United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM
10-Q  [X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934  For the quarterly period ended: September 30, 2008  [ ]
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934  For the transition period from _______________ to
_______________   Commission
File No.

Name of
Registrant, State of Incorporation, Address
of Principal Executive Offices, and Telephone
No.

IRS Employer
Identification
No.000-49965

MGE Energy, Inc.
(a Wisconsin Corporation)
133 South Blair Street
Madison, Wisconsin 53703
(608) 252-7000
www.mgeenergy.com

39-2040501000-1125

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

39-0444025   Indicate by check mark 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 registrant was required to file such reports) and (2)
have been subject to such filing requirements for the past 90 days:  Yes [X]  No [  ]  Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting CompanyMGE Energy,
Inc.
XMadison
Gas and Electric Company


X  Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act):  MGE Energy, Inc. and Madison Gas and
Electric Company: Yes [  ]  No [X]   Number of Shares Outstanding of Each Class of Common Stock
as of October 31, 2008MGE Energy,
Inc.
Common
stock, $1.00 par value, 22,331,956 shares outstanding.Madison
Gas and Electric Company
Common
stock, $1.00 par value, 17,347,889 shares outstanding (all of which are
owned beneficially and of record by MGE Energy,
Inc.).   Page 1    Table of Contents   PART I.
FINANCIAL INFORMATION. Filing
Format Forward-Looking Statements Where to
Find More Information Definitions, Abbreviations, and Acronyms Used in the Text and Notes
of this Report Item 1.
Financial Statements. MGE Energy,
Inc. Consolidated Statements of Income (unaudited) Consolidated Statements of Cash Flows (unaudited) Consolidated Balance Sheets (unaudited) Madison Gas and Electric
Company Consolidated Statements of Income (unaudited) Consolidated Statements of Cash Flows (unaudited) Consolidated Balance Sheets (unaudited) MGE Energy,
Inc., and Madison Gas and Electric Company Notes to
Consolidated Financial Statements (unaudited) Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Item 3.
Quantitative and Qualitative Disclosures About Market Risk. Item 4.
Controls and Procedures. Item 4T.
Controls and Procedures. PART II.
OTHER INFORMATION. Item 1.
Legal Proceedings. Item 1A.
Risk Factors. Item 6.
Exhibits. Signatures - MGE Energy, Inc. Signatures
- Madison Gas and Electric Company    Page 2    PART
I. FINANCIAL INFORMATION.   Filing Format  This combined quarterly report on Form 10-Q is being
filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and
Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and
represents a majority of its assets, liabilities, revenues, expenses, and
operations. Thus, all information contained in this report relates to, and is
filed by, MGE Energy. Information that is specifically identified in this
report as relating solely to MGE Energy, such as its financial statements
and information relating to its nonregulated business, does not relate to, and
is not filed by, MGE. MGE makes no representation as to that information. The
terms "we" and "our" as used in this report refer to MGE Energy and its
consolidated subsidiaries, unless otherwise indicated.   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. Words such as "believe," "expect," "anticipate," "estimate,"
"could,""should," "intend," and other similar words generally identify
forward-looking statements. Both MGE Energy and MGE caution investors that
these forward-looking statements are subject to known and unknown risks and
uncertainties that may cause actual results to differ materially from those
projected, expressed, or implied.  The factors that could cause actual results to differ
materially from the forward-looking statements made by a registrant include (a)
those factors discussed in the following sections of the Registrants' 2007
Annual Report on Form 10-K: ITEM 1A. Risk Factors and ITEM 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations as
updated by Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations in this report, and (b) other factors
discussed herein and in other filings with the SEC by the Registrants.  Readers are cautioned not to place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. MGE Energy and MGE undertake no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this report.   Where to Find More Information  The public may read and copy any reports or other
information that MGE Energy and MGE file with the SEC at the SEC's public
reference room at 100 F Street, NE, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. These documents are also available to the public from
commercial document retrieval services, 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. Information contained on MGE Energy's and MGE's Web sites shall not
be deemed incorporated into, or to be a part of, this report.    Page 3    Definitions, Abbreviations,
and Acronyms Used in the Text and Notes of this Report  AFUDC
allowance for funds used during
constructionAlliant
Alliant Energy CorporationARB
Accounting Research BulletinATC
American Transmission Company LLCARO
Asset Retirement ObligationBART
Best Available Retrofit TechnologyBlount
Blount StationCAIR
Clean Air Interstate RuleCAMR
Clean Air Mercury RuleCAVR
Clean Air Visibility RuleColumbia
Columbia Energy Centercooling degree days
Measure of the extent to which the average daily
temperature is above 65 degrees Fahrenheit, increasing demand for
coolingCWDC
Central Wisconsin Development CorporationDistribution Agreement
Distribution Agreement between MGE Energy and
J.P. Morgan Securities Inc.Dth
dekathermsEGU
electric generating unitEITF
Emerging Issues Task ForceElm Road
Elm Road Generating StationEPA
U.S. Environmental Protection AgencyFAS
Financial Accounting StandardFASB
Financial Accounting Standards BoardFERC
Federal Energy Regulatory CommissionFIN
FASB Interpretation No.FSP
FASB Staff PositionFTR
Financial Transmission RightsGCIM
gas cost incentive mechanismGHG
greenhouse gasGW-hr
gigawatthourheating degree days (HDD)
Measure of the extent to which the average daily
temperature is below 65 degrees Fahrenheit, increasing demand for
heatingIBEW
International Brotherhood of Electric
WorkersIRS
Internal Revenue ServiceJCRAR
Joint Committee for Review of Administrative
RuleskV
kilovoltkWh
kilowatt-hourLIBOR
London interbank offered rateLMP
Locational Marginal PricingMACT
Maximum available control technologyMAGAEL
MAGAEL, LLCMGE
Madison Gas and Electric CompanyMGE Construct
MGE Construct LLCMGE Energy or MGEE
MGE Energy, Inc.MGE Power
MGE Power LLCMGE Power Elm Road
MGE Power Elm Road, LLCMGE Power West Campus
MGE Power West Campus, LLCMGE Transco
MGE Transco Investment LLCMISO
Midwest Independent System Operator (a regional
transmission organization)Moody's
Moody's Investors Service, Inc.MW
megawattMWh
megawatt-hourNAAQS
New national ambient air quality standardNasdaq
The Nasdaq National Stock MarketNOx
nitrogen oxideNSPS
new source performance standardsNYMEX
New York Mercantile ExchangePGA
Purchased Gas Adjustment clausePJM
PJM Interconnection, LLC (a regional transmission
organization)  Page 4     PSCW
Public Service Commission of WisconsinRTO
Regional Transmission OrganizationS&P
Standard & Poor's Ratings Group, a division of
McGraw-Hill CompaniesSAB
Staff Accounting BulletinSEC
Securities and Exchange CommissionSFAS
Statement of Financial Accounting Standards (issued
by the FASB )SIP
State Implementation PlanSO2
sulfur dioxideStock Plan
Direct Stock Purchase and Dividend Reinvestment
Plan of MGE EnergyUARG
Utility Air Regulatory GroupUW
University of Wisconsin-MadisonVIE
variable interest entityWCCF
West Campus Cogeneration FacilityWDNR
Wisconsin Department of Natural ResourcesWEPCO
Wisconsin Electric Power Companyworking capital
current assets less current liabilitiesWPDES
Wisconsin Pollutant Discharge Elimination
SystemWPL
Wisconsin Power and Light
Company    Page 5    Item
1. Financial Statements.   MGE Energy, Inc.  Consolidated Statements of Income (unaudited) (In thousands, except per-share amounts)   Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007Operating Revenues:Regulated revenues
$124,020

$115,023

$434,894

$390,874Nonregulated revenues
1,787

1,300

5,646

3,880Total Operating
Revenues
125,807

116,323

440,540

394,754Operating Expenses:Fuel for electric
generation
14,222

16,786

43,172

44,022Purchased power
20,462

20,954

56,764

61,029Natural gas purchased
15,171

8,450

119,577

93,785Other operations and
maintenance
36,607

32,446

111,270

95,974Depreciation and
amortization
9,974

7,977

29,264

24,057Other general taxes
4,120

3,975

12,692

11,796Total Operating
Expenses
100,556

90,588

372,739

330,663Operating Income
25,251

25,735

67,801

64,091Other income, net
5,292

2,352

7,558

5,412Interest expense, net
(3,511)

(3,242)

(10,379)

(9,957)Income before income taxes
27,032

24,845

64,980

59,546Income tax provision
(9,722)

(9,309)

(23,276)

(21,742)Net Income
$17,310

$15,536

$41,704

$37,804Earnings per Share of Common Stock
(basic and diluted)
$0.78

$0.71

$1.89

$1.77Dividends paid per share of common stock
$0.362

$0.355

$1.072

$1.052Average Shares Outstanding(basic and
diluted)
22,230

21,780

22,109

21,396  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 6    MGE Energy, Inc.  Consolidated Statements of Cash Flows (unaudited) (In thousands)   Nine Months Ended
September 30,2008

2007Operating Activities:Net income
$41,704

$37,804Items not affecting cash:Depreciation and
amortization
29,264

24,057Deferred income taxes
3,807

(3,376)Amortization of investment tax
credits
(263)

(307)Amortization of debt issuance
costs and discount
417

406Provision for doubtful accounts
receivable
2,652

2,192AFUDC - equity funds
(755)

(1,071)Employee benefit plan
expenses
6,079

6,099Equity earnings in ATC
(5,320)

(4,495)Gain on sale of property
(294)

-Gain on sale of
investments
(2,838)

(363)Reserve for fuel refund
3,183

1,244Other items
1,474

1,527Changes in working
capital:(Increase) decrease in current
assets
(4,663)

12,609Decrease in current
liabilities
(17,772)

(7,739)Proceeds from Congestion Cost
and Line Loss Allocation Agreement
-

2,336Dividend income from ATC
3,754

3,282Cash contributions to pension
and other postretirement plans
(7,081)

(5,077)Other noncurrent items,
net
5,168

(571)Cash Provided by Operating
Activities
58,516

68,557Investing Activities:Capital expenditures
(84,949)

(102,576)Capital contributions to
investments
(2,529)

(125)Advance to WEPCO for ATC work
related to Elm Road
(267)

(296)Proceeds from sale of
property
303

724Proceeds from sale of
investments
2,321

456Other
1,079

680Cash Used for Investing
Activities
(84,042)

(101,137)Financing Activities:Issuance of common stock
12,060

29,238Cash dividends paid on common
stock
(23,695)

(22,526)Repayment of long-term
debt
(30,000)

(15,000)Issuance of long-term
debt
40,000

25,000Increase in short-term debt,
net
27,000

17,000Other
(299)

-Cash Provided by Financing
Activities
25,066

33,712Change in Cash and Cash Equivalents
(460)

1,132Cash and cash equivalents at
beginning of period
3,789

3,003Cash and cash equivalents at end
of period
$3,329

$4,135  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 7    MGE Energy, Inc.  Consolidated Balance Sheets (unaudited) (In thousands)   September 30,
2008

December 31,
2007ASSETSCurrent Assets:Cash and cash equivalents
$3,329

$3,789Restricted cash
5,486

2,896Accounts receivable, less
reserves of $4,266 and $3,709, respectively
34,400

43,668Other accounts receivable, less
reserves of $148 and $114, respectively
6,001

3,397Unbilled revenues
18,213

30,370Materials and supplies, at lower
of average cost or market
15,289

14,809Fossil fuel
3,691

5,136Stored natural gas, at lower of
average cost or market
45,698

28,483Prepaid taxes
10,783

14,696Regulatory assets -
current
7,293

189Other current assets
8,314

8,242Total Current
Assets
158,497

155,675Other long-term receivables
6,381

6,166Special billing projects
726

999Regulatory assets
50,953

53,375Other deferred assets and other
5,345

5,881Property, Plant, and Equipment, Net
701,753

638,774Construction work in progress
188,622

205,214Total Property, Plant, and
Equipment
890,375

843,988Other Property and Investments
46,429

45,503Total Assets
$1,158,706

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

$30,000Short-term debt
130,500

103,500Accounts payable
30,470

58,498Accrued interest and
taxes
4,900

3,964Deferred income taxes
2,236

4,153Regulatory liabilities -
current
3,913

2,924Pension liability -
current
607

607Other current liabilities
16,224

16,466Total Current
Liabilities
188,850

220,112Other Credits:Deferred income taxes
113,494

107,393Investment tax credit -
deferred
2,824

3,087Regulatory liabilities
19,743

20,885Accrued pension and other
postretirement benefits
72,754

74,056Other deferred liabilities and
other
32,258

25,982Total Other
Credits
241,073

231,403Capitalization:Common shareholders'
equity
456,390

427,726Long-term debt
272,393

232,346Total
Capitalization
728,783

660,072Commitments and contingencies
(see Footnote 10)
-

-Total Liabilities and
Capitalization
$1,158,706

$1,111,587  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.    Page 8    Madison Gas and Electric Company  Consolidated Statements of Income (unaudited) (In thousands)  Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007Operating Revenues:Regulated electric
revenues
$99,177

$98,435

$265,647

$256,146Regulated gas revenues
24,843

16,588

169,247

134,728Nonregulated revenues
1,787

1,300

5,646

3,880Total Operating
Revenues
125,807

116,323

440,540

394,754Operating Expenses:Fuel for electric
generation
14,222

16,786

43,172

44,022Purchased power
20,462

20,954

56,764

61,029Natural gas purchased
15,171

8,450

119,577

93,785Other operations and
maintenance
36,455

32,327

110,878

95,642Depreciation and
amortization
9,974

7,977

29,264

24,057Other general taxes
4,120

3,976

12,692

11,796Income tax provision
7,330

8,191

19,572

19,264Total Operating
Expenses
107,734

98,661

391,919

349,595Operating Income
18,073

17,662

48,621

45,159Other Income and Deductions:AFUDC - equity funds
111

526

755

1,071Equity earnings in ATC
2,010

1,537

5,320

4,495Income tax provision
(1,177)

(880)

(2,015)

(1,971)Other income (deductions),
net
666

291

(1,014)

(162)Total Other Income and
Deductions
1,610

1,474

3,046

3,433Income before interest
expense
19,683

19,136

51,667

48,592Interest Expense:Interest on long-term
debt
4,041

3,881

12,036

11,667Other interest, net
219

297

772

320AFUDC - borrowed funds
(46)

(224)

(313)

(455)Net Interest
Expense
4,214

3,954

12,495

11,532Net Income Before Minority Interest
$15,469

$15,182

$39,172

$37,060Minority interest, net of tax
(3,084)

(2,909)

(9,235)

(8,358)Net Income
$12,385

$12,273

$29,937

$28,702  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 9    Madison Gas and Electric Company  Consolidated Statements of Cash Flows (unaudited) (In thousands)   Nine Months Ended
September 30,2008

2007Operating Activities:Net income
$29,937

$28,702Items not affecting cash:Depreciation and
amortization
29,264

24,057Deferred income taxes
3,807

(3,379)Amortization of investment tax
credits
(263)

(307)Amortization of debt issuance
costs and discount
417

406Provision for doubtful accounts
receivable
2,652

2,192AFUDC - equity funds
(755)

(1,071)Employee benefit plan
expenses
6,079

6,099Equity earnings in ATC
(5,320)

(4,495)Minority interest, net of
tax
9,235

8,358Gain on sale of property
(294)

-Gain on sale of
investments
(490)

(363)Reserve for fuel refund
3,183

1,244Other items
2,872

3,250Changes in working
capital:(Increase) decrease in current
assets
(5,469)

11,571Decrease in current
liabilities
(18,768)

(6,058)Proceeds from Congestion Cost
and Line Loss Allocation Agreement
-

2,336Dividend income from ATC
3,754

3,282Cash contributions to pension
and other postretirement plans
(7,081)

(5,077)Other noncurrent items,
net
5,115

(694)Cash Provided by Operating
Activities
57,875

70,053Investing Activities:Capital expenditures
(84,949)

(102,576)Capital contributions to
investments
(2,420)

(25)Advance to WEPCO for ATC work
related to Elm Road
(267)

(296)Proceeds from sale of
property
303

724Proceeds from sale of
investments
795

456Other
981

860Cash Used for Investing
Activities
(85,557)

(100,857)Financing Activities:Cash dividends paid to parent by
MGE
-

(13,121)Cash dividends paid to parent
from Power West Campus and Transco
(9,498)

(8,961)Equity contributions received by
Power Elm Road and Transco
33,582

33,669Repayment of long-term
debt
(30,000)

(15,000)Issuance of long-term
debt
40,000

25,000(Decrease) increase in
short-term debt, net
(6,500)

10,000Other
(299)

-Cash Provided by Financing
Activities
27,285

31,587Change in Cash and Cash Equivalents
(397)

783Cash and cash equivalents at
beginning of period
1,859

1,246Cash and cash equivalents at end
of period
$1,462

$2,029  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 10    Madison Gas and Electric Company  Consolidated Balance Sheets (unaudited) (In thousands)   ASSETS
September 30, 2008

December 31, 2007Utility Plant(At Original Cost, in Service):Electric
$766,935

$691,162Gas
277,421

268,032Nonregulated
110,135

110,020Gross
plant in service
1,154,491

1,069,214Less
accumulated provision for depreciation
(452,868)

(430,572)Net
plant in service
701,623

638,642Construction
work in progress
188,622

205,214Total
Utility Plant
890,245

843,856Other property
and investments
1,026

2,777Investment in
ATC
44,715

40,799Total
Other Property and Investments
45,741

43,576Current
Assets:Cash
and cash equivalents
1,462

1,859Restricted
cash
5,486

2,896Accounts
receivable, less reserves of $4,266 and $3,709, respectively
34,400

