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, 2007  [
] 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 ClassMGE Energy,
Inc.
Common Stock,
$1 Par Value Per Share  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  Indicate by checkmark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.  MGE Energy, Inc.

Madison Gas and Electric
Company
Yes [X]  No [   ]
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.

Madison Gas and Electric
Company
Yes [   ]  No [X ]
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.  Indicate by checkmark if the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Exchange Act:  MGE Energy, Inc.

Madison Gas and Electric
CompanyLarge
accelerated filer
X

-Accelerated
filer
-

-Non-accelerated
file
-

X  Indicate by
checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).  MGE Energy,
Inc.

Madison
Gas and Electric Company
Yes [
  ]  No [X]
Yes [
  ]  No [X]  The aggregate
market value of the voting and nonvoting common equity held by nonaffiliates of
each registrant as of June 30, 2007, was as follows:  MGE Energy,
Inc.
$707,462,316Madison
Gas and Electric Company
$0  The number of
shares outstanding of each registrant's common stock as of February 1,
2008, were as follows:  MGE Energy,
Inc.

Madison
Gas and Electric Company
21,970,785
17,347,889  Documents Incorporated by Reference  Portions of
MGE Energy, Inc.'s definitive proxy statement to be filed on or before
April 14, 2008, 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.  Table
of Contents Filing Format Forward-Looking Statements Where to Find More Information Definitions 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 - MGE Energy and MGE. 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   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 www.mgeenergy.com and 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.   Definitions  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 CorporationANR
ANR
Pipeline CompanyAPB
Accounting
Principles BoardAPBO
Accumulated
Postretirement Benefit ObligationARB
Accounting
Research BulletinATC
American
Transmission Company LLCARO
Asset
Retirement ObligationBART
Best
Available Retrofit TechnologyBlount
Blount
StationCAIR
Clean Air
Interstate RuleCAMR
Clean Air
Mercury RuleCO2
carbon
dioxideColumbia
Columbia
Energy Centercooling
degree days
Measure of
the extent to which the average daily temperature is above 65 degrees
Fahrenheit, increasing demand for coolingCWDC
Central
Wisconsin Development CorporationDNR
Wisconsin
Department of Natural ResourcesDth
dekathermsDistribution
Agreement
Distribution
Agreement between MGE Energy and J.P. Morgan Securities
Inc.EITF
Emerging
Issues Task ForceElm
Road
Elm Road
Generating StationEPA
U.S.
Environmental Protection AgencyEPC
Engineering,
Procurement, and ConstructionFASB
Financial
Accounting Standards BoardFERC
Federal
Energy Regulatory CommissionFIN
FASB Interpretation
No.FSP
FASB Staff
Position No.FTR
Financial
Transmission RightsGCIM
gas cost
incentive mechanismGHG
greenhouse
gasheating
degree days (HDD)
Measure of
the extent to which the average daily temperature is below 65 degrees
Fahrenheit, increasing demand for heatingIBEW
International
Brotherhood of Electric Workersinterconnection
agreement
Generation-Transmission
Interconnection AgreementkV
kilovoltkVA
kilovolt
amperekWh
kilowatt-hourlbs
poundsLIBOR
London
Inter Bank Offer RateLIFO
Last-in-first-out
pricingMACT
Maximum
available control technologyMAGAEL
MAGAEL,
LLCMAIN
Mid-America
Interconnected Network, Inc.MGE
Madison
Gas and Electric CompanyMGE Construct
MGE Construct
LLCMGE Energy
MGE Energy,
Inc.MGE Power
MGE Power
LLCMGE Power
Elm Road
MGE Power
Elm Road, LLCMGE Power
West Campus
MGE Power
West Campus, LLCMGE Transco
MGE Transco
Investment LLCMidwest ISO
Midwest
Independent System Operator (a regional transmission
organization)MMBtu
million
British thermal unitsMoody's
Moody's
Investors Service, Inc.MRO
Midwest
Reliability OrganizationMW
megawattMWh
megawatt-hourNAAQS
National
Ambient Air Quality StandardsNasdaq
The Nasdaq
Stock MarketNERC
National
Electric Reliability CouncilNNG
Northern
Natural Gas CompanyNOx
nitrogen
oxideNR
Natural
ResourcesNSPS
new source
performance standardsOPEIU
Office and
Professional Employees International UnionPGA
Purchased
Gas Adjustment clausePJM
PJM
Interconnection, LLC (a regional transmission organization)PSCW
Public
Service Commission of WisconsinRSG
Revenue
Sufficiency Guarantee ChargeRTO
Regional
Transmission OrganizationSAB
Staff
Accounting BulletinSEC
Securities
and Exchange CommissionSECA
Seams
Elimination Cost AdjustmentsSFAS
Statement
of Financial Accounting Standards (issued by the FASB)SO2
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 SystemWPSC
Wisconsin
Public Service CorporationWUMS
Wisconsin
and Upper Peninsula of Michigan System   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. In the fourth quarter of 2005, the
investment in ATC was transferred from MGE to MGE Transco.   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 a 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.  Electric
Utility Operations  MGE generates
and distributes electricity in a service area covering a 315 square-mile area of
Dane County, Wisconsin. Its service area includes the city of Madison,
Wisconsin.  At
December 31, 2007, MGE supplied electric service to nearly 136,000
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 87% were residential and 13% were commercial or
industrial. Electric revenues for 2007, 2006, and 2005 were comprised of the
following:  Twelve Months Ended December 31,2007

2006

2005Residential
33.8%

34.2%

33.3%Commercial
51.9%

51.8%

47.7%Industrial
5.4%

5.5%

5.6%Public
authorities (including the UW)
8.0%

8.4%

7.4%Other
utilities and other
0.9%

0.1%

6.0%Total
100.0%

100.0%

100.0%  Electric
operations accounted for approximately 62.8%, 63.3%, and 60.8% of MGE's total
2007, 2006, and 2005 regulated revenues, respectively.  See Item 2,
Properties, for a description of MGE's electric utility plant.  MGE has chosen
to join the MRO as its regional reliability council. The essential purposes of
the MRO are: (1) the development and implementation of regional and NERC
reliability standards, and (2) determining compliance with those standards,
including enforcement mechanisms. The MRO also provides other services
consistent with its reliability charter.  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, 2007, 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
Midwest ISO. MGE is however a non-transmission owning member of the
Midwest ISO.  Regional
Transmission Organizations  On
February 1, 2002, MGE started taking network transmission service from the
Midwest ISO. Midwest ISO is a nonprofit RTO approved by FERC. The
Midwest ISO is responsible for monitoring the electric transmission system
that delivers power from generating plants to wholesale power transmitters. Its
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, Midwest ISO is required to provide a real-time market-based
mechanism for congestion management. On April 1, 2005, Midwest ISO
implemented its bid-based energy market. At that time, MGE began offering
substantially all of its generation on the Midwest ISO market and
purchasing much of its load requirement from the Midwest ISO market in
accordance with the Midwest ISO Tariff.  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.  Fuel
supply and generation  MGE satisfies
its customers' electric demand with purchased power and internal generation.
During the years ended December 31, 2007, 2006, and 2005, MGE's electric
energy delivery requirements were satisfied by the following sources:  Twelve Months Ended December 31,2007

2006

2005Coal
51.3%

48.7%

52.0%Natural
gas
8.2%

6.8%

10.0%Fuel
oil
0.1%

0.1%

0.1%Renewable
sources
0.8%

0.7%

1.2%Purchased
power
39.6%

43.7%

36.7%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 generating capability. 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 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 increased from 31 days on
December 31, 2006, to 33 days on December 31, 2007. The co-owners'
current goal is to maintain approximately a 35 day inventory.  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 generating capacity.  See discussion
above for discussion of the 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 On
September 29, 2006, MGE formalized plans to acquire 29.7 MW or 18
turbines in a wind-powered electric generating facility to be constructed in
Worth County, Iowa. This project is expected to be completed in the first
quarter of 2008. At December 31, 2007, MGE had incurred $55.9 million
(excluding AFUDC) of costs on the project, which is reflected in the
Construction Work in Progress balance on MGE and MGE Energy's consolidated
balance sheets. Additionally, MGE had recorded a total of $2.4 million in
AFUDC-debt and equity which is also reflected in Construction Work in Progress
at December 31, 2007. MGE will begin 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
Midwest ISO implemented its bid-based energy market, MGE began offering
substantially all of its generation on the Midwest ISO market and
purchasing much of its load requirement from the Midwest ISO market in
accordance with the Midwest ISO Tariff. Accordingly, the Midwest ISO
market is the source of MGE's purchased power needs.  MGE also has
purchase power contracts with two companies located in the PJM market. These
agreements provide a means for MGE to participate in the PJM market via the
receipt of FTRs. Under these agreements MGE has the contractual right to
65 MW of power.  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 being constructed 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
to be constructed near Brownsville, Wisconsin. Construction of this facility
began in June 2007 and the facility is expected to be operational in early
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 1,625 square miles in
seven south-central Wisconsin counties. Its service area includes the city of
Madison, Wisconsin.  On
December 31, 2007, MGE supplied natural gas service to nearly 140,000
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 2007, 2006, and 2005
were comprised of the following:  Twelve Months Ended December 31,2007

2006

2005Residential
55.6%

55.0%

55.6%Commercial
38.3%

38.3%

39.1%Industrial
4.0%

3.6%

2.3%Transportation
service and other
2.1%

3.1%

3.0%Total
100.0%

100.0%

100.0%  Gas operations
accounted for approximately 37.2%, 36.7%, and 39.2% of MGE's total 2007, 2006,
and 2005 regulated revenues, respectively.  MGE can curtail
gas deliveries to its interruptible customers. Approximately 7% of gas
deliveries in 2007 and 8% of gas sold in 2006 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 5,430,964 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.  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, 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 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. On April 26, 2005, the
facility lease between MGE and MGE Power West Campus commenced. 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 MWs of capacity.  Elm
Road  On
November 4, 2005, MGE Power Elm Road closed on the exercise of an
option to acquire an undivided 8.33% ownership interest in each of two
615 MW advanced technology, coal-fired generating units being constructed
by We Energies 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 $171 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, 2007, MGE Power Elm Road had incurred $103.7 million
(excluding capitalized interest) of costs on the project, which is reflected in
the Construction Work In Progress balance on MGE and MGE Energy's
consolidated balance sheets.  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% 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 $53.6 million. Of these costs, $21.1 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 $32.5 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 DNR 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.  Air
quality  Air quality
regulations promulgated by the EPA and DNR 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 Regional Haze
Regulations, as well as existing and proposed state mercury emissions limits,
may result in additional operating and capital expenditure costs.  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
NOxand 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) and Fitchburg Substation. In future generation years, Elm Road will
be and WCCF may be affected by 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.  CAMR seeks 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, which are scheduled to
commence in 2009; although there is some uncertainty in light of a
February 8, 2008 U.S. Court of Appeals decision invalidating the rule's
cap-and-trade provisions. In March 2007, the DNR proposed state mercury
rules under NR 446 to address its requirements under CAMR. The state's proposed
rule is significantly different from the federal CAMR. If the state's version of
CAMR as currently proposed becomes a rule, it will increase CAMR compliance
costs for Columbia, Blount and Elm Road (those facilities currently subject to
CAMR) because it is more restrictive in scope than the federal CAMR. However, it
is unknown at this time what those additional costs would be. The Wisconsin DNR
has announced that it intends to introduce a revised proposed rule some time in
2008. Thus, the economic and operational effect on MGE is not known at this
time.  Air modeling
indicates that emissions from Columbia may impair visibility at certain Class I
Scenic Areas and may therefore be subject to Regional Haze and Best Available
Retrofit Technology (BART) regulations. DNR expects to submit rules on BART
and/or Regional Haze to EPA in 2008 with BART becoming effective in 2013. The
State of Minnesota has also 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 approximately
0.25 lbs/MMBtu by 2018. If adopted, these rates could affect capital,
operational and maintenance expenses at MGE's generating facilities.  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.  The EPA recently
lowered the acceptable 24-hour National Ambient Air Quality Standards (NAAQS)
for fine particulate matter, i.e., particles that are 2.5 microns or smaller in
diameter and states must monitor and collect data on fine particulate levels in
order to establish attainment and nonattainment areas for the new standard.
States (including Wisconsin) determine designation by county and/or area based
on whether the county/area meets the NAAQS (designated as attainment) or the
county does not meet the NAAQS (designated as nonattainment), as measured by air
monitors placed in that county/area. In mid-December 2007, Wisconsin
recommended that the EPA designate all areas in the state as attainment.
However, EPA will finalize designations (attainment or nonattainment) in 2009.
Updated air monitoring results may play a role in EPA's designation decision.
Designations of nonattainment and implementation of the fine particulate NAAQS
could affect capital, operational and maintenance expenses at generating
facilities.  Compliance with
these and other related environmental initiatives is expected to result in
significant additional operating and capital expenditures at Columbia. 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 $200 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. Pursuant to an order issued by the PSCW on
September 14, 2007, MGE is permitted 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.  Water
quality  MGE is subject
to water quality regulations issued by the DNR. 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 DNR 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. The DNR has also proposed rules regarding thermal
discharge which are subject to comment and further modification. Depending on
the terms of the final rules, MGE may be required to make significant additional
capital expenditures but are expected to be recoverable in rates.  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.  The WPDES permit
for the Oak Creek/Elm Road facility has been contested. On November 29,
2007, an Administrative Law Judge (the "ALJ") 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 and therefore are subject to the
standards promulgated by EPA for new facilities in the so-called Phase I rule.
Unlike the Phase II rule for existing facilities previously discussed, the Phase
I rules for new facilities largely withstood judicial review and are valid. 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 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 WDNR with a direction that it 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
regarding the WPDES permit. The ALJ's ruling has been appealed to circuit
court.  The Operator has
advised us that there are alternatives under the EPA's rule for new facilities
that would permit the use of the once-through cooling system rather than the use
of cooling towers. The Operator has requested the WDNR to issue a modified
permit and has submitted additional information to the WDNR supporting the
request for approval of the once-through cooling system under this rule. The
Operator anticipates the WDNR will complete the WPDES permit modifications
process in the first half of 2008. At this time, we cannot predict with
certainty what the WDNR's decision will be. A reissued permit would be subject
to public comment and possible administrative and legal review.  While the
process for modifying the WPDES permit proceeds, construction of the additional
coal units will continue on the current schedule.  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,
2007, a $0.1 million gross liability was accrued for this matter.  Global
climate change  The United
States is currently not a party to the United Nations' Kyoto Protocol that
became effective for signatories on February 16, 2005. The Protocol process
generally requires developed countries to cap greenhouse gas (GHG) emissions at
certain levels during the 2008 to 2012 time period. Although GHG is not
currently regulated in the United States, MGE 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 is regularly introduced in Congress and in the
Wisconsin legislature. Such legislation typically includes various compliance
dates and compliance limits. There are several proposed versions of legislation
pending in Congress and in the Wisconsin legislature to address global climate
changes, including efforts to reduce and control and/or tax the emission of
greenhouse gases, 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. In addition, there
could be national and state mandates to produce increasing percentages of
electricity from renewable forms of energy, such as wind. Such legislation 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. MGE management would expect to
seek and receive recovery of such compliance measures through rate increases,
yet the probability and specific impact of such legislation cannot be reasonably
estimated at this time. MGE will continue to monitor proposed legislation.  Employees  As of
December 31, 2007, MGE had 724 employees. MGE employs 247 employees who are
covered by a collective bargaining agreement with Local Union 2304 of the
International Brotherhood of Electrical Workers and 102 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.  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: 53
Chairman of the Board, President and Chief
Executive Officer
02/01/2002
18Lynn K. Hobbie(b)
Age: 49
Senior Vice President
02/01/2000
12James G. Bidlingmaier(b)
Age: 61
Vice President - Admin. and Chief Information
Officer
02/01/2000
8Kristine A. Euclide(b)
Age: 55
Vice President and General Counsel
11/15/2001
6Terry A. Hanson(a)
Age: 56
Vice President, Chief Financial Officer and
Secretary
10/01/2001
16Scott A. Neitzel(b)
Age: 47
Vice President - Energy Supply
Vice President- Energy Supply Policy
09/01/2006
07/01/2002
10Jeffrey C. Newman(a)
Age: 45
Vice President and Treasurer
01/01/2001
10Peter J. Waldron(b)
Age: 50
Vice President and Operations Officer
Vice President - Energy Supply Operations
09/01/2006
07/01/2002
11  Note: Ages, years of service, and positions as of
December 31, 2007.  (a) Executive officer of MGE Energy
and MGE (b) Executive officer of MGE   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.  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, non-governmental 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 addition of additional control
equipment or the implementation of other compliance measures.  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 and private parties, have increasingly
expressed concern about the effects of global warming and the effects of
greenhouse gases (GHG). These concerns have prompted federal and state
legislation that would regulate or cap such emissions to be actively discussed.
There are 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 legislative 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
legislation 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.  Our business
may be negatively affected by the restructuring of the energy industry.  MGE is a member
of the Midwest ISO, a FERC-approved RTO. Effective April 1, 2005,
Midwest ISO implemented its bid-based energy market. MGE cannot predict the
impact the new market may ultimately have on its electric operations. Also, the
ability of Midwest ISO to maintain its members is an important factor in
the success of its operations.  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.  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 shortages of, the inability to obtain, or
the cost of, labor or materials; the inability 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, including the WPDES permit, and
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.  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
$103.5 million of variable-rate debt outstanding at December 31, 2007,
including $61.0 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.  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.  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.   Item 1B.
Unresolved Staff Comments.  MGE Energy
and MGE  None.   Item 2.
Properties.  Electric
Generation  Net generating
capability in service at December 31, 2007, was as follows:  Plants

Location

Commercial
Operation
Date

Fuel

Net
Capability
(MW)

No. of
UnitsSteam
plants:Columbia

Portage,
WI

1975 &
1978

Low-sulfur
coal

225(1,2)

2Blount

Madison,
WI

1957 &
1961

Coal/gas

97(3)

21938 &
1943

Gas

39

21949

Coal/gas

22(3)

11964-1968

Gas/oil

28

4WCCF

Madison,
WI

2005

Gas/oil

149(4,5)

2Combustion
turbines

Madison,
WI
Marinette,
WI

1964-2000

Gas/oil

174

6Portable
generators

Madison,
WI

1998-2001

Diesel

44

55Wind
turbines

Townships
of Lincoln and Red River, WI

1999

Wind

2

17Total
780  (1) Baseload
generation.  (2) MGE's
22% share of two 512-MW units. The other owners are Alliant, which operates
Columbia, and WPSC.  (3) On
January 19, 2006, MGE announced that it would cease coal-fired generation
at Blount in 2011, subject to certain conditions, including regulatory
approvals.  (4) 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 capability.  (5) 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 27 MW in
the winter and approximately 17 MW in the summer.  Electric and
Gas Distribution Facilities  Major electric
distribution lines and substations in service at December 31, 2007, which
are owned by MGE, are as follows:  MilesDistribution
lines:

Overhead

Underground13.8 kV
and under

925

1,056Distribution:

Substations

Installed Capacity (kVA)69-13.8 kV

26

949,00013.8-4 kV

31

285,967  Gas facilities
include 2,398 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.  Transmission
Facilities  As required by
Wisconsin law, MGE and other Wisconsin electric utilities transferred their
electric transmission assets to ATC on January 1, 2001. MGE received an
ownership interest in ATC in exchange for its transmission plant and related
deferred taxes and deferred investment tax credits. That interest is presently
held by MGE Transco. MGE receives a return on its investment in ATC that is
approximately equal to the return it would have earned by retaining its
transmission facilities.   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, 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.   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,
2008, there were approximately 18,480 shareholders of record. 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 rangeHigh

Low2007Fourth
quarter
$37.24

$32.06Third
quarter
$35.50

$29.40Second
quarter
$37.02

$31.46First
quarter
$36.82

$33.052006Fourth
quarter
$37.00

$32.17Third
quarter
$34.09

$29.23Second
quarter
$33.33

$29.20First
quarter
$35.18

$30.39  MGE  As of
February 1, 2008, 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 2007 and 2006:  2007

2006(Per share)
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.

