[X] Annual Report Pursuant to Section 13
  or 15(d) of the Securities Exchange Act of 1934





[ ] Transition report pursuant to
  Section 13 or 15(d) of the Securities Exchange Act of 1934



|**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 StreetMadison, Wisconsin 53703(608) 252-7000                  |  | 39-2040501                                          
|000-1125                          |  | **Madison Gas and Electric Company**
      (a Wisconsin Corporation)133 South Blair StreetMadison, Wisconsin 53703(608) 252-7000         |  | 39-0444025                                          
|                                  |  | **www.mge.com and/or****www.mgeenergy.com***(Web sites)*                                                                                 |  |                                                     





None.



|                                                 | Title of Class                                                                          
|------------------------------------------------ | ----------------------------------------------------------------------------------------
|MGE Energy, Inc.Madison Gas and Electric Company | Common Stock, $1 Par Value Per Share Cumulative Preferred Stock, $25 Par Value Per Share

Indicate by checkmark whether the registrants (1) have
  filed all reports required to be filed by Section 13 or 15(d) of the Securities
  Exchange Act of 1934 during the preceding 12 months (or for such shorter period
  that the registrants were required to file such reports) and (2) have been
  subject to such filing requirements for the past 90 days. Yes X No

Indicate by checkmark if disclosure of delinquent filers pursuant
  to Item 405 of Regulation S-K is not contained herein, and will not be
  contained, to the best of registrants' knowledge, in definitive proxy or information
  statements incorporated by reference in Part III of this Form 10-K or any
  amendment to this Form 10-K. X

Indicate by checkmark whether the registrants are accelerated
  filers (as defined in Rule 12b-2 of the Act).

|MGE Energy, Inc.
        Madison Gas and Electric Company | Yes X NoYes No X
|--------------------------------------------------------- | ----------------

The aggregate market value of the voting and nonvoting common
  equity held by nonaffiliates of each registrant as of June 30, 2003, was
  as follows:

|MGE Energy, Inc.                 | $560,764,000
|-------------------------------- | ------------
|Madison Gas and Electric Company | $0          

The number of shares outstanding of each registrant's common stock as of March 1,
  2004, was as follows:

|MGE Energy, Inc.Madison Gas and Electric Company | 18,441,740 17,347,889
|------------------------------------------------ | ---------------------



Portions of MGE Energy, Inc.'s definitive proxy statement
  to be filed prior to April 29, 2004, 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 to Certain Relationships and Related Transactions.





Filing Format



Forward-Looking Statements



Where to Find More Information



Definitions



**PART I.**

Item 1. Business.

Item 2. Properties.

Item 3. Legal Proceedings.

Item 4. Submission of Matters to a Vote of
  Security Holders.



**PART II.**

Item 5. Market for Registrant's Common Equity
  and Related Stockholder Matters.

Item 6. Selected Financial Data.

Item 7. Management's Discussion and Analysis
  of Financial Condition and
  Results of Operations.

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.



**PART III.**

Item 10. Directors and Executive Officers
  of the Registrants.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial
  Owners and Management.

Item 13. Certain Relationships and Related
  Transactions.

Item 14. Principal Accountant Fees and Services.



**PART IV.**

Item 15. Exhibits, Financial Statement Schedules,
  and Reports on Form 8-K.

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 substantial portion
  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 nonutility
  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. Some of those risks and uncertainties include:

- Weather, which enters into the calculation of MGE's rates
  for service and which affects the demand for electricity and gas and the projected
  and actual need for electric generation capacity to serve customers.

- Economic and market conditions in MGE's service territory,
  which affect demand for electricity and gas and, consequently, our revenues
  and expenses as well as capital investment requirements to extend, improve,
  or reinforce the existing electricity and gas distribution systems.

- Magnitude and timing of capital expenditures, which affect
  capital needs, financing costs, and operating expenses.

- Regulatory environment in which we operate, which can affect
  the way in which we do business as well as the accounting treatment of expenses
  that we incur and our ability to continue carrying specified assets and liabilities
  on our books.

- Environmental regulation, which can affect the way in which
  we operate, our operating expenses, and our capital expenditures.

- Availability and cost of power supplies, which affect operating
  expenses and capital expenditure decisions with respect to sources of new generation.

- Completion of the West Campus Cogeneration Facility at the
  University of Wisconsin-Madison, which provides MGE Energy with an opportunity
  if construction is completed on or ahead of schedule, but exposes it to liquidated
  damages if construction is delayed or the facility fails to operate according
  to specifications.

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 450 Fifth Street, NW, 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, the Web site maintained by the SEC at http://www.sec.gov,
  MGE Energy's Web site at http://www.mgeenergy.com, and MGE's Web
  site at http://www.mge.com. Copies may be obtained from our Web sites
  free of charge.

**Definitions**

Abbreviations, acronyms, and definitions used in the text and
  notes of this report are defined below.

|AFUDC                     | allowance for funds used during construction                                                                                    
|------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|AMR                       | automated meter reading                                                                                                         
|ANR                       | ANR Pipeline Company                                                                                                            
|APB                       | Accounting Principles Board                                                                                                     
|ATC                       | American Transmission Company LLC                                                                                               
|Alliant                   | Alliant Energy Corporation                                                                                                      
|Blount                    | Blount Station                                                                                                                  
|CPCN                      | Certificate of Public Convenience and Necessity                                                                                 
|CO2                       | carbon dioxide                                                                                                                  
|Columbia                  | Columbia Energy Center                                                                                                          
|cooling degree days       | Measure of the extent to which the average daily temperature
      is above 65 degrees Fahrenheit, increasing demand for cooling
|DNR                       | Wisconsin Department of Natural Resources                                                                                       
|DOA                       | Wisconsin Department of Administration                                                                                          
|DOE                       | U.S. Department of Energy                                                                                                       
|Dth                       | dekatherms                                                                                                                      
|EITF                      | Emerging Issues Task Force                                                                                                      
|Electric Margin           | electric revenues less fuel and purchased power                                                                                 
|EPA                       | U.S. Environmental Protection Agency                                                                                            
|EPC Agreement             | Engineering, Procurement, and Construction Agreement                                                                            
|FASB                      | Financial Accounting Standards Board                                                                                            
|FERC                      | Federal Energy Regulatory Commission                                                                                            
|FIN                       | Financial Interpretation No.                                                                                                    
|FTR                       | Financial Transmission Rights                                                                                                   
|gas margin                | gas revenues less gas purchased                                                                                                 
|GCIM                      | gas cost incentive mechanism                                                                                                    
|interconnection agreement | Generation-Transmission Interconnection Agreement                                                                               
|heating degree days       | Measure of the extent to which the average daily temperature
      is below 65 degrees Fahrenheit, increasing demand for heating
|Kewaunee                  | Kewaunee Nuclear Power Plant                                                                                                    
|kV                        | kilovolt                                                                                                                        
|kWh                       | kilowatt-hour                                                                                                                   
|LMP                       | Locational Marginal Pricing                                                                                                     
|MACT                      | Maximum available control technology                                                                                            
|MAIN                      | Mid-America Interconnected Network, Inc.                                                                                        
|MAPP                      | Mid-Continent Area Power Pool                                                                                                   
|MGE Energy                | MGE Energy, Inc.                                                                                                                
|MGE Construct             | MGE Construct LLC                                                                                                               
|MGE Power West Campus     | MGE Power West Campus, LLC                                                                                                      
|MGE                       | Madison Gas and Electric Company                                                                                                
|MGE Power                 | MGE Power LLC                                                                                                                   
|Midwest ISO               | Midwest Independent System Operator                                                                                             
|Moody's                   | Moody's Investors Service, Inc.                                                                                                 
|MW                        | megawatt                                                                                                                        
|MWh                       | megawatt-hour                                                                                                                   
|Nasdaq                    | The Nasdaq National Stock Market                                                                                                
|NNG                       | Northern Natural Gas Company                                                                                                    
|NOx                       | nitrogen oxide                                                                                                                  
|NOx SIP Call              | Nitrogen oxide State Implementation Plan (federal rule
      40 CFR Part 96, commonly known as the NOx SIP Call)                
|NRC                       | Nuclear Regulatory Commission                                                                                                   
|PGA clause                | Purchased Gas Adjustment clause                                                                                                 
|PSCW                      | Public Service Commission of Wisconsin                                                                                          
|RTC                       | Regional Transmission Committee                                                                                                 
|RTO                       | Regional Transmission Organization                                                                                              
|S&P                       | Standard & Poor's Ratings Group, a division of McGraw-Hill
      Companies, Inc.                                                
|SAB                       | Staff Accounting Bulletin                                                                                                       
|SEC                       | Securities and Exchange Commission                                                                                              
|SFAS                      | Statement of Financial Accounting Standards (issued by
      the FASB)                                                          
|SO2                       | sulfur dioxide                                                                                                                  
|the State                 | State of Wisconsin                                                                                                              
|UW                        | University of Wisconsin at Madison                                                                                              
|VIE                       | Variable Interest Entity                                                                                                        
|VOC                       | volatile organic compounds                                                                                                      
|WCCF                      | West Campus Cogeneration Facility                                                                                               
|Working capital           | current assets less current liabilities                                                                                         
|WPSC                      | Wisconsin Public Service Corporation                                                                                            
|York                      | York International Corporation                                                                                                  

**PART I.**

**Item 1. Business.**

MGE Energy operates in three business segments:

- Electric utility operations--generating and distributing
  electricity through MGE.

- Gas utility operations--purchasing and distributing natural
  gas through MGE.

- Nonutility energy operations--constructing and owning new
  electric generating capacity through its wholly owned subsidiaries MGE Construct,
  MGE Power, and MGE Power West Campus.

MGE Energy became the holding company for MGE on August 12,
  2002, when shareholders exchanged their shares of MGE common stock for shares
  of MGE Energy common stock. The share exchange had no accounting effect
  on MGE's recorded assets, liabilities, revenues, or expenses.

MGE's utility operations represent a substantial portion of
  the assets, liabilities, revenues, expenses, and operations of MGE Energy.
  MGE Energy's nonutility energy operations currently relate to the development
  of a cogeneration project on the UW-Madison campus.

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.

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. FERC has jurisdiction, under the Federal Power Act, over certain
  accounting practices and certain other aspects of MGE's business.

MGE is also subject to regulation under local, state, and federal
  laws regarding air and water quality and solid waste disposal. See "Environmental"
  below.

MGE's business fluctuates based on changes in weather conditions,
  with gas revenues generally higher during the winter months due to heating needs
  and electricity revenues generally higher in the summer months due to cooling
  needs.

**Electric Utility Operations**

MGE generates and distributes electricity in a service area
  covering the 250-square-mile area of Dane County, Wisconsin. Its service area
  includes the city of Madison, Wisconsin.

At December 31, 2003, MGE supplied electric service to
  nearly 132,000 customers, of whom 117,000 were located in the cities of Fitchburg,
  Madison, Middleton, and Monona and 15,000 in adjacent areas. Of the total number
  of customers, approximately 114,500 were residential and 17,500 were commercial
  and industrial. Electric revenues for 2003 were comprised of residential (35%),
  commercial (49%), industrial (6%), sales to public authorities including
  the UW (8%), and sales to other utilities and other (2%). Electric
  revenues for 2002 were comprised of residential (36%), commercial (48%),
  industrial (6%), sales to public authorities including UW (7%), and
  sales to other utilities and other (3%). Electric operations accounted
  for approximately 60%, 65%, and 61% of MGE's total 2003, 2002, and 2001 revenues,
  respectively.

See Item 2, Properties, for a description of MGE's electric
  utility plant.

MGE is a member of MAIN, a regional reliability group. MAIN
  members work together to utilize better reserve generating capacity and coordinate
  long-range system planning and day-to-day operations. MAIN seeks to maintain
  adequate planning reserve margins for generation in the region.

MGE is part owner of ATC, a for-profit transmission company
  resulting from Reliability 2000 legislation enacted in Wisconsin. Part of that
  legislation mandated the creation of a statewide transmission company to own
  the investor-owned utilities' transmission assets. 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.

Effective January 1, 2001, MGE transferred all of its
  electric utility transmission assets to ATC in exchange for an ownership interest.
  ATC is owned and governed by the utilities that contributed facilities or capital
  in accordance with Wisconsin Act 9. At December 31, 2003, MGE has
  approximately a 5% ownership interest in ATC. 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 a nontransmission-owning member of the Midwest ISO.

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.

In connection with its role as a FERC-approved RTO, the Midwest ISO
  is in the process of developing a bid-based energy market, which is currently
  proposed to be implemented on December 1, 2004. In connection with the
  development of this energy market, the Midwest ISO is developing a market-based
  platform for valuing transmission congestion premised upon the LMP system that
  has been implemented in certain states. It is expected that the LMP system will
  include the ability to mitigate or eliminate congestion costs through the use
  of FTRs. The Midwest ISO will initially allocate FTRs, and it is anticipated
  that the FTRs will be available through an auction-based system run by the Midwest ISO.
  It is unknown at this time the quantity of FTRs that will be allocated by the
  Midwest ISO or what the financial impact of the LMP congestion pricing
  system might have on MGE.

***Fuel supply and generation***

MGE's net kWh requirements for 2003 were provided from
  the following sources: 61% from fossil-fueled steam plants, 38% from power purchases,
  and 1% from a combination of wind turbines, diesel generators, and combustion
  turbines. Sources used depended on generating unit availability, weather, and
  customer demand.

MGE has a 22% ownership interest in two 512-MW coal-burning
  units at Columbia. The coal inventory supply for the units decreased from 46
  days on December 31, 2002, to 45 days on December 31, 2003. The co-owners'
  current goal is to maintain approximately a 35-day inventory. The units burn
  low-sulfur coal obtained (pursuant to long-term contracts) from the Powder River
  Basin coal fields located in Wyoming and Montana.

**Gas Utility Operations**

MGE transports and distributes natural gas in a service area
  covering 1,375 square miles in seven south-central Wisconsin counties. Its service
  area includes the city of Madison, Wisconsin.

On December 31, 2003, MGE supplied natural gas service
  to more than 129,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison,
  Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all
  or parts of 46 townships. Gas revenues for 2003 were comprised of residential
  (58%), commercial (37%), industrial (2%), and transportation service and other
  (3%). Gas revenues for 2002 were comprised of residential (58%), commercial (37%),
  industrial (1%), and transportation service and other (4%). Gas operations
  accounted for approximately 40%, 35%, and 39% of MGE's total 2003, 2002, and
  2001 revenues, respectively.

MGE can curtail gas deliveries to its interruptible customers.
  Approximately 4% of gas sold in 2003 was 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 4,946,852 Dth can be injected into
  ANR's storage fields from April 1 through October 31. These gas supplies
  are then available for withdrawal during the subsequent heating season, November 1
  through March 31. ANR's storage fields are located in Michigan. 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. Storage quantities were close to planned levels on December 31,
  2003.

MGE's contracts for firm transportation service include winter
  maximum daily quantities of:

- 143,650 Dth (including 86,078 Dth of storage withdrawals)
  on ANR.- 56,151 Dth on NNG.- 2,457 Dth into Viroqua's NNG gate station.

Winter maximum daily quantities under these contracts are scheduled
  to increase an additional 15,000 Dth by November 2005.

**Nonutility Energy Operations**

MGE Energy, through subsidiaries, is seeking to develop
  generation sources that will assist MGE in meeting the electricity needs of
  its customers. It is currently engaged in the construction of a cogeneration
  facility on the UW-Madison campus and, with MGE, is examining other potential
  sources of electricity including new coal-fired plants through an initiative
  known as Power the Future as well as renewable forms of energy.

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.

***Power the Future Generation***

On February 23, 2001, MGE secured an option to own a portion
  of the advanced technology, coal-fired, base-load generation proposed in We
  Energies' Power the Future plan. The plan included three new 600-MW coal-fired
  plants, which would be located in Wisconsin. On November 11, 2003, a PSCW
  order approved issuing a CPCN for We Energies' proposal for two of the coal
  facilities. Pursuant to an amended agreement reached on January 31, 2003,
  MGE has the option to acquire an undivided 8.33% (16.66% under certain conditions)
  ownership interest in each of the proposed coal plants or up to approximately
  50 MW per unit. If the options on Units 1 and 2 are fully exercised,
  MGE Energy's share of capital costs is estimated to be $175 million.
  Unit 1 is expected to begin operating in 2009, and Unit 2 is scheduled
  to begin operating in 2010. MGE has filed its own Certificate of Authority with
  the PSCW for the coal facilities and a proposed lease structure with an MGE Energy
  affiliate. MGE expects PSCW approval on this filing in the first half of 2004.

***WCCF***

MGE Energy has undertaken, through MGE Construct, the
  construction of a chilled-water, steam, and electric generation facility on
  the UW-Madison campus. When completed in the spring of 2005, the facility will
  have the capacity to produce 20,000 tons of chilled water, 500,000 pounds per
  hour of steam, and approximately 150 MW of electricity. It will be jointly
  owned by the State, the UW, and MGE Power West Campus. MGE Power West Campus'
  share will be leased and the entire facility will be operated by MGE. The State
  and the UW will own a controlling interest in the chilled-water and steam plants
  in accordance with the EPC Agreement, which will be used to meet the UW's growing
  need for air-conditioning and steam-heat capacity. MGE Power West Campus will
  own a controlling interest in the electric generation plant, which will provide
  electricity for MGE's customers.

MGE Energy, MGE Power West Campus, and MGE Construct have
  assumed certain risks related to some of the executed agreements. In the EPC
  Agreement, MGE Power West Campus is responsible for cost overruns and MGE Construct
  is responsible for the construction process of the entire facility, paying liquidated
  damages relating to failure to achieve the Mechanical Completion Date Guarantee
  and/or the Acceptance Test Capacity Guarantee. MGE Energy is the guarantor
  of MGE Construct's obligations under the EPC Agreement.

The cost to construct WCCF is expected to be approximately
  $180 million in total, of which MGE Power West Campus' portion will be
  $103 million. On November 20, 2003, the State paid $19.4 million
  to MGE Construct for its share of construction costs incurred since its last
  payment in November 2002. MGE Construct now bills the State monthly for
  its share of the cost of WCCF in accordance with the EPC Agreement. As of December 31,
  2003, MGE Power West Campus had incurred $48.6 million of costs on the
  project, which is reflected in construction work in progress on MGE Energy's
  and MGE's consolidated balance sheets. These costs largely represent amounts
  paid under long lead-time equipment contracts in order to meet project schedules.

**Environmental**

MGE is subject to local, state, and federal regulations concerning
  air quality, water quality, and solid waste disposal. 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 believes that it has met the requirements of current environmental
  regulations. 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.

The EPA and DNR regulate pollution and environmental control
  matters at MGE's electric generating plants. The DNR has primary jurisdiction
  over air and water quality as well as solid and hazardous waste standards.

The ongoing issue of global warming could result in significant
  costs to reduce CO2emissions. MGE does not yet know the amounts
  of these expenditures or the period of time over which they may be required.

The National Environmental Policy Act and the Wisconsin Environmental
  Policy Act require MGE to conduct a complete environmental review and issue
  a detailed environmental impact statement before obtaining necessary authorizations
  or permits from regulatory agencies for certain projects. This applies to any
  new projects, such as generating plants, or other major actions that could significantly
  affect the environment.

***Air quality***

*Proposed eight-hour ozone standard.* In 1997, the EPA
  promulgated a new eight-hour ozone ambient air-quality standard. EPA has recommended
  that Dane County be designated as in attainment with that eight-hour ozone standard
  based upon a review of preliminary monitoring data for the county. The final
  nonattainment designations will not be made by the EPA until later in 2004 and
  will be based upon final monitoring data for 2001 through 2003. That data currently
  shows Dane County air quality to be in attainment with the eight-hour ozone
  standard.

Dane County ozone levels have been increasing over time. MGE
  is working with the DNR and other Dane County sources to make voluntary reductions
  of ozone precursor emissions and prevent the county from being classified as
  a nonattainment area. If Dane County were classified as a nonattainment area,
  MGE facilities in Dane County may need to meet new limits for ozone precursor
  emissions.

*Proposed utility MACT standards.* Section 112 of the
  1990 Clean Air Act Amendments requires the EPA to develop standards to control
  major sources of hazardous air pollutants to levels consistent with the lowest-emitting
  facilities in similar source categories. MGE operates several sources that may
  be subject to MACT standards including electric steam generating units; combustion
  turbines; reciprocating internal combustion engines; and industrial, commercial,
  and institutional boilers. All sources, except Blount and Columbia coal-fired
  units, are expected to be exempt from implementing additional emission-control
  strategies. The EPA is expected to finalize standards for electric-steam generating
  units in 2004. It is expected that MGE will be required to comply with new mercury
  limits by the current proposal date of December 2007. Complying with the
  MACT standards would likely increase capital expenditures and operating and
  maintenance expenses. Because the rules are still in the process of being developed
  and in the public comment stage, it is not possible to determine exactly what
  impact this compliance would have for MGE's generation facilities.

*NOx SIP Call.* On October 27, 1998,
  the EPA issued the "NOx SIP Call" rule that imposed a NOx
  emission budget for emission sources in Wisconsin. The NOx SIP Call
  was premised upon two theories: the downwind contribution of Wisconsin air emissions
  to existing one-hour ozone nonattainment areas and the downwind contribution
  of Wisconsin air emissions to potential future eight-hour nonattainment areas.

On March 2, 2000, the Court of Appeals for the District
  of Columbia held that the EPA "acted unlawfully by including Wisconsin in the
  [NOx] SIP Call" for purposes of the State's alleged impacts to downwind
  one-hour ozone nonattainment areas. However, the Court and EPA stayed that portion
  of the challenge concerning Wisconsin's alleged impacts on downwind, eight-hour
  ozone nonattainment areas. If that stay is lifted and that portion of the NOx
  SIP Call 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
  new NOx limits could increase capital expenditures and operating
  and maintenance expenses at those facilities.

*Interstate Air Quality Rule.* This proposed rule was
  introduced in December 2003 and would reduce emissions of SO2
  and NOx in 29 eastern states and the District of Columbia in two
  phases. SO2 emissions would be reduced by 3.6 million tons in
  2010 (approximately 40% below current levels) and by another 2 million
  tons per year when the rules are fully implemented (approximately 70% below
  current levels). Emissions of NOx would be cut by 1.5 million
  tons in 2010 (approximately 55% below current levels) and 1.8 million tons
  annually in 2015 (approximately 65% below current levels). The EPA is expected
  to finalize the rule by the end of 2005. It is expected that MGE will be required
  to comply with NOx and particulate limits by 2010. Complying with
  the rule would likely increase capital expenditures and operating and maintenance
  expenses at Blount and Columbia.

*Columbia.* In December 2000, February 2001,
  June 2002, and January 2003, Alliant received Requests for Information
  from the EPA seeking information concerning Columbia's compliance with the Clean
  Air Act. The requests appear to be part of an EPA initiative to assess the regulatory
  consequences of past investments in utility generation, energy efficiency, maintenance,
  and environmental protection within the utility sector. Alliant, the plant operator,
  has responded to all requests, but MGE has not been informed of any response
  from the EPA. The plant operator has not informed MGE of any definitive increase
  in capital expenditures or operating and maintenance expenses arising from the
  EPA's inquiry.

***Water quality***

MGE is subject to water quality regulations issued by the DNR.
  These regulations include categorical-effluent discharge standards and general
  water quality standards. The regulations limit discharges from MGE's plants
  into Lake Monona and other Wisconsin waters.

The categorical-effluent discharge standards require each discharger
  to use 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.

In February 2003, Columbia received a Notice of Violation
  from the DNR for exceeding limits in its Wisconsin Pollutant Discharge Elimination
  System permit. That matter has been referred to the Wisconsin Department of
  Justice for prosecution. In addition, the plant operator has been named in a
  Clean Water Act citizen suit action alleging similar violations. The Columbia
  plant operator has been working with the DNR to resolve the allegations raised
  in these proceedings. Resolving these issues may require additional capital
  expenditures to install and implement new treatment techniques. While it is
  possible that a court may impose a civil penalty in these proceedings, the operator
  believes it can resolve these issues in a manner that will not have a material
  adverse effect on the operator's financial conditions or results of operations.
  See Item 3, Legal Proceedings, regarding an action filed by Wisconsin
  Environmental Law Advocates U.A.

On February 16, 2004, EPA signed a rule establishing performance
  standards for cooling water intake structures at large power plants. The rule
  applies to structures that withdraw at least 50 million gallons per day
  of water and use 25% of that withdrawal for cooling. The rule will have no impact
  on MGE's wholly owned power plants but may impact power plants in which MGE
  has a partial interest.

***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
  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. MGE estimates its future expense to
  clean up this site could range from $0.1 million to $0.2 million.
  At December 31, 2003, MGE accrued a $0.1 million liability for this
  matter.

As a result of the Blount 69-kV transmission substation expansion,
  coal tar-contaminated soil and debris within the excavation zone are being removed
  and disposed of in accordance with a DNR-approved "Removal Action Work Plan."
  MGE estimates cleanup costs for this site will be $1.0 million. MGE has
  recorded a $1.0 million liability for the cleanup of this site with an
  offsetting regulatory asset (deferred charge). We expect to recover cleanup
  costs in future rates. Carrying costs associated with the cleanup expenditures
  will not be recoverable.

