MGE and MGE Energy.  Based on current forecasts, the
remaining capital costs for the Elm Road project are estimated to be
$22.3 million in 2009, $4.8 million in 2010, and $0.1 million in
2011. Included in the 2009 amount is $1.7 million, which has been accrued
and recorded as construction work in progress at December 31, 2008. See
Footnote 21a for additional information regarding Elm Road construction
costs.  g. Top of Iowa III Wind Project
Commitments - MGE and MGE Energy.  MGE has a service and maintenance
agreement related to the Top of Iowa III wind project which results in an
estimated commitment of $0.8 million in each year for 2009, 2010, 2011, and
2012.  h. Leases - MGE Energy and
MGE.  MGE has noncancelable operating
leases, primarily for combustion turbines, railcars, and computer equipment. The
operating leases generally do not contain renewal options, with the exception of
certain railcar operating leases. These leases have a renewal option of one year
or less. MGE is required to pay all executory costs such as maintenance and
insurance for its leases. MGE also has a purchase power agreement that is
considered a lease. There are no minimum future lease payments related to this
purchase power agreement. However, the estimated commitment for this purchase
power agreement has been included in the purchase power contracts commitments.
See Footnote 18b for additional information.  Future minimum rental payments at
December 31, 2008, under agreements classified as operating leases with
noncancelable terms in excess of one year are as follows:  (In thousands)2009
$2,4462010
2,1922011
1,7592012
1,5142013
1,493Thereafter
11,035Total minimum future
lease payments
$20,439  Rental expense under operating leases
totaled $5.1 million for 2008, $3.0 million for 2007, and
$3.1 million for 2006.  i. Other Legal Matters.  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 December 31, 2008, MGE
has a total of $1.5 million accrued in the financial statements for such
matters. The ultimate outcomes of such matters are uncertain and may have an
adverse effect on MGE's results of operations or cash flows.  j. Other Commitments.  MGE Energy holds an investment
in a nonpublic entity. From time to time this entity requires additional capital
infusions from their investors. MGE Energy has committed to contribute
$0.6 million in capital for such infusions. The timing of these infusions
is dependent on the needs of the investee and is therefore uncertain at this
time.  101    In
addition, MGE Energy has a three year agreement with a venture debt fund
expiring in December 2010. MGE Energy has committed to invest up to a
total of $1.0 million into this fund. As of December 31, 2008,
MGE Energy has $0.6 million remaining in commitments. The timing of
infusions is dependent on the needs of the fund and is therefore uncertain at
this time.  MGE has a commitment to the City of
Madison for certain "green energy" projects. These funds will primarily be used
to construct or purchase assets that will be owned by MGE and will be included
in the property, plant and equipment balance on the MGE and MGE Energy's
financial statements once the costs are incurred. The timing of the capital
expenditures is dependent on the feasibility of the individual projects. MGE
currently expects that $0.3 million will be expended in 2009,
$0.2 million in both 2010 and 2011, and $0.3 million in 2012.  MGE has entered into easements
related to wind projects. Estimated payments for these easements are
$0.1 million in each of the years 2009, 2010, 2011, 2012, and 2013.  19. 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.  On January 19, 2006, MGE entered
into severance agreements providing severance benefits to the nonunion employees
affected by the exit plan. Additionally, on September 21, 2006, MGE
ratified a labor agreement with the IBEW providing those union employees
impacted 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: $0.1 million in 2010 and $1.2 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 union and nonunion 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
December 31, 2008:  (In thousands)Balance at December 31, 2007
$609Additional expense during the period
211Cash payments during the period
(149)Balance at December 31, 2008
$671  The aforementioned exit plan has also
resulted in a plan curtailment for MGE's bargaining pension and postretirement
plans as defined in SFAS 88. See Footnote 13 for discussion of the
accounting implications.  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 twelve months ended December 31, 2008,
$3.4 million of accelerated depreciation expense had been recognized and
recovered in rates.   102    20. Asset Retirement Obligations -
MGE Energy and MGE.  FIN 47 and SFAS 143  Effective January 1, 2003, MGE
recorded an obligation for the fair value of its legal liability for asset
retirement obligations associated with removing an electric substation, a
combustion turbine generating unit, wind generating facilities, and photovoltaic
generating facilities, all of which are located on property not owned by MGE and
MGE Energy and would be removed upon the ultimate end of the lease. As of
December 31, 2005, MGE adopted FIN 47, Accounting for Conditional Asset
Retirement Obligations. The adoption of FIN 47 required MGE to update an
existing inventory of AROs, originally created for the adoption of
SFAS 143, Accounting for Asset Retirement Obligations, and to
determine which, if any, of the conditional AROs could be reasonably estimated.
The significant conditional AROs identified by MGE included the costs of
abandoning in place gas services and mains, the abatement and disposal of
equipment and buildings contaminated with asbestos and polychlorinated
biphenyls, and the proper disposal and removal of tanks. Changes in management's
assumptions regarding settlement dates, settlement methods, or assigned
probabilities could have had a material effect on the liabilities recorded by
MGE at December 31, 2008, as well as the regulatory asset recorded.  MGE also may have asset retirement
obligations relating to the removal of various assets, such as certain electric
and gas distribution facilities. These facilities are generally located on
property owned by third parties, on which MGE is permitted to operate by lease,
permit, easement, license, or service agreement. The asset retirement
obligations associated with these facilities cannot be reasonably determined due
to the indeterminate life of the related agreements.  In December 2007, upon
substantial completion of the Top of Iowa III wind project, MGE recorded an
obligation for the fair value of its legal liability for asset retirement
obligations associated with the removal, demolition, and restoration of the
facility and associated site.  The following table shows costs as of
December 31, 2006 and 2007, and changes to the asset retirement obligations
and accumulated depreciation through December 31, 2008. Amounts include
conditional AROs per FIN 47.  (In thousands)
(a)
Original Asset
Retirement
Obligation

(b)
Accumulated
Accretion

(c)
(a
+ b)
Asset
Retirement
Obligation

(d)
Accumulated
Depreciation-
Related AssetBalance,
December 31, 2006
$3,934

$8,545

$12,479

$1,790Changes through
December 31, 2007
1,431

400

1,831

47Balance,
December 31, 2007
$5,365

$8,945

$14,310

$1,837Changes through
December 31, 2008
(20)