4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.MGE Energy
$0.355
$0.355
$0.348
$0.348

$0.348
$0.348
$0.345
$0.345  MGE  The following table sets forth MGE's quarterly cash
dividends declared during 2007 and 2006:  2007

2006(In thousands)
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.

4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.MGE
$2,500
$   -
$6,560
$6,561

$     -
$     -
$6,499
$6,498  See "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.  Issuer
Purchases of Equity Securities  MGE Energy
and MGE  None.   Item 6.
Selected Financial Data.  MGE Energy (In thousands, except per-share amounts)  For the years ended December 31,Summary of Operations
2007

2006

2005

2004

2003Operating
revenues:Regulated
electric
$334,488

$318,912

$310,984

$250,386

$241,745Regulated
gas
197,925

185,226

200,533

171,763

159,802Nonregulated
5,181

3,408

1,853

2,732

1,023Total
537,594

507,546

513,370

424,881

402,570Operating
expenses
438,156

413,150

439,629

350,213

330,124Other
general taxes
15,771

15,402

13,269

12,715

11,592Operating
income
83,667

78,994

60,472

61,953

60,854Other
income
6,069

4,329

4,938

3,927

1,888Interest
expense, net
(13,056)

(15,001)

(13,448)

(11,384)

(12,201)Income
before taxes
76,680

68,322

51,962

54,496

50,541Income
tax provision
(27,855)

(25,899)

(19,871)

(20,656)

(19,901)Net
income
$  48,825

$  42,423

$  32,091

$  33,840

$  30,640Average
shares outstanding
21,520

20,564

20,436

19,119

17,894Basic
and diluted earnings per share
$2.27

$2.06

$1.57

$1.77

$1.71Dividends
declared per share
$1.41

$1.39

$1.37

$1.36

$1.35AssetsElectric
$  614,949

$547,150

$533,896

$466,897

$433,385Gas
234,002

228,639

233,139

205,738

185,382Assets
not allocated
14,876

12,270

21,013

25,894

24,650Nonregulated
energy operations
227,415

177,234

143,101

98,751

49,446Transmission
investments
40,808

38,470

35,239

32,542

27,886All
others
342,491

298,261

276,565

272,211

205,735Eliminations
(362,954)

(319,792)

(326,046)

(273,262)

(200,477)Total
$1,111,587

$982,232

$916,907

$828,771

$726,007Capitalization including Short-Term DebtCommon
shareholders' equity
$427,726

$375,348

$343,883

$338,197

$263,070Long-term
debt*
262,346

252,284

222,312

202,257

222,204Short-term
debt
103,500

57,000

82,500

53,275

31,680Total
Capitalization
$793,572

$684,632

$648,695

$593,729

$516,954  *Includes
current maturities.   Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.  General  MGE Energy
is a holding company operating through subsidiaries in five business segments:
electric utility operations, gas utility operations, nonregulated energy
operations, transmission investments, and all other. Our principal subsidiary is
MGE, which conducts our electric utility and gas utility operations and
represents a majority portion of our assets, liabilities, revenues, and
expenses. MGE generates and distributes electricity to nearly 136,000 customers
in Dane County, Wisconsin, including the city of Madison, and purchases and
distributes natural gas to nearly 140,000 customers in the Wisconsin counties of
Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.  Our nonregulated
energy operations have been formed to lease and own new electric generating
capacity. Our nonregulated energy operations include the leasing of the
cogeneration project on the UW-Madison campus. Our 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. Both of
these operations are included in MGE's consolidated financial statements as a
result of the accounting requirements of FIN 46R.  The transmission
investment segment consists of our investment in ATC and the related equity
earnings.  Our all other
segment includes corporate operations and services, as well as certain
construction services.  Our primary
focus today and for the foreseeable future is our core utility customers at MGE.
MGE continues to face the challenge of providing its customers with reliable
power at competitive prices. MGE plans to meet this challenge by building more
efficient generation projects and continuing its efforts to control its
operational costs. We believe it is critical to continue maintaining a strong
credit standing and financial strength in MGE as well as the parent company in
order to accomplish these goals.  Results of
Operations  Year Ended
December 31, 2007, Versus the Year Ended December 31, 2006  Executive
Summary - MGE Energy and MGE  In 2007,
MGE Energy's earnings were $48.8 million or $2.27 per share compared
to $42.4 million or $2.06 per share in the prior year. MGE's earnings for
the twelve months ended December 31, 2007, were $37.1 million compared
to $32.6 million for the same period in the prior year.  During the
twelve month period ended December 31, 2007, our utility operations
experienced an increase in electric revenues of $15.6 million. This
increase is primarily attributable to an increase in sales volumes, the effect
of a fuel surcharge and an increase in sales for resale. Additionally, the
electric rates for the twelve months ended December 31, 2007, are higher
than those for the same period in the prior year, when the fuel credit and
refund in effect during the twelve months ended December 31, 2006, are
considered. As a result of lower actual fuel costs during the twelve months
ended December 31, 2006, than those costs provided in the applicable rate
order, the PSCW issued an interim order implementing a $0.00454 per kWh
fuel credit. Additionally, the PSCW stated that MGE's electric rates set in the
final order were subject to refund, together with interest, pending a full
review of MGE's 2006 actual electric fuel costs. As a result of these actions,
MGE recognized an obligation to make refunds to its customers by recording a
$19.1 million gross reduction to other electric revenues during the twelve
months ended December 31, 2006.  For the twelve
months ended December 31, 2007, fuel used for electric generation increased
$7.5 million or 15.2% compared to the twelve months ended December 31,
2006. This increase is attributable to an increase in the volume of internal
generation and an increase in the per-unit cost of fuel. During this same
period, purchased power expense increased by $0.4 million or 0.6%. This
increase is attributable to an increase in the per-unit-cost offset by a
decrease in volume of power purchased.  On
April 26, 2007, the PSCW approved a $0.00339 per kWh fuel surcharge on
MGE's electric rates to cover increased fuel and purchased power expenses. The
fuel surcharge was applied to electric rates as of the date of the PSCW order.
On August 31, 2007, MGE received a final decision from the PSCW which
reduced the fuel surcharge to $0.00242 per kWh. This fuel surcharge went
into place on the date of the order and remained in place until
December 31, 2007. These surcharges resulted in a $5.6 million
increase in electric revenue for the twelve months ended December 31, 2007.
Pursuant to the provisions of the April 26, 2007, surcharge order, MGE's
electric revenues resulting from this surcharge were subject to refund and
interest at 11%. During the twelve months ended December 31, 2007, MGE
recorded a $1.3 million adjustment to other electric revenue to account for
the refund provision. This refund amount was applied to customers' accounts on
October 6, 2007.  During the
twelve months ended December 31, 2007, gas revenues increased
$12.7 million. This increase is a result of increases in sales volumes,
partially offset by a decline in the costs of gas and a decrease in other gas
revenues. During this period, natural gas purchased increased $11.5 million
as a result of an increase in volumes and an increase in the per therm cost.  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)
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.   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. 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 is 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 a $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 reflects 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 Midwest ISO 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 expenses  Electric
operating expense increased $3.2 million in 2007. The following changes
contributed to the net change in electric operating 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
0.8Total
$3.2  Included in the
decrease in transmission costs is 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
maintenance expense  In 2007,
electric maintenance expense increased $0.8 million, or 5.7%, due to a
increase in the maintenance of distribution assets ($0.7 million) and the
maintenance of general and administrative facilities ($0.1 million).  Electric
depreciation  Electric
depreciation expense increased $0.7 million in 2007. This increase is
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)
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
is 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 are above or below a
benchmark set by the PSCW, then MGE's gas sales service customers and
shareholders share equally in any increased costs or savings. The PSCW allows
MGE to resell gas pipeline capacity reserved to meet peak demands but not needed
every day to serve customers. Revenues from capacity release that exceed or fall
short of PSCW-targeted levels are 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.  Natural
gas purchased  In 2007, natural
gas purchased increased $11.5 million, or 8.9%. Due primarily to higher
retail sales volumes, the volume of natural gas purchased increased
$10.8 million for the year ended December 31, 2007, when compared to
the prior year. Additionally, a decrease in the natural gas purchase price
coupled with an increase in the PGA provision provides 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 expenses  Gas operating
expense increased $0.4 million, or 1.2%, in 2007. The following changes
contributed to the net change in gas operating 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)Total
$0.4  Gas
maintenance expenses  Gas maintenance
expense increased $0.4 million , or 17.9% in 2007. This increase primarily
relates to maintenance work performed on distribution assets.  Gas
depreciation  Gas depreciation
expense increased $0.2 million in 2007 as a result of additional gas plant
assets.  Other Income
(Expense)  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  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 include $14.9 million and $15.0  million, respectively, in
interdepartmental revenues. The interdepartmental revenues relate 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 is eliminated.  Also included in
operating revenues is 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. 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.
Current forecasts estimate the total carrying costs to be incurred to be
$53.6 million. A portion of this amount is being recognized over the period
allowed for recovery in rates ($32.5 million) and a portion is being
deferred and will be recognized over the period in which the facility is
depreciated ($21.1 million). 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 operations and maintenance expense  For the years
ended December 31, 2007 and 2006, other operations and maintenance expense
remained consistent. These expenses primarily relate to administrative and
general expenses at MGE Power West Campus and MGE Power Elm Road.  Nonregulated
energy depreciation expense  Depreciation
expense began when the WCCF commenced operations on April 26, 2005.
Depreciation expense for the year ended December 31, 2007, remained
consistent when compared to the prior year.  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 is offset by a
$0.1 million of miscellaneous interest income.  Also included in
the nonregulated interest expense is 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,
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  Transmission
investment other income (loss)  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
revenues  During the
twelve months ended December 31, 2007 and 2006, the All Other segment did
not record any revenues.  All other
operations and maintenance expense  All other
operations and maintenance expense for the year ended December 31, 2007,
decreased $0.1 million when compared to the same period in the prior year.
This decrease is related to a decrease in general and administrative expense at
corporate.  All other
interest income (expense)  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,
includes $3.9 million and $1.9 million 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 is offset in part by $1.8 million and
$1.1 million, respectively, in interest expense on short-term debts.  Consolidated
Other General Taxes  MGE Energy
and MGE's other general taxes increased $0.4 million or 2.4% in 2007. This
increase is 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 are 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 is 36.3% for the twelve months ended December 31,
2007, compared to 37.9% for the year ended December 31, 2006. This decrease
is 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.  Other factors
contributing to a decrease in the effective tax rate include the favorable
settlement of an income tax examination for which a FIN 48 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 new 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.  Year Ended
December 31, 2006, Versus the Year Ended December 31, 2005  Executive
Summary  In 2006, our
earnings were $42.4 million or $2.06 per share compared to
$32.1 million or $1.57 per share in the prior year. Results for 2005 were
adversely impacted by the natural disasters in the Gulf of Mexico. These
disasters and the related damage to the energy infrastructure, resulted in
abnormally high fuel and purchased power costs that were not entirely recovered
from our customers, and ultimately, lower 2005 earnings.  During 2006,
utility operations experienced an increase in electric revenues of
$7.9 million or 2.5%. This increase is attributable to an increase in
rates, offset by decreases in retail volumes, sales for resale, and other
electric revenues.  On
December 12, 2005, the PSCW authorized MGE to increase 2006 electric
revenues by $35.9 million. This increase was implemented to cover
forecasted increases in fuel costs and the cost of additional facilities such as
MGE Power West Campus and MGE Power Elm Road. During 2006, this
authorized increase was partially offset by an interim credit issued by the
PSCW.  For the year
ended December 31, 2006, actual electric fuel costs were lower than those
included in the aforementioned rate order. In 2006, fuel used for generation
decreased $15.8 million or 24.3% compared to 2005. Additionally, purchased
power expense decreased $4.5 million or 5.5% compared to 2005. As a result
of lower actual fuel costs during 2006, the PSCW approved an interim credit and
electric rates during this period were subject to refund. In response, MGE
recorded a $19.1 decrease to other electric revenues to reflect the refund and
credit due to customers. This amount includes $0.4 million in carrying
costs incurred. As of December 31, 2006, $16.8 million of this amount
had been credited on customers bills. The remaining $2.3 million was
refunded to customers in March 2007.  During the year
ended December 31, 2006, gas revenues decreased $15.3 million or 7.6%.
This decrease is attributable to a 7.3% decrease in the cost per therm of gas
and a decrease in gas deliveries.  Operation and
maintenance expenses increased $8.5 million during the year ended
December 31, 2006. This increase is primarily due to higher general and
administrative expenses.  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, 2006 and 2005:  (In thousands)
Revenues

kWh Sales2006

2005

% Change

2006

2005

% ChangeResidential
$109,178

$103,674

5.3%

809,560

842,758

(3.9)%Commercial
165,147

148,294

11.4%

1,772,385

1,774,035

(0.1)%Industrial
17,765

17,432

1.9%

286,546

302,294

(5.2)%Other
- retail/municipal
26,710

22,863

16.8%

384,222

357,542

7.5%Total
retail
318,800

292,263

9.1%

3,252,713

3,276,629

(0.7)%Sales
for resale
5,585

17,527

(68.1)%

94,988

187,338

(49.3)%Other
revenues
(5,473)

1,194

(558.4)%

-

-

-Total
$318,912

$310,984

2.5%

3,347,701

3,463,967

(3.4)%Cooling
degree days (normal 634)
637

847

(24.8)%  Electric
operating revenues were up 2.5% in 2006 due to the following:  (In millions)
2006Rate
changes
$28.8Volume
(2.3)Sales
for resale
(11.9)Other
revenues
(6.7)Total
$7.9   Rates.On December 12, 2005, the PSCW authorized MGE to increase 2006 electric
revenues by $35.9 million to cover rising fuel and purchased power costs
and the cost of additional facilities needed to meet the rising electric needs
of MGE's customers.  On
March 9, 2006, the PSCW approved an interim fuel credit to reduce electric
rates by $0.00069 per kWh as a result of lower January fuel costs than
those in the aforementioned rate order. This credit was applied to rates as of
March 9, 2006. Per the terms of the order issued on March 9, 2006,
MGE's rates were also subject to refund. On May 25, 2006, the PSCW approved
a stipulation filed by MGE. Under this stipulation, the interim credit was
increased by $0.00454 per kWh. The aforementioned orders resulted in a
$16.8 million reduction to customer bills for the year ended
December 31, 2006.  On
December 21, 2004, the PSCW authorized MGE to increase 2005 electric
revenues by $27.4 million. Due to the natural disasters in the Gulf of
Mexico and the abnormally high fuel costs that resulted, on November 11,
2005, the PSCW approved an interim fuel surcharge. During 2005, MGE recorded
$1.7 million in additional electric revenues under this interim order.   Sales
for resale. During 2006, sales for resale decreased $11.9 million.
Sales for resale include transactions conducted on the PJM and Midwest ISO
markets reflecting our involvement in the PJM and Midwest ISO markets since
their establishment on May 1, 2004, and April 1, 2005, respectively.
MGE has recorded transactions on the PJM and Midwest ISO markets in which
we are buying and selling power within the same hour to meet our electric energy
delivery requirements on a net basis. This treatment resulted in a
$154.4 million and $122.2 million reduction to sales for resale and
purchased power expense for the years ended December 31, 2006 and 2005,
respectively. The decrease in sales for resale for the year ended
December 31, 2006, when compared to the same period in the prior year is
largely attributable to a change in the relationship between the cost of
purchased power and the cost of internal generation. Namely, during 2006 the
cost to purchase power in certain periods was less than the cost to internally
generate. Accordingly, MGE was purchasing more power from the market than they
were selling power into the market for the year ended December 31, 2006,
when compared to the same period in 2005.   Volume.
During 2006, there was a 0.7% decrease in total retail sales volumes. This
decrease is primarily attributable to cooler temperatures during the summer
months. Cooling degree days for the year ended December 31, 2006, decreased
24.8% from 847 for the year ended December 31, 2005, to 637 for the year
ended December 31, 2006.   Other
Revenues.Other electric revenues decreased $6.7 million for the twelve
months ended December 31, 2006, compared to the same period in the prior
year. During the twelve months ended December 31, 2006, MGE recorded a net
$2.3 million reduction to other electric revenues to account for the
effects of the interim orders described above under "Rates."  During
the year ended December 31, 2006, MGE recovered in electric rates carrying
costs on WCCF and Elm Road. MGE recorded a $5.2 million adjustment to other
electric revenues to eliminate the recognition of revenue related to these costs
in the electric segment as revenue related to these carrying costs is recorded
by MGE Power Elm Road and MGE Power West Campus (see discussion of
these revenues in the "nonregulated operations revenue" section).  For
the year ended December 31, 2005, MGE recorded a $0.8 million
adjustment to other electric revenues to eliminate the recognition of revenues
related to carrying costs on MGE Power West Campus.  Electric
fuel and purchased power  In 2006, fuel
used for electric generation decreased $15.8 million, or 24.3%, compared to
2005. The per-unit cost of internal generation decreased 11.3% for the year
ended December 31, 2006, when compared to the same period in the prior
year, reflecting the decreased cost of natural gas. Recall that fuel costs in
2005 were abnormally high due to the natural disasters that occurred in the Gulf
of Mexico and the reduction in natural gas supplies that resulted.  The volume of
internal generation also decreased during this period reflecting a shift between
internal generation and purchased power. Namely, MGE found that during certain
time periods it was more cost effective to satisfy demand through purchased
power, rather than internal generation.  Despite a 14.5%
increase in the volume of purchased power for the year ended December 31,
2006, purchased power expense decreased by $4.5 million, or 5.5%. This
decrease reflects a 17.5% decrease in the per-unit-cost partially offset by the
aforementioned increase in volume.  MGE has recorded
transactions on the PJM and Midwest ISO markets in which we are buying and
selling power within the same hour to meet our electric energy delivery
requirements on a net basis. This treatment resulted in a $154.4 million
and $122.2 million reduction to purchased power expense for the years ended
December 31, 2006 and 2005, respectively.  Electric
operating expenses  Electric
operating expense increased $7.9 million in 2006. The following changes
contributed to the net change in electric operating expenses for 2006:  (In millions)
2006Increased
rent expense (a)
$4.9Increased
other general and administrative expenses
2.7Increased
transmission costs
0.1Decreased
production costs
(0.8)Increased
distribution costs
0.4Increased
customer services, promotions, and account costs
0.6Total
$7.9  (a) This
increase relates to the commencement of the leasing arrangement between MGE and
MGE Power West Campus on April 26, 2005. In accordance with the terms
of this leasing arrangement, the electric segment recorded $15.0 million
and $10.1 million in rent expense for the years ended December 31,
2006 and 2005, respectively. Upon consolidation, this amount is
eliminated.  Electric
maintenance expense  In 2006,
electric maintenance expense increased $1.1 million, or 8.4%, due to a
increase in the maintenance of distribution assets ($1.0 million) and the
maintenance of general and administrative facilities ($0.1 million).  Electric
depreciation  Electric
depreciation expense increased $0.8 million in 2006. This increase is
attributable to additions to electric production assets at the Columbia and
Blount facilities.  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, 2006 and 2005:  (In thousands)
Revenues