43,668Affiliate
receivables
34

4Other
receivables, less reserves of $148 and $114, respectively
4,814

3,295Unbilled
revenues
18,213

30,370Materials
and supplies, at lower of average cost or market
15,289

14,809Fossil
fuel
3,691

5,136Stored
natural gas, at lower of average cost or market
45,698

28,483Prepaid
taxes
10,191

13,249Regulatory
assets - current
7,293

189Other
current assets
8,279

8,216Total
Current Assets
154,850

152,174Other long-term
receivables
5,798

5,485Special billing
projects
726

999Affiliate
receivable long-term
9,278

10,676Regulatory
assets
50,953

53,375Other deferred
assets and other
5,246

5,751Total
Assets
$1,162,837

$1,115,892CAPITALIZATION
AND LIABILITIESCommon
stockholder's equity
$359,156

$329,944Minority
interest
170,347

137,028Long-term
debt
272,393

232,346Total
Capitalization
801,896

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

30,000Short-term
debt - commercial paper
54,500

61,000Accounts
payable
30,440

58,263Affiliate
payables
145

2,115Accrued
interest and taxes
11,849

10,148Accrued
payroll related items
7,516

6,980Deferred
income taxes
2,236

4,153Regulatory
liabilities - current
3,913

2,924Pension
liability - current
607

607Other
current liabilities
8,676

9,450Total
Current Liabilities
119,882

185,640Other
Credits:Deferred
income taxes
113,480

106,924Investment
tax credit - deferred
2,824

3,087Regulatory
liabilities
19,743

20,885Accrued
pension and other postretirement benefits
72,754

74,056Other
deferred liabilities and other
32,258

25,982Total
Other Credits
241,059

230,934Commitments
and contingencies (see Footnote 10)
-

-Total
Capitalization and Liabilities
$1,162,837

$1,115,892  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 11    MGE Energy, Inc., and Madison Gas and Electric
Company  Notes
to Consolidated Financial Statements (unaudited) September 30, 2008   1. Basis of
Presentation - MGE Energy and MGE.  This report is a
combined report of MGE Energy and MGE. References in this report to
"MGE Energy" are to MGE Energy, Inc., and its subsidiaries. References
in this report to "MGE" are to Madison Gas and Electric Company.  In accordance
with FIN 46R, Consolidation of Variable Interest Entities - An Interpretation
of ARB No. 51, MGE is required to consolidate MGE Power West Campus and
MGE Power Elm Road. Both entities own electric generating assets and lease those
assets to MGE. MGE is considered the primary beneficiary of these entities as a
result of these leasing arrangements.  The accompanying
consolidated financial statements as of September 30, 2008, and for the
three and nine months then ended are unaudited, but include all adjustments that
MGE Energy and MGE management consider necessary for a fair statement of
their respective financial statements. All adjustments are of a normal,
recurring nature except as otherwise disclosed. The year-end consolidated
balance sheet information was derived from the audited balance sheet appearing
in MGE Energy's and MGE's annual reports on Form 10-K for the year ended
December 31, 2007, but does not include all disclosures required by
generally accepted accounting principles. These notes should be read in
conjunction with the financial statements and the notes on pages 53 through 102
of the 2007 Annual Report on Form 10-K.  2. Equity and
Financing Arrangements.  a. Common Stock -
MGE Energy.  MGE Energy
sells shares of its common stock through its Stock Plan. Those shares may be
newly-issued shares or shares that MGE Energy has purchased in the open
market for resale to participants in the Stock Plan.  For the nine
months ended September 30, 2008, MGE Energy issued 357,732 new shares
of common stock under the Stock Plan for net proceeds of $12.1 million. For
the nine months ended September 30, 2007, MGE Energy issued 488,708
new shares of common stock under the Stock Plan for net proceeds of
$16.5 million.  On
November 9, 2006, MGE Energy entered into a Distribution Agreement
with J.P. Morgan under which MGE Energy may offer and sell up to 1,500,000
shares of its common stock. During the nine months ended September 30,
2008, MGE Energy did not issue any shares of its common stock under this
agreement. During the nine months ended September 30, 2007, MGE Energy
issued 383,500 shares of its common stock for $12.7 million in net proceeds
under this agreement.  b. Dilutive
Shares Calculation - MGE Energy.  MGE Energy
does not have any dilutive securities.  c. Accumulated
Other Comprehensive Income - MGE Energy and MGE.  The accumulated
other comprehensive income balance at September 30, 2008, includes the
unrealized gains and losses on available-for-sale securities and certain hedging
transactions. The following table illustrates the changes in accumulated other
comprehensive income, net of taxes, from December 31, 2007, to
September 30, 2008, for MGE Energy and MGE:  Page 12      (In thousands)
MGEE
MGEBalance, December 31, 2007
$1,643
$898Change in unrealized gain on available-for-sale
securities,
net of tax ($164 and
$265)
(245)
(396)Reclassification to realized gain on
available-for-sale securities,
net of tax ($751 and
$194)
(1,120)
(289)Change in cash flow hedges, net of tax ($26 and
$26)
(40)
(40)Balance, September 30, 2008
$238
$173  d. Unsecured Debt
- MGE Energy and MGE.  On
September 11, 2008, MGE issued $40 million of its unsecured 5.59%
senior notes due September 11, 2018. MGE used the net proceeds from the
sale of the notes to repay $30 million of its 6.02% Medium-Term Notes that
matured on September 15, 2008 and to repay $10 million of its
short-term indebtedness consisting of commercial paper. The Notes carry an
interest rate of 5.59% per annum, which is payable semiannually on March 11
and September 11 of each year, commencing on March 11, 2009. Holders
of the notes have the right to require MGE to repurchase their notes at par in
the event of an acquisition of beneficial ownership of 30% or more of the
outstanding voting stock of MGE Energy, Inc. The Note Purchase Agreement
requires MGE to maintain a ratio of its consolidated indebtedness to
consolidated total capitalization not to exceed a maximum of 65%. The Note
Purchase Agreement also restricts MGE from issuing "Priority Debt" in an amount
exceeding 20% of its consolidated assets. Priority Debt is defined as any
indebtedness of MGE secured by liens other than specified liens permitted by the
Note Purchase Agreement and certain unsecured indebtedness of certain
subsidiaries.  e. Credit
Facilities - MGE Energy and MGE.  On
August 29, 2008, MGE entered into an agreement establishing a
$20 million committed credit facility. The agreement expires on
March 31, 2009. This facility carries an interest rate based on either
prime or a LIBOR-type rate for each applicable interest period plus, in the case
of the LIBOR-type rate, 0.40%. Interest is payable on the last day of each
calendar quarter, if based upon prime, and on the last day of each interest
period if less than three months or the three-month anniversary of the first day
of the interest period, if based upon the LIBOR-type rate . The facility is
expected to be used as a backup facility to MGE's commercial paper program. No
borrowings are outstanding under this facility at this time. A change in control
constitutes a default under the agreement. Change in control events are defined
as (i) a failure by MGE Energy to hold 100% of the outstanding voting
equity interest in MGE or (ii) the acquisition of beneficial ownership of 30% or
more of the outstanding voting stock of MGE Energy by one person or two or
more persons acting in concert. The agreement requires MGE to maintain a ratio
of its consolidated indebtedness to consolidated total capitalization not to
exceed a maximum of 65%.  On
August 29, 2008, MGE Energy entered into a separate agreement
establishing a $20 million revolving credit facility. The revolving credit
facility expires on August 28, 2009. This facility carries an interest rate
based on prime or a LIBOR-based rate plus, in the case of the LIBOR-based rate,
an adder, not to exceed 1.0% per annum, based on the credit rating of MGE's
senior unsecured debt. Interest is payable monthly, if based upon prime, and on
the last day of each interest period if less than three months or the
three-month anniversary of the first day of the interest period, if based upon
the LIBOR-based rate. No borrowings are outstanding under this facility at this
time. A change in control constitutes a default under the agreement. Change in
control events are defined as (i) a failure by MGE Energy to hold 100% of
the outstanding voting equity interest in MGE or (ii) the acquisition of
beneficial ownership of 30% or more of the outstanding voting stock of
MGE Energy by one person or two or more persons acting in concert. The
agreement requires MGE Energy to maintain a ratio of its consolidated
indebtedness to consolidated total capitalization not to exceed a maximum of
65%.  3. Comprehensive
Income - MGE Energy and MGE.  The reporting of
other comprehensive income is required under the provisions of SFAS 130,
Reporting Comprehensive Income. Total comprehensive income represents the
change in equity during a period from transactions and other events and
circumstances from nonowner sources. MGE Energy's and MGE's total
comprehensive income is:  Page 13     (In thousands)
Three Months Ended
September 30,

Nine Months Ended
September 30,2008
2007

2008
2007MGE EnergyNet
income
$17,310
$15,536

$41,704
$37,804Unrealized gain
(loss) on cash flow hedges, net of tax
($(444)
and $113, and $26 and $104)
662
(169)

(40)
(155)Unrealized
(loss) gain on available-for-sale securities,
net
of tax ($110 and $(249), and $164 and $(310))
(165)
372

(245)
463Reclassification
of realized gain on available-for-sale securities, net of tax ($751 and
$-, and $751 and $-)
(1,120)
-

(1,120)
-Total
comprehensive income
$16,687
$15,739

$40,299
$38,112MGENet
income
$12,385
$12,273

$29,937
$28,702Unrealized gain
(loss) on cash flow hedges, net of tax
($(444)
and $113, and $26 and $104)
662
(169)

(40)
(155)Unrealized
(loss) gain on available-for-sale securities,
net
of tax ($110 and $(79), and $265 and $(100))
(164)
118

(396)
149Reclassification
of realized gain on available-for-sale securities, net of tax ($194 and
$-, and $194 and $-)
(289)
-

(289)
-Total
comprehensive income
$12,594
$12,222

$29,212
$28,696  4. Investments - MGE Energy and
MGE.  a. Investment in
ATC.  ATC owns and operates electric
transmission facilities primarily in Wisconsin. MGE received an interest in ATC
when it, like other Wisconsin electric utilities, contributed its electric
transmission facilities to ATC. That interest is presently held by MGE Transco,
which is jointly owned by MGE and MGE Energy.  On September 30, 2008, the PSCW
approved an amendment to the Operating Agreement of ATC. The amendment, which
became retroactively effective to January 1, 2008, effected changes in the
allocation of profits and losses among the various members, which include both
taxpaying and tax-exempt entities, in order to allocate more appropriately
revenues to all participants, based on invested capital and FERC mandated rate
recovery for each participant. The earnings allocation methodology change will
result in the taxpaying members receiving additional earnings and less being
allocated to the tax-exempt members, reflecting the difference in their tax
status. As part of the amendment process, the taxpaying members transferred a
portion of their equity interests to the tax-exempt members. MGE Transco's
ownership in the ATC changed by 0.08% as a result of the member unit
transfer.  MGE Transco, through MGE, has a seat
on the Board of Directors of ATC and has a 20% ownership interest in ATC
Management, Inc. Due to MGE Transco's ability to exercise significant control
over management activities, MGE Transco has accounted for its investment in ATC
under the equity method of accounting. For the nine months ended
September 30, 2008 and 2007, MGE Transco recorded equity earnings from the
investment in ATC of $5.3 million (pretax) and $4.5 million (pretax),
respectively. Dividend income received from ATC was $3.8 million and
$3.3 million for the nine months ended September 30, 2008 and 2007,
respectively. During the nine months ended September 30, 2008, MGE Transco
made capital contributions of $2.3 million. During the nine months ended
September 30, 2007, MGE Transco made no cash contributions to ATC. However,
on February 15, 2007, MGE (through MGE Transco) transferred
$1.4 million in additional transmission assets to ATC. In exchange, MGE
Transco received an additional $0.7 million investment in ATC and
$0.7 million in cash consideration.  At September 30, 2008, MGE is
the majority owner and MGE Energy, the holding company, is the minority
owner of MGE Transco. MGE Energy's proportionate share of the equity and
net income of MGE Transco is classified within the MGE financial statements as
minority interest.   Page 14    ATC's
summarized financial data for the three and nine months ended September 30,
2008 and 2007 is as follows:  (In
thousands)Income statement data for the three months ended
Sept. 30,
2008

2007Operating revenues
$119,955

$103,733Operating expenses
(52,107)

(50,126)Other (expense) income
(169)

9Interest expense, net
(18,037)

(14,230)Earnings before members' income taxes
$49,642

$39,386MGE's and MGE Energy's equity earnings in
ATC
$2,010

$1,537   (In
thousands)Income statement data for the nine months ended
Sept. 30,
2008

2007Operating revenues
$345,131

$303,550Operating expenses
(156,267)

(148,963)Other expense
(315)

(317)Interest expense, net
(50,794)

(40,689)Earnings before members' income taxes
$137,755

$113,581MGE's and MGE Energy's equity earnings in
ATC
$5,320

$4,495  b. Other
Investments.  MGE Energy
and MGE hold available for sale securities in both publicly traded and privately
held companies. During the three and nine months ended September 30, 2008,
certain investments were liquidated. As a result of these liquidations,
MGE Energy and MGE received $2.3 million and $0.8 million,
respectively, in cash proceeds and in addition, MGE Energy recorded a
receivable of $1.0 million. MGE Energy and MGE recorded a
$2.8 million and $0.5 million pre-tax gain on the sale of investments,
respectively, in the income statement for the three and nine months ended
September 30, 2008.  During the nine
months ended September 30, 2007, certain investments were also liquidated.
As a result of these liquidations, MGE Energy and MGE received
$0.5 million in cash proceeds and recorded a $0.4 million pre-tax gain
on the sale of investments in the income statement for the nine months ended
September 30, 2007.  5. Taxes - MGE Energy and
MGE.  a. FIN 48.  On January 1, 2007,
MGE Energy and MGE adopted FIN 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109, Accounting for Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with
SFAS No. 109. The interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109 and requires a
recognition threshold and measurement standard for the financial statement
recognition and measurement of a tax position taken, or expected to be taken, in
an income tax return. FIN 48 defines the threshold for recognizing tax return
positions in the financial statements as "more likely than not" that the
position is sustainable, based on its merits. Subsequent recognition,
derecognition, and measurement is based on management's best judgment given the
facts, circumstances and information available at the reporting date.  For both MGE Energy and MGE,
there have been no changes to unrecognized tax benefits existing at
December 31, 2007, nor any additions for new tax positions, during the nine
months ended September 30, 2008. During the nine months ended
September 30, 2008, less than $0.1 million of interest was accrued on
unrecognized tax benefits.  b. Effective Tax Rate.  MGE Energy's effective income
tax rate for the three and nine months ended September 30, 2008, is 36.0%
and 35.8%, respectively, compared to 37.5% and 36.5% for the same periods in
2007. The decrease in the rates for 2008 compared to 2007 is primarily
attributable to an increase in federal tax credits from the production of
electricity from wind energy, as a result of placing the Top of Iowa III wind
project into production in February 2008.  Page 15    MGE's
effective income tax rate for the three and nine months ended September 30,
2008, is 35.5% and 35.5%, respectively, compared to 37.4% and 36.4% for the same
periods in 2007. The decrease in the rates for 2008 compared to 2007 is also
primarily attributable to an increase in wind energy tax credits.  6. Elm Road - MGE Energy and
MGE.  a. Construction.  On November 4, 2005, MGE Power
Elm Road acquired a 8.33% ownership interest in each of two 615 MW generating
units being constructed in Oak Creek, Wisconsin (Oak Creek expansion). MGE Power
Elm Road's sole principal asset is the 8.33% undivided ownership interest in the
aforementioned coal-fired generating plants. The estimated share of capital
costs for that ownership interest in both units was approximately
$172 million (excluding capitalized interest).  In July 2008, the Elm Road
construction contractor gave notice forecasting that the in-service date of Unit
1 would be delayed by three months from the guaranteed in-service date of
September 29, 2009 and that the in-service date of Unit 2 would be one
month earlier than the guaranteed in-service date of September 29, 2010.
The notice stated that the delays in Unit 1 were caused by severe weather,
changes in local labor conditions from those anticipated by the contractor and
other factors. The notice also stated that the contractor is analyzing the
impacts of these events and expects to submit claims for schedule extensions and
cost relief. The claims are expected to be submitted before December 31,
2008. At this time, because of the lack of information, the operator is not able
to predict the amount of the claims that may be submitted, or the validity of
such claims. However, the operator of the units has stated its belief that the
circumstances and events for which they continue to retain price adjustment risk
under the construction contract are force majeure, wage escalation in excess of
4% as measured by published wage bulletins, delays caused by the operator,
requested change in scope or performance by the operator and unforeseen
sub-surface ground conditions. On September 29, 2008, the operator notified
the Elm Road construction contractor that it was invoking the contractual
dispute resolution process in order to resolve the rights of the parties under
the contract. The contract provides for an informal resolution process, followed
by mediation, and then binding arbitration. The operator is currently unable to
predict how long this process will take or what the outcome of this process will
be. Management is unable to determine the financial impact, if any, of these
matters at this time.  At September 30, 2008,
$140.4 million (excluding capitalized interest) related to this project is
reflected in the construction work in progress balance on MGE's and
MGE Energy's consolidated balance sheets. MGE Power Elm Road calculates
capitalized interest in accordance with SFAS 34, Capitalization of
Interest Cost, on the Elm Road project. At September 30, 2008, MGE
Power Elm Road recorded a total of $9.6 million in capitalized interest
related to the Elm Road project which is reflected in the construction work in
progress balance on MGE's and MGE Energy's consolidated balance sheets.  b. Consolidation.  In connection with this project,
MGE Energy and its subsidiaries entered into various agreements, including
a facility lease agreement between MGE Power Elm Road (a nonregulated subsidiary
of MGE Energy) and MGE. The financial terms of the facility lease include a
capital structure of 55% equity and 45% long-term debt, and return on equity of
12.7%, a lease term of 30 years, and a 5% lease payment reduction in the first
five years.  Based on the nature and terms of the
leasing agreement and the relationship it establishes, MGE absorbs a majority of
the expected losses, residual value, or both, associated with the ownership of
MGE Power Elm Road. MGE also is the party most closely associated with MGE Power
Elm Road. As a result, MGE is the primary beneficiary and MGE Power Elm Road is
a VIE under FIN 46R. Accordingly, MGE Power Elm Road has been consolidated in
the financial statements of MGE.  MGE Energy's share of the equity
and net income (through its wholly owned subsidiary MGE Power) of MGE Power Elm
Road is classified within the MGE financial statements as minority interest.   Page 16    c. Nonregulated Revenues.  MGE has approval from the PSCW to
defer the recovery of the payments made to MGE Power Elm Road for carrying costs
during construction of the facility, management fees, and community impact
mitigation costs. MGE estimates that the total carrying costs on the Elm Road
project will be $61.0 million. This estimate is subject to change based on
changes in interest rates, timing of capital expenditures, and the total project
cost. During 2008, MGE will recover $12.1 million in electric rates for its
investment in MGE Power Elm Road. Of this amount, $9.6 million relates to
carrying costs and $2.5 million relates to management fees, community
impact mitigation costs, and other related costs.  MGE began collecting the carrying
costs in rates in 2006. These amounts are being collected over multiple years.
Of these costs, MGE estimates that $22.3 million relates to the capitalized
interest and the debt portion of the facility. These costs will be recognized
over the period in which the facility will be depreciated. The remaining
$38.7 million is estimated to represent the equity portion and is being
recognized over the period allowed for recovery in rates. For the nine months
ended September 30, 2008, $7.2 million related to the carrying costs
were recovered in rates. Of this amount, $2.4 million relates to the debt
portion of the facility and was deferred on the consolidated financial
statements of MGE and MGE Energy. The remaining $4.8 million
represents the equity portion and was recognized as nonregulated revenues in the
consolidated financial statements of MGE and MGE Energy.  d. WPDES Permit.  On November 29, 2007, the
Administrative Law Judge (the "ALJ") in the proceeding related to the previously
issued Wisconsin Pollution Discharge Elimination System ("WPDES") permit
determined that the two additional coal units that are part of the Oak Creek
expansion are "new facilities" under section 316(b) of the Federal Clean Water
Act. The ALJ did not vacate the WPDES permit or any other permit necessary to
continue construction of the two additional coal units, pointing out that, based
upon the present record, the water intake system currently under construction as
part of the Oak Creek expansion may be permittable under the standards that
apply to new facilities. The ALJ remanded the WPDES permit to the Wisconsin
Department of Natural Resources (the "WDNR") and directed the WDNR to reissue or
modify the permit to reflect "best technology available" to comply with the
standards applicable to new facilities under Wisconsin state law. As part of the
decision, the ALJ restated his prior opinion that the water intake system
currently under construction may not be operated so long as it remains a
contested matter.  On May 8, 2008, WDNR issued its
public notice that it intended to reissue the WPDES permit to allow for the
once-through cooling system that was under construction by Wisconsin Energy
Corporation. On June 6, 2008, EPA issued its concurrence letter on the
draft permit indicating it would not object to the modification of the WPDES
permit as drafted. A public information hearing on the intended reissued WPDES
permit was held on June 9, 2008 and the public comment period closed on
June 16, 2008. On July 31, 2008, the WDNR issued the final modified
permit, with no substantive changes from the previously issued draft permit. The
deadline for a legal challenge to the permit has expired without appeal.  On July 31, 2008, the joint
owners of the Oak Creek expansion reached an agreement with Clean Wisconsin,
Inc. and Sierra Club, the groups opposing the WPDES permit. Under the settlement
agreement, these groups agreed to withdraw their opposition to the modified
WPDES permit for the expansion units at Oak Creek. The joint owners committed to
various environmental projects, including projects designed to address
greenhouse gas emissions and water quality. MGE's share of those commitments
would involve a payment of approximately $0.4 million in 2009 for
greenhouse gas reduction efforts and, subject to regulatory approval, further
payments of approximately $0.3 million annually over 25 years (2010-2034)
to address water quality issues in Lake Michigan.  7. Top of Iowa III Wind Project
- MGE Energy and MGE.  MGE has constructed a 29.7 MW
(18 turbines) wind-powered electric generating facility in Iowa. In
February 2008, the project was placed into service.  At September 30, 2008, MGE had
incurred approximately $56 million of costs on the project and
$2.9 million in AFUDC, which are reflected in the property, plant, and
equipment balance on MGE's and MGE Energy's consolidated balance sheets.
During the nine months ended September 30, 2008 and 2007, MGE had recorded
$0.6 million and $1.3 million, respectively, in AFUDC related to this
project. MGE was permitted to recover 100% AFUDC on the Top of Iowa III
wind project during construction of the facility.   Page 17    8. Pension and Postretirement Plans -
MGE Energy and MGE.  MGE maintains qualified and
nonqualified pension plans, health care, and life insurance benefits.
Additionally, MGE has deferred contribution 401(k) benefit plans.  a. Net Periodic Cost.  The following table presents the
components of MGE's and MGE Energy's net periodic benefit costs recognized
for the three and nine months ended September 30, 2008 and 2007. A portion
of the net periodic benefit cost is capitalized within the consolidated balance
sheets.  (In thousands)
Three Months Ended
September 30,

Nine Months Ended
September 30,2008
2007

2008
2007Pension
BenefitsComponents of
net periodic benefit cost:Service
cost
$1,199
$1,312

$3,804
$3,934Interest
cost
2,910
2,657

8,563
7,965Expected
return on assets
(3,308)
(3,087)

(9,990)
(9,256)Amortization
of:Transition
obligation
36
36

108
108Prior
service cost
111
111

333
333Actuarial
loss
237
218

434
654Net periodic
benefit cost
$1,185
$1,247

$3,252
$3,738Postretirement
BenefitsComponents of
net periodic benefit cost:Service
cost
$467
$435

$1,400
$1,305Interest
cost
949
762

2,846
2,286Expected
return on assets
(323)
(288)