***Environmental Cooperative Agreement***

On September 26, 2002, MGE and the DNR signed an Environmental
  Cooperative Agreement under which MGE committed to work toward superior environmental
  performance at its Blount plant. Among other things, the five-year agreement
  requires MGE to evaluate combustion efficiency improvements, enhance new pollution
  control on Boiler 8, increase use of alternative fuels, attempt to increase
  beneficial reuse of fly ash and bottom ash, study cogeneration possibilities,
  and upgrade MGE's environmental management system to be consistent with ISO
  14001 standards. Implementing these and other actions required by the agreement
  will increase capital expenditures and operating and maintenance expenses over
  the next five years.

As part of the agreement, MGE conducted a voluntary audit of
  Blount's compliance with various environmental laws. The auditors identified
  several conformance exceptions which were addressed and disclosed pursuant to
  a state statute that provides for qualified civil enforcement immunity. MGE
  believes that it has adequately responded to the audit's findings and does not
  anticipate any further action by the state regulators.

**Employees**

As of December 31, 2003, MGE had 691 full-time employees.
  Of these employees, 251 are covered by a collective bargaining agreement with
  Local Union 2304 of the International Brotherhood of Electrical Workers
  and 107 are covered by a collective bargaining agreement with Local Union No. 39
  of the Office and Professional Employees International Union. Both collective
  bargaining agreements expire on May 1, 2006.

**Executive Officers of the Registrants**

|Executive                                                                                                                                               | Title                                                                                                                                                                                                                                                                | Effective
      **Date**                                | **Service**
      
      **Years as**
      **an Officer**
|------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------------------------
|Gary J. Wolter* Age: 49                                                                                                                                 | Chairman of the Board, President and Chief Executive Officer
      President and Chief Executive OfficerSenior Vice President - Administration and Secretary                                                                                                         | 02/01/200202/01/200005/01/1995                          | 14                                                        
|Lynn K. Hobbie**Age: 45                                                                                                                                 | Senior Vice PresidentVice President - Marketing                                                                                                                                                                                                                      | 02/01/200005/01/1996                                    | 9                                                         
|Mark T. Maranger**Age: 55                                                                                                                               | Senior Vice President, MGE President and CEO, Wisconsin Fuel and Light Company                                                                                                                                                                                       | 04/09/20011996-2001                                     | 2                                                         
|James G. Bidlingmaier**Age: 57                                                                                                                          | Vice President - Admin. and Chief Information OfficerExecutive Director - Information Management Systems                                                                                                                                                             | 02/01/200009/01/1994                                    | 4                                                         
|Kristine A. Euclide**Age: 51                                                                                                                            | Vice President and General Counsel, MGEPartner in the law firm of Stafford Rosenbaum LLPExecutive Assistant to County Executive of Dane County,Wisconsin, in which capacity she served as a senior
      policyadvisor to the chief-elected official in Dane County. | 11/15/20011982-05/1997
      06/99-11/200105/97-05/1999 | 2                                                         
|Terry A. Hanson* Age: 52                                                                                                                                | Vice President, Chief Financial Officer and SecretaryVice President and Chief Financial OfficerVice President - Finance                                                                                                                                              | 10/01/200105/01/200011/01/1997                          | 12                                                        
|Jeffrey C. Newman*Age: 41                                                                                                                               | Vice President and TreasurerTreasurer                                                                                                                                                                                                                                | 01/01/200111/01/1997                                    | 6                                                         
|Note: Ages, years of service, and positions as of February 1,
      2004.
      |**Executive officer of MGE Energy and MGE****Executive officer of MGE*



**Item 2. Properties.**

MGE's net generating capability in service at December 31,
  2003, was as follows:

|Plants                                                                                                                                                                           |     | Location                               |  | CommercialOperation Date |  | Fuel            |  | NetCapability(MW) |  | No. ofUnits
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | -------------------------------------- |  | ------------------------ |  | --------------- |  | ----------------- |  | -----------
|Steam plants:                                                                                                                                                                    |     |                                        |  |                          |  |                 |  |                   |  |            
|Columbia                                                                                                                                                                         |     | Portage, WI                            |  | 1975 & 1978              |  | Low-sulfur coal |  | 225 (1,2,3)       |  | 2          
|Blount                                                                                                                                                                           |     | Madison, WI                            |  | 1957 & 1961              |  | Coal/gas        |  | 97                |  | 2          
|                                                                                                                                                                                 |     |                                        |  | 1938 & 1943              |  | Gas             |  | 39                |  | 2          
|                                                                                                                                                                                 |     |                                        |  | 1949                     |  | Coal/gas        |  | 22                |  | 1          
|                                                                                                                                                                                 |     |                                        |  | 1964-1968                |  | Gas/oil         |  | 35                |  | 4          
|                                                                                                                                                                                 |     |                                        |  |                          |  |                 |  |                   |  |            
|Combustion turbines                                                                                                                                                              |     | Madison, WI
      
      Marinette, WI |  | 1964-2000                |  | Gas/oil         |  | 174               |  | 6          
|                                                                                                                                                                                 |     |                                        |  |                          |  |                 |  |                   |  |            
|Portable generators                                                                                                                                                              |     | Madison, WI                            |  | 1998-2001                |  | Diesel          |  | 51                |  | 55         
|                                                                                                                                                                                 |     |                                        |  |                          |  |                 |  |                   |  |            
|Wind turbines                                                                                                                                                                    |     | Townships of Lincoln and Red River, WI |  | 1999                     |  | Wind            |  | 2                 |  | 17         
|Total                                                                                                                                                                            | 645 |                                        | 
|*(1) Base load generation.**(2) MGE's 22% share of two 512-MW units.
      The other owners are Alliant, which operates Columbia, and WPSC.**(3) See Item 3, Legal Proceedings.*



MGE sold its 17.8% ownership interest in Kewaunee to WPSC in
  2001. Footnote 18 of the Notes to Consolidated Financial Statements in
  this report includes information regarding that sale along with a description
  of MGE's obligations for Kewaunee beyond the closing date. MGE exercised an
  option to buy electric capacity and energy from WPSC through September 23,
  2003.

Major electric distribution lines and substations in service
  at December 31, 2003, are as follows:

|                    |  | Miles      
|------------------- |  | -----------
|Distribution lines: |  | Overhead   
|69 kV               |  | 7          
|13.8 kV and under   |  | 960        
|                    |  |            
|Distribution:       |  | Substations
|69-13.8 kV          |  | 23         
|13.8-4 kV           |  | 32         

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 approximate 5% ownership interest in ATC in exchange for its transmission
  plant and related deferred taxes and deferred investment tax credits. 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. A small portion
  of the 69-kV lines and substations has been classified as distribution assets.

Gas facilities include 2,234 miles of distribution mains.

**Item 3. Legal Proceedings.**

**MGE Energy**

On November 6, 2003, Friends of Responsible Energy (FORE),
  an unincorporated citizen association, filed a petition with the Dane County,
  Wisconsin, Circuit Court seeking judicial review of various decisions made by
  the PSCW, the Wisconsin Department of Natural Resources, the UW, and the Wisconsin
  Department of Administration in connection with the WCCF. Those decisions include
  the grant of a CPCN by the PSCW and various environmental determinations made
  by the governmental parties. FORE alleges that those decisions were arbitrary,
  capricious, and contrary to law and seeks to have them set aside or remanded
  for further review.

MGE Energy, along with MGE and MGE Power West Campus, have
  intervened as a party to the proceeding. MGE Energy believes the suit is not
  likely to cause any material adverse change in the WCCF or its construction
  schedule.

**MGE**

By letter dated October 23, 2003, the Wisconsin Environmental
  Law Advocates U.A. (WELA), an unincorporated, not-for-profit association, sent
  a Notice of Violation and Intent to File Suit under the Clean Water Act regarding
  alleged violations at Columbia to Alliant and to Wisconsin Power and Light (WPL),
  a subsidiary of Alliant, as well as to Columbia's joint owners and their parent
  companies. The notice is required by the Clean Water Act as a condition precedent
  to filing a lawsuit based on the alleged environmental law violations. The notice
  alleges numerous violations of the Clean Water Act and of Columbia's wastewater
  discharge permit. On December 16, 2003, WPL and Alliant responded to WELA
  that the majority of the allegations are inaccurate and of those that are accurate,
  the Wisconsin DNR had already begun enforcement and many of the violations have
  been corrected and have ceased. This notwithstanding, on December 29, 2003,
  WELA filed a complaint in the U.S. District Court, Western District of Wisconsin,
  against WPL and Alliant.

MGE does not operate Columbia and was not named as a party
  in the litigation. WELA communicated to WPL and Alliant that it filed the action
  in order to formally assert its claims in order to ensure WELA's participation
  in any enforcement resolution expected to be sought by the Wisconsin DNR. Although
  the complaint was filed, WELA indicated that it would not serve it on WPL and
  Alliant while good faith settlement negotiations were ongoing or unless otherwise
  directed by the district court.

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 Registrant's
  Common Equity and Related Stockholder Matters.**

**MGE Energy**

MGE Energy common stock is traded on Nasdaq under the
  symbol MGEE. On March 1, 2004, there were approximately 18,948 registered
  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 range
|-------------- | ------------------------
|               | High                    
|**2003**       |                         
|First quarter  | $29.95                  
|Second quarter | $33.65                  
|Third quarter  | $35.84                  
|Fourth quarter | $33.00                  
|               |                         
|**2002***      |                         
|First quarter  | $29.35                  
|Second quarter | $28.64                  
|Third quarter  | $30.14                  
|Fourth quarter | $29.75                  



**On August 12, 2002, MGE Energy became the holding
  company for MGE following a share exchange and began trading on Nasdaq under
  the symbol MGEE. Prior to the share exchange, MGE traded on Nasdaq under the
  symbol MDSN.*

**MGE**

As of March 1, 2004, there were outstanding 17,347,889
  shares of common stock, all of which were held by MGE Energy. There is
  no market for shares of common stock of MGE.

**Dividends**

The following table sets forth MGE Energy's quarterly
  cash dividends paid during 2003 and 2002:

|                                                                                                                                                                                                                                        | 2003     |          | 2002    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------- | -------- | --------
|*(Per share)*                                                                                                                                                                                                                           | 1st Qtr. | 2nd Qtr. | 3rd Qtr.
|MGE Energy                                                                                                                                                                                                                              | $0.336   | $0.336   | $0.338  
|**The dividends for the first two quarters
      of 2002 were paid by MGE. As a result of the share exchange described in
      Part I, Item 1, the dividends for the remainder of 2002 and all of 2003
      were paid by MGE Energy.*

The following table sets forth MGE's quarterly cash dividends
  paid during 2003 and 2002:

|                 | 2003     |          | 2002    
|---------------- | -------- | -------- | --------
|*(In thousands)* | 1st Qtr. | 2nd Qtr. | 3rd Qtr.
|MGE              | $11,804  | $5,977   | $6,074  

**Item 6. Selected Financial
  Data.**



|                                                                                 | For the years ended December 31,
|-------------------------------------------------------------------------------- | --------------------------------
|**Summary of Operations**                                                        | 2003                            
|Operating revenues:                                                              |                                 
|Electric                                                                         | $241,745                        
|Gas                                                                              | 159,802                         
|Total                                                                            | 401,547                         
|Operating expenses                                                               | 330,124                         
|Other general taxes                                                              | 11,592                          
|Operating income                                                                 | 59,831                          
|Other income                                                                     | 2,486                           
|Interest expense                                                                 | (11,776)                        
|Income before taxes                                                              | 50,541                          
|Income tax provision                                                             | (19,901)                        
|Income before cumulative effect of achange in accounting principle               | 30,640                          
|Cumulative effect of a change in accountingprinciple, net of tax benefit of $78* | -                               
|Net income                                                                       | $ 30,640                        
|Average shares outstanding                                                       | 17,894                          
|Earnings per share before cumulative effectof a change in accounting principle   | $1.71                           
|Cumulative effect of a change in accountingprinciple                             | -                               
|Basic and diluted earnings per share                                             | $1.71                           
|Dividends paid per share                                                         | $1.348                          
|                                                                                 |                                 
|**Assets**                                                                       |                                 
|Electric                                                                         | $445,728                        
|Gas                                                                              | 165,577                         
|Assets not allocated                                                             | 56,136                          
|Nonregulated                                                                     | 54,246                          
|Total                                                                            | $721,687                        
|                                                                                 |                                 
|**Capitalization including Short-Term
      Debt**                               |                                 
|Common shareholders' equity                                                      | $263,070                        
|Long-term debt**                                                                 | 222,204                         
|Short-term debt                                                                  | 31,680                          
|Total Capitalization                                                             | $516,954                        

**The change in accounting principle in 2001 is due to MGE's
  adoption of SFAS No. 133.****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 three business segments: electric utility operations, gas utility operations,
  and nonutility energy operations. Our principal subsidiary is MGE, which conducts
  our electric utility and gas utility operations. MGE generates and distributes
  electricity to nearly 132,000 customers in Dane County, Wisconsin, including
  the city of Madison, and purchases and distributes natural gas to more than
  129,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa,
  Juneau, Monroe, and Vernon. Other subsidiaries, which constitute our nonutility
  energy operations, have been formed to own and construct new electric generating
  capacity. Those subsidiaries are currently undertaking the construction of a
  150-MW, electricity, steam, and chilled-water cogeneration facility on the UW-Madison
  campus.

We became the holding company for MGE on August 12, 2002,
  when MGE shareholders exchanged their shares of MGE common stock for shares
  of our common stock. The share exchange had no accounting effect on MGE's recorded
  assets, liabilities, revenues, or expenses.

MGE's electric and gas utility operations represent a substantial
  part of our assets, liabilities, revenues, and expenses. Our nonutility operations,
  relating, principally, to the development of a cogeneration project on the UW-Madison
  campus, are not significant at this time. Consequently, the following discussion
  focuses mainly on the results of operations and financial condition of MGE.

**Executive Summary**

In 2003, our utility operations experienced an increase in
  gas deliveries offset by a slight decline in electric sales due to cooler-than-normal
  summer weather. Operation and maintenance expenses increased due to higher employee
  benefit costs associated with pensions and health care, higher transmission
  costs, and higher distribution and maintenance costs. We also experienced lower
  interest costs as a result of debt refinancings that were completed in 2002
  as well as the generally lower interest rates for our variable and short-term
  debt during 2003.

Our liquidity and capital position remained strong during 2003,
  although our overall debt increased as a result of a cogeneration facility that
  MGE Power West Campus is constructing on the UW-Madison campus. We anticipate
  relying on short- and long-term borrowings to support that construction and
  the associated capital expenditures. We also anticipate a need for additional
  equity capital during 2004 beyond the amounts we are able to raise through our
  Dividend Reinvestment and Direct Stock Purchase Plan.

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. It 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***

**Earnings Overview - MGE Energy**

In 2003, our earnings were $30.6 million, or $1.71 per
  share. MGE's increase in base rates to cover, in large part, rising fuel costs
  led to an increase in utility revenues. Electric retail sales declined slightly,
  but retail gas deliveries increased 6.4%. Operations and maintenance costs increased
  due to higher costs for employee benefits (health care, pension, etc.), transmission
  wheeling charges, distribution costs, and maintenance. These costs were somewhat
  offset by a decrease in depreciation costs, as MGE was no longer required to
  contribute to the decommissioning fund for Kewaunee in 2003. Also, MGE Energy
  benefited from lower interest costs due to refinancing a large portion of its
  long-term debt in 2002 and the lower interest rates on its variable rate and
  short-term debt in 2003.

In 2002, our earnings were $29.2 million, or $1.69 per
  share. MGE's 5.5% increase in electric retail sales, coupled with an increase
  in base rates to cover rising fuel costs, contributed to a 10.7% increase in
  electric revenues. Purchased power costs increased substantially. 2002 was the
  first full year MGE purchased 90 MW of capacity and energy to replace its
  share of generation lost from Kewaunee. MGE sold its interest in Kewaunee to
  WPSC in September 2001. As a result, MGE's operations and maintenance costs
  were lower in 2002. MGE's gas margin increased $4.2 million due to growth
  in gas deliveries.

In 2001, MGE Energy's earnings were $27.2 million,
  or $1.62 per share. Electric revenues remained constant despite a third-quarter
  pretax adjustment of approximately $4.5 million, reducing electric unbilled
  revenues. Electric operating income was down due to increased fuel costs, transmission
  wheeling expenses paid to ATC, and higher distribution expenses. Gas operating
  income mainly decreased because warm weather in the fourth quarter resulted
  in lower gas deliveries. Other income increased substantially due to MGE's equity
  in earnings of ATC, gains on weather hedge instruments, and lower charitable
  contributions. Interest expense was down due to lower interest rates and less
  short-term debt.

**Electric Utility Operations**

***Electric sales and revenues***

The following table compares MGE's electric retail revenues
  and electric kWh sales by customer class during each of the years ended
  December 31:

|*(In thousands)*                | Revenues |  | kWh Sales
|------------------------------- | -------- |  | ---------
|                                | 2003     |  | 2002     
|Residential                     | $ 85,164 |  | $ 81,258 
|Commercial                      | 119,585  |  | 108,842  
|Industrial                      | 14,555   |  | 12,949   
|Other - retail/municipal        | 17,975   |  | 16,585   
|Total retail                    | 237,279  |  | 219,634  
|Sales for resale                | 5,184    |  | 2,659    
|Other revenues                  | (718)    |  | 2,694    
|Total                           | $241,745 |  | $224,987 
|Cooling degree days(normal 629) | NA       |  | NA       

Electric operating revenues were up 7.4% and 10.7% in 2003
  and 2002 due to the following:

|*(In millions)*  | 2003  | 2002 
|---------------- | ----- | -----
|Rate changes     | $19.3 | $ 8.9
|Sales for resale | 2.5   | 1.0  
|Volume           | (1.6) | 11.0 
|Other effects    | (3.4) | 0.9  
|Total            | $16.8 | $21.8

- *Rates.* The PSCW authorized increases in MGE's electric
  rates effective March 1, 2003, and January 1, 2002, to cover rising
  fuel costs, increased system demands, and the installation of an AMR system.
  Revenues in 2003 also reflect a surcharge of 2% on electric rates, effective
  October 24, 2002, and ending October 23, 2003, which the PSCW authorized
  to recover deferred costs associated with forming ATC and ongoing incremental
  transmission costs. See Footnote 15 of the Notes to Consolidated Financial Statements
  for additional information.

- *Sales for resale.* The change in 2003 reflects higher
  sales volume as the result of a contract to sell 25 MW of electric capacity
  to Alliant from January through August 2003. The change in 2002 was
  attributable to higher prices, although the volume of sales was 14.3% lower
  due to lower off-peak sales during the first half of that year.

- *Volume.* Electric retail sales were slightly lower
  in 2003 due to cooler-than-normal summer temperatures, as reflected in the 26.2%
  reduction in cooling degree days. The opposite effect was felt in 2002 when
  warmer-than-normal temperatures caused electric retail sales to increase 5.5%.
  Total cooling degree days were up 17% in 2002.

- *Other effects.* The other effects in 2003 reflect
  a fuel credit that was in effect from mid-August through year-end. In 2002,
  the increase was associated with a vendor settlement and a true-up for a spring
  2000 outage at Kewaunee.

In 2001, MGE changed its method for incorporating unbilled
  consumption from prior periods into calculating amounts available for sale to
  customers. The revised calculation determines unbilled quantities available
  for sale in the current month based on the current month and the trailing two
  months. MGE previously brought forward the unbilled quantity from prior months,
  which had the effect of accumulating any underestimated line loss amounts. The
  three months is based on an assumption (which MGE believes is reasonable) that
  all electricity consumed by all classes of customers is billed within three
  months. MGE also determined the ratio of unbilled-to-billed sales had a sufficient
  relationship to include that statistic in validating results of its estimation
  methodology. This is in addition to the ratio between unbilled sales and accounts
  receivable that was previously used. See Footnote 1.c. for more information
  regarding the unbilled revenue estimation methodology.

***Electric fuel and purchased power***

In 2003, fuel used for electric generation increased $3.3 million,
  or 8.8%, primarily due to a rise in the cost of natural gas used at certain
  MGE generating plants. MGE's internal generation increased 2.5% in 2003. Purchased
  power expense increased $4.9 million, or 11.0%, primarily due to an increase
  in the cost of natural gas ($6.4 million). The average price for purchased
  power was $39.309 per MWh in 2003 compared to $34.210 in 2002, an increase
  of 14.9%. The increase in purchased power expense was partially offset by a
  3.4% decrease in volume ($1.5 million) resulting from the expiration of
  a 90-MW purchased power agreement with WPSC in September 2003.

In 2002, fuel used for electric generation decreased $2.1 million,
  or 5.2%, due to the following:

- Fuel costs for MGE's electric generating units (excluding
  Columbia) decreased $1.5 million, or 7.3%. MGE relied less on certain generating
  units because higher fuel costs made it generally cheaper to buy electricity
  than operate those units.

- Nuclear fuel expense decreased $2.3 million, or 89.5%,
  since MGE sold its ownership interest in Kewaunee in 2001.

- Fuel costs for the Columbia units increased $1.7 million,
  or 9.5%, due to higher coal costs.

In 2002, purchased power expense increased $26.3 million,
  or 143.6%. MGE purchased electric capacity and energy to replace the energy
  generation lost from selling its ownership interest in Kewaunee and to meet
  expected load growth. In June 2001, MGE exercised an option to buy 90 MW
  of electric capacity and energy at a fixed price from WPSC from September 24,
  2001, through September 23, 2003.

***Electric operating expenses***

Electric operating expense increased $13.3 million, or
  35.4%, in 2003 and decreased $0.8 million, or 1.4%, in 2002. The following
  changes contributed to the net change in electric operating expenses for the
  indicated year:

|*(In millions)*                                                                                                                                                                                                                                                                                                                                                                                                                          | 2003  |  | 2002  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | ------
|Increased transmission costs due to growing reliance on
      purchased power                                                                                                                                                                                                                                                                                                                                                            | $ 3.5 |  | $ 0.6 
|Amortization of deferred costs related to ATC's formation
      and incrementaloperating costs                                                                                                                                                                                                                                                                                                                                           | 2.8   |  | -     
|Increased health and pension expenses due to rising health
      care costs andlower investment returns on plan assets                                                                                                                                                                                                                                                                                                                   | 3.7   |  | 2.6   
|Increased outside service expenses associated with holding
      companyformation and participation in Power the Future proposal                                                                                                                                                                                                                                                                                                         | -     |  | 1.2   
|Decreased operating expenses as a result of sale of interest
      in Kewaunee                                                                                                                                                                                                                                                                                                                                                           | -     |  | (5.3) 
|Increased miscellaneous distribution expenses                                                                                                                                                                                                                                                                                                                                                                                            | 0.7   |  | -     
|Increased regulatory expenses due to filing a CPCN for
      authority to buildWCCF                                                                                                                                                                                                                                                                                                                                                      | 0.6   |  | -     
|Increased/(decreased) miscellaneous steam power expenses*                                                                                                                                                                                                                                                                                                                                                                                | 0.5   |  | (0.4) 
|Increased miscellaneous electric operating expenses                                                                                                                                                                                                                                                                                                                                                                                      | 1.5   |  | 0.5   
|Total electric operating expenses                                                                                                                                                                                                                                                                                                                                                                                                        | $13.3 |  | $(0.8)
|**Amount for 2002 reflects a decrease of $1.1 million, or 41.9%,
      as a result of MGE's recovery through rates of some carrying costs for actions
      taken at Columbia to reduce NOx emissions, partially offset by
      increased expenses for Columbia of $0.7 million, or 27.8%, as a result
      of increased administrative and general overheads ($0.4 million) and
      employee pensions and benefits ($0.3 million).*

***Maintenance expense***

In 2003, electric maintenance expense increased $3.6 million,
  or 30.8%. This is due to the following factors:

- Increase in maintenance of distribution assets ($2.1 million),
  including substation work, transformers, and overhead and underground lines.
  Maintenance and system upgrades help to improve the reliability of MGE's electric
  distribution system.

- Increase in other maintenance sources, including electric
  generating assets and Columbia ($1.5 million).

In 2002, electric maintenance expense was down $2.5 million,
  or 20.2%. This decrease is the net result of the following two factors:

- Maintenance expenses declined ($3.1 million) since MGE
  sold its 17.8% ownership interest in Kewaunee to WPSC.

- Maintenance expenses at Columbia increased ($0.6 million)
  as a result of a scheduled seven-week outage during April and May 2002.

***Depreciation***

Electric depreciation expense decreased $6.6 million and
  $6.7 million in 2003 and 2002, respectively. The decrease in 2003 reflects
  lower decommissioning expense ($8.2 million) as a result of the sale of
  Kewaunee, offset in part by $1.6 million of increased depreciation associated
  with an increase in electric plant assets. The decrease in 2002 reflects reduced
  decommissioning expense ($4.0 million), reduced depreciation due to the
  sale of Kewaunee ($3.4 million, see Footnote 18), and is partially
  offset by increased depreciation expense for the addition of electric assets
  ($0.7 million).