Therms delivered2006

2005

% Change

2006

2005

% ChangeResidential
$101,771

$ 111,509

(8.7)%

84,354

91,887

(8.2)%Commercial/industrial
77,681

82,956

(6.4)%

82,255

82,661

(0.5)%Total
retail
179,452

194,465

(7.7)%

166,609

174,548

(4.5)%Gas
transportation
2,644

2,881

(8.2)%

36,385

45,435

(19.9)%Other
revenues
3,130

3,187

(1.8)%

-

-

-Total
$185,226

$200,533

(7.6)%

202,994

219,983

(7.7)%Heating
degree days (normal 7,108)
6,520

6,840

(4.7)%Average
rate per therm of retail customers
$1.077

$1.114

(3.3)%  Gas revenues
decreased 7.6% in 2006 due to the following:  (In millions)
2006Gas
costs/rates
$ (6.5)Gas
deliveries
(8.5)Gas
transportation
(0.2)Other
effects
(0.1)Total
$(15.3)   Gas
costs/rates. Gas costs decreased significantly for the year ended
December 31, 2006, from those costs experienced for the year ended
December 31, 2005. 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. As a result of a decrease in gas prices, MGE's average rate per therm for
retail customers in 2006 decreased 3.3%.   Retail
gas deliveries. In 2006, retail gas deliveries decreased 4.5%. This decrease
is primarily attributable to warmer temperatures. Heating degree days for the
year ended December 31, 2006, were 6,520 compared to 6,840 for the same
period in the prior year.   Transportation
and other gas revenues.In 2006, there was a $0.3 million decrease in
transportation and other gas revenues. This decrease represents a
$0.2 million decrease in transportation revenues and a $0.1 million
decrease in revenues earned under the GCIM and other miscellaneous gas revenues.
Under MGE's GCIM, if actual gas commodity costs are above or below a benchmark
set by the PSCW, then MGE's gas sales service customers and shareholders share
equally in any increased costs or savings. The PSCW allows MGE to resell gas
pipeline capacity reserved to meet peak demands but not needed every day to
serve customers. Revenues from capacity release that exceed or fall short of
PSCW-targeted levels are shared equally. In 2006 and 2005, MGE shareholders
received the benefit of $2.5 million and $2.7 million from capacity
release revenues and commodity savings under the GCIM, respectively.  Natural
gas purchased  In 2006, natural
gas purchased decreased $16.8 million, or 11.5%. This decrease is primarily
due to lower average wellhead prices. Natural gas prices (cost per therm)
decreased 7.3% in 2006. As mentioned, in 2005 natural gas prices were atypically
high due to the natural disasters that occurred in the Gulf of Mexico. For the
year ended December 31, 2006, the amount of natural gas purchased also
decreased from those levels experienced for the same period in the prior year.
Due primarily to lower retail sales volumes, the volume of natural gas purchased
decreased 4.6% for the year ended December 31, 2006.  Gas
operating expenses  Gas operating
expense increased $4.1 million, or 15.3%, in 2006. The following changes
contributed to the net change in gas operating expense for the year:  (In millions)
2006Increased
production costs
$0.4Increased
other administrative and general expenses
2.0Increased
distribution costs
0.2Increased
customer services, promotions, account costs
1.5Total
$4.1  Gas
maintenance expenses  Gas maintenance
expense for the year ended December 31, 2006, did not change from the
$2.3 million experienced for the same period in the prior year. This
expense primarily relates to maintenance work performed on distribution
assets.  Gas
depreciation  Gas depreciation
expense increased $0.4 million in 2006 as a result of additional gas plant
assets. For example, during the year ended December 31, 2006, additional
mains, services, and meters were placed in service.  Other Income
(Expense)  Other expense
for the year ended December 31, 2006, for the electric and gas segments was
$1.0 million, compared to other income of $0.1 million for the same
period in the prior year. 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 instrument.  For the year
ended December 31, 2005, the gas and electric segments recognized a total
of $0.4 million in AFUDC-equity funds and a $0.1 million gain on the
sale of assets. This income was offset by $0.2 million in charitable
contributions recorded in the electric and gas segments and $0.2 million in
miscellaneous expense, net.  Interest
Expense  For the
year-ended December 31, 2006, total interest expense for the electric and
gas segments increased $1.2 million when compared to the same period in the
prior year. For the year ended December 31, 2006, there was a
$1.3 million increase in interest expense on short-term debt at the
electric and gas segments as a result of increased interest rates and higher
levels of short-term debt for much of the year. These increases were offset by a
$0.1 million increase in AFUDC-debt income at the electric and gas
segments.  Nonregulated
Energy Operations  Nonregulated
Energy operating revenues  Operating
revenues from nonregulated energy operations were $18.4 million for the
year ended December 31, 2006. This amount includes $15.0 million in
interdepartmental revenues. The interdepartmental revenues relate 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 $15.0 million and $10.1 million in lease revenue for the
years ended December 31, 2006 and 2005, respectively. Upon consolidation,
this interdepartmental amount is eliminated.  Also included in
operating revenues is the recognition of revenues related to carrying costs for
MGE Power West Campus and MGE Power Elm Road (2006 only). 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. Of
these costs, $4.1 million relates to the capitalized interest and the debt
portion of the facility. These costs are recognized over the period in which the
facility is being depreciated (40 years). The remaining amount of
$8.0 million represents the equity portion and is recognized over the
ten-year period for recovery in rates. For the years ended December 31,
2006 and 2005, MGE Power West Campus recognized $1.1 million and
$0.6 million, respectively, 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.
Current forecasts estimate the total carrying costs to be incurred to be
$54.3 million. A portion of this amount is being recognized over the period
allowed for recovery in rates ($32.6 million) and a portion is being
deferred and will be recognized over the period in which the facility is
depreciated ($21.7 million). For the year ended December 31, 2006,
MGE Power Elm Road recognized $2.3 million related to carrying costs
on the Elm Road project.  Nonregulated
energy operations and maintenance expense  For the years
ended December 31, 2006 and 2005, other operations and maintenance expense
remained consistent. These expenses primarily relate to administrative and
general expenses at MGE Power West Campus and MGE Power Elm Road.  Nonregulated
energy depreciation expense  Depreciation
expense began when the WCCF commenced operations on April 26, 2005.
Depreciation expense for the year ended December 31, 2006, was
$2.7 million compared to $1.9 million for the year ended
December 31, 2005, reflecting a partial year of depreciation in 2005.  Nonregulated
energy interest expense, net  For the twelve
months ended December 31, 2006, interest expense, net at the nonregulated
energy operations segment increased $1.1 million compared to the same
period in the prior year. Interest expense at the nonregulated energy segment
for the year ended December 31, 2006, represents interest expense on the
long-term borrowings held by MGE Power West Campus. On September 30,
2003, MGE Power West Campus issued $30.0 million of 5.68% senior
secured notes maturing September 25, 2033 and on October 27, 2005,
issued $20.0 million of 5.19% senior secured notes also due
September 25, 2033. Interest expense for the twelve months ended
December 31, 2006 and 2005, related to these borrowings was
$2.8 million and $1.9 million, respectively.  Also included in
the nonregulated interest expense is interdepartmental interest expense at
MGE Power Elm Road and MGE Power West Campus. During the twelve months
ended December 31, 2006 and 2005, MGE Power Elm Road was charged
$1.9 million and $0.2 million, respectively, in interest expense by
MGE Energy on funds borrowed for the Elm Road Project. This expense is
eliminated upon consolidation. During the year ended December 31, 2005,
MGE Power West Campus recorded $0.4 million in interdepartmental
interest expense. This expense is also eliminated upon consolidation.  The interest
expense at MGE Power Elm Road is offset by $1.9 million and
$0.2 million in capitalized interest during the twelve months ended
December 31, 2006 and 2005, respectively. Under the provision of SFAS 34,
MGE Power Elm Road is capitalizing interest on the Elm Road Project. During
construction of the WCCF, MGE Power West Campus also recorded capitalized
interest in accordance with the provisions of SFAS 34. During the twelve months
ended December 31, 2005, $0.7 million in capitalized interest was
recognized as an offset to interest expense. On April 26, 2005, when the
electric generation facilities of WCCF began generating electricity,
MGE Power West Campus discontinued the capitalization of interest, as the
project was deemed to be substantially complete.  For the year
ended December 31, 2006, MGE Power Elm Road recorded $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  Transmission
investment other income (loss)  For the year
ended December 31, 2006, other income at the transmission investment
segment was $5.3 million, compared to $4.9 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
revenues  During the
twelve months ended December 31, 2006, the All Other segment did not record
any revenues. However, MGE Construct received service fees of
$1.3 million from the State in 2005. The service fees earned relate to
MGE Construct's role as EPC contractor for WCCF. This amount is classified
as nonregulated revenue within MGE Energy's financial statements. The total
fee of $5.0 million had been recognized at December 31, 2005. This
amount was recognized as services were rendered and was collected over a
22-month period.  All other
operations and maintenance expense  All other
operations and maintenance expense for the year ended December 31, 2006,
increased $0.2 million when compared to the same period in the prior year.
This increase is related to a increase in general and administrative expense at
corporate. For the year ended December 31, 2005, the all other segment
recorded a $0.2 million gain as a result of the settlement of disputed
legal fees.  All other
interest income (expense)  All other
interest income for the year ended December 31, 2006, was $0.8 million
compared to $0.1 million for the year ended December 31, 2005.
Interest income for the twelve months ended December 31, 2006 and 2005,
includes $1.9 million and $0.2 million in interdepartmental income
from MGE Power Elm Road. Additionally, for the year ended December 31,
2005, this balance includes $0.4 million in interdepartmental income from
MGE Power West Campus. This interest income is eliminated upon
consolidation. This interest income for the year ended December 31, 2006,
is offset in part by $1.1 million in interest expense on short-term debt.
Interest expense on these borrowings was $0.5 million for the same period
in the prior year.  Consolidated
Other General Taxes  MGE Energy
and MGE's other general taxes increased 16.1% in 2006 primarily because MGE's
license fee tax increased. The annual license fee tax expense is based on
adjusted operating revenues of the prior year. Tax rates have not increased.  Consolidated
Income Taxes  MGE Energy's
effective income tax rate is 37.9% for 2006 compared to 38.2% in 2005. The lower
effective tax rate is chiefly due to the recognition, in 2006, of tax benefits
from the domestic manufacturing deduction, as provided by the American Jobs
Creation Act of 2004, over time periods related to PSCW rate action.  Minority
Interest, Net of Tax  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.  For the year
ended December 31, 2005, MGE Energy earned $5.4 million, net of
tax , for its interest in MGE Power West Campus and less than
$0.1 million for its interest in MGE Transco and MGE Power Elm
Road. These amounts are recorded as minority interest expense, net of tax, on
MGE's Consolidated Statement of Income.  Liquidity and
Capital Resources  Cash
Flows  The following
summarizes cash flows for MGE Energy and MGE during the twelve months ended
2007, 2006, and 2005:  MGE Energy

MGE(In thousands)
2007

2006

2005

2007

2006

2005Cash
provided by/(used for):Operating
activities
$  76,586

$101,039

$ 53,377

$  78,542

$ 97,224

$ 32,843Investing
activities
(134,791)

(94,441)

(75,733)

(134,137)

(94,382)

(75,523)Financing
activities
58,991

(6,926)

22,183

56,208

(2,418)

42,589  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.  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 is 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 is primarily attributable to the construction of the
Top of Iowa III wind generation project. Construction of this project is
expected to be completed in the first quarter of 2008.  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 is 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 is 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 the Congestion Cost and Line
Loss Allocation Services Agreement that they are a party to.  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.  2006 vs.
2005  Cash provided by
operating activities increased $47.7 million for the year ended
December 31, 2006, when compared to the same period in the prior year. This
increase is primarily attributable to an increase in net income and decreases in
accounts receivable, inventories, and unbilled revenues. Namely,
MGE Energy's net income increased $10.3 million for the year ended
December 31, 2006, when compared to the same period in the prior year.
MGE Energy's working capital accounts contributed to $8.7 million in
cash provided by operating activities, compared to a use of cash of
$23.8 million for the same period in the prior year.  As a result of
the natural disasters that occurred in the Gulf of Mexico, fuel costs were
atypically high in the latter portion of 2005. The high fuel costs had several
impacts on the financial statements of MGE Energy for the year ended
December 31, 2005. For instance, high fuel costs ultimately resulted in an
increase to both electric and gas rates. The increase in rates for both the
electric and gas segment resulted in higher billed and unbilled receivables at
December 31, 2005. Additionally, the increase in fuel costs above those
forecasted in MGE's rate order, was a source of the lower net income that was
experienced for the year ended December 31, 2005, and caused the cost of
inventories, such as gas in storage to be atypically high. The offsetting impact
on cash flows of these disasters in 2005 is a reduction in accounts payable.
Because of the high costs of gas, accounts payable levels at December 31,
2005, were higher than normal levels.  During 2006 and
2005, MGE Construct collected $2.4 million and $2.5 million of
the retainage receivable from the State under the EPC agreement related to the
construction of the WCCF, respectively. Additionally, during the year ended
December 31, 2006, MGE billed $2.3 million (net of $16.8 million
returned to customers between March 9, 2006, and December 31, 2006) in
electric rates which, pursuant to an interim order issued by the PSCW, was
required to be refunded to customers. This credit was recorded as a reduction to
other electric revenues in the consolidated income statement of MGE Energy
for the twelve months ended December 31, 2006, and is shown as a noncash
adjustment to net income on the consolidated statement of cash flows of
MGE Energy.  Other noncurrent
items, net contributed $4.4 million to cash flows from operations for the
year ended December 31, 2006, compared to $0.7 million in cash used
for operations for the year ended December 31, 2005. Additionally, during
the years ended December 31, 2006 and 2005, MGE Energy made
$5.8 million and $5.5 million in voluntary cash contributions to the
pension and other postretirement plans, respectively.  During the year
ended December 31, 2006, MGE recorded a $3.2 million provision for
doubtful accounts. This represents a $1.2 million increase from the amount
recorded during the same period in the prior year. In 2006 MGE experienced a
deterioration in the composition of the aging of its accounts receivable largely
attributable to the increase in gas and electric rates that was experienced in
the latter portion of 2005. MGE recorded $10.2 million in employee benefit
expenses compared to $9.7 million for the prior year. See Footnote 13
for further discussion of MGE Energy's Pension and Other Postretirement
Benefits.  For the year
ended December 31, 2006, MGE Energy recorded $5.3 million in
equity earnings from ATC and $4.0 million in cash dividends received from
ATC. For the same period in the prior year, MGE Energy recorded
$4.9 million in equity earnings from ATC and $3.6 million in cash
dividends from ATC.  There was a
$5.7 million decrease in deferred tax expense between 2006 and 2005. This
decrease is largely attributable to the expiration, on December 31, 2005,
of federal law permitting bonus tax depreciation. This law allowed taxpayers to
claim additional bonus depreciation equal to 50% of the qualifying basis of
certain property placed in service prior to January 1, 2006. For the year
ended December 31, 2005, bonus tax depreciation resulted in approximately
$11.2 million in deferred tax expense, due to the placement in service of
WCCF.  MGE  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 is 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.  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 is 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 the Congestion Cost and Line Loss Allocation
Services Agreement that they are a party to.  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.  2006 vs.
2005  Cash provided by
operating activities increased $64.4 million for the year ended
December 31, 2006, when compared to the same period in the prior year. This
increase is primarily attributable to an increase in net income and decreases in
accounts receivable, inventories, and unbilled revenues. Namely, MGE's net
income increased $6.6 million for the year ended December 31, 2006,
when compared to the same period in the prior year. MGE's working capital
accounts contributed to $5.5 million in cash provided by operating
activities, compared to a use of cash of $43.8 million for the same period
in the prior year.  As a result of
the natural disasters that occurred in the Gulf of Mexico, fuel costs were
atypically high in the latter portion of 2005. The high fuel costs had several
impacts on the financial statements of MGE for the year ended December 31,
2005. For instance, high fuel costs ultimately resulted in an increase to both
electric and gas rates. The increase in rates for both the electric and gas
segment resulted in higher billed and unbilled receivables at December 31,
2005. Additionally, the increase in fuel costs above those forecasted in MGE's
rate order, was a source of the lower net income that was experienced for the
year ended December 31, 2005, and caused the cost of inventories, such as
gas in storage to be atypically high. The offsetting impact on cash flows of
these disasters in 2005 is a reduction in accounts payable. Because of the high
costs of gas, accounts payable levels at December 31, 2005, were higher
than normal levels.  Other noncurrent
items, net resulted in $4.4 million in cash provided by operating
activities for the year ended December 31, 2006, compared to
$0.6 million in cash used by operating activities for the same period in
the prior year. Additionally, during the years ended December 31, 2006 and
2005, MGE made $5.8 million and $5.5 million in voluntary cash
contributions to the pension and other postretirement plans.  During the year
ended December 31, 2006, MGE billed $2.3 million (net of
$16.8 million returned to customers between March 9, 2006, and
December 31, 2006) in electric rates which, pursuant to an interim order
issued by the PSCW, is required to be refunded to customers. This credit was
recorded as a reduction to other electric revenues in the consolidated income
statement of MGE for the twelve months ended December 31, 2006, and is
shown as a noncash adjustment to net income on the consolidated statement of
cash flows of MGE.  During the year
ended December 31, 2006, MGE recorded a $3.2 million provision for
doubtful accounts. This represents a $1.2 million increase from the amount
recorded during the same period in the prior year. In 2006, MGE experienced a
deterioration in the composition of the aging of its accounts receivable largely
attributable to the increase in gas and electric rates that was experienced in
the latter portion of 2005. MGE recorded $10.2 million in employee benefit
expenses compared to $9.7 million for the prior year. See Footnote 13
for further discussion of MGE's Pension and Other Postretirement Benefits.  For the year
ended December 31, 2006, MGE recorded $5.3 million in equity earnings
from ATC and $4.0 million in cash dividends received from ATC. For the same
period in the prior year, MGE recorded $4.9 million in equity earnings from
ATC and $3.6 million in cash dividends from ATC.  There was a
$6.1 million decrease in deferred tax expense between 2006 and 2005. This
decrease is largely attributable to the expiration, on December 31, 2005,
of federal law permitting bonus tax depreciation. This law allowed taxpayers to
claim additional bonus depreciation equal to 50% of the qualifying basis of
certain property placed in service prior to January 1, 2006. For the year
ended December 31, 2005, bonus tax depreciation resulted in approximately
$11.2 million in deferred tax expense, due to the placement in service of
WCCF.  For the year
ended December 31, 2006, MGE recorded $9.6 million in minority
interest, net of tax, compared to $5.4 million for the same period in the
prior year. This amount relates to net income earned by MGE Energy from its
interest in MGE Power West Campus, MGE Power Elm Road, and
MGE Transco.  Capital
Requirements and Investing Activities  MGE Energy  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 is 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 are 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 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 $1.1 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.  2006 vs.
2005  In 2006,
MGE Energy's cash used for investing activities increased
$18.7 million. Capital expenditures for the year ended December 31,
2006, were $92.6 million. This amount represents a $6.8 million
increase from those made in the prior year. This increase is related to the
construction activity for the Elm Road project ($5.1 million) and the Top
of Iowa III wind project ($10.7 million). These increases are
partially offset by a $8.5 million decrease in capital expenditures related
to WCCF, reflecting the substantial completion of that project in
April 2005 and a $0.5 million decrease in other MGE utility plant
additions. During 2006 and 2005, MGE Energy made a $1.9 million and a
$1.4 million capital contribution to ATC, respectively. Additionally,
during 2006 and 2005, MGE Energy made $0.1 million and
$0.3 million in capital contribution to other investments.  In the first
quarter 2005, MGE collected $13.0 million in funds previously advanced to
ATC in conjunction with the WCCF project. No additional funds were advanced to
ATC directly during 2005 or 2006. Although MGE Energy did not advance any
funds to ATC directly during the aforementioned periods, funds were indirectly
advanced to ATC. Namely, in 2006 and 2005 in connection with the Elm Road
project, MGE Power Elm Road advanced $0.8 million and
$1.6 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. These funds are expected to be repaid
in full when the project is operational.  During the year
ended December 31, 2006, MGE Energy's cash provided by other cash
investing activities was $0.9 million compared to $0.4 million in the
prior year.  MGE  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 is 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 are
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 $1.6 million compared to $0.9 million in the prior
year. During the twelve months ended December 31, 2007, MGE received
$0.9 million in cash proceeds from the sale of equity investments.  2006 vs.
2005  Cash used for
investing activities was $94.4 million for 2006, compared to
$75.5 million in the prior year. Capital expenditures for the year ended
December 31, 2006, were $92.6 million. This amount represents a
$6.8 million increase from those made in the prior year. This increase is
related to the construction activity for the Elm Road project
($5.1 million) and the Top of Iowa III wind project
($10.7 million). These increases are partially offset by a $0.5 decrease in
other MGE utility plant additions and a $8.5 million decrease in capital
expenditures related to WCCF, reflecting the substantial completion of that
project in April 2005. During 2006 and 2005, MGE Transco made capital
contributions to ATC totaling $1.9 million and $1.4 million,
respectively. In the first quarter of 2005, MGE collected $13.0 million in
funds previously advanced to ATC in conjunction with the WCCF project. No
additional funds were advanced to ATC directly during 2005 or 2006. Although MGE
did not advance any funds to ATC directly in 2005 or 2006, funds were indirectly
advanced to ATC. Namely, in 2006 and 2005 in connection with the Elm Road
project, MGE Power Elm Road advanced $0.8 million and
$1.6 million, respectively in funds to WEPCO, who in turn provided these
funds to ATC. These funds will be used by ATC for transmission system upgrades
related to the Elm Road project. These funds are expected to be repaid in
full.  During the year
ended December 31, 2006, cash provided by other investing activities was
$0.9 million compared to $0.4 million for the same period in the prior
year.  Capital
expenditures  The following
table shows MGE Energy's budgeted capital expenditures for 2008 and actual
capital expenditures for both 2007 and 2006:  (In thousands)
For the
years ended December 31
2008
(Budget)