(970)
(864)Amortization
of:Transition
obligation
106
106

320
320Prior
service cost
72
52

215
156Actuarial
loss
76
44

229
132Net periodic
benefit cost
$1,347
$1,111

$4,040
$3,335  b. Expected Cash Flows.  There are no required contributions
for the 2008 plan year. Likewise, there were no required contributions for the
2007 plan year. MGE elected to make discretionary deductible contributions of
$7.1 million during the nine months ended September 30, 2008. MGE may
elect to make additional discretionary deductible contributions.  9. Share-Based Compensation -
MGE Energy and MGE.  The MGE Energy Board approved a
Performance Unit Plan (the "Plan") on December 15, 2006. Under the Plan,
eligible participants may receive performance units that entitle the holder to
receive a cash payment equal to the value of a designated number of shares of
MGE Energy's common stock, plus dividend equivalent payments thereon, at
the end of the set performance period.  On January 1, 2007, the Board of
Directors granted 22,479 units based on the MGE Energy December 31,
2006, closing stock price. On January 18, 2008, the Board of Directors
granted 18,538 units based on the MGE Energy closing stock price as of that
date. These units are subject to either a four or five year graded vesting
schedule. Based on the provisions of SFAS 123R, Share-Based Payment,
on the grant date, MGE Energy and MGE measured the cost of the employee
services received in exchange for the award based on current market value of
MGE Energy common stock. The fair value of the awards has been subsequently
re-measured at September 30, 2008. Changes in fair value as well as the
original grant have been recognized as compensation cost. Because this amount
will be remeasured throughout the vesting period, the compensation cost is
subject to variability.  For nonretirement eligible employees,
stock based compensation costs are accrued and recognized using the graded
vesting method. Pursuant to the provisions of SFAS 123R and the terms of
the plan, compensation cost for retirement eligible employees or employees that
will become retirement eligible during the vesting schedule, are recognized on
an abridged horizon also using the graded vesting method.  Page 18    During the
nine months ended September 30, 2008 and 2007, MGE recorded
$0.4 million and $0.2 million, respectively, in compensation expense
as a result of this plan. A forfeiture, but no cash settlements, occurred during
the aforementioned period.  10. Commitments and Contingencies.  a. Coal Contracts - MGE Energy
and MGE.  MGE has coal supply contracts related
to the Blount plant. As of September 30, 2008, total coal commitments
related to the Blount plant are estimated to be $4.0 million for the
remainder of 2008, $11.6 million for 2009, and $7.2 million for 2010.
Fuel procurement for MGE's jointly owned Columbia and Elm Road plants are
handled by Alliant and Wisconsin Energy Corporation who are, respectively, the
operating companies. If any minimum purchase obligations must be paid under
these contracts, management believes these obligations would be considered costs
of service and recoverable in rates. As of September 30, 2008, MGE's share
of the total commitments for Columbia and Elm Road plants are estimated to be
$3.3 million for the remainder of 2008, $18.3 million in 2009,
$31.1 million in 2010, $9.3 million in 2011, and $4.4 million in
2012.  b. Natural Gas Supply Contracts -
MGE Energy and MGE.  MGE has natural gas supply
commitments which include market-based pricing. As of September 30, 2008,
total natural gas supply commitments are estimated to be $26.5 million for
the remainder of 2008, $31.2 million for 2009, and $2.1 million for
2010. Management expects to recover these costs in future customer rates.  c. Environmental - MGE Energy
and MGE.  MGE is listed as a potentially
responsible party for a site the EPA has placed on the national priorities
Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing and
processing waste oil for several years. This site requires clean up under the
Comprehensive Environmental Response, Compensation and Liability Act. A group of
companies, including MGE, is currently working on cleaning up the site.
Management believes that its share of the final cleanup costs will not result in
any materially adverse effects on MGE's operations, cash flows, or financial
position. Insurance may cover a portion of the cleanup costs. Management
believes that the cleanup costs not covered by insurance will be recovered in
current and future rates. At September 30, 2008, MGE accrued a
$0.1 million gross liability for this matter. The expected range of loss
for this item is estimated to be between $0.1 million and
$0.2 million.  Effective March 31, 2006,
Wisconsin adopted the Energy Efficiency and Renewables Act that focuses on three
areas: increasing the use of renewable energy in Wisconsin, promoting the
development of renewable energy technologies, and strengthening the state's
energy efficiency programs. This new legislation requires that by 2015, 10% of
the state's electricity be generated from renewable resources. As part of this
initiative, MGE plans to add additional renewable energy resources, such as wind
farms. MGE expects the cost to comply with the Act and its accompanying
regulations will be recoverable through current and future rates.  Air quality regulations promulgated
by the EPA and WDNR in accordance with the Federal Clean Air Act and the Clean
Air Act Amendments of 1990 impose restrictions on emission of particulates,
sulfur dioxide (SO2), nitrogen oxides (NOx), and other
pollutants and require permits for operation of emission sources. These permits
have been obtained by MGE and must be renewed periodically.  On March 12, 2008, the U.S. EPA
announced a new national ambient air quality standard for ozone which is more
stringent than the current standard (standard lowered from 0.08 to 0.0750 parts
per million). States (including Wisconsin) must monitor and collect data on
ozone levels in order to determine attainment or nonattainment status on a
county and/or area basis. Currently available monitoring data for Dane and
Columbia counties demonstrates attainment with this new standard. However, final
attainment designations will not be made until 2010 using the monitoring data
collected during the period 2007 through 2009. There is a possibility that
future monitoring data for one or both of these counties will demonstrate
nonattainment for this new ozone standard, which could result in additional
operating and capital expenditures at Columbia (located in Columbia county) and
Blount (located in Dane county). Similarly, new standards for particulate
emissions under 2.5 microns and monitoring data has resulted in a preliminary
nonattainment designation for Dane county and Columbia county for particulate
emissions, which could also result in increased expenditures at Blount and
Columbia (see the Federal National Ambient Air Quality Standards subsection
within the Environmental Matters section for additional details).  Page 19    Various
initiatives including, but not limited to, the Clean Air Interstate Rule (CAIR),
Clean Air Mercury Rule (CAMR), maximum achievable control technology (MACT)
standards, new source performance standards (NSPS), Clean Air Visibility Rule
(CAVR), the protection of visibility by application of best available retrofit
technologies (BART), and existing and proposed state mercury emissions limits,
are expected to result in significant additional operating and capital
expenditures at Columbia, Elm Road, and Blount. There is some uncertainty
concerning the mercury emission reduction requirements in light of a
February 8, 2008, U.S. Court of Appeals decision vacating CAMR and the
potential for the Supreme Court to rule on this decision. Further, the state of
Wisconsin's mercury rules under NR 446 that are significantly different than
CAMR have been finalized through state legislative review process, these will
further increase mercury control compliance costs at these facilities (as
compared to CAMR). See the State mercury rules subsection of the Environmental
Matters section for additional details. There is also uncertainty concerning the
NOxand SO2 emissions reduction requirements of CAIR in
light of a July 11, 2008, U.S. Court of Appeals decision vacating CAIR. The
EPA, the Utility Air Regulatory Group (UARG), and others have appealed the
decision by requesting an en banc rehearing before the Court of Appeals.  In 1998, the EPA issued a rule that
imposed NOx emission budget for emission sources in Wisconsin. In
2000, the Court of Appeals for the District of Columbia invalidated a portion of
the rule as applied to Wisconsin; however, the Court stayed that portion of the
challenge concerning Wisconsin's alleged impacts on downwind, eight-hour ozone
nonattainment areas. EPA has also stayed that portion of the rule concerning
Wisconsin's alleged impacts on downwind eight-hour ozone nonattainment areas. If
that portion of the rule concerning eight-hour ozone nonattainment areas is
upheld, the resulting NOx emission budget for Wisconsin could
potentially affect the level of permissible NOx emissions from
Blount, Columbia, and WCCF.  The Columbia operator's current
estimates show that MGE's share of the capital expenditures required to comply
with various environmental initiatives will be between $130 million and
$200 million. According to current estimates, compliance with various
environmental initiatives is also expected to result in an increase to MGE's
pro-rata share of Columbia's ongoing operating expenses. The operator and MGE
management are continuing to explore various alternatives to comply with these
standards. Accordingly, actual capital expenditures may fall above or below the
range provided. These standards and initiatives may also result in additional
capital and operating expenditures at MGE's other generating facilities. MGE
expects that the costs to comply with these standards will be fully recoverable
through rates. The PSCW is permitting MGE to defer pre-certification and
pre-construction costs related to compliance with environmental regulations at
Columbia. Additionally, MGE is entitled to a carrying cost on the related
pre-construction costs at a 100% AFUDC rate. As of September 30, 2008, MGE
had incurred $1.3 million (excluding carrying costs) in expenditures at
Columbia related to environmental initiatives.  As of September 30, 2008,
Columbia entered into various contractual commitments with vendors for a small
portion of the aforementioned expenditures as well as other Columbia
environmental projects. MGE is indirectly a party to these agreements as a
result of its joint ownership of Columbia and is also contractually obligated,
under the applicable ownership and operating agreements, with respect to any
commitments made. MGE has a 22% ownership interest in Columbia. MGE's share of
these commitments is estimated to be $0.5 million for the remainder of
2008. These costs are expected to be capitalized and included in the
consolidated balance sheets of MGE Energy and MGE.  d. Chattel Paper Agreement and Other
Guarantees - MGE Energy and MGE.  MGE makes available to qualifying
customers a financing program for purchasing and installing energy-related
equipment that will provide more efficient use of utility service at the
customer's property. MGE is party to a chattel paper purchase agreement with a
financial institution under which it can sell or finance an undivided interest
with recourse, in up to $10.0 million of the financing program receivables,
until August 28, 2009. At September 30, 2008, MGE had sold an
outstanding $3.9 million interest in these receivables, which MGE accounted
for as a sale under SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities - A Replacement of
FASB Statement No. 125. MGE retains the servicing responsibility
for these receivables.  On January 1, 2007, MGE adopted
SFAS 156, Accounting for Servicing of Financial Assets, an amendment of
SFAS 140. SFAS 156 clarified when to separately account for
servicing rights, requires these rights to be initially measured at fair value,
and provides the option to subsequently account for those servicing rights at
either fair value or under the amortization method previously required under
SFAS 140. MGE continues to account for servicing rights under the
amortization method. Initial determination of the servicing asset fair value is
based on the present value of the estimated future cash flows. The discount rate
is based on the PSCW authorized weighted cost of capital.  Page 20    MGE would
be required to perform under its guarantee if a customer defaulted on its loan.
The energy-related equipment installed at the customer sites is used to secure
the customer loans. The loan balances outstanding at September 30, 2008,
approximate the fair value of the energy-related equipment acting as collateral.
The length of the MGE guarantee to the financial institution varies from one to
ten years depending on the term of the customer loan. Principal payments for the
next five years on the loans are $0.4 million in 2008, $0.6 million in
2009, $0.8 million in 2010, $0.5 million in 2011, and
$0.3 million in 2012.  e. Other Legal Matters -
MGE Energy and MGE.  MGE is involved in various other
legal matters that are being defended and handled in the normal course of
business. MGE maintains accruals for such costs that are probable of being
incurred and subject to reasonable estimation. As of September 30, 2008,
MGE has a total of $1.5 million accrued in the financial statements for
such matters. The ultimate outcome of such matters is uncertain and may have an
adverse effect on MGE's and MGE Energy's results of operations, financial
position, and cash flows.  f. Venture Debt Commitment -
MGE Energy.  MGE Energy has a three year
agreement with a venture debt fund expiring in December 2010.
MGE Energy has committed to invest up to a total of $1.0 million into
this fund. As of September 30, 2008, MGE Energy has $0.7 million
remaining in commitments. The timing of infusions is dependent on the needs of
the fund and is therefore uncertain at this time.  g. ATC Capital Commitment -
MGE Energy and MGE.  On September 18, 2008, MGE
Transco elected to participate in a voluntary capital call for ATC. As a result,
MGE Transco contributed $1.1 million to ATC in October 2008.  11. Restructuring Activities -
MGE Energy and MGE.  On January 19, 2006, MGE
announced a plan, subject to certain conditions, that includes discontinuing
coal use at the end of 2011 at Blount. The plant will continue to run on natural
gas but will be reduced from its current approximate 190 MW capacity to 100 MW
when coal burning is discontinued. MGE has determined that certain employee
positions will be eliminated in 2011 as a result of this exit plan.  MGE has entered into severance
agreements providing severance benefits to the nonunion employees affected by
the exit plan. Additionally, MGE ratified a labor agreement with the IBEW
providing those union employees affected by the exit plan with involuntary and
voluntary severance benefits. MGE has accounted for the involuntary union and
nonunion severance benefits in accordance with the provisions of SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. These
benefits were recognized initially at the respective communication dates based
on the fair value of the liability as of the termination date and are being
recognized ratably over the future service period of the employees. Benefits are
expected to be paid as follows: $0.2 million in 2010 and $1.2 million
in 2011. Total benefits paid as of September 30, 2008 were
$0.2 million.  MGE will recover in rates the costs
associated with the discontinuance of coal at Blount. As such, the severance
charges for the nonunion and union employees have been deferred and recognized
on the consolidated balance sheet of MGE Energy and MGE as a regulatory
asset.  The following table presents the
activity in the restructuring accrual from December 31, 2007, through
September 30, 2008:   (In thousands)Balance at December 31, 2007
$609Additional expense, net (deferred)
172Cash payments during the period
(149)Balance at September 30, 2008
$632  The aforementioned exit plan has also
resulted in accelerated depreciation for the Blount assets expected to be
retired in 2011. These assets will be recovered in rates over a four year period
starting in 2008. For the nine months ended September 30, 2008,
$2.5 million of accelerated depreciation expense had been recognized and
recovered in rates.   Page 21    12. Derivative and Hedging Instruments
- MGE Energy and MGE.  As part of its regular operations,
MGE enters into contracts, including options, swaps, futures, forwards, and
other contractual commitments, to manage its exposure to interest rates,
commodity prices, and gas revenues. MGE evaluates its derivative contracts in
accordance with SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted. To the extent that these
contracts are derivatives, MGE assesses whether or not the normal purchases or
normal sales exclusion applies. For contracts in which this exclusion cannot be
applied, SFAS 133 requires MGE Energy and MGE to recognize such
derivatives in the consolidated balance sheets at fair value, with changes in
the fair value of derivative instruments to be recorded in current earnings or
deferred in accumulated other comprehensive income (loss), depending on whether
a derivative is designated as, and is effective as, a hedge and depending on the
type of hedge transaction. If the derivative qualifies for regulatory deferral
subject to the provisions of SFAS 71, Accounting for the Effects of
Certain Types of Regulation, the derivatives are marked to fair value
pursuant to SFAS 133 and are offset with a corresponding regulatory asset
or liability.  In April 2007, the
FASB issued FSP 39-1, Amendment of FASB Interpretation No. 39
(FSP FIN 39-1). This pronouncement amends FIN 39, Offsetting of Amounts
Related to Certain Contracts, and allows companies to offset fair value
amounts recognized for the right to reclaim cash collateral (a receivable) or
the obligation to return cash collateral (a payable) against fair value amounts
recognized for derivative instruments executed with the same counterparty under
a master netting agreement. MGE and MGE Energy elected the net presentation
as prescribed by this pronouncement. FSP FIN 39-1 became effective for MGE and
MGE Energy as of January 1, 2008. The effects of applying this
pronouncement shall be recognized as a change in accounting principle through
retroactive application for all financial statements presented. The adoption of
this pronouncement did not have any impact on MGE's or MGE Energy's net
income. At September 30, 2008, MGE Energy and MGE had
$7.5 million in cash collateral that was netted against the net derivative
positions with counterparties.  MGE's gas and electric segments
purchased and sold exchange traded and over-the-counter options, swaps, and
futures and, in addition, holds Financial Transmission Rights (FTRs) for certain
transmission paths in the MISO market. At September 30, 2008, the cost of
all these aforementioned instruments exceeded their net market value by
$7.3 million. The amounts recorded for the net mark-to-market value of the
commodity based contracts is offset with a corresponding regulatory asset
because these transactions are part of the PGA or fuel rules clause authorized
by the PSCW.  MGE has also entered into a ten-year
purchased power agreement which provides MGE with firm capacity and energy
beginning June 1, 2012, and ending on May 31, 2022 (the "base term").
The agreement also allows MGE the option to purchase power during a period of
time preceding the base term as well as an option to extend the contract after
the base term. The agreement is a derivative contract and is recognized at its
fair value on the balance sheet. The fair value of the contract at
September 30, 2008, reflects a loss position of $1.2 million; however,
the financial effects of the contract qualify for regulatory deferral and are
recognized with a corresponding regulatory asset.  Under the PGA clause and electric
fuel rules, MGE may include in costs of fuel (natural gas or power) the costs
and benefits of the aforementioned fuel price risk management tools. Because
these costs and benefits are recoverable, the related unrealized loss/gain is
deferred on the balance sheet as a regulatory asset/liability. All of the
instruments outstanding as of September 30, 2008, will expire in 12 months
or less, except for the aforementioned ten-year purchased power agreement.
Depending on the nature of the instrument, the gain or loss associated with
these transactions will be reflected in natural gas purchased, purchased power,
or fuel used for electric generation in the delivery month applicable to the
instrument.  On September 26, 2007, MGE
entered into a non-exchange traded HDD collar. This agreement extended from
January 2008 until March 2008 and had a premium of $0.2 million.
Under this agreement, MGE was subject to a floor (3,450 HDD) and a ceiling
(3,600 HDD), based on forecasted heating degree days during the indicated
period. If actual heating degree days were below the floor, MGE was entitled to
receive a payment, and if actual heating degree days exceeded the ceiling, MGE
was obligated to make a payment. Any payment or receipt was limited to
$1.3 million. Actual heating degree days during the aforementioned period
were 3,971. Because this number exceeded the ceiling, MGE recorded a
$1.5 million expense (includes the $0.2 million premium) on the collar
in the first quarter of 2008. MGE accounted for the HDD collar using the
intrinsic value method pursuant to the requirements of EITF 99-2, Accounting
for Weather Derivatives.  Nonperformance of counterparties to
the non-exchange traded derivatives could expose MGE to credit loss. However,
MGE enters into transactions only with companies that meet or exceed strict
credit guidelines and monitors these counterparties on an ongoing basis to
mitigate nonperformance risk in its portfolio.  Page 22    13. Regional Transmission
Organizations - MGE Energy and MGE.  On April 1, 2005, the MISO
implemented its bid-based energy market. MISO is a FERC approved RTO that is
required to provide a real-time market based mechanism for congestion
management. MGE is a participant in this market. On April 1, 2005, MGE
began offering substantially all of its generation on the MISO market and
purchasing much of its load requirement from the MISO market in accordance with
the MISO Tariff.  Additionally, on May 1, 2004,
MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent
party that coordinates and directs the operation of the region's transmission
grid, administers a competitive wholesale electricity market, and plans regional
transmission expansion improvements to maintain grid reliability and relieve
congestion. MGE has two purchase power agreements, for a total of 65 MW, that
are affected by this market.  MGE reports on a net basis
transactions on the MISO and PJM markets in which it buys and sells power within
the same hour to meet electric energy delivery requirements. This treatment
resulted in $50.1 million and $43.0 million reduction to sales for
resale and purchased power expense for the three months ended September 30,
2008 and 2007, respectively, and an $134.9 million and $121.4 million
reduction to sales for resale and purchased power expense for the nine months
ended September 30, 2008 and 2007, respectively.  14. Rate Matters - MGE Energy and
MGE.  a. Rate proceedings.  On May 30, 2008, MGE filed with
the PSCW a limited scope reopener of its 2009 electric rates. The application
included an update to MGE's electric fuel costs monitored under the fuel rules
and an update to the Elm Road costs. If approved by the PSCW, the net effect of
the requested changes would result in a 6.99% increase, on average, in retail
electric rates.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric rates by 4.8% or $16.2 million and
increase gas rates by 2.8% or $7.8 million. The electric increase will
cover costs for MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs to discontinue coal use at the Blount Station. In addition to funding the
statewide energy programs, the natural gas rate increase covered costs for area
gas construction projects needed to accommodate customer growth. Authorized
return on common stock equity was set at 10.8% based on 57.4% utility common
equity.  Pursuant to the provisions of the
December 2007 rate order, the fuel rules bandwidth effective
January 1, 2008, is plus or minus 2%. See description of fuel rules
below.  On December 22, 2006, the PSCW
approved a limited scope rate case reopener related to MGE's electric rates.
This order approved an update to MGE's electric fuel costs monitored under the
fuel rules, an updated estimate of the 2007 Elm Road carrying costs, and a
request for recovery of increased ATC-related transmission costs through
December 31, 2007. This order resulted in a net 0.15% decrease, on average,
in retail electric rates for 2007. The PSCW also approved the recovery of 100%
AFUDC on the Top of Iowa III wind project beginning in November 2006 and
continuing until construction on the project ceased.  b. Fuel rules.  Actual electric fuel costs are