**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:

|*(In thousands)*                  | Revenues |  | Therms delivered
|--------------------------------- | -------- |  | ----------------
|                                  | 2003     |  | 2002            
|Residential                       | $ 92,472 |  | $ 71,341        
|Commercial/industrial             | 62,025   |  | 46,248          
|Total retail                      | 154,497  |  | 117,589         
|Gas transportation                | 3,394    |  | 3,238           
|Other revenues                    | 1,911    |  | 1,282           
|Total                             | $159,802 |  | $122,109        
|Heating degree days(normal 7,209) | NA       |  | NA              

Gas revenues were up 30.9% in 2003 and decreased 6.5% in 2002
  due to the following:

|*(In millions)*                                 | 2003  |  | 2002   
|----------------------------------------------- | ----- |  | -------
|Gas costs/rates                                 | $29.4 |  | $(21.5)
|Gas deliveries                                  | 7.5   |  | 12.9   
|Gas transportation                              | 0.1   |  | 0.3    
|Other effects                                   | 0.7   |  | (0.1)  
|Total                                           | $37.7 |  | $ (8.4)
|Average rate per therm of residential customers | $0.95 |  | $ 0.78 

- *Gas costs/rates.* The PSCW authorized increases in MGE's gas rates
  effective March 1, 2003, and January 1, 2002, to cover increased system
  demands. Gas costs increased significantly in 2003 from 2002. The average rate
  per therm in 2003 increased 23% compared to the prior year. The reverse was
  true for 2002. Despite a 10.2% increase in retail gas deliveries, revenues decreased
  due to the decrease -in the cost of gas. See Footnote 15 of the Notes to Consolidated
  Financial Statements for additional information on gas base rates.

- *Retail gas deliveries.* The 6.4% increase in 2003
  was due to colder-than-normal temperatures, as reflected in the 5.9% increase
  in heating degree days. The same effect was felt in 2002 when colder-than-normal
  temperatures caused gas deliveries to increase 10.2%. Total heating degree days
  were up 3.7% in 2002. The 2002 increase also reflects a full year of ownership
  of the Prairie du Chien-area natural gas system that was purchased on December 28,
  2001, from We Energies for $3.9 million. MGE gained approximately 3,600
  residential and commercial customers in southwestern Wisconsin as a result of
  the purchase.

- *Gas transportation.* The 10.1% decrease in deliveries
  in 2003 reflects fuel switching by customers with other fuel options, who switched
  due to the higher price of gas. The reverse effect was observed in 2002 as alternative
  fuel customers used more gas during the first half of 2002, causing a 17% increase
  in deliveries.

- *Other effects.* The other effects in 2003 reflect
  an increase of $0.6 million in the GCIM and other miscellaneous increases
  totaling $0.1 million.

***Natural gas purchased***

In 2003, natural gas purchased increased $30.7 million,
  or 41.8%, primarily due to higher wellhead prices, on average. Natural gas prices
  (cost per therm) increased more than 33% in 2003. A PGA clause allows MGE to
  pass along to customers the cost of gas, subject to certain limited incentives.
  The PGA is authorized by the PSCW.

In 2002, natural gas purchased decreased $12.6 million,
  or 14.7%, primarily due to lower wellhead prices.

***Gas operating expenses***

Gas operating expense increased $2.3 million, or 21.4%,
  in 2003 and increased $1.8 million, or 8.3%, in 2002. The following changes
  contributed to the net change in gas operating expense for the indicated year:

|*(In millions)*                                                                                                        | 2003 |  | 2002 
|---------------------------------------------------------------------------------------------------------------------- | ---- |  | -----
|Increased health and pension expenses due
      to rising health care costs andlower investment returns on plan assets | $1.7 |  | $1.4 
|Increased administrative and general costs                                                                             | -    |  | 1.4  
|Decreased uncollected revenues                                                                                         | -    |  | (1.3)
|Increased miscellaneous gas operating expenses                                                                         | 0.6  |  | 0.3  
|Total gas operating expenses                                                                                           | $2.3 |  | $1.8 

***Depreciation***

Gas depreciation expense increased $0.6 million and $0.4 million
  in 2003 and 2002, respectively, as a result of additional gas plant assets.

***Gas cost incentives***

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 up to $1.5 million.
  Any costs or savings that exceed $1.5 million will be passed on to gas
  sales service customers. 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 2003, MGE shareholders benefited $0.9 million (after
  tax) from capacity release revenues and commodity savings under the GCIM.

The PSCW recently lowered the formula used in establishing
  the benchmark for gas commodity costs. Beginning February 1, 2004, the
  benchmark will be 99.5% of what it would have been under the prior formula.
  This change is intended to better reflect market conditions.

**Other General Taxes**

The 6.7% increase ($0.7 million) in other general taxes
  from 2002 to 2003 is due to an increase in MGE's license fee tax, which for
  any year is based on adjusted operating revenues of the prior year. The Wisconsin
  license fee tax is in lieu of all property taxes on utility property.

**Income Taxes**

The 2003 effective income tax rate increased slightly from
  2002 from 39.1% to 39.4% due to constant amounts of tax credits (amortized investment
  tax credits and credit for electricity from wind energy) in relation to pretax
  income (see Footnote 9).

The increase in effective income tax rates from 2001 to 2002
  (36.8% to 39.1%) is partly attributable to lower amounts of amortized tax benefits
  from excess deferred income taxes and deferred investment tax credit. These
  lower amortized tax benefits are the result of the MGE's investment in ATC and
  the sale of its interest in Kewaunee, both 2001 transactions. In 2002 compared
  to 2001, amortized excess deferred income taxes and amortized investment tax
  credits decreased by a total of $0.4 million.

Additionally, the state tax component of the effective income
  tax rate was greater in 2002 than in 2001 due to permanent differences for certain
  one-time intercompany transactions for state tax purposes and for costs of capital
  incurred in forming MGE Energy on August 12, 2002.

**Other Nonoperating Items**

In 2003, MGE Construct received a service fee from the
  State in relation to WCCF of $1.0 million. This was offset by an increase
  in charitable contributions of $1.2 million. Dividend and interest income
  increased in 2003 by $0.4 million.

In 2002, other income decreased $6.3 million, or 72.8%.
  The decrease in other income is attributed to the following:

- MGE transferred its qualified decommissioning fund ($65.0 million,
  fair market value) and nonqualified decommissioning fund ($28.1 million,
  fair market value) to WPSC with the sale of its 17.8% ownership interest in
  Kewaunee (Footnote 18). There was no impact on earnings. The lower decommissioning
  earnings on trust assets were offset by an equal decrease in accumulated depreciation
  expense. The related decrease in other income was $4.0 million.

- An increase in charitable contributions reduced other income
  by $1.6 million.

- In 2001, MGE received a $0.8 million pretax gain from
  weather hedge instruments. During 2002, MGE did not receive a similar benefit.
  The net effect was a $0.8 million decrease in other income in 2002.

**Interest Expense**

In 2003, interest expense decreased by $0.8 million, or
  6.1%, due to the following factors:

- MGE refinanced a large portion of its long-term debt in 2002,
  helping to decrease interest expense by $0.5 million.

- Lower short-term interest rates coupled with reduced borrowing
  levels helped to decrease other interest expense by $0.3 million.

In 2002, interest expense decreased $1.2 million, or 9.0%,
  due to the following factors:

- Lower rates on MGE's $20.0 million variable rate debt
  (which matured on May 3, 2002) reduced interest expense by $0.7 million.

- Lower short-term debt levels in the first quarter, coupled
  with significantly lower interest rates, reduced other interest expense by $0.5 million.

***Liquidity and Capital Resources***

**Cash Flows**

The following summarizes cash flows for MGE Energy and
  MGE during 2003, 2002, and 2001:

|                             | MGE Energy |  | MGE     
|---------------------------- | ---------- |  | --------
|*(Thousands of dollars*)     | 2003       |  | 2002    
|Cash provided by/(Used for): |            |  |         
|Operating activities         | $ 68,602   |  | $ 56,246
|Investing activities         | (93,474)   |  | (86,709)
|Financing activities         | 26,207     |  | 30,709  

**Cash Provided by Operating Activities for MGE Energy**

In 2003, cash provided by operating activities increased $12.4 million,
  or 22.0%. Working capital increased $6.6 million primarily due to increases
  in unbilled revenues ($3.1 million), stored natural gas ($5.6 million),
  prepayments ($3.4 million), and accounts receivable ($1.4 million).
  These increases in current assets were offset by higher accounts payable of
  $3.0 million and other current liabilities totaling $3.7 million.

Deferred income taxes increased $13.1 million in 2003
  due to the impact of 50% additional bonus depreciation, which went into effect
  in May 2003. An increase in other noncurrent items net, of $5.2 million,
  also contributed to the increase in cash provided by operating activities.

In 2002, cash provided by operating activities decreased $17.7 million,
  or 24.0%. Working capital decreased $0.3 million primarily due to an increase
  in customer payables. Depreciation and other amortization expenses decreased
  $6.3 million, mainly because MGE sold its ownership interest in Kewaunee.
  Deferred income taxes for 2002 decreased $8.0 million compared to 2001.
  The significantly larger deferred tax expense in 2001 was due to selling Kewaunee,
  which resulted in reversal of temporary differences associated with the plant
  and decommissioning funds.

**Cash Provided by Operating Activities for MGE**

In 2003, cash provided by operating activities increased $19.7 million,
  or 36.8%. Working capital increased $3.2 million in 2003 due to a decrease
  in accounts receivable of $1.8 million and increases in accounts payable
  of $3.7 million. Other current assets, such as unbilled revenues, inventories,
  and prepayments, increased in total $12.1 million. Other current liabilities
  increased $3.6 million. Deferred income taxes increased $13.2 million
  in 2003, while depreciation decreased $6.0 million, due to lower decommissioning
  expenses. Other noncurrent items, net, increased $6.6 million, which contributed
  to the increase in cash provided by operating activities.

In 2002, cash provided by operating activities decreased $20.0 million.
  Working capital increased $2.5 million in 2002 due to an increase in accounts
  receivable of $11.2 million and increases in unbilled revenues and prepayments
  of $2.0 million each. The increases in current assets were offset by an
  increase in accounts payable of $6.5 million, an increase in other current
  liabilities of $3.9 million, and a decrease in inventories of $2.4 million.
  Decreases in depreciation of $6.3 million and deferred taxes of $8.0 million
  attributed to the decrease in operating activities. The decreases in these items
  was attributable to the sale of Kewaunee as discussed earlier.

**Capital Requirements and Investing Activities for MGE Energy
  and MGE**

In 2003, MGE Energy's cash used for investing activities increased
  $6.8 million. Capital expenditures increased $6.0 million in 2003.
  Utility plant additions decreased $3.4 million, while capital expenditures
  related to the WCCF increased $9.4 million over last year. MGE's advance
  to ATC in connection with the installation of equipment and system upgrades
  for WCCF increased $7.9 million in 2003. In 2002, MGE was still contributing
  to the decommissioning fund for Kewaunee.

In 2002, cash used for investing activities increased $61.8 million.
  Utility plant additions were up $16.2 million due to installing an AMR
  system, installing NOx emissions equipment at Columbia, and upgrading
  MGE substations to improve reliability. Capital expenditures related to WCCF
  totaled $18.9 million. The increase in 2002 also reflects an unfavorable
  comparison to 2001, in which MGE received a $15.0 million capital distribution
  from ATC and $15.4 million for selling its interest in Kewaunee.

The following table shows MGE Energy's and MGE's estimated
  capital expenditures for 2004, actual for 2003, and the three-year average for
  2000 to 2002:

|*(In thousands)*
      For the years ended December 31 | 2004(Estimated) |  | 2003 (Actual) |  | Three-Year Average (2000 to
      2002)
|------------------------------------------------------ | --------------- |  | ------------- |  | ---------------------------------------
|Electric:                                              |                 |  |               |  |                                        
|Production                                             | $10,739         |  | 10.9%         |  | $7,541                                 
|Transmission                                           | -               |  | -             |  | -                                      
|Distribution and general                               | 20,449          |  | 20.8%         |  | 27,182                                 
|Nuclear fuel                                           | -               |  | -             |  | -                                      
|Total electric                                         | 31,188          |  | 31.8%         |  | 34,723                                 
|Gas                                                    | 8,656           |  | 8.8%          |  | 9,269                                  
|Common                                                 | 5,456           |  | 5.5%          |  | 10,716                                 
|Utility plant total                                    | 45,300          |  | 46.1%         |  | 54,708                                 
|Nonutility (WCCF)                                      | 52,920          |  | 53.9%         |  | 28,262                                 
|MGE Energy total                                       | $98,220         |  | 100.0%        |  | $82,970                                



MGE Energy's and MGE's liquidity are primarily affected
  by their construction requirements. MGE's major 2003 capital projects included
  substation improvements ($3.5 million), AMR project costs ($7.0 million),
  upgrading its energy management system ($1.6 million).

MGE Energy used funds received as dividend payments from MGE
  as well as short- and long-term external financing to meet its 2003 capital
  requirements and cash obligations, including dividend payments. External financing
  included short-term financing under existing lines of credit and longer-term
  financing through the issuance of $30 million of 5.68% senior secured notes
  due September 25, 2033, and the issuance of 165,000 shares of its common
  stock pursuant to a Distribution Agreement with Banc One Capital Markets, Inc.
  While dividends from MGE will remain a significant source for the cash needs
  of MGE Energy, MGE Energy expects that revenues from the WCCF will
  supplement those dividends starting in 2005 when the WCCF becomes operational.
  In the interim, MGE Energy expects to continue to use existing lines of
  credit and to issue additional long-term debt and shares of common stock, in
  addition to cash dividends from MGE, to meet its capital requirements and other
  cash obligations, including dividends.

Dividend payments by MGE to MGE Energy are subject to restrictions
  arising under a January 12, 2004, 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 $25.1 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,
  2003, as determined under the calculation used in the rate proceeding, is estimated
  to be 55.4%. The rate proceeding calculation includes as indebtedness imputed
  amounts for MGE's outstanding purchase power capacity payments and other PSCW
  adjustments and excludes the indebtedness associated with MGE Power West
  Campus, which is consolidated in accordance with FIN No. 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, 2003, approximately $145 million was available
  for the payment of dividends under this covenant.

MGE used internally generated funds, short-term debt, and proceeds
  from common stock issued through MGE Energy's Dividend Reinvestment and
  Direct Stock Purchase Plan to satisfy most of its 2003 capital requirements
  and expects to do the same in 2004. For the larger capital investments, MGE
  would expect to finance these with additional long-term debt and capital contributions
  from MGE Energy.

**Financing Activities and Capitalization Matters for
  MGE Energy and MGE**

In 2003, cash provided by MGE Energy's financing activities
  was $26.2 million. On September 30, 2003, MGE Energy's subsidiary,
  MGE Power West Campus, issued $30 million in private-placement debt, increasing
  long-term debt and using the proceeds from this issue to pay off short-term
  debt. MGE Energy was temporarily financing the capital expenditures for
  WCCF with short-term debt. MGE refinanced $20.0 million of its 7.70%, 2028
  Series, First Mortgage Bonds with lower cost debt.

Proceeds from the issuance of common stock increased $9.6 million
  when compared to lastyear. In addition to its Dividend
  Reinvestment and Direct Stock Purchase Plan, MGE Energy also has been selling
  additional shares of stock through Banc One Capital Markets, Inc., under a Distribution
  Agreement.

Short-term debt decreased $2.6 million in 2003. MGE Energy,
  through its affiliate MGE Construct, received a reimbursement of $19.4 million
  in November from the State for its share of the capital expenditures related
  to WCCF. This reimbursement was used to pay down MGE Energy's bank loan.

In 2002, MGE Energy's cash provided by financing activities
  was $30.7 million. Short-term debt increased $24.8 million. Two long-term
  debt issues occurred in the fourth quarter of 2002. A $20.0 million issue
  replaced the $20.0 million in debt that matured in May, which was rolled
  into short-term debt at that time. Another $15.0 million issue financed
  capital expenditures for the AMR project, which had been financed with short-term
  debt.

In 2003, MGE's cash used for financing activities was $18.9 million.
  In conformity with FIN No. 46-R, MGE includes the consolidation of
  MGE Power West Campus (see Footnote 2). MGE Power West Campus
  had $10.5 million of affiliate loans for the financing of WCCF. MGE benefited
  from $19.6 million in equity contributions from its parent, which was offset
  by $29.7 million in cash dividends paid to parent. MGE's short-term debt
  increased $2.0 million.

In 2002, MGE's cash provided by financing activities was $14.1 million.
  MGE refinanced $20.0 million of debt in 2002 and issued an additional $15.0 million
  in November of 2002 to help finance the AMR project.

MGE Energy's and MGE's capitalization ratios were as follows:

|                                                                                                                                                                    | MGE Energy |  | MGE  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- |  | -----
|                                                                                                                                                                    | 2003       |  | 2002 
|Common shareholders' equity                                                                                                                                         | 50.9%      |  | 50.1%
|Long-term debt*                                                                                                                                                     | 43.0%      |  | 42.3%
|Short-term debt                                                                                                                                                     | 6.1%       |  | 7.6% 
|**Includes current maturities and $30 million
      in debt for MGE Power West Campus, which is being consolidated into MGE
      in accordance with FIN No. 46-R.*

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's
|--------------------------- | ----------------- |  | -------
|First Mortgage Bonds        | AA                |  | Aa2    
|Unsecured Medium Term Notes | AA-               |  | Aa3    
|Commercial paper            | A1+               |  | P1     

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.

**Contractual Obligations and Commercial Commitments
  for MGE Energy and MGE**

MGE Energy's and MGE's contractual obligations as of December 31,
  2003, representing cash obligations that are considered to be firm commitments,
  are as follows:

|*(In thousands)*                         |          |  | Payment due within: |  | Due after
|---------------------------------------- | -------- |  | ------------------- |  | ---------
|                                         | Total    |  | 1 Year              |  | 2-3 Years
|**MGE:**                                 |          |  |                     |  |          
|Long-term debt                           | $193,500 |  | $20,000             |  | $ -      
|Short-term debt                          | 15,500   |  | 15,500              |  | -        
|Operating leases                         | 8,940    |  | 1,379               |  | 1,774    
|Purchase obligations                     | 208,559  |  | 31,647              |  | 57,485   
|ATC - capital call                       | 3,560    |  | 3,560               |  | -        
|ATC - WCCF                               | 849      |  | 849                 |  | -        
|Other long-term obligations              | 1,216    |  | 655                 |  | 561      
|Total MGE contractual obligations        | $432,124 |  | $73,590             |  | $59,820  
|**MGE Energy:**                          |          |  |                     |  |          
|Long-term debt                           | $30,000  |  | $ -                 |  | $ -      
|Short-term debt                          | 16,180   |  | 16,180              |  | -        
|Purchase obligations-WCCF                | 24,934   |  | 24,934              |  | -        
|Total Non-MGE contractual obligations    | 71,114   |  | 41,114              |  | -        
|Total MGE Energy contractual obligations | $503,238 |  | $114,704            |  | $59,820  

For additional information about:

- Long-term debt consisting of secured First Mortgage Bonds
  and unsecured medium-term notes, see Footnotes 13.c. The long-term debt
  under MGE Energy is the obligation of MGE Power West Campus. This debt is being
  consolidated into MGE's financials in accordance with FIN No. 46-R, see
  Footnote 13.d.

- Short-term debt consisting of commercial paper issued by
  MGE, which is supported by unused lines of credit from banks and bank loans
  to MGE Energy, see Footnote 14.

- Operating leases, see Footnote 16.

- Purchase obligations for MGE consist of the purchase of electricity
  and the purchase and transport of natural gas, see Footnote 16.

- MGE has made a commitment to ATC for an additional capital
  contribution.

- Commitment to advance funds to ATC for the construction of
  transmission equipment related to WCCF, see Footnote 17.

- Purchase obligations for MGE Energy related to contracts
  for equipment and services related to the construction of WCCF, see Footnote 16.f.

- Other long-term obligations are related to a special assessment
  for decontaminating and decommissioning of nuclear facilities, see Footnotes 3
  and 18, and investment in a limited partnership.

MGE Energy's and MGE's commercial commitments as of December 31,
  2003, 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:

|*(In thousands)*              |         |  | Expiration within: |  | Due after
|----------------------------- | ------- |  | ------------------ |  | ---------
|                              | Total   |  | 1 Year             |  | 2-3 Years
|**MGE:**                      |         |  |                    |  |          
|Available lines of credit (a) | $40,000 |  | $40,000            |  | $ -      
|Bank letter of credit (b)     | $ 5,000 |  | $ 5,000            |  | -        
|**MGE Energy:**               |         |  |                    |  |          
|Available lines of credit (c) | $60,000 |  | $60,000            |  | -        
|Guarantees (d)                | $ 6,130 |  | $ 904              |  | $1,695   

(a) Lines of credit consisting of a 364-day credit facility
  to support commercial paper issuances. At December 31, 2003, there were
  no borrowings against the credit facility. Additionally, at December 31,
  2003, there was $15.5 million of commercial paper outstanding.

(b) MGE has a letter of credit with a commercial bank established
  as collateral for equipment purchases that ATC will make to provide necessary
  system upgrades for WCCF.

(c) MGE Energy has established a $60.0 million line
  of credit for temporary financing of the capital commitments for WCCF and for
  general corporate purposes. Additionally, at December 31, 2003, MGE Energy
  had $16.2 million in bank loans outstanding.

(d) MGE has guaranteed repayment of certain receivables it
  sold to a financial institution under a Chattel Paper Agreement (see Footnote 16
  of the Notes to Consolidated Financial Statements).

**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 has decreased. These factors may also result
  in additional future funding requirements of the pension and postretirement
  benefit plans.

***Business and Regulatory Environment***

**Electric Transmission - ATC**

On January 1, 2001, MGE transferred substantially all
  of its electric transmission facilities to ATC in exchange for approximately
  a 5.0% interest in this joint venture. ATC is comprised of Wisconsin investor-owned
  utilities and some Wisconsin municipal utilities, cooperatives, and power supply
  agencies.

The PSCW authorized an electric rate surcharge of $4.5 million,
  or 2.0%, over a twelve-month period ended October 23, 2003, for MGE to
  recover deferred costs associated with ATC's formation and ongoing incremental
  transmission costs during 2001 and 2002.

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 has advanced funds for construction of transmission equipment and work done
  by ATC related to WCCF in the amounts of $9.2 million and $1.3 million
  in 2003 and 2002, respectively. MGE expects to advance an additional $0.8 million
  in 2004. MGE will be reimbursed by ATC upon completion of the project.

**Kewaunee Sale**

MGE sold to WPSC its 17.8% ownership interest in Kewaunee in
  September 2001. In exchange for a cash payment of $15.4 million, MGE
  transferred its net book value of utility plant ($8.2 million), net nuclear
  fuel ($7.9 million), inventories ($1.5 million), and other assets
  ($0.1 million). These assets were offset by $2.3 million owed to WPSC.
  On the closing date, MGE also transferred its qualified decommissioning fund
  ($65.0 million, fair market value) and nonqualified decommissioning fund
  ($28.1 million, fair market value), which decreased accumulated depreciation
  by an equal amount.

Under the Kewaunee sale agreement, MGE was obligated to continue
  collecting decommissioning costs from its customers during 2002 and to remit
  those amounts, net of trust investment expenses and taxes on investment income,
  to the WPSC nonqualified decommissioning fund, which it did on January 3,
  2003. MGE has no further obligation with respect to the decommissioning of Kewaunee
  except as described in the next paragraph with respect to spent nuclear fuel.

The federal government is responsible for the disposition and
  storage of spent nuclear fuel. Federal legislation is being considered to establish
  an interim storage facility. Spent nuclear fuel is currently stored at Kewaunee.
  Minor plant modifications to the spent fuel pools completed in 2001 should ensure
  Kewaunee has sufficient fuel storage capacity until the end of its licensed
  life in 2013. MGE retained its spent fuel obligations for all fuel burned at
  Kewaunee for MGE's share of the generation from the opening of the plant to
  the closing date. WPSC took title to such fuel at the closing date.

A surcharge imposed by the National Energy Policy Act of 1992
  requires nuclear power companies to fund the decontamination and decommissioning
  of U.S. Department of Energy facilities that process nuclear fuel. As a result,
  the Kewaunee co-owners are required to pay a surcharge on uranium enrichment
  services purchased from the federal government prior to October 23, 1992.
  On an inflation-adjusted basis, MGE's portion of the obligation related to Kewaunee
  is approximately $0.8 million at December 31, 2003. MGE is required
  to continue paying its portion of this annual assessment.

As allowed under the Kewaunee sale agreement, MGE exercised
  an option to purchase 90 MW of electric capacity and energy at a fixed
  price from September 24, 2001, through September 23, 2003, to help
  meet customers' electric needs.

**Industry Restructuring in Wisconsin**

Wisconsin has focused on building the infrastructure needed
  within the state to provide reliable electric service to customers. Wisconsin
  has been building new generating capacity, improving existing and adding new
  electric transmission lines, and continues to develop an independent electric
  transmission system operator. State regulators realize a competitive market
  cannot exist when supply is short. The PSCW will decide if or when it is appropriate
  for retail competition to proceed in the electric industry. MGE cannot predict
  what impact future PSCW actions may have on its future financial condition,
  cash flows, and results of operations.

Restructuring the electric industry could affect MGE's ability
  to continue establishing certain regulatory asset and liability amounts allowed
  under SFAS No. 71, *Accounting for the Effects of Certain Types
  of Regulation*. MGE is unable to predict whether any adjustments to regulatory
  assets and liabilities will occur in the future. However, the PSCW has recognized
  the need to allow recovery for commitments made under prior regulation.