2007
(Actual)

2006
(Actual)Electric
:
$36,674

$70,687

$50,604Gas
14,502

12,091

10,206Utility
plant total
51,176

82,778

60,810Nonregulated
43,729

53,480

31,765MGE Energy
total
$94,905

$136,258

$92,575  As of
December 31, 2007, MGE and MGE Energy had a working capital deficit
(current liabilities exceeded current assets). This deficit is in part due to
MGE currently funding the majority of its capital commitments for the Top of
Iowa III wind project and the Elm Road project with short-term debt and the
reclassification of $30.0 million of long term debt which matures in
September 2008, from a long-term to a current liability. MGE intends to
refinance the $30 million medium-term note with an additional long-term
debt facility. MGE intends to fund future capital commitments for these projects
with funds generated from normal operations, the issuance of long tem debt, and
financing received from MGE Energy. MGE Energy intends to raise the
funds for such financing primarily through the issuance of equity securities and
short-term debt, as needed.  MGE Energy's
and MGE's liquidity is primarily affected by their construction requirements. We
allocate common plant for the financial statements and footnotes based on a
prescribed formula (60% (electric) and 40% (gas)). MGE Energy's major 2007
capital projects include Elm Road and the Top of Iowa III wind project.
During 2007, $53.0 million in capital expenditures were incurred for the
construction of Elm Road. Included in this amount is $3.9 million of
interest capitalized in accordance with the provisions set forth in
SFAS No. 34, Capitalization of Interest Cost. During 2007, MGE
expended $36.5 million on capital additions for the construction of the Top
of Iowa III wind project and recorded an additional $2.2 million in
AFUDC.  As of
December 31, 2007, MGE Power Elm Road's remaining capital commitments
for the Elm Road project are estimated to be $72.0 million. Included in
this amount is $4.5 million, which has been accrued and recorded as
construction work in progress at December 31, 2007. Based on current
forecasts, capital expenditures for this project are expected to be
$48.0 million in 2008, $20.5 million in 2009, and $3.5 million in
2010. These amounts may change as a result of modifications to the project cost
estimate or timing differences.  As of
December 31, 2007, MGE's remaining capital commitments for the Top of
Iowa III wind project are estimated to be $9.0 million and is expected
to be expended in 2008. Included in this amount is $8.7 million, which has
been accrued and recorded as construction work in progress at December 31,
2007. These amounts may change as a result of modifications to the project cost
estimate or timing differences.  MGE Energy
used funds received as dividend payments from MGE and MGE Power West Campus
as well as short- and long-term external financing to meet its 2007 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 Distribution Agreement with JP Morgan and
the Stock Plan.  Financing
Activities  MGE Energy  2007 vs.
2006  Cash provided by
MGE Energy's financing activities was $59.0 million for 2007, compared
to cash used for financingactivities 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 is 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 is 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 its
outstanding obligation for its 7.49% medium-term notes which came due
September 20, 2007 ($15.0 million) and issued $25.0 million in
6.247% medium-term notes due September 15, 2037.  2006 vs.
2005  Cash used by
MGE Energy's financing activities was $6.9 million for 2006, compared
to cash provided by financing activities of $22.2 million for 2005. For the
year ended December 31, 2006, net short term debt repayments were
$25.5 million compared to net short-term debt borrowings of
$29.2 million for the same period in the prior year. As a result of
atypically high fuel costs in the latter portion of 2005, short term debt
borrowings were above normal levels at December 31, 2005. Namely, to fund
the purchase of the related inventory (natural gas, purchased power, etc.),
MGE Energy was required to rely more heavily on short-term financing.
Conversely, during 2006, although short term debt levels were up for most of the
year, there was a large decrease in these levels in December 2006. Namely,
in December 2006 MGE used most of the net proceeds from a medium-term note
issuance to repay short term debt obligations. See discussion of financing
activities under MGE for further discussion of this issuance. Cash dividends
paid on common stock during the year ended December 31, 2006, were
$28.5 million compared to $28.1 million for the same period in the prior
year. This increase is a result of a higher dividend per share ($1.39 vs. $1.37)
and an increase in the number of shares outstanding.  The
aforementioned increases in uses of cash, were offset by additional proceeds
from stock issued. Proceeds under the Stock Plan were $9.7 million for the
year ended December 31, 2006. This represents a $7.4 million increase
from that received in the prior year. This increase is attributable to a change
from using open market purchases during the most of 2005 to satisfy Stock Plan
requirements to using newly issued shares starting June 1, 2006.
Additionally, on November 9, 2006, MGE Energy entered into a
Distribution Agreement with JP Morgan in which MGE Energy may offer and
sell up to 1,500,000 shares of its common stock. During 2006, MGE Energy
received $7.4 million in net proceeds from shares issued under the
Distribution Agreement. These sales are made pursuant to an effective shelf
registration statement MGE Energy filed with the SEC in March 2003.  MGE  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 its outstanding
obligation for its 7.49% medium-term notes which came due September 20,
2007 ($15.0 million) and issued $25.0 million in 6.247% medium-term
notes due September 15, 2037.  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
$26.1 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 common equity ratio at December 31, 2007, is estimated to be 53.1% as
determined under the calculation used in the rate proceeding. 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, 2007, approximately $186.0 million was available for the
payment of dividends under this covenant.  2006 vs.
2005  During 2006,
cash used for MGE's financing activities was $2.4 million compared to cash
provided by financing activities of $42.6 million in 2005. During 2006, MGE
had net short-term repayments of $36.5 million compared to net short-term
debt borrowings of $25.7 million for the same period in the prior year. As
a result of atypically high fuel costs in the latter portion of 2005, short term
debt borrowings were above normal levels at December 31, 2005. Namely, to
fund the purchase of the related inventory (natural gas, purchased power, etc.),
MGE was required to rely more heavily on short-term financing. Conversely,
during 2006 although short term debt levels were up for most of the year, there
was a large decrease in these levels in December 2006. Namely, in
December 2006 MGE used most of the net proceeds from a medium-term note
issuance to repay short term debt obligations. See below for further discussion
of this issuance.  During 2006,
equity and affiliate financing received from MGE Energy by MGE Power
West Campus, MGE Transco, and MGE Power Elm Road was
$27.3 million compared to $33.9 million for the same period in the
prior year. This decrease reflects the substantial completion of the WCCF
project in April 2005 and the resulting decrease in capital needs for this
project. These equity contributions received by the aforementioned subsidiaries
from MGE Energy are included in minority interest on the MGE consolidated
balance sheet.  These decreases
in cash from financing activities were offset by decreases in the cash dividends
and an increase in long term debt issued. Cash proceeds from long term debt
issuances were $30 million in 2006 compared to $20 million in 2005.
Namely, on December 29, 2006, MGE issued $30 million in 5.25%
medium-term notes due January 15, 2017. On October 27, 2005,
MGE Energy through its wholly owned subsidiary MGE Power West Campus
issued $20.0 million of 5.19% senior secured notes due September 25,
2033.  For the year
ended December 31, 2006, cash dividends made by MGE, MGE Transco, and
MGE Power West Campus were $23.1 million compared to
$36.3 million for the same period in the prior year.  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
$26.1 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 common equity ratio at December 31, 2006, is estimated to be 53.1% as
determined under the calculation used in the rate proceeding. 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.  In addition, 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, 2006, approximately $167.5 million was available for the
payment of dividends under this covenant.  During 2006 and
2005, MGE's dividend payments were restricted under a PSCW rate order and its
mortgage bond indenture. MGE's common equity ratio at December 31, 2005,
was approximately 55.7% as determined under the calculation used in the PSCW
rate proceeding. As of December 31, 2005, approximately $148.2 million
was available for the payment of dividends under the covenant in MGE's mortgage
bond indenture.  MGE Energy's
capitalization ratios were as follows: MGE Energy2007

2006Common
shareholders' equity
53.9%

54.8%Long-term
debt*
33.1%

36.9%Short-term
debt
13.0%

8.3%*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.  Contractual
Obligations and Commercial Commitments for MGE Energy and MGE  MGE Energy's
and MGE's contractual obligations as of December 31, 2007, 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)
$   263,500

$  30,000

$
          -

$  34,300

$199,200Short-term
debt (b)
103,500

103,500

-

-

-Interest
expense (c)
258,181

14,924

27,269

26,528

189,460Operating
leases (d)
21,585

2,650

3,789

2,895

12,251Purchase
obligations (e)
409,802

74,039

84,799

45,384

205,580Other
obligations (f)
4,252

3,063

467

565

157Purchase
obligations-Elm Road (g)
72,046

48,031

24,015

-

-Purchase
obligations - Top of Iowa III (j)
9,004

9,004

-

-

-Purchase
obligations-Columbia environmental (i)
868

868

-

-

-Total
MGE Energy contractual obligations
$1,142,738

$286,079

$140,339

$109,672

$606,648MGELong-term
debt (a)
$   263,500

$  30,000

$
          -

$  34,300

$199,200Short-term
debt (h)
61,000

61,000

-

-

-Interest
expense (c)
258,181

14,924

27,269

26,528

189,460Operating
leases (d)
21,585

2,650

3,789

2,895

12,251Purchase
obligations (e)
409,802

74,039

84,799

45,384

205,580Other
obligations (f)
3,492

2,303

467

565

157Purchase
obligations-Elm Road (g)
72,046

48,031

24,015

-

-Purchase
obligations - Top of Iowa III (j)
9,004

9,004

-

-

-Purchase
obligations-Columbia environmental (i)
868

868

-

-

-Total
MGE contractual obligations
$1,099,478

$242,819

$140,339

$109,672

$606,648  For additional
information about:  (a) Long-term
debt consisting of secured First Mortgage Bonds, unsecured medium-term notes,
and Industrial Development Revenue Bonds issued by MGE, and private placement
debt issued by 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, 2007.  (d) Operating
leases. See Footnote 18 of the Notes to Consolidated Financial
Statements.  (e) Purchase
obligations for MGE consist 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 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.  (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.  (j) Purchase
obligations for MGE and MGE Energy related to contracts for equipment and
services related to the construction of the Top of Iowa III wind project.
See Footnotes 18 and 22 of the Notes to Consolidated Financial
Statements.  The above
amounts do not include any contributions that may be made for MGE's pension and
postretirement plans. Due to uncertainties in the future economic performance of
plan assets, discount rates, and other key assumptions, management is unable to
estimate these amounts at this time. During 2007 MGE made $6.3 million in
employer contributions primarily related to the 2006 plan year. Additionally, in
2008 MGE made a $5.4 million contribution to the pension and other
postretirement plans related to the 2007 plan year. These payments were made
strictly at MGE's discretion as there were no contributions required related to
the 2007 or 2006 plan year.  MGE Energy's
and MGE's commercial commitments as of December 31, 2007, 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)
$155,000

$20,000

$135,000

$    -

$     -Guarantees
(b)
3,994

1,058

1,461

834

641MGEAvailable
lines of credit (c)
$75,000

$20,000

$55,000

$    -

$     -Guarantees
(d)
3,841

966

1,400

834

641  (a) Amount
includes those facilities discussed in (c) plus an additional line of credit.
MGE Energy has available at any time a $80.0 million committed
revolving credit agreement, expiring in December 2010. At December 31,
2007, MGE Energy had borrowed $42.5 million under this credit
facility. Accordingly, MGE Energy's available credit under this credit
facility was $37.5 million at December 31, 2007.  (b) Amounts
include those guarantees described in (d) as well as guarantees held by
MGE Energy. Also, MGE Energy has guaranteed debt service payments on a
development project.  (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, 2008. Each credit facility is used to
support commercial paper issuances. At December 31, 2007, there were no
borrowings under either credit facility. At December 31, 2007, there was
$61.0 million of commercial paper outstanding.  (d) 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.  Restructuring
Activities  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. The nonunion and union benefits are expected to be paid as
follows: $0.1 million in 2008, $0.2 million in 2010, and
$1.4 million in 2011.  MGE will recover
in rates the costs associated with the discontinuance of coal at Blount. As
such, the severance charges for these employees have been deferred and
recognized on the consolidated balance sheet of MGE Energy and MGE as a
regulatory asset.  Other
Factors  Due to the
performance of the United States debt and equity markets, the value of assets
held in trusts to satisfy the obligations of pension and postretirement benefit
plans may vary.  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 receivables to billed electric sales. MGE expects that
this ratio will be in the range of 40% to 60%.  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. 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.   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 2007, 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, 2007, the ten-year historical return was 10.14%. 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, 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 judgement 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.  In the third
quarter of 2002, 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.  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.  Conditional
ARO  As of
December 31, 2005, MGE adopted FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations" (FIN 47).
FIN 47 clarified that a legal obligation associated with the retirement of
a long-lived asset whose timing and/or method of settlement are conditional on a
future event is within the scope of SFAS No. 143. Under FIN 47, MGE is
required to record a conditional ARO at its estimated fair value if that fair
value can be reasonably estimated.  The adoption of
FIN 47 required MGE to update an existing inventory of AROs, originally
created for the adoption of SFAS No. 143, and to determine which, if any,
of the conditional AROs could be reasonably estimated. The ability to reasonably
estimate a conditional 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 conditional AROs. In
determining whether our conditional 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 conditional
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, 2007. The liabilities associated with conditional 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.  Adoption of
Accounting Principles and Recently Issued Accounting Pronouncements -
MGE Energy and MGE  SFAS
157  In
September 2006, the FASB issued FASB Statement 157, Fair Value
Measurements(SFAS 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Under SFAS 157, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. The standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset or liability.
SFAS 157 will be effective as of January 1, 2008. MGE and MGE Energy
have created an inventory of items under the scope of this standard. This
inventory primarily includes marketable securities and derivatives. The adoption
of this standard does not materially impact MGE Energy's and MGE's
financial statements. This standard will however require additional disclosure
within the footnotes.  SFAS
159  In
February 2007, the FASB issued SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115. This statement allows companies to choose
to measure certain financial instruments and other items at fair value at
specified election dates. Per the provisions of this standard, companies are
permitted to choose the fair value option on an instrument-by-instrument basis.
MGE has not elected to early adopt this statement. Accordingly, SFAS 159 is
effective for MGE as of January 1, 2008. MGE has assessed this standard and
the related implications. Based on this assessment, MGE has concluded that on
January 1, 2008, it will not elect the fair value option available under
this standard.  Pension
Protection Act  During the third
quarter of 2006, President Bush signed into law the Pension Protection Act of
2006, which will affect the manner in which companies, including MGE and
MGE Energy, administer their pension plans. This legislation will require
companies to, amongst other things, increase the amount by which they fund their
pension plans, pay higher premiums to the Pension Benefit Guaranty Corporation
if they sponsor defined benefit plans, amend plan documents and provide
additional plan disclosures in regulatory filings and to plan participants. This
legislation will be effective as of January 1, 2008. The U.S. Treasury
Department's interim guidance indicates that further guidance is forthcoming.
MGE does not expect significant changes in expected cash flows as a result of
the Act. Absent changes in plan design as a result of the Act, the Act is not
expected to materially impact MGE and MGE Energy's results of operations.  FSP FIN 39-1  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 will be electing the accounting policies
prescribed by this pronouncement. FSP FIN 39-1 will be 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 unless it is
impracticable to do so. The adoption of this pronouncement will have no impact
on MGE or MGE Energy's net income.  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. 51and
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. MGE and
MGE Energy are currently assessing the impact these pronouncements will
have on their 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.   Item 7A.
Quantitative and Qualitative Disclosures About Market Risk - MGE Energy and
MGE.  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 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 gas purchased) 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.  On
September 26, 2007, MGE entered into a non-exchange traded weather
derivative. This agreement extends from January 2008 until March 2008.
This agreement has a premium of $0.2 million. Under this agreement, MGE is
subject to a floor and a ceiling based on forecasted heating degree days during
the indicated period. If heating degree days are below the floor, MGE is
entitled to receive payment, and if actual heating degree days exceed the
ceiling, MGE is obligated to make a payment. Any payment or receipt is limited
to $1.3 million. MGE accounts for HDD Collars using the intrinsic value
method pursuant to the requirements of EITF No. 99-2, Accounting
for Weather Derivatives.  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
2007, 2006, and 2005, as measured by degree days, may be found in Results of
Operations.  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. Pursuant to the PSCW order issued on December 14, 2007, MGE's will
be 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 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 one year. MGE's energy contracts are accounted for under SFAS 133.
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, 2007, 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, 2007, the cost basis of these
instruments exceeded their fair value by $0.3 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 and benefits are recoverable, the related unrealized
gain has been deferred on the balance sheet as a regulatory asset.  During 2007, 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 50% of the benefits or loss
from these deals if certain thresholds are achieved. At December 31, 2007,
these positions were in an unrealized gain position of $0.2 million. Of
this amount, 50% is reflected in other comprehensive income and 50% is reflected
as a regulatory asset pursuant to a rate order issued by the PSCW.  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 2007 average interest rate under these borrowings, it is estimated that
our 2007 interest expense and net income would have changed by $0.6 million
for MGE and $1.0 million for MGE Energy.  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
they 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. Pursuant to a PSCW rate order issued on
December 14, 2007, effective January 1, 2008, 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 2008, fuel and purchased power costs included in MGE's
base fuel rates are $119.1 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 315
square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory
includes a service area covering 1,625 square miles in Wisconsin. For the year
ended December 31, 2007, no one customer constituted more than 7% 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.   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 Frameworkissued
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, 2007.  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, 2007, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.  February 26,
2008  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 Frameworkissued
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, 2007.  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,
2008  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, 2007
and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, 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, 2007, 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,
2008  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, 2007 and 2006, and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
2007, 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,
2008