704

684

130Balance,
December 31, 2008
$5,345

$9,649

$14,994

$1,967  In 2008 and 2007, MGE reduced
accumulated accretion by $0.1 million and $0.3 million, respectively,
due to the removal and retirement of assets.  Non-SFAS 143 Costs  Accumulated costs of removal that are
non-SFAS No. 143 obligations are classified within the financial
statements as regulatory liabilities. At December 31, 2008 and 2007, there
were $12.8 million and $13.2 million of these costs recorded as
regulatory liabilities within the financial statements, respectively.  21. 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. Each owner provides
its own financing and reflects its respective portion of the facility and costs
in its financial statements. MGE Power Elm Road's estimated share of capital
costs for both units was approximately $172 million (excluding capitalized
interest).   103    In
July 2008, the Elm Road construction contractor gave notice forecasting
that the in-service date of Unit 1 would be delayed by three months from the
guaranteed in-service date of September 29, 2009 and that the in-service
date of Unit 2 would be one month earlier than the guaranteed in-service date of
September 29, 2010. The notice stated that the delays in Unit 1 were caused
by severe weather, changes in local labor conditions from those anticipated by
the contractor and other factors. On December 23, 2008, we received notice
from Elm Road Services, LLC (ERS) that it had received a letter from Bechtel
Power Corporation (Bechtel) containing Bechtel's formal claim for schedule and
cost relief on the construction of the Elm Road units. Bechtel is
constructing the Elm Road units under a Turnkey Engineering, Procurement and
Construction Contract for Supercritical Pulverized Coal Fired Electric
Generation Facility dated April 9, 2004 (the "Contract") with ERS, which is
the project manager for the Elm Road units. As reported previously, Bechtel had
notified the owners of the Elm Road units of its intention to submit a formal
claim under the Contract for schedule and cost relief by year-end 2008. MGE Power Elm
Road has leased the Elm Road units to MGE pursuant to separate facility lease
agreements. These leases were authorized by order of the PSCW in accordance with
applicable provisions of Wisconsin law that authorized financing of new
generation through facility leases. The PSCW order establishes a cap on the
construction costs that may be passed through the lease agreements to MGE and
its customers, through rates. Additional costs attributable to force majeure
events, as defined in the leases, do not count against this cap, but are subject
to PSCW review and determination that the costs were prudently incurred. Bechtel has
asserted two claims for cost and schedule relief in its letter to ERS: · The first
claim is based on the impact of severe weather and specified labor-related
matters. It seeks compensation for additional costs of approximately
$413 million, of which MGE Energy's share would be approximately
$34.4 million, if the claim is successful in full. Although Bechtel has
reserved the right to request future additional costs and schedule relief, the
aggregate amount of the first claim includes $45 million of projected
future costs in addition to those already incurred. Bechtel seeks cost and
schedule relief for weather-related events, which it contends are force majeure
events and changed local conditions under the Contract, consisting of extreme
winds from September 2006 through April 2007, snowstorms from
December 2007 through April 2008, and rain storms in June 2008. It
also seeks cost and schedule relief based upon alleged changes in labor
conditions, which it contends consisted of a significant shortage in the
availability of craft labor, significant increases in competing projects,
overtime and per diems allegedly necessary to attract labor, and alleged
restrictions that the project labor agreement placed on Bechtel's ability to
attract and retain craft labor. · The second
claim is based upon the alleged effects of ERS-directed changes and ERS-caused
delays prior to the issuance of the full notice to proceed ("FNTP") in July
2005. It seeks compensation for additional costs of approximately
$72 million, of which MGE Energy's share would be approximately
$6 million, if the claim is successful in full. These changes and delays
are alleged to consist of a delay in issuing certain limited notices to proceed,
a delay in issuing the FNTP until the final resolution of litigation brought by
opposition groups that challenged the Certificate of Public Convenience and
Necessity for the Elm Road units, the imposition of additional limits to third
party cancellation charges that allegedly restricted Bechtel's ability to issue
purchase orders, a reduction of the pre-FNTP monthly payments below the amounts
required by the Contract, and a request by ERS to perform design studies and
issue design changes during the pre-FNTP period. Although ERS
is in the process of analyzing the claims and its responses to them, it has
stated its belief that both claims are without merit. It has also stated its
view that the only circumstances and events for which the Elm Road units owners
currently retain price adjustment risk under the contract are force majeure,
wage escalation in excess of 4% annually as measured by published wage
bulletins, delays caused by ERS, changes in scope or performance requested by
ERS, and unforeseen sub-surface ground conditions. ERS has invoked the dispute
resolution process provided for in the contract in order to address the claims
made by Bechtel under the contract. That process involves an informal resolution
process, followed by mediation and then binding arbitration. ERS is currently in
the mediation phase with respect to determining the rights of the parties under
the contract and the disposition of Bechtel's claims. ERS has expressed its
inability to predict the length or ultimate outcome of the claims. As a result,
we are unable to predict the results of these claims or their effect on the
costs recoverable under the existing facility leases, in the event that the
outcome of the claims should cause total construction costs of the Elm Road
units to exceed the amounts authorized in the PSCW order. Bechtel
continues to target an in-service date for Elm Road unit 1 three months beyond
the guaranteed Contract date of September 29, 2009, and an in-service date
for Elm Road unit 2 one month earlier than the guaranteed Contract date of
September 29, 2010. However, Bechtel does request schedule relief that
would result in six months of relief from liquidated damages beyond the
guaranteed Contract date for unit 1 and three months of relief from liquidated
damages beyond the guaranteed Contract date for unit 2.  104    At
December 31, 2008, MGE Power Elm Road had incurred $146.0 million
(excluding capitalized interest) of costs on the project, which is reflected in
the construction work in progress balance on MGE's and MGE Energy's
consolidated balance sheets. These amounts may change as a result of
modifications to the project estimate or timing differences.  MGE Power Elm Road calculates
capitalized interest in accordance with SFAS 34, Capitalization of
Interest Cost, on the Elm Road project. At December 31, 2008, MGE Power
Elm Road had recorded a total of $10.9 million in capitalized interest
related to the Elm Road project which is reflected in the construction work in
progress balance on MGE's and MGE Energy's consolidated balance sheets.  b. Consolidation.  On the date of acquisition,
MGE Energy and its subsidiaries entered into various agreements, including
a facility lease agreement. This facility lease agreement is 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 46(R). 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.  On November 1, 2005, MGE
received approval from the PSCW to defer 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 $61.3 million. This estimate is subject to
change based on changes in interest rates, timing of capital expenditures, and
the total project cost.  MGE began collecting the carrying
costs in rates in 2006. These amounts are being collected over multiple years.
Of these costs, MGE estimates $22.4 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