***Nonutility Energy Outlook***

**Power the Future Generation**

On February 23, 2001, MGE secured an option to own a portion
  of the advanced technology, coal-fired, base-load generation proposed in We
  Energies' Power the Future plan. The plan included three new 600-MW coal-fired
  plants, which would be located in Wisconsin. On November 11, 2003, a PSCW
  order approved issuing a CPCN for We Energies' proposal for two of the coal
  facilities. Pursuant to an amended agreement reached on January 31, 2003,
  MGE has the option to acquire an undivided 8.33% (16.66% under certain conditions)
  ownership interest in each of the proposed coal plants or up to approximately
  50 MW per unit. If the options on Units 1 and 2 are fully exercised,
  MGE Energy's share of capital costs is estimated to be $175 million.
  Unit 1 is expected to begin operating in 2009 and Unit 2 is scheduled
  to begin operating in 2010. MGE has filed its own Certificate of Authority with
  the PSCW for the coal facilities and a proposed lease structure with an MGE Energy
  affiliate. MGE expects PSCW approval on this filing in the first half of 2004.

**WCCF**

The cost to construct WCCF is expected to be approximately
  $180 million in total, of which MGE Power West Campus' portion will be
  $103 million. On November 20, 2003, the State paid $19.4 million
  to MGE Construct for its share of construction costs incurred since its last
  payment in November 2002. MGE Construct now bills the State monthly for
  its share of the cost of WCCF in accordance with the EPC Agreement. As of December 31,
  2003, MGE Power West Campus had incurred $48.6 million of costs on the
  project, which is reflected in construction work in progress on MGE Energy's
  and MGE's consolidated balance sheets. These costs largely represent amounts
  paid under long lead-time equipment contracts in order to meet project schedules.
  In 2003, MGE Construct received a service fee of $1.0 million (pretax)
  from the State in relation to its role as EPC contractor for WCCF. The total
  fee of $5.0 million will be recognized as services are rendered and will
  be collected over a 22-month period.

MGE Energy, MGE Power West Campus, and MGE Construct have
  assumed certain risks related to some of the executed agreements. In the EPC
  Agreement, MGE Power West Campus is responsible for cost overruns and MGE Construct
  is responsible for the construction process of the entire facility, paying liquidated
  damages relating to failure to achieve the Mechanical Completion Date Guarantee
  and/or the Acceptance Test Capacity Guarantee. MGE Energy is the guarantor
  of MGE Construct's obligations under the EPC Agreement.

***Critical Accounting Policies****- **MGE Energy and MGE***

The preparation of financial statements in conformity with
  generally accepted accounting principles requires management to apply policies
  and make estimates and assumptions that affect results of operations and the
  reported amounts of assets and liabilities in the financial statements. Because
  of the inherent uncertainty in the nature of the matters where estimates are
  used, actual amounts could differ from estimated amounts. The following accounting
  policies represent those that management believes are particularly important
  to the financial statements and require the use of judgment in estimating matters
  that are inherently uncertain.

**Unbilled Revenues**

Revenues from the sale of electricity and gas to customers
  are generally 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 mix of sales between customer rate classes, which is
  based upon historical utilization assumptions.

During 2003, many of MGE's largest customers were shifted to
  a calendar month bill. As a result of this shift, the majority of these customers'
  electricity usage is now accounted for in the unbilled calculation. The unbilled
  amounts are based on actual usage billed the following month and are therefore
  very reliable. Due to this billing shift, MGE has seen the ratio of unbilled-to-billed
  electric sales climb. The ratio has settled into a range of 45% to 65%, and
  MGE will continue to monitor and track this range.

**Pension Plans**

MGE maintains qualified and nonqualified pension plans. MGE
  also provides health care and life insurance benefits for its retired employees.
  MGE's pensions are funded through an outside trust.

In addition to the market returns, various other assumptions
  also affect the investment returns and pension costs.

- *Assumed return on assets.* This assumption is 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 2003, MGE used a 9.0% assumed return
  on assets. This rate was set at the end of 2002. One of the approaches MGE used
  in determining its assumed return on assets is based on historical returns.
  As of December 31, 2003, the ten-year historical return was 11.3%.

- *Discount rate.* The discount rate for SFAS No. 87
  pension cost purposes is a rate at which pension obligations could be effectively
  settled. MGE bases its rate on high-grade bond yields with a 25 basis point
  adder. This adder is based on the relatively long duration of pension plan liabilities,
  benefit payments that are in the form of an annuity, and the rate used has historically
  been at the top of the range. Moody's Aa Corporate Bond Yield was 6.01% on December 31,
  2003. This approach generated a 6.25% discount rate (i.e., 6.01% + 0.25%, rounded).

- *Medical trend assumptions.* The health care cost
  trend rate is the assumed rate of increase in per-capita health care charges.
  For 2003, the health trend was reset to 14% with the ultimate trend of 5% reached
  in 2012.

**Tax Provision**

MGE Energy's and MGE's 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.

**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. If a contract is designated as a cash flow hedge, the
  change in its market value is generally deferred as a component of other comprehensive
  income until the transaction it is hedging is completed. Conversely, the change
  in the market value of a derivative not designated as a cash flow hedge is recorded
  in current period earnings. A cash flow hedge is a hedge of a forecasted transaction
  or the variability of cash flows to be received or paid related to a recognized
  asset or liability. To qualify as a cash flow hedge, the fair value changes
  in the derivative must be expected to offset 80% to 120% of the changes in fair
  value or cash flows of the hedged item.

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 to fund future expected costs or amounts received
  in rates that are expected to be refunded to customers in future periods. These
  costs typically include deferral of energy costs, the normalization of income
  taxes, and the deferral of losses incurred on debt retirements. The accounting
  for these regulatory assets and liabilities is in accordance with the provisions
  of SFAS No. 71.

MGE continually assesses whether the regulatory assets continue
  to 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
  revenue or expense.

Amortization of regulatory assets is provided over the recovery
  period as allowed in the related regulatory agreement. It is also included in
  depreciation and amortization expense. The most significant regulatory assets
  recorded by MGE include decommissioning and decontaminating enrichment facilities,
  environmental costs, deferred charges related to the setup of ATC, deferred
  charges on the interest expense of its 2027A Series First Mortgage Bonds, deferred
  charges related to the effects of mark-to-market accounting as required by SFAS No. 133,
  and deferred charges related to tax recovery on AFUDC equity. See Footnote 6
  for a listing of these assets and liabilities.

The most significant regulatory liabilities recorded by MGE
  include decommissioning and decontaminating enrichment facilities, deferred
  credits related to the accounting of deferred taxes as required by SFAS No. 109,
  amounts recorded for certain gas supply contracts that are considered derivatives
  under SFAS No. 133 but are part of the PGA clause authorized by the
  PSCW, and a customer fuel credit.

**Adoption of Accounting Principles and Recently Issued
  Accounting Pronouncements - MGE Energy and MGE**

***SFAS No. 143***

In 2001, FASB issued SFAS No. 143, *Accounting
  for Asset Retirement Obligations*. SFAS No. 143 provides accounting
  requirements for retirement obligations associated with tangible long-lived
  assets. MGE Energy and MGE were required to adopt SFAS No. 143
  as of January 1, 2003. Retirement obligations associated with long-lived
  assets included within the scope of SFAS No. 143 are those for which
  there is a legal obligation under existing or enacted law, statute, written
  or oral contract, or by legal construction under the doctrine of promissory
  estoppel.

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 the photovoltaic generating facilities, all
  of which are located on property not owned by MGE and would be removed upon
  the ultimate end of the lease. At December 31, 2003, this liability is
  estimated at $1.4 million and is included in other deferred liabilities.

At the point the liability for asset retirement is incurred,
  SFAS No. 143 requires capitalization of the costs to the related asset,
  property, plant, and equipment, net. For asset retirement obligations existing
  at the time of adoption, the statement requires capitalization of costs at the
  level that existed at the point of incurring the liability. These capitalized
  costs are depreciated over the same period as the related property. At the date
  of adoption, the depreciation expense for past periods was recorded as a regulatory
  asset in accordance with SFAS No. 71 because MGE believes the PSCW
  will allow it to recover these costs in future rates. Current depreciation of
  the asset retirement cost is also being deferred as a regulatory asset under
  SFAS No. 71.

The initial liability is accreted to its present value each
  period. MGE defers this accretion as a regulatory asset based on its determination
  that these costs can be collected from customers. MGE also may have asset retirement
  obligations relating to various assets, such as combustion turbine generating
  units, small distributed generating units, aboveground and underground storage
  tanks, facilities located at Columbia (co-owned with Alliant and WPSC), and
  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, but also include
  some facilities located on property owned by MGE. The asset retirement obligations
  associated with these facilities cannot be reasonably determined due to the
  indeterminate life of the related assets.

The pro forma asset retirement obligation MGE would have recognized
  as of January 1, 2002, had MGE implemented SFAS No. 143 as of
  that date, was approximately $1.2 million based on the information, assumptions,
  and interest rates as of January 1, 2003, used to determine the $1.4 million
  liability recognized upon initial adoption of SFAS No. 143. Because
  MGE's regulators are allowing these costs to be recovered in future rates, adoption
  of SFAS No. 143 in the first quarter of 2002 would have had no impact
  on net income and earnings per share of common stock. Accordingly, pro forma
  impacts are not presented.

The following table shows costs as of January 1, 2003,
  and changes to the asset retirement obligation and accumulated depreciation
  during the twelve months ended December 31, 2003.

|(In thousands)                           | (a)
      Original AssetRetirementObligation |  | (b)
      
      AccumulatedAccretion |  | (c)
      
      (a + b)AssetRetirementObligation |  | (d)
      
      AccumulatedDepreciation-Related Asset
|---------------------------------------- | -------------------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- |  | ------------------------------------------------------
|Balance, Jan. 1, 2003 (date of adoption) | $685                                         |  | $596                                  |  | $1,281                                            |  | $148                                                  
|Changes through Dec. 31, 2003            | 1                                            |  | 79                                    |  | 80                                                |  | 27                                                    
|Balance, Dec. 31, 2003                   | $686                                         |  | $675                                  |  | $1,361                                            |  | $175                                                  



As of December 31, 2003, MGE's regulatory asset, included
  in deferred charges, is the total accumulated accretion ($675,000) and accumulated
  depreciation ($175,000) or $850,000.

MGE made a significant reclassification related to the reporting
  of accumulated costs of removal that are non-SFAS No. 143 obligations.
  The reclass removed the costs from accumulated depreciation and recorded them
  as regulatory liability.

***SFAS No. 146***

In June 2002, the FASB issued SFAS No. 146,
  *Accounting for Costs Associated with Exit or Disposal Activities*. This
  statement addresses financial accounting and reporting for costs associated
  with exit or disposal activities and nullifies EITF 94-3, *Liability
  Recognition for Certain Employee Termination Benefits and Other Costs to Exit
  an Activity (including Certain Costs Incurred in a Restructuring)*. SFAS No. 146
  is effective for transactions initiated after December 31, 2002. Adoption
  of this statement did not have a material impact on the consolidated financial
  statements.

***SFAS No. 148***

In December 2002, the FASB issued SFAS No. 148,
  *Accounting for Stock-Based Compensation-Transition and Disclosure*.
  This statement amends FASB Statement No. 123, *Accounting for Stock-Based
  Compensation*, to provide alternative methods of transition for a voluntary
  change to the fair value-based method of accounting for stock-based employee
  compensation. In addition, the statement amends the disclosure requirements
  of Statement 123 to require prominent disclosures in both annual and interim
  financial statements about the method of accounting for stock-based employee
  compensation and the effect of the method used on reported results. MGE Energy
  has no stock options as of December 31, 2003, and therefore SFAS No. 148
  did not have a material impact on the consolidated financial statements.

***SFAS No. 149***

On April 30, 2003, the FASB issued SFAS No. 149,
  *Amendment of SFAS No. 133 on Derivative Instruments and Hedging
  Activities*. This statement amends and clarifies accounting for derivative
  instruments including certain derivative instruments embedded in other contracts
  for hedging activities. SFAS No. 149 amends certain other existing
  pronouncements. The amendments will result in a more consistent reporting of
  contracts that are derivatives in their entirety or that contain embedded derivatives
  that warrant separate accounting. SFAS No. 149 is effective for contracts
  entered into or modified after June 30, 2003. Adoption of this statement
  did not have a material impact on the consolidated financial statements.

***SFAS No. 150***

In May 2003, the FASB issued SFAS No. 150, *Accounting
  for Certain Financial Instruments with Characteristics of both Liabilities and
  Equity*. This statement establishes standards for how an issuer classifies
  and measures certain financial instruments with characteristics of both liabilities
  and equity. It requires that an issuer classify a financial instrument that
  is within the scope of SFAS No. 150 as a liability (or an asset in
  some circumstances). Many of those instruments were previously classified as
  equity. SFAS No. 150 is effective for interim periods beginning after
  June 15, 2003, for financial instruments entered into or modified after
  May 31, 2003, except for mandatorily redeemable financial instruments of
  nonpublic entities which will be effective for interim periods beginning after
  December 15, 2003. Adoption of this statement did not have a material impact
  on the consolidated financial statements.

***SFAS No. 132***

In December 2003, the FASB issued an amended SFAS No. 132,
  *Employers' Disclosures about Pensions and Other Postretirement Benefits*.
  This revised statement requires additional disclosures to those in the original
  SFAS No. 132 about the plan assets, obligations, cash flows, and net
  periodic benefit cost of defined benefit pension plans and other defined benefit
  postretirement plans.

***FIN No. 45***

In November 2002, the FASB issued FIN No. 45, *Guarantor's
  Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
  of Indebtedness of Others*. This interpretation provides the disclosures
  to be made by a guarantor in interim and annual financial statements about obligations
  under certain guarantees. The interpretation also clarifies that a guarantor
  is required to recognize, at the inception of a guarantee, a liability for the
  fair value of the obligation.

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 $7.5 million
  of the financing program receivables, until February 28, 2004. Loans totaling
  $1.1 million have been sold to the financial institution during 2003. The
  liability for the fair value of the obligation associated with these loans is
  not material.

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 length of the MGE guarantee
  to the financial institution varies from one to ten years depending on the term
  of the customer loan. Principal payments for the next five years on the loans
  are $0.9 million in 2004 and 2005 and $0.8 million in 2006, 2007,
  and 2008.

***FIN No. 46***

In January 2003, the FASB issued FIN No. 46,
  *Consolidation of Variable Interest Entities - an Interpretation of
  ARB No. 51."* In December 2003, the FASB issued the updated and
  final interpretation FIN No. 46-R. FIN No. 46-R requires
  that an equity investor in a VIE have significant equity at risk (generally
  a minimum of 10%, which is an increase from 3% required under the previous guidance)
  and hold a controlling interest, evidenced by voting rights, and absorb a majority
  of the entity's expected losses, receive a majority of the entity's expected
  returns, or both. If the equity investor is unable to evidence these characteristics,
  the entity that retains these ownership characteristics will be required to
  consolidate the VIE as the primary beneficiary. FIN No. 46 was applicable
  immediately to VIEs created or obtained after January 31, 2003. FIN No. 46-R
  was effective on December 31, 2003, for interests in entities that were
  previously considered special purpose entities under then existing authoritative
  guidance.

MGE Power West Campus is a VIE pursuant to FIN No. 46-R,
  as the equity investment at December 31, 2003, was not sufficient to permit
  the entity to finance its activities without additional support. MGE concluded
  a VIE relationship exists due to the long-term lease arrangement between MGE
  and MGE Power West Campus. MGE Power West Campus will lease all of
  its assets, a power plant, to MGE, pursuant to this leasing arrangement and
  MGE will absorb a majority of the expected losses, residual returns, or both.
  The VIE was consolidated into MGE as of December 31, 2003.

***EITF 03-11***

In July 2003, FASB issued EITF 03-11, *Reporting
  Realized Gains and Losses on Derivative Instruments that are subject to SFAS No. 133
  (Accounting for Derivative Instruments and Hedging Activities), and Not Held
  for Trading Purposes*. This issue addresses whether realized gains and losses
  should be shown gross or net in the income statement, for contracts that are
  not held for trading purposes. This issue will not have a material impact on
  the consolidated financials statements.

***FSP 106-1***

In January 2004, the FASB issued FASB Staff Position No. FAS 106-1
  (FSP 106-1), *Accounting and Disclosure Requirements Related to the
  Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)*.
  FSP 106-1 permits employers that sponsor postretirement benefit plans (plan
  sponsors) that provide prescription drug benefits to retirees to make a one-time
  election to defer accounting for any effects of the Act. The FSP 106-1
  requires all plan sponsors to provide certain disclosures, regardless of whether
  they choose to account or defer accounting. FSP 106-1 is effective for
  annual fiscal periods ending after December 7, 2003. If deferral is elected,
  the deferral must remain in effect until the earlier of (1) the issuance
  of guidance by the FASB on how to account for the federal subsidy to be provided
  to plan sponsors under the Act or (2) the remeasurement of plan assets
  and obligations subsequent to January 31, 2004. MGE has elected to defer
  recognition of the Act.

***SEC SAB No. 104***

In December 2003, the SEC issued SAB No. 104 regarding
  revenue recognition. SAB No. 104 revises or rescinds portions of the interpretive
  guidance included in Topic 13 of the codification of Staff Accounting Bulletins
  to make the guidance consistent with current authoritative accounting and auditing
  guidance and SEC rules and regulations. MGE Energy and MGE will comply
  with the revised guidance.

**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 historical 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.**

**Market Risks**

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 uses derivative instruments. MGE's
  market risk has not changed between 2003 and 2002. MGE does not enter into speculative
  trading transactions.

**Interest Rate Risk**

MGE issues commercial paper at varying interest rates for its
  short-term borrowings (see Footnote 14). MGE also has $15.0 million
  in variable rate long-term debt outstanding as of December 31, 2003. Borrowing
  levels under commercial paper arrangements 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 has a swap agreement with a commercial bank at a notional amount
  of $5.0 million, backed by MGE's commercial paper. MGE pays a fixed rate
  of 6.91% on the swap, which was used to replace a portion of MGE's 7.70%, 2028
  Series, First Mortgage Bonds. MGE manages its interest rate risk by limiting
  its 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. MGE records the changes in the fair market value of its commercial
  paper swap agreement currently in the income statement as required by SFAS No. 133
  each period, which is then offset by a corresponding regulatory asset or liability
  in accordance with authorization received from the PSCW.

**Commodity Price Risk**

MGE has commodity price risk exposure with respect to the price
  of natural gas, electricity, coal, and oil. MGE employs established policies
  and procedures to reduce the market risks associated with changing commodity
  prices, including the use of commodity and financial instruments (see Footnote 12).
  MGE's commodity risks are somewhat mitigated by the current ratemaking process
  in place for recovering electric fuel, purchased energy, and the cost of natural
  gas purchased for resale. MGE's electric fuel costs are subject to fuel rules
  established by the PSCW, which further mitigate commodity risk. Under the fuel
  rules, if electric fuel costs exceed or fall below a 3.0% bandwidth set by the
  PSCW, MGE can apply for a fuel surcharge or may have a fuel credit to its customers.
  Under the PGA authorized by the PSCW, MGE passes through to customers the cost
  of gas, subject to certain limited incentives.

Under the fuel rules, MGE may include the costs and benefits
  of fuel price risk management tools implemented under a risk management plan
  approved by the PSCW. In 2003, the PSCW approved MGE's Electric Procurement
  Risk Management Program, with conditions, through December 31, 2004. No
  transactions have occurred under this program through December 31, 2003.

MGE has a limited number of financial gas commodity contracts.
  These contracts are primarily comprised of exchange-traded option contracts
  to manage the cost of gas and over-the-counter financial floating-to-fixed price
  swaps and calls for the "Winter Set-Price Firm Gas Sales Service" pilot program.
  The derivative amounts recorded as a result of these gas contracts are offset
  with a corresponding regulatory asset or liability because these transactions
  are part of the PGA and not subject to incentive participation.

**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.

In August 2003, MGE purchased a nonexchange-traded Heating
  Degree Day (HDD) Put Option with a strike of 5,500 HDD and sold a nonexchange-traded
  HDD Call Option with a strike of 5,800 HDD. The options have a net premium cost
  of $0.1 million; notional amounts of $2,500 per HDD; a maximum HDD-related
  receipt or payment of $1.0 million; terms covering November 1, 2003,
  through March 31, 2004; and financial settlements against Madison weather.
  If the total actual HDD, as calculated under the contract, is greater than 5,800,
  MGE will pay. If the total actual HDD is less than 5,500, MGE receives payment.
  For the contract period, MGE's average gas margin per HDD at risk is estimated
  to exceed $2,500. MGE is accounting for the HDD options using the intrinsic
  value method pursuant to EITF 99-2, *Accounting for Weather Derivatives*.
  Through December 31, 2003, actual HDD were 1,984 and contract allocated
  HDD strikes were 2,087 and 2,201, resulting in a $0.3 million gain for
  MGE.

A summary of actual weather information in the utility segment's
  service territory during 2003, 2002, and 2001, as measured by degree days, may
  be found in Results of Operations.

**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. MGE assumes the
  risks and benefits of variances that are within a 3.0% bandwidth. For 2003 and
  2002, fuel and purchased power costs included in MGE's base fuel rates were
  $81.0 million and $85.1 million, respectively. In 2003 and 2002, the
  base fuel rates included a fuel credit in the amount of $4.0 million and
  $1.2 million, respectively.

**Equity Price Risk**

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. 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.

**Credit Risk**

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. As a result, MGE has
  a broad customer base. For the year ended December 31, 2003, MGE's ten
  largest electric customers represented approximately 17.3% of its retail electric
  revenues. MGE's ten largest gas customers represented approximately 5.4% of
  its gas revenues. Credit risk for electric and gas is managed by MGE's credit
  and collection policies, which are consistent with state regulatory requirements.

**Item 8. Financial Statements
  and Supplementary Data.**

**Report of Independent Auditors**

To the Board of Directors andShareholders of MGE Energy, Inc.:

In our opinion, the consolidated financial statements listed
  in the accompanying index Item 15 (a)(1) present fairly, in all material respects,
  the financial position of MGE Energy, Inc. and its subsidiaries at December 31,
  2003 and 2002, and the results of their operations and their cash flows for
  each of the three years in the period ended December 31, 2003 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) present 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 auditing standards generally accepted in the United States of
  America, which 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.

As discussed in Note 1 to the consolidated financial statements,
  effective August 12, 2002, MGE Energy, Inc. became the holding company
  for Madison Gas and Electric Company (MGE). As a result of the formation of
  the holding company, an exchange of shares of MGE Energy, Inc. common stock
  for shares of MGE common stock occurred. The MGE Energy, Inc financial statements
  reflect this transaction for all periods presented.

/s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 27, 2004

**Report of Independent Auditors**

To the Board of Directors andShareholder of Madison Gas and Electric Company:

In our opinion, the consolidated financial statements listed
  in the accompanying index 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, 2003 and 2002, and the results of their operations and
  their cash flows for each of the three years in the period ended December 31,
  2003 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) present 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 auditing standards generally accepted in
  the United States of America, which 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.

As discussed in Note 2 to the consolidated financial statements,
  the Company adopted certain provisions of Financial Accounting Standards Board
  Interpretation No. 46, "Consolidation of Variable Interest Entities - an
  interpretation of ARB 51 (revised December 2003)," as of December 31,
  2003.