MGE Energy, Inc. Consolidated Statements of Income (In thousands, except per-share amounts)  For the years ended December 31,2007

2006

2005Operating
Revenues:Regulated
revenues
$532,413

$504,138

$511,517Nonregulated
revenues
5,181

3,408

1,853Total
Operating Revenues
537,594

507,546

513,370Operating
Expenses:Fuel
for electric generation
56,694

49,227

65,016Purchased
power
77,594

77,164

81,676Natural
gas purchased
140,838

129,331

146,110Other
operations and maintenance
130,831

126,086

117,552Depreciation
and amortization
32,199

31,342

29,275Other
general taxes
15,771

15,402

13,269Total
Operating Expenses
453,927

428,552

452,898Operating
Income
83,667

78,994

60,472Other
income, net
6,069

4,329

4,938Interest
expense
(13,056)

(15,001)

(13,448)Income
before income taxes
76,680

68,322

51,962Income
tax provision
(27,855)

(25,899)

(19,871)Net
Income
$  48,825

$  42,423

$  32,091Earnings
Per Share of Common Stock (basic and diluted):
$2.27

$2.06

$1.57Dividends
paid per share of common stock
$1.41

$1.39

$1.37Average
Shares Outstanding (basic and diluted)
21,520

20,564

20,436  The
accompanying notes are an integral part of the above consolidated financial
statements.  MGE Energy, Inc. Consolidated Statements of Cash Flows (In thousands)  For the years ended
December 31,2007

2006

2005Operating Activities:Net
income
$   48,825

$   42,423

$   32,091Items not affecting
cash:Depreciation
and amortization
32,199

31,342

29,275Deferred
income taxes
750

5,241

10,900Amortization
of investment tax credits
(410)

(432)

(460)Amortization
of debt issuance costs and discount
543

595

493Provision
for doubtful accounts receivable
3,080

3,230

2,080AFUDC-equity
funds
(1,927)

(554)

(414)Employee
benefit plan expenses
8,101

10,178

9,665Equity
earnings in ATC
(6,047)

(5,317)

(4,871)Reserve
for fuel refund
-

2,312

-Gain
on sale of investments
(778)

-

-Other
items
1,950

653

1,109Changes in working capital
items:Restricted
cash - margin account
694

(1,080)

-Trade
and other receivables, net
(12,574)

14,791

(18,855)Inventories
4,099

(3,717)

(12,468)Unbilled
revenues
(4,332)

4,394

(5,552)Other
current assets
(274)

(3,771)

2,052Retainage
receivable
75

2,425

2,500Accounts
payable
3,608

(4,226)

7,014Accrued
interest and taxes
667

101

2,979Other
current liabilities
(457)

(174)

(1,478)Proceeds
from Congestion Cost and Line Loss Allocation Agreement
2,545

-

-Dividend
income from ATC
4,441

4,003

3,550Cash
contributions to pension and other postretirement plans
(6,346)

(5,779)

(5,536)Other
noncurrent items, net
(1,846)

4,401

(697)Cash
Provided by Operating Activities
76,586

101,039

53,377Investing Activities:Capital
expenditures
(136,258)

(92,575)

(85,771)Repayment
from ATC related to WCCF
-

-

12,964Capital
contributions to ATC and other investments
(255)

(1,974)

(1,686)Advance
to WEPCO for ATC work related to Elm Road
(138)

(808)

(1,599)Proceeds
from sale of property to ATC
724

-

-Other
1,136

916

359Cash
Used for Investing Activities
(134,791)

(94,441)

(75,733)Financing Activities:Issuance
of common stock, net
32,786

17,050

2,259Issuance
(purchase) of treasury stock
-

119

(119)Cash
dividends paid on common stock
(30,295)

(28,513)

(28,054)Repayment
of long-term debt
(15,000)

-

-Issuance
of long-term debt
25,000

30,000

20,000Increase
(decrease) in short-term debt
46,500

(25,500)

29,225Other
-

(82)

(1,128)Cash
Provided by (Used for) Financing Activities
58,991

(6,926)

22,183Change
in Cash and Cash Equivalents:
786

(328)

(173)Cash
and cash equivalents at beginning of period
3,003

3,331

3,504Cash
and cash equivalents at end of period
$    3,789

$    3,003

$    3,331Supplemental disclosures of cash flow
information:Interest
paid
$13,736

$16,693

$13,680Income
taxes paid
$27,902

$20,530

$  7,339Income
taxes received
$(333)

$
         -

$(3,313)  The accompanying
notes are an integral part of the above consolidated financial statements.  MGE Energy, Inc. Consolidated Balance Sheets (In thousands)  At December 31,ASSETS
2007

2006Current
Assets:Cash
and cash equivalents
$      3,789

$    3,003Restricted
cash
2,896

4,243Accounts
receivable, less reserves of $3,709 and $3,489, respectively
43,668

33,397Other
accounts receivable, less reserves of $114 and $107, respectively
3,397

4,508Unbilled
revenues
30,370

26,038Materials
and supplies, at lower of average cost or market
14,809

15,052Fossil
fuel
5,136

6,010Stored
natural gas, at lower of average cost or market
28,483

31,465Prepaid
taxes
14,696

13,748Regulatory
assets - current
189

4,270Other
current assets
8,242

7,679Total
Current Assets
155,675

149,413Other
long-term receivables
6,166

4,631Special
billing projects
999

1,861Regulatory
assets
53,375

50,841Other
deferred charges
5,881

5,874Property,
Plant, and Equipment, Net
638,774

632,474Construction
work in progress
205,214

95,949Total
Property, Plant, and Equipment
843,988

728,423Other
Property and Investments
45,503

41,189Total
Assets
$1,111,587

$982,232LIABILITIES
AND CAPITALIZATIONCurrent
Liabilities:Long-term
debt due within one year
$    30,000

$  15,000Short-term
debt
103,500

57,000Accounts
payable
58,498

45,063Accrued
interest and taxes
3,964

3,430Deferred
income taxes
4,153

3,917Regulatory
liabilities - current
2,924

2,943Pension
liability - current
607

614Other
current liabilities
16,466

15,894Total
Current Liabilities
220,112

143,861Other
Credits:Deferred
income taxes
107,393

101,700Investment
tax credit - deferred
3,087

3,497Regulatory
liabilities
20,885

24,207Accrued
pension and other postretirement benefits
74,056

76,050Other
deferred liabilities
25,982

20,285Total
Other Credits
231,403

225,739Capitalization:Common
shareholders' equity
427,726

375,348Long-term
debt
232,346

237,284Total
Capitalization
660,072

612,632Commitments
and contingencies (see Footnote 18)
-

-Total
Liabilities and Capitalization
$1,111,587

$982,232  The
accompanying notes are an integral part of the above consolidated financial
statements.  MGE Energy, Inc. Consolidated Statements of Capitalization (In thousands)  At December 31,2007

2006Common
Shareholders' Equity:Common
stock - par value $1 per share:Authorized
50,000,000 sharesIssued
21,950,335 and 20,975,392 shares, respectively
$  21,950

$  20,975Additional
paid-in capital
280,217

248,406Retained
earnings
123,916

105,386Accumulated
other comprehensive income, net of tax
1,643

581Total
Common Shareholders' Equity
427,726

375,348Redeemable
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:7.49%,
due 2007
-

15,0006.02%,
due 2008
30,000

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

30,0007.12%,
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

-Total
Other Long-Term Debt
262,300

252,300Long-term
debt due within one year
(30,000)

(15,000)Unamortized
discount
(1,154)

(1,216)Total
Long-Term Debt
232,346

237,284Total
Capitalization
$660,072

$612,632  The
accompanying notes are an integral part of the above consolidated financial
statements.


MGE Energy, Inc. Consolidated Statements of Common Equity and Comprehensive
Income (In thousands, except per-share amounts)  Common Stock
Shares
Value
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss)/Income
Comprehensive
Income
Total2005Beginning
balance - December 31, 2004
20,390
$20,390
-
$229,682
$87,439
$686

$338,197Net
income




$32,091

$32,091
$32,091Other
comprehensive income/(loss):Net
unrealized loss on investments, net of $329 tax benefit





$(491)
(491)
(491)Total
comprehensive income






$31,600Treasury
stock, at cost


$(119)




(119)Common
stock dividends declared
($1.37
per share)




(28,054)


(28,054)Common
stock issued, net
64
$      64

$   2,195



2,259Ending
balance - December 31, 2005
20,454
$20,454
$(119)
$231,877
$91,476
$195

$343,8832006Net
income




$42,423

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





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





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 - December 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 expense





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





(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 - December 31, 2007
21,950
$21,950
$    -
$280,217
$123,916
$1,643

$427,726  The
accompanying notes are an integral part of the above consolidated financial
statements.


Madison Gas and Electric Company Consolidated Statements of Income (In thousands)  For years ended December 31,2007

2006

2005Operating
Revenues:Regulated
electric revenues
$334,488

$318,912

$310,984Regulated
gas revenues
197,925

185,226

200,533Nonregulated
revenues
5,181

3,408

603Total
Operating Revenues
537,594

507,546

512,120Operating
Expenses:Fuel
for electric generation
56,694

49,227

65,016Purchased
power
77,594

77,164

81,676Natural
gas purchased
140,838

129,331

146,110Other
operations and maintenance
130,390

125,573

117,272Depreciation
and amortization
32,199

31,342

29,275Other
general taxes
15,771

15,399

13,268Income
tax provision
24,932

24,066

16,924Total
Operating Expenses
478,418

452,102

469,541Operating
Income
59,176

55,444

42,579Other
Income and Deductions:AFUDC
- equity funds
1,927

554

417Equity
in earnings in ATC
6,047

5,317

4,871Income
tax provision
(2,153)

(1,719)

(2,494)Other
deductions
(1,874)

(1,545)

(354)Total
Other Income and Deductions
3,947

2,607

2,440Interest
Expense:Interest
on long-term debt
15,664

14,034

12,527Other
interest
485

2,036

1,158AFUDC
- borrowed funds
(818)

(235)

(155)Net
Interest Expense
15,331

15,835

13,530Net
Income Before Minority Interest
$  47,792

$  42,216

$  31,489Minority
interest, net of tax
(10,721)

(9,610)

(5,438)Net
Income
$  37,071

$  32,606

$  26,051  The
accompanying notes are an integral part of the above consolidated financial
statements.  Madison Gas and Electric Company Consolidated Statements of Cash Flows (In
thousands)  For the years ended December 31,Operating
Activities:
2007

2006

2005Net
income
$
 37,071

$
 32,606

$
 26,051Items
not affecting cash:Depreciation
and amortization
32,199

31,342

29,275Deferred
income taxes
714

4,839

10,895Amortization
of investment tax credits
(410)

(432)

(460)Amortization
of debt issuance costs and discount
543

595

493Provision
for doubtful accounts receivable
3,080

3,230

2,080AFUDC
- equity funds
(1,927)

(554)

(414)Employee
benefit plan expenses
8,101

10,178

9,665Equity
earnings in ATC
(6,047)

(5,317)

(4,871)Minority
interest, net of tax
10,721

9,610

5,438Reserve
for fuel refund
-

2,312

-Gain
on sale of investments
(778)

-

-Other
items
4,197

653

1,109Changes
in working capital items:Restricted
cash - margin account
694

(1,080)

-Trade
and other receivables, net
(12,511)

12,877

(24,078)Inventories
4,099

(3,717)

(12,468)Unbilled
revenues
(4,332)

4,394

(5,552)Other
current assets
177

(3,835)

3,983Accounts
payable
3,968

(1,611)

(8,697)Accrued
interest and taxes
698

(1,360)

4,325Other
current liabilities
(401)

(146)

(1,302)Proceeds
from Congestion Cost and Line Loss Allocation Agreement
2,545

-

-Dividend
income from ATC
4,441

4,003

3,550Cash
contributions to pension and other postretirement plans
(6,346)

(5,779)

(5,536)Other
noncurrent items, net
(1,954)

4,416

(643)Cash
Provided by Operating Activities
78,542

97,224

32,843Investing
Activities:Capital
expenditures
(136,258)

(92,575)

(85,771)Repayment
from ATC related to WCCF
-

-

12,964Capital
contributions to ATC and other investments
(55)

(1,915)

(1,476)Advance
to WEPCO for ATC work related to Elm Road
(138)

(808)

(1,599)Proceeds
from sale of property to ATC
724

-

-Other
1,590

916

359Cash
Used for Investing Activities
(134,137)

(94,382)

(75,523)Financing
Activities:Cash
dividends paid to parent by MGE
(15,621)

(12,997)

(25,831)Cash
dividends paid to parent from Power West Campus and Transco
(13,044)

(10,119)

(10,513)Affiliate
financing of MGE Power Elm Road and MGE Power West Campus
-

-

25,441Equity
contribution received by Transco, Power Elm Road, and Power West
Campus
43,373

27,280

8,464Repayment
of long-term debt
(15,000)

-

-Issuance
of long-term debt
25,000

30,000

20,000Increase
(decrease) in short-term debt
31,500

(36,500)

25,725Other
-

(82)

(697)Cash
Provided by (Used for) Financing Activities
56,208

(2,418)

42,589Change
in Cash and Cash Equivalents
613

424

(91)Cash
and cash equivalents at beginning of period
1,246

822

913Cash
and cash equivalents at end of period
$
  1,859

$
  1,246

$
     822Supplemental
disclosures of cash flow information:Interest
paid
$15,673

$15,793

$13,192Income
taxes paid
$4,901

$
 3,850

$4,789Income
taxes received
$(33)

$
         -

$(3,313)  The
accompanying notes are an integral part of the above consolidated financial
statements.  Madison Gas and Electric Company Consolidated Balance Sheets (In thousands)  At December 31,ASSETS
2007

2006Utility
Plant (At Original Cost, In Service):Electric
$   691,162

$   667,597Gas
268,032

260,550Nonregulated
110,020

109,587Gross
plant in service
1,069,214

1,037,734Less
accumulated provision for depreciation
(430,572)

(405,391)Net
plant in service
638,642

632,343Construction
work in progress
205,214

95,949Total
Utility Plant
843,856

728,292Other
property and investments
2,777

1,306Investment
in ATC
40,799

38,468Total
Other Property and Investments
43,576

39,774Current
Assets:Cash
and cash equivalents
1,859

1,246Restricted
cash
2,896

4,243Accounts
receivable, less reserves of $3,709 and $3,489, respectively
43,668

33,397Affiliate
receivables
4

-Other
accounts receivable, less reserves of $114 and $107, respectively
3,295

4,398Unbilled
revenues
30,370

26,038Materials
and supplies, at lower of average cost or market
14,809

15,052Fossil
fuel
5,136

6,010Stored
natural gas, at lower of average cost or market
28,483

31,465Prepaid
taxes
13,249

12,753Regulatory
assets - current
189

4,270Other
current assets
8,216

7,652Total
Current Assets
152,174

146,524Other
long-term receivables
5,485

4,631Special
billing projects
999

1,861Affiliate
receivable long-term
10,676

12,923Regulatory
assets
53,375

50,841Other
deferred charges
5,751

5,684Total
Assets
$1,115,892

$   990,530CAPITALIZATION
AND LIABILITIESCommon
stockholder equity
$   329,944

$   307,784Minority
interest
137,028

95,978Long-term
debt
232,346

237,284Total
Capitalization
699,318

641,046Current
Liabilities:Long-term
debt due within one year
30,000

15,000Short-term
debt - commercial paper
61,000

29,500Accounts
payable
58,263

44,513Affiliate
payables
2,115

2,070Accrued
interest and taxes
10,148

9,583Accrued
payroll - related items
6,980

6,688Deferred
income taxes
4,153

3,919Regulatory
liabilities - current
2,924

2,943Pension
liability - current
607

614Other
current liabilities
9,450

9,114Total
Current Liabilities
185,640

123,944Other
Credits:Deferred
income taxes
106,924

101,501Investment
tax credit - deferred
3,087

3,497Regulatory
liabilities
20,885

24,207Accrued
pension and other postretirement benefits
74,056

76,050Other
deferred liabilities
25,982

20,285Total
Other Credits
230,934

225,540Commitments
and contingencies (see Footnote 18)
-

-Total
Capitalization and Liabilities
$1,115,892

$
  990,530  The
accompanying notes are an integral part of the above consolidated financial
statements.  Madison Gas and Electric Company Consolidated Capitalization Statement (In thousands)  At December 31,2007

2006Common
Stockholder Equity:Common
stock - par value $1 per share:Authorized
50,000,000 sharesOutstanding
17,347,889
$  17,348

$  17,348Additional
paid-in capital
184,917

184,917Retained
earnings
126,781

105,331Accumulated
other comprehensive income, net of tax
898

188Total
Common Stockholder Equity
329,944

307,784Minority
Interest
137,028

95,978Redeemable
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:7.49%,
due 2007
-

15,0006.02%,
due 2008
30,000

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

30,0007.12%,
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

-Total
Other Long-Term Debt
262,300

252,300Long-term
debt due within one year
(30,000)

(15,000)Unamortized
discount
(1,154)

(1,216)Total
Long-Term Debt
232,346

237,284Total
Capitalization
$699,318

$641,046   The
accompanying notes are an integral part of the above consolidated financial
statements.


Madison Gas and Electric Company Consolidated Statements of Common Equity and Comprehensive
Income (In thousands, except per-share amounts)  Common Stock
Shares
Value
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other Comprehensive (Loss)/Income
Comprehensive
Income
Total2005Beginning
balance - December 31, 2004
17,348

$17,348
$184,917
$85,502
$63

$287,830Net
income




$26,051

$26,051
$26,051Other
comprehensive income/(loss):Net
unrealized loss on investments, net of $57 tax benefit





$(84)
(84)
(84)Total
comprehensive income






$25,967Common
stock dividends declared




(25,831)


(25,831)Ending
balance - December 31, 2005
17,348

$17,348
$184,917
$85,722
$(21)

$287,9662006Net
income




$32,606

$32,606
$32,606Other
comprehensive income/(loss):Net
unrealized gain on investments, net of $36 tax expense





$54
54
54Net
unrealized gain on cash flow hedges, net of $104 tax expense





155
155
155Total
comprehensive income






$32,815Common
stock dividends declared




(12,997)


(12,997)Ending
balance - December 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 tax expense





$815
815
815Net
unrealized loss on cash flow hedges, net of $71 tax expense





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






$37,781Common
stock dividends declared




(15,621)


(15,621)Ending
balance - December 31, 2007
17,348

$17,348
$184,917
$126,781
$898

$329,944  The
accompanying notes are an integral part of the above consolidated financial
statements.