$38.9 million represents the equity portion and is being recognized over
the period allowed for recovery in rates. For the year ended December 31,
2008, $9.6 million related to the carrying costs were recovered in rates.
Of this amount, $3.2 million relates to the debt portion of the facility
and was deferred on the consolidated financial statements of MGE and
MGE Energy. The remaining $6.4 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 Pollutant 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 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.   105    On
May 8, 2008, WDNR issued its public notice that it intended to reissue the
WPDES permit to allow for the once-through cooling system that was under
construction by Wisconsin Energy Corporation. On June 6, 2008, EPA issued
its concurrence letter on the draft permit indicating it would not object to the
modification of the WPDES permit as drafted. A public information hearing on the
intended reissued WPDES permit was held on June 9, 2008 and the public
comment period closed on June 16, 2008. On July 31, 2008, the WDNR
issued the final modified permit, with no substantive changes from the
previously issued draft permit. The deadline for a legal challenge to the permit
has expired without appeal.  On July 31, 2008, the joint
owners of the Oak Creek expansion reached an agreement with Clean Wisconsin,
Inc. and Sierra Club, the groups opposing the WPDES permit. Under the settlement
agreement, these groups agreed to withdraw their opposition to the modified
WPDES permit for the expansion units at Oak Creek. The joint owners committed to
various environmental projects, including projects designed to address
greenhouse gas emissions and water quality. MGE's share of those commitments
would involve a payment of approximately $0.4 million in 2009 for
greenhouse gas reduction efforts (which has been accrued in 2008) and, subject
to regulatory approval, further payments of approximately $0.3 million
annually over 25 years (2010-2034) to address water quality issues in Lake
Michigan.  22. Top of Iowa III Wind Project
- MGE Energy and MGE.  On September 29, 2006, MGE
formalized plans to acquire 30 MW or 18 turbines in a wind-powered electric
generating facility located in Worth County, Iowa. In February 2008, the
project was placed into service. At December 31, 2008, MGE had incurred
approximately $56 million of costs on the project and $2.9 million in
AFUDC, which are reflected in the property, plant, and equipment balance on
MGE's and MGE Energy's consolidated balance sheets. MGE was permitted to
recover 100% AFUDC on the Top of Iowa III wind project during construction
of the facility.  MGE began recovering the costs of
this project in rates in 2008.  23. Adoption of Accounting Principles
and Recently Issued Accounting Pronouncements - MGE Energy and MGE.  a. 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 and will
affect the presentation of the minority interest on MGE's financial
statements.  b. 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 and will not have any material impact on MGE Energy and MGE.  c. FSP FAS 140-4 and FIN
46(R)-8.  In December 2008, the
FASB issued FSP FAS 140-4 and FIN 46(R)-8 which amends
FASB Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, to provide additional
disclosures about transfers of financial assets. It also amends
FASB Interpretation No. 46, Consolidation of Variable Interest
Entities, to require public enterprises to provide additional disclosures
about their involvement with variable interest entities. The adoption of FSP
FAS 140-4 and FIN 46(R)-8 is effective for the reporting period ending
December 31, 2008, and did not have any material impact on MGE Energy
and MGE.   106    d. FSP FAS 132(R)-1.  In December 2008, the
FASB issued FSP FAS 132(R)-1, which amends FASB Statement
No. 132 Employers' Disclosures about Pensions and Other Postretirement
Benefits. This amendment provides guidance on employer's disclosures about
plan assets of a defined benefit pension or other postretirement plan. The
adoption of FSP FAS 132 (R)-1 is effective for fiscal years ending after
December 15, 2009. MGE Energy and MGE are currently assessing the
impact this pronouncement will have on their financial statements.  24. Segment Information -
MGE Energy and MGE.  The electric utility business
purchases, generates and distributes electricity, and contracts for transmission
service. The gas utility business purchases and distributes natural gas and
contracts for the transportation of natural gas. Both the electric and gas
segments operate through MGE Energy's principal subsidiary, MGE.  The nonregulated energy operations
are conducted through MGE Energy's subsidiaries: MGE Power, MGE Power West
Campus, and MGE Power Elm Road. These subsidiaries have been formed to
construct, own and lease new electric generating capacity to assist MGE. MGE
Power West Campus owns a controlling interest in the electric generation plant
of the natural gas-fired cogeneration facility on the UW campus, which is leased
to MGE, and MGE Power Elm Road has an undivided 8.33% ownership interest in each
of two 615 MW generating units being constructed in Oak Creek, Wisconsin.
MGE Power Elm Road's portion is also being leased to MGE.  The transmission investment segment
invests, through MGE Transco, in ATC, a company that provides electric
transmission services primarily in Wisconsin. See Footnote 4 to the
consolidated financial statements for further discussion of MGE Transco and the
investment in ATC.  The "All other" segment includes:
corporate, CWDC, MAGAEL, and MGE Construct. These entities' operations consist
of investing in companies and property which relate to the regulated operations,
financing the regulated operations, or providing construction services to the
other subsidiaries.  General corporate expenses include
the cost of executive management, corporate accounting and finance, information
technology, risk management, human resources and legal functions, and employee
benefits that are allocated to electric and gas segments based on formulas
prescribed by the PSCW. Identifiable assets are those used in MGE's operations
in each segment. Assets not allocated consist primarily of cash and cash
equivalents, restricted cash, investments, other accounts receivable, and
prepaid assets.  Sales between our electric and gas
segments are based on PSCW approved tariffed rates. Additionally, intersegment
operations related to the leasing arrangement between our electric segment and
MGE Power West Campus/ MGE Power Elm Road are based on terms previously approved
by the PSCW. Consistent with internal reporting and in accordance with the
provisions of SFAS 131, management has presented the direct financing
capital lease between MGE and MGE Power West Campus as an operating lease for
purposes of segment reporting. Lease payments made by MGE to MGE Power West
Campus are shown as operating expenses. The lease payments received by MGE Power
West Campus from MGE are shown as lease income in interdepartmental revenues.
The depreciation expense associated with the WCCF is reflected in the
nonregulated energy segment.   107    All prior
year segment data has been re-presented to conform with the current year
presentation and segment break out. The following table shows segment
information for MGE Energy's and MGE's operations:  (In thousands)
MGE Energy
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
All
Others
Consolidation/
Elimination
Entries
Consolidated
TotalYear ended
December 31, 2008Operating
revenues
$345,962
$242,598
$7,433
$-
$-
$-
$595,993Interdepartmental
revenues
541
21,511
14,878
-
-
(36,930)
-Total
operating revenues
346,503
264,109
22,311
-
-
(36,930)
595,993Depreciation and
amortization
(27,354)
(9,175)
(2,744)
-
-
-
(39,273)Other operating
expenses
(270,671)
(234,593)
(105)
(1)
(498)
36,930
(468,938)Operating income
(loss)
48,478
20,341
19,462
(1)
(498)
-
87,782Other income
(deductions), net
(38)
(1,660)
-
7,241
2,501
-
8,044Interest income
(expense), net
(11,026)
(3,156)
(2,639)
-
2,819
-
(14,002)Income before
taxes
37,414
15,525
16,823
7,240
4,822
-
81,824Income tax
provision
(11,718)
(5,741)
(6,752)
(2,914)
(1,931)
-
(29,056)Net income
$25,696
$9,784
$10,071
$4,326
$2,891
$-
$52,768Year ended
December 31, 2007Operating revenues

