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: March 31, 2009  [
  ] 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 registrants have
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files): Yes [ ] 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 April 30, 2009MGE Energy,
Inc.
Common
stock, $1.00 par value, 23,086,485 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)  Consolidated
Statements of Equity and Comprehensive Income (unaudited)  Madison
Gas and Electric Company  Consolidated
Statements of Income (unaudited)  Consolidated
Statements of Cash Flows (unaudited)  Consolidated
Balance Sheets (unaudited)  Consolidated
Statements of Equity and Comprehensive Income (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
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' 2008
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
constructionAPB
Accounting Principles BoardARB
Accounting Research BulletinASM
Ancillary Services MarketATC
American Transmission Company LLCBART
Best Available Retrofit TechnologyBechtel
Bechtel Power CorporationBlount
Blount StationCAA
Clean Air ActCAIR
Clean Air Interstate RuleCAMR
Clean Air Mercury RuleCAVR
Clean Air Visibility RuleCH4
MethaneCO2
Carbon dioxideColumbia
Columbia Energy Centercooling degree days
Measure of the extent to which the average daily
temperature is above 65 degrees Fahrenheit, which is considered an
indicator of possible increased demand for energy to provide
coolingDistribution Agreement
Distribution Agreement between MGE Energy and
J.P. Morgan Securities Inc.Dth
DekathermsEITF
Emerging Issues Task ForceElm Road
Elm Road Generating StationEPA
U.S. Environmental Protection AgencyERS
Elm Road Services, LLCFAS
Financial Accounting StandardFASB
Financial Accounting Standards BoardFERC
Federal Energy Regulatory CommissionFIN
FASB Interpretation No.FNTP
Full notice to proceedFSP
FASB Staff PositionFTR
Financial Transmission RightsGCIM
Gas cost incentive mechanismGHG
Greenhouse gasheating degree days (HDD)
Measure of the extent to which the average daily
temperature is below 65 degrees Fahrenheit, which is considered an
indicator of possible increased demand for energy to provide
heatingHFC
HydrofluorocarbonsIBEW
International Brotherhood of Electric
WorkersIRS
Internal Revenue ServiceJ.P. Morgan
J.P. Morgan Securities Inc.kWh
Kilowatt-hourLIBOR
London Inter Bank Offer RateMACT
Maximum available control technologyMGE
Madison Gas and Electric CompanyMGE Energy
MGE Energy, Inc.MGE Power
MGE Power LLCMGE Power Elm Road
MGE Power Elm Road, LLCMGE Power West Campus
MGE Power West Campus, LLCMGE Transco
MGE Transco Investment LLCMISO
Midwest Independent System Operator (a regional
transmission organization)Moody's
Moody's Investors Service, Inc.MW
MegawattN2O
Nitrous oxideNOx
Nitrogen oxideNR
Natural ResourcesNSPS
New source performance standardsNYMEX
New York Mercantile ExchangePFC
PerfluorocarbonsPGA
Purchased Gas Adjustment clausePJM
PJM Interconnection, LLC (a regional transmission
organization)  Page 4     PPA
Purchased power agreementPSCW
Public Service Commission of WisconsinRTO
Regional Transmission OrganizationStandard &Poor's
Standard & Poor's Ratings Group, a division of
McGraw-Hill CompaniesSEC
Securities and Exchange CommissionSF6
Sulfur hexafluorideSFAS
Statement of Financial Accounting Standards (issued
by the FASB )SO2
Sulfur dioxideStock Plan
Direct Stock Purchase and Dividend Reinvestment
Plan of MGE EnergyUW
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 liabilitiesWPL
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
March 31,2009

2008Operating Revenues:Regulated revenues
$178,947

$187,923Nonregulated revenues
2,197

2,073Total Operating
Revenues
181,144

189,996Operating Expenses:Fuel for electric
generation
9,872

16,194Purchased power
25,038

21,679Cost of gas sold
70,328

77,943Other operations and
maintenance
36,854

36,096Depreciation and
amortization
10,054

9,397Other general taxes
4,662

4,379Total Operating
Expenses
156,808

165,688Operating Income
24,336

24,308Other income, net
1,979

576Interest expense, net
(3,389)

(3,433)Income before income taxes
22,926

21,451Income tax provision
(7,974)

(7,614)Net Income
$14,952

$13,837Earnings per Share of Common Stock
(basic and diluted)
$0.65

$0.63Dividends paid per share of common stock
$0.362

$0.355Average Shares Outstanding(basic and
diluted)
22,956

21,989  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)   Three Months Ended
March 31,2009

2008Operating Activities:Net income
$14,952

$13,837Items not affecting cash:Depreciation and
amortization
10,054

9,397Deferred income taxes
203

(2,502)Provision for doubtful accounts
receivable
1,637

1,098AFUDC - equity funds
(106)

(532)Employee benefit plan
expenses
1,800

2,026Equity earnings in ATC
(1,981)

(1,606)Other items
429

378Changes in working
capital:Decrease in current
assets
38,410

21,370(Decrease) increase in current
liabilities
(12,269)

5,833Dividend income from ATC
1,520

1,117Cash contributions to pension
and other postretirement plans
(6,621)

(5,942)Other noncurrent items,
net
1,804

1,303Cash Provided by Operating
Activities
49,832

45,777Investing Activities:Capital expenditures
(18,627)

(28,541)Capital contributions to
investments
(888)

(50)Other
977

482Cash Used for Investing
Activities
(18,538)

(28,109)Financing Activities:Issuance of common stock
4,402

3,553Cash dividends paid on common
stock
(8,302)

(7,805)Decrease in short-term debt,
net
(25,500)

(14,000)Cash Used for Financing
Activities
(29,400)

(18,252)Change in Cash and Cash Equivalents
1,894

(584)Cash and cash equivalents at
beginning of period
4,106

3,789Cash and cash equivalents at end
of period
$6,000

$3,205  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)   March 31,
2009

December 31,
2008ASSETSCurrent Assets:Cash and cash equivalents
$6,000

$4,106Restricted cash
4,303

4,805Accounts receivable, less
reserves of $4,857 and $4,076, respectively
42,439

45,266Other accounts receivable, less
reserves of $204 and $200, respectively
6,878

7,659Unbilled revenues
22,869

34,701Materials and supplies, at
average cost
15,953

15,592Fossil fuel
4,920

3,228Stored natural gas, at average
cost
21,655

42,146Prepaid taxes
10,576

15,671Regulatory assets -
current
10,673

9,876Other current assets
7,839

10,828Total Current
Assets
154,105

193,878Other long-term receivables
2,989

3,005Special billing projects
299

464Regulatory assets
121,072

116,165Other deferred assets and other
5,467

5,620Property, Plant, and Equipment, Net
710,613

702,549Construction work in progress
196,612

198,694Total Property, Plant, and
Equipment
907,225

901,243Other Property and Investments
49,132

47,900Total Assets
$1,240,289

$1,268,275LIABILITIES AND CAPITALIZATIONCurrent Liabilities:Short-term debt
$99,000