/s/ PricewaterhouseCoopers LLPChicago, IllinoisFebruary 27, 2004





|                                                                                | **For the years ended
      December 31,**
|------------------------------------------------------------------------------- | ------------------------------------------
|                                                                                | **2003**                                  
|                                                                                |                                           
|**Operating Revenues**                                                          | $401,547                                  
|                                                                                |                                           
|**Operating Expenses:**                                                         |                                           
|Fuel for electric generation                                                    | 41,557                                    
|Purchased power                                                                 | 49,521                                    
|Natural gas purchased                                                           | 104,066                                   
|Other operations and maintenance                                                | 111,636                                   
|Depreciation and amortization                                                   | 23,344                                    
|Other general taxes                                                             | 11,592                                    
|*Total Operating Expenses*                                                      | 341,716                                   
|**Operating Income**                                                            | 59,831                                    
|                                                                                |                                           
|Other income                                                                    | 2,486                                     
|Interest expense                                                                | (11,776)                                  
|Income before income taxes                                                      | 50,541                                    
|Income tax provision                                                            | (19,901)                                  
|Income before cumulative effect of a change in accounting
      principle       | 30,640                                    
|Cumulative effect of a change in accounting principle,net of tax benefit of $78 | -                                         
|**Net Income**                                                                  | $ 30,640                                  
|                                                                                |                                           
|**Earnings Per Share of Common Stock** (basic
      and diluted):               |                                           
|Income before cumulative effect of a change in accounting
      principle       | $1.71                                     
|Cumulative effect of a change in accounting principle                           | -                                         
|**Net Income**                                                                  | $1.71                                     
|                                                                                |                                           
|Dividends paid per share of common stock                                        | $1.35                                     
|                                                                                |                                           
|**Average Shares Outstanding** (basic and
      diluted)                        | 17,894                                    

*The accompanying notes are an integral part of the above
  consolidated financial statements.*





|                                                                              | **For the years ended
      December 31,**
|----------------------------------------------------------------------------- | ------------------------------------------
|                                                                              | **2003**                                  
|**Operating Activities:**                                                     |                                           
|Net income                                                                    | $30,640                                   
|Items not affecting cash:                                                     |                                           
|Depreciation and amortization                                                 | 23,344                                    
|Deferred income taxes                                                         | 13,075                                    
|Amortization of nuclear fuel                                                  | -                                         
|Amortization of investment tax credits                                        | (516)                                     
|Equity in earnings in ATC                                                     | (3,687)                                   
|Cumulative effect of change in accounting principle,net of tax benefit of $78 | -                                         
|Other items                                                                   | (514)                                     
|Dividend income from ATC                                                      | 2,640                                     
|Prepayments to ATC                                                            | 5,000                                     
|Changes in working capital items:                                             |                                           
|Receivables, net                                                              | (1,438)                                   
|Inventories                                                                   | (5,195)                                   
|Unbilled revenues                                                             | (3,105)                                   
|Prepayments                                                                   | (3,368)                                   
|Accounts payable                                                              | 3,044                                     
|Accrued interest                                                              | (193)                                     
|Other current liabilities                                                     | 3,655                                     
|Other noncurrent items, net                                                   | 5,220                                     
|*Cash Provided by Operating Activities*                                       | 68,602                                    
|**Investing Activities:**                                                     |                                           
|Capital expenditures                                                          | (82,970)                                  
|Advance to ATC related to WCCF                                                | (9,223)                                   
|Increase in nuclear decommissioning fund                                      | -                                         
|Capital distribution from ATC                                                 | -                                         
|Sale of interest in nuclear plant                                             | -                                         
|Purchase of gas service territory                                             | -                                         
|Other                                                                         | (1,281)                                   
|*Cash Used for Investing Activities*                                          | (93,474)                                  
|**Financing Activities:**                                                     |                                           
|Issuance of common stock                                                      | 23,162                                    
|Cash dividends paid on common stock                                           | (24,137)                                  
|Long-term debt maturities/redemptions                                         | (20,000)                                  
|Issuance of long-term debt                                                    | 50,000                                    
|Increase/(decrease) in short-term debt                                        | (2,618)                                   
|Other                                                                         | (200)                                     
|*Cash Provided by/(Used for) Financing Activities*                            | 26,207                                    
|Change in Cash and Cash Equivalents:                                          | 1,335                                     
|Cash and cash equivalents at beginning of period                              | 685                                       
|**Cash and cash equivalents at end of period**                                | $ 2,020                                   

*The accompanying notes are an integral part of the above
  consolidated financial statements.*



**MGE Energy, Inc.****Consolidated Balance Sheets**



|                                                                            | **At December 31,**
|--------------------------------------------------------------------------- | -------------------
|**ASSETS**                                                                  | **2003**           
|**Current Assets:**                                                         |                    
|Cash and cash equivalents                                                   | $ 2,020            
|Restricted cash                                                             | 3,364              
|Accounts receivable, less reserves of $2,735 and $2,659,
      respectively | 37,713             
|Unbilled revenues                                                           | 21,644             
|Materials and supplies, at lower of average cost or market                  | 7,851              
|Fossil fuel, at lower of average cost or market                             | 5,054              
|Stored natural gas, at lower of average cost or market                      | 18,598             
|Prepaid taxes                                                               | 14,063             
|Other prepayments                                                           | 2,156              
|*Total Current Assets*                                                      | 112,463            
|                                                                            |                    
|**Deferred Charges**                                                        | 40,420             
|                                                                            |                    
|**Property, Plant, and Equipment, Net**                                     | 449,022            
|Construction work in progress                                               | 88,489             
|Nuclear decommissioning fund                                                | -                  
|*Total Property, Plant, and Equipment*                                      | 537,511            
|                                                                            |                    
|**Other property and investments**                                          | 31,293             
|                                                                            |                    
|**Total Assets**                                                            | $721,687           
|                                                                            |                    
|**LIABILITIES AND CAPITALIZATION**                                          |                    
|**Current Liabilities:**                                                    |                    
|Long-term debt due within one year                                          | $ 20,000           
|Short-term debt - commercial paper                                          | 31,680             
|Accounts payable                                                            | 35,043             
|Accrued interest                                                            | 2,968              
|Other current liabilities                                                   | 15,874             
|*Total Current Liabilities*                                                 | 105,565            
|                                                                            |                    
|**Other Credits:**                                                          |                    
|Deferred income taxes                                                       | 75,525             
|Investment tax credit - deferred                                            | 4,891              
|Regulatory liabilities                                                      | 34,469             
|Other deferred liabilities                                                  | 35,963             
|*Total Other Credits*                                                       | 150,848            
|                                                                            |                    
|**Capitalization:**                                                         |                    
|Common shareholders' equity                                                 | 263,070            
|Long-term debt                                                              | 202,204            
|*Total Capitalization*                                                      | 465,274            
|                                                                            |                    
|Commitments and contingencies                                               | -                  
|                                                                            |                    
|**Total Liabilities and Capitalization**                                    | $721,687           

*The accompanying notes are an integral part of the above
  consolidated financial statements.*





|                                                           | **At December 31,**
|---------------------------------------------------------- | -------------------
|                                                           | **2003**           
|**Common Shareholders' Equity:**                           |                    
|Common stock - par value $1 per share:                     |                    
|Authorized 50,000,000 shares                               |                    
|Outstanding 18,343,913 and 17,574,796 shares, respectively | $ 18,344           
|Additional paid-in capital                                 | 168,574            
|Retained earnings                                          | 79,542             
|Accumulated other comprehensive loss                       | (3,390)            
|*Total Common Shareholders' Equity*                        | 263,070            
|                                                           |                    
|**First Mortgage Bonds:**                                  |                    
|7.70%, 2028 Series                                         | 1,200              
|                                                           |                    
|**Other Long-Term Debt:**                                  |                    
|Variable rate, due 2004                                    | -                  
|6.91%, due 2004                                            | -                  
|7.49%, due 2007                                            | 15,000             
|6.02%, due 2008                                            | 30,000             
|4.875% 2012 Series, Industrial Development Revenue Bonds   | 19,300             
|5.875% 2034 Series, Industrial Development Revenue Bonds   | 28,000             
|6.58%, due 2012                                            | 15,000             
|5.26%, due 2017                                            | 20,000             
|7.12%, due 2032                                            | 25,000             
|6.12%, due 2028                                            | 20,000             
|5.68%, due 2033                                            | 30,000             
|*Total Other Long-Term Debt*                               | 202,300            
|                                                           |                    
|Unamortized discount and premium on bonds, net             | (1,296)            
|*Total Long-Term Debt*                                     | 202,204            
|                                                           |                    
|**Total Capitalization**                                   | $465,274           

*The accompanying notes are an integral part of the above
  consolidated financial statements.*





|                                                                      | **Common Stock**
      **Shares Value** |  | **Additional**
      **Paid-in**
      **Capital** |  | **Retained**
      **Earnings** |  | **Accumulated Other Comprehensive
      (Loss)/Income** |  | **Comprehensive**
      **Income**
|--------------------------------------------------------------------- | --------------------------------------- |  | -------------------------------------------------- |  | ------------------------------- |  | ------------------------------------------------------- |  | ----------------------------------
|2001                                                                  |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Beginning balance - December 31, 2000                                 | 16,619                                  |  | $16,619                                            |  | $122,661                        |  | $62,112                                                 |  | $(1,080)                          
|Net income                                                            |                                         |  |                                                    |  |                                 |  | 27,245                                                  |  |                                   
|Other comprehensive income/(loss):                                    |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Minimum pension liability adjustment, net of $132 tax
      expense   |                                         |  |                                                    |  |                                 |  |                                                         |  | 197                               
|Total comprehensive income                                            |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Common stock dividends declared ($1.33 per share)                     |                                         |  |                                                    |  |                                 |  | (22,341)                                                |  |                                   
|Common stock issued                                                   | 453                                     |  | 453                                                |  | 10,426                          |  |                                                         |  |                                   
|Ending balance - December 31, 2001                                    | 17,072                                  |  | $17,072                                            |  | $133,087                        |  | $ 67,016                                                |  | $ (883)                           
|                                                                      |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|2002                                                                  |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Net income                                                            |                                         |  |                                                    |  |                                 |  | 29,193                                                  |  |                                   
|Other comprehensive income/(loss):                                    |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Minimum pension liability adjustment, net of $5,727 tax
      benefit |                                         |  |                                                    |  |                                 |  |                                                         |  | (8,542)                           
|Total comprehensive income                                            |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Common stock dividends declared ($1.34 per share)                     |                                         |  |                                                    |  |                                 |  | (23,170)                                                |  |                                   
|Common stock issued                                                   | 503                                     |  | 503                                                |  | 13,094                          |  |                                                         |  |                                   
|Ending balance - December 31, 2002                                    | 17,575                                  |  | $17,575                                            |  | $146,181                        |  | $73,039                                                 |  | $(9,425)                          
|                                                                      |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|2003                                                                  |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Net income                                                            |                                         |  |                                                    |  |                                 |  | 30,640                                                  |  |                                   
|Other comprehensive income/(loss):                                    |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Minimum pension liability adjustment, net of $4,046 tax
      expense |                                         |  |                                                    |  |                                 |  |                                                         |  | 6,035                             
|Total comprehensive income                                            |                                         |  |                                                    |  |                                 |  |                                                         |  |                                   
|Common stock dividends declared ($1.35 per share)                     |                                         |  |                                                    |  |                                 |  | (24,137)                                                |  |                                   
|Common stock issued                                                   | 769                                     |  | 769                                                |  | 22,393                          |  |                                                         |  |                                   
|Ending balance - December 31, 2003                                    | 18,344                                  |  | $18,344                                            |  | $168,574                        |  | $79,542                                                 |  | $(3,390)                          



*The accompanying notes are an integral part of the above
  consolidated financial statements.*





|                                                                                        | **For years ended December 31,**
|--------------------------------------------------------------------------------------- | --------------------------------
|                                                                                        | **2003**                        
|**Operating Revenues:**                                                                 |                                 
|Regulated electric revenues                                                             | $241,745                        
|Regulated gas revenues                                                                  | 159,802                         
|*Total Operating Revenues*                                                              | 401,547                         
|                                                                                        |                                 
|**Operating Expenses:**                                                                 |                                 
|Fuel for electric generation                                                            | 41,557                          
|Purchased power                                                                         | 49,521                          
|Natural gas purchased                                                                   | 104,066                         
|Other operations and maintenance                                                        | 111,254                         
|Depreciation and amortization                                                           | 23,344                          
|Other general taxes                                                                     | 11,589                          
|Income tax provision                                                                    | 19,094                          
|*Total Operating Expenses*                                                              | 360,425                         
|**Net Operating Income**                                                                | 41,122                          
|                                                                                        |                                 
|**Other Income and Deductions:**                                                        |                                 
|AFUDC - equity funds                                                                    | 514                             
|Equity in earnings in ATC                                                               | 3,687                           
|Income tax provision                                                                    | (463)                           
|Other deductions                                                                        | (3,002)                         
|*Total Other Income and Deductions*                                                     | 736                             
|Income before interest expense and cumulative effectof a change in accounting principle | 41,858                          
|                                                                                        |                                 
|**Interest Expense:**                                                                   |                                 
|Interest on long-term debt                                                              | 11,558                          
|Other interest                                                                          | 201                             
|AFUDC - borrowed funds                                                                  | (230)                           
|*Net Interest Expense*                                                                  | 11,529                          
|Net income before cumulative effect of a change inaccounting principle                  | 30,329                          
|Cumulative effect of a change in accounting principle,net of tax benefit of $78         | -                               
|Net Income                                                                              | $ 30,329                        

*The accompanying notes are an integral part of the above
  financial statements.*





|                                                                              | **For the years ended
      December 31,**
|----------------------------------------------------------------------------- | ------------------------------------------
|**Operating Activities:**                                                     | **2003**                                  
|Net income                                                                    | $30,329                                   
|Items not affecting cash:                                                     |                                           
|Depreciation and amortization                                                 | 23,344                                    
|Deferred income taxes                                                         | 13,156                                    
|Amortization of nuclear fuel                                                  | -                                         
|Amortization of investment tax credits                                        | (516)                                     
|AFUDC - equity funds                                                          | (514)                                     
|Equity in earnings in ATC                                                     | (3,687)                                   
|Cumulative effect of change in accounting principle,net of tax benefit of $78 | -                                         
|Dividend income from ATC                                                      | 2,640                                     
|Prepayments to ATC                                                            | 5,000                                     
|Changes in working capital items:                                             |                                           
|Receivables, net                                                              | 1,838                                     
|Inventories                                                                   | (5,195)                                   
|Unbilled revenues                                                             | (3,105)                                   
|Prepayments                                                                   | (3,813)                                   
|Accounts payable                                                              | 3,675                                     
|Accrued interest                                                              | (166)                                     
|Other current liabilities                                                     | 3,592                                     
|Other noncurrent items, net                                                   | 6,584                                     
|*Cash Provided by Operating Activities*                                       | 73,162                                    
|**Investing Activities:**                                                     |                                           
|Capital expenditures                                                          | (43,755)                                  
|Advance to ATC related to WCCF                                                | (9,223)                                   
|AFUDC - borrowed funds                                                        | (230)                                     
|Increase in nuclear decommissioning fund                                      | -                                         
|Purchase of gas service territory                                             | -                                         
|Capital distribution from ATC                                                 | -                                         
|Sale of interest in nuclear plant                                             | -                                         
|Other                                                                         | (1,051)                                   
|*Cash Used for Investing Activities*                                          | (54,259)                                  
|**Financing Activities:**                                                     |                                           
|Equity contributions from parent                                              | 19,606                                    
|Issuance of common stock                                                      | -                                         
|Cash dividends paid on common stock                                           | -                                         
|Cash dividends paid to parent                                                 | (29,685)                                  
|Affiliate financing of WCCF                                                   | (10,542)                                  
|Long-term debt maturities/redemptions                                         | (20,000)                                  
|Issuance of long-term debt                                                    | 20,000                                    
|Increase/(decrease) in short-term debt                                        | 2,000                                     
|Other                                                                         | (300)                                     
|*Cash Provided by/(Used for) Financing Activities*                            | (18,921)                                  
|Change in Cash and Cash Equivalents                                           | (18)                                      
|Cash and cash equivalents at beginning of period                              | 468                                       
|**Cash and cash equivalents at end of period**                                | $ 450                                     

*The accompanying notes are an integral part of the above
  financial statements.*





|                                                                            | **At December 31,**
|--------------------------------------------------------------------------- | -------------------
|**ASSETS**                                                                  | **2003**           
|**Utility Plant** (At Original Cost, In Service):                           |                    
|Electric                                                                    | $573,326           
|Gas                                                                         | 232,401            
|Gross plant in service                                                      | 805,727            
|Less accumulated provision for depreciation                                 | (356,705)          
|Net plant in service                                                        | 449,022            
|Construction work in progress                                               | 88,489             
|Nuclear decommissioning fund                                                | -                  
|*Total Utility Plant*                                                       | 537,511            
|Other property and investments                                              | 2,679              
|Investment in ATC                                                           | 27,886             
|*Total Other Property and Investments*                                      | 30,565             
|**Current Assets:**                                                         |                    
|Cash and cash equivalents                                                   | 450                
|Restricted cash                                                             | 3,364              
|Accounts receivable, less reserves of $2,735 and $2,659,
      respectively | 34,453             
|Unbilled revenues                                                           | 21,644             
|Materials and supplies, at lower of average cost or market                  | 7,851              
|Fossil fuel, at lower of average cost or market                             | 5,054              
|Stored natural gas, at lower of average cost or market                      | 18,598             
|Prepaid taxes                                                               | 14,305             
|Other prepayments                                                           | 2,128              
|*Total Current Assets*                                                      | 107,847            
|Special billing projects                                                    | 14,574             
|Regulatory assets                                                           | 8,241              
|Other deferred charges                                                      | 17,334             
|**Total Assets**                                                            | $716,072           
|**CAPITALIZATION AND LIABILITIES**                                          |                    
|Common stockholder equity                                                   | $256,819           
|Long-term debt                                                              | 202,204            
|*Total Capitalization*                                                      | 459,023            
|**Current Liabilities:**                                                    |                    
|Long-term debt - due within one year                                        | 20,000             
|Short-term debt - commercial paper                                          | 15,500             
|Accounts payable                                                            | 32,826             
|Affiliate payables                                                          | 18,918             
|Accrued interest                                                            | 2,967              
|Accrued payroll - related items                                             | 6,786              
|Other current liabilities                                                   | 8,872              
|*Total Current Liabilities*                                                 | 105,869            
|**Other Credits:**                                                          |                    
|Deferred income taxes                                                       | 75,606             
|Investment tax credit - deferred                                            | 4,891              
|Regulatory liabilities                                                      | 34,469             
|Pension liability                                                           | 29,947             
|Other deferred liabilities                                                  | 6,267              
|*Total Other Credits*                                                       | 151,180            
|Commitments and Contingencies                                               | -                  
|**Total Capitalization and Liabilities**                                    | $716,072           

The accompanying notes are an integral part of the above financial
  statements.





|                                                                                                   | **At December 31,**
|-------------------------------------------------------------------------------------------------- | -------------------
|                                                                                                   | **2003**           
|**Common Shareholders' Equity**                                                                    |                    
|Common stock - par value $1 per share:                                                             |                    
|Authorized 50,000,000 shares                                                                       |                    
|Outstanding 17,347,889 shares, respectively                                                        | $ 17,348           
|Additional paid-in capital                                                                         | 164,385            
|Retained earnings                                                                                  | 78,476             
|Accumulated other comprehensive loss                                                               | (3,390)            
|*Total Common Shareholders' Equity*                                                                | 256,819            
|                                                                                                   |                    
|**Redeemable Preferred Stock**,Cumulative, $25 par value, 1,175,000 authorized,
      but unissued | -                  
|                                                                                                   |                    
|**First Mortgage Bonds**                                                                           |                    
|7.70%, 2028 Series                                                                                 | 1,200              
|                                                                                                   |                    
|**Other Long-Term Debt**                                                                           |                    
|Variable rate, due 2004                                                                            | -                  
|6.91%, due 2004                                                                                    | -                  
|7.49%, due 2007                                                                                    | 15,000             
|6.02%, due 2008                                                                                    | 30,000             
|4.875% 2012 Series, Industrial Development Revenue Bonds                                           | 19,300             
|5.875% 2034 Series, Industrial Development Revenue Bonds                                           | 28,000             
|6.58%, due 2012                                                                                    | 15,000             
|5.26%, due 2017                                                                                    | 20,000             
|7.12%, due 2032                                                                                    | 25,000             
|6.12%, due 2028                                                                                    | 20,000             
|5.68%, due 2033                                                                                    | 30,000             
|*Other Long-Term Debt*                                                                             | 202,300            
|                                                                                                   |                    
|Unamortized discount and premium on bonds, net                                                     | (1,296)            
|*Total Long-Term Debt*                                                                             | 202,204            
|                                                                                                   |                    
|**Total Capitalization**                                                                           | $459,023           

The accompanying notes are an integral part of the above financial
  statements.





|                                                                      | **Common Stock**
      **Shares Value** |  | **Additional
      Paid-in
      Capital** |  | **Retained
      Earnings** |  | **Accumulated Other Comprehensive
      (Loss)/Income** |  | **Comprehensive
      Income**
|--------------------------------------------------------------------- | --------------------------------------- |  | ------------------------------------------ |  | --------------------------- |  | ------------------------------------------------------- |  | ------------------------------
|**2001**                                                              |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Beginning balance - December 31, 2000                                 | 16,619                                  |  | $16,619                                    |  | $122,661                    |  | $ 62,112                                                |  | $(1,080)                      
|Net income                                                            |                                         |  |                                            |  |                             |  | 27,245                                                  |  |                               
|Other comprehensive income/(loss):                                    |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Minimum pension liability adjustment, net of $70 tax expense          |                                         |  |                                            |  |                             |  |                                                         |  | 197                           
|Total comprehensive income                                            |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Common stock dividends declared                                       |                                         |  |                                            |  |                             |  | (22,341)                                                |  |                               
|Common stock issued                                                   | 453                                     |  | 453                                        |  | 10,426                      |  |                                                         |  |                               
|Ending balance - December 31, 2001                                    | 17,072                                  |  | $17,072                                    |  | $133,087                    |  | $ 67,016                                                |  | $ (883)                       
|                                                                      |                                         |  |                                            |  |                             |  |                                                         |  |                               
|2002                                                                  |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Net income                                                            |                                         |  |                                            |  |                             |  | 29,631                                                  |  |                               
|Other comprehensive income/(loss):                                    |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Minimum pension liability adjustment, net of $5,727 tax
      benefit |                                         |  |                                            |  |                             |  |                                                         |  | (8,542)                       
|Total comprehensive income                                            |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Common stock dividends declared                                       |                                         |  |                                            |  |                             |  | (17,316)                                                |  |                               
|Transfer of subsidiary equity to parent                               |                                         |  |                                            |  |                             |  | (1,499)                                                 |  |                               
|Common stock issued                                                   | 276                                     |  | 276                                        |  | 11,692                      |  |                                                         |  |                               
|Ending balance - December 31, 2002                                    | 17,348                                  |  | $17,348                                    |  | $144,779                    |  | $77,832                                                 |  | $(9,425)                      
|                                                                      |                                         |  |                                            |  |                             |  |                                                         |  |                               
|2003                                                                  |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Net income                                                            |                                         |  |                                            |  |                             |  | 30,329                                                  |  |                               
|Other comprehensive income/(loss):                                    |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Minimum pension liability adjustment, net of $4,046 tax
      expense |                                         |  |                                            |  |                             |  |                                                         |  | 6,035                         
|Total comprehensive income                                            |                                         |  |                                            |  |                             |  |                                                         |  |                               
|Common stock dividends declared                                       |                                         |  |                                            |  |                             |  | (29,685)                                                |  |                               
|Capital distribution from parent                                      |                                         |  |                                            |  | 19,606                      |  |                                                         |  |                               
|Ending balance - December 31, 2003                                    | 17,348                                  |  | $17,348                                    |  | $164,385                    |  | $78,476                                                 |  | $(3,390)                      

*The accompanying notes are an integral part of the above
  financial statements.*





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.

**1. Summary of Significant Accounting Policies.**

**a. General** - **MGE Energy.**

On August 12, 2002, MGE Energy became the holding company
  for MGE as the result of the completion of an exchange of shares of MGE Energy
  common stock for shares of MGE common stock. The MGE Energy financial statements
  reflect this transaction for all periods presented. Consequently, MGE constitutes
  a substantial portion of all of the assets, liabilities, and results of operations
  of MGE Energy and is expected to continue to do so for the foreseeable future.

MGE Energy is a holding company. MGE, a wholly owned
  subsidiary of MGE Energy, is a regulated electric and gas utility headquartered
  in Madison, Wisconsin. MGE generates and distributes electricity to nearly 132,000
  customers in a 250-square-mile area of Dane County. MGE also purchases and distributes
  natural gas to more than 129,000 customers in 1,375 square miles of service
  territory in seven south-central Wisconsin counties. Other wholly owned subsidiaries
  of MGE Energy include MGE Power, which owns 100% of MGE Power West Campus,
  and MGE Construct. These subsidiaries are part of our nonutility energy operations,
  which have been formed to construct and own new electric generation projects.

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.

Accounting policies for regulated operations are in accordance
  with those prescribed by the regulatory authorities having jurisdiction, principally
  the PSCW, FERC, and SEC under the Public Utility Holding Company Act of 1935.

**b. 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.

**c. Revenues - MGE.**

Revenues from the sale of electricity and gas to customers
  are generally 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 service that has been rendered but not billed.
  As a result, management must estimate revenue related to 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 accounts receivable
  and billed sales for the particular period, in order to confirm its reasonableness.

During 2003, many of MGE's largest customers were shifted
  to a calendar month bill. As a result of this shift, the majority of these customers'
  electricity usage is now accounted for in the unbilled calculation. The unbilled
  amounts are based on actual usage billed the following month and are therefore
  very reliable. Due to this billing shift, MGE has seen the ratio of unbilled-to-billed
  electric sales climb. The ratio has settled into a range of 45% to 65%, and
  MGE will continue to monitor and track this range.

Gas revenues are subject to an adjustment clause related to
  periodic changes in the cost of gas.

**d. Income Taxes and Excise Taxes - MGE.**

Under the liability method prescribed by SFAS 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 reflects the revenue
  requirement associated with the return of these tax benefits to customers.

Investment tax credits from regulated operations are amortized
  over related property service lives.

Tax credits for the generation of electricity from wind are
  based on kWh produced and sold during the year at the current statutory
  tax credit rate of 1.8 cents per kWh.

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 percent of adjusted operating revenues of
  the prior year. The electric tax rate is 3.19%, and the gas tax rate is 0.97%.
  Estimated tax is prepaid (prepaid taxes) one year in advance of expense recognition.
  License fee tax expense, included in other general taxes, was $8.4 million,
  $7.8 million, and $7.7 million for the years ended December 31,
  2003, 2002, and 2001, respectively.

Operating income taxes, including tax credits, and license
  fee tax are included in rates.

**e. Inventories - MGE.**

Inventories consist of natural gas in storage, fossil fuels,
  and materials and supplies. MGE values all natural gas in storage, fossil fuels,
  and materials and supplies using average cost.

**f. Regulatory Matters - 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.

Electric industry restructuring could affect MGE's ability
  to continue establishing certain regulatory asset and liability amounts now
  allowed under SFAS No. 71. MGE is unable to predict whether any adjustments
  to regulatory assets and liabilities will occur in the future. However, the
  PSCW has recognized the need to allow recovery for commitments made under prior
  regulation.

**g. 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.

**h. Comprehensive Income - MGE.**

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.

**i. Hedge Accounting - MGE.**

Hedge accounting is applied only if the derivative reduces
  the risk of the underlying hedged item and is designated at inception as a hedge,
  with respect to the hedged item. If a derivative instrument ceased to meet the
  criteria for deferral, any gains or losses were recognized in income.