$334,488
$197,925
$5,181
$-
$-
$-
$537,594Interdepartmental
revenues
506
21,134
14,858
-
-
(36,498)
-Total
operating revenues
334,994
219,059
20,039
-
-
(36,498)
537,594Depreciation and
amortization
(20,994)
(8,527)
(2,678)
-
-
-
(32,199)Other operating
expenses
(260,184)
(197,491)
(108)
(2)
(441)
36,498
(421,728)Operating income
(loss)
53,816
13,041
17,253
(2)
(441)
-
83,667Other income
(deductions), net
642
(589)
-
6,047
(31)
-
6,069Interest income
(expense), net
(9,860)
(2,962)
(2,509)
-
2,275
-
(13,056)Income before
taxes
44,598
9,490
14,744
6,045
1,803
-
76,680Income tax
provision
(15,147)
(3,594)
(5,917)
(2,427)
(770)
-
(27,855)Net income
$29,451
$5,896
$8,827
$3,618
$1,033
$-
$48,825Year ended
December 31, 2006Operating revenues

$318,912
$185,226
$3,408
$-
$-
$-
$507,546Interdepartmental
revenues
500
19,135
15,019
-
-
(34,654)
-Total
operating revenues
319,412
204,361
18,427
-
-
(34,654)
507,546Depreciation and
amortization
(20,260)
(8,339)
(2,743)
-
-
-
(31,342)Other operating
expenses
(247,662)
(183,534)
(143)
(8)
(517)
34,654
(397,210)Operating income
(loss)
51,490
12,488
15,541
(8)
(517)
-
78,994Other income
(deductions), net
(1,238)
247
-
5,317
3
-
4,329Interest income
(expense), net
(10,281)
(2,900)
(2,654)
-
834
-
(15,001)Income before
taxes
39,971
9,835
12,887
5,309
320
-
68,322Income tax
provision
(14,865)
(3,654)
(5,109)
(2,134)
(137)
-
(25,899)Net income
$25,106
$6,181
$7,778
$3,175
$183
$-
$42,423(In thousands)
MGE
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Consolidated
TotalYear ended
December 31, 2008Operating
revenues
$345,962
$242,598
$7,433
$-
$-
$595,993Interdepartmental
revenues
541
21,511
14,878
-
(36,930)
-Total
operating revenues
346,503
264,109
22,311
-
(36,930)
595,993Depreciation and
amortization
(27,354)
(9,175)
(2,744)
-
-
(39,273)Other operating
expenses*
(282,395)
(240,953)
(6,857)
(1)
36,930
(493,276)Operating income
(loss)*
36,754
13,981
12,710
(1)
-
63,444Other income
(deductions), net *
(32)
(1,041)
-
4,327
-
3,254Interest
expense, net
(11,026)
(3,156)
(2,639)
-
-
(16,821)Income before
minority interest
25,696
9,784
10,071
4,326
-
49,877Minority
interest, net of tax
-
-
-
-
(12,304)
(12,304)Net income
(loss)
$25,696
$9,784
$
10,071
$4,326
$(12,304)
$37,573Year ended
December 31, 2007Operating revenues

$334,488
$197,925
$5,181
$-
$-
$537,594Interdepartmental
revenues
506
21,134
14,858
-
(36,498)
-Total
operating revenues
334,994
219,059
20,039
-
(36,498)
537,594Depreciation and
amortization
(20,994)
(8,527)
(2,678)
-
-
(32,199)Other operating
expenses*
(275,652)
(201,038)
(6,025)
(2)
36,498
(446,219)Operating income
(loss)*
38,348
9,494
11,336
(2)
-
59,176Other income
(deductions), net*
963
(636)
-
3,620
-
3,947Interest
expense, net
(9,860)
(2,962)
(2,509)
-
-
(15,331)Income before
minority interest
29,451
5,896
8,827
3,618
-
47,792Minority
interest, net of tax
-
-
-
-
(10,721)
(10,721)Net income
(loss)
$29,451
$5,896
$8,827
$3,618
$(10,721)
$37,071Year ended
December 31, 2006Operating revenues

$318,912
$185,226
$3,408
$-
$-
$507,546Interdepartmental
revenues
500
19,135
15,019
-
(34,654)
-Total
operating revenues
319,412
204,361
18,427
-
(34,654)
507,546Depreciation and
amortization
(20,260)
(8,339)
(2,743)
-
-
(31,342)Other operating
expenses*
(263,057)
(187,096)
(5,252)
(8)
34,653
(420,760)Operating income
(loss)*
36,095
8,926
10,432
(8)
(1)
55,444Other income
(deductions), net *
(708)
155
-
3,183
(23)
2,607Interest
expense, net
(10,281)
(2,900)
(2,654)
-
-
(15,835)Income (loss)
before minority interest
25,106
6,181
7,778
3,175
(24)
42,216Minority
interest, net of tax
-
-
-
-
(9,610)
(9,610)Net income
(loss)
$25,106
$6,181
$7,778
$3,175
$(9,634)
$32,606  *Amounts are shown net of the related
tax expense, consistent with the presentation on the consolidated MGE Income
Statement.  The following table shows segment
information for MGE Energy's and MGE's assets and capital expenditures:  Utility

Consolidated(In
thousands)
MGE Energy
Electric
Gas
Assets not
Allocated

Nonregulated
Energy
Transmission
Investment
All
Others
Consolidation/
Elimination
Entries
TotalAssets:December 31,
2008
$677,540
$284,211
$14,642

$271,568
$46,292
$381,433
$(407,411)
$1,268,275December 31,
2007
614,949
234,002
14,876

227,415
40,808
342,491
(362,954)
1,111,587December 31,
2006
547,150
228,639
10,472

177,234
38,470
298,261
(319,792)
980,434Capital
Expenditures:Year ended
Dec. 31, 2008
$47,033
$8,441
$
-

$50,303
$
-
$
-
$
-
$105,777Year ended
Dec. 31, 2007
70,687
12,091
-

53,480
-
-
-
136,258Year ended
Dec. 31, 2006
50,604
10,206
-

31,765
-
-
-
92,575  Utility

Consolidated(In
thousands)
MGE
Electric
Gas
Assets not
Allocated

Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
TotalAssets:December 31,
2008
$677,540
$284,211
$14,642

$271,318
$46,292
$(22,881)
$1,271,122December 31,
2007
614,949
234,002
14,876

227,165
40,808
(15,908)
1,115,892December 31,
2006
547,150
228,639
10,472

176,984
38,470
(12,983)
988,732Capital
Expenditures:Year ended
Dec. 31, 2008
$47,033
$8,441
$
-

$50,303
$
-
$
-
$105,777Year ended
Dec. 31, 2007
70,687
12,091
-

53,480
-
-
136,258Year ended
Dec. 31, 2006
50,604
10,206
-

31,765
-
-
92,575  108    25. Quarterly Summary of Operations -
MGE Energy (unaudited).  (In
thousands, except per-share amounts)
Quarters Ended2008
March 31