$124,500Accounts payable
28,013

47,229Accrued interest and
taxes
10,148

4,070Deferred income taxes
1,010

3,306Regulatory liabilities -
current
1,426

5,974Pension liability -
current
813

813Other current liabilities
20,735

19,349Total Current
Liabilities
161,145

205,241Other Credits:Deferred income taxes
120,287

117,505Investment tax credit -
deferred
2,650

2,736Regulatory liabilities
19,172

18,814Accrued pension and other
postretirement benefits
133,996

137,286Other deferred liabilities and
other
41,399

36,083Total Other
Credits
317,504

312,424Capitalization:Common shareholders'
equity
489,216

478,202Long-term debt
272,424

272,408Total
Capitalization
761,640

750,610Commitments and contingencies
(see Footnote 9)
-

-Total Liabilities and
Capitalization
$1,240,289

$1,268,275  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 8    MGE Energy, Inc.  Consolidated Statements of Equity and Comprehensive Income
(unaudited) (In thousands, except per-share
amounts)  Accumulated Other Comprehensive (Loss)/IncomeAdditional
Paid-in
CapitalCommon Stock
Retained
Earnings
Comprehensive
IncomeShares
Value
TotalBeginning
balance - Dec. 31, 2008
22,905
$22,905
$310,202
$144,904
$191

$478,202Net
income



14,952

$14,952
14,952Other
comprehensive income/(loss):Net
unrealized loss on investments,
net
of $26 tax




(38)
(38)
(38)Total
comprehensive income





$14,914Common
stock dividends declared
($0.362
per share)



(8,302)


(8,302)Common stock
issued, net
148
148
4,254



4,402Ending Balance -
March 31, 2009
23,053
$23,053
$314,456
$151,554
$153

$489,216  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 9    Madison Gas and Electric Company  Consolidated Statements of Income (unaudited) (In thousands)  Three Months Ended
March 31,2009

2008Operating Revenues:Regulated electric
revenues
$80,127

$82,439Regulated gas revenues
98,820

105,484Nonregulated revenues
2,197

2,073Total Operating
Revenues
181,144

189,996Operating Expenses:Fuel for electric
generation
9,872

16,194Purchased power
25,038

21,679Cost of gas sold
70,328

77,943Other operations and
maintenance
36,627

36,032Depreciation and
amortization
10,054

9,397Other general taxes
4,662

4,379Income tax provision
6,969

7,209Total Operating
Expenses
163,550

172,833Operating Income
17,594

17,163Other Income and Deductions:AFUDC - equity funds
106

532Equity earnings in ATC
1,981

1,606Income tax provision
(811)

(145)Other deductions, net
(106)

(1,561)Total Other Income and
Deductions
1,170

432Income before interest
expense
18,764

17,595Interest Expense:Interest on long-term
debt
4,104

3,995Other interest, net
23

369AFUDC - borrowed funds
(44)

(221)Net Interest
Expense
4,083

4,143Net Income Before Noncontrolling
Interest
$14,681

$13,452Noncontrolling interest, net of tax
(3,376)

(3,146)Net Income Attributable to MGE
$11,305

$10,306  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 10    Madison Gas and Electric Company  Consolidated Statements of Cash Flows (unaudited) (In thousands)   Three Months Ended
March 31,2009

2008Operating Activities:Net income
$14,681

$13,452Items not affecting cash:Depreciation and
amortization
10,054

9,397Deferred income taxes
203

(2,502)Provision for doubtful accounts
receivable
1,637

1,098AFUDC - equity funds
(106)

(532)Employee benefit plan
expenses
1,800

2,026Equity earnings in ATC
(1,981)

(1,606)Other items
429

378Changes in working
capital:Decrease in current
assets
36,471

19,812(Decrease) increase in current
liabilities
(10,733)

7,423Dividend income from ATC
1,520

1,117Cash contributions to pension
and other postretirement plans
(6,621)

(5,942)Other noncurrent items,
net
1,812

1,284Cash Provided by Operating
Activities
49,166

45,405Investing Activities:Capital expenditures
(18,627)

(28,541)Capital contributions to
investments
(888)

-Other
971

422Cash Used for Investing
Activities
(18,544)

(28,119)Financing Activities:Distributions
to parent from noncontrolling interest
(2,386)

(3,108)Equity contributions received by
noncontrolling interest
888

12,159Decrease in short-term debt,
net
(27,500)

(27,000)Cash Used for Financing
Activities
(28,998)

(17,949)Change in Cash and Cash Equivalents
1,624

(663)Cash and cash equivalents at
beginning of period
1,318

1,859Cash and cash equivalents at end
of period
$2,942

$1,196  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 11    Madison Gas and Electric Company  Consolidated Balance Sheets (unaudited) (In thousands)   ASSETS
March 31, 2009

December 31, 2008Utility Plant(At Original Cost, in Service):Electric
$786,023

$773,605Gas
282,372

279,483Nonregulated
110,340

110,317Gross
plant in service
1,178,735

1,163,405Less
accumulated provision for depreciation
(468,321)

(461,037)Net
plant in service
710,414

702,368Construction
work in progress
196,612

198,694Total
Utility Plant
907,026

901,062Other property
and investments
863

965Investment in
ATC
47,566

46,217Total
Other Property and Investments
48,429

47,182Current
Assets:Cash
and cash equivalents
2,942

1,318Restricted
cash
4,303

4,805Accounts
receivable, less reserves of $4,857 and $4,076, respectively
42,439

45,266Affiliate
receivables
2,735

2,547Other
receivables, less reserves of $204 and $200, respectively
6,877

7,575Unbilled
revenues
22,869

34,701Materials
and supplies, at average cost
15,953

15,592Fossil
fuel
4,920

3,228Stored
natural gas, at average cost
21,655

42,146Prepaid
taxes
10,576

14,013Regulatory
assets - current
10,673

9,876Other
current assets
7,825

10,804Total
Current Assets
153,767

191,871Other long-term
receivables
2,380

2,390Special billing
projects
299

464Affiliate
receivable long-term
6,433

6,433Regulatory
assets
121,072

116,165Other deferred
assets and other
5,404

5,555Total
Assets
$1,244,810

$1,271,122CAPITALIZATION
AND LIABILITIESEquity:Common
stockholder's equity
$385,524

$374,253Noncontrolling
interest
176,035

174,157Total
Equity
561,559

548,410Long-term
debt
272,424

272,408Total
Capitalization
833,983

820,818Current
Liabilities:Short-term
debt - commercial paper
23,500

51,000Accounts
payable
28,003

47,186Affiliate
payables
20

63Accrued
interest and taxes
18,000

10,307Accrued
payroll related items
6,023

7,380Deferred
income taxes
1,010

3,305Regulatory
liabilities - current
1,426

5,974Pension
liability - current
813

813Other
current liabilities
14,661

11,987Total
Current Liabilities
93,456

138,015Other
Credits:Deferred
income taxes
120,154

117,369Investment
tax credit - deferred
2,650

2,736Regulatory
liabilities
19,172

18,814Accrued
pension and other postretirement benefits
133,996

137,286Other
deferred liabilities and other
41,399

36,084Total
Other Credits
317,371

312,289Commitments
and contingencies (see Footnote 9)
-

-Total
Capitalization and Liabilities
$1,244,810

$1,271,122 The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 12    Madison Gas
and Electric Company  Consolidated Statements of Equity and Comprehensive Income
(unaudited) (In thousands)  MGE


TotalAdditional
Paid-in
Capital

Accumulated
Other
Comprehensive
Income/(Loss)Common Stock
Retained
Earnings
Non-
controlling
Interest
Comprehensive
IncomeShares
ValueBeginning
balance - Dec. 31, 2008
17,348
$17,348
$192,417
$164,354
$134
$174,157