**j. Accounting for Financial Derivatives - MGE.**

MGE manages its risk exposure related to interest rates, commodity
  prices, and gas margin through its risk management policies and the use of various
  derivative instruments. MGE manages its interest rate risk by limiting its variable
  rate exposure through interest rate swap agreements. MGE uses various derivative
  contracts to manage the cost of gas for its "Winter Set-Price Firm Gas Sales
  Service" pilot program. MGE may use weather derivatives to reduce the impact
  of weather volatility on its gas margin.

**k. Impairment of Long-Lived Assets - 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
  is 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, 2003.

**l. Restricted Cash - MGE**

MGE has some cash accounts that are restricted to uses other
  than current operations, and designated for a specific purpose. MGE's restricted
  cash accounts relate to cash deposited for operations and capital expenditures
  at its joint operating plant and cash held by trustee for certain employee benefits.

**m. Unbilled Receivables and Retainage Receivable Associated
  with the WCCF.**

Unbilled receivables for MGE Construct represent actual
  costs incurred on behalf of the State for the construction of WCCF. The costs
  are billed to the State on a monthly basis pursuant to the EPC Agreement.
  The unbilled receivable at December 31, 2003, totaled $2.0 million
  and was billed to the State in January 2004.

At December 31, 2003, MGE Construct has a $1.2 million
  retainage receivable from the State associated with WCCF. Ten percent of all
  nonmajor equipment and service costs (up to $5 million) billed to the State
  will be retained until commercial operation of the facility pursuant to the
  EPC Agreement.

**n. Reclassification.**

Certain prior-year amounts have been reclassified for comparative
  purposes. The financial statements include the accounts of MGE Energy and
  its subsidiaries. These reclassifications did not affect consolidated net income
  for the years presented.

MGE made a significant reclassification related to the reporting
  of accumulated costs of removal, which are nonlegal retirement obligations.
  Previously, these costs were included as components of accumulated depreciation.

**2. Basis of Consolidation - MGE.**

MGE Power West Campus was created for the purpose of owning
  new generating assets including WCCF. These new generating assets are for the
  primary benefit of MGE's customers. The long-term lease arrangement between
  MGE and MGE Power West Campus creates a VIE relationship under FIN No. 46-R
  (see Footnote 20). MGE is considered the primary beneficiary to this VIE
  because it will absorb a majority of the entity's expected losses, residual
  returns, or both. Therefore, MGE Power West Campus has been consolidated into
  MGE in accordance with FIN No. 46-R as of December 31, 2003.

The consolidation of MGE Power West Campus resulted in an
  increase to construction work in progress of $48.6 million, an increase
  in long-term debt of $30.0 million, and affiliate payables of $18.9 million
  at December 31, 2003. As MGE Power West Campus had no significant operations,
  the consolidation of this entity by MGE did not have a material impact on the
  Consolidated Statements of Income for the year ended December 31, 2003.

**3. Nuclear Fuel - MGE.**

The 1992 National Energy Policy Act requires all utilities
  that have used federal enrichment facilities to pay a special assessment for
  decontaminating and decommissioning these facilities. This special assessment
  is based on past enrichment. MGE has accrued in other regulatory liabilities
  and deferred in deferred charges an estimated $0.8 million for its portion
  of the special assessment. MGE believes any additional costs will be recovered
  in future rates.

MGE sold its 17.8% ownership interest in Kewaunee to WPSC
  in September 2001 (see Footnote 18). However, it retained financial
  responsibility for spent nuclear fuel associated with its share of generation
  from Kewaunee for the period from the opening of the plant to the closing date
  of the sale.

**4. Property, Plant, and Equipment - MGE Energy
  and MGE.**

MGE's utility plant is stated at the original cost of construction,
  which includes indirect costs consisting of payroll taxes, pensions, postretirement
  benefits, other fringe benefits, administrative and general costs, and AFUDC.

AFUDC represents the approximate cost of debt and equity capital
  devoted to plant under construction. MGE presently capitalizes AFUDC at a rate
  of 9.97% on 50.0% of average construction work in progress. The AFUDC rate approximates
  MGE's cost of capital. The portion of the allowance that applies to borrowed
  funds is presented in the Consolidated Statements of Income as a reduction of
  interest expense, and equity funds is presented as other income. Although the
  allowance does not represent current cash income, it is recovered under the
  ratemaking process over the service lives of the related properties.

MGE's accounting policy for planned major maintenance projects
  is to expense the costs for these projects in the periods for which they are
  incurred.

MGE Energy's nonregulated businesses capitalize interest
  costs under SFAS No. 34, *Capitalizing Interest Costs*, for
  costs incurred to finance their power plant construction projects.

MGE Power West Campus calculates capitalized interest
  in accordance with SFAS No. 34 on construction projects for periods
  where financing is provided by MGE Energy through interim debt. The interest
  rate capitalized is based upon the monthly short-term borrowing rate MGE Energy
  incurs for such funds and the interest rate related to MGE Power West Campus's
  long-term debt.

Total capitalized interest as of December 31, 2003, related
  to WCCF was $1.2 million.

**5. Depreciation - MGE.**

Provisions at composite straight-line depreciation rates,
  excluding decommissioning costs, approximate the following percentages for the
  cost of depreciable property:

|         | 2003 |  | 2002 |  | 2001
|-------- | ---- |  | ---- |  | ----
|Electric | 3.0% |  | 2.8% |  | 3.4%
|Gas      | 3.3% |  | 3.3% |  | 3.3%

Depreciation rates are approved by the PSCW and are generally
  based on the estimated economic lives of property.

MGE transferred the assets of its external decommissioning
  trusts to external trusts of WPSC in September 2001 as part of the Kewaunee
  sale agreement (see Footnote 18). The agreement required MGE to continue
  funding its external decommissioning trust through the end of 2002 at the PSCW-authorized
  level of approximately $0.7 million per month. These costs were recovered
  from customers in rates. At the beginning of 2003, the remaining assets of the
  MGE external trust were transferred to the external trust of WPSC. The trusts
  are shown on the balance sheet in the Utility Plant section.

As required by SFAS No. 115, *Accounting for
  Certain Investments in Debt and Equity Securities*, MGE's debt and equity
  security investments in the trusts were classified as available for sale. Gains
  and losses on the trusts were determined based on specific identification. Net
  unrealized holding gains and losses on the trusts were recorded as part of accumulated
  provision for depreciation.

As of December 31, 2003, the decommissioning trust had
  been transferred to WPSC. Realized earnings on the trusts were $0.0 million,
  $0.1 million, and $4.1 million for the years ended December 31,
  2003, 2002, and 2001, respectively. Unrealized earnings (loss) of the trusts
  totaled $0 million, ($1.2 million), and $0 million at December 31,
  2003, 2002, and 2001, respectively.

**6. Regulatory Assets and Liabilities - MGE.**

MGE's regulatory and deferred assets and liabilities consisted
  of the following as of December 31:

|                                                       | 2003   |  | 2002       
|------------------------------------------------------ | ------ |  | -----------
|*(In thousands)*                                       | Assets |  | Liabilities
|Decommissioning and decontamination                    | $ 846  |  | $ 846      
|Environmental costs                                    | 1,825  |  | -          
|Regulatory liability - SFAS No. 109                    | -      |  | 9,877      
|Gas supply derivatives                                 | -      |  | 732        
|Non-SFAS No. 143 removal cost                          | -      |  | 18,247     
|Deferred charges related to ATC                        | 340    |  | -          
|Deferred charges related to interest -2027A Series     | 810    |  | -          
|Nitrogen oxide escrow                                  | -      |  | -          
|Deferred charges - SFAS No. 133                        | 277    |  | -          
|Deferred charges - tax recovery relatedto AFUDC equity | 2,740  |  | -          
|Regulatory liability - customer fuel credit            | -      |  | 2,762      
|Asset retirement obligation - SFAS No. 143             | 850    |  | -          
|Other                                                  | 553    |  | 2,005      
|Total - regulatory assets/liabilities                  | $8,241 |  | $34,469    

MGE is recovering carrying costs on all regulatory assets,
  except for amounts expended for environmental costs.

Costs related to decommissioning and decontamination will
  be recovered in rates through September 2007 (see Footnotes 3 and
  18).

MGE has received regulatory treatment on environmental costs
  including clean up of two landfill sites and a substation site. The regulators
  have not allowed MGE to recover carrying costs on these environmental expenditures.
  As of December 31, 2003, MGE has recorded $1.8 million in regulatory
  assets for environmental costs, including $1.1 million for accrual for
  estimated future site remediation and $0.7 million of deferrals for actual
  remediation costs incurred. MGE is currently recovering in rates some of the
  actual costs incurred through the first quarter of 2003 and expects to recover
  any additional costs in our next rate case. The actual costs are amortized over
  four years in our rate case.

MGE has a limited number of physical and financial gas commodity
  contracts that are defined as derivatives under SFAS No. 133, *Accounting
  for Derivative Instruments and Hedging Activities*. The derivative amounts
  recorded as a result of these gas contracts is offset with a corresponding regulatory
  asset or liability because these transactions are part of the PGA clause authorized
  by the PSCW and not subject to the gas cost incentive sharing mechanism. This
  regulatory liability will be returned in the first quarter of 2004.

In connection with the adoption of SFAS No. 143, companies
  are required to reclassify 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.

Deferred charges in connection with the start-up of ATC and
  ongoing incremental transmission costs during 2001 and 2002 associated with
  ATC were deferred under SFAS No. 71. MGE recovered these costs from
  October 2002 through October 23, 2003. The PSCW has also allowed MGE
  to use escrow accounting for the incremental transmission costs for 2003. 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 amortized
  over that rate case period. A carrying cost component is calculated on the escrow
  balance.

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.

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. Management believes that it is the PSCW's
  intent to allow a utility to recover its actual costs embedded in the contract
  if the costs are deemed reasonable and prudent. MGE interpreted the PSCW's letter
  as requiring MGE to record a gain or loss from the application of SFAS No. 133
  as either a regulatory asset or liability. As of December 31, 2003, MGE
  has recorded a regulatory asset of $0.3 million for the cumulative mark-to-market
  value of its derivative contracts, the commercial paper swap agreement, and
  the Columbia coal contract.

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 28 years.
  Deferred charges (tax recovery related to AFUDC equity) represents the revenue
  requirement related to recovery of these future taxes payable, calculated at
  current statutory tax rates.

**7. Joint Plant Ownership - MGE.**

MGE and two other utilities jointly own Columbia, a coal-fired
  generating facility, which accounts for 35.0% (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 22.0% 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 was $27.4 million, $26.2 million,
  and $23.5 million for the years ended December 31, 2003, 2002, and
  2001, respectively.

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)*         | 2003     |  | 2002    
|------------------------ | -------- |  | --------
|Utility plant            | $ 95,594 |  | $ 94,169
|Accumulated depreciation | (60,723) |  | (58,147)
|Net plant                | $ 34,871 |  | $ 36,022

Information regarding MGE's 2001 sale of its 17.8% ownership
  interest in Kewaunee to WPSC, MGE's obligations relative to Kewaunee continuing
  beyond the closing date, and MGE's 2001 exercise of an option to buy electric
  capacity and energy for a two-year period from WPSC is included in Footnote 18.

**8. Statement of Cash Flows - MGE Energy and MGE.**

MGE Energy and MGE considers cash equivalents to be those
  investments that are highly liquid with original maturity dates of less than
  three months.

Supplementary noncash investing items and cash paid/(received)
  for interest and income taxes and other noncash investing and financing items
  for the years ended December 31 were as follows:

|*(In thousands)*                         | 2003     |  | 2002    |  | 2001   
|---------------------------------------- | -------- |  | ------- |  | -------
|Interest paid, net of amount capitalized | $12,439  |  | $12,408 |  | $13,551
|Income taxes paid                        | 18,279   |  | 17,223  |  | 10,347 
|Income taxes received                    | (3,159)  |  | (759)   |  | (570)  
|Noncash financing item                   | -        |  | 1,499   |  | -      
|Noncash financing item (MGE Energy)      | 46,618   |  | -       |  | -      
|Noncash investing item (MGE Energy)      | (46,618) |  | -       |  | -      

On August 16, 2002, the Board of Directors for MGE approved
  a resolution to dividend the ownership of two small nonregulated subsidiaries
  previously owned by MGE to MGE Energy. The net assets transferred approximated
  $1.5 million. This transfer represented a noncash transaction.

In June 2003, MGE Power assigned its assets and liabilities
  to MGE Power West Campus. The assets transferred represented $46.6 million
  of construction work in progress related to WCCF. The liabilities represented
  intercompany loans to finance WCCF in the amount of $46.6 million. This
  transfer of assets and liabilities represented a noncash transaction.

The amortization of debt issuance costs for the years ended
  2003, 2002, and 2001 are included in the line item "Other noncurrent items,
  net" in the cash flow statement from operating activities and is not presented
  in a separate line as it is immaterial.

**9. 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 before cumulative effect of a change in accounting principle (2001
  only) consists of the following provision (benefit) components for the years
  ended December 31:

|*(In thousands)*                 | 2003    |  | 2002    |  | 2001   
|-------------------------------- | ------- |  | ------- |  | -------
|Current payable:                 |         |  |         |  |        
|Federal                          | $ 8,976 |  | $10,677 |  | $ 6,634
|State                            | 3,366   |  | 4,384   |  | 1,100  
|Net-deferred:                    |         |  |         |  |        
|Federal                          | 6,874   |  | 4,073   |  | 6,487  
|State                            | 1,201   |  | 113     |  | 2,569  
|Amortized investment tax credits | (516)   |  | (520)   |  | (849)  
|Total income taxes               | $19,901 |  | $18,727 |  | $15,941

MGE Energy's consolidated provision for income taxes
  differs from the amount computed by applying the statutory federal income tax
  rate to income before tax provision and cumulative effect of a change in accounting
  principle (2001 only), as follows:

|                                           | 2003   |  | 2002   |  | 2001  
|------------------------------------------ | ------ |  | ------ |  | ------
|Statutory federal income tax rate          | 35.0%  |  | 35.0%  |  | 35.0% 
|Amortized investment tax credits           | (1.0)% |  | (1.1)% |  | (2.0)%
|State income taxes, net of federal benefit | 5.4%   |  | 5.5%   |  | 5.0%  
|Credit for electricity from wind energy    | (0.8)% |  | (0.9)% |  | (0.9)%
|Other, individually insignificant          | 0.8%   |  | 0.6%   |  | (0.3)%
|Effective income tax rate                  | 39.4%  |  | 39.1%  |  | 36.8% 

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)*                        | 2003     |  | 2002    
|--------------------------------------- | -------- |  | --------
|Property-related                        | $ 73,395 |  | $ 66,959
|Investment in ATC                       | 10,862   |  | 11,530  
|Bond transactions                       | 2,841    |  | 2,637   
|Pension expense                         | 1,742    |  | 2,798   
|Tax deductible prepayments              | 4,275    |  | -       
|Other                                   | 3,276    |  | 2,390   
|Gross deferred income tax liabilities   | 96,391   |  | 86,314  
|Accrued expenses                        | (7,502)  |  | (7,061) 
|Retirement benefits, other than pension | (3,909)  |  | (2,928) 
|Deferred tax regulatory account         | (5,927)  |  | (6,557) 
|Minimum pension liability adjustment    | (2,273)  |  | (6,319) 
|Other                                   | (1,623)  |  | (1,367) 
|Gross deferred income tax assets        | (21,234) |  | (24,232)
|Less valuation allowance                | 368      |  | 368     
|Net deferred income tax assets          | (20,866) |  | (23,864)
|Deferred income taxes                   | $ 75,525 |  | $ 62,450

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, 2003, MGE Energy
  had approximately $7.6 million of state tax net operating loss deductions
  that expire variously in 2011 through 2019 if unused.

**b. MGE Income Taxes.**

On a separate company basis, the components of MGE's tax provision
  are as follows for the years ended December 31:

|*(In thousands)*                 | 2003    |  | 2002    |  | 2001   
|-------------------------------- | ------- |  | ------- |  | -------
|Current payable:                 |         |  |         |  |        
|Federal                          | $ 8,747 |  | $10,877 |  | $ 6,634
|State                            | 3,191   |  | 3,919   |  | 1,100  
|Net-deferred:                    |         |  |         |  |        
|Federal                          | 6,922   |  | 4,073   |  | 6,487  
|State                            | 1,213   |  | 113     |  | 2,569  
|Amortized investment tax credits | (516)   |  | (520)   |  | (849)  
|Total income taxes               | $19,557 |  | $18,462 |  | $15,941

MGE's provision for income taxes on a separate company basis
  differs from the amount computed by applying the statutory federal income tax
  rate to income before tax provision as follows:

|                                           | 2003   |  | 2002   |  | 2001  
|------------------------------------------ | ------ |  | ------ |  | ------
|Statutory federal income tax rate          | 35.0%  |  | 35.0%  |  | 35.0% 
|Amortized investment tax credits           | (1.0)% |  | (1.1)% |  | (2.0)%
|State income taxes, net of federal benefit | 5.2%   |  | 4.9%   |  | 5.0%  
|Credit for electricity from wind energy    | (0.8)% |  | (0.9)% |  | (0.9)%
|Other, individually insignificant          | 0.8%   |  | 0.5%   |  | (0.3)%
|Effective income tax rate                  | 39.2%  |  | 38.4%  |  | 36.8% 

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)*                        | 2003     |  | 2002    
|--------------------------------------- | -------- |  | --------
|Property-related                        | $73,395  |  | $66,959 
|Investment in ATC                       | 10,862   |  | 11,530  
|Bond transactions                       | 2,841    |  | 2,637   
|Pension expense                         | 1,742    |  | 2,798   
|Tax deductible prepayments              | 4,275    |  | -       
|Other                                   | 3,276    |  | 2,390   
|Gross deferred income tax liabilities   | 96,391   |  | 86,314  
|Accrued expenses                        | (7,502)  |  | (7,061) 
|Retirement benefits, other than pension | (3,909)  |  | (2,928) 
|Deferred tax regulatory account         | (5,927)  |  | (6,557) 
|Minimum pension liability adjustment    | (2,273)  |  | (6,319) 
|Other                                   | (1,542)  |  | (1,367) 
|Gross deferred income tax assets        | (21,153) |  | (24,232)
|Less valuation allowance                | 368      |  | 368     
|Net deferred income tax assets          | (20,785) |  | (23,864)
|Deferred income taxes                   | $75,606  |  | $62,450 

**10. Pension Plans - MGE**.

MGE maintains qualified and nonqualified pension plans. MGE
  also provides health care and life insurance benefits for its retired employees.
  MGE uses a measurement date of December 31 for all of its pension and postretirement
  benefit plans.

MGE maintains two defined contribution 401(k) benefit plans
  for its employees. MGE's costs of the 401(k) plans were $0.7 million in
  2003, $0.6 million in 2002, and $0.6 million in 2001.

**a. Benefit Obligations.**

|*(In thousands)*                            | Pension Benefits |  | Postretirement
      Benefits
|------------------------------------------- | ---------------- |  | -----------------------------
|Change in benefit obligation:               | 2003             |  | 2002                         
|Net benefit obligation at beginning of year | $117,410         |  | $101,593                     
|Service cost                                | 3,418            |  | 2,603                        
|Interest cost                               | 8,023            |  | 7,514                        
|Plan participants' contributions            | -                |  | -                            
|Plan amendments                             | 557              |  | -                            
|Actuarial loss                              | 7,743            |  | 9,277                        
|Special termination benefits                | 280              |  | -                            
|Gross benefits paid                         | (3,970)          |  | (3,577)                      
|Net benefit obligation at end of year       | $133,461         |  | $117,410                     



The accumulated benefit obligation for the defined benefit
  pension plan at the end of 2003 and 2002 was $113.8 million and $100.4 million,
  respectively.

|                                                                                | Pension Benefits |  | PostretirementBenefits
|------------------------------------------------------------------------------- | ---------------- |  | ----------------------
|Weighted-average assumptions used to determine end of year benefit obligations: | 2003             |  | 2002                  
|Discount rate                                                                   | 6.25%            |  | 6.75%                 
|Expected return on plan assets                                                  | 9.00%            |  | 9.00%                 
|Rate of compensation increase                                                   | 4.50%            |  | 4.50%                 

Assumed health care cost trend rates at December 31:

|                                                                                 | 2003 |  | 2002
|-------------------------------------------------------------------------------- | ---- |  | ----
|Health care cost trend rate assumed for next year                                | 13%  |  | 14% 
|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 2003 dollars:

|*(In thousands)*                            | 1% Increase |  | 1% Decrease
|------------------------------------------- | ----------- |  | -----------
|Effect on postretirement benefit obligation | $8,815      |  | $(7,579)   

On December 8, 2003, the "Medicare Prescription Drug,
  Improvement and Modernization Act of 2003" (the Act) was signed into law. The
  Act introduced a prescription drug benefit program under Medicare (Medicare
  Part D) 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 Medicare Part D.

In general, accounting rules require that changes in relevant
  laws and government benefit programs be considered in measuring postretirement
  benefit costs and the Accumulated Projected Benefit Obligation (APBO). However,
  certain accounting issues raised by the Act--in particular, how to account for
  the federal subsidy--are not explicitly addressed by FASB Statement 106.
  In addition, significant uncertainties exist for a plan sponsor both as to the
  direct effects of the Act and its ancillary effects on plan participants' behavior
  and health care costs.

The FASB issued FASB Staff Position No. FAS 106-1,
  *Accounting and Disclosure Requirements Related to the Medicare Prescription
  Drug, Improvement and Modernization Act of 2003 (FSP 106-1)*, that
  allows sponsors to elect to defer recognition of the effects of the Act.

In accordance with FSP 106-1, MGE has elected to defer
  recognition of the effects of the Act. Accordingly, any measurers of the APBO
  or net periodic postretirement benefit cost in the financial statements or the
  accompanying footnotes do not reflect the effects of the Act on the plan.

**b. Plan Assets.**

|*(In thousands)*                               | Pension Benefits |  | Postretirement
      Benefits
|---------------------------------------------- | ---------------- |  | -----------------------------
|Change in plan assets:                         | 2003             |  | 2002                         
|Fair value of plan assets at beginning of year | $ 79,821         |  | $ 91,739                     
|Actual return on plan assets                   | 20,883           |  | (10,225)                     
|Employer contributions                         | 3,494            |  | 1,884                        
|Plan participants' contributions               | -                |  | -                            
|Gross benefits paid                            | (3,970)          |  | (3,577)                      
|Fair value of plan assets at end of year       | $100,228         |  | $ 79,821                     



The asset allocation for the MGE's pension plans at the end
  of 2003 and 2002, and the target allocation for 2004, by asset category, follows.
  The fair value of plan assets for these plans is $100.2 million and $79.8 million
  at the end of 2003 and 2002, respectively. The expected long-term rate of return
  on these plan assets was 9.0% in 2003 and 9.5% in 2002.

**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 reasonability and appropriateness.

|                  | Target
      Allocation |  | Percentage of Plan Assets at
      Year End
|----------------- | ----------------------- |  | -------------------------------------------
|                  |                         |  | 2003                                       
|Equity securities | 75.0%                   |  | 75.8%                                      
|Debt securities   | 20.0%                   |  | 19.4%                                      
|Real estate       | 5.0%                    |  | 4.8%                                       
|Other             | 0.0%                    |  | 0.0%                                       
|Total             | 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 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: 55% United States equity, 20% non-United States
  equity, 20% fixed income, and 5% real estate. Investment risk is measured
  and monitored on an ongoing basis through periodic investment portfolio reviews
  and liability measurements.

**e. Postretirement Benefits.**

The fair value of plan assets for these postretirement benefit
  plans is $9.9 million and $7.3 million at the end of 2003 and 2002,
  respectively. The expected long-term rate of return on these plan assets was
  9.0% in 2003 and 9.5% in 2002.

Of the above amounts, $7.3 million and $6.6 million,
  at the end of 2003 and 2002, respectively, was held in the master pension trust
  and is allocable to postretirement health expenses. The target asset allocation
  and investment strategy for the portion of assets held in the master pension
  trust is 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 of the plans, reconciled to the amount reported
  on the statement of financial position, follows:

|*(In thousands)*                                          | Pension Benefits |  | Postretirement
      Benefits
|--------------------------------------------------------- | ---------------- |  | -----------------------------
|                                                          | 2003             |  | 2002                         
|Fair value of plan assets at end of year                  | $100,228         |  | $ 79,821                     
|Benefit obligations                                       | 133,461          |  | 117,410                      
|Funded status at end of year                              | (33,233)         |  | (37,589)                     
|Unrecognized net actuarial (gain)/loss                    | 25,364           |  | 32,925                       
|Unrecognized prior service cost                           | 4,170            |  | 4,094                        
|Unrecognized net transition obligation                    | 1,167            |  | 1,271                        
|Net amount recognized at end of year                      | $ (2,532)        |  | $ 701                        
|                                                          |                  |  |                              
|Amounts recognized in the balance sheet consist
      of: |                  |  |                              
|Prepaid benefit cost                                      | $ -              |  | $ -                          
|Accrued benefit liability                                 | (13,551)         |  | (20,583)                     
|Intangible asset                                          | 5,357            |  | 5,540                        
|Accumulated other comprehensive income                    | 5,662            |  | 15,744                       
|Net amount recognized at end of year                      | $ (2,532)        |  | $ 701                        



MGE reports comprehensive income in accordance with SFAS No. 130,
  *Reporting Comprehensive Income*. Comprehensive income includes the minimum
  pension liability adjustment, net of tax, for the pension plans and is reflected
  in the Consolidated Statements of Common Equity and Comprehensive Income.