June 30

Sept. 30

Dec. 31Operating
revenues:Regulated
electric revenues
$82,439

$84,031

$99,177

$80,315Regulated gas
revenues
105,484

38,920

24,843

73,351Nonregulated
revenues
2,073

1,786

1,787

1,787Total
189,996

124,737

125,807

155,453Operating
expenses
165,688

106,495

100,556

135,472Operating income
24,308

18,242

25,251

19,981Interest and
other income, net
(2,857)

(1,745)

1,781

(3,137)Income tax
provision
(7,614)

(5,940)

(9,722)

(5,780)Earnings on
common stock
$13,837

$10,557

$17,310

$11,064Earnings per
common share
$0.63

$0.48

$0.78

$0.49Dividends per
share
$0.355

$0.355

$0.362

$0.3622007Operating
revenues:Regulated
electric revenues
$76,764

$80,947

$98,435

$78,342Regulated gas
revenues
89,843

28,297

16,588

63,197Nonregulated
revenues
1,279

1,301

1,300

1,301Total
167,886

110,545

116,323

142,840Operating
expenses
146,253

93,822

90,588

123,264Operating income
21,633

16,723

25,735

19,576Interest and
other income, net
(2,225)

(1,430)

(890)

(2,442)Income tax
provision
(7,106)

(5,327)

(9,309)

(6,113)Earnings on
common stock
$12,302

$9,966

$15,536

$11,021Earnings per
common share
$0.59

$0.47

$0.71

$0.50Dividends per
share
$0.348

$0.348

$0.355

$0.355  Notes:   The quarterly results of operations
within a year may not be comparable because of seasonal and other factors.   The sum of earnings per share of
common stock for any four quarters may vary slightly from the earnings per share
of common stock for the equivalent twelve-month period due to rounding.   MGE Energy's operations are
based primarily on its utility subsidiary MGE.  26. Related Party Transactions -
MGE Energy and MGE.  ATC  During 2008, 2007, and 2006, MGE
recorded $21.9 million, $18.7 million, and $16.3 million,
respectively for transmission services received from ATC. MGE also provides a
variety of operational, maintenance, and project management work for ATC, which
is reimbursed by ATC. For the year ended December 31, 2008, MGE had a
receivable due from ATC of $0.2 million. For each of the years ended
December 31, 2007 and 2006, MGE had a receivable due from ATC of
$0.1 million.  WEPCO and ATC entered into an
interconnection agreement related to transmission system upgrades for the Elm
Road project, in which MGE Power Elm Road has an undivided 8.33% ownership
interest. At December 31, 2008 and 2007, MGE Power Elm Road has a
receivable from ATC totaling $3.2 million and $2.8 million,
respectively, related the work done by ATC on the Elm Road interconnection
project. MGE will be reimbursed for all these costs upon commercial operation of
Unit 1.  During the year ended
December 31, 2008, MGE paid $0.1 million in cash to ATC in exchange
for substation assets.  For additional discussion on MGE's
relationship with ATC, see Footnote 4.   109    27. Subsequent Events- MGE Energy
and MGE.  a. Pension and Postretirement Benefit
Payment.  On January 23, 2009, MGE made a
cash payment of $6.0 million to the pension and postretirement plans. This
contribution was made at MGE's discretion.  b. ATC Capital Contribution.  On January 30, 2009, MGE Transco
made a voluntary $0.9 million capital contribution to ATC.   Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure.  MGE Energy and MGE  None.   Item 9A. Controls
and Procedures.  MGE Energy and MGE  Conclusion Regarding the Effectiveness of Disclosure
Controls and Procedures  During the fourth quarter of 2008, each registrant's
management, including the principal executive officer and principal financial
officer, evaluated its disclosure controls and procedures related to the
recording, processing, summarization, and reporting of information in its
periodic reports that it files with the SEC. These disclosure controls and
procedures have been designed to ensure that material information relating to
that registrant, including its subsidiaries, is accumulated and made known to
that registrant's management, including its principal executive officer and its
principal executive financial officer, by other employees of that registrant and
its subsidiaries as appropriate to allow timely decisions regarding required
disclosure, and that this information is recorded, processed, summarized,
evaluated, and reported, as applicable, within the time periods specified in the
SEC's rules and forms. Due to the inherent limitations of control systems, not
all misstatements may be detected. These inherent limitations include the
realities that judgments in decision making can be faulty and breakdowns can
occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. Also, the registrants do not
control or manage certain of their unconsolidated entities, and thus, their
access and ability to apply their procedures to those entities is more limited
than is the case for their consolidated subsidiaries.  As of December 31, 2008, the principal executive
officer and principal financial officer of each registrant concluded that such
registrant's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) were effective to
accomplish their objectives. Each registrant intends to continually strive to
improve its disclosure controls and procedures to enhance the quality of its
financial reporting.  During the quarter ended December 31, 2008, there
were no changes in MGE Energy or MGE's internal controls over financial
reporting that materially affected, or are reasonably likely to materially
affect, MGE Energy or MGE's internal control over financial reporting.  MGE Energy and MGE  Management of MGE Energy and MGE are required to
assess and report on the effectiveness of its internal control over financial
reporting as of December 31, 2008. As a result of that assessment,
management determined that there were no material weaknesses as of
December 31, 2008 and, therefore, concluded that MGE Energy and MGE's
internal control over financial reporting was effective. Management's Report on
Internal Control Over Financial Reporting is included in Item 8. - Financial
Statements and Supplementary Data.   Item 9B. Other
Information.  MGE Energy  None.    110    PART
III.   Item 10.
Directors, Executive Officers, and Corporate Governance.  MGE Energy  The information required by Item 10 relating to directors
and nominees for election as directors at MGE Energy's annual meeting of
shareholders is incorporated herein by reference to the information under the
heading "ELECTION OF DIRECTORS" in MGE Energy's definitive proxy statement
(2009 Proxy Statement) to be filed with the SEC on or before April 9, 2009.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is incorporated herein by reference to the information under the
heading "BENEFICIAL OWNERSHIP - Section 16(a) Beneficial Ownership Reporting
Compliance" in the 2009 Proxy Statement.  The information required by Item 10 relating to executive
officers is set forth above in Item 1. Business - Executive Officers of the
Registrants.  Code of Ethics  MGE Energy has adopted a Code of Ethics applicable
to its directors and all of its employees, including its chief executive
officer, chief financial officer, and principal accounting officer. The Code of
Ethics is available on MGE Energy's web site at www.mgeenergy.com.   Item 11. Executive
Compensation.  See Item 12.   Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.  MGE Energy  The required information for Items 11 and 12 is included
in the 2009 Proxy Statement, which will be filed with the SEC on or before
April 9, 2009, under the section "EXECUTIVE COMPENSATION," not including
"Compensation Committee Report," and "Company Performance," and under the
section "BENEFICIAL OWNERSHIP," which is incorporated herein by reference.  MGE Energy does not have or maintain any equity
compensation plans.   Item 13. Certain
Relationships and Related Transactions, and Director Independence.  MGE Energy  The information required by Item 13 is incorporated by
reference herein from the "BOARD OF DIRECTORS INFORMATION" section in the 2009
MGE Energy Proxy Statement, which will be filed with the SEC on or before
April 9, 2009.   111    Item
14. Principal Accounting Fees and Services.  MGE Energy  The information required by Item 14 is incorporated
herein by reference to the information under the heading "RATIFICATION OF
PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM"
in the 2009 Proxy Statement.  MGE  Independent Registered Public Accounting Firm Fees
Disclosure  2008