$548,410Net
income



11,305

3,376
$14,681
14,681Other
comprehensive income/(loss):Net
unrealized loss on investments,
net
of $22 tax




(34)

(34)
(34)Total
comprehensive income






$14,647Equity
contribution received by noncontrolling interest





888

888Distributions to
parent from
noncontrolling
interest





(2,386)

(2,386)Ending balance -
March 31, 2009
17,348
$17,348
$192,417
$175,659
$100
$176,035

$561,559  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 13    MGE Energy, Inc., and Madison Gas and Electric
Company  Notes
to Consolidated Financial Statements (unaudited) March 31, 2009   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 46(R), 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 March 31, 2009, and for the three
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, 2008, but does not include all disclosures required by
accounting principles in the United States of America. These notes should be
read in conjunction with the financial statements and the notes on pages 57
through 112 of the 2008 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 three
months ended March 31, 2009, MGE Energy issued 148,164 new shares of
common stock under the Stock Plan for net proceeds of $4.4 million. For the
three months ended March 31, 2008, MGE Energy issued 109,146 new
shares of common stock under the Stock Plan for net proceeds of
$3.6 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 three months ended March 31, 2008,
MGE Energy did not issue any shares of its common stock under this
agreement. This agreement expired in December 2008.  b. Dilutive
Shares Calculation - MGE Energy.  MGE Energy
does not have any dilutive securities.  c. Credit
Facilities - MGE Energy and MGE.  On March 31,
2009, MGE amended its existing agreement dated August 29, 2008, with JPMorgan
Chase Bank, N.A., as lender, which provides MGE with a $20 million
committed credit facility. The principal purpose of the amendment was to extend
the expiration date of the original agreement from March 31, 2009, to
March 30, 2010. The credit facility continues to be used as a backup
facility to MGE's commercial paper program. As of March 31, 2009, no
borrowings were outstanding under the credit facility.  The amendment
also changed the interest rate provisions of the original agreement. As amended,
borrowings under the credit facility may bear interest at either (i) a
LIBOR-based rate (as defined in the original agreement) for an applicable
interest period, plus 1.50% or (ii) an Alternate Base Rate, plus 1%. The
Alternate Base Rate is defined as the greater of (1) JPMorgan Chase Bank, N.A.'s
prime rate, (2) the Federal Funds Effective Rate (as defined in the original
agreement) plus 0.50% and (3) the one-month LIBOR-based rate plus 1%. The
amendment also changed the non-use fee to 0.150% per annum on the unused
commitment under the credit facility.  Page 14     3. Comprehensive
Income - MGE Energy and MGE.  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:  (In thousands)
Three Months Ended
March 31,2009
2008MGE EnergyNet
income
$14,952
$13,837Unrealized loss
on cash flow hedges, net of tax
($-
and $177)
-
(264)Unrealized loss
on available-for-sale securities,
net
of tax ($26 and $208)
(38)
(311)Total
comprehensive income
$14,914
$13,262MGENet
income
$14,681
$13,452Unrealized loss
on cash flow hedges, net of tax
($-
and $177)
-
(264)Unrealized loss
on available-for-sale securities,
net
of tax ($22 and $186)
(34)
(278)Total
comprehensive income
$14,647
$12,910  4. Investment in ATC -
MGE Energy and MGE.  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 Energy and MGE.  MGE Transco, through MGE, has a seat
on the Board of Directors of ATC and has a 20% voting ownership interest in ATC
Management, Inc. Due to MGE Transco's ability to exercise significant control
over management activities, MGE Transco has accounted for its investment in ATC
under the equity method of accounting. For the three months ended March 31,
2009 and 2008, MGE Transco recorded equity earnings from the investment in ATC
of $2.0 million (pretax) and $1.6 million (pretax), respectively.
Dividend income received from ATC was $1.5 million and $1.1 million
for the three months ended March 31, 2009 and 2008, respectively. During
the three months ended March 31, 2009, MGE Transco made capital
contributions of $0.9 million. During the three months ended March 31,
2008, MGE Transco made no cash contributions to ATC.  At March 31, 2009, 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
noncontrolling interest.  ATC's summarized financial data for
the three months ended March 31, 2009 and 2008, is as follows:  (In
thousands)Income statement data for the three months ended
March 31,
2009

2008Operating revenues
$126,232

$109,092Operating expenses
(56,955)

(50,916)Other expense, net
(63)

(148)Interest expense, net
(18,265)