subject to reconciliation to the amount approved by the PSCW in MGE's rate order
covering the applicable period. Known as "fuel rules," the process can produce a
fuel surcharge for MGE or require MGE to make a refund in the form of a credit,
to the extent that the actual fuel costs are outside a range higher or lower
than the level authorized by the PSCW in that rate order.  Under fuel rules
effective January 1, 2008, MGE can apply for a fuel surcharge if its actual
electric fuel costs exceed 102% of the electric fuel costs allowed in its latest
rate order. Conversely, MGE can be required to provide a fuel credit to its
customers if actual electric fuel costs are less than 98% of the electric fuel
costs allowed in that order.   Page 23    The
PSCW approved a $0.00239 per kWh interim fuel surcharge on MGE's electric rates
effective May 6, 2008, to cover increased fuel and purchased power
expenses. This interim fuel surcharge will result in an estimated
$8.0 million increase in electric revenues on an annual basis. For the
three and nine months ended September 30, 2008, this interim surcharge
resulted in a $2.2 million and a $3.4 million increase to electric
rates, respectively. On September 22, 2008, MGE and the intervenors in this
proceeding filed a stipulation agreement for consideration by the PSCW. The
stipulation allows the interim surcharge to remain in effect until the end of
the year, but requires MGE to review its 2008 monitored fuel costs at year-end
and to refund to customers, with interest at 10.8%, any amount by which its
actual fuel costs fall short of the monitored fuel costs collected in rates. See
Footnote 18 for additional information on this stipulation. As of
September 30, 2008, MGE accrued and expects to refund $3.2 million to
customers as a result of this stipulation and has reflected this reduction in
other electric revenues.  On April 26,
2007, the PSCW approved a $0.00339 per kWh interim fuel surcharge on MGE's
electric rates to cover increased fuel and purchased power expenses. On
August 31, 2007, MGE received a final decision which reduced the fuel
surcharge from $0.00339 per kWh to $0.00242 per kWh. These surcharges resulted
in a gross increase to electric rates of $6.9 million for the twelve months
ended December 31, 2007. For the interim period April 26, 2007,
through August 31, 2007, the difference between the interim surcharge and
the final surcharge was required to be refunded to customers. Accordingly, on
October 6, 2007, a refund of $1.3 million was applied to customers'
accounts.  As a result of a
decrease in electric fuel costs during the twelve months ended December 31,
2006, a fuel credit was approved by the PSCW. To account for this credit, MGE
recorded a $19.1 million reduction to other electric revenues. During the
year ended December 31, 2006, $16.8 million had been credited to
electric customers. An additional $2.4 million (includes interest) was
applied to customers' accounts in April 2007.  15. SFAS 157 Fair Value of Assets
and Liabilities - MGE Energy and MGE.  As of January 1, 2008, MGE and
MGE Energy adopted SFAS 157, Fair Value Measurements. The
adoption of this standard requires enhanced disclosures about MGE's and
MGE Energy's assets and liabilities carried at fair value.  SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. The standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset or liability
including assumptions about risk. The standard also establishes a three level
fair value hierarchy based upon the observability of the assumptions used and
requires the use of observable market data when available. The levels are:  Level 1 - Pricing inputs are quoted
prices within active markets for identical assets or liabilities.  Level 2 - Pricing inputs are quoted
prices within active markets for similar assets or liabilities; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations that are correlated with or otherwise verifiable by
observable market data.  Level 3 - Pricing inputs are
unobservable and reflect management's best estimate of what market participants
would use in pricing the asset or liability.  In February 2008, the
FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2008. MGE Energy and
MGE have elected to defer the adoption of the nonrecurring fair value
measurement disclosures of nonfinancial assets and liabilities. The adoption of
FSP FAS 157-2, effective January 1, 2009, is not expected to have any
material impact on MGE Energy and MGE.  On October 10, 2008, the
FASB issued FSP FAS No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active, which
clarifies the application of SFAS No. 157 and was effective upon
issuance. This standard provides guidance on determination of the fair value of
a financial asset in a market where that financial asset is inactive. The
adoption of this standard as of September 30, 2008, does not have any
material impact on MGE Energy and MGE.   Page 24    The
following table presents the balances of assets and liabilities measured at fair
value on a recurring basis for MGE Energy and MGE.   (In thousands)
Fair Value as of September 30,
2008Total
Level 1
Level 2
Level 3MGE EnergyAssets:Exchange-traded
investments
$573
$573
$ -
$ -Total Assets
$573
$573
$ -
$ -Liabilities:Derivatives, net
(a)
$8,491
$4,794
$ -
$3,697Deferred compensation
1,107
1,107
-
-Total Liabilities
$9,598
$5,901
$ -
$3,697MGEAssets:Exchange-traded
investments
$412
$412
$ -
$ -Total Assets
$412
$412
$ -
$ -Liabilities:Derivatives, net
(a)
$8,491
$4,794
$ -
$3,697Deferred compensation
1,107
1,107
-
-Total Liabilities
$9,598
$5,901
$ -
$3,697  (a) These amounts are shown gross and
exclude $4.8 million and $2.7 million of cash collateral that was
netted against net derivative positions with counterparties for Level 1 and
Level 3, respectively.  Derivatives
include exchange-traded derivative contracts, a ten-year purchased power
agreement, and FTRs. Most exchange-traded derivative contracts are valued based
on unadjusted quoted prices in active markets and are therefore classified as
Level 1. A small number of exchange-traded contracts are valued using quoted
market pricing in markets with insufficient volumes and are therefore classified
as Level 3. The ten-year purchased power agreement (see Footnote 12) was
valued using an internally-developed pricing model and therefore classified as
Level 3. The model includes both observable and unobservable inputs. Inputs to
the model require significant management judgment and estimation. The model uses
a forward power pricing curve based on exchange-traded contracts in the electric
futures market. As described above, the market prices from this source have
insufficient volumes and are classified as Level 3 in the fair value hierarchy.
To project future prices beyond the period in which these quoted market prices
are available, MGE calculates the price based on forward gas prices and an
implied heat rate. MGE considers the assumptions that market participants would
use in valuing the asset or liability. This includes assumptions about market
risk such as liquidity, volatility and contract duration. The fair value model
incorporates discounting, credit, and model risks. FTRs are priced based upon
monthly auction results for identical or similar instruments in a closed market
with limited data available and are therefore classified as Level 3.  Investments include exchange-traded
investment securities valued using quoted prices on active exchanges and are
therefore classified as Level 1.  The deferred compensation plan allows
participants to defer certain cash compensation into a notional investment
account. These amounts are included within other deferred liabilities in the
balance sheets of MGE Energy and MGE. The notional investments earn
interest based upon the semiannual rate of U.S. Treasury Bills having a 26 week
maturity increased by 1% compounded monthly, with a minimum annual rate of 7%,
compounded monthly, and are therefore based upon observable market data and
classified as Level 1.   Page 25    The
following table summarizes the changes in Level 3 assets and liabilities
measured at fair value on a recurring basis for both MGE Energy and
MGE.   (In thousands)Three Months Ended September 30,
2008Balance as of July 1, 2008
$5,802Realized and unrealized gains (losses):Included in regulatory
liabilities (assets)
(9,489)Included in other comprehensive
income
(10)Included in earnings
(82)Included in current
assets
-Purchases, sales, issuances, and settlements,
net
82Transfers in and/or out of Level 3
-Balance as of September 30, 2008
$(3,697)Total gains (losses) included in earnings
attributed to the change in unrealized gains (losses) related to assets
and liabilities held at September 30, 2008 (b)
$ -  (In thousands)Nine Months Ended September 30,
2008Balance as of January 1, 2008
$(444)Realized and unrealized gains (losses):Included in regulatory
liabilities (assets)
(3,296)Included in other comprehensive
income
43Included in earnings
1,122Included in current
assets
-Purchases, sales, issuances, and settlements,
net
(1,122)Transfers in and/or out of Level 3
-Balance as of September 30, 2008
$(3,697)Total gains (losses) included in earnings
attributed to the change in unrealized gains (losses) related to assets
and liabilities held at September 30, 2008 (b)
$ -  The following table presents total
realized and unrealized gains (losses) included in income for Level 3 assets and
liabilities measured at fair value on a recurring basis during the three and
nine months ended September 30, 2008, for both MGE Energy and MGE.
(b).   (In
thousands)
Purchased Power Expense
Natural Gas Purchased Expense
Regulated Gas RevenuesTotal gains
(losses) included in earnings for the
three
months ended September 30, 2008
$(114)
$16
$16Total gains
(losses) included in earnings for the
nine
months ended September 30, 2008
$1,184
$(31)
$(31)  (b) MGE's exchange-traded
derivative contracts, ten-year purchased power agreement, and FTRs are subject
to regulatory deferral under the provisions of SFAS 71. These derivatives
are therefore marked to fair value pursuant to SFAS 133 and are offset with
a corresponding regulatory asset or liability. A portion of MGE's derivative
contracts fall under the incentive mechanism within the PGA clause and
shareholders have the ability to receive 50% of the benefit or loss from these
deals if certain thresholds are achieved. Under these derivatives, only 50% of
the gains or losses are subject to regulatory deferral under SFAS 71. The
remaining 50%, the shareholder portion, is reflected in other comprehensive
income. As a result of the above described treatment, there are no unrealized
gains or losses that flow through earnings.   Page 26    16. New Accounting Pronouncements and
Legislation - MGE Energy and MGE.  a. FSP FIN 39-1.  See Footnote 12 for discussion
of this pronouncement.  b. FAS 160 and
FAS 141(R).  In December 2007, the
FASB issued FAS 160, Non-Controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 and FAS 141(R),
Business Combinations. These pronouncements will change the accounting
and reporting for business acquisitions and noncontrolling interest in a
subsidiary. In addition, FAS 160 will change the accounting and reporting
for the deconsolidation of a subsidiary. FAS 160 and FAS 141(R) will
be effective for MGE and MGE Energy as of January 1, 2009. MGE and
MGE Energy are currently assessing the impact these pronouncements will
have on their financial statements.  c. FAS 161.  In March 2008, the
FASB issued FAS 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early adoption allowed. MGE and
MGE Energy have elected not to early adopt this pronouncement. Therefore,
FAS 161 will be effective for MGE and MGE Energy as of January 1,
2009. MGE and MGE Energy are currently assessing the impact this
pronouncement will have on their financial statements.   Page 27    17. Segment Information -
MGE Energy and MGE.  MGE Energy operates in the
following business segments: electric utility, gas utility, nonregulated energy,
transmission investment, and all other. See MGE Energy's and MGE's Form
10-K for additional discussion of each of these segments.  The following tables show segment
information for MGE Energy's operations for the indicated periods:   MGE Energy(In
thousands)
Electric
Gas
Nonregulated Energy
Transmission Investment
All
Others
Consolidation/ Elimination Entries
Consolidated TotalThree months
ended Sept. 30, 2008Operating
revenues
$99,177
$24,843
$1,787
$-
$-
$-
$125,807Interdepartmental
revenues
169
6,547
3,720
-
-
(10,436)
-Total operating
revenues (loss)
99,346
31,390
5,507
-
-
(10,436)
125,807Depreciation and
amortization
(6,962)
(2,326)
(686)
-
-
-
(9,974)Other operating
expenses
(69,116)
(31,725)
(26)
-
(151)
10,436
(90,582)Operating income
(loss)
23,268
(2,661)
4,795
-
(151)
-
25,251Other income,
net
606
171
-
2,010
2,505
-
5,292Interest
(expense) income, net
(2,779)
(784)
(651)
-
703
-
(3,511)Income (loss)
before taxes
21,095
(3,274)
4,144
2,010
3,057
-
27,032Income tax
(provision) benefit
(7,863)
1,834
(1,663)
(814)
(1,216)
-
(9,722)Net income
(loss)
$13,232
$(1,440)
$2,481
$1,196
$1,841
$
-
$17,310Three months
ended Sept. 30, 2007Operating
revenues
$98,435
$16,588
$1,300
$-
$-
$
-
$116,323Interdepartmental
revenues
193
6,764
3,714
-
-
(10,671)
-Total operating
revenues (loss)
98,628
23,352
5,014
-
-
(10,671)
116,323Depreciation and
amortization
(5,230)
(2,127)
(620)
-
-
-
(7,977)Other operating
expenses
(69,448)
(23,690)
(26)
-
(118)
10,671
(82,611)Operating income
(loss)
23,950
(2,465)
4,368
-
(118)
-
25,735Other income
(deductions), net
801
16
-
1,537
(2)
-
2,352Interest
(expense) income, net
(2,534)
(809)
(611)
-
712
-
(3,242)Income (loss)
before taxes
22,217
(3,258)
3,757
1,537
592
-
24,845Income tax
(provision) benefit
(8,138)
1,192
(1,508)
(617)
(238)
-
(9,309)Net income
(loss)
$14,079
$(2,066)
$2,249
$920
$354
$-
$15,536Nine months
ended Sept. 30, 2008Operating
revenues
$265,647
$169,247
$5,646
$-
$-
$-
$440,540Interdepartmental
revenues
419
18,532
11,157
-
-
(30,108)
-Total operating
revenues (loss)
266,066
187,779
16,803
-
-
(30,108)
440,540Depreciation and
amortization
(20,363)
(6,843)
(2,058)
-
-
-
(29,264)Other operating
expenses
(204,542)
(168,571)
(78)
(1)
(391)
30,108
(343,475)Operating income
(loss)
41,161
12,365
14,667
(1)
(391)
-
67,801Other income
(deductions), net
1,084
(1,343)
-
5,320
2,497
-
7,558Interest
(expense) income, net
(8,203)
(2,360)
(1,932)
-
2,116
-
(10,379)Income before
taxes
34,042
8,662
12,735
5,319
4,222
-
64,980Income tax
provision
(11,512)
(2,820)
(5,111)
(2,143)
(1,690)
-
(23,276)Net
income
$22,530
$5,842
$7,624
$3,176
$2,532
$
-
$41,704Nine months
ended Sept. 30, 2007Operating
revenues
$256,146
$134,728
$3,880
$-
$-
$-
$394,754Interdepartmental
revenues
392
17,772
11,141
-
-
(29,305)
-Total operating
revenues (loss)
256,538
152,500
15,021
-
-
(29,305)
394,754Depreciation and
amortization
(15,701)
(6,364)
(1,992)
-
-
-
(24,057)Other operating
expenses
(198,418)
(137,079)
(81)
(2)
(331)
29,305
(306,606)Operating income
(loss)
42,419
9,057
12,948
(2)
(331)
-
64,091Other income
(deductions), net
1,149
(240)
-
4,495
8
-
5,412Interest
(expense) income, net
(7,457)
(2,197)
(1,878)
-
1,575
-
(9,957)Income before
taxes
36,111
6,620
11,070
4,493
1,252
-
59,546Income tax
provision
(12,484)
(2,503)
(4,443)
(1,804)
(508)
-
(21,742)Net
income
$23,627
$4,117
$6,627
$2,689
$744
$-
$37,804    Page 28    The following tables show
segment information for MGE's operations for the indicated periods:  MGE(In
thousands)
Electric
Gas
Nonregulated Energy
Transmission Investment
Consolidation/ Elimination Entries
Consolidated TotalThree months
ended Sept. 30, 2008Operating
revenues
$99,177
$24,843
$1,787
$-
$-
$125,807Interdepartmental
revenues
169
6,547
3,720
-
(10,436)
-Total operating
revenues (loss)
99,346
31,390
5,507
-
(10,436)
125,807Depreciation and
amortization
(6,962)
(2,326)
(686)
-
-
(9,974)Other operating
expenses*
(76,696)
(29,811)
(1,689)
-
10,436
(97,760)Operating income
(loss)*
15,688
(747)
3,132
-
-
18,073Other income,
net*
323
91
-
1,196
-
1,610Interest
expense, net
(2,779)
(784)
(651)
-
-
(4,214)Income (loss)
before minority interest
13,232
(1,440)
2,481
1,196
-
15,469Minority
interest, net of tax
-
-
-
-
(3,084)
(3,084)Net income
(loss)
$13,232
$(1,440)
$2,481
$1,196
$(3,084)
$12,385Three months
ended Sept. 30, 2007Operating
revenues
$98,435
$16,588
$1,300
$-
$-
$116,323Interdepartmental
revenues
193
6,764
3,714
-
(10,671)
-Total operating
revenues (loss)
98,628
23,352
5,014
-
(10,671)
116,323Depreciation and
amortization
(5,230)
(2,127)
(620)
-
-
(7,977)Other operating
expenses*
(77,595)
(22,226)
(1,534)
-
10,671
(90,684)Operating income
(loss)*
15,803
(1,001)
2,860
-
-
17,662Other income
(deductions), net*
810
(256)
-
920
-
1,474Interest
expense, net
(2,534)
(809)
(611)
-
-
(3,954)Income (loss)
before minority interest
14,079
(2,066)
2,249
920
-
15,182Minority
interest, net of tax
-
-
-
-
(2,909)
(2,909)Net income
(loss)
$14,079
$(2,066)
$2,249
$920
$(2,909)
$12,273Nine months
ended September 30, 2008Operating
revenues
$265,647
$169,247
$5,646
$-
$-
$440,540Interdepartmental
revenues
419
18,532
11,157
-
(30,108)
-Total operating
revenues (loss)
266,066
187,779
16,803
-
(30,108)
440,540Depreciation and
amortization
(20,363)
(6,843)
(2,058)
-
-
(29,264)Other operating
expenses*
(215,673)
(171,900)
(5,189)
(1)
30,108
(362,655)Operating income
(loss)*
30,030
9,036
9,556
(1)
-
48,621Other income
(deductions), net*
703
(834)
-
3,177
-
3,046Interest
expense, net
(8,203)
(2,360)
(1,932)
-
-
(12,495)Income before
minority interest
22,530
5,842
7,624
3,176
-
39,172Minority
interest, net of tax
-
-
-
-
(9,235)
(9,235)Net income
(loss)
$22,530
$5,842
$7,624
$3,176
$(9,235)
$29,937Nine months
ended September 30, 2007Operating
revenues
$256,146
$134,728
$3,880
$-
$-
$394,754Interdepartmental
revenues
392
17,772
11,141
-
(29,305)
-Total operating
revenues (loss)
256,538
152,500
15,021
-
(29,305)
394,754Depreciation and
amortization
(15,701)
(6,364)
(1,992)
-
-
(24,057)Other operating
expenses*
(210,879)
(139,438)
(4,524)
(2)
29,305
(325,538)Operating income
(loss)*
29,958
6,698
8,505
(2)
-
45,159Other income
(deductions), net*
1,126
(384)
-
2,691
-
3,433Interest
expense, net
(7,457)
(2,197)
(1,878)
-
-
(11,532)Income before
minority interest
23,627
4,117
6,627
2,689
-
37,060Minority
interest, net of tax
-
-
-
-
(8,358)
(8,358)Net income
(loss)
$23,627
$4,117
$6,627
$2,689
$(8,358)
$28,702  *Amounts are shown net of the related tax expense,
consistent with the presentation on the consolidated MGE Income Statement.  Page 29    The following table shows
segment information for MGE Energy's and MGE's assets and capital
expenditures:  MGE Energy
(In
thousands)
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
All
Others
Consolidation/
Elimination Entries
TotalAssets:September 30,
2008
$630,950
$226,773
$15,431
$265,409
$44,726
$371,477
$(396,060)
$1,158,706December 31,
2007
614,949
234,002
14,876
227,415
40,808
342,491
(362,954)
1,111,587Capital
Expenditures:Nine months
ended Sept. 30, 2008
36,974
5,285
-
42,690
-
-
-
84,949Year ended
December 31, 2007
70,687
12,091
-
53,480
-
-
-
136,258   MGE
(In
thousands)
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination Entries
TotalAssets:September 30,
2008
$630,950
$226,773
$15,431
$265,159
$44,726
$(20,202)
$1,162,837December 31,
2007
614,949
234,002
14,876
227,165
40,808
(15,908)
1,115,892Capital
Expenditures:Nine months
ended Sept. 30, 2008
36,974
5,285
-
42,690
-
-
84,949Year ended
December 31, 2007
70,687
12,091
-
53,480
-
-
136,258  18. Subsequent Events -
MGE Energy and MGE.  a. ATC Capital Contribution.  On October 31, 2008, MGE Transco
made a voluntary $1.1 million capital contribution to ATC.  b. Fuel Surcharge
Stipulation.  On October 24, 2008, the PSCW
approved the stipulation related to the May 5, 2008, fuel surcharge.     Page 30    Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.  General  MGE Energy is a holding company operating through
subsidiaries in five business segments: electric utility operations, gas utility
operations, nonregulated energy operations, transmission investments, and all
other. Our principal subsidiary is MGE, which conducts our electric utility and
gas utility operations. MGE generates and distributes electricity to nearly
136,000 customers in Dane County, Wisconsin, including the city of Madison, and
purchases and distributes natural gas to nearly 140,000 customers in the
Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and
Vernon.  Our nonregulated energy operations have been formed to
own, for lease to MGE, new electric generating capacity. Our nonregulated energy
operations include a cogeneration project on the UW-Madison campus. Our
nonregulated energy operations also include an undivided 8.33% ownership
interest in each of two 615 MW generating units being constructed in Oak Creek,
Wisconsin. All of these operations are included in MGE's consolidated financial
statements as a result of the accounting requirements of FIN 46R,
Consolidation of Variable Interest Entities - An Interpretation of ARB
No. 51.  The transmission investment segment consists of our
investment in ATC. Our all other segment includes corporate operations and
services and certain construction services.  Our primary focus today and for the foreseeable future is
our core utility customers at MGE. MGE continues to face the challenge of
providing its customers with reliable power at competitive prices. MGE plans to
meet this challenge by building more efficient generation projects and
continuing its efforts to control operational costs. We believe it is critical
to maintain a strong credit standing and financial strength for MGE as well as
for the parent company in order to accomplish these goals.  Three Months
Ended September 30, 2008 and 2007  Executive Summary - MGE Energy and MGE  For the three months ended September 30, 2008,
MGE Energy's earnings were $17.3 million or $0.78 per share compared
to $15.5 million or $0.71 per share for the same period in the prior year.
MGE's earnings for the three months ended September 30, 2008, were
$12.4 million compared to $12.3 million for the same period in the
prior year.  The following discussion is based on the business
segments as discussed in Footnote 17.  Electric Utility  The electric utility segment contributed
$13.2 million of net income during the third quarter of 2008, a decrease of
$0.8 million compared to the third quarter of 2007 resulting from lower
demand due to cooler weather.  Electric revenues were $99.2 million or 0.8% higher
during the third quarter of 2008 compared to the same period last year. The
increase is partially related to a 4.8% rate increase approved by the PSCW,
effective January 1, 2008. The rate increase was to cover higher costs
pertaining to MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs associated with the discontinued use of coal at the Blount Station.  Gas Utility  The gas utility segment recorded a $1.4 million net
loss during the third quarter of 2008 compared to a $2.1 million net loss
in the third quarter of 2007. Gas margin (regulated gas revenues less natural
gas purchased) increased $1.5 million during the third quarter of 2008
compared to the same period last year. MGE received a 2.8% rate increase from
the PSCW, effective January 1, 2008, to cover costs for area gas
construction projects needed to accommodate growth and funding of statewide
energy efficiency and renewable energy programs. Compared to the prior period,
gas operating and maintenance expenses increased $1.4 million primarily
related to payments required to be made to statewide energy efficiency and
renewable resource programs pursuant to Wisconsin legislation.  Gas margin (regulated gas revenues less natural gas
purchased) is not a measurement defined under GAAP. MGE Energy and MGE
believe this measurement is useful in analyzing the gas utility segment.
However, it may not be comparable to measurements of other companies. In
addition, this measurement may not be more useful than the GAAP information
regarding the gas utility segment provided elsewhere in this report.  Page 31    Nonregulated
Energy  The nonregulated energy segment contributed
$2.5 million of net income during the third quarter of 2008, an increase of
$0.2 million or 10.3% compared to the third quarter of 2007. The increase
is largely attributable to higher carrying costs recognized for the Elm Road
project. Carrying costs during construction of the nonregulated energy projects,
related to the equity portion, are recognized over the period of time the costs
are recovered in rates.  Capital expenditures during the third quarter of 2008
totaled $12.0 million for the Elm Road project.  Transmission Investment  Earnings from our interest in ATC increased
$0.3 million for the third quarter of 2008 compared to the same period last
year.  MGE Transco contributed $1.1 million for voluntary
capital contributions to ATC in the third quarter of 2008.  All Others  MGE Energy's corporate operations contributed
$1.8 million in earnings for the third quarter of 2008. These earnings are
a result of interdepartmental interest income recognized as a result of
capitalized interest on the Elm Road project and include the gains on certain
investments.  Electric Utility Operations - MGE Energy and
MGE  Electric sales and revenues  The following table compares MGE's electric revenues and
electric kWh sales by customer class for each of the periods indicated:   Revenues