2007Audit Fees:Audit of financial statements
and internal controls
$659,554

$620,190Review of SEC filings and
comfort letters
-

32,995Total Audit Fees
$659,554

$653,185Audit-Related Fees:Services rendered for utility
commission-mandated obligations
$12,387

$ -Total Audit-Related Fees
$12,387

$ -Tax Fees:Review of federal and state
income tax returns
$28,246

$28,300Total Tax Fees
$28,246

$28,300All Other Fees:Fee to access online accounting
standards library
$3,000

$1,500Financial analysis for
generation projects
93,400

55,600Total All Other Fees
$96,400

$57,100  MGE is a wholly owned subsidiary of MGE Energy and
does not have a separate audit committee. Instead, that function is fulfilled
for MGE by the MGE Energy Audit Committee. The Audit Committee approves
each engagement of the independent registered public accounting firm to render
any audit or nonaudit services before the firm is engaged to render those
services. The Chair of the Audit Committee or other designated Audit Committee
member may represent the entire Audit Committee for purposes of this approval.
Any services approved by the Chair or other designated Audit Committee member
are reported to the full Audit Committee at the next scheduled Audit Committee
meeting. No de minimis exceptions to this approval process are allowed under the
Audit Committee Charter; and thus, none of the services described in the
preceding table were approved pursuant to Rule 2-01(c)(7)(i)(C) of Regulation
S-X.     112    PART
IV.   Item 15. Exhibits
and Financial Statement Schedules.  (a) 1. Financial Statements.  MGE EnergyReport of
Independent Registered Public Accounting Firm
58Consolidated
Statements of Income for the years ended December 31, 2008, 2007, and
2006
60Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007,
and 2006
61Consolidated
Balance Sheets as of December 31, 2008 and 2007
62Consolidated
Statements of Capitalization as of December 31, 2008 and 2007
63Consolidated
Statements of Common Equity and Comprehensive Income as of
December 31, 2008, 2007, and 2006
64Notes to
Consolidated Financial Statements
70MGEReport of
Independent Registered Public Accounting Firm
59Consolidated
Statements of Income for the years ended December 31, 2008, 2007, and
2006
65Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007,
and 2006
66Consolidated
Balance Sheets as of December 31, 2008 and 2007
67Consolidated
Capitalization Statement as of December 31, 2008 and 2007
68Consolidated
Statements of Common Equity and Comprehensive Income as of
December 31, 2008, 2007, and 2006
69Notes to
Consolidated Financial Statements
70  2. Financial Statement
Schedule.  Schedule II - Valuation and
Qualifying Accounts for MGE Energy, Inc. and Madison Gas and Electric
Company.  All other schedules have been omitted
because they are not applicable or not required, or because the required
information is shown in the consolidated financial statements or notes
thereto.  3. All Exhibits Including Those
Incorporated by Reference.  Exhibits. Certain of the following
exhibits are incorporated herein by reference under Rule 12b-32 of the
Securities Exchange Act of 1934, as amended, as indicated by the parenthetical
reference. Certain other instruments which would otherwise be required to be
listed below have not been so listed because such instruments do not authorize
securities in an amount which exceeds 10% of the total assets of the applicable
registrant and its subsidiaries on a consolidated basis and the relevant
registrant agrees to furnish a copy of any such instrument to the Commission
upon request. An asterisk (*) indicates a management contract or compensatory
plan or arrangement.  3.1 Amended and Restated Articles of
Incorporation of MGE Energy, Inc. (Exhibit 3.1 to MGE Energy's
Registration Statement on Form S-4, Registration No. 333-72694.)  3.2 Amended and Restated Bylaws of
MGE Energy, Inc. (Exhibit 3.2 to MGE Energy's Registration Statement
on Form S-4, Registration No. 333-72694.)  3.3 Restated Articles of Incorporation of
Madison Gas and Electric Company as in effect at May 6, 1996. (Exhibit
3.(i) to Form 10-K for year ended December 31, 1996, File
No. 0-1125.)  3.4 Amended Bylaws of Madison Gas and
Electric Company as in effect at August 16, 2002. (Exhibit 3.4 to Form 10-K
for year ended December 31, 2002, File No. 0-1125.)  4.1 Indenture of Mortgage and Deed of
Trust between Madison Gas and Electric Company and Firstar Trust Company
(successor to First Wisconsin Trust Company), as Trustee, dated as of
January 1, 1946. (Exhibit 7-D to SEC File No. 0-1125.)   113    4.2 Supplemental Indenture to
aforementioned indenture of Mortgage and Deed of Trust.  Supplemental
Indenture

Dated as of

Exhibit No.