(15,635)Earnings before members' income taxes
$50,949

$42,393MGE Energy's and MGE's equity earnings in
ATC
$1,981

$1,606   Page 15    5. Taxes - MGE Energy and
MGE.  a. FIN 48.  MGE Energy and MGE adopted the
provisions of FIN 48, Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109, Accounting for Income Taxes, on
January 1, 2007. Under FIN 48, the difference between the tax benefit
amount taken on prior year tax returns, or expected to be taken on a current
year tax return, and the tax benefit amount recognized in the financial
statements is an unrecognized tax benefit.  For both MGE Energy and MGE,
there have been no changes to unrecognized tax benefits existing at
December 31, 2008, nor any additions for new tax positions, during the
three months ended March 31, 2009.  b. Effective Tax Rate.  MGE Energy's effective income
tax rate for the three months ended March 31, 2009, is 34.8% compared to
35.5% for the same period in 2008. This decrease is attributable to an increase
in the federal tax credit for producing electricity from wind energy. Federal
law allows a tax credit of 2.1 cents per kilowatt hour of electricity produced
and sold from wind energy.  The decrease in the effective income
tax rate for MGE from 35.3% in the first quarter of 2008 to 34.6% for the first
quarter of 2009 is similarly due to an increased wind energy tax credit.  Under 2009 Act 2, effective for years
beginning on or after January 1, 2009, Wisconsin requires corporations to
use combined reporting to compute their Wisconsin income for income tax
purposes. Formerly, Wisconsin law required each corporation in a combined group
to file separate returns. The effect of the combined reporting statute in
Wisconsin is not expected to make any significant changes to the effective
income tax rate or the tax accrual.  6. Elm Road - MGE Energy and
MGE.  a. Construction.  On November 4, 2005, MGE Power
Elm Road acquired an 8.33% ownership interest in each of two 615 MW
generating units being constructed in Oak Creek, Wisconsin. MGE Power Elm Road's
sole principal asset is the 8.33% undivided ownership interest in the
aforementioned coal-fired generating plants. Each owner provides its own
financing and reflects its respective portion of the facility and costs in its
financial statements. 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, Bechtel, gave notice forecasting that the in-service
date of Unit 1 would be delayed by three months from the guaranteed in-service
date of September 29, 2009, and that the in-service date of Unit 2 would be
one month earlier than the guaranteed in-service date of September 29,
2010. The notice stated that the delays in Unit 1 were caused by severe weather,
changes in local labor conditions from those anticipated by the contractor and
other factors. On December 23, 2008, we received notice from Elm Road
Services, LLC (ERS) that it had received a letter from Bechtel containing
Bechtel's formal claim for schedule and cost relief on the construction of the
Elm Road units. Bechtel is constructing the Elm Road units under a Turnkey
Engineering, Procurement and Construction Contract for Supercritical Pulverized
Coal Fired Electric Generation Facility dated April 9, 2004 (the
"Contract") with ERS, which is the project manager for the Elm Road units.  MGE Power Elm Road has leased the Elm
Road units to MGE pursuant to separate facility lease agreements for each unit.
These leases were authorized by order of the PSCW in accordance with applicable
provisions of Wisconsin law that authorized financing of new generation through
facility leases. The PSCW order establishes a cap on the construction costs that
may be passed through the lease agreements to MGE and its customers, through
rates. Additional costs attributable to force majeure events, as defined in the
leases, do not count against this cap, but are subject to PSCW review and
determination that the costs were prudently incurred.   Page 16    Bechtel
asserted two claims for cost and schedule relief in its December 2008 letter to
ERS:  · The first claim is based on the
alleged impact of severe weather and specified labor-related matters. It seeks
compensation for additional costs of approximately $413 million, of which
MGE Energy's share would be approximately $34.4 million, if the claim
is successful in full. Bechtel has reserved the right to request future
additional costs and schedule relief. Bechtel seeks cost and schedule relief for
weather-related events, which it contends are force majeure events and changed
local conditions under the Contract, consisting of extreme winds from September
2006 through April 2007, snowstorms from December 2007 through
April 2008, and rain storms in June 2008. It also seeks cost and schedule
relief based upon alleged changes in labor conditions, which it contends
consisted of a significant shortage in the availability of craft labor,
significant increases in competing projects, overtime and per diems allegedly
necessary to attract labor, and alleged restrictions that the project labor
agreement placed on Bechtel's ability to attract and retain craft labor.  · The second claim is based upon the
alleged effects of ERS-directed changes and ERS-caused delays prior to the
issuance of the full notice to proceed ("FNTP") in July 2005. It seeks
compensation for additional costs of approximately $72 million, of which
MGE Energy's share would be approximately $6 million, if the claim is
successful in full. These changes and delays are alleged to consist of a delay
in issuing certain limited notices to proceed, a delay in issuing the FNTP until
the final resolution of litigation brought by opposition groups that challenged
the Certificate of Public Convenience and Necessity for the Elm Road units, the
imposition of additional limits to third party cancellation charges that
allegedly restricted Bechtel's ability to issue purchase orders, a reduction of
the pre-FNTP monthly payments below the amounts required by the Contract, and a
request by ERS to perform design studies and issue design changes during the
pre-FNTP period.  Although ERS is in the process of
analyzing the claims and its responses to them, it has stated its belief that
both claims are without merit. It has also stated its view that the only
circumstances and events for which the Elm Road units owners currently retain
price adjustment risk under the contract are force majeure, wage escalation in
excess of 4% annually as measured by published wage bulletins, delays caused by
ERS, changes in scope or performance requested by ERS, and unforeseen
sub-surface ground conditions. ERS has stated that it currently believes Bechtel
was fully compensated for any and all impacts of the delayed start as indicated
in certain change orders entered into between ERS and Bechtel prior to the start
of construction of the Elm Road units. Furthermore, ERS has stated that it does
not believe that the contract provides for relief based upon the cumulative
impact of change orders.  ERS has invoked the dispute
resolution process provided for in the contract in order to address the claims
made by Bechtel under the contract. ERS and Bechtel have since agreed to combine
these issues and Bechtel's claims into one mediation. ERS anticipates mediating
all issues before the end of the year and if this is unsuccessful, the contract
calls for binding arbitration which ERS anticipates will be concluded in 2010.
We are unable to predict the results of these claims or their effect on the
costs recoverable under the existing facility leases, in the event that the
outcome of the claims should cause total construction costs of the Elm Road
units to exceed the amounts authorized in the PSCW order.  Bechtel continues to target an
in-service date for Elm Road unit 1 three months beyond the guaranteed Contract
date of September 29, 2009, and an in-service date for Elm Road unit 2 one
month earlier than the guaranteed Contract date of September 29, 2010.
However, Bechtel does request schedule relief that would result in six months of
relief from liquidated damages beyond the guaranteed Contract date for unit 1
and three months of relief from liquidated damages beyond the guaranteed
Contract date for unit 2. Although Bechtel has made significant progress in much
of the construction plan, it has fallen behind in moving from construction to
start-up. Bechtel has informed ERS that it has developed a recovery plan and is
adding resources in an effort to recover the lost time.  At March 31, 2009,
$148.0 million (excluding capitalized interest) related to this project is
reflected in the construction work in progress balance on MGE Energy's and
MGE'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 March 31, 2009, MGE Power Elm Road recorded a
total of $11.7 million in capitalized interest related to the Elm Road
project which is reflected in the construction work in progress balance on
MGE Energy's and MGE's consolidated balance sheets.   Page 17    b. Consolidation.  In connection with this project,
MGE Energy and its subsidiaries entered into various agreements, including
facility lease agreements between MGE Power Elm Road (a nonregulated subsidiary