Sales(In
thousands, except cooling degree days)
Three Months Ended September 30,

Three Months Ended September 30,2008
2007
% Change

2008
2007
%
ChangeResidential
$34,309
$34,382
(0.2)%

227,827
242,172
(5.9)%Commercial
55,131
52,316
5.4%

512,527
520,609
(1.6)%Industrial
4,930
4,312
14.3%

66,410
66,779
(0.6)%Other -
retail/municipal
9,371
7,763
20.7%

117,288
105,798
10.9%Total
retail
103,741
98,773
5.0%

924,052
935,358
(1.2)%Sales for
resale
893
2,012
(55.6)%

3,590
24,477
(85.3)%Other
revenues
(5,457)
(2,350)
(132.2)%

-
-
-Total
$99,177
$98,435
0.8%

927,642
959,835
(3.4)%Cooling degree
days (normal 454)




421
532
(20.9)%  Electric operating revenues increased $0.7 million
or 0.8% for the three months ended September 30, 2008, due to the
following:   (In millions)Three months ended Sept. 30,
2008Rate changes
$6.2Volume
(1.3)Sales for resale
(1.1)Other revenues
(3.1)Total
$0.7   Rates changes. Rates charged
to retail customers for the three months ended September 30, 2008, were
6.3% or $6.2 million higher than those charged during the same period in
the prior year.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric revenue by $16.2 million to cover
costs for MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs to discontinue coal use at the Blount Station.   Page 32    On
May 5, 2008, the PSCW approved a $0.00239 per kWh interim fuel surcharge on
MGE's electric rates to cover increased fuel and purchased power expenses. This
interim fuel surcharge will result in an estimated $8.0 million increase in
electric revenues on an annual basis. For the three months ended
September 30, 2008, this interim surcharge resulted in a $2.2 million
increase to electric rates. On September 22, 2008, MGE and the intervenors
in the fuel surcharge proceeding filed a stipulation agreement for consideration
by the PSCW. The stipulation was approved on October 24, 2008 and allows
the interim surcharge to remain in effect until the end of the year, but
requires MGE to review its 2008 monitored fuel costs at year-end and refund to
customers, with interest at 10.8%, any amount by which its actual fuel costs
fall short of the monitored fuel costs collected in rates. See "Other revenues"
below.  Electric rates from April 26,
2007 to August 31, 2007, were subject to a $0.00339 per kWh interim fuel
surcharge and subject to refund. On August 31, 2007, MGE received a final
decision from the PSCW that reduced the fuel surcharge to $0.00242 per kWh
effective the date of the order. This surcharge resulted in a $2.9 million
increase to electric rates charged to customers during the three months ended
September 30, 2007.   Volume. During the three
months ended September 30, 2008, there was a 1.2% decrease in total retail
sales volumes when compared to the same period in the prior year. This decrease
represents decreased usage by residential, commercial, and industrial customers,
offset by an increase in usage from other-retail/municipal customers.   Sales for resale. For the
three months ended September 30, 2008, sales for resale decreased
$1.1 million when compared to the same period in the prior year, reflecting
a decreased volume of sales. Sales for resale include transactions conducted on
the PJM and MISO markets reflecting our involvement in the PJM and MISO markets
since their establishment on May 1, 2004, and April 1, 2005,
respectively.   Other revenues. Other electric
revenues decreased $3.1 million for the three months ended
September 30, 2008, compared to the same period in the prior year.  During the three months ended
September 30, 2008 and 2007, MGE recovered in electric rates carrying costs
and other fees related to WCCF and Elm Road. During the three months ended
September 30, 2008 and 2007, MGE recorded a $2.8 million and
$2.1 million reduction, respectively, to other electric revenues to
transfer the revenues from the electric segment to the nonregulated energy
operations segment. See discussion of these revenues in the "nonregulated energy
operating revenues" section.  As a result of the refund provisions
in the interim fuel surcharge order, MGE has recognized an estimated refund to
customers totaling $3.2 million during the three months ended
September 30, 2008 and has reflected this reduction in other electric
revenues.  To account for the subject to refund
provisions implemented by the PSCW on April 26, 2007, during the three
months ended September 30, 2007, MGE recognized an obligation to make
refunds to its customers by recording a $0.7 million reduction to other
electric revenues.  Other miscellaneous electric revenues
for the three months ended September 30, 2008 increased $0.1 million
compared to the same period in 2007.  Electric fuel and purchased power  The expense for fuel used for electric generation
decreased $2.6 million or 15.3% during the three months ended
September 30, 2008, compared to the same period in the prior year primarily
as a result of a decrease in fuel costs.  Purchased power expense decreased by $0.5 million or
2.3% during the three months ended September 30, 2008, compared to the same
period in the prior year. This decrease in expense reflects a $1.0 million
or 4.8% decrease in the volume of power purchased offset by a $0.5 million
or 2.5% increase in the per-unit cost of purchased power.   Page 33    Electric operating
expenses  Electric operating expenses increased $3.3 million
during the three months ended September 30, 2008, compared to the same
period in 2007. The following changes contributed to the net change:   (In millions)Three months ended Sept. 30,
2008Increased production costs
$0.5Increased transmission costs
1.2Increased distribution expenses
0.1Increased customer accounts expenses
0.3Increased customer service costs
1.0Increased other general and administrative
expenses
0.2Total
$3.3  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the three
months ended September 30, 2008, costs associated with funding these
programs increased customer service expense by $1.3 million. Transmission
costs increased primarily due to network service fees pertaining to ATC.  Electric maintenance expense  For the three months ended September 30, 2008,
electric maintenance expense decreased $0.5 million, when compared to the
same period in the prior year. This decrease is primarily attributable to
decreases in production maintenance and distribution expenses.  Electric depreciation expense  Depreciation expense at the electric segment increased by
$1.7 million for the three months ended September 30, 2008, when
compared to the same period in the prior year. This increase is related to
higher levels of electric assets, including the Top of Iowa III wind-powered
electric generating facility which was placed in service in the first quarter of
2008. Also contributing to the increase is the accelerated depreciation of
certain Blount assets. For additional information on the Blount accelerated
depreciation, see Footnote 11.  Gas Utility Operations - MGE Energy and
MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:   Revenues

Deliveries(In
thousands, except HDD and average rate per therm of retail
customer)
Three Months Ended September 30,

Three Months Ended September 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$11,159
$8,634
29.2%

5,830
5,702
2.2%Commercial/industrial
12,047
6,965
73.0%

10,557
7,815
35.1%Total
retail
23,206
15,599
48.8%

16,387
13,517
21.2%Gas
transportation
520
494
5.3%

6,280
6,290
(0.2%)Other
revenues
1,117
495
125.7%

-
-
-Total
$24,843
$16,588
49.8%

22,667
19,807
14.4%Heating degree
days (normal 184)




107
125
(14.4)%Average rate per
therm of retail customer




$1.416
$1.154
22.7%   Page 34    Gas revenues increased
$8.3 million or 49.8% for the three months ended September 30, 2008.
These changes are related to the following factors:   (In millions)Three months ended Sept. 30,
2008Gas costs/rates
$3.6Gas deliveries
4.1Transportation and other effects
0.6Total
$8.3   Gas costs/rates. The average
retail rate per therm for the three months ended September 30, 2008,
increased 22.7% compared to the same period in 2007. The primary contributor to
this increase is higher natural gas costs. Also, the PSCW authorized a 2.8%
increase in MGE's gas rates effective January 1, 2008, to cover increased
system demands and funding statewide energy programs.   Retail gas deliveries. The
21.2% increase in retail gas deliveries for the three months ended
September 30, 2008, was attributable to an increased use by a large
commercial/industrial customer.   Transportation and other
revenues. Transportation and other revenues increased a total of
$0.6 million primarily due to an increase in income realized under the
GCIM.  Under MGE's GCIM, if actual gas
commodity costs are above or below a benchmark set by the PSCW, then MGE's gas
sales service customers and shareholders share equally in any increased costs or
savings. The PSCW also 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. For the three months ended September 30, 2008 and 2007,
shareholders received the benefit of $1.0 million and $0.5 million,
respectively, from capacity release revenues and commodity savings under the
GCIM.  Natural gas purchased  For the three months ended September 30, 2008,
natural gas purchased increased by $6.7 million, compared to the same
period in the prior year. The cost per therm of natural gas increased 60.1%
which resulted in $5.7 million of additional expense. In addition, a 12.1%
increase in the volume of gas purchased resulted in $1.0 million of
additional expense.  Gas operating expenses  Gas operating expenses increased $1.3 million for
the three months ended September 30, 2008, compared to the same period a
year ago. The following changes contributed to the net change:   (In millions)Three months ended Sept.  30,
2008Increased customer accounts costs
$0.1Increased customer service costs
0.7Increased general and administrative costs
0.5Total
$1.3  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the three
months ended September 30, 2008, costs associated with funding these
programs increased customer service expense by $0.9 million.  Gas maintenance expense  Gas maintenance expenses increased by $0.1 million
for the three months ended September 30, 2008, compared to the same period
in the prior year. This increase primarily relates to an increase in
distribution costs.  Gas depreciation expense  Gas depreciation expense increased $0.2 million for
the three months ended September 30, 2008, compared to the same period in
the prior year.   Page 35    Other Income (Deductions),
Net  During the three months ended September 30, 2008,
the gas and electric segments recognized a total of $0.1 million in
AFUDC-equity, $0.5 million gain on an investment and $0.2 million of
miscellaneous income.  For the three months ended September 30, 2007, the
gas and electric segments recognized a total of $0.5 million in
AFUDC-equity, $0.2 million from equity earnings in miscellaneous
investments, and a $0.2 million gain on the sale of investments. This
income was offset by $0.1 million in miscellaneous expense.  Interest Expense, Net  For the three months ended September 30, 2008, total
interest expense for the electric and gas segments increased $0.2 million
compared to the same period in the prior year.  Nonregulated Energy Operations - MGE Energy and
MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $0.5 million for the three months ended September 30, 2008,
when compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for both the three months ended
September 30, 2008 and 2007 include $3.7 million in interdepartmental
revenues related to a leasing arrangement between MGE and MGE Power West Campus
which commenced on April 26, 2005. Upon consolidation, these
interdepartmental revenues are eliminated.  MGE also received approval from the PSCW to collect
carrying costs expected to be incurred by MGE Power Elm Road during construction
of the Elm Road project. MGE estimates that the total carrying costs on the Elm
Road project will be $61.0 million. A portion of this amount is being
recognized over the period recovered in rates and a portion is being deferred
and will be recognized over the period in which the facility is depreciated. For
the three months ended September 30, 2008 and 2007, MGE Power Elm Road
recognized $1.5 million and $1.0 million, respectively, related to
carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For the three months ended September 30, 2008 and
2007, interest expense, net at the nonregulated energy operations segment was
$0.7 million and $0.6 million, respectively. Interest expense at the
nonregulated energy segment for both the three months ended September 30,
2008 and 2007 includes $0.7 million in interest expense incurred on
$50 million of long-term, fixed-rate borrowings at MGE Power West
Campus.  Also included in the nonregulated interest expense is
interdepartmental interest expense and capitalized interest at MGE Power Elm
Road. During the three months ended September 30, 2008 and 2007, MGE Power
Elm Road was charged $1.2 million and $1.1 million, respectively, in
interest expense by Corporate on funds borrowed for the Elm Road Project. This
expense is eliminated upon consolidation for MGE Energy only. The interest
expense at MGE Power Elm Road is offset by $1.2 million and
$1.1 million, respectively, in capitalized interest. MGE Power Elm Road is
capitalizing interest on the Elm Road project.  During the three months ended September 30, 2008 and
2007, MGE Power Elm Road recorded less than $0.1 million and
$0.1 million, respectively, in interest income on cash advanced to Elm Road
Services, LLC for construction of transmission equipment and work done by ATC
related to the Elm Road project.  Transmission Investment Operations - MGE Energy
and MGE  Transmission investment other income  For the three months ended September 30, 2008 and
2007, other income at the transmission investment segment was $2.0 million
and $1.5 million, respectively. The transmission investment segment holds
our interest in ATC, and its income reflects our equity in the earnings of
ATC.   Page 36    All Other Nonregulated
Operations - MGE Energy  All other - other income  The all other segment recorded $2.5 million in other
income for the three months ended September 30, 2008, primarily due to
gains on investments.  All other interest income, net  All other interest income, net for both the three months
ended September 30, 2008 and 2007, was $0.7 million. Interest income
for the three months ended September 30, 2008, represents $1.2 million
in interdepartmental interest income from MGE Power Elm Road, partially offset
by $0.5 million in interest expense on short-term debt. Interest income for
the three months ended September 30, 2007, represents $1.1 million in
interdepartmental interest income from MGE Power Elm Road, partially offset by
$0.4 million in interest expense on short-term debt. The interdepartmental
interest income is eliminated upon consolidation.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$0.1 million or 3.6% for the three months ended September 30, 2008,
when compared to the same period in 2007, primarily because MGE's license fee
tax increased. The annual license fee tax expense is based on adjusted operating
revenues of the prior year. Tax rates have not increased.  Consolidated Income Taxes  MGE Energy's effective income tax rate for the three
months ended September 30, 2008, is 36.0% compared to 37.5% for the same
period in 2007. The lower tax rate for the three months ended September 30,
2008, is primarily attributable to an increase in federal tax credits from the
production of electricity from wind energy, as a result of placing the Top of
Iowa III wind conversion project into production in February 2008.  MGE's effective income tax rate for the three months
ended September 30, 2008, is 35.5% compared to 37.4% for the same period in
the prior year. The lower tax rate for the three months ended September 30,
2008, is primarily attributable to an increase in federal tax credits from the
production of electricity from wind energy, as a result of placing the Top of
Iowa III wind conversion project into production in February 2008.  Minority Interest, Net of Tax  For the three months ended September 30, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$1.9 million and $0.9 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy earned $0.3 million, net of tax for its interest in MGE
Transco. These amounts are recorded as minority interest expense, net of tax, on
MGE's consolidated statement of income.  For the three months ended September 30, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$2.2 million and $0.6 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy had earned $0.1 million, net of tax, for its interest in
MGE Transco. These amounts are recorded as minority interest expense, net of
tax, on MGE's consolidated statement of income.  Nine Months
Ended September 30, 2008 and 2007  Executive Summary - MGE Energy and MGE  For the nine months ended September 30, 2008,
MGE Energy's earnings were $41.7 million or $1.89 per share compared
to $37.8 million or $1.77 per share for the same period in the prior year.
MGE's earnings for the nine months ended September 30, 2008, were
$29.9 million compared to $28.7 million for the same period in the
prior year.  The following discussion is based on the business
segments as discussed in Footnote 17.  Electric Utility  The electric utility segment contributed
$22.5 million of net income during the nine months ended September 30,
2008, a decrease of $1.1 million compared to the same period in 2007
resulting from lower demand due to a cooler summer.   Page 37    Electric revenues were
$9.5 million or 3.7% higher during the nine months ended September 30,
2008 compared to the same period last year. The increase is a result of a 4.8%
rate increase approved by the PSCW, effective January 1, 2008. The rate
increase was to cover higher costs pertaining to MGE's new wind energy projects,
statewide energy efficiency and renewable energy programs, transmission
improvements by ATC, and accelerated costs associated with the discontinued use
of coal at the Blount Station.  The Top of Iowa III construction project was placed in
service during the first quarter of 2008. As of September 30, 2008, MGE has
incurred approximately $56 million of costs on the 29.7 MW wind-powered
electric generating facility located in Iowa. MGE recorded $0.6 million of
AFUDC in the nine months ended September 30, 2008 related to the
construction of the project.  Gas Utility  The gas utility segment contributed $5.8 million of
net income during the nine months ended September 30, 2008, an increase of
$1.7 million or 41.9% compared to the same period in 2007. The increase is
largely attributable to higher gas margins as a result of colder weather
compared to the same period in 2007. Gas margin (regulated gas revenues less
natural gas purchased) increased $8.7 million during the nine months ended
September 30, 2008 compared to the same period last year. The increase was
primarily attributable to 13.8% increase in gas retail sales. Heating degree
days were 11.4% higher for the period compared to last year as a result of
colder weather. MGE also received a 2.8% rate increase from the PSCW, effective
January 1, 2008, to cover costs for area gas construction projects needed
to accommodate growth and funding of statewide energy efficiency and renewable
energy programs. Partially offsetting the higher margin was a $1.3 million
expense (excludes premium) in 2008 for a weather hedge (heating degree day
collar). The weather hedge obligated MGE to pay additional costs if the weather
was colder than a prescribed ceiling or would have compensated MGE if weather
was warmer than a prescribed floor.  Gas margin (regulated gas revenues less natural gas
purchased) is not a measurement defined under GAAP. MGE Energy and MGE
believe this measurement is useful in analyzing the gas utility segment.
However, it may not be comparable to measurements of other companies. In
addition, this measurement may not be more useful than the GAAP information
regarding the gas utility segment provided elsewhere in this report.  Nonregulated Energy  The nonregulated energy segment contributed
$7.6 million of net income during the nine months ended September 30,
2008, an increase of $1.0 million or 15.0% compared to the same period in
2007. The increase is largely attributable to higher carrying costs recognized
for the Elm Road project. Carrying costs during construction of the nonregulated
energy projects, related to the equity portion, are recognized over the period
of time the costs are recovered in rates.  Capital expenditures during the nine months ended
September 30, 2008 totaled $42.5 million for the Elm Road project.  Transmission Investment  Earnings from our interest in ATC increased
$0.5 million for the nine months ended September 30, 2008 compared to
the same period last year.  MGE Transco contributed $2.3 million for voluntary
capital contributions to ATC in the nine months ended September 30, 2008.
An additional voluntary capital contribution of $1.1 million was made in
October 2008.  All Others  MGE Energy's corporate operations contributed
$2.5 million in earnings for the nine months ended September 30, 2008.
These earnings are a result of interdepartmental interest income recognized as a
result of capitalized interest on the Elm Road project and include the gains on
certain investments.    Page 38    Electric Utility Operations
- MGE Energy and MGE  Electric sales and revenues  The following table compares MGE's electric revenues and
electric kWh sales by customer class for each of the periods indicated:  Revenues