The projected benefit obligation, accumulated benefit obligation,
  and fair value of assets for pension plans with a projected benefit obligation
  in excess of plan assets and pension plans and postretirement plans with an
  accumulated benefit obligation in excess of the fair value of assets are as
  follows:

|*(In thousands)*                                          | Pension Benefits |  | Postretirement
      Benefits
|--------------------------------------------------------- | ---------------- |  | -----------------------------
|As of December 31,                                        | 2003             |  | 2002                         
|Projected benefit obligation exceeds plan assets:         |                  |  |                              
|Projected benefit obligation                              | $133,461         |  | $117,410                     
|Accumulated benefit obligation                            | 113,779          |  | 100,404                      
|Fair value of assets                                      | 100,228          |  | 79,821                       
|                                                          |                  |  |                              
|Accumulated benefit obligation exceeds
      plan assets: |                  |  |                              
|Projected benefit obligation                              | 133,461          |  | 117,410                      
|Accumulated benefit obligation                            | 113,779          |  | 100,404                      
|Fair value of assets                                      | 100,228          |  | 79,821                       



**g. Expected Cash Flows.**

There are no required contributions, but MGE may elect discretionary
  deductible contributions depending upon its valuation results and cash flow
  from operations.

**h. 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 |  | Postretirement Benefits
|---------------------------------------------------------------- | ---------------- |  | -----------------------
|Components of net periodic benefit cost:                         | 2003             |  | 2002                   
|Service cost                                                     | $3,418           |  | $2,603                 
|Interest cost                                                    | 8,023            |  | 7,514                  
|Expected return on assets                                        | (7,023)          |  | (8,556)                
|Amortization of:                                                 |                  |  |                        
|Transition obligation                                            | 104              |  | 104                    
|Prior service cost                                               | 480              |  | 457                    
|Actuarial gain/(loss)                                            | 1,444            |  | 147                    
|Net periodic benefit cost                                        | $6,446           |  | $2,269                 
|                                                                 |                  |  |                        
|Weighted-average assumptions used todetermine net periodic cost: |                  |  |                        
|Discount rate                                                    | 6.75%            |  | 7.25%                  
|Expected return on plan assets                                   | 9.00%            |  | 9.50%                  
|Rate of compensation increase                                    | 4.50%            |  | 4.50%                  



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% Decrease
|---------------------------------------------------- | ----------- |  | -----------
|Effect on total service and interest cost components | $ 910       |  | $ (785)    



**11. Fair Value of Financial Instruments - MGE Energy
  and MGE.**

At December 31, 2003 and 2002, 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. MGE's
  nuclear decommissioning trust is recorded at fair market value. The estimated
  fair market value of MGE's long-term debt and interest rate swap agreements
  are based on quoted market prices at December 31. The estimated fair market
  value of MGE's financial instruments are as follows:

|                                           | 2003                  |  | 2002                   
|------------------------------------------ | --------------------- |  | -----------------------
|*(In thousands)*                           | Carrying
      Amount |  | Fair
      
      Value
|Assets:                                    |                       |  |                        
|Cash and cash equivalents (MGE Energy)     | $ 2,020               |  | $ 2,020                
|Restricted cash (MGE)                      | 3,364                 |  | 3,364                  
|Decommissioning fund (MGE)                 | -                     |  | -                      
|Liabilities:                               |                       |  |                        
|Short-term debt - bank loans (MGE Energy)  | 16,180                |  | 16,180                 
|Short-term debt - commercial paper (MGE)   | 15,500                |  | 15,500                 
|Long-term debt (MGE Energy)                | 218,500               |  | 231,712                
|Other long-term debt swap agreements (MGE) | (148)                 |  | (148)                  



**12. Risk Management Activities - MGE Energy and MGE.**

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.

MGE has an interest rate swap agreement with a commercial
  bank totaling $5.0 million for 2003 and 2002 with effective interest rates
  of 1.1% and 1.7%, respectively. This agreement has a fixed rate and is backed
  by MGE's commercial paper. MGE believes the counterparties to the agreement
  will meet their obligations based on their high credit ratings. Therefore, MGE
  records the changes in the fair market value currently in the income statement
  as required by SFAS No. 133 each quarter, which is offset by a corresponding
  regulatory asset or liability.

MGE purchased and sold exchange-traded option contracts to
  manage the cost of gas and purchased over-the-counter financial floating-to-fixed
  price swaps and calls to fix the price of gas for the "Winter Set-Price Firm
  Gas Sales Service" pilot program. These contracts have terms of January, February,
  and March 2004. Under MGE's natural gas risk management program, approved
  by the PSCW, the cost of the financial option and swap contracts (as well as
  the gains or losses realized) will be recovered under the PGA and will not affect
  net income. The fair value of these financial contracts was an asset of $0.7 million
  on the balance sheet at December 31, 2003.

Nonperformance of counterparties to the nonexchange-traded
  derivatives could expose MGE to credit loss. However, MGE enters into transactions
  only with companies that meet or exceed strict credit guidelines.

MGE has a 22.0% ownership interest in Columbia, which is operated
  by Alliant. Alliant has entered into a long-term coal supply agreement with
  Dynegy Marketing and Trade. The contract contains certain put options, and consequently,
  in accordance with the terms of SFAS No. 133, the contract is recorded
  at fair value on the balance sheet. Gains and losses are recorded in other income
  with an offsetting entry to a corresponding regulatory asset or liability.

**13. Capitalization Matters.**

**a. Common Stock** - **MGE Energy**.

On August 15, 2003, MGE Energy entered into a Distribution
  Agreement (Agreement) with Banc One Capital Markets, Inc. Under the terms of
  this Agreement, MGE Energy may offer and sell up to 1,600,000 shares of
  its common stock from time to time through Banc One as its sales agent or to
  Banc One as principal. The sales will be made pursuant to a shelf registration
  statement MGE Energy filed with the SEC in March 2003 and which has
  been declared effective.

Under the Agreement, MGE Energy sold 165,000 shares of
  its common stock as of December 31, 2003, for net proceeds of $5.1 million.
  The proceeds from the issuance of common stock were used to pay for capital
  expenditures related to WCCF and for other general corporate purposes.

MGE Energy also issues new shares of its common stock
  through its Dividend Reinvestment and Direct Stock Purchase Plan (the Plan).
  Through December 31, 2003, MGE Energy issued 604,000 new shares
  of common stock under the Plan for net proceeds of $18.7 million. The proceeds
  from the issuance of common stock for the Plan were contributed to MGE for its
  capital expenditures and to strengthen its capital structure.

**b. Preferred Stock - MGE.**

MGE has 1,175,000 shares of $25 par value redeemable preferred
  stock (cumulative) that is authorized but unissued at December 31, 2003.

**c. First Mortgage Bonds and Other Long-Term Debt -
  MGE.**

MGE's utility plant is subject to the lien of its First Mortgage
  Bonds.

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. As of December 31,
  2003, MGE's earned surplus exceeded all such payments for all years covered
  under this report.

On November 27, 2002, MGE issued $15.0 million in
  unsecured variable rate Medium Term Notes, maturing on November 26, 2004.
  Interest on the notes will be paid quarterly on the third Wednesday of March,
  June, September, and December. The variable rate, based on the three-month London
  Interbank Offering Rate (LIBOR) plus 12.5 basis point, was 1.295% as of December 31,
  2003.

On September 9, 2003, MGE issued $20 million in
  unsecured 6.12% Medium Term Notes maturing on September 1, 2028. Interest
  on these notes will be paid semiannually on March 1 and September 1
  of each year. The proceeds from this issue were used to redeem $20 million,
  7.70%, 2028 Series, First Mortgage Bonds, on September 30, 2003. The
  call premium for the redeemed bonds was $0.9 million and is recoverable
  through rates.

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's aggregate maturities for all long-term debt
  for years following the December 31, 2003, balance sheet.

|*(In thousands)*
|----------------
|                
|2004            
|2005            
|2006            
|2007            
|2008            
|Future years    
|Total*          

**Includes $30 million maturity for MGE Power West
  Campus, which is consolidated with MGE's debt in accordance with FIN No. 46-R
  (see Footnote 2).*

**d. Long-Term Debt.**

On September 30, 2003, MGE Energy, through MGE Power
  West Campus, issued $30.0 million of 5.68% senior secured notes maturing
  September 25, 2033, in a private placement offering. Interest only will
  be paid monthly for the first ten years and then principal and interest payments
  will be paid monthly for the remaining life of the debt. The proceeds from these
  notes were used to pay off a portion of MGE Energy's bank loans, which
  provided temporary financing of capital expenditures for the WCCF.

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. Until the facility is operational, MGE Energy will guarantee
  the debt.

**14. 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. Through negotiations with three
  banks, MGE has $40.0 million in bank lines of credit.

MGE Energy has established a $60.0 million bank
  line of credit with a commercial bank. The line of credit will be used for temporary
  financing of the capital commitments for the WCCF and general corporate purposes.

Information concerning short-term borrowings for the past
  three years is shown below:

|*(In thousands)*               | 2003    |  | 2002    |  | 2001   
|------------------------------ | ------- |  | ------- |  | -------
|**MGE**                        |         |  |         |  |        
|As of December 31:             |         |  |         |  |        
|Available lines of credit      | $40,000 |  | $40,000 |  | $40,000
|Commercial paper outstanding   | $15,500 |  | $13,500 |  | $9,500 
|Weighted-average interest rate | 1.21%   |  | 1.40%   |  | 2.11%  
|During the year:               |         |  |         |  |        
|Maximum short-term borrowings  | $15,500 |  | $33,500 |  | $44,000
|Average short-term borrowings  | $2,162  |  | $14,359 |  | $12,803
|Weighted-average interest rate | 1.29%   |  | 1.82%   |  | 5.27%  
|                               |         |  |         |  |        
|**MGE Energy**                 |         |  |         |  |        
|As of December 31:             |         |  |         |  |        
|Available lines of credit      | $60,000 |  | $45,000 |  | -      
|Short-term debt outstanding    | $31,680 |  | $34,298 |  | -      
|Weighted-average interest rate | 1.73%   |  | 2.09%   |  | -      
|During the year:               |         |  |         |  |        
|Maximum short-term borrowings  | $54,605 |  | $34,298 |  | -      
|Average short-term borrowings  | $36,681 |  | $14,613 |  | -      
|Weighted-average interest rate | 1.99%   |  | 1.83%   |  | -      

**15. Rate Matters - MGE.**

Under the fuel rules, if electric fuel costs are outside a
  3.0% annual threshold set by the PSCW, MGE can apply for a fuel surcharge or
  may be required to return a fuel credit to its customers. MGE is allowed to
  retain fuel savings within 3% under and must bear fuel costs within 3% over
  the level set in its most recent order. On July 28, 2003, MGE submitted
  an application to the PSCW for decreasing electric rates as required under the
  fuel rules monitoring mechanism. The PSCW on August 14, 2003, reopened
  MGE's rate case docket to examine fuel costs and how to appropriately credit
  ratepayers. The PSCW approved an interim fuel cost credit of $.00099 per kWh.
  The PSCW also required a full review of the actual and forecasted costs for
  2003 with MGE's fuel rates subject to refund. The fuel credit through December 31,
  2003, totaled $4.0 million, of which $1.2 million represents the interim
  fuel credit and $2.8 million is the estimate for the additional fuel credit
  to be refunded to customers.

On January 14, 2004, the PSCW authorized MGE to increase
  revenues by $12.8 million. The increase covers rising fuel costs for electric
  generation and addresses increased system demands for both gas and electric.

Effective March 1, 2003, the PSCW authorized MGE to increase
  revenues by $27.1 million. The increase covered rising fuel costs and addressed
  increased system demands and costs to complete a new AMR project.

Effective October 24, 2002, the PSCW authorized an electric
  rate surcharge of $4.5 million to recover deferred costs associated with
  forming ATC and ongoing incremental transmission costs during 2001 and 2002.
  The surcharge was in effect for a twelve-month period ending October 23,
  2003 (see Footnote 17 for additional information on ATC).

In July 2002, MGE notified the PSCW that its electric
  fuel costs were below the 3% range established in its most recent order, thus
  triggering a fuel credit to its customers. The fuel credit was $1.2 million
  through December 31, 2002. The fuel credit continued through February 28,
  2003.

Effective January 1, 2002, the PSCW authorized MGE to
  increase revenues by $12 million. The increase was associated with a limited
  reopener to address specific issues affecting 2002. These issues included the
  full-year impact of selling its ownership interest in Kewaunee, rising fuel
  costs, and installing an AMR system.

**16. Commitments**.

**a. Coal Contracts - MGE**.

MGE has no coal contracts that contain demand obligations
  for its Blount plant. Fuel procurement for MGE's jointly owned Columbia plant
  is handled by Alliant, the operating company. If any demand obligations must
  be paid under these contracts, management believes these obligations would be
  considered costs of service and recoverable in rates.

**b. Purchased Power Contracts - MGE.**

MGE has several purchased power contracts to help meet future
  electric supply requirements. As of December 31, 2003, MGE's total commitments
  for energy and purchased power contracts for capacity are estimated to be $14.8 million
  in 2004, $13.4 million in 2005, $13.5 million in 2006, $10.5 million
  in 2007, and $9.0 million in 2008. Management expects to recover these
  costs in future customer rates.

Related to the purchased power contracts, MGE has negotiated
  firm transmission contracts with Commonwealth Edison and Dairyland Power Cooperative,
  which are estimated to be $1.8 million for 2004, $1.1 million in 2005
  and 2006, $0.8 million in 2007, and $0.6 million in 2008. Management
  also expects to recover these costs in future customer rates.

**c. Natural Gas Transportation and Storage Contracts
  - MGE.**

MGE's natural gas supply, 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.
  These payments are estimated to be $15.0 million in 2004, $14.0 million
  in 2005, $14.3 million in 2006, $14.2 million in 2007, and $14.0 million
  in 2008. Management expects to recover these costs in future customer rates.

**d. Environmental - MGE.**

As a result of the Blount 69-kV transmission substation expansion,
  coal tar-contaminated soil and debris within the excavation zone are being removed
  and disposed of in accordance with a DNR approved "Removal Action Work Plan."
  MGE has recorded a $1 million liability for the cleanup of this site with
  an offsetting regulatory asset (deferred charge). We expect to recover cleanup
  costs in future rates. Carrying costs associated with the cleanup expenditures
  will not be recoverable.

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 Lenz
  Oil site 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. MGE estimates
  its future expense to clean up this site could range from $0.1 million
  to $0.2 million. At December 31, 2003, MGE accrued a $0.1 million
  liability for this matter.

**e. Chattel Paper Agreement - 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 $7.5 million
  of the financing program receivables, until February 28, 2005. At December 31,
  2003 and 2002, respectively, MGE had sold a $6.1 million and $6.8 million
  interest in these receivables, which MGE accounted for as a sale under SFAS No. 140,
  *Accounting for Transfers and Servicing of Financial Assets and Extinguishment
  of Liabilities - a Replacement of FASB Statement No. 125*. MGE retains
  the servicing responsibility for these receivables.

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,
  2003 and 2002, MGE has recorded a servicing asset of $0.3 million and $0.2 million,
  respectively. In 2003 and 2002, gains of $0.1 million and $0.2 million,
  respectively, were recognized in connection with the sale of loan assets. In
  2001, no gain or loss was recognized. The servicing asset recognized and the
  amount amortized in 2003 totaled $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 2003 and 2002, MGE received approximately
  $1.3 million and $3.3 million, respectively, from the financial institution
  for the sale of loan assets. During those same years, payments of $1.6 million
  and $2.4 million, respectively, were made by MGE to the financial institution.

MGE would be required to perform under the guarantee if the
  customer defaulted on their loan. The energy-related equipment installed at
  the customer sites is used to secure the customer loans. The length of the MGE
  guarantee to the financial institution varies from one to ten years depending
  on the term of the customer loan. Principal payments for the next five years
  on the loans are $0.9 million in 2004 and 2005 and $0.8 million in
  2006, 2007, and 2008.

**f. WCCF Purchase Commitments - MGE Energy.**

MGE has entered into various contracts for the purchase of
  gas and steam turbines and miscellaneous equipment for the WCCF. Most of these
  contracts have been assigned or are in the process of being assigned to MGE
  Construct. MGE Construct has entered into a contract for the purchase of chiller
  equipment. All of these contracts are summarized in the following table.

|*(In thousands)*               | Contract Total |  | Payments through
      December 31, 2003 |  | Remaining
      
      Contract Amounts
|------------------------------ | -------------- |  | ---------------------------------------- |  | ---------------------------------------
|Gas turbines                   | $30,190        |  | $29,797                                  |  | $ 393                                  
|Steam turbine                  | 7,805          |  | 7,805                                    |  | -                                      
|Heat-recovery steam generators | 11,993         |  | 11,993                                   |  | -                                      
|Chiller equipment              | 6,689          |  | 1,876                                    |  | 4,813                                  
|Project management             | 8,400          |  | 4,083                                    |  | 4,317                                  
|Miscellaneous equipment        | 23,901         |  | 8,490                                    |  | 15,411                                 
|Total                          | $88,978        |  | $64,044                                  |  | $24,934                                



**g. Leases - MGE.**

Future minimum rental payments at December 31, 2003,
  under agreements classified as operating leases with noncancellable terms in
  excess of one year are as follows:

|*(In thousands)*                    |       
|----------------------------------- | ------
|2004                                | $1,379
|2005                                | 1,023 
|2006                                | 751   
|2007                                | 595   
|2008                                | 524   
|Thereafter                          | 4,668 
|Total minimum future lease payments | $8,940

Rental expense under operating leases totaled $1.5 million
  for 2003 and $1.6 million for 2002 and 2001.

**17. ATC - MGE.**

On January 1, 2001, MGE transferred substantially all
  of its electric transmission facilities to ATC in exchange for approximately
  a 5% interest in this joint venture. ATC is comprised of Wisconsin investor-owned
  utilities and some Wisconsin municipal utilities, cooperatives, and power-supply
  agencies.

MGE has a seat on the Board of Directors of ATC and has a
  20% ownership interest in ATC Management, Inc. Due to MGE's ability to
  exercise significant control over management activities, MGE has accounted for
  this investment under the equity method of accounting. MGE records as equity
  in earnings of the investee its share of ATC's earnings, amortization of the
  SFAS No. 109 regulatory liability, and deferred investment tax credits
  related to the transmission assets transferred to ATC. MGE recorded equity earnings
  from its investment in ATC of $3.7 million (pretax) in 2003 and $3.3 million
  (pretax) both in 2002 and 2001. MGE recorded transmission expenses from ATC
  of $13.5 million in 2003, $7.5 million in 2002, and $7.3 million
  in 2001.

The PSCW authorized an electric rate surcharge of $4.5 million,
  or 2%, over a twelve-month period ended October 23, 2003, for MGE to recover
  deferred costs associated with the ATC formation and ongoing incremental transmission
  costs during 2001 and 2002.

On November 21, 2002, MGE and ATC entered into an interconnection
  agreement related to transmission system upgrades for WCCF. MGE issued to the
  ATC a "Notice to Proceed for the Procurement of the Equipment" for the system
  upgrades. MGE has advanced funds for construction to ATC for transmission equipment
  related to WCCF in the amounts of $9.2 million and $1.3 million in
  2003 and 2002, respectively. MGE expects to advance an additional $0.8 million
  in 2004. MGE will be reimbursed by ATC upon completion of the project.

**18. Kewaunee Sale - MGE.**

MGE sold to WPSC its 17.8% ownership interest in Kewaunee
  in September 2001. In exchange for a cash payment of $15.4 million,
  MGE transferred its net book value of utility plant ($8.2 million), net
  nuclear fuel ($7.9 million), inventories ($1.5 million), and other
  assets ($0.1 million). These assets were offset by $2.3 million owed
  to WPSC. On the closing date, MGE also transferred its qualified decommissioning
  fund ($65.0 million, fair market value) and nonqualified decommissioning
  fund ($28.1 million, fair market value), which decreased accumulated depreciation
  by an equal amount.

MGE made monthly contributions of approximately $0.7 million
  (the level authorized by the PSCW) to the MGE nonqualified decommissioning fund
  from September 23, 2001, through December 31, 2002. These costs were
  recovered from customers in rates. MGE's decommissioning liability is limited
  to the fund balances at the closing date plus all decommissioning collections
  through 2002. MGE's nonqualified decommissioning fund is shown on the balance
  sheet in the Utility Plant section. Under the Kewaunee sale agreement, MGE was
  obligated to continue collecting decommissioning costs from its customers during
  2002 and to remit those amounts, net of trust investment expenses and taxes
  on investment income, to the WPSC nonqualified decommissioning fund, which it
  did on January 3, 2003. MGE has no further obligation with respect to the
  decommissioning of Kewaunee except as described in the next paragraph with respect
  to spent nuclear fuel.

The federal government is responsible for the disposition
  and storage of spent nuclear fuel. Federal legislation is being considered to
  establish an interim storage facility. Spent nuclear fuel is currently stored
  at Kewaunee. Minor plant modifications to the spent fuel pools in 2001 should
  ensure Kewaunee has sufficient fuel storage capacity until the end of its licensed
  life in 2013. MGE retained its spent fuel obligations for all fuel burned at
  Kewaunee for MGE's share of the generation from the opening of the plant to
  the closing date. WPSC took title to such fuel at the closing date.

A surcharge imposed by the National Energy Policy Act of 1992
  requires nuclear power companies to fund the decontamination and decommissioning
  of U.S. Department of Energy facilities that process nuclear fuel. As a
  result, the Kewaunee co-owners are required to pay a surcharge on uranium enrichment
  services purchased from the federal government prior to October 23, 1992.
  On an inflation-adjusted basis, MGE's portion of the obligation related to Kewaunee
  is approximately $0.8 million at December 31, 2003. MGE is required
  to continue paying its portion of this annual assessment.

As allowed under the Kewaunee sale agreement, MGE exercised
  an option to purchase 90 MW of electric capacity and energy at a fixed
  price from September 24, 2001, through September 23, 2003, to help
  meet customers' electric needs.

**9. WCCF.**

MGE Energy, through MGE Power, MGE Power West Campus,
  and MGE Construct, is building a natural gas-fired cogeneration facility on
  the UW-Madison campus. As planned, the facility will have capacity to produce
  20,000 tons of chilled water, 500,000 pounds per hour of steam, and approximately
  150 MW of electricity. The facility will be jointly owned by the UW and
  MGE Power West Campus. The UW will own a controlling interest in the chilled-water
  and steam plants, which will be used to meet the growing needs for air-conditioning
  and steam-heat capacity for the UW-Madison campus. MGE Power West Campus will
  own a controlling interest in the electric generation plant, which will be used
  to provide electricity to MGE's customers. MGE will lease the assets owned by
  MGE Power West Campus and will operate the entire facility. MGE Construct will
  be responsible for the construction of the facility. A PSCW order approving
  the issuance of a CPCN for the WCCF was received on October 9, 2003. The
  ownership, construction, and operation of the facility has received various
  other state approvals, and the parties have entered into definitive agreements
  including a construction agreement. Construction on the project commenced in
  October of 2003, and it is estimated that the project will be completed
  by the spring of 2005. In 2003, MGE Construct received a service fee of $1.0 million
  (pretax) from the State in relation to its role as EPC contractor for WCCF.
  The total fee of $5.0 million will be recognized as services are rendered
  and will be collected over a 22-month period.

MGE Energy, MGE Power West Campus, and MGE Construct
  have assumed certain risks related to some of the executed agreements. In the
  EPC Agreement, MGE Power West Campus is responsible for cost overruns and MGE
  Construct is responsible for the construction process of the entire facility,
  including paying liquidated damages relating to failure to achieve the Mechanical
  Completion Date Guarantee and/or the Acceptance Test Capacity Guarantee. MGE Energy
  is the guarantor of MGE Construct's obligations under the EPC Agreement.

The expected cost to construct WCCF is approximately $180 million
  in total, of which $103 million is MGE Power West Campus' estimated portion.
  On November 20, 2003, the State paid $19.4 million to MGE Construct
  for its share of the costs incurred since its last payment in November of
  2002. MGE Construct is now billing the State monthly for its share of the cost
  of WCCF in accordance with the EPC Agreement. As of December 31, 2003,
  MGE Power West Campus had incurred $48.6 million of costs on the project,
  which is reflected in construction work in progress on MGE Energy's consolidated
  balance sheets. These costs largely represent amounts paid under long lead-time
  equipment contracts in order to meet project schedules.

**20. Adoption of Accounting Principles and Recently
  Issued Accounting Pronouncements**- **MGE Energy and
  MGE.**

**a. SFAS No. 143.**

In 2001, FASB issued SFAS No. 143, *Accounting
  for Asset Retirement Obligations*. SFAS No. 143 provides accounting
  requirements for retirement obligations associated with tangible long-lived
  assets. MGE Energy and MGE were required to adopt SFAS No. 143
  as of January 1, 2003. Retirement obligations associated with long-lived
  assets included within the scope of SFAS No. 143 are those for which
  there is a legal obligation under existing or enacted law, statute, written
  or oral contract, or by legal construction under the doctrine of promissory
  estoppel.

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 the photovoltaic generating facilities, all
  of which are located on property not owned by MGE and would be removed upon
  the ultimate end of the lease. At December 31, 2003, this liability is
  estimated at $1.4 million and is included in other deferred liabilities.