Notes
to Consolidated Financial Statements December 31, 2007, 2006, and 2005  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 of our
nonregulated energy operations, which were formed to own and lease new electric
generation projects.  MGE
consolidates the financial statements of entities in which it has a controlling
financial interest, pursuant to the requirements of FIN 46R. 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.  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.  MGE
is obligated to provide service to all electric and gas customers within its
franchised territories. MGE's franchised electric territory includes a 315
square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory
includes a service area covering 1,625 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, 2007 and 2006, $0.9 million and $2.2 million,
respectively, of the fossil fuel inventory at Blount was valued using LIFO. This
inventory at current cost exceeds the LIFO stated value by $1.0 million and
$0.4 million at December 31, 2007 and 2006, respectively.
Additionally, during 2007 and 2006, liquidation of LIFO layers, carried at costs
that were lower than current purchases, resulted in a decrease to costs of goods
sold of $0.6 million and less than $0.1 million, respectively.  SO2
emission allowances are included in inventory and are recorded at the lower of
weighted average cost or market. These allowances are charged to fuel expense as
they are used in operations. MGE's emission allowance balances as of
December 31, 2007 and 2006, were $1.6 million and $2.9 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.  Provisions
at composite straight-line depreciation rates approximate the following
percentages for the cost of depreciable property:  2007

2006

2005Electric
3.1%

3.1%

3.1%Gas
3.3%

3.3%

3.4%Nonregulated
2.5%

2.5%

2.5%  k. Repairs
and Maintenance Expense - MGE Energy and MGE.  In
accordance with the provisions set forth in FSP AUG AIR-1, Accounting
for Planned Major Maintenance Activities, MGE utilizes the direct expensing
method for any such 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, 2007 and 2006, MGE had over collected $4.5 million and
$1.9 million, respectively. These amounts were recorded in other current
liabilities on MGE's 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 subsidiaries MGE Power West Campus and 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.  For
the years ended December 31, 2007, 2006, and 2005, $3.9 million,
$1.9 million, and $0.9 million in interest costs related to the Elm
Road and/or WCCF projects were capitalized, respectively. The aforementioned
amounts were capitalized as part of the cost of the asset in accordance with the
provisions set forth in SFAS No. 34.  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 wind project) during 2007
at 9.12%. 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.  q. Capitalized
Software Costs - MGE Energy and MGE.  Property,
plant and equipment includes the capitalized costs of internal use software
totaling $7.4 million at December 31, 2007, and $6.9 million at
December 31, 2006. During both 2007 and 2006, MGE recorded
$1.0 million 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, 2007.  s. Income
Taxes and Excise Taxes - MGE Energy and MGE.  Income
taxes Under
the liability method prescribed by SFAS No. 109, 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 reflect 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
2007, 2006, and 2005 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 2.0 cents per kWh or $0.5 million for 2007 and 1.9 cents
per kWh or $0.4 million for both 2006 and 2005.  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 judgement 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
$11.8 million, $11.6 million, and $9.7 million for the years
ended December 31, 2007, 2006, and 2005, respectively.  Operating
income taxes, including tax credits, and license fee tax are included in rates
for utility related items.  t. Share-Based
Compensation - MGE Energy and MGE.  The
MGE Energy Board approved a Performance Unit Plan (the "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 performance 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. Namely, MGE monitors
the reasonableness of the unbilled revenue estimate through the review of ratios
such as unbilled electric receivables to billed electric sales. MGE expects that
this ratio will be in the range of 40% to 60%.  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, Accounting for the Effects of Certain Types of
Regulation, 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 46R. FIN 46 was applicable immediately to VIEs created or obtained
after January 31, 2003. FIN 46R 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 as of December 31, 2003, and subsequent periods
due to the adoption of FIN 46R. 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 46R.  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 46R. 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 will be leased to MGE for the benefit of its
customers. 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 46R.  c. Shared
Savings Program.  FIN 46R
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 87.7% of the total current Shared Savings program
balance and has determined that the provisions of FIN 46R are not
applicable via the "business scope exception." For the remaining 12.3% 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

MGE Energy(In
thousands)
2007

2006

2007
2006Utility:Electric
$691,162

$667,597

$691,146
$667,580Gas
268,032

260,550

268,021
260,539Total
utility plant
959,194

928,147

959,167
928,119Less:
Accumulated depreciation and amortization
422,584

400,107

422,584
400,107In-service
utility plant, net
536,610

528,040

536,583
528,012Nonregulated:Nonregulated
110,020

109,587

110,179
109,746Less:
Accumulated depreciation and amortization
7,988

5,284

7,988
5,284In
service nonregulated plant, net
102,032

104,303

102,191
104,462Construction
work in progress:Utility
construction work in progress
95,448

40,368

95,448
40,368Nonregulated
construction work in progress
109,766

55,581

109,766
55,581Total
property, plant, and equipment
$843,856

$728,292

$843,988
$728,423  MGE's
utility plant is subject to the lien of its Indenture of Mortgage and Deed of
Trust. As of December 31, 2007, there was $1.2 million of bonds
outstanding under that indenture. See Footnote 9 for further discussion of
the mortgage indenture.  4. Investments
- MGE Energy and MGE.  a. Equity
Method Investments and Available for Sale Securities.  (In thousands)
2007

2006MGE Energy

MGE

MGE Energy

MGEAvailable
for sale securities:Cost
basis
$1,540

$   857

$1,527

$769Gross
unrealized gains
2,660

1,416

712

55Gross
unrealized losses
-

-

-

-Fair
Value
$4,200

$2,273

$2,239

$824Equity
method investments:ATC
$40,799

$40,799

$38,468

$38,468Other
504

504

482

482Total
equity method investments
$41,303

$41,303

$38,950

$38,950Total
$45,503

$43,576

$41,189

$39,774  MGE
and MGE Energy's available for sale securities represent publicly traded
securities and private equity investments in common stock of companies in
various industries.  Of
the available for sale securities held by MGE Energy and MGE at
December 31, 2007, $1.0 million and $0.5 million, respectively,
were not evaluated for impairment because a) the Company did not estimate the
fair value of those investments in accordance with paragraphs 14 and 15 of SFAS
107,Disclosures about Fair Value of Financial Instruments, and b)
the Company did not identify any events or changes in circumstances that may
have had a significant adverse effect on the fair value of those
investments.  For
the year ended December 31, 2006, MGE and MGE Energy recorded
$0.1 million in investment impairment charges. These charges represent an
other-than-temporary decline in the value of its investment portfolio. No such
charges were recorded for the years ended December 31, 2007 and 2005.  During
the year ended December 31, 2007, certain investments were liquidated. As a
result of these liquidations, MGE and MGE Energy 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.  MGE
Transco, through MGE, has a seat on the Board of Directors of ATC and has a 20%
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, 2007, 2006, and 2005, MGE Transco
recorded equity earnings from the investment in ATC of $6.0 million,
$5.3 million, and $4.9 million, respectively. Dividend income received
from ATC was $4.4 million, $4.0 million , and $3.6 million for
the twelve months ended December 31, 2007, 2006, and 2005, respectively.
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. MGE Transco made capital
contributions to ATC of $1.9 million and $1.4 million for the twelve
months ended December 31, 2006 and 2005, respectively.  At
December 31, 2007, 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 and
additional contributions required by tax-exempt shareholders.  At
December 31, 2007, 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.  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 generating capability. 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 Alliant,
which operates Columbia, and WPSC. MGE's share of fuel, operating, and
maintenance expenses for Columbia were $31.3 million, $29.7 million,
and $28.5 million for the years ended December 31, 2007, 2006, and
2005, respectively. See Footnote 18 for discussion of MGE's future capital
commitments as s 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)
2007

2006Utility
plant
$112,079

$112,407Accumulated
depreciation
(70,562)

(69,522)Net
plant
$  41,517

$  42,885  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.  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 at December 31 were as follows:  (In thousands)
2007

2006Nonregulated
Plant
$108,757

$108,310Accumulated
depreciation
(7,289)

(4,611)Net
plant
$101,468

$103,699  Operating
charges are allocated to the UW based on 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. These allocations are based on
formulas outlined in the operating agreement. For the years ended
December 31, 2007, 2006, and 2005, the State was allocated
$3.0 million, $2.6 million, and $0.9 million, respectively, in
fuel and operating costs.  c. Elm
Road.  See
Footnote 21 for a discussion of MGE Energy's joint ownership interest
in Power 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)
2007

2006Regulatory
AssetsEnvironmental
costs
$  1,268

$  1,386Deferred
charges related to interest - 2027A Series
672

707Regulatory
asset - SFAS No. 133
189

2,849Tax
recovery related to AFUDC equity
4,124

3,087Asset
retirement obligation - SFAS No. 143 and FIN 47
4,247

4,039Unfunded
pension and other postretirement liability
33,672

38,085Debt
related costs
3,829

2,427Regulatory
assets - Elm Road
1,025

1,427Conservation
costs
2,815

-Blount
restructuring costs
770

233Other
953

871Total
regulatory assets
$53,564

$55,111Regulatory
LiabilitiesRegulatory
liability - SFAS No. 109
$  5,549

$  6,689Regulatory
liability - SFAS 158 medicare subsidy
1,558

3,668Non-SFAS No. 143
removal cost
13,204

12,963Vendor
settlements
189

504Regulatory
liability - customer fuel credit
-

2,312Deferred
charges related to ATC
78

751Conservation
costs
-

57Congestion
Cost and Line Loss Allocation Agreement
2,845

-Other
386

206Total
regulatory liabilities
$23,809

$27,150  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.  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, 2007, MGE has recorded
$0.9 million in regulatory assets for these environmental costs, including
$0.1 million for accrual for estimated future site remediation and
$0.8 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, 2007, MGE
has recorded $0.4 million in regulatory assets related to these costs. The
costs will be transferred to construction work in progress once a Certificate of
Authority is received by 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. 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, Accounting for Derivative Instruments and Hedging
Activities. 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, Accounting for Income
Taxes. 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. 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. At
December 31, 2007, $0.6 million of the regulatory asset balance
related to Elm Road represents deferred management fees, community impact, and
transition costs and $0.4 million represents carrying costs on the carrying
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.  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 and retention bonus payments. MGE expects recovery of
these amounts beginning in 2008 and continuing 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, 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.  Vendor
Settlements MGE
has a settlement agreement with a certain vendor in which it has received
various payments since 1999. All settlements received from this vendor are
returned to customers generally over a two-year period beginning in the rate
case period following the actual receipt.  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 will be
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 in which MGE Energy may offer and sell up to 1,500,000
shares of its common stock. During 2007, MGE Energy issued 383,500 shares
of its common stock for $12.7 million in net proceeds under this agreement.
During 2006, MGE Energy issued 221,500 shares of its common stock for
$7.4 million in net proceeds under this agreement. These sales are made
pursuant to an effective shelf registration statement MGE Energy filed with
the SEC in March 2003.  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, 2007 and 2006, MGE Energy issued
591,443 and 299,396 new shares of common stock under the Stock Plan for net
proceeds of $20.1 million and $9.7 million, respectively.  At
December 31, 2005, MGE Energy held $0.1 million of treasury stock
that had been purchased on the open market. The cost basis of these shares was
shown at December 31, 2005, as a reduction to stockholders' equity on the
MGE Energy consolidated financial statements. During the twelve months
ended December 31, 2006, these shares were distributed to participants of
the Stock Plan. No treasury stock was held by MGE Energy as of
December 31, 2007 and 2006. During the twelve months ended
December 31, 2007 and 2006, MGE Energy paid $30.3 million (or
$1.41 per share) and $28.5 million (or $1.39 per share), respectively, in
cash dividends on their 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" 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, 2007 and 2006.  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. As of
December 31, 2007 and 2006, MGE Power had invested (net of dividends)
$15.6 million and $28.0 million in MGE Power West Campus,
respectively. For the years ended December 31, 2007, 2006, and 2005,
MGE Power had earned $7.7 million, $7.8 million, and
$5.4 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.  On
October 28, 2005, MGE Transco was formed. On this date, MGE
transferred its investment in ATC to MGE Transco and received an ownership
interest in MGE Transco. During 2005 and 2006, MGE Energy contributed
a total of $3.3 million to MGE Transco in exchange for an ownership
interest. At December 31, 2007, MGE is the majority owner and
MGE Energy is the minority owner of this entity. MGE Energy's
proportionate share of the equity and net income of MGE Transco is
classified within the MGE financial statements as minority interest. As of
December 31, 2007 and 2006, MGE Energy had invested (net of dividends)
$2.2 million and $2.9 million in MGE Transco. For the years ended
December 31, 2007, 2006, and 2005, MGE Energy had earned
$0.5 million, $0.4 million, and less than $0.1 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. As of December 31, 2007 and 2006, MGE Power had
invested $93.4 million and $50.1 million in MGE Elm Road. For the
years ended December 31, 2007, 2006, and 2005, MGE Power recognized
earnings of $2.6 million, $1.4 million, and less than
$0.1 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.  9. Long-Term
Debt.  a. 6.247%
Medium-Term Notes - MGE and MGE Energy.  On
September 19, 2007, MGE issued $25 million of 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 Trust
Company, N.A. (as successor to Bank One, N.A.), as Trustee. The notes are
unsecured.  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 carry an interest rate of 6.247% per
annum, which is payable semiannually on March 15 and September 15 of
each year, commencing on March 15, 2008. 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 is reflected as an
expense in MGE and MGE Energy's income statement for the twelve months
ended December 31, 2007.  b. 5.25%
Medium-Term Notes - MGE and MGE Energy.  On
December 29, 2006, MGE issued $30 million in 5.25% medium-term notes
due January 15, 2017. The notes were issued pursuant to an Indenture dated
as of September 1, 1998, between MGE and The Bank of New York Trust
Company, N.A., (as successor to Bank One, N.A.), as Trustee. The notes are
unsecured. MGE used the net proceeds from the sale of the Notes to repay
short-term indebtedness, namely, commercial paper.  The
notes carry an interest rate of 5.25% per annum, which is payable semiannually
on January 15 and July 15 of each year, commencing on July 15,
2007. The notes are redeemable at any time at MGE's option at a redemption price
equal to or greater of (i) 100% of the principal amount of the Notes to be
redeemed, plus accrued interestto 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.  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 subject to a collateral assignment of lease payments that MGE will be
making to MGE Power West Campus for use of the cogeneration facility.  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.  e. Other
Long-Term Debt - MGE Energy and MGE.  MGE
has $30 million of 6.02% medium-term notes due in 2008, $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, 2007, balance sheet.  (In thousands)
Amount2008
$30,0002009
-2010
-2011
-2012
34,300Future
years
199,200Total*
$263,500  *Includes
$30 million and $20 million maturity for MGE Power West Campus,
which is consolidated with MGE's debt in accordance with FIN 46R (see
Footnote 2).  10. Notes
Payable to Banks, Commercial Paper, and Lines of Credit - MGE Energy and
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
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 an adder based on the senior unsecured credit rating of MGE.
Interest is payable monthly. The credit agreement requires 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).  On
August 1, 2007, MGE entered into a $20 million unsecured line of
credit, which expires on March 31, 2008. This facility carries an interest
rate based on LIBOR plus an applicable margin of 0.40% per annum. Interest is
payable monthly commencing on September 1, 2007, and will be computed on
any unpaid principal at the date of each borrowing. The line of credit will be
used as a backup facility to MGE's commercial paper program. No borrowings are
outstanding under this facility at this time. Borrowings may be made and repaid
at any time during the term of the note and must be repaid upon the earlier of
the maturity of the note or the occurrence of an event of default. Events of
default include failures to pay scheduled principal or interest and certain
bankruptcy-related events, in each case subject to applicable cure periods.  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. MGE Energy has the right to request an increase in the
aggregate commitment amount up to a maximum amount of $20 million so long
as no default or unmatured default exists. Interest rates on borrowings under
the credit facility are based on either prime or LIBOR plus an adder 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
credit agreement requires MGE Energy to maintain a ratio of consolidated
debt to consolidated total capitalization not to exceed a maximum of 65%.  Information
concerning short-term borrowings for the past three years is shown below:  As of December 31,(In
thousands)
2007

2006

2005MGE EnergyAvailable
lines of credit
$155,000

$155,000

$155,000Short-term
debt outstanding
$103,500

$  57,000

$  82,500Weighted-average
interest rate
4.71%

5.56%

4.44%During
the year:Maximum
short-term borrowings
$108,500

$90,000

$85,500Average
short-term borrowings
$59,113

$67,026

$44,540Weighted-average
interest rate
5.39%

5.20%

3.58%MGEAvailable
lines of credit
$75,000

$75,000

$75,000Commercial
paper outstanding
$61,000

$29,500

$66,000Weighted-average
interest rate
4.47%

5.32%

4.36%During
the year:Maximum
short-term borrowings
$64,000

$70,250

$69,000Average
short-term borrowings
$27,954

$46,452

$31,151Weighted-average
interest rate
5.08%

5.02%

3.42%  11. Fair
Value of Financial Instruments - MGE Energy and MGE.  At
December 31, 2007 and 2006, 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:  2007

2006(In thousands)
Carrying
Amount

Fair
Value

Carrying
Amount

Fair
ValueMGE EnergyAssets:Cash
and cash equivalents
$3,789

$3,789

$3,003

$3,003Restricted
cash
2,896

2,896

4,243

4,243Liabilities:Short-term
debt - bank loans
42,500

42,500

27,500

27,500Short-term
debt - commercial paper
61,000

61,000

29,500

29,500Long-term
debt*
263,500

260,787

253,500

261,595MGEAssets:Cash
and cash equivalents
1,859

1,859

1,246

1,246Restricted
cash
2,896

2,896

4,243

4,243Liabilities:Short-term
debt - commercial paper
61,000

61,000

29,500

29,500Long-term
debt*
263,500

260,787

253,500

261,595  *Includes
long-term debt due within one year.  See
Footnotes 4 and 16 for a discussion of the fair value related to investments and
derivatives, respectively.  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)
2007

2006

2005Current
payable:Federal
$22,482

$16,169

$  6,025State
5,033

4,921

3,406Net-deferred:Federal
37

4,565

9,795State
713

676

1,105Amortized
investment tax credits
(410)

(432)

(460)Total
income tax provision
$27,855

$25,899

$19,871  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:  2007

2006

2005Statutory
federal income tax rate
35.0%

35.0%

35.0%Amortized
investment tax credits
(0.5)%

(0.6)%

(0.9)%State
income taxes, net of federal benefit
4.8%

5.0%

5.3%Credit
for electricity from wind energy
(0.6)%

(0.5)%

(0.7)%Medicare
subsidy
(0.4)%

(0.5)%

(0.4)%Domestic
manufacturing deduction
(0.6)%

(0.5)%

-Other,
individually insignificant
(1.4)%

-

(0.1)%Effective
income tax rate
36.3%

37.9%

38.2%  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)
2007

2006Property-related
$105,527

$102,146Investment
in ATC
15,171

14,798Bond
transactions
2,274

2,416Pension
expense
1,781

841Unfunded
pension and other postretirement liability
13,514

15,286Tax
deductible prepayments
6,579

6,288Other
7,929

5,671Gross
deferred income tax liabilities
152,775

147,446Accrued
expenses
(13,605)

(9,702)Retirement
benefits, other than pension
(8,105)

(7,102)Deferred
tax regulatory account
(3,479)

(4,043)Unfunded
pension and other postretirement liability
(14,826)