Sales(In
thousands, except cooling
degree
days)
Nine Months Ended September 30,

Nine Months Ended September 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$89,413
$86,839
3.0%

614,828
635,438
(3.2)%Commercial
142,959
133,014
7.5%

1,401,546
1,403,075
(0.1)%Industrial
15,233
13,765
10.7%

207,775
213,160
(2.5)%Other -
retail/municipal
24,379
20,499
18.9%

312,673
288,684
8.3%Total
retail
271,984
254,117
7.0%

2,536,822
2,540,357
(0.1)%Sales for
resale
3,685
5,983
(38.4)%

28,832
75,764
(61.9)%Other
revenues
(10,022)
(3,954)
(153.5)%

-
-
-Total
$265,647
$256,146
3.7%

2,565,654
2,616,121
(1.9)%Cooling degree
days (normal 634)




534
743
(28.1)%  Electric operating revenues increased $9.5 million
or 3.7% for the nine months ended September 30, 2008, due to the
following:  (In millions)Nine months ended Sept. 30, 2008Rate changes
$18.2Volume
(0.3)Sales for resale
(2.3)Other revenues
(6.1)Total
$9.5  Rates changes. Rates charged to retail customers
for the nine months ended September 30, 2008, were 7.2% or
$18.2 million higher than those charged during the same period in the prior
year.  On December 14, 2007, the PSCW authorized MGE to
increase 2008 electric revenue by $16.2 million to cover costs for MGE's
new wind energy projects, statewide energy efficiency and renewable energy
programs, transmission improvements by ATC, and accelerated costs to discontinue
coal use at the Blount Station.  On May 5, 2008, the PSCW approved a $0.00239 per kWh
interim fuel surcharge on MGE's electric rates to cover increased fuel and
purchased power expenses. This interim fuel surcharge will result in an
estimated $8.0 million increase in electric revenues on an annual basis.
During the nine months ended September 30, 2008, this surcharge resulted in
$3.4 million increase to electric rates. On September 22, 2008, MGE
and the intervenors in this proceeding filed a stipulation agreement for
consideration by the PSCW. The stipulation was approved on October 24, 2008
and allows the interim surcharge to remain in effect until the end of the year,
but requires MGE to review its 2008 monitored fuel costs at year-end and to
refund to customers, with interest at 10.8%, any amount by which its actual fuel
costs fall short of the monitored fuel costs collected in rates. See "Other
revenues" below.  On April 24, 2007, when the PSCW completed their
audit of 2006 electric fuel costs and issued a final order on the 2006 fuel
credit, $2.4 million (related to 2006 fuel costs and including interest)
was applied to customers' accounts.  Electric rates from April 26, 2007 to
August 31, 2007, were subject to a $0.00339 per kWh interim fuel surcharge
and subject to refund. On August 31, 2007, MGE received a final decision
from the PSCW that reduced the fuel surcharge to $0.00242 per kWh effective the
date of the order. This fuel surcharge resulted in a $4.9 million increase
to electric rates charged to customers during the nine months ended
September 30, 2007.  Volume. During the nine months ended
September 30, 2008, total retail sales volumes were comparable to the same
period in the prior year. Higher usage by other-retail/municipal customers was
offset by a decline in residential, commercial and industrial usage.   Page 39    Sales for resale. For
the nine months ended September 30, 2008, sales for resale decreased
$2.3 million when compared to the same period in the prior year, reflecting
a decreased volume of sales. Sales for resale include transactions conducted on
the PJM and MISO markets reflecting our involvement in the PJM and MISO markets
since their establishment on May 1, 2004, and April 1, 2005,
respectively.  Other revenues. Other electric revenues decreased
$6.1 million for the nine months ended September 30, 2008, compared to
the same period in the prior year.  During the nine months ended September 30, 2008 and
2007, MGE recovered in electric rates carrying costs and other fees related to
WCCF and Elm Road. During the nine months ended September 30, 2008 and
2007, MGE recorded a $8.2 million and $6.1 million reduction,
respectively, to other electric revenues to transfer the revenues from the
electric segment to the nonregulated energy operations segment. See discussion
of these revenues in the "nonregulated energy operating revenues" section.  As a result of the refund provisions in the interim fuel
surcharge order, MGE has recognized an estimated refund to customers totaling
$3.2 million during the nine months ended September 30, 2008 and has
reflected this reduction in other electric revenues.  During the nine months ended September 30, 2007,
other electric revenues included a $2.4 million upward adjustment to negate
the impact on overall electric revenues for the 2006 fuel refund provided to
customers in April 2007. Note that this refund was accrued in revenues
during 2006, and was returned to customers via a reduction in rates in
April 2007. See "Rate changes" above for more information on this refund.
Furthermore, to account for the subject to refund provisions implemented by the
PSCW on April 26, 2007, during the nine months ended September 30,
2007, MGE recognized an obligation to make refunds to its customers by recording
a $1.2 million reduction to other electric revenues.  Other miscellaneous electric revenues for the nine months
ended September 30, 2008, increased $0.4 million compared to the same
period during the prior year.  Electric fuel and purchased power  The expense for fuel used for electric generation
decreased $0.9 million or 1.9% during the nine months ended
September 30, 2008, compared to the same period in the prior year.
Additional internal generation resulted in a $0.1 million decrease of this
expense and decreased fuel costs between the two periods resulted in a
$0.8 million decrease of this expense.  Purchased power expense decreased by $4.3 million or
7.0% during the nine months ended September 30, 2008, compared to the same
period in the prior year. This decrease in expense reflects a $1.7 million
or 2.7% decrease in the per-unit cost of purchased power and a $2.6 million
or 4.4% decrease in the volume of power purchased.  Electric operating expenses  Electric operating expenses increased $9.5 million
during the nine months ended September 30, 2008, compared to the same
period in 2007. The following changes contributed to the net change:  (In millions)Nine months ended Sept. 30, 2008Increased production costs
$1.4Increased transmission costs
2.4Increased distribution expenses
0.3Increased customer service costs
3.1Increased customer accounts costs
0.3Increased other general and administrative
expenses
2.0Total
$9.5  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the nine
months ended September 30, 2008, costs associated with funding these
programs increased customer service expense by $3.9 million. Transmission
costs increased primarily due to network service fees pertaining to ATC.   Page 40    Electric maintenance
expense  For the nine months ended September 30, 2008,
electric maintenance expense increased $1.4 million, when compared to the
same period in the prior year. This increase is attributable to increases of
$1.1 million in production maintenance, $0.1 million in distribution
maintenance, and $0.2 million in administrative and general.  Electric depreciation expense  Depreciation expense at the electric segment increased by
$4.7 million for the nine months ended September 30, 2008, when
compared to the same period in the prior year. This increase is related to
higher levels of electric assets, including the Top of Iowa III wind-powered
electric generating facility which was placed in service in the first quarter of
2008. Also contributing to the increase is the accelerated depreciation of
certain Blount assets. For additional information on the Blount accelerated
depreciation, see Footnote 11.  Gas Utility Operations - MGE Energy and
MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:  Revenues

Deliveries(In
thousands, except HDD and average rate per therm)
Nine Months Ended September 30,

Nine Months Ended September 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$90,104
$74,591
20.8%

66,742
61,947
7.7%Commercial/industrial
74,457
56,395
32.0%

71,326
59,373
20.1%Total
retail
164,561
130,986
25.6%

138,068
121,320
13.8%Gas
transportation
2,089
1,889
10.6%

26,523
24,732
7.2%Other
revenues
2,597
1,853
40.2%

-
-
-Total
$169,247
$134,728
25.6%

164,591
146,052
12.7%Heating degree
days (normal 4,550)




4,903
4,403
11.4%Average rate per
therm of retail customer




$1.192
$1.080
10.4%  Gas revenues increased $34.5 million or 25.6% for
the nine months ended September 30, 2008. These changes are related to the
following factors:  (In millions)Nine months ended Sept. 30, 2008Gas costs/rates
$13.6Gas deliveries
20.0Transportation and other effects
0.9Total
$34.5  Gas costs/rates. The average retail rate per therm
for the nine months ended September 30, 2008, increased 10.4% compared to
the same period in 2007. The PSCW authorized a 2.8% increase in MGE's gas rates
effective January 1, 2008, to cover increased system demands and funding
statewide energy programs. Also contributing to this increase is higher natural
gas costs.  Retail gas deliveries. The 13.8% increase in
retail gas deliveries for the nine months ended September 30, 2008, was
attributable to a 11.4% increase in the heating degree days between the periods
and increased use by a large commercial/industrial customer.  Transportation and other revenues. Transportation
and other revenues increased a total of $0.9 million primarily due to an
increase in income realized under the GCIM.  Under MGE's GCIM, if actual gas commodity costs are above
or below a benchmark set by the PSCW, then MGE's gas sales service customers and
shareholders share equally in any increased costs or savings. The PSCW also
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. For the nine months
ended September 30, 2008 and 2007, shareholders received the benefit of
$2.1 million and $1.5 million, respectively, from capacity release
revenues and commodity savings under the GCIM.  Page 41    Natural gas
purchased  For the nine months ended September 30, 2008,
natural gas purchased increased by $25.8 million, compared to the same
period in the prior year. The volume of gas purchased increased 12.7% which
resulted in $11.9 million of additional expense. In addition, the cost per
therm of natural gas increased 13.1% which resulted in $13.9 million of
additional expense.  Gas operating expenses  Gas operating expenses increased $4.1 million for
the nine months ended September 30, 2008, compared to the same period a
year ago. The following changes contributed to the net change:  (In millions)Nine months ended Sept. 30, 2008Increased distribution costs
$0.3Increased customer accounts costs
0.5Increased customer service costs
2.2Increased general and administrative costs
1.1Total
$4.1  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the nine
months ended September 30, 2008, costs associated with funding these
programs increased customer service expense by $2.7 million.  Gas maintenance expense  Gas maintenance expenses increased by $0.4 million
for the nine months ended September 30, 2008, compared to the same period
in the prior year. This increase relates to an increase in distribution and
other general and administrative costs.  Gas depreciation expense  Gas depreciation expense increased $0.5 million for
the nine months ended September 30, 2008, compared to the same period in
the prior year.  Other Income (Deductions), Net  During the nine months ended September 30, 2008, the
gas and electric segments incurred $0.3 million in other deductions. The
other deductions included income pertaining to $0.8 million in
AFUDC-equity, a $0.3 million gain on the sale of property, and a
$0.5 million gain on investments. This income was offset by a
$1.5 million expense for a heating degree day collar, a $0.3 million
loss related to an equity investment and $0.1 million of miscellaneous
expenses. See Footnote 12 for further discussion of the HDD collar.  For the nine months ended September 30, 2007, the
gas and electric segments recognized a total of $1.1 million in
AFUDC-equity, $0.1 million in equity earnings from miscellaneous
investments, and a $0.4 million gain on the sale of investments. This
income was offset by $0.3 million in premium expense for a heating degree
day collar and $0.4 million in miscellaneous expenses.  Interest Expense, Net  For the nine months ended September 30, 2008, total
interest expense for the electric and gas segments increased $0.9 million
when compared to the same period in the prior year.   Page 42    Nonregulated Energy
Operations - MGE Energy and MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $1.8 million for the nine months ended September 30, 2008,
when compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for the nine months ended September 30, 2008
and 2007 include $11.2 million and $11.1 million, respectively, in
interdepartmental revenues related to a leasing arrangement between MGE and MGE
Power West Campus which commenced on April 26, 2005. Upon consolidation,
these interdepartmental revenues are eliminated.  MGE also received approval from the PSCW to collect
carrying costs expected to be incurred by MGE Power Elm Road during construction
of the Elm Road project. MGE estimates that the total carrying costs on the Elm
Road project will be $61.0 million. A portion of this amount is being
recognized over the period recovered in rates and a portion is being deferred
and will be recognized over the period in which the facility is depreciated. For
the nine months ended September 30, 2008 and 2007, MGE Power Elm Road
recognized $4.8 million and $3.1 million, respectively, related to
carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For both the nine months ended September 30, 2008
and 2007, interest expense, net at the nonregulated energy operations segment
was $1.9 million. Interest expense at the nonregulated energy segment for
both the nine months ended September 30, 2008 and 2007, includes
$2.1 million in interest expense incurred on $50 million of long-term,
fixed-rate borrowings at MGE Power West Campus.  Also included in the nonregulated interest expense is
interdepartmental interest expense and capitalized interest at MGE Power Elm
Road. During the nine months ended September 30, 2008 and 2007, MGE Power
Elm Road was charged $3.5 million and $2.7 million, respectively, in
interest expense by Corporate on funds borrowed for the Elm Road Project. This
expense is eliminated upon consolidation for MGE Energy only. The interest
expense at MGE Power Elm Road is offset by $3.5 million and
$2.7 million, respectively, in capitalized interest. MGE Power Elm Road is
capitalizing interest on the Elm Road project.  During both the nine months ended September 30, 2008
and 2007, MGE Power Elm Road recorded $0.2 million in interest income on
cash advanced to Elm Road Services, LLC for construction of transmission
equipment and work done by ATC related to the Elm Road project.  Transmission Investment Operations - MGE Energy
and MGE  Transmission investment other income  For the nine months ended September 30, 2008 and
2007, other income at the transmission investment segment was $5.3 million
and $4.5 million, respectively. The transmission investment segment holds
our interest in ATC, and its income reflects our equity in the earnings of
ATC.  All Other Nonregulated Operations -
MGE Energy  All other - other income The all other segment recorded $2.5 million in other
income for the nine months ended September 30, 2008, primarily due to gains
on investments.  All other interest income, net  All other interest income, net for the nine months ended
September 30, 2008 and 2007, was $2.1 million and $1.6 million,
respectively. Interest income for the nine months ended September 30, 2008,
represents $3.5 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $1.4 million in interest expense on
short-term debt. Interest income for the nine months ended September 30,
2007, represents $2.7 million in interdepartmental interest income from MGE
Power Elm Road and $0.1 million in miscellaneous interest income, partially
offset by $1.2 million in interest expense on short-term debt. The
interdepartmental interest income is eliminated upon consolidation.   Page 43    Consolidated Other General
Taxes  MGE Energy's and MGE's other general taxes increased
$0.9 million or 7.6% for the nine months ended September 30, 2008,
when compared to the same period in 2007, due to a combination of two factors
affecting the MGE license fee tax, which is a tax levied on gross sales in lieu
of property tax on utility property. First, higher sales increased the 2008 tax
compared to the 2007 tax. Secondly, the license fee tax for 2007 was reduced by
an audit settlement, achieved in March 2007, involving prior years' license
fee tax.  Consolidated Income Taxes  MGE Energy's effective income tax rate for the nine
months ended September 30, 2008, is 35.8% compared to 36.5% for the same
period in 2007. This decrease is primarily attributable to an increased federal
tax credit for production of electricity from wind energy, as a result of
placing the Top of Iowa III wind project into production in February 2008.
Electricity generated from wind energy produces a 2.1 cents per kilowatt hour
federal tax credit. The Top of Iowa III wind project will substantially increase
the wind energy tax credit for 2008.  MGE's effective income tax rate for the nine months ended
September 30, 2008, is 35.5% compared to 36.4% for the same period in the
prior year. The decrease is also primarily attributable to the increased wind
energy tax credit.  Minority Interest, Net of Tax  For the nine months ended September 30, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$5.7 million and $3.0 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy earned $0.6 million, net of tax for its interest in MGE
Transco. These amounts are recorded as minority interest expense, net of tax, on
MGE's consolidated statement of income.  For the nine months ended September 30, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$6.1 million and $1.9 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy had earned $0.4 million, net of tax, for its interest in
MGE Transco. These amounts are recorded as minority interest expense, net of
tax, on MGE's consolidated statement of income.  Contractual Obligations and Commercial Commitments -
MGE Energy and MGE  Columbia Environmental Matters - MGE Energy
and MGE  As of September 30, 2008, Columbia entered into
various contractual commitments with vendors for a small portion of the
environmental expenditures. MGE is indirectly a party to these agreements as a
result of its joint ownership of Columbia and is also contractually obligated,
under the applicable ownership and operating agreements, with respect to any
commitments made. MGE's share of these commitments is estimated to be
$0.5 million for the remainder of 2008. These costs are expected to be
capitalized and included in the consolidated balance sheet of MGE. See
"Environmental Matters - Columbia" below for additional information.  Elm Road Construction - MGE Energy and
MGE  In July 2008, Bechtel, the Elm Road construction
contractor, gave notice forecasting the in-service date of Unit 1 would be
delayed three months beyond the guaranteed contract date of September 29,
2009. Bechtel also forecasted the in-service date of Unit 2 to be one month
earlier than the guaranteed contract date of September 29, 2010.  Bechtel states that reasons for the delay of Unit 1
include severe winter weather experienced during the winters of 2006-2007 and
2007-2008, exacerbated by severe rain storms in April and June of
2008, changes in local labor conditions from those anticipated by Bechtel, the
cumulative impact of a large number of change orders and delay in receiving full
notice to proceed in 2005 (which was a result of the court challenges by certain
opposition groups to the Certificate of Public Convenience and Necessity for the
Oak Creek expansion).  Bechtel's notice indicates that it is still analyzing the
impact of these events, and that it expects to submit claims for schedule
extensions and cost relief with required justification by the end of 2008. These
claims will be reviewed when they arrive to determine if Bechtel is entitled to
any schedule and/or cost relief.  The operator of the units has stated its belief that the
circumstances and events for which they continue to retain price adjustment risk
under the construction contract are force majeure, wage escalation in excess of
4% as measured by published wage bulletins, delays caused by the operator,
requested change in scope or performance by the operator and unforeseen
sub-surface ground conditions.  Page 44    On September 29, 2008,
the operator notified Bechtel that it was invoking the contractual dispute
resolution process in order to resolve the rights of the parties under the
contract. The contract provides for an informal resolution process, followed by
mediation, and then binding arbitration. The operator is currently unable to
predict how long this process will take or what the outcome of this process will
be. Management is unable to determine the financial impact, if any, of these
matters at this time.  Other Legal Matters - MGE Energy and
MGE  MGE is involved in various other legal matters that are
being defended and handled in the normal course of business. MGE maintains
accruals for such costs that are probable of being incurred and subject to
reasonable estimation. At September 30, 2008, MGE has a total of
$1.5 million accrued in the financial statements for such matters. The
ultimate outcome of such matters is uncertain and may have an adverse effect on
MGE's results of operations or cash flows.  Venture Debt Commitment -
MGE Energy  MGE Energy has a three year agreement with a venture
debt fund expiring in December 2010. MGE Energy has committed to
invest up to a total of $1.0 million into this fund. As of
September 30, 2008, MGE Energy has $0.7 million remaining in
commitments. The timing of infusions is dependent on the needs of the fund and
is therefore uncertain at this time.  ATC Capital Commitment - MGE Energy and
MGE  On September 18, 2008, MGE Transco elected to
participate in a voluntary capital call for ATC. As a result, MGE Transco
contributed $1.1 million to ATC in October 2008. In addition, MGE
Transco contributed $2.3 million to ATC in the nine months ended
September 30, 2008. The amount and timing of future voluntary capital calls
is uncertain and primarily dependent on the operations and expansion of ATC.  Coal Contracts - MGE Energy and
MGE  MGE has coal supply contracts related to the Blount
plant. As of September 30, 2008, total coal commitments related to the
Blount plant are estimated to be $4.0 million for the remainder of 2008,
$11.6 million for 2009, and $7.2 million for 2010. Fuel procurement
for MGE's jointly owned Columbia and Elm Road plants are handled by Alliant and
Wisconsin Energy Corporation who are, respectively, the operating companies. If
any minimum purchase obligations must be paid under these contracts, management
believes these obligations would be considered costs of service and recoverable
in rates. As of September 30, 2008, MGE's share of the total commitments
for Columbia and Elm Road plants are estimated to be $3.3 million for the
remainder of 2008, $18.3 million in 2009, $31.1 million in 2010,
$9.3 million in 2011, and $4.4 million in 2012.  Natural Gas Supply Contracts - MGE Energy and
MGE  MGE has natural gas supply commitments which include
market-based pricing. As of September 30, 2008, total natural gas supply
commitments are estimated to be $26.5 million for the remainder of 2008,
$31.2 million for 2009, and $2.1 million for 2010. Management expects
to recover these costs in future customer rates.  WPDES Settlement Agreement Contracts -
MGE Energy and MGE  On July 31, 2008, the joint owners of the Oak Creek
expansion reached an agreement with Clean Wisconsin, Inc. and Sierra Club, the
groups opposing the WPDES permit. As part of this settlement, MGE has committed
to make approximate payments of $0.4 million in 2009, subject to certain
conditions.  Unsecured Debt - MGE Energy
and MGE  On September 11, 2008, MGE
issued $40 million of its unsecured 5.59% senior notes due
September 11, 2018. MGE used the net proceeds from the sale of the notes to
repay $30 million of its 6.02% Medium-Term Notes that matured on
September 15, 2008 and to repay $10 million of its short-term
indebtedness consisting of commercial paper. The Notes carry an interest rate of
5.59% per annum, which is payable semiannually on March 11 and
September 11 of each year, commencing on March 11, 2009. Holders of
the notes have the right to require MGE to repurchase their notes at par in the
event of an acquisition of beneficial ownership of 30% or more of the
outstanding voting stock of MGE Energy, Inc. The Note Purchase Agreement
requires MGE to maintain a ratio of its consolidated indebtedness to
consolidated total capitalization not to exceed a maximum of 65%. The Note
Purchase Agreement also restricts MGE from issuing "Priority Debt" in an amount
exceeding 20% of its consolidated assets. Priority Debt is defined as any
indebtedness of MGE secured by liens other than specified liens permitted by the
Note Purchase Agreement and certain unsecured indebtedness of certain
subsidiaries.  Page 45    Credit
Facilities - MGE Energy and MGE  On August 29, 2008, MGE entered
into an agreement establishing a $20 million committed credit facility. The
agreement expires on March 31, 2009. This facility carries an interest rate
based on either prime or a LIBOR-type rate for each applicable interest period
plus, in the case of the LIBOR-type rate, 0.40%. Interest is payable on the last
day of each calendar quarter, if based upon prime, and on the last day of each
interest period if less than three months or the three-month anniversary of the
first day of the interest period, if based upon the LIBOR-type rate . The
facility is expected to be used as a backup facility to MGE's commercial paper
program. No borrowings are outstanding under this facility at this time. A
change in control constitutes a default under the agreement. Change in control
events are defined as (i) a failure by MGE Energy to hold 100% of the
outstanding voting equity interest in MGE or (ii) the acquisition of beneficial
ownership of 30% or more of the outstanding voting stock of MGE Energy by
one person or two or more persons acting in concert. The agreement requires MGE
to maintain a ratio of its consolidated indebtedness to consolidated total
capitalization not to exceed a maximum of 65%.  On August 29, 2008,
MGE Energy entered into a separate agreement establishing a
$20 million revolving credit facility. The revolving credit facility
expires on August 28, 2009. This facility carries an interest rate based on
prime or a LIBOR-based rate plus, in the case of the LIBOR-based rate, an adder,
not to exceed 1.0% per annum, based on the credit rating of MGE's senior
unsecured debt. Interest is payable monthly, if based upon prime, and on the
last day of each interest period if less than three months or the three-month
anniversary of the first day of the interest period, if based upon the
LIBOR-based rate. No borrowings are outstanding under this facility at this
time. A change in control constitutes a default under the agreement. Change in
control events are defined as (i) a failure by MGE Energy to hold 100% of
the outstanding voting equity interest in MGE or (ii) the acquisition of
beneficial ownership of 30% or more of the outstanding voting stock of
MGE Energy by one person or two or more persons acting in concert. The
agreement requires MGE Energy to maintain a ratio of its consolidated
indebtedness to consolidated total capitalization not to exceed a maximum of
65%.  There were no other material changes, other than from the
normal course of business, to MGE Energy's and MGE's contractual
obligations (representing cash obligations that are considered to be firm
commitments) and commercial commitments (representing commitments triggered by
future events) during the nine months ended September 30, 2008. Further
discussion of the contractual obligations and commercial commitments is included
in Footnote 10 of this filing and Footnote 18 in MGE Energy's and
MGE's annual reports on Form 10-K for the year ended December 31, 2007.  Liquidity and
Capital Resources  Cash Flows  The following summarizes cash flows during the nine
months ended September 30, 2008 and 2007, respectively:   MGE Energy