of MGE Energy) and MGE with respect to each of the generating units. The
financial terms of the facility leases include a capital structure of 55% equity
and 45% long-term debt, 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 agreements and the relationship they establish, MGE absorbs a majority
of the expected losses, residual value, or both, associated with the ownership
of MGE Power Elm Road. MGE also is the party most closely associated with MGE
Power Elm Road. As a result, MGE is the primary beneficiary and MGE Power Elm
Road is a VIE under FIN 46(R). Accordingly, MGE Power Elm Road has been
consolidated in the financial statements of MGE.  MGE Energy's share of the equity
and net income (through its wholly owned subsidiary MGE Power) of MGE Power Elm
Road is classified within the MGE financial statements as noncontrolling
interest.  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 $59.6 million. This estimate is subject to change based on
changes in interest rates, timing of capital expenditures, and the total project
cost. During 2009, MGE will recover $11.1 million in electric rates for its
investment in MGE Power Elm Road. Of this amount, $9.5 million relates to
carrying costs and $1.6 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 $20.6 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
$39.0 million is estimated to represent the equity portion and is being
recognized over the period allowed for recovery in rates. For the three months
ended March 31, 2009, $2.4 million related to the carrying costs were
recovered in rates. Of this amount, $0.4 million relates to the debt
portion of the facility and was deferred on the consolidated financial
statements of MGE Energy and MGE. The remaining $2.0 million
represents the equity portion and was recognized as nonregulated revenues in the
consolidated financial statements of MGE Energy and MGE.  7. 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.  The following table presents the
components of MGE Energy's and MGE's net periodic benefit costs recognized
for the three months ended March 31, 2009 and 2008. A portion of the net
periodic benefit cost is capitalized within the consolidated balance sheets. In
2009, $2.2 million of the net periodic benefit cost has been deferred on
the consolidated balance sheet as a result of PSCW approval.  Page 18     (In thousands)
Three Months Ended
March 31,2009
2008Pension
BenefitsComponents of
net periodic benefit cost:Service
cost
$1,354
$1,304Interest
cost
2,983
2,829Expected
return on assets
(2,302)
(3,345)Amortization
of:Transition
obligation
36
36Prior
service cost
111
111Actuarial
loss
1,211
99Net periodic
benefit cost
$3,393
$1,034Postretirement
BenefitsComponents of
net periodic benefit cost:Service
cost
$478
$466Interest
cost
973
949Expected
return on assets
(229)
(324)Amortization
of:Transition
obligation
107
107Prior
service cost
72
72Actuarial
loss
168
76Net periodic
benefit cost
$1,569
$1,346  8. Share-Based Compensation -
MGE Energy and MGE.  The MGE Energy Board approved a
Performance Unit Plan on December 15, 2006. Under that 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.  In addition to units granted in 2008
and 2007, on January 16, 2009, 18,604 units were granted based on the
MGE Energy closing stock price as of that date. These newly-granted units
are subject to a 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, including the outstanding awards granted in 2008 and 2007,
has been subsequently re-measured at March 31, 2009, as required by
applicable accounting principles. Changes in fair value as well as the original
grant have been recognized as compensation cost. Since this amount will be
re-measured throughout the vesting period, the compensation cost is subject to
variability.  For nonretirement eligible employees,
stock based compensation costs are accrued and recognized using the graded
vesting method. Pursuant to the provisions of SFAS 123R and the terms of
the plan, compensation cost for retirement eligible employees or employees that
will become retirement eligible during the vesting schedule, are recognized on
an abridged horizon also using the graded vesting method.  During both the three months ended
March 31, 2009 and 2008, MGE recorded $0.1 million in compensation
expense as a result of this plan. No forfeitures or cash settlements occurred
during the aforementioned periods. At March 31, 2009, $0.1 million of
these awards were vested.  9. Commitments and Contingencies.  a. Environmental - MGE Energy
and MGE.  Solid Waste MGE is listed as a potentially
responsible party for the Lenz Oil site in Lemont, Illinois, which is a site on
the national priorities Superfund list. This site 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 March 31, 2009, 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.  Page 19    Water
Quality MGE is subject to various water
quality regulations issued by the WDNR. These regulations limit chemical and
thermal discharges from MGE's plants and activities into Wisconsin waters. These
regulations also limit water intake from new and existing power plants. EPA's
proposed regulations regarding water intake from existing power plants continue
to evolve and MGE is monitoring these regulations to determine the effect on our
facilities.  The WDNR is promulgating revised
rules to regulate thermal effluent discharges from point sources in Wisconsin.
The current draft rules apply strict standards for thermal discharges into
inland lakes, streams, rivers, and the Great Lakes. While dischargers can apply
for variances, MGE may incur additional capital expenditures, such as equipment
upgrades at Blount and Columbia, if the variances are not granted. Costs at
Blount have not been fully determined, however, capital expenditures may include
cooling towers, which in past analyses have been shown to be cost prohibitive.
Potential costs at Columbia have not been determined at this time. Based on
initial reviews of the current revised rules, we do not expect Elm Road to be
impacted by this rule.  Energy Efficiency and
Renewables 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 Air quality regulations promulgated
by the EPA and WDNR in accordance with the Federal Clean Air Act and the Clean
Air Act Amendments of 1990 impose restrictions on emission of particulates,
sulfur dioxide (SO2), nitrogen oxides (NOx), and other
pollutants and require permits for operation of emission sources. These permits
have been obtained by MGE and must be renewed periodically.  Various initiatives including, but
not limited to, the Clean Air Interstate Rule (CAIR), new source performance
standards (NSPS), Clean Air Visibility Rule (CAVR), and the protection of
visibility by application of best available retrofit technologies (BART), are
expected to result in significant additional operating and capital expenditures
at Columbia, Elm Road, and Blount. Further, the state of Wisconsin's mercury
rules under NR 446 have been finalized through state legislative review process,
these rules are expected to further increase mercury control compliance costs at
these facilities.  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 the years 2006
 2008 for Dane, Columbia, and Milwaukee counties demonstrates attainment with
this new standard. However, final attainment designations will not be made until
2010 using the monitoring data collected during the period 2007 through 2009.
There is a possibility that future monitoring data for one or more of these
counties will demonstrate nonattainment for this new ozone standard, which could
result in additional operating and capital expenditures at Columbia (located in
Columbia County), Blount and WCCF (located in Dane County) and Elm Road (located
in Milwaukee County). Similarly, new standards for particulate emissions under
2.5 microns and monitoring data has resulted in a preliminary nonattainment
designation for Dane, Columbia, and Milwaukee counties for particulate
emissions, which could also result in increased expenditures at our generation
facilities. On February 18, 2009, the State of Wisconsin requested that the
EPA re-evaluate several Wisconsin counties' nonattainment designations based on
these counties' being in attainment using the most recent monitoring data (years
2006-2008). Wisconsin's request included the re-designation of Dane and Columbia
counties to attainment status. The EPA has not formally responded to this
re-evaluation request. (See the Federal National Ambient Air Quality Standards
subsection within the Environmental Matters section in Part I, Item 1 of the
2008 Annual Report on Form 10-K for additional details).   Page 20    On
February 9, 2009, the Justice Department, on behalf of the EPA, asked the
Supreme Court to dismiss EPA's request (petition for certiorari) that the Court
review the D.C. Circuit Court's vacatur of the Clean Air Mercury Rule (CAMR).
This withdraw paves the way for the EPA to develop Maximum Achievable Control
Technology (MACT) standards for electric utilities. It is unclear at this time
how quickly MACT standards will be created for electric utilities and how they
will affect MGE's operations, however, earlier versions of the MACT rule for