SEC
File No.Seventeenth

February 1, 1993

4F

Form 10-K for
year ended
December 31,
1992,
File
No. 0-1125  4.3 Indenture between MGE and The Bank of
New York Mellon Trust Company, N.A. (as successor to Bank One, N.A.), as
Trustee, dated as of September 1, 1998. (Exhibit 4B to Form 10-K for year
ended December 31, 1999, File No. 0-1125.)  10.1 Credit Agreement dated as of
December 21, 2005, among MGE Energy, the Lenders party thereto, and
JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.5 to Form 10-K
for the year ended December 31, 2005, File No. 0-1125.)  10.2 First Amendment dated as of
April 25, 2006, to Credit Agreement dated as of December 21, 2005,
among MGE Energy, the Lenders party thereto, and JPMorgan Chase Bank, N.A.,
as Administrative Agent. (Exhibit 10.1 to Form 10-Q for the quarter ended
March 31, 2006, File No. 0-469965.)  10.3 Amended and Restated Credit Agreement
dated as of December 21, 2005, among Madison Gas and Electric Company, the
Lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent.
(Exhibit 10.6 to Form 10-K for the year ended December 31, 2005, File
No. 0-1125.)  10.4 Agreement dated August 29, 2008,
between Madison Gas and Electric Company, as Borrower, and JPMorgan Chase Bank,
N.A., as Lender. (Exhibit 10.1 to Form 8-K dated August 29, 2008, File
No. 0-1125.)  10.5 Credit Agreement dated as of
August 29, 2008 among MGE Energy, Inc., as Borrower, the lenders named
therein, and JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit 10.2
to Form 8-K dated August 29, 2008, File No. 0-49965.)  10.6 Credit Agreement dated as of
December 30, 2008, among MGE Energy, Inc., as Borrower, the lenders
named therein, and JPMorgan Chase Bank, N.A., as Administrative Agent. (Exhibit
10.1 to Form 8-K dated December 30, 2008, File No. 0-49965.)  10.7 Distribution Agreement, dated as of
November 9, 2006, by and between MGE Energy, Inc. and J.P. Morgan
Securities Inc. (Exhibit 1.1 to Form 8-K dated November 9, 2006, File
No. 0-49965.)  10.8 Copy of Joint Power Supply Agreement
with Wisconsin Power and Light Company and Wisconsin Public Service Corporation
dated February 2, 1967. (Exhibit 4.09 to Registration Statement,
Registration No. 2-27308.)  10.9 Copy of Joint Power Supply Agreement
(Exclusive of Exhibits) with Wisconsin Power and Light Company and Wisconsin
Public Service Corporation dated July 26, 1973, amending Exhibit 5.04.
(Exhibit 5.04A to Registration Statement, Registration No. 2-48781.)  10.10 Copy of revised Agreement for
Construction and Operation of Columbia Generating Plant with Wisconsin Power and
Light Company and Wisconsin Public Service Corporation dated July 26, 1973.
(Exhibit 5.07 to Registration Statement, Registration No. 2-48781.)  10.11 Copy of Amended and Restated
Agreement for Construction and Operation of Columbia Generating Plant dated
January 17, 2007. (Exhibit 10.9 to Form 10-K for the year ended
December 31, 2006, File No. 0-1125.)  10.12 West Campus Cogeneration Facility
Engineering, Procurement and Construction Agreement, dated as of October 1,
2003, among MGE Construct LLC, as General Contractor, and the State of
Wisconsin, and MGE Power West Campus, LLC, as Joint Owners. (Exhibit 10.18 to
Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)   114    10.13 West Campus Cogeneration Facility
Joint Ownership Agreement, dated as of October 13, 2003, among MGE Power
West Campus, LLC, The Board of Regents of the University of Wisconsin System,
and the State of Wisconsin, as Joint Owners. (Exhibit 10.19 to Form 10-Q for the
quarter ended September 30, 2005, File No. 0-1125.)  10.14 West Campus Cogeneration Facility
Operation and Maintenance Agreement, dated as of October 13, 2003, among
Madison Gas and Electric Company, as Operator, and the Board of Regents of the
University of Wisconsin System, as Joint Owner. (Exhibit 10.20 to Form 10-Q for
the quarter ended September 30, 2005, File No. 0-1125.)  10.15 West Campus Cogeneration Facility
Lease Agreement, dated as of March 18, 2004, among MGE Power West Campus,
LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit 10.21
to Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)  10.16 West Campus Cogeneration Facility
Ground Lease, dated as of July 15, 2002, among MGE Power LLC, as Lessee,
and the Board of Regents of the University of Wisconsin System, as Lessor.
(Exhibit 10.22 to Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)  10.17 West Campus Cogeneration Facility
Amendment of Ground Lease, dated as of March 18, 2004, among MGE Power West
Campus, LLC as Lessee, and the Board of Regents of the University of Wisconsin
System, as Lessor. (Exhibit 10.23 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)  10.18 West Campus Cogeneration Facility MGE
Ground Sublease, dated as of March 18, 2004, among MGE Power West Campus,
LLC as Lessee, and Madison Gas and Electric Company, as Lessor. (Exhibit 10.24
to Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)  10.19 Elm Road Generating Station Common
Facilities Operating and Maintenance Agreement, dated as of December 17,
2004, among Madison Gas and Electric Company, Wisconsin Electric Power Company,
and Wisconsin Public Power Inc., as Lessee/Owner Parties, and Wisconsin Electric
Power Company, as Operating Agent. (Exhibit 10.7 to Form 10-Q for the quarter
ended September 30, 2005, File No. 0-1125.)  10.20 Elm Road Generating Station New
Common Facilities Ownership Agreement, dated as of December 17, 2004, among
MGE Power Elm Road, LLC, Elm Road Generating Station Supercritical, LLC, and
Wisconsin Public Power Inc., as Joint Owners. (Exhibit 10.8 to Form 10-Q for the
quarter ended September 30, 2005, File No. 0-1125.)  10.21 Elm Road Generating Station I
Ownership Agreement, dated as of December 17, 2004, among MGE Power Elm
Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public
Power Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and
W.E. Power LLC. (Exhibit 10.9 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)  10.22 Elm Road Generating Station I
Facility Lease Agreement, dated as of November 4, 2005, among MGE Power Elm
Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit
10.10 to Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)  10.23 Elm Road Generating Station I
Operating and Maintenance Agreement, dated as of December 17, 2004, among
Madison Gas and Electric Company, Wisconsin Electric Power Company, and
Wisconsin Public Power Inc., as Lessee/ Owners, and Wisconsin Electric Power
Company, as Operating Agent. (Exhibit 10.11 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)  10.24 Elm Road Generating Station I
Easement and Indemnification Agreement, dated as of December 17, 2004,
among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and
Wisconsin Electric Power Company, as Grantor. (Exhibit 10.12 to Form 10-Q for
the quarter ended September 30, 2005, File No. 0-1125.)  10.25 Elm Road Generating Station I
Easement and Indemnification Agreement, dated as of December 17, 2004,
among MGE Power Elm Road, LLC and Madison Gas and Electric Company. (Exhibit
10.16 to Form 10-K for the year ended December 31, 2005, File
No. 0-1125.)   115    10.26 Elm Road Generating Station II
Ownership Agreement, dated as of December 17, 2004, among MGE Power Elm
Road, LLC, Elm Road Generating Station Supercritical, LLC, and Wisconsin Public
Power Inc., as Joint Owners, Elm Road Services, LLC, as Project Manager, and
W.E. Power LLC. (Exhibit 10.13 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)  10.27 Elm Road Generating Station II
Facility Lease Agreement, dated as of November 4, 2005, among MGE Power Elm
Road, LLC, as Lessor, and Madison Gas and Electric Company, as Lessee. (Exhibit
10.14 to Form 10-Q for the quarter ended September 30, 2005, File
No. 0-1125.)  10.28 Elm Road Generating Station II
Operating and Maintenance Agreement, dated as of December 17, 2004, among
Madison Gas and Electric Company, Wisconsin Electric Power Company, and
Wisconsin Public Power Inc., as Lessee/ Owners, and Wisconsin Electric Power
Company, as Operating Agent. (Exhibit 10.15 to Form 10-Q for the quarter ended
September 30, 2005, File No. 0-1125.)  10.29 Elm Road Generating Station II
Easement and Indemnification Agreement, dated as of December 17, 2004,
among MGE Power Elm Road, LLC and Wisconsin Public Power Inc., as Grantees, and
Wisconsin Electric Power Company, as Grantor. (Exhibit 10.16 to Form 10-Q for
the quarter ended September 30, 2005, File No. 0-1125.)  10.30 Operating Agreement, dated as of
October 28, 2005, among MGE Energy LLC, Madison Gas and Electric
Company, and MGE Transco Investment LLC. (Exhibit 10.17 to Form 10-Q for the
quarter ended September 30, 2005, File No. 0-1125.)  10.31 Wind Turbine Supply Agreement, dated
as of September 29, 2006, among Madison Gas and Electric Company as Buyer
and Vestas-American Wind Technology , Inc. As Supplier. (Exhibit 10.2 to Form
10-Q for the quarter ended September 30, 2006, File No. 0-1125.)  10.32 Warranty Agreement to the Wind
Turbine Supply Agreement, dated as of September 29, 2006, among Madison Gas
and Electric Company as Buyer and Vestas-American Wind Technology, Inc. As
Supplier. (Exhibit 10.3 to Form 10-Q for the quarter ended September 30,
2006, File No. 0-1125.)  10.33 Service and Maintenance Agreement,
dated as of September 29, 2006, among Madison Gas and Electric Company as
Buyer and Vestas-American Wind Technology, Inc. As Supplier. (Exhibit 10.4 to
Form 10-Q for the quarter ended September 30, 2006, File
No. 0-1125.)  10.34 Asset Purchase Agreement, dated as of
September 29, 2006, among Madison Gas and Electric Company as Buyer and
Northern Iowa Windpower II LLC and Northern Iowa Windpower III LLC as Seller.
(Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2006, File
No. 0-1125.)  10.35 Substation and Transformer Shared Use
Agreement and Easement Agreement, dated as of September 29, 2006, among
Madison Gas and Electric Company and Northern Iowa Windpower II LLC as Joint
Owners. (Exhibit 10.6 to Form 10-Q for the quarter ended September 30,
2006, File No. 0-1125.)  10.36 Management and Administration
Agreement, dated as of October 13, 2006, among Madison Gas and Electric
Company as Owner and Midwest Renewable Energy Resources, LLC as Manager.
(Exhibit 10.7 to Form 10-Q for the quarter ended September 30, 2006, File
No. 0-1125.)  10.37* Form of Severance Agreement.  10.38* Form of Deferred Compensation
Agreement.  10.39* Form of Amended and Restated Deferred
Compensation Agreement.  10.40* Form of Income Continuation
Agreement.  10.41* MGE Energy, Inc., 2006
Performance Unit Plan.  10.42* Form of Performance Unit Award
Agreement.   116    12 Statements regarding computation of
ratio of earnings to fixed charges: 12.1 MGE Energy,
Inc. 12.2 Madison Gas and
Electric Company  21 Subsidiaries of MGE Energy,
Inc.  23 Consent of Independent Registered
Public Accounting Firm 23.1 MGE Energy,
Inc. 23.2 Madison Gas and
Electric Company.  31 Certifications Pursuant to Rule
13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as to the Annual
Report on Form 10-K for the year ended December 31, 2008, filed by the
following officers for the following companies:  31.1 Filed by Gary J.
Wolter for MGE Energy, Inc. 31.2 Filed by Jeffrey
C. Newman for MGE Energy, Inc. 31.3 Filed by Gary J.
Wolter for Madison Gas and Electric Company 31.4 Filed by Jeffrey
C. Newman for Madison Gas and Electric Company  32 Certifications Pursuant to Section
1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002)
as to the Annual Report on Form 10-K for the year ended December 31, 2008,
filed by the following officers for the following companies:  32.1 Filed by Gary J.
Wolter for MGE Energy, Inc. 32.2 Filed by Jeffrey
C. Newman for MGE Energy, Inc. 32.3 Filed by Gary J.
Wolter for Madison Gas and Electric Company 32.4 Filed by Jeffrey
C. Newman for Madison Gas and Electric Company   117     Schedule II MGE Energy, Inc., and Madison Gas and Electric
Company Valuation and Qualifying Accounts   AdditionsBalance at
beginning of
period