At the point the liability for asset retirement is incurred,
  SFAS No. 143 requires capitalization of the costs to the related asset,
  property, plant, and equipment, net. For asset retirement obligations existing
  at the time of adoption, the statement requires capitalization of costs at the
  level that existed at the point of incurring the liability. These capitalized
  costs are depreciated over the same period as the related property. At the date
  of adoption, the depreciation expense for past periods was recorded as a regulatory
  asset in accordance with SFAS No. 71 because MGE believes the PSCW
  will allow it to recover these costs in future rates. Current depreciation of
  the asset retirement cost is also being deferred as a regulatory asset under
  SFAS No. 71.

The initial liability is accreted to its present value each
  period. MGE defers this accretion as a regulatory asset based on its determination
  that these costs can be collected from customers. MGE also may have asset retirement
  obligations relating to various assets, such as combustion turbine generating
  units, small distributed generating units, aboveground and underground storage
  tanks, facilities located at Columbia (co-owned with Alliant and WPSC), and
  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, but also include
  some facilities located on property owned by MGE. The asset retirement obligations
  associated with these facilities cannot be reasonably determined due to the
  indeterminate life of the related assets.

The pro forma asset retirement obligation MGE would have recognized
  as of January 1, 2002, had MGE implemented SFAS No. 143 as of
  that date, was approximately $1.2 million based on the information, assumptions,
  and interest rates as of January 1, 2003, used to determine the $1.4 million
  liability recognized upon initial adoption of SFAS No. 143. Because
  MGE's regulators are allowing these costs to be recovered in future rates, adoption
  of SFAS No. 143 in the first quarter of 2002 would have had no impact
  on net income and earnings per share of common stock. Accordingly, pro forma
  impacts are not presented.

The following table shows costs as of January 1, 2003,
  and changes to the asset retirement obligation and accumulated depreciation
  during the twelve months ended December 31, 2003.

|(In thousands)                           | (a)
      Original AssetRetirementObligation |  | (b)
      
      AccumulatedAccretion |  | (c)(a + b)AssetRetirementObligation |  | (d)
      
      AccumulatedDepreciation-Related Asset
|---------------------------------------- | -------------------------------------------- |  | ------------------------------------- |  | ----------------------------------- |  | ------------------------------------------------------
|Balance, Jan. 1, 2003 (date of adoption) | $685                                         |  | $596                                  |  | $1,281                              |  | $148                                                  
|Changes through Dec. 31, 2003            | 1                                            |  | 79                                    |  | 80                                  |  | 27                                                    
|Balance, Dec. 31, 2003                   | $686                                         |  | $675                                  |  | $1,361                              |  | $175                                                  



As of December 31, 2003, MGE's regulatory asset, included
  in deferred charges, is the total accumulated accretion ($675,000) and accumulated
  depreciation ($175,000) or $850,000.

MGE made a significant reclassification related to the reporting
  of accumulated costs of removal that are non-SFAS No. 143 obligations.
  The reclass removed the costs from accumulated depreciation and recorded them
  as regulatory liability.

**b. SFAS No. 146.**

In June 2002, the FASB issued SFAS No. 146,
  *Accounting for Costs Associated with Exit or Disposal Activities*. This
  statement addresses financial accounting and reporting for costs associated
  with exit or disposal activities and nullifies EITF 94-3, *Liability
  Recognition for Certain Employee Termination Benefits and Other Costs to Exit
  an Activity (including Certain Costs Incurred in a Restructuring)*. SFAS No. 146
  is effective for transactions initiated after December 31, 2002. Adoption
  of this statement did not have a material impact on the consolidated financial
  statements.

**c. SFAS No. 148.**

In December 2002, the FASB issued SFAS No. 148,
  *Accounting for Stock-Based Compensation-Transition and Disclosure*.
  This statement amends FASB Statement No. 123, *Accounting for Stock-Based
  Compensation*, to provide alternative methods of transition for a voluntary
  change to the fair value-based method of accounting for stock-based employee
  compensation. In addition, the statement amends the disclosure requirements
  of Statement 123 to require prominent disclosures in both annual and interim
  financial statements about the method of accounting for stock-based employee
  compensation and the effect of the method used on reported results. MGE Energy
  has no stock options as of December 31, 2003, and therefore SFAS No. 148
  did not have a material impact on the consolidated financial statements.

**d. SFAS No. 149.**

On April 30, 2003, the FASB issued SFAS No. 149,
  *Amendment of SFAS No. 133 on Derivative Instruments and Hedging
  Activities*. This statement amends and clarifies accounting for derivative
  instruments including certain derivative instruments embedded in other contracts
  for hedging activities. SFAS No. 149 amends certain other existing
  pronouncements. The amendments will result in a more consistent reporting of
  contracts that are derivatives in their entirety or that contain embedded derivatives
  that warrant separate accounting. SFAS No. 149 is effective for contracts
  entered into or modified after June 30, 2003. Adoption of this statement
  did not have a material impact on the consolidated financial statements.

**e. SFAS No. 150.**

In May 2003, the FASB issued SFAS No. 150,
  *Accounting for Certain Financial Instruments with Characteristics of both
  Liabilities and Equity*. This statement establishes standards for how an
  issuer classifies and measures certain financial instruments with characteristics
  of both liabilities and equity. It requires that an issuer classify a financial
  instrument that is within the scope of SFAS No. 150 as a liability
  (or an asset in some circumstances). Many of those instruments were previously
  classified as equity. SFAS No. 150 is effective for interim periods
  beginning after June 15, 2003, for financial instruments entered into or
  modified after May 31, 2003, except for mandatorily redeemable financial
  instruments of nonpublic entities which will be effective for interim periods
  beginning after December 15, 2003. Adoption of this statement did not have
  a material impact on the consolidated financial statements.

**f. SFAS No. 132.**

In December 2003, the FASB issued an amended SFAS No. 132,
  *Employers' Disclosures about Pensions and Other Postretirement Benefits*.
  This revised statement requires additional disclosures to those in the original
  SFAS No. 132 about the plan assets, obligations, cash flows, and net
  periodic benefit cost of defined benefit pension plans and other defined benefit
  postretirement plans.

**g. FIN No. 45.**

In November 2002, the FASB issued FIN No. 45, *Guarantor's
  Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
  of Indebtedness of Others*. This interpretation provides the disclosures
  to be made by a guarantor in interim and annual financial statements about obligations
  under certain guarantees. The interpretation also clarifies that a guarantor
  is required to recognize, at the inception of a guarantee, a liability for the
  fair value of the obligation.

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 $7.5 million
  of the financing program receivables, until February 28, 2004. Loans totaling
  $1.1 million have been sold to the financial institution during 2003. The
  liability for the fair value of the obligation associated with these loans is
  not material.

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 length of the MGE guarantee
  to the financial institution varies from one to ten years depending on the term
  of the customer loan. Principal payments for the next five years on the loans
  are $0.9 million in 2004 and 2005 and $0.8 million in 2006, 2007,
  and 2008.

**h. FIN No. 46.**

In January 2003, the FASB issued FIN No. 46,
  *Consolidation of Variable Interest Entities - an Interpretation of
  ARB No. 51."* In December 2003, the FASB issued the updated and
  final interpretation FIN No. 46-R. FIN No. 46-R requires
  that an equity investor in a VIE have significant equity at risk (generally
  a minimum of 10%, which is an increase from 3% required under the previous guidance)
  and hold a controlling interest, evidenced by voting rights, and absorb a majority
  of the entity's expected losses, receive a majority of the entity's expected
  returns, or both. If the equity investor is unable to evidence these characteristics,
  the entity that retains these ownership characteristics will be required to
  consolidate the VIE as the primary beneficiary. FIN No. 46 was applicable
  immediately to VIEs created or obtained after January 31, 2003. FIN No. 46-R
  was effective on December 31, 2003, for interests in entities that were
  previously considered special purpose entities under then existing authoritative
  guidance.

MGE Power West Campus is a VIE pursuant to FIN No. 46-R,
  as the equity investment at December 31, 2003, was not sufficient to permit
  the entity to finance its activities without additional support. MGE concluded
  a VIE relationship exists due to the long-term lease arrangement between MGE
  and MGE Power West Campus. MGE Power West Campus will lease a major
  portion of its assets, a power plant, to MGE, pursuant to this leasing arrangement
  and MGE will absorb a majority of the expected losses, residual, or both. The
  VIE was consolidated into MGE as of December 31, 2003.

**i. EITF 03-11.**

In July 2003, FASB issued EITF 03-11, *Reporting
  Realized Gains and Losses on Derivative Instruments that are subject to SFAS No. 133
  (Accounting for Derivative Instruments and Hedging Activities), and Not Held
  for Trading Purposes*. This issue addresses whether realized gains and losses
  should be shown gross or net in the income statement, for contracts that are
  not held for trading purposes. This issue will not have a material impact on
  the consolidated financials statements.

**j. FSP 106-1.**

In January 2004, the FASB issued FASB Staff Position
  No. FAS 106-1 (FSP 106-1), *Accounting and Disclosure Requirements
  Related to the Medicare Prescription Drug, Improvement and Modernization Act
  of 2003 (the Act)*. FSP 106-1 permits employers that sponsor postretirement
  benefit plans (plan sponsors) that provide prescription drug benefits to retirees
  to make a one-time election to defer accounting for any effects of the Act.
  The FSP 106-1 requires all plan sponsors to provide certain disclosures,
  regardless of whether they choose to account or defer accounting. FSP 106-1
  is effective for annual fiscal periods ending after December 7, 2003. If
  deferral is elected, the deferral must remain in effect until the earlier of
  (1) the issuance of guidance by the FASB on how to account for the federal
  subsidy to be provided to plan sponsors under the Act or (2) the remeasurement
  of plan assets and obligations subsequent to January 31, 2004. MGE has
  elected to defer recognition of the Act.

**k. SEC SAB No. 104.**

In December 2003, the SEC issued SAB No. 104 regarding
  revenue recognition. SAB No. 104 revises or rescinds portions of the interpretive
  guidance included in Topic 13 of the codification of Staff Accounting Bulletins
  to make the guidance consistent with current authoritative accounting and auditing
  guidance and SEC rules and regulations. MGE Energy and MGE will comply
  with the revised guidance.

**21. Segment Information - MGE Energy and MGE.**

Prior to 2003, MGE Energy operated in two business segments:
  electric utility operations and gas utility operations. In 2003, MGE Energy
  added a third segment for nonutility energy operations as discussed below. The
  electric utility business 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 nonutility energy operations are conducted through MGE Energy's
  other subsidiaries: MGE Power, MGE Power West Campus, and MGE Construct. These
  subsidiaries have been formed to own and construct new electric generating capacity
  and are currently undertaking the construction of WCCF, a 150-MW cogeneration
  plant on the UW-Madison campus. Construction on this facility started in the
  fall of 2003. The table below shows key information about all three of these
  segments, including the distribution of net assets, for the years ended December 31.

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 based on formulas prescribed by the PSCW. Identifiable assets are those
  used in MGE's operations in each segment. Corporate assets consist primarily
  of cash and cash equivalents and deferred taxes.

The following table shows segment information for MGE Energy's
  and MGE's operations:

|*(In thousands)*                 | Utility   |  |           |  |           
|-------------------------------- | --------- |  | --------- |  | ----------
|**Year ended December 31, 2003** | Electric  |  | Gas       |  | Nonutility
|Gross operating revenues         | $ 242,264 |  | $ 167,550 |  | $ -       
|Interdepartmental revenues       | (519)     |  | (7,748)   |  | -         
|Depreciation and amortization    | (16,437)  |  | (6,907)   |  | -         
|Other operating expenses         | (196,286) |  | (140,795) |  | (729)     
|Operating income                 | $ 29,022  |  | $ 12,100  |  | $(729)    
|                                 |           |  |           |  |           
|**Year ended December 31, 2002** |           |  |           |  |           
|Gross operating revenues         | $ 225,453 |  | $ 126,639 |  | $ -       
|Interdepartmental revenues       | (466)     |  | (4,530)   |  | -         
|Depreciation and amortization    | (23,072)  |  | (6,290)   |  | -         
|Other operating expenses         | (170,870) |  | (106,292) |  | (280)     
|Operating income                 | $ 31,045  |  | $ 9,527   |  | $(280)    
|                                 |           |  |           |  |           
|**Year ended December 31, 2001** |           |  |           |  |           
|Gross operating revenues         | $ 203,570 |  | $ 136,638 |  | $ -       
|Interdepartmental revenues       | (392)     |  | (6,105)   |  | -         
|Depreciation and amortization    | (29,791)  |  | (5,868)   |  | -         
|Other operating expenses         | (147,997) |  | (115,384) |  | -         
|Operating income                 | $ 25,390  |  | $ 9,281   |  | $ -       

MGE's regulated electric and gas utility operations are the
  only revenue-generating segments for MGE Energy. MGE Energy's nonutility
  segment does not currently generate any revenues.

|*(In thousands)*                                                                       |         
|-------------------------------------------------------------------------------------- | --------
|**MGE Energy**                                                                         | 2003    
|Electric operating income                                                              | $29,022 
|Gas operating income                                                                   | 12,100  
|Nonregulated operating loss                                                            | (729)   
|Consolidated                                                                           | 40,393  
|Other income                                                                           | 2,486   
|Interest expense                                                                       | (11,776)
|Other general taxes                                                                    | (463)   
|Net income                                                                             | $30,640 
|**MGE**                                                                                |         
|Electric operating income                                                              | $29,022 
|Gas operating income                                                                   | 12,100  
|Net operating income                                                                   | 41,122  
|Equity in earnings in ATC                                                              | 3,687   
|Other income and deductions                                                            | (2,951) 
|Interest expense, net                                                                  | (11,529)
|Net income before cumulative effect of a
      change in accounting principle          | 30,329  
|Cumulative effect of a change in accounting principle,
      net of tax benefit of $78 | -       
|Net income                                                                             | $30,329 
|**MGE Energy was formed in 2002.*                                                     

|*(In thousands)*                         | Utility  |  | Consolidated
|---------------------------------------- | -------- |  | ------------
|****
      
      **MGE Energy and MGE** | Electric |  | Gas         
|**Assets**                               |          |  |             
|December 31, 2003                        | $445,728 |  | $165,577    
|December 31, 2002                        | 414,827  |  | 151,548     
|December 31, 2001*                       | 376,568  |  | 144,145     
|                                         |          |  |             
|**Capital Expenditures**                 |          |  |             
|Year ended December 31, 2003             | $40,833  |  | $13,875     
|Year ended December 31, 2002             | 42,940   |  | 15,209      
|Year ended December 31, 2001*            | 33,722   |  | 8,244       
|**MGE Energy was formed in 2002.*       

**22. Quarterly Summary of Operations (unaudited).**

|*(In thousands, except per-share amounts)* | Quarters Ended
|------------------------------------------ | --------------
|**2003**                                   | March 31      
|Operating revenues:                        |               
|Regulated electric revenues                | $56,099       
|Regulated gas revenues                     | 72,395        
|Total                                      | 128,494       
|Operating expenses                         | 111,043       
|Operating income                           | 17,451        
|Interest and other income                  | (2,035)       
|Income tax provision                       | (6,041)       
|Earnings on common stock                   | $9,375        
|Earnings per common share                  | $0.53         
|Dividends per share                        | $0.336        
|**2002**                                   |               
|Operating revenues:                        |               
|Regulated electric revenues                | $50,820       
|Regulated gas revenues                     | 47,452        
|Total                                      | 98,272        
|Operating expenses                         | 78,001        
|Operating income                           | 20,271        
|Interest and other income                  | (2,220)       
|Income tax provision                       | (7,029)       
|Earnings on common stock                   | $11,022       
|Earnings per common share                  | $0.64         
|Dividends per share                        | $0.333        



**Notes**:

- The quarterly results of operations within a year are not
  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.

**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**

During the fourth quarter of 2003, MGE Energy'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 MGE Energy, including its
  subsidiaries, is made known to MGE Energy's management, including these
  officers, by other employees of MGE Energy and its subsidiaries, 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. MGE Energy's controls and procedures can only provide reasonable,
  not absolute, assurance that the above objectives have been met. Also, MGE Energy
  does not control or manage certain of its unconsolidated entities and thus,
  its access and ability to apply its procedures to entities that it does not
  control or manage are more limited than is the case for the entities that it
  controls and manages.

As of December 31, 2003, these officers (principal executive
  officer and principal financial officer) concluded that MGE Energy's disclosure
  controls and procedures were effective to accomplish their objectives (as defined
  in the SEC Act of 1934 Rules 13a-15(e) and 15d-15(e)). MGE Energy continually
  strives to improve its disclosure controls and procedures to enhance the quality
  of its financial reporting.

There were no significant changes in MGE's Energy's internal
  controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
  of the Exchange Act) that occurred during the quarter ended December 31,
  2003, that have materially affected, or reasonably likely to materially affect
  the internal control over financial reporting.

**MGE**

During the fourth quarter of 2003, MGE'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 MGE is made known to MGE's management, including
  these officers, by other employees of MGE, 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. MGE's controls and procedures
  can only provide reasonable, not absolute, assurance that the above objectives
  have been met. Also, MGE does not control or manage certain of its unconsolidated
  entities and thus, its access and ability to apply its procedures to the entities
  that it does not control or manage are more limited than is the case for the
  entities that it controls and manages.

As of December 31, 2003, these officers (principal executive
  officer and principal financial officer) concluded that MGE's disclosure controls
  and procedures were effective to accomplish their objectives (as defined in
  the SEC Act of 1934 Rules 13a-15(e) and 15d-15(e)). MGE intends to continually
  strive to improve its disclosure controls and procedures to enhance the quality
  of its financial reporting.

There were no significant changes in MGE's Energy's internal
  controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
  of the Exchange Act) that occurred during the quarter ended December 31,
  2003, that have materially affected, or reasonably likely to materially affect
  the internal control over financial reporting.

**PART III.**

**Item 10. Directors and Executive
  Officers of the Registrants.**

**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" (not including the information under the subheading "Audit Committee
  Report," which is not incorporated herein) in MGE Energy's definitive proxy
  statement (2004 Proxy Statement) to be filed with the SEC prior to April 29,
  2004.

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.**

**MGE Energy**

The required information for Items 11 and 12 is included in
  MGE Energy's 2004 Proxy Statement under the section "Executive Compensation,"
  not including "Report on Executive Compensation" and "Company Performance,"
  and under the section "Beneficial Ownership of Common Stock," which is incorporated
  herein by reference.

**Item 13. Certain Relationships
  and Related Transactions.**

**MGE Energy**

None.

**Item 14. Principal Accountant Fees
  and Services.**

**MGE Energy**

The information required by Item 14 is incorporated herein
  by reference to the information under the heading "OTHER INFORMATION - Independent
  Accountants" in MGE Energy's 2004 Proxy Statement.

**MGE**

The following table presents fees for professional audit services
  rendered by PricewaterhouseCoopers LLP for the audit of MGE's financial statements
  for the years ended December 31, 2002 and 2003, and fees billed for other
  services rendered by PricewaterhouseCoopers LLP during those periods.

|                                                          | 2003     |  | 2002    
|--------------------------------------------------------- | -------- |  | --------
|Audit Fees:                                               |          |  |         
|Audit of financial statements                             | $182,000 |  | $174,800
|Review of SEC filings and comfort letters                 | 8,700    |  | 56,000  
|Total Audit Fees                                          | $190,700 |  | $230,800
|                                                          |          |  |         
|Audit-Related Fees:                                       |          |  |         
|Financial accounting and reporting standards consultation | $14,000  |  | $4,500  
|Total Audit-Related Fees                                  | $14,000  |  | $4,500  
|                                                          |          |  |         
|Tax Fees:                                                 |          |  |         
|Tax advice on financial accounting issues                 | $6,400   |  | $21,500 
|Review of federal and state income tax returns            | 13,400   |  | 12,700  
|Total Tax Fees                                            | $19,800  |  | $34,200 
|                                                          |          |  |         
|All Other Fees:                                           |          |  |         
|Financial analysis for WCCF project                       | $198,400 |  | $386,900
|Business resumption and computer security analysis        | -        |  | 203,600 
|Total All Other Fees                                      | $198,400 |  | $590,500

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. That committee approves each engagement
  of the independent accountants to render any audit or nonaudit services before
  the accountants are engaged to render those services. The chair of that committee
  or other designated committee member may represent the entire committee for
  purposes of this approval. Any services approved by the chair or other designated
  committee member are reported to the full committee at the next scheduled MGE Energy
  Audit Committee meeting. No de minimis exceptions to this approval process are
  allowed under the MGE Energy 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, Financial Statement
  Schedules, and Reports on Form 8-K.**

|**(a) 1. Financial Statements.**                                                                               |   
|-------------------------------------------------------------------------------------------------------------- | --
|**MGE Energy**                                                                                                 |   
|Report of Independent Auditors                                                                                 | 43
|Consolidated Statements of Incomefor the years ended December 31, 2003, 2002,
      and 2001                   | 45
|Consolidated Statements of Cash Flowsfor the years ended December 31, 2003, 2002,
      and 2001               | 46
|Consolidated Balance Sheets as of December 31, 2003
      and 2002                                             | 47
|Consolidated Statements of Capitalization as of December 31,
      2003 and 2002                               | 48
|Consolidated Statements of Common Equity and Comprehensive
      Incomeas of December 31, 2003, 2002, and 2001 | 49
|Notes to Consolidated Financial Statements                                                                     | 55
|**MGE**                                                                                                        |   
|Report of Independent Auditors                                                                                 | 44
|Consolidated Statements of Incomefor the years ended December 31, 2003, 2002,
      and 2001                   | 50
|Consolidated Statements of Cash Flowsfor the years ended December 31, 2003, 2002,
      and 2001               | 51
|Consolidated Balance Sheets as of December 31, 2003
      and 2002                                             | 52
|Consolidated Capitalization Statement as of December 31,
      2003 and 2002                                   | 53
|Consolidated Statements of Common Equity and Comprehensive
      Incomeas of December 31, 2003, 2002, and 2001 | 54
|Notes to Consolidated Financial Statements                                                                     | 55



**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 and 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 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 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 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.)

10.2 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.)

10.3 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.)

10.4* Form of Severance Agreement. (Exhibit 10F to Form 10-K
  for the year ended December 31, 1994, File No. 0-1125.)

Statements regarding computation of ratio of earnings to fixed
  charges:

12.1 MGE Energy, Inc.

12.2 Madison Gas and Electric Company

21.1 Subsidiaries of MGE Energy, Inc.

23.1 Consent of Independent Accountants - MGE Energy,
  Inc.

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of
  the Securities and Exchange Act of 1934 as to the Annual Report on Form 10-K
  for the year ended December 31, 2003 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

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, 2002, 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

(b) **4. Reports on Form 8-K.**

On October 30, 2003, MGE Energy, Inc. and Madison
  Gas and Electric Company furnished a Current Report on Form 8-K dated October 30,
  2003, reporting the issuance of a press release announcing MGE Energy,
  Inc.'s earnings for the third quarter of 2003.



**MGE Energy, Inc. and Madison Gas and Electric Company**



|                                                          |                              |  | Additions                      |  |                            |  |                       
|--------------------------------------------------------- | ---------------------------- |  | ------------------------------ |  | -------------------------- |  | ----------------------
|                                                          | Balance atbeginning ofperiod |  | (1)Charged tocosts andexpenses |  | (2)Chargedto otheraccounts |  | NetAccountswritten off
|Fiscal Year 2001: Accumulated provisionfor uncollectibles | (2,071,104)                  |  | (2,887,124)                    |  | -                          |  | 1,193,901             
|Fiscal Year 2002:Accumulated provisionfor uncollectibles  | (3,764,327)                  |  | (1,149,000)                    |  | -                          |  | 2,254,073             
|Fiscal Year 2003:Accumulated provisionfor uncollectibles  | (2,659,254)                  |  | (1,340,863)                    |  | -                          |  | 1,264,669             

**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 27, 2004 | /s/ Gary J. Wolter                             
|                        | Chairman, 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 27, 2004.

|/s/ Gary J. Wolter        | Gary J. WolterChairman, President and Chief Executive Officer and
      Director (Principal Executive Officer)                          
|------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|                          |                                                                                                                                         
|/s/ Terry A. Hanson       | Terry A. HansonVice President, Chief Financial Officer and Secretary(Principal Financial Officer and Principal Accounting
      Officer)
|                          |                                                                                                                                         
|/s/ David C. Mebane       | David C. Mebane, Vice Chairman of the
      Board and Director                                                                          
|                          |                                                                                                                                         
|/s/ Richard E. Blaney     | Richard E. Blaney, 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/ Donna K. Sollenberger | Donna K. Sollenberger, 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 27, 2004 | /s/ Gary J. Wolter                              
|                        | Chairman, 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 27, 2004.

|/s/ Gary J. Wolter        | Gary J. WolterChairman, President and Chief Executive Officer and
      Director (Principal Executive Officer)                          
|------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------
|                          |                                                                                                                                         
|/s/ Terry A. Hanson       | Terry A. HansonVice President, Chief Financial Officer and Secretary(Principal Financial Officer and Principal Accounting
      Officer)
|                          |                                                                                                                                         
|/s/ David C. Mebane       | David C. Mebane, Vice Chairman of the
      Board and Director                                                                          
|                          |                                                                                                                                         
|/s/ Richard E. Blaney     | Richard E. Blaney, 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/ Donna K. Sollenberger | Donna K. Sollenberger, Director                                                                                                         
|                          |                                                                                                                                         
|/s/ H. Lee Swanson        | H. Lee Swanson, Director