electric utilities focused on mercury emissions from electric utilities that
burned oil and coal for distribution in commerce. The implementation of the MACT
standards will likely affect our facilities that burn coal and oil, however, we
are uncertain of the exact cost at this time.  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.  Columbia In April 2009, the Columbia
owners filed a Certificate of Authority with the PSCW requesting authorization
of an emissions reduction project as a result of an environmental initiative.
The operator's current estimates show that MGE's share of the capital
expenditures required to comply with this project will be approximately
$140 million. According to the current estimate, this project is expected
to result in an increase to Columbia's ongoing operating expenses. MGE expects
that the costs pertaining to this project 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 March 31, 2009, MGE had
incurred $0.7 million (excluding carrying costs) in expenditures at
Columbia related this environmental initiative.  As of March 31, 2009, 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 $0.3 million for the remainder of 2009. These costs are
expected to be capitalized and included in the consolidated balance sheets of
MGE Energy and MGE.  WPL, the operator of Columbia, is
aware of public comments or petitions from citizen groups submitted to the WDNR
and U.S. EPA objecting to the renewal of the Title V air operating permit at
Columbia. In September 2008, WPL received a Title V air permit renewal for
Columbia from WDNR, which contained permit changes and responded to the citizen
comments. In December 2008, a citizen group submitted a notice of intent to sue
the EPA for failure to respond to its petition encouraging EPA to challenge the
Columbia permit. In March 2009, this citizen group commenced an action
against the U.S. EPA in federal court in Wisconsin, challenging the EPA's
failure to act on their petition.  b. 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 March 31, 2009, MGE has outstanding
$4.0 million interest in these receivables. MGE retains the servicing
responsibility for these receivables.  MGE accounts for servicing rights
under the amortization method. Initial determination of the servicing asset fair
value is based on the present value of the estimated future cash flows. The
discount rate is based on the PSCW authorized weighted cost of capital.  MGE 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 March 31, 2009, 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 $0.5 million in 2009, $0.9 million in 2010,
$0.6 million in 2011, $0.4 million in 2012, and $0.4 million in
2013.  Page 21     c. 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 March 31, 2009, 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 Energy's and MGE's results of operations, financial
position, and cash flows.  d. ATC Capital Commitment -
MGE Energy and MGE.  On March 17, 2009, MGE Transco
elected to participate in a voluntary capital call for ATC. As a result, MGE
Transco contributed $0.7 million to ATC in April 2009.  10. 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: $0.1 million in 2010 and $1.2 million
in 2011. Total benefits paid as of March 31, 2009, 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.  In March 2009, MGE received
notification from MISO that in order to meet national electric system
reliability standards, MGE will need to keep Blount available at full capacity
until MISO declares that the 90 MW are no longer needed for system
reliability. To comply with the MISO directive, MGE will delay plans for
retiring 90 MW of generation equipment at Blount. The transition from
burning coal to burning only natural gas will still occur by the end of 2011.
After 2011, the entire plant will be operated exclusively on natural gas. MGE
will be working with MISO to develop a detailed agreement for this continued
operation, which among other things will include a mechanism for cost recovery.
MGE management will also begin working on an implementation plan.  The following table presents the
activity in the restructuring accrual from December 31, 2008, through
March 31, 2009:   (In thousands)Balance at December 31, 2008
$671Additional expense, net (deferred)
22Cash payments during the period
-Balance at March 31, 2009
$693  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 both the three months ended March 31, 2009 and 2008,
$0.8 million of accelerated depreciation expense had been recognized and
recovered in rates.   Page 22    11. 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 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 to 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. The majority of
MGE's derivative activities are conducted in accordance with its electric and
gas risk management program, which is approved by the PSCW and limits the volume
MGE can hedge against specific risk management strategies. The maximum length of
time over which cash flows related to energy commodities can be hedged is two
years. Generally, electric commodity derivative contracts have a volume hedge
limit of 85% of projected power and fuel volumes for each month. Gas commodity
derivative contracts generally have a volume hedge limit of 75% of flowing gas
and 75% of storage gas. FTRs have a volume hedge limit of 100% of forecasted
monthly peak demand. As of March 31, 2009, MGE is in compliance with these
limits.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. The deferred gain or loss is recognized in earnings in the
delivery month applicable to the instrument. Gains and losses related to hedges
qualifying for regulatory treatment are recoverable in gas rates through the PGA
or in electric rates as a component of the fuel rules mechanism.  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 Energy and MGE elected the net
presentation as prescribed by this pronouncement. FSP FIN 39-1 became effective
for MGE Energy and MGE as of January 1, 2008. The effects of applying
this pronouncement were 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 Energy's or MGE's net
income. At March 31, 2009, MGE Energy and MGE had $10.8 million
in cash collateral that was netted against the net derivative positions with
counterparties.  During 2009, MGE purchased and sold
exchange-traded and over the counter options, swaps, and future contracts. These
arrangements are primarily entered into to help stabilize the price risk
associated with gas or power purchases. These transactions are employed by both
MGE's gas and electric segments. Additionally, as a result of the firm
transmission agreements that MGE holds on transmission paths in the MISO
market,MGE holdsFTRs. An
FTR is a financial instrument that entitles the holder to a stream of revenues
or charges based on the differences in hourly day ahead energy prices between
two points on the transmission grid. The fair values of these instruments are
reflected as a regulatory asset/liability depending on whether they are in a net
loss/gain position. Depending on the nature of the instrument, the gain or loss
associated with these transactions will be reflected as cost of gas sold, fuel
for electric generation, or purchased power expense in the delivery month
applicable to the instrument. At March 31, 2009, the cost basis of these
financial instruments exceeded their fair value by $10.8 million.  During 2009, MGE has also entered
into futures and basis swaps to take advantage of physical and financial
arbitrage opportunities between supply basins and pricing spreads between future
months' gas supply. Under the incentive mechanism within the PGA clause, MGE
shareholders have the ability to receive a set percentage of the benefits or
loss from these deals if certain thresholds are achieved. The portion related to
the shareholders is reflected in other comprehensive income and the portion
related to customers is reflected as a regulatory asset/liability depending on
whether they are in a net loss/gain position. At March 31, 2009, none of
these instruments were outstanding.  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. However, the derivative qualifies for regulatory
deferral and is recognized with a corresponding regulatory asset or liability
depending on whether the fair value is in a loss or gain position. The fair
value of the contract at March 31, 2009, reflects a loss position of
$8.6 million. The actual fuel cost will be recognized in purchased power
expense in the month of purchase.  Page 23    The
following table summarizes the fair value of the derivative instruments on the
balance sheet at March 31, 2009. All derivative instruments in this table
are presented on a gross basis and are calculated prior to the application of
FSP FIN 39-1 which allows for netting of instruments with the same counterparty
under a master netting agreement as well as the netting of cash collateral. For
financial statement purposes, MGE Energy and MGE have applied FSP FIN 39-1
by netting instruments with the same counterparty under a master netting
agreement as well as the netting of cash collateral.  Asset Derivatives
Liability Derivatives(in thousands)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair ValueCommodity derivative contracts