(18,954)Other
(1,580)

(2,394)Gross
deferred income tax assets
(41,595)

(42,195)Less
valuation allowance
366

366Net
deferred income tax assets
(41,229)

(41,829)Deferred
income taxes
$111,546

$105,617  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, 2007, 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)
2007

2006

2005Current
payable:Federal
$21,899

$16,468

$  5,669State
4,882

4,910

3,314Net-deferred:Federal
11

4,241

9,791State
703

598

1,104Amortized
investment tax credits
(410)

(432)

(460)Total
income tax provision
$27,085

$25,785

$19,418  MGE's
income tax provision on a 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:  2007

2006

2005Statutory
federal income tax rate
35.0%

35.0%

35.0%Amortized
investment tax credits
(0.5)%

(0.6)%

(0.9)%State
income taxes, net of federal benefit
4.7%

5.0%

5.3%Credit
for electricity from wind energy
(0.6)%

(0.5)%

(0.7)%Medicare
subsidy
(0.4)%

(0.5)%

(0.4)%Domestic
manufacturing deduction
(0.6)%

(0.5)%

-Other,
individually insignificant
(1.4)%

-

(0.2)%Effective
income tax rate
36.2%

37.9%

38.1%  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)
2007

2006Property-related
$105,527

$102,146Investment
in ATC
15,171

14,798Bond
transactions
2,274

2,416Pension
expense
1,781

841Unfunded
pension and other postretirement liability
13,514

15,286Tax
deductible prepayments
6,579

6,288Other
7,473

5,451Gross
deferred income tax liabilities
152,319

147,226Accrued
expenses
(13,362)

(9,679)Retirement
benefits, other than pension
(8,105)

(7,102)Deferred
tax regulatory account
(3,479)

(4,043)Unfunded
pension and other postretirement liability
(14,826)

(18,954)Other
(1,836)

(2,394)Gross
deferred income tax assets
(41,608)

(42,172)Less
valuation allowance
366

366Net
deferred income tax assets
(41,242)

(41,806)Deferred
income taxes
$111,077

$105,420  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, 2007, 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. At the
date of adoption, MGE Energy and MGE reclassified $0.3 million of
accrued income taxes under prior accounting standards to its long term
FIN 48 tax liability account. Additionally in the adoption accounting,
MGE Energy and MGE reclassified $0.1 million of accrued interest under
prior accounting standards to its FIN 48 interest payable account. These
adjustments had no impact on retained earnings. MGE and MGE Energy have
elected to recognize interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. During the year ended
December 31, 2007, less than $0.1 million of interest expense was
recognized and no penalties were incurred.  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. A tabular reconciliation of unrecognized tax benefits and interest
under FIN 48 from January 1, 2007 (date of adoption) to
December 31, 2007, 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)Amount
of unrecognized tax benefits from 2007 tax positions
99

-Unrecognized
tax benefits, December 31, 2007
$
  99

$
    -  Unrecognized
tax benefits are liabilities shown with Other Deferred Liabilities on the
December 31, 2007, balance sheets.  The
unrecognized tax benefits recorded upon adoption of FIN 48 related to MGE's
state tax matters that were under examination. In 2007, MGE reached a settlement
regarding all state tax matters identified in the adoption of FIN 48.
Unrecognized tax benefits arising in 2007 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, 2007, 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
2004
through 2007MGE Energy
Wisconsin separate corporation return
2003
through 2007MGE
Wisconsin separate corporation return
2005
through 2007  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 $1.0 million
in both 2007 and 2006, and $0.9 million in 2005. A measurement date of
December 31 is utilized for all pension and postretirement benefit
plans.  MGE
employs 247 individuals who are covered by a collective bargaining agreement
with Local Union No. 2304 of the IBEW, 102 employees who are covered by a
collective bargaining agreement with Local Union No. 39 of the Office and
Professional Employees International Union (OPEIU), and 5 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.  a. Benefit
Obligations.  (In
thousands)
Pension Benefits

Other
Postretirement
BenefitsChange in
benefit obligation:
2007

2006

2007

2006Net
benefit obligation at beginning of year
$176,312

$173,452

$49,986

$58,468Service
cost
5,165

5,404

1,618

1,954Interest
cost
10,421

9,758

3,101

3,000Plan
participants' contributions
-

-

366

296Plan
amendments
-

840

793

-Actuarial
(gain) loss
(9,253)

(7,943)

4,912

(12,286)Curtailments
-

(227)

-

(265)Special
termination benefits
22

18

-

-Gross
benefits paid
(5,729)

(4,990)

(1,570)

(1,298)Less:
federal subsidy on benefits paid
-

-

125

117Net
benefit obligation at end of year
$176,938

$176,312

$59,331

$49,986  The
accumulated benefit obligation for the defined benefit pension plan at the end
of 2007 and 2006 was $153.3 million and $150.4 million, respectively.
The accumulated benefit obligation for the other postretirement benefits at the
end of 2007 and 2006, was $59.3 million and $50.0 million,
respectively.  Pension Benefits

Other
Postretirement
BenefitsWeighted-average
assumptions used to
determine
end of year benefit obligations:
2007

2006

2007

2006Discount
rate
6.24%

5.90%

6.29%

5.97%Rate
of compensation increase
4.55%

4.55%

N/A

N/A  The
following table shows assumed health care cost trend rates at
December 31:  2007

2006Health
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
2012

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 2007 dollars:  (In thousands)
1% Increase

1% DecreaseEffect
on other postretirement benefit obligation
$8,341

$(7,114)  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, 2007, the subsidy due
to MGE was $0.1 million.  b. Plan
Assets. (In thousands)
Pension Benefits

Other
Postretirement
BenefitsChange in
plan assets:
2007

2006

2007

2006Fair
value of plan assets at beginning of year
$134,372

$116,719

$15,261

$12,646Actual
return on plan assets
10,819

18,563

1,795

1,917Employer
contributions
5,656

4,080

690

1,699Plan
participants' contributions
-

-

366

296Gross
benefits paid
(5,729)

(4,990)

(1,570)

(1,297)Fair
value of plan assets at end of year
$145,118

$134,372

$16,542

$15,261  The
expected long-term rate of return on the pension plan assets was 9.0% in both
2007 and 2006.  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. Consideration is also given to diversification, rebalancing, and
active portfolio management. Peer data and historical returns are reviewed to
check for appropriateness.  The
asset allocation for MGE's pension plans at the end of 2007 and 2006, and the
target allocation for 2008, by asset category, follows:  Target
Allocation

Percentage of Plan Assets at Year End2007

2006Equity
securities
75.0%

75.6%

76.6%Debt
securities
15.0%

13.2%

13.0%Real
estate
10.0%

11.2%

10.4%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
$16.5 million and $15.3 million at the end of 2007 and 2006,
respectively. The expected long-term rate of return on these plan assets was
7.85% and 7.78% in 2007 and 2006.  Of
the above amounts, $13.5 million and $12.3 million at the end of 2007
and 2006, 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.  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
2007

2006

2007

2006Fair
value of plan assets
$145,118

$134,372

$  16,542

$  15,261Benefit
obligations
176,938

176,312

59,331

49,986Funded
status
$(31,820)

$(41,940)

$(42,789)

$(34,725)  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.  At
December 31, 2006, MGE and MGE Energy's balance sheets included a
$0.6 million current liability, a $76.1 million long-term liability,
and a $38.1 million regulatory asset to properly account for the unfunded
status of the plan. (In
thousands)
Pension
Benefits

Other
Postretirement
BenefitsAmounts
recognized as regulatory asset
2007

2007Net
actuarial loss
$17,178

$9,562Prior
service cost
3,197

1,277Transition
obligation
286

2,172$20,661

$13,011  The
qualified pension plans are 90% funded at December 31, 2007 (computed as a
percent of projected benefit obligation).  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, 2007 and 2006, were as follows:  Pension BenefitsProjected
Benefit Obligation in Excess of Plan Assets
2007

2006Projected
benefit obligation, end of year
$176,938

$176,312Fair
value of plan assets, end of year
$145,118

$134,372  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, 2007 and 2006, were as follows:  Pension BenefitsAccumulated
Benefit Obligation in Excess of Plan Assets
2007

2006Projected
benefit obligation, end of year
$16,371

$111,284Accumulated
benefit obligation, end of year
12,500

90,823Fair
value of plan assets, end of year
-

74,060  g. Expected
Cash Flows.  There
are no required contributions for the 2007 plan year, but MGE may elect
discretionary deductible contributions depending upon its valuation results and
cash flow from operations. In 2007, MGE made $6.3 million in employer
contributions to its pension and postretirement plans related to the 2006 and
2007 plan years. MGE has made a $5.4 million contribution in 2008 related
to the 2007 plan year. See Footnote 27 for further discussion. These
payments are made strictly at MGE's discretion as there are no contributions
required for the 2007 plan year.  h. Benefit
Payments.  The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as follows:  Pension

Other PostretirementPension Benefits

Gross Postretirement Benefits

Expected Medicare Part D Subsidy

Net Postretirement Benefits2008
$  5,852

$  2,147

$    (133)

$  2,0142009
6,638

2,431

(154)

2,2772010
7,288

2,775

(177)

2,5982011
7,998

3,163

(195)

2,9682012
8,856

3,412

(225)

3,1872013-2017
56,850

21,203

(1,584)

19,619  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:
2007

2006

2005

2007

2006

2005Service
cost
$  5,165

$  5,404

$  4,811

$ 1,618

$1,953

$1,905Interest
cost
10,421

9,758

9,185

3,101

3,000

3,054Expected
return on assets
(12,248)

(10,570)

(9,846)

(1,148)

(971)

(988)Amortization
of:Transition
obligation
143

237

260

427

437

434Prior
service cost
440

461

404

208

224

224Actuarial
loss
804

1,583

1,380

232

420

696Curtailment
(gain)/loss
-

105

-

-

(150)

-Net
periodic benefit cost
$  4,725

$  6,978

$  6,194

$ 4,438

$4,913

$5,325Weighted-average
assumptions used to determine net periodic cost:Discount
rate
5.90%

5.65%

5.85%

5.97%

5.72%

5.85%Expected
return on plan assets
9.00%

9.00%

9.00%

7.78%

7.61%

9.00%Rate
of compensation increase
4.55%

4.52%

4.55%

N/A

N/A

N/A  On
September 21, 2006, certain voluntary termination benefits were awarded to
International Brotherhood of Electrical Workers (IBEW) who 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.  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
$809

$(684)  During
the third quarter of 2006, President Bush signed into law the Pension Protection
Act of 2006, which will affect the manner in which companies, including MGE and
MGE Energy, administer their pension plans. This legislation will require
companies to, amongst other things, increase the amount by which they fund their
pension plans, pay higher premiums to the Pension Benefit Guaranty Corporation
if they sponsor defined benefit plans, amend plan documents and provide
additional plan disclosures in regulatory filings and to plan participants. This
legislation will be effective as of January 1, 2008. The U.S. Treasury
Department's interim guidance indicates that further guidance is forthcoming.
MGE does not expect significant changes in expected cash flows as a result of
the Act. Absent changes in plan design as a result of the Act, the Act is not
expected to materially impact MGE and MGE Energy's results of operations.  14. Share-Based
Compensation - MGE Energy and MGE.  The
MGE Energy Board approved a Performance Unit Plan (the "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 performance 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.  On
January 1, 2007, 22,479 units were granted based on the MGE Energy
December 31, 2006, closing stock price. 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 on the grant date was
$1.0 million. The fair value of the awards has been subsequently
re-measured at December 31, 2007. 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, 2007, MGE recorded $0.3 million
in compensation expense as a result of this plan. No compensation expense was
recognized in 2005 and 2006 as there had not been any grants during those years.
No forfeitures or cash settlements occurred during the aforementioned period. No
awards were fully vested at December 31, 2007.  On
January 18, 2008, 18,538 units were granted based on the MGE Energy
closing stock price as of that date.  15. Regional
Transmission Organizations - MGE Energy and MGE.  On
April 1, 2005, the Midwest ISO implemented its bid-based energy
market. Midwest ISO 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 Midwest ISO
market and purchasing much of its load requirement from the Midwest ISO
market in accordance with the Midwest ISO Tariff.  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 Midwest ISO 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 $157.3 million,
$154.4 million, and $122.2 million reduction to sales for resale and
purchased power expense for the years ended December 31, 2007, 2006, and
2005, respectively.  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, Accounting for
Derivative Instruments and Hedging Activities, 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 can not 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, 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.  During
2007 and 2006, 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 Midwest ISO market, at December 31, 2007,
MGE holds 2008 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, 2007 and 2006, the cost basis of these instruments exceeded
their fair value by $0.3 million and $3.1 million, respectively. These
financial instruments will expire throughout 2008. Accordingly, the fair value
of these instruments is reflected as a current regulatory asset and current
deferred liability. Depending on the nature of the instrument, the gain or loss
associated with these transactions will be reflected as natural gas purchased,
fuel for electric generation, or purchased power expense in the delivery month
applicable to the instrument.  During
2007, 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 50% of the benefits
or loss from these deals if certain thresholds are achieved. At
December 31, 2007 and 2006, these positions were in an unrealized gain
position of $0.2 million and $0.5 million, respectively. Of this
amount, 50% is reflected in other comprehensive income and 50% is reflected as a
current regulatory asset. These instruments all expire in 2008.  MGE
has also entered into a ten-year purchased power agreement which provides MGE
with firm capacity and energy beginning June 12, 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, 2007, is $0.1 million. Also, the
derivative qualifies for regulatory deferral and is recognized with a
corresponding regulatory liability.  On
September 26, 2007, MGE entered into a non-exchange traded HDD collar. This
agreement extends from January 2008 until March 2008 and has a premium
of $0.2 million. Under this agreement, MGE is subject to a floor (3,450
HDD) and a ceiling (3,600 HDD), based on forecasted heating degree days during
the indicated period. If heating degree days are below the floor, MGE is
entitled to receive a payment, and if actual heating degree days exceed the
ceiling, MGE is obligated to make a payment. Any payment or receipt is limited
to $1.3 million. MGE will account 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.  In
October 2005, MGE also entered into two non-exchange traded weather
derivatives. The first agreement extended from November 2005 until
December 2005. This agreement had a premium of $0.1 million and
resulted in a loss of less than $0.1 million. The second agreement extended
from January 2006 until March 2006. This agreement also had a premium
of $0.1 million and resulted in a gain of $0.6 million.  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.  17. Rate
Matters - MGE Energy and MGE.  a. Rate
proceedings.  On
December 14, 2007, the PSCW authorized MGE to increase 2008 electric rates
by 4.8% or $16.2 million and increase gas rates by 2.8% or
$7.8 million. The electric increase will cover costs for MGE's new wind
energy projects, statewide energy efficiency 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. The PSCW order allows MGE
to eliminate a base rate case proceeding for 2009 and request a limited reopener
for certain items. The costs MGE can update in its limited reopener include
monitored fuel rules costs, ERGS lease payments and operation and maintenance
costs as a result of ERGS Unit 1 becoming operational, and ATC network service
fees.  Pursuant
to the provisions of this rate order, the fuel rules bandwidth effective
January 1, 2008, will be plus or minus 2%. See below for further
description of fuel rules.  On
December 22, 2006, the PSCW approved a limited scope rate case reopener
related to MGE's current 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 will
result 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 ceases. The fuel rules bandwidth established by this order and
effective January 1, 2007, was plus or minus 2%.  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 is intended to cover
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 relates to the recovery
of the carrying costs for Elm Road.  On
December 21, 2004, the PSCW authorized MGE to increase 2005 electric
revenues by $27.4 million and to decrease 2005 gas revenues by
$4.2 million. The increase to electric revenues is intended to cover rising
fuel costs, commercial operation of WCCF, and increased transmission expenses.  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 effective January 1, 2007, 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 have been 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.  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 its latest order, a 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.  During
the twelve months ended December 31, 2005, MGE was subject to a 3%
bandwidth under the fuel rules. As a result of the natural disasters that
occurred in the Gulf of Mexico and the related damage to the energy
infrastructure, natural gas prices in 2005 rose to abnormally high levels. These
increased prices caused MGE's fuel costs during the fourth quarter of 2005 to
exceed the upper bandwidth limit. On November 11, 2005, the PSCW approved
an interim rate order granting MGE's request for a fuel surcharge on its
electric rates to cover increased fuel and purchased power costs. Between
November 11, 2005, and December 31, 2005, MGE recorded
$1.7 million in revenue under this interim order.  18. Commitments.  a. Coal
Contracts - MGE Energy and MGE.  MGE
has coal supply contracts related to the Blount plant. As of December 31,
2007, total coal commitments related to the Blount plant are estimated to be
$6.9 million for 2008. Fuel procurement for MGE's jointly owned Columbia
and Elm Road plants are handled by Alliant and We Energies, 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, 2007, MGE's share
of the total coal commitments for the Columbia and Elm Road plants are estimated
to be $12.2 million in 2008, $15.9 million in 2009, $22.2 million
in 2010, $5.2 million in 2011, and $4.2 million in 2012.  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 2008, 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, 2007, MGE's total commitments for energy
and purchase power agreements for capacity are estimated to be $9.1 million
in 2008, $9.2 million in both 2009 and 2010, $9.3 million in 2011, and
$16.8 million in 2012. Management expects to recover these costs in future
customer rates.  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 being constructed 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 approximately 15 MW of wind power at a facility to be constructed
near Brownsville, Wisconsin for a 20-year term. Construction of this facility
began in June 2007 and the facility is expected to be operational in early
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.  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, 2007, these payments are estimated to be $15.0 million in
2008, $14.1 million in 2009, $13.8 million in 2010, $9.0 million
in 2011, and $0.7 million in 2012. MGE also has natural gas supply
commitments. These commitments include market-based pricing. As of
December 31, 2007, total natural gas supply commitments for 2008 are
estimated to be $30.7 million. 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,
2007, 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. See Footnote 22 for
discussion of agreements relating to the development of wind generation
resources.  Air
quality regulations promulgated by the EPA and DNR 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, but not limited to, the Clean Air Interstate Rule (CAIR),
Clean Air Mercury Rule (CAMR), maximum achievable control technology (MATC)
standards, new source performance standards (NSPS) and existing and proposed
state mercury emissions limits, are expected to result in significant additional
operating and capital expenditures at Columbia. 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
$200 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 CAIR and CAMR regulations at
Columbia. Additionally, MGE is entitled to 100% AFUDC on the related
pre-construction costs. As of December 31, 2007, MGE had incurred
$0.8 million in costs at Columbia related to these initiatives.  As
of December 31, 2007, Columbia entered into various contractual commitments
with vendors for a small portion of the aforementioned expenditures. 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 $0.9 million for 2008. These costs are expected to be
capitalized and included in the consolidated balance sheet of MGE.  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 31, 2008. At December 31,
2007, 2006, and 2005, respectively, MGE had sold a $3.8 million,
$4.8 million, and $5.1 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 clarified when to
separately account 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. As of December 31, 2007, 2006,
and 2005, MGE has recorded a servicing asset of $0.1 million,
$0.1 million, and $0.2 million, respectively. MGE recognized gains of
less than $0.1 million in each of the years ended December 31, 2007,
2006, and 2005, in connection with the sale of loan assets. The servicing asset
recognized and the amount amortized in 2007 was $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 2007, 2006, and 2005,
MGE received approximately $0.5 million, $0.7 million, and
$0.5 million, respectively, from the financial institution for the sale of
loan assets. During those same years, payments of $1.9 million,
$1.2 million, and $1.7 million, respectively, were made by MGE to the
financial institution.  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,
2007, 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 $1.0 million in 2008,
$0.6 million in 2009, $0.8  million in 2010, $0.5 million in
2011, and $0.3 million in 2012.  MGE Energy
also has guaranteed debt service payments on a development project. This
guarantee is a two year commitment ending in 2009 with a maximum financial
exposure of $0.2 million for the term of the guarantee.  f. Elm
Road Purchase Commitments - MGE and MGE Energy.  Based
on current forecasts, the remaining capital costs for the Elm Road project will
be $48.0 million in 2008, $20.5 million in 2009, and $3.5 million
in 2010. Included in the 2008 amount is $4.5 million, which has been
accrued and recorded as construction work in progress at December 31, 2007.
See Footnote 21 for further discussion.  g. Top
of Iowa III Wind Project Commitments - MGE and MGE Energy.  Based
on current forecasts, the remaining capital commitments for the Top of
Iowa III wind project will be $9.0 million in 2008. Included in this
amount is $8.7 million, which has been accrued and recorded as construction
work in progress at December 31, 2007. See Footnote 22 for further
discussion.  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.  Future
minimum rental payments at December 31, 2007, under agreements classified
as operating leases with noncancellable terms in excess of one year are as
follows:  (In
thousands)2008
$  2,6502009
2,1592010
1,6302011
1,4552012
1,440Thereafter
12,251Total
minimum future lease payments
$21,585  Rental
expense under operating leases totaled $3.0 million for 2007,
$3.1 million for 2006, and $2.7 million for 2005.  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, 2007, MGE has a total of $1.5 million accrued in the
financial statements for such matters. The ultimate outcome 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
and MGE hold equity investments in various non-public entities. See
Footnote 4 for further discussion. From time to time these entities require
additional capital infusions from their investors. MGE Energy has committed
to contribute $0.8 million in capital for such infusions. Additionally, MGE
has committed to contribute $0.1 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.  MGE
has also made a $1.1 million 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 $0.2 million will be expended each year in 2008, 2009, 2010,
2011, and $0.3 million in 2012.  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 will be paid out in 2008,
$0.2 million in 2010, and $1.4 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, 2006, through December 31, 2007:  (In
thousands)Balance
at December 31, 2006
$202Additional
expense during the period
414Cash
payments during the period
(7)Balance
at December 31, 2007
$609  The
aforementioned exit plan has also resulted in 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. See Footnote 13 for
discussion of the accounting implications.  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. The adoption
of FIN 47 required MGE to update an existing inventory of AROs, originally
created for the adoption of SFAS 143, 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, 2007, 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, 2005 and 2006, and changes
to the asset retirement obligations and accumulated depreciation through
December 31, 2007. 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, 2005
$3,934