MGE(In thousands)
2008
2007

2008
2007Cash provided by/(used for):Operating activities
$58,516
$ 68,557

$57,875
$ 70,053Investing activities
(84,042)
(101,137)

(85,557)
(100,857)Financing activities
25,066
33,712

27,285
31,587  Cash Provided by Operating Activities  MGE Energy  MGE Energy's consolidated net cash provided by
operating activities is derived mainly from the electric and gas operations of
its principal subsidiary, MGE.  Cash provided by operating activities for the nine months
ended September 30, 2008, was $58.5 million, a decrease of
$10.0 million when compared to the same period in the prior year primarily
as a result of changes in working capital.  MGE Energy's net income increased $3.9 million
for the nine months ended September 30, 2008, when compared to the same
period in the prior year.   Page 46    Depreciation for the nine
months ended September 30, 2008, was $29.3 million compared to
$24.1 million in the same period in the prior year. This increase is
primarily attributable to higher levels of assets, including the Top of Iowa III
wind-powered electric generating facility which was placed in service in the
first quarter of 2008 as well as accelerated depreciation of certain Blount
assets. For additional information on the Blount accelerated depreciation, see
Footnote 11. Depreciation expense associated with Top of Iowa III and the
Blount accelerated depreciation is being recovered in rates.  Deferred taxes increased $7.2 million for the nine
months ended September 30, 2008 compared to the nine months ended
September 30, 2007, primarily due to bonus tax depreciation as a result of
the Economic Stimulus Act of 2008.  Working capital accounts resulted in $22.4 million
in cash used by operating activities for the nine months ended
September 30, 2008, compared to $4.9 million in cash provided by
operating activities during the same period in the prior year. Contributing to
this change is a higher restricted cash balance as a result of additional margin
calls associated with MGE Energy's financial and hedging instruments and a
higher balance of stored natural gas.  MGE Energy received $2.3 million in cash
proceeds as a result of the Congestion Cost and Line Loss Allocation Services
Agreement that they are a party to during the nine months ended
September 30, 2007.  During the nine months ended September 30, 2008 and
2007, MGE Energy made $7.1 million and $5.1 million,
respectively, in discretionary contributions to the pension and other
postretirement plans. See Footnote 8 for further discussion of
MGE Energy's Pension and Other Postretirement Benefits.  During the nine months ended September 30, 2008,
MGE Energy's other noncurrent items, net contributed to $5.2 million
of operating inflows compared to $0.6 million of operating outflows for the
nine months ended September 30, 2007. Factors contributing to this change
include regulatory assets for the conservation costs, debt related costs and
ERGS related costs.  MGE  Cash provided by operating activities for the nine months
ended September 30, 2008, was $57.9 million, a decrease of
$12.2 million when compared to the same period in the prior year primarily
as a result of changes in working capital.  MGE's net income increased $1.2 million for the nine
months ended September 30, 2008, when compared to the same period in the
prior year.  Depreciation for the nine months ended September 30,
2008, was $29.3 million compared to $24.1 million in the same period
in the prior year. This increase is primarily attributable to higher levels of
assets, including the Top of Iowa III wind-powered electric generating facility
which was placed in service in the first quarter of 2008 as well as accelerated
depreciation of certain Blount assets. For additional information on the Blount
accelerated depreciation, see Footnote 11. Depreciation expense associated
with Top of Iowa III and the Blount accelerated depreciation is being recovered
in rates.  Deferred taxes increased $7.2 million for the nine
months ended September 30, 2008 compared to the nine months ended
September 30, 2007, primarily due to bonus tax depreciation as a result of
the Economic Stimulus Act of 2008.  Working capital accounts resulted in $24.2 million
in cash used by operating activities for the nine months ended
September 30, 2008, compared to $5.5 million in cash provided by
operating activities during the same period in the prior year. Contributing to
this change is a higher restricted cash balance as a result of additional margin
calls associated with MGE's financial and hedging instruments and a higher
balance of stored natural gas.  MGE received $2.3 million in cash proceeds as a
result of the Congestion Cost and Line Loss Allocation Services Agreement that
they are a party to during the nine months ended September 30, 2007.  During the nine months ended September 30, 2008 and
2007, MGE made $7.1 million and $5.1 million, respectively in
discretionary contributions to the pension and other postretirement plans. See
Footnote 8 for further discussion of MGE's Pension and Other Postretirement
Benefits.  During the nine months ended September 30, 2008,
MGE's other noncurrent items, net contributed to $5.1 million of operating
inflows compared to $0.7 million of operating outflows for the nine months
ended September 30, 2007. Factors contributing to this change include
regulatory assets for the conservation costs, debt related costs and ERGS
related costs.   Page 47    Cash Used for Investing
Activities  MGE Energy  MGE Energy's cash used for investing activities
decreased $17.1 million for the nine months ended September 30, 2008,
when compared to the same period in the prior year.  Capital expenditures for the nine months ended
September 30, 2008, were $84.9 million. This amount represents a
$17.6 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to decreased construction activity for the
Top of Iowa III wind generation project of $21.8 and a decrease of
$0.2 million for capital expenditures related to WCCF. These decreases were
partially offset by increased construction activity for Elm Road of
$2.2 million and $2.2 million in other utility capital expenditures.  During the nine months ended September 30, 2008,
MGE Energy made a cash capital contribution of $2.3 million to ATC.
During the nine months ended September 30, 2007, MGE Energy did not
make any cash capital contributions to ATC. However, during the nine months
ended September 30, 2007, MGE (through MGE Transco) transferred
$1.4 million in certain transmission assets to ATC. In exchange for this
transfer, MGE Transco received $0.7 million in cash proceeds and
$0.7 million in an additional investment in ATC.  During the nine months ended September 30, 2008,
proceeds from the sale of property were $0.3 million. These proceeds
primarily relate to the sale of nonutility property.  During the nine months ended September 30, 2008,
MGE Energy received $2.3 million in cash proceeds from the sale of
equity investments compared to $0.5 million received during the nine months
ended September 30, 2007.  MGE  MGE's cash used for investing activities decreased
$15.3 million for the nine months ended September 30, 2008, when
compared to the same period in the prior year.  Capital expenditures for the nine months ended
September 30, 2008, were $84.9 million. This amount represents a
$17.6 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to decreased construction activity for the
Top of Iowa III wind generation project of $21.8 and a decrease of
$0.2 million for capital expenditures related to WCCF. These decreases were
partially offset by increased construction activity for Elm Road of
$2.2 million and $2.2 million in other utility capital expenditures.  During the nine months ended September 30, 2008, MGE
made a cash capital contribution of $2.3 million to ATC. During the nine
months ended September 30, 2007, MGE did not make any cash capital
contributions to ATC. However, during the nine months ended September 30,
2007, MGE (through MGE Transco) transferred $1.4 million in certain
transmission assets to ATC. In exchange for this transfer, MGE Transco received
$0.7 million in cash proceeds and $0.7 million in an additional
investment in ATC.  During the nine months ended September 30, 2008,
proceeds from the sale of property were $0.3 million. These proceeds
primarily relate to the sale of nonutility property.  Cash Provided by Financing Activities  MGE Energy  Cash provided by MGE Energy's financing activities
was $25.1 million for the nine months ended September 30, 2008,
compared to $33.7 million for the nine months ended September 30,
2007.  MGE Energy received $12.1 million and
$29.2 million in cash proceeds as the result of stock issued during the
nine months ended September 30, 2008 and 2007, respectively.  For the nine months ended September 30, 2008,
dividends paid were $23.7 million compared to $22.5 million for same
period in the prior year.  MGE Energy repaid $30 million of long-term debt
in the nine months ended September 30, 2008, compared to $15.0 million
in the nine months ended September 30, 2007.   Page 48    MGE Energy issued
$40 million of long-term debt in the nine months ended September 30,
2008, compared to $25.0 million in the nine months ended September 30,
2007.  For the nine months ended September 30, 2008, net
short-term debt borrowings were $27.0 million compared to
$17.0 million for the same period in the prior year.  On March 31, 2008, MGE's $20.0 million
unsecured line of credit expired. On August 29, 2008, MGE Energy
entered into a $20.0 million revolving credit facility and additionally MGE
entered into a $20.0 million committed credit facility. Aggregate
commitments on bank lines of credit for MGE Energy and its subsidiaries as
of September 30, 2008, were $175.0 million. As of September 30,
2008, outstanding borrowings on such lines of credit totaled
$130.5 million, and $44.5 million was available for borrowing.  MGE  During the nine months ended September 30, 2008,
cash provided by MGE's financing activities was $27.3 million compared to
of $31.6 million in the same period in the prior year.  No cash dividends were paid from MGE to MGE Energy
for the nine months ended September 30, 2008. For the nine months ended
September 30, 2007, cash dividends made from MGE to MGE Energy were
$13.1 million.  MGE repaid $30.0 million of long-term debt in the
nine months ended September 30, 2008, compared to $15.0 million in the
nine months ended September 30, 2007.  MGE issued $40.0 million of long-term debt in the
nine months ended September 30, 2008, compared to $25.0 million in the
nine months ended September 30, 2007.  For the nine months ended September 30, 2008, net
short-term debt repayments were $6.5 million compared to net short-term
issuance of $10.0 million for the same period in the prior year.  On March 31, 2008, MGE's $20 million unsecured
line of credit expired. On August 29, 2008, MGE entered into a
$20.0 million committed credit facility. Aggregate commitments on bank
lines of credit for MGE as of September 30, 2008, were $75.0 million.
As of September 30, 2008, outstanding borrowings on such lines of credit
totaled $54.5 million, and $20.5 million was available for
borrowing.  Capitalization Ratios  MGE Energy's capitalization ratios were as
follows:  MGE EnergySept. 30, 2008
Dec. 31, 2007Common shareholders' equity
53.1%
53.9%Long-term debt*
31.7%
33.1%Short-term debt
15.2%
13.0%*Includes the current portion of long-term
debt.  MGE Energy's and MGE's Capital
Requirements  As of September 30, 2008, MGE Energy had a
working capital deficit (current liabilities exceeded current assets). This
deficit is in part due to MGE Energy funding the majority of its capital
commitments for the Elm Road project with short-term debt. MGE Energy
intends to fund future capital commitments for the Elm Road project with funds
generated from normal operations, through the issuance of equity, the issuance
of long-term debt, and short-term debt.  MGE Energy's and MGE's liquidity are primarily
affected by their capital requirements. During the nine months ended
September 30, 2008, capital expenditures for MGE Energy and MGE
totaled $84.9 million, which included $42.4 million of capital
expenditures for Elm Road, $0.2 million of capital expenditures for MGE
Power West Campus, $8.5 million for the Top of Iowa III wind project, and
$33.8 million of capital expenditures for other utility operations.   Page 49    The following table shows
MGE's current credit ratings. The ratings presented reflect the current views of
these rating agencies and are subject to change. MGE Energy is not yet
rated because it has not issued any debt securities.  Standard & Poor's
Moody'sFirst Mortgage Bonds
AA-
Aa2Unsecured Medium Term Notes
AA-
Aa3Commercial Paper
A1+
P1  MGE's access to the capital markets, including the
commercial paper market and its financing costs in those markets, is dependent
on its securities' ratings. None of MGE's borrowings is subject to default or
prepayment due to downgrading of securities' ratings, although MGE's future
interest expense may be affected by a change in those ratings.  Recent Developments in the Capital and Credit
Markets  The recent uncertainty in the capital and credit markets
has adversely affected the United States and global economies. These events have
the potential to create additional risks for businesses, including
MGE Energy and MGE, in the upcoming months. MGE Energy and MGE have
performed additional analyses to determine the potential impact, if any, of
recent market conditions on its financial statements. These analyses and
assessments include counterparty creditworthiness, value of our investments,
access to liquidity in the capital and credit markets, and exposure to
operational risk.  MGE Energy's and MGE's operations are affected by
local, national and worldwide economic conditions. The consequences of a
prolonged recession may include a lower level of economic activity, uncertainty
regarding energy prices and the capital and commodity markets, and increased
credit risk. A lower level of economic activity might result in a decline in
energy consumption, which may adversely affect our revenues and future growth.
Increased credit risk reflects the risk that our retail customers will not pay
their bills in a timely manner or at all, which may lead to a reduction in
liquidity and an eventual increase in bad debt expense.  Long-term instability in the financial markets, as a
result of recession or otherwise, also may affect the cost of capital and our
ability to raise capital. MGE Energy and MGE believe they have sufficient
liquidity despite the disruption of capital and credit markets. MGE Energy
and MGE recently completed their necessary long-term financings for 2008 and do
not anticipate a need for further long-term financing until the third quarter of
2009. See Equity and Financing Arrangements Footnote for more detailed
information.  Credit risk also includes the risk that trading
counterparties that owe us money or product will breach their obligations. Risk
management policy is to limit transactions to a diversified group of high
quality counterparties. Should the counterparties to these arrangements fail to
perform, we may be forced to enter into alternative arrangements. In that event,
our financial results could be adversely affected and we could incur losses.  MGE sponsors defined benefit pension plans and
postretirement benefits plans for our employees. The oversight on the
investments held in the plans is substantial, and we believe the investment
strategies are prudent. The market value of the investments within the employee
benefit plans trusts declined by approximately 16% during the nine months ended
September 30, 2008, and continued to decline during the month of
October 2008. Changes in the value of trust assets may affect the level of
required contributions to these trusts to meet benefits obligations. Changes in
the value of plan assets are not expected to have an impact on the income
statement for 2008; however, reduced benefit plan assets could result in
increased benefit costs in future years and may increase the amount and
accelerate the timing of required future funding contributions. Such increases
could be material to periods subsequent to 2008.  MGE Energy has reviewed its exposure to insurance
risk and has concluded that there are no material changes related to the cost or
availability of liability, property and other forms of insurance. Management
continues to monitor closely events and the ratings for insurance companies
associated with insurance programs.  Environmental Matters  The following discussion is limited to updates or
developments in environmental matters that occurred during the nine months ended
September 30, 2008. Further discussion of environmental matters is included
in MGE Energy's and MGE's annual reports on Form 10-K for the year ended
December 31, 2007.   Page 50    State mercury
rules  On October 6, 2008, Wisconsin's mercury rule (NR
446) was effectively approved by the Joint Committee for Review of
Administrative Rules (JCRAR) when JCRAR failed to uphold an objection made by
the Assembly Natural Resources Committee within the required 30-day period. We
anticipate that Wisconsin's NR446 will go into effect either December 1,
2008 or January 1, 2009, depending on when the rule is published in the
Wisconsin Administrative Register. The state's rule is significantly different
from the federal CAMR that was vacated in February 2008 by the U.S. Court
of Appeals for the District of Columbia Circuit. See Item 1. Business in
MGE Energy's and MGE's annual reports on Form 10-K for the year ended
December 31, 2007, for additional discussion of the federal CAMR. NR 446
will require large coal-fired Electric Generating Units (EGUs larger than 150
MW) to reduce mercury emissions by 90% beginning in 2015, or choose a
multi-pollutant reduction approach, which allows a stepped approach to mercury
reduction while reducing NOx and SO2emissions at
prescribed rates. Smaller coal-fired EGUs, those between 25  150 MW in size,
will need to apply Best Available Control Technology (BACT) to achieve mercury
reductions. This rule will require additional pollution controls at Columbia,
and may cost Blount and Elm Road additional capital and operating costs. Exact
costs are unknown at this time.  Federal National Ambient Air Quality
Standards  On March 12, 2008, the U.S. EPA announced a new
national ambient air quality standard (NAAQS) for ozone which is more stringent
than the current standard (standard lowered from 0.08 to 0.0750 parts
per million). States (including Wisconsin) must monitor and collect data on
ozone levels in order to determine attainment or nonattainment status on a
county and/or area basis. Currently available monitoring data for Dane and
Columbia counties demonstrates attainment with this new standard. However, final
attainment designations will not be made until 2010 using the monitoring data
collected during the period 2007 through 2009. There is a possibility that
future monitoring data for one or both of these counties will demonstrate
nonattainment for this new ozone standard, which could result in additional
operating and capital expenditures at Columbia (located in Columbia county) and
Blount (located in Dane county).  In addition, the EPA has made the preliminary
determination that the counties of Dane (where Blount is located) and Columbia
(where Columbia is located) are in nonattainment with the 2006 NAAQS for PM2.5,
a particulate matter air pollutant that is 2.5 microns or smaller in size. The
State of Wisconsin has filed comments opposing these designations. The EPA will
make a final determination for these counties this winter. The State of
Wisconsin will need to develop a State Implementation Plan (SIP) by early 2012
for those counties that are designated as nonattainment. It is not clear whether
or to what extent the nonattainment designations and associated SIP will affect
Blount and Columbia.  Federal Clean Air Interstate Rule
(CAIR)  On July 11, 2008, the DC Circuit Court of Appeals
remanded the EPA's Clean Air Interstate Rule (CAIR). See Part I. Item 1.
Business, Environmental, Air Quality in the December 31, 2007 10-K for
additional information on CAIR. On September 24, 2008, EPA filed a petition
with the Court requesting a rehearing on the matter. The State of Wisconsin's NR
432 deals with NOXallocations under CAIR, and portions of
Wisconsin's Best Available Retrofit Technology (BART) rule defer to CAIR when
dealing with emissions from EGUs subject to CAIR. The WDNR has indicated that in
the absence of CAIR, utilities will be subject to the full extent of BART under
NR 433 and have begun meeting with utilities to discuss their expectations with
regard to conducting a BART analysis. Columbia, which is subject to BART, will
need to conduct a BART analysis in the absence of CAIR. Based on what is on the
books today, the pollution controls determined by a BART analysis will need to
be installed by the end of 2013. It is unclear at this time if this will
increase expenditures at Columbia beyond what was estimated for CAIR and other
regulations. To date, we have been advised that the Blount units will not be
required to conduct a full BART analysis (i.e., not subject to BART).  Global Climate Change  On March 27, 2008, the U.S. EPA sent letters to
various environmental committees in the U.S. Senate and House of Representatives
announcing their plans to address their obligations under the Supreme Court's
ruling in Massachusetts v. EPA. The letters to Congress indicated that
the EPA sees any Green House Gas regulations that they develop to be
far-reaching and likely to include both mobile and stationary sources. In
July 2008, the EPA issued an Advance Notice of Proposed Rulemaking seeking
comment on a large array of possible regulatory actions it is contemplating
under the federal Clean Air Act to reduce greenhouse gas emissions. The proposed
rules impact virtually all aspects of the economy including electric and natural
gas utilities. The EPA document follows last year's U.S. Supreme Court decision
requiring the EPA to regulate greenhouse gas emissions under the Clean Air Act
if it finds that they endanger public health or welfare. The document seeks
comment by November 28, 2008, on whether the EPA should make that finding
and, if so, the types of regulations it should adopt. It is unknown at this time
what impact, if any, such a finding would have on us.   Page 51    A final report from Governor
Doyle's Global Warming Task Force was approved on July 24, 2008, concluding
over a year's work by the task force. While several Public Service Commission of
Wisconsin (PSCW) dockets have been created as a result of Task Force
recommendations, it is unknown at this time the extent to which the Task Force
recommendations will be implemented in Wisconsin or the effect that these
recommendations might have on MGE operations.  Boiler Maximum Achievable Control Technology