Other current assets
$941
Other current liabilities
$11,465Commodity derivative contracts
Other deferred charges
139
Other deferred liabilities
406FTRs
Other current assets
57
Other current liabilities
98Ten-year PPA
N/A
N/A
Other deferred liabilities
8,593  The following table summarizes the
unrealized and realized losses related to the derivative instruments on the
balance sheet at March 31, 2009, and the income statement for the three
months ended March 31, 2009 (a).  (in thousands)
Current and long-term Regulatory
Asset
Other current assetsBalance at December 31, 2008
$14,007
$4,466Change in unrealized loss
18,767
-Realized loss reclassified to a deferred
account
(8,416)
8,416Realized loss reclassified to income
statement
(4,933)
(10,672)Balance at March 31, 2009
$19,425
$2,210  (in thousands)
Regulated gas revenues
Fuel for electric generation/
Purchased power
Cost of gas soldRealized losses:Commodity derivative contracts
$84
$7,410
$7,519FTRs
-
592
-Ten-year PPA
-
-
-  (a) MGE's commodity derivative
contracts, FTRs and ten-year PPA are subject to regulatory deferral under the
provisions of SFAS 71. These derivatives are marked to fair value pursuant
to SFAS 133 and are offset with a corresponding regulatory asset or
liability. Realized gains and losses are deferred on the balance sheet and are
recognized in earnings in the delivery month applicable to the instrument. As a
result of the above described treatment, there are no unrealized gains or losses
that flow through earnings.  The ten-year PPA has a provision that
may require MGE to post collateral if MGE's debt rating falls below investment
grade (BBB-) once MGE begins purchasing energy under the contract. The amount of
collateral that may be required to post varies from $20.0 million to
$40.0 million depending on MGE's nominated capacity amount. At
March 31, 2009, the ten-year PPA was in a net liability of
$8.6 million. A counterparty related to FTRs extends MGE a credit limit of
$1.0 million. If MGE exceeds this limit, collateral may need to be posted.
At March 31, 2009, the FTRs related to this counterparty are in a net
liability of less than $0.1 million.  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.
Actual heating degree days during the aforementioned period were 3,971 which
exceeded the ceiling; therefore, MGE recorded a $1.5 million expense
(includes the $0.2 million premium) on the collar in the first quarter of
2008.  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. As of March 31, 2009, no
counterparties have defaulted.   Page 24    12. Regional Transmission
Organizations - MGE Energy and MGE.  On April 1, 2005, the MISO
implemented its bid-based energy market. MISO is a FERC approved RTO that is
required to provide real-time energy services and a market based mechanism for
congestion management. MGE is a participant in this market. On April 1,
2005, MGE began offering substantially all of its generation on the MISO market
and purchasing much of its load requirement from the MISO market in accordance
with the MISO Tariff. In January 2009, MISO implemented and MGE began
participating in the ancillary services market (ASM). The ASM is an extension of
the existing energy market in which MISO assumes the responsibility of
maintaining sufficient generation reserves. Previously, MGE was responsible for
providing its own reserves, however in the ASM, MISO will provide the reserves
for MGE's load, and MGE may offer to sell reserves from its generating units. In
addition to this market change, MISO took on various balance authority
functions.  Additionally, on May 1, 2004,
MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent
party that coordinates and directs the operation of the region's transmission
grid, administers a competitive wholesale electricity market, and plans regional
transmission expansion improvements to maintain grid reliability and relieve
congestion. MGE has two purchase power agreements, for a total of 65 MW,
that are 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 $20.4 million and $42.2 million reduction to sales for
resale and purchased power expense for the three months ended March 31,
2009 and 2008, respectively.  13. Rate Matters - MGE Energy and
MGE.  a. Rate proceedings.  On December 18, 2008, under a
limited reopener, the PSCW authorized MGE to decrease 2009 rates for retail
electric customers by 0.74% or $2.7 million, while gas rates remain
unchanged from 2008. The decrease in retail electric rates is driven by a
decrease in fuel and purchased power costs, decrease in Elm Road costs and a
decrease in ATC transmission costs. The PSCW also approved deferred accounting
for incremental pension and other postretirement benefit costs above the levels
currently included in rates. Pursuant to the provisions of this rate order, the
fuel rules bandwidth effective January 1, 2009, will be plus or minus 2%.
See below for further description of fuel rules.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric rates by 4.8% or $16.2 million and
increase gas distribution rates by 2.8% or $7.8 million. The electric
increase covered costs for MGE's new wind energy projects, statewide energy
efficiency and renewable energy programs, transmission improvements by ATC, and
accelerated costs to discontinue coal use at the Blount Station. In addition to
funding the statewide energy programs, the natural gas rate increase covered
costs for area gas construction projects needed to accommodate customer growth.
Authorized return on common stock equity was set at 10.8% based on 57.4% utility
common equity.  b. Fuel rules.  Actual electric fuel costs are
subject to reconciliation to the amount approved by the PSCW in MGE's rate order
covering the applicable period. Known as "fuel rules," the process can produce a
fuel surcharge for MGE or require MGE to make a refund in the form of a credit,
to the extent that the actual fuel costs are outside a range higher or lower
than the level authorized by the PSCW in that rate order.  Under fuel rules,
MGE 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.  As a result of
lower than expected fuel costs pertaining to 2009, MGE requested a proposed fuel
credit with the PSCW in April 2009. Therefore, MGE estimated and accrued a
$1.1 million projected reduction to other electric revenues in the three
months ended as of March 31, 2009.  As a result of
lower than expected fuel and purchased power costs in 2008, a fuel refund was
approved by the PSCW. To account for this refund, MGE recorded a
$5.5 million reduction to other electric revenues in the twelve months
ended December 31, 2008. In March 2009, the PSCW completed their audit of
the 2008 electric fuel costs and issued a final order, which applied this refund
to customers' accounts in March 2009.  Page 25     14. SFAS 157 Fair Value of Assets
and Liabilities - MGE Energy and MGE.  MGE Energy and MGE adopted
SFAS 157, Fair Value Measurements as of January 1, 2008, and
SFAS 157-2, Effective Date of FASB Statement No. 157 as of
January 1, 2009. The adoption of this standard requires enhanced
disclosures about MGE Energy's and MGE'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.  The following tables present 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 March 31,
2009Total
Level 1
Level 2
Level 3MGE EnergyAssets:Cash and cash equivalents
$6,000
$6,000
$-
$-Restricted cash(a)
16,558
16,558
-
-Exchange-traded
investments
447
447
-
-Total Assets
$23,005
$23,005
$-
$-Liabilities:Derivatives, net
(b)
$19,425
$2,695
$-
$16,730Deferred compensation
1,212
1,212
-
-Total Liabilities
$20,637
$3,907
$-
$16,730MGEAssets:Cash and cash equivalents
$2,942
$2,942
$-
$-Restricted cash(a)
16,558
16,558
-
-Exchange-traded
investments
308
308
-
-Total Assets
$19,808
$19,808
$-
$-Liabilities:Derivatives, net
(b)
$19,425
$2,695
$-
$16,730Deferred compensation
1,212
1,212
-
-Total Liabilities
$20,637
$3,907
$-
$16,730  (a)These amounts are shown gross
and exclude $12.3 million of cash collateral that was netted against net
derivative positions as well as other liabilities with counterparties.  (b)These amounts are shown gross
and exclude $2.7 million and $8.1 million of cash collateral that was
netted against net derivative positions with counterparties for Level 1 and
Level 3, respectively.  Page 26     (In thousands)
Fair Value as of December 31,
2008Total
Level 1
Level 2
Level 3MGE EnergyAssets:Cash and cash equivalents
$4,106
$4,106
$-
$-Restricted cash
(c)
15,297
15,297
-
-Exchange-traded
investments
511
511
-
-Total Assets
$19,914
$19,914
$-
$-Liabilities:Derivatives, net
(d)
$14,007
$4,788
$-
$9,219Deferred compensation
1,171
1,171
-
-Total Liabilities
$ 15,178
$5,959
$-
$9,219MGEAssets:Cash and cash equivalents
$1,318
$1,318
$-
$-Restricted cash
(c)
15,297
15,297
-
-Exchange-traded
investments
364
364
-
-Total Assets
$16,979
$16,979
$-
$-Liabilities:Derivatives, net
(d)
$14,007
$4,788
$-
$9,219Deferred compensation
1,171
1,171
-
-Total Liabilities
$15,178
$5,959
$-
$9,219  (c) These amounts are shown gross
and exclude $10.5 million of cash collateral that was netted against net
derivative positions as well as other liabilities with counterparties.  (d)These amounts are shown gross