$7,882

$11,816

$1,685Changes
through December 31, 2006
-

663

663

105Balance,
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

$1,837  In
2007, MGE reduced accumulated accretion by $0.3 million 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,
2007 and 2006, there were $13.2 million and $13.0 million of these
costs recorded as regulatory liabilities within the financial statements,
respectively.  21. Elm
Road - MGE Energy and MGE.  a. Consolidation.  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 is
approximately $171 million (excluding capitalized interest). At
December 31, 2007, MGE Power Elm Road had incurred $103.7 million
(excluding capitalized interest) of costs on the project, which is reflected in
the Construction Work In Progress balance on MGE 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, 2007, MGE Power Elm Road had recorded a total of
$6.0 million in capitalized interest related to the Elm Road project.  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.  b. 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
$53.6 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 $21.1 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 $32.5 million represents the equity portion and
is being recognized over the period allowed for recovery in rates. For the year
ended December 31, 2007, $6.8 million related to the carrying costs
were recovered in rates. Of this amount, $2.7 million relates to the debt
portion of the facility and was deferred on the consolidated financial
statements of MGE and MGE Energy. The remaining $4.1 million
represents the equity portion and was recognized as nonregulated revenues in the
consolidated financial statements of MGE and MGE Energy.  c. WPDES
Permit.  On
November 29, 2007, the Administrative Law Judge (the "ALJ") in the
proceeding related to the previously issued Wisconsin Pollution 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.  The
Operator has advised us that there are alternatives under the United States
Environmental Protection Agency's (the "EPA") rule for new facilities that would
permit the use of the once-through cooling system rather than the use of cooling
towers. The Operator has requested the WDNR to issue a modified permit and has
submitted additional information to the WDNR supporting the request for approval
of the once-through cooling system under this rule. The Operator anticipates the
WDNR will complete the WPDES permit modification process in the first half of
2008. At this time, we cannot predict with certainty what the WDNR's decision
will be. A reissued permit would be subject to public comment and possible
administrative and legal review.  While
the process for modifying the WPDES permit proceeds, construction of the
additional coal units will continue on the current schedule.  22. Top
of Iowa III Wind Project - MGE Energy and MGE.  On
September 29, 2006, MGE formalized plans to acquire 29.7 MW or 18
turbines in a wind-powered electric generating facility located in Worth County,
Iowa. Construction of this facility is expected to be completed in the first
quarter of 2008. MGE's costs to complete this project are $57.6 million
(excluding AFUDC). At December 31, 2007, MGE had incurred
$55.9 million (excluding AFUDC) of costs on the project, which is reflected
in the Construction Work in Progress balance on MGE and MGE Energy's
consolidated balance sheets. MGE was permitted to recover 100% AFUDC on the Top
of Iowa III wind project beginning in November 2006 and continuing
until construction on the project is complete. At December 31, 2007, MGE
recognized a total of $2.4 million in AFUDC for this project.  MGE
will begin 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. SFAS
157.  In
September 2006, the FASB issued FASB Statement 157, Fair Value
Measurements(SFAS 157). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Under SFAS 157, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. The standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset or liability.
SFAS 157 will be effective as of January 1, 2008. MGE and MGE Energy
have created an inventory of items under the scope of this standard. This
inventory primarily includes marketable securities and derivatives. The adoption
of this standard does not materially impact MGE Energy's and MGE's
financial statements. This standard will however require additional disclosure
within the footnotes.  b. SFAS
159.  In
February 2007, the FASB issued SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of
FASB Statement No. 115. This statement allows companies to choose
to measure certain financial instruments and other items at fair value at
specified election dates. Under this standard, companies are permitted to choose
the fair value option on an instrument-by-instrument basis. MGE has not elected
to early adopt this statement. Accordingly, SFAS 159 is effective for MGE as of
January 1, 2008. MGE has assessed this standard and the related
implications. Based on this assessment, MGE has concluded that on
January 1, 2008, it will not elect the fair value option available under
this standard.  c. FSP FIN 39-1.  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 will be electing the accounting policies
prescribed by this pronouncement. FSP FIN 39-1 will be 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 unless it is
impracticable to do so. The adoption of this pronouncement is not expected to
have any impact on MGE or MGE Energy's net income.  d. 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. 51and
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. MGE and
MGE Energy are currently assessing the impact these pronouncements will
have on their financial statements.  24. Segment
Information - MGE Energy and MGE.  Prior
to 2005, MGE Energy operated in three business segments: electric utility
operations, gas utility operations, and nonregulated. As of December 31,
2005, MGE Energy added segments for nonregulated energy operations,
transmission investments, and all other operations. All prior year segment data
has been re-presented to conform with the current year presentation and segment
break out.  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. 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. When these units are completed,
MGE Power Elm Road's portion will also be 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.  The
following table shows segment information for MGE Energy's and MGE's
operations:  MGE Energy
(In thousands)

Year ended
December 31, 2007
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
All
Others
Consolidation/
Elimination
Entries
Consolidated
TotalOperating
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 (loss)
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 (loss)
(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
$
         -
$
  42,423Year ended
December 31, 2005Operating
revenues
$310,984
$200,533
$
    603
$
        -
$1,250
$
          -
$513,370Interdepartmental
revenues
453
25,764
10,106
-
-
(36,323)
-Total
operating revenues
311,437
226,297
10,709
-
1,250
(36,323)
513,370Depreciation
and amortization
(19,472)
(7,937)
(1,866)
-
-
-
(29,275)Other
operating expenses
(256,987)
(202,429)
(124)
-
(278)
36,195
(423,623)Operating
income (loss)
34,978
15,931
8,719
-
972
(128)
60,472Other
income
51
13
-
4,871
3
-
4,938Interest
income (expense), net
(9,345)
(2,636)
(1,549)
-
82
-
(13,448)Income
(loss) before taxes
25,684
13,308
7,170
4,871
1,057
(128)
51,962Income
tax provision
(9,642)
(5,013)
(2,874)
(1,956)
(430)
44
(19,871)Net
income (loss)
$
 16,042
$
  8,295
$
 4,296
$
2,915
$
   627
$
     (84)
$
 32,091  MGE
(In thousands)

Year ended
December 31, 2007
Electric
Gas
Non-
Regulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
Consolidated
TotalOperating
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 (loss)
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 (loss)
(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)
$
  32,606Year ended
December 31, 2005Operating
revenues
$310,984
$200,533
$
    603
$
       -
$
          -
$512,120Interdepartmental
revenues
453
25,764
10,106
-
(36,323)
-Total
operating revenues
311,437
226,297
10,709
-
(36,323)
512,120Depreciation
and amortization
(19,472)
(7,937)
(1,866)
-
-
(29,275)Other
operating expenses*
(266,903)
(207,519)
(2,998)
-
37,154
(440,266)Operating
income
25,062
10,841
5,845
-
831
42,579Other
income (loss)*
325
90
-
2,915
(890)
2,440Interest
expense, net
(9,345)
(2,636)
(1,549)
-
-
(13,530)Income
(loss) before minority interest
16,042
8,295
4,296
2,915
(59)
31,489Minority
interest, net of tax
-
-
-
-
(5,438)
(5,438)Net
income (loss)
$
  16,042
$
   8,295
$
 4,296
$2,915
$
 (5,497)
$
 26,051  *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:  (In thousands)
Utility

ConsolidatedMGE Energy
Electric
Gas
Assets not Allocated

Nonregulated Energy
Transmission
Investment
All
Others
Consolidation/
Elimination
Entries
TotalAssets:December 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
12,270

177,234
38,470
298,261
(319,792)
982,232December 31,
2005
533,896
233,139
21,013

143,101
35,239
276,565
(326,046)
916,907Capital
Expenditures:Year
ended Dec. 31, 2007
$70,687
$12,091
$
  -

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

31,765
-
-
-
92,575Year
ended Dec. 31, 2005
40,340
10,264
-

35,167
-
-
-
85,771  (In thousands)
Utility

ConsolidatedMGE
Electric
Gas
Assets not Allocated

Nonregulated Energy
Transmission
Investment
Consolidation/
Elimination
Entries
TotalAssets:December 31,
2007
$614,949
$234,002
$14,876

$227,165
$40,808
$(15,908)
$1,115,892December 31,
2006
547,150
228,639
12,270

176,984
38,470
(12,983)
990,530December 31,
2005
533,896
233,139
21,013

142,875
35,239
(52,366)
913,796Capital
ExpendituresYear
ended Dec. 31, 2007
$70,687
$12,091
$
  -

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

31,765
-
-
92,575Year
ended Dec. 31, 2005
40,340
10,264
-

35,167
-
-
85,771  25. Quarterly Summary of Operations -
MGE Energy (unaudited).  (In thousands, except per-share
amounts)
Quarters Ended2007
March 31

June 30

Sept. 30

Dec. 31Operating 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
(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

$0.3552006Operating revenues:Regulated
electric revenues
$  72,553

$75,441

$  93,101

$  77,817Regulated
gas revenues
85,109

23,358

16,694

60,065Nonregulated
revenues
923

922

834

729Total
158,585

99,721

110,629

138,611Operating expenses
137,726

85,882

87,871

117,073Operating
income
20,859

13,839

22,758

21,538Interest and other
income
(2,132)

(2,529)

(1,907)

(4,104)Income tax provision
(7,211)

(4,259)

(8,148)

(6,281)Earnings
on common stock
$  11,516

$  7,051

$  12,703

$  11,153Earnings
per common share
$  0.56

$  0.34

$  0.62

$  0.54Dividends per share
$0.345

$0.345

$0.348

$0.348  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  On November 21, 2002, MGE and
ATC entered into an interconnection agreement related to transmission system
upgrades for WCCF. MGE issued to ATC a "Notice to Proceed for the Procurement of
the Equipment" for the system upgrades. MGE advanced funds for construction of
transmission equipment and work done by ATC related to WCCF. Total funds
advanced to ATC, including interest incurred, for this project at
December 31, 2005, were $13.0 million. During 2004 funds were advanced
in the amount of $2.3 million. During the first quarter of 2005, MGE
received $13.0 million from ATC as full reimbursement of its costs incurred
to complete the upgrade.  During 2007, 2006, and 2005, MGE
recorded $18.7 million, $16.3 million, and $14.9 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 each of the years ended December 31, 2007, 2006,
and 2005, 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, 2007 and 2006, MGE Power Elm Road has a
receivable from ATC totaling $2.8 million and $2.4 million,
respectively, related the work done by ATC on the Elm Road interconnection
project. MGE will be reimbursed for all these costs upon completion of the
project.  For additional discussion on MGE's
relationship with ATC, see Footnote 4.  27. Subsequent Events- MGE Energy
and MGE.  a. Pension and Postretirement Benefit
Payment.  On January 14, 2008, MGE made a
cash payment of $5.4 million to the pension and postretirement plans. This
contribution was made at MGE's discretion.  b. Venture Debt Commitment.  On January 15, 2008,
MGE Energy entered into an three year agreement with a venture debt fund.
As a result of this agreement, MGE Energy has committed $0.5 million
to this venture debt fund .   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 2007, 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, 2007, 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, 2007, 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, 2007. As a result of that assessment,
management determined that there were no material weaknesses as of
December 31, 2007 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.   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 (2008 Proxy Statement) to be filed with the SEC on or before
April 14, 2008. 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 2008 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 2008 Proxy Statement 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  None.   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 2008 Proxy Statement.  MGE  Independent Registered Public Accounting Firm Fees
Disclosure2007

2006Audit Fees:Audit
of financial statements and internal controls
$620,190

$695,000Review
of SEC filings and comfort letters
32,995

26,000Total
Audit Fees
$653,185

$721,000Audit-Related Fees:Total
Audit-Related Fees
$  -

$  -Tax Fees:Tax
advice on financial accounting issues
$
         -

$58,600Review
of federal and state income tax returns
28,300

24,400Total
Tax Fees
$28,300

$83,000All Other Fees:Fee
to access online accounting standards library
$  1,500

$  1,500Financial
analysis for generation projects
55,600

28,300Total
All Other Fees
$57,100

$29,800  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 non-audit 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.   PART IV.   Item 15.
Exhibits and Financial Statement Schedules.  (a)
1.
Financial
Statements.MGE EnergyReport
of Independent Registered Public Accounting Firm
54Consolidated
Statements of Income for the years ended December 31, 2007, 2006, and
2005
56Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006,
and 2005
57Consolidated
Balance Sheets as of December 31, 2007 and 2006
58Consolidated
Statements of Capitalization as of December 31, 2007 and 2006
59Consolidated
Statements of Common Equity and Comprehensive Income as of
December 31, 2007, 2006, and 2005
60Notes
to Consolidated Financial Statements
66MGEReport
of Independent Registered Public Accounting Firm
55Consolidated
Statements of Income for the years ended December 31, 2007, 2006, and
2005
61Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006,
and 2005
62Consolidated
Balance Sheets as of December 31, 2007 and 2006
63Consolidated
Capitalization Statement as of December 31, 2007 and 2006
64Consolidated
Statements of Common Equity and Comprehensive Income as of
December 31, 2007, 2006, and 2005
65Notes
to Consolidated Financial Statements
66  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. (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. (Exhibit 3.2 to MGE Energy's Registration Statement
on Form S-4, Registration No. 333-72694.)  3.3 Restated Articles of Incorporation of
MGE 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 MGE 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 MGE and Firstar Trust Company, as Trustee, dated as of
January 1, 1946. (Exhibit 7-D to SEC File No. 0-1125.)  4.2 Supplemental Indenture to
aforementioned 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 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, Inc., 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, Inc., 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 Line of Credit Note, dated as
September 29, 2006, among Madison Gas and Electric Company, as Borrower,
and JPMorgan Chase Bank, N.A., as Lender. (Exhibit 10.1 to Form 10-Q for the
quarter ended September 30, 2006, File No. 0-1125.)  10.5 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.)  10.6 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.)  10.7 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.)  10.8 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.)  10.9 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.)  10.10 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.)  10.11 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.)  10.12 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.)  10.13 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.)  10.14 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.)  10.15 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.)  10.16 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.)  10.17 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.)  10.18 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.)  10.19 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.)  10.20 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.)  10.21 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.)  10.22 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.)  10.23 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.)  10.24 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.)  10.25 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.)  10.26 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.)  10.27 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.)  10.28 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.)  10.29 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.)  10.30 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.)  10.31 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.)  10.32 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.)  10.33 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.)  10.34 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.)  10.35* Form of Severance Agreement.
(Exhibit 10F to Form 10-K for the year ended December 31, 1994, File
No. 0-1125.)  10.36* MGE Energy, Inc. 2006
Performance Unit Plan. (Exhibit 10.36 to Form 10-K for the year ended
December 31, 2006, File No. 0-49965.)  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, 2007, filed by the
following officers for the following companies:  31.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 31.2 Filed by Terry A. Hanson for
MGE Energy, Inc. 31.3 Filed by Gary J. Wolter for
Madison Gas and Electric Company 31.4 Filed by Terry A. Hanson 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, 2007, filed by the following officers for the
following companies:  32.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 32.2 Filed by Terry A. Hanson for
MGE Energy, Inc. 32.3 Filed by Gary J. Wolter for
Madison Gas and Electric Company 32.4 Filed by Terry A. Hanson for
Madison Gas and Electric Company  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 2005:
Accumulated provision for
uncollectibles
(2,754,848)

(2,202,310)
-

2,130,122

(2,827,036)Fiscal 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)   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, 2008
/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,
2008.  /s/ Gary J. Wolter
Gary J. Wolter
Chairman, President and Chief Executive Officer and
Director (Principal Executive Officer)/s/ Terry A. Hanson
Terry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Principal Financial Officer and Principal
Accounting Officer)/s/ Richard E. Blaney
Richard E. Blaney, Director/s/ Londa J. Dewey
Londa J. Dewey, Director/s/ F. Curtis Hastings
F. Curtis Hastings, Director/s/ Regina M. Millner
Regina M. Millner, Director/s/ Frederic E. Mohs
Frederic E. Mohs, Director/s/ John R. Nevin
John R. Nevin, Director/s/ H. Lee Swanson
H. Lee Swanson, Director   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, 2008
/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,
2008.  /s/ Gary J. Wolter
Gary J. Wolter
Chairman, President and Chief Executive Officer and
Director (Principal Executive Officer)/s/ Terry A. Hanson
Terry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Principal Financial Officer and Principal
Accounting Officer)/s/ Richard E. Blaney
Richard E. Blaney, Director/s/ Londa J. Dewey
Londa J. Dewey, Director/s/ F. Curtis Hastings
F. Curtis Hastings, Director/s/ Regina M. Millner
Regina M. Millner, Director/s/ Frederic E. Mohs
Frederic E. Mohs, Director/s/ John R. Nevin
John R. Nevin, Director/s/ H. Lee Swanson
H. Lee Swanson, Director