(Boiler MACT)  Boilers at Blount and Columbia may need to meet emission
standards for hazardous air pollutants reflecting the use of maximum achievable
control technology ("MACT Standards"). Although EPA had developed these MACT
Standards, they were vacated by the United States Court of Appeals for the D.C.
Circuit. In the absence of the EPA approved MACT Standards, it may be necessary
for MGE to submit a permit application to the WDNR requesting that case specific
MACT Standards be developed for certain boilers at BGS. MGE is exploring whether
or not boilers in our operations are subject to these requirements. If any of
our boilers are subject to Boiler MACT it may require that we limit emissions
and/or install additional pollution controls. Whether or not additional
compliance steps are needed and the cost of such compliance is unclear at this
time.  WPDES permit  On November 29, 2007, the Administrative Law Judge
(the "ALJ") in the proceeding related to the previously issued Wisconsin
Pollution Discharge Elimination System ("WPDES") permit determined that the two
additional coal units that are part of the Oak Creek expansion are "new
facilities" under section 316(b) of the Federal Clean Water Act. The ALJ did not
vacate the WPDES permit or any other permit necessary to continue construction
of the two additional coal units, pointing out that, based upon the present
record, the water intake system currently under construction as part of the Oak
Creek expansion may be permittable under the standards that apply to new
facilities. The ALJ remanded the WPDES permit to the Wisconsin Department of
Natural Resources (the "WDNR") and directed the WDNR to reissue or modify the
permit to reflect "best technology available" to comply with the standards
applicable to new facilities under Wisconsin state law. As part of the decision,
the ALJ restated his prior opinion that the water intake system currently under
construction may not be operated so long as it remains a contested matter.  On May 8, 2008, WDNR issued its public notice that
it intended to reissue the WPDES permit to allow for the once-through cooling
system that was under construction by Wisconsin Energy Corporation. On
June 6, 2008, EPA issued its concurrence letter on the draft permit
indicating it would not object to the modification of the WPDES permit as
drafted. A public information hearing on the intended reissued WPDES permit was
held on June 9, 2008 and the public comment period closed on June 16,
2008. On July 31, 2008, the WDNR issued the final modified permit, with no
substantive changes from the previously issued draft permit. The deadline for a
legal challenge to the permit has expired without appeal.  On July 31, 2008, the joint owners of the Oak Creek
expansion reached an agreement with Clean Wisconsin, Inc. and Sierra Club, the
groups opposing the WPDES permit. Under the settlement agreement, these groups
agreed to withdraw their opposition to the modified WPDES permit for the
expansion units at Oak Creek. The joint owners committed to various
environmental projects, including projects designed to address greenhouse gas
emissions and water quality. MGE's share of those commitments would involve a
payment of approximately $0.4 million in 2009 for greenhouse gas reduction
efforts, and, subject to regulatory approval, further payments of approximately
$0.3 million annually over 25 years (2010-2034) to address water
quality issues in Lake Michigan.  Columbia  MGE and two other utilities jointly own Columbia, a
coal-fired generating facility, which accounts for 225 MW (29%) of MGE's net
generating capability. Various environmental initiatives are expected to result
in significant additional operating and capital expenditures at Columbia. The
operator's current estimates show that MGE's share of the capital expenditures
required to comply with various environmental initiatives will be between
$130 million and $200 million. According to current estimates,
compliance with various environmental initiatives is also expected to result in
an increase to MGE's pro-rata share of Columbia's ongoing operating expenses.
The operator and MGE management are continuing to explore various alternatives
to comply with these standards. Accordingly, actual capital expenditures may
fall above or below the range provided. MGE expects that the costs to comply
with these standards will be fully recoverable through rates.   Page 52    Restructuring
Activities  On January 19, 2006, MGE announced a plan, subject
to certain conditions, that includes discontinuing coal use at the end of 2011
at Blount. The plant will continue to run on natural gas but will be reduced
from its current approximate 190 MW capacity to 100 MW when coal burning is
discontinued. MGE has determined that certain employee positions will be
eliminated in 2011 as a result of this exit plan.  MGE has entered into severance agreements providing
severance benefits to the nonunion employees affected by the exit plan.
Additionally, MGE ratified a labor agreement with the IBEW providing those union
employees affected by the exit plan with involuntary and voluntary severance
benefits. The nonunion and union benefits are expected to be paid follows:
$0.2 million in 2010 and $1.2 million in 2011.  MGE will recover in rates the costs associated with the
discontinuance of coal at Blount. As such, the severance charges for these
employees have been deferred and recognized on the consolidated balance sheet of
MGE Energy and MGE as a regulatory asset.  Other Regulatory Matters  Fuel filing  On May 30, 2008, MGE filed with the PSCW a limited
scope reopener of its 2009 electric rates with the PSCW. The application
included an update to MGE's electric fuel costs monitored under the fuel rules
and an update to the Elm Road costs. If approved by the PSCW, the net effect of
the requested changes would result in a 6.99% increase, on average, in retail
electric rates.  Fuel surcharge  On May 5, 2008, the PSCW approved a $0.00239 per kWh
interim fuel surcharge on MGE's electric rates. This interim fuel surcharge will
result in an estimated $8.0 million increase in electric revenues on an
annual basis. On September 22, 2008, MGE and the intervenors in this
proceeding filed a stipulation agreement for consideration by the PSCW. The
stipulation was approved on October 24, 2008 and allows the interim
surcharge to remain in effect until the end of the year, but requires MGE to
review its 2008 monitored fuel costs at year-end and to refund to customers,
with interest at 10.8%, any amount by which its actual fuel costs fall short of
the monitored fuel costs collected in rates.  New Accounting
Principles  FSP FIN 39-1  In April 2007, the FASB issued FSP 39-1,
Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). This
pronouncement amends FIN 39, Offsetting of Amounts Related to Certain
Contracts, and allows companies to offset fair value amounts recognized for
the right to reclaim cash collateral (a receivable) or the obligation to return
cash collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under a master netting
agreement. MGE and MGE Energy elected the net presentation as prescribed by
this pronouncement. FSP FIN 39-1 became effective for MGE and MGE Energy as
of January 1, 2008. The effects of applying this pronouncement shall be
recognized as a change in accounting principle through retroactive application
for all financial statements presented. The adoption of this pronouncement did
not have any impact on MGE or MGE Energy's net income. At
September 30, 2008, MGE Energy and MGE had $7.5 million in cash
collateral that was netted against the net derivative positions with
counterparties.  FAS 160 and FAS 141(R)  In December 2007, the FASB issued FAS 160,
Non-Controlling Interests in Consolidated Financial Statements, an amendment
of ARB No. 51 and FAS 141(R), Business Combinations. These
pronouncements will change the accounting and reporting for business
acquisitions and noncontrolling interest in a subsidiary. In addition,
FAS 160 will change the accounting and reporting for the deconsolidation of
a subsidiary. FAS 160 and FAS 141(R) will be effective for MGE and
MGE Energy as of January 1, 2009. MGE and MGE Energy are
currently assessing the impact these pronouncements will have on their financial
statements.   Page 53    FAS 161  In March 2008, the FASB issued FAS 161,
Disclosures about Derivative Instruments and Hedging Activities. The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption allowed. MGE and MGE Energy have elected not to early adopt
this pronouncement. Therefore, FAS 161 will be effective for MGE and
MGE Energy as of January 1, 2009. MGE and MGE Energy are
currently assessing the impact this pronouncement will have on their financial
statements.  FSP FAS No. 157-3  On October 10, 2008, the FASB issued FSP
FAS No. 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset is Not Active, which clarifies the application of
SFAS No. 157 and was effective upon issuance. This standard provides
guidance on determination of the fair value of a financial asset in a market
where that financial asset is inactive. The adoption of this standard as of
September 30, 2008, does not have any material impact on MGE Energy
and MGE.   Page 54    Item
3. Quantitative and Qualitative Disclosures About Market Risk.  MGE Energy and MGE are potentially exposed to market
risk associated with interest rates, commodity prices, weather, and equity
returns. MGE currently has no exposure to foreign currency risk. MGE manages
some risk exposure through risk management policies and uses derivative
instruments. MGE does not enter into speculative trading transactions. The
recent uncertainty in the capital and credit markets has adversely affected the
United States and global economies. Additional detail can be found in the
Management Discussion and Analysis section under Recent Developments in the
Capital and Credit Markets.  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 revenues are 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 revenue 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 revenues.  MGE may also be impacted by extreme weather conditions
such as hurricanes or tornados. Such conditions may damage critical operating
assets or may negatively impact the price of commodity and other costs.  A summary of actual weather information in the utility
segment's service territory during the three and nine months ended
September 30, 2008, as measured by degree days, may be found in results of
operations.  Commodity Price Risk  MGE has commodity price risk exposure with respect to the
price of natural gas, electricity, coal, emission credits, and oil. MGE employs
established policies and procedures to reduce the market risks associated with
changing commodity prices. MGE's commodity risks are somewhat mitigated by the
current ratemaking process in place for recovering electric fuel cost, purchased
energy costs, and the cost of natural gas. MGE's electric fuel costs are subject
to fuel rules established by the PSCW.  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.  Under the electric fuel rules, MGE may be required to
refund to customers if its actual fuel costs fall outside the lower end of the
range and would be allowed to request a surcharge if those actual fuel costs
exceed the upper end of the range. The range is defined by the PSCW and has been
modified throughout the years based on market conditions and other relevant
factors. Pursuant to the PSCW order issued on December 14, 2007, MGE's
electric fuel rules monitored range is a plus or minus 2% range. MGE assumes the
risks and benefits of variances that are within the 2% bandwidth. For 2008 as
updated for the interim fuel surcharge, fuel and purchased power costs included
in MGE's base fuel rates are $126.8 million. See Footnote 14.b. for
additional information. MGE's gas segment is governed by the purchased gas
adjustment clause (PGA). Under the PGA, MGE is able to pass through to customers
the cost of gas, subject to certain limited incentives. Under both the electric
fuel rules and PGA clause, MGE may include in the cost of fuel (natural gas or
power) the costs and benefits of fuel price risk management tools implemented
under the risk management plan approved by the PSCW.  MGE also reduces price risk caused by market fluctuations
via physical contracts and financial contracts, including futures, swaps,
options, and forwards. The financial contracts currently being cash-flow hedged
are no greater than one year, except for the ten-year purchased power agreement
described below.  At September 30, 2008, MGE has financial gas and
electric commodity contracts to hedge commodity price risk in the gas and
electric segments. These contracts are primarily comprised of exchange-traded
option and future contracts to manage the cost of gas. MGE also holds FTRs which
are used to hedge the risk of increased electric transmission congestion
charges. At September 30, 2008, the cost of all these aforementioned
instruments exceeded their net market value by $7.3 million. The amounts
recorded for the net mark-to-market value of the commodity based contracts is
offset with a corresponding regulatory asset because these transactions are part
of the PGA or fuel rules clause authorized by the PSCW.  Page 55    MGE has also entered into a
ten-year purchased power agreement which provides MGE with firm capacity and
energy beginning June 1, 2012, and ending on May 31, 2022 (the "base
term"). The agreement also allows MGE the option to purchase power during a
period of time preceding the base term as well as an option to extend the
contract after the base term. The agreement is a derivative contract and is
recognized at its fair value on the balance sheet. The fair value of the
contract at September 30, 2008, reflects a loss position of
$1.2 million.  Interest Rate Risk  Both MGE and MGE Energy have short-term borrowings
at varying interest rates. MGE issues commercial paper for its short-term
borrowings, while MGE Energy draws from its current credit facility to meet
its short-term borrowing needs. Borrowing levels vary from period to period
depending upon capital investments and other factors. Future short-term interest
expense and payments will reflect both future short-term interest rates and
borrowing levels. MGE Energy and MGE manage interest rate risk by limiting
their variable rate exposure and continually monitoring the effects of market
changes on interest rates. MGE is not exposed to changes in interest rates on a
substantial portion of its long-term debt until that debt matures and is
refinanced at market rates.  Equity Price Risk - Pension-Related Assets  MGE currently funds its liabilities related to employee
benefits through trust funds. These funds, which include investments in debt and
equity securities, are managed by various investment managers. Changes in market
value of these investments can have an impact on the future pension and
postretirement expenses.  Credit Risk - Counterparty  Credit risk is the loss that may result from counterparty
nonperformance. MGE is exposed to credit risk primarily through its merchant
energy business. MGE uses credit policies to manage its credit risk, which
includes utilizing an established credit approval process, monitoring
counterparty limits, employing credit mitigation measures such as collateral or
prepayment arrangements, and using netting agreements.  Due to the possibility of extreme volatility in the
prices of energy commodities and derivatives, the market value of contractual
positions with individual counterparties could exceed established credit limits
or collateral provided by those counterparties. If such a counterparty were then
to fail to perform its obligations under its contract (for example, fail to
deliver the electricity MGE originally contracted for), MGE could sustain a loss
that could have a material impact on its financial results.  Additionally, if a counterparty were to default and MGE
were to liquidate all contracts with that entity, MGE's credit loss would
include the loss in value of mark-to-market contracts; the amount owed for
settled transactions; and additional payments, if any, to settle unrealized
losses on accrual contracts.  MGE is obligated to provide service to all electric and
gas customers within its respective franchised territories. MGE's franchised
electric territory includes a 315 square-mile area in Dane County, Wisconsin,
and MGE's franchised gas territory includes a service area covering 1,625 square
miles in Wisconsin. Based on results for the year ended December 31, 2007,
no one customer constituted more than 7% of total operating revenues for MGE and
MGE Energy. Credit risk for electric and gas is managed by MGE's credit and
collection policies, which are consistent with state regulatory
requirements.  Cash, cash equivalents, and customer accounts receivable
are the financial instruments that potentially subject MGE Energy and MGE
to concentrations of credit risk. MGE Energy and MGE place their cash and
cash equivalents with high credit-quality financial institutions. MGE has
limited concentrations of credit risk from customer accounts receivable because
of the large number of customers and strong economy in its service
territory.    Page 56    Item
4. Controls and Procedures.  During the third quarter of 2008, 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 accumulated and made known to
MGE Energy's management, including these officers, by other employees of
MGE Energy and its subsidiaries as appropriate to allow timely decisions
regarding required disclosure, and that this information is recorded, processed,
summarized, evaluated, and reported, as applicable, within the time periods
specified in the SEC's rules and forms. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision making can be
faulty and breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Also, MGE Energy does not control or manage certain of its
unconsolidated entities and thus, its access and ability to apply its procedures
to those entities is more limited than is the case for its consolidated
subsidiaries.  As of September 30, 2008, the principal executive
officer and the principal financial officer concluded that MGE Energy's
disclosure controls and procedures were effective to accomplish their
objectives. MGE Energy intends to continually strive to improve its
disclosure controls and procedures to enhance the quality of its financial
reporting.  During the quarter ended September 30, 2008, there
were no changes in MGE Energy's internal controls over financial reporting
that materially affected, or are reasonably likely to materially affect,
MGE Energy's internal control over financial reporting.   Item 4T. Controls
and Procedures.  During the third quarter of 2008, 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, including its
subsidiaries, is accumulated and made known to MGE's management, including these
officers, by other employees of MGE and its subsidiaries as appropriate to allow
timely decisions regarding required disclosure, and that this information is
recorded, processed, summarized, evaluated, and reported, as applicable, within
the time periods specified in the SEC's rules and forms. Due to the inherent
limitations of control systems, not all misstatements may be detected. These
inherent limitations include the realities that judgments in decision making can
be faulty and breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Also, MGE does not control or manage certain of its unconsolidated
entities and thus, its access and ability to apply its procedures to those
entities is more limited than is the case for its consolidated subsidiaries.  As of September 30, 2008, the principal executive
officer and the principal financial officer concluded that MGE's disclosure
controls and procedures were effective to accomplish their objectives. MGE
intends to continually strive to improve its disclosure controls and procedures
to enhance the quality of its financial reporting.  During the quarter ended September 30, 2008, there
were no changes in MGE's internal control over financial reporting that
materially affected, or are reasonable likely to materially affect, MGE's
internal control over financial reporting.    Page 57    PART
II. OTHER INFORMATION.   Item 1. Legal
Proceedings.  MGE Energy and MGE  MGE Energy and MGE from time to time are involved in
various legal proceedings that are handled and defended in the ordinary course
of business. While MGE Energy and MGE are unable to predict the outcome of
these matters, management does not believe, based upon currently available
facts, that the ultimate resolution of any of such proceedings would have a
material adverse effect on their overall financial condition or results of
operations except as disclosed in MGE Energy's and MGE's annual report on
Form 10-K for the year ended December 31, 2007.   Item 1A. Risk
Factors.  MGE Energy and MGE  At September 30, 2008, MGE Energy and MGE have
updated the risk factors contained in the 2007 Annual Report on Form 10-K as
described below.  The recent uncertainty in the capital and credit markets
has adversely affected the United States and global economies. These events have
the potential to create additional risks for businesses, including
MGE Energy and MGE, in the upcoming months. Additional detail can be found
in the Management Discussion and Analysis section under Recent Developments in
the Capital and Credit Markets.   Item 6.
Exhibits.  12 Statement regarding computation of
ratio of earnings to fixed charges for Madison Gas and Electric Company.  Certifications Pursuant to Rule 13a-14(a) and 15d-14(a)
of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form
10-Q for the quarter ended September 30, 2008, filed by the following
officers for the following companies:  31.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 31.2 Filed by 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 Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008, filed by the
following officers for the following companies:  32.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 32.2 Filed by 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   Page 58    Signatures - MGE Energy, Inc.  Pursuant to the requirements 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.Date: November 5, 2008
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: November 5, 2008
/s/ Terry A. HansonTerry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Chief Financial and Accounting
Officer)     Page 59    Signatures - Madison Gas and Electric Company  Pursuant to the requirements 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 COMPANYDate: November 5, 2008
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: November 5, 2008
/s/ Terry A. HansonTerry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Chief Financial and Accounting
Officer)   Page 60