(1)
Charged to
costs and
expenses
(2)
Charged
to
other
accounts

Net
Accounts
written
off

Balance at
end
of
periodFiscal Year
2006:Accumulated
provision for uncollectibles
$(2,827,036)
(3,264,911)
-
2,495,420
$(3,596,527)Fiscal Year
2007:Accumulated
provision for uncollectibles
$(3,596,527)
(3,122,611)
-
2,895,957
$(3,823,181)Fiscal Year
2008:Accumulated
provision for uncollectibles
$(3,823,181)
(4,273,313)
(83,457)
3,904,052
$(4,275,899)   118     Signatures - MGE Energy, Inc.   Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized.  MGE Energy, Inc.(Registrant)Date: February 26, 2009
/s/ Gary J. WolterChairman, President and Chief Executive
Officer  Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on February 26,
2009.  /s/ Gary J. Wolter
Gary J. Wolter
Chairman, President and Chief Executive Officer and
Director
(Principal Executive Officer)/s/ Jeffrey C. Newman
Jeffrey C. Newman
Vice President, Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)/s/ Richard E. Blaney, Director
Richard E. Blaney, Director/s/ Londa J. Dewey, Director
Londa J. Dewey, Director/s/ F. Curtis Hastings, Director
F. Curtis Hastings, Director/s/ Regina M. Millner, Director
Regina M. Millner, Director/s/ Frederic E. Mohs, Director
Frederic E. Mohs, Director/s/ John R. Nevin, Director
John R. Nevin, Director/s/ Thomas R. Stolper, Director
Thomas R. Stolper, Director/s/ H. Lee Swanson, Director
H. Lee Swanson, Director    119    Signatures - Madison Gas and Electric Company   Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, hereunto duly authorized.  Madison Gas and Electric Company(Registrant)Date: February 26, 2009
/s/ Gary J. WolterChairman, President and Chief Executive
Officer  Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on February 26,
2009.  /s/ Gary J. Wolter
Gary J. Wolter
Chairman, President and Chief Executive Officer and
Director
(Principal Executive Officer)/s/ Jeffrey C. Newman
Jeffrey C. Newman
Vice President, Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and Principal
Accounting Officer)/s/ Richard E. Blaney, Director
Richard E. Blaney, Director/s/ Londa J. Dewey, Director
Londa J. Dewey, Director/s/ F. Curtis Hastings, Director
F. Curtis Hastings, Director/s/ Regina M. Millner, Director
Regina M. Millner, Director/s/ Frederic E. Mohs, Director
Frederic E. Mohs, Director/s/ John R. Nevin, Director
John R. Nevin, Director/s/ Thomas R. Stolper, Director
Thomas R. Stolper, Director/s/ H. Lee Swanson, Director
H. Lee Swanson, Director    120