and exclude $4.8 million and $5.1 million of cash collateral that was
netted against net derivative positions with counterparties for Level 1 and
Level 3, respectively.  Cash and cash equivalents include
investments with maturities of less than three months which are traded in active
markets and deposit accounts, and are therefore classified as Level 1.  Restricted cash primarily includes
cash collateral related to derivative and hedging instruments and is therefore
classified as Level 1.  Investments include exchange-traded
investment securities valued using quoted prices on active exchanges and are
therefore classified as Level 1.  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. Transactions done with an over-the-counter party are on inactive
markets and are therefore classified as Level 3. These transactions are valued
based on quoted prices with markets with similar exchange traded transactions.
The ten-year purchased power agreement (see Footnote 11) was valued using
an internally-developed pricing model and therefore classified as Level 3. The
model includes both observable and unobservable inputs. Inputs to the model
require significant management judgment and estimation. The model uses a forward
power pricing curve based on exchange-traded contracts in the electric futures
market. As described above, the market prices from this source have insufficient
volumes and are classified as Level 3 in the fair value hierarchy. To project
future prices beyond the period in which these quoted market prices are
available, MGE calculates the price based on forward gas prices and an implied
heat rate. MGE considers the assumptions that market participants would use in
valuing the asset or liability. This consideration includes assumptions about
market risk such as liquidity, volatility and contract duration. The fair value
model incorporates discounting, credit, and model risks. FTRs are priced based
upon monthly auction results for identical or similar instruments in a closed
market with limited data available and are therefore classified as Level 3.   Page 27    The
deferred compensation plan allows participants to defer certain cash
compensation into a notional investment account. These amounts are included
within other deferred liabilities in the balance sheets of MGE Energy and
MGE. The notional investments earn interest based upon the semiannual rate of
U.S. Treasury Bills having a 26 week maturity increased by 1% compounded
monthly, with a minimum annual rate of 7%, compounded monthly, and are therefore
based upon observable market data and classified as Level 1.  The following table summarizes the
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis for both MGE Energy and MGE.   (In thousands)Three Months Ended March 31,
2009
2008Balance as of January 1,
$(9,219)
$(444)Realized and unrealized gains (losses):Included in regulatory
liabilities (assets)
(7,511)
2,329Included in other comprehensive
income
-
(13)Included in earnings
(4,934)
863Included in current
assets
-
(7)Purchases, sales, issuances, and settlements,
net
4,934
(856)Transfers in and/or out of Level 3
-
-Balance as of March 31,
$(16,730)
$1,872Total gains (losses) included in earnings
attributed to the change in unrealized gains (losses) related to assets
and liabilities held at March 31, (e)
$-
$-  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 months
ended March 31, 2009 and 2008, for both MGE Energy and MGE.
(e).   (In thousands)
Purchased Power Expense
Cost of Gas Sold Expense
Regulated Gas RevenuesTotal gains (losses) included in earnings for
the
three months ended
March 31, 2009
$(5,098)
$94
$70Total gains (losses) included in earnings for
the
three months ended
March 31, 2008
$957
$(47)
$(47)  (e) MGE's exchange-traded
derivative contracts, ten-year purchased power agreement, and FTRs are subject
to regulatory deferral under the provisions of SFAS 71. These derivatives
are therefore marked to fair value pursuant to SFAS 133 and are offset with
a corresponding regulatory asset or liability. A portion of MGE's derivative
contracts fall under the incentive mechanism within the PGA clause and
shareholders have the ability to receive a set percentage of the benefit or loss
from these deals if certain thresholds are achieved. Under these derivatives,
only the gains or losses associated with customers are subject to regulatory
deferral under SFAS 71. The remaining shareholder portion is reflected in
other comprehensive income. As a result of the above described treatment, there
are no unrealized gains or losses that flow through earnings.  15. New Accounting Pronouncements -
MGE Energy and MGE.  a. FAS 160 and
FAS 141(R).  In December 2007, the
FASB issued FAS 160, Non-Controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 and FAS 141(R),
Business Combinations. These pronouncements changed the accounting and
reporting for business acquisitions and noncontrolling interest in a subsidiary.
In addition, FAS 160 changed the accounting and reporting for the
deconsolidation of a subsidiary. FAS 160 and FAS 141(R) became
effective for MGE Energy and MGE as of January 1, 2009, and affected
the presentation of the minority interest on MGE's financial statements.   Page 28    b. FAS 161.  In March 2008, the
FASB issued FAS 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early adoption allowed.
MGE Energy and MGE did not elect to early adopt this pronouncement.
Therefore, FAS 161 became effective for MGE Energy and MGE as of
January 1, 2009. See Footnote 11 for additional information.  c. FSP FAS 132(R)-1.  In December 2008, the
FASB issued FSP FAS 132(R)-1, which amends FASB Statement
No. 132 Employers' Disclosures about Pensions and Other Postretirement
Benefits. This amendment provides guidance on employer's disclosures about
plan assets of a defined benefit pension or other postretirement plan. The
adoption of FSP FAS 132 (R)-1 is effective for fiscal years ending after
December 15, 2009. MGE Energy and MGE are currently assessing the
impact this pronouncement will have on their financial statements.  d. FSP FAS 107-1 and APB
28-1.  In April 2009, the
FASB issued FSP FAS 107-1, Interim Disclosures about Fair Value of
Financial Instruments, which requires disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion
No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. This FSP will be
effective for interim reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. MGE Energy
and MGE did not elect to early adopt this pronouncement. The adoption of this
pronouncement will not have any financial impact, but will require additional
disclosures.  16. 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 March 31, 2009Operating
revenues
$80,127
$98,820
$2,197
$-
$-
$-
$181,144Interdepartmental
revenues
111
2,435
3,722
-
-
(6,268)
-Total operating
revenues (loss)
80,238
101,255
5,919
-
-
(6,268)
181,144Depreciation and
amortization
(7,058)
(2,310)
(686)
-
-
-
(10,054)Other operating
expenses
(69,385)
(83,374)
(34)
-
(229)
6,268
(146,754)Operating income
(loss)
3,795
15,571
5,199
-
(229)
-
24,336Other income
(deductions), net
-
-
-
1,981
(2)
-
1,979Interest
(expense) income, net
(2,667)
(752)
(664)
-
694
-
(3,389)Income before
taxes
1,128
14,819
4,535
1,981
463
-
22,926Income tax
benefit (provision)
658
(5,824)
(1,821)
(795)
(192)
-
(7,974)Net
income
$1,786
$8,995
$2,714
$1,186
$271
$-
$14,952Three months
ended March 31, 2008Operating
revenues
$82,439
$105,484
$2,073
$-
$-
$-
$189,996Interdepartmental
revenues
121
8,588
3,718
-
-
(12,427)
-Total operating
revenues (loss)
82,560
114,072
5,791
-
-
(12,427)
189,996Depreciation and
amortization
(6,482)
(2,229)
(686)
-
-
-
(9,397)Other operating
expenses
(72,002)
(96,627)
(25)
-
(64)
12,427
(156,291)Operating income
(loss)
4,076
15,216
5,080
-
(64)
-
24,308Other income
(deductions), net
484
(1,513)
-
1,606
(1)
-
576Interest
(expense) income, net
(2,699)
(807)
(637)
-
710
-
(3,433)Income before
taxes
1,861
12,896
4,443
1,606
645
-
21,451Income tax
benefit (provision)
189
(5,115)
(1,783)
(645)
(260)
-
(7,614)Net
income
$2,050
$7,781
$2,660
$961
$385
$-
$13,837   Page 29    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 March 31, 2009Operating
revenues
$80,127
$98,820
$2,197
$-
$-
$181,144Interdepartmental
revenues
111
2,435
3,722
-
(6,268)
-Total operating
revenues (loss)
80,238
101,255
5,919
-
(6,268)
181,144Depreciation and
amortization
(7,058)
(2,310)
(686)
-
-
(10,054)Other operating
expenses*
(68,715)
(89,194)
(1,855)
-
6,268
(153,496)Operating
income*
4,465
9,751
3,378
-
-
17,594Other
(deductions) income, net*
(12)
(4)
-
1,186
-
1,170Interest
expense, net
(2,667)
(752)
(664)
-
-
(4,083)Income before
noncontrolling interest
1,786
8,995
2,714
1,186
-
14,681Noncontrolling
interest, net of tax
-
-
-
-
(3,376)
(3,376)Net income
(loss) attributable to MGE
$1,786
$8,995
$2,714
$1,186
$(3,376)
$11,305Three months
ended March 31, 2008Operating
revenues
$82,439
$105,484
$2,073
$-
$-
$189,996Interdepartmental
revenues
121
8,588
3,718
-
(12,427)
-Total operating
revenues (loss)
82,560
114,072
5,791
-
(12,427)
189,996Depreciation and
amortization
(6,482)
(2,229)
(686)
-
-
(9,397)Other operating
expenses*
(71,721)
(102,334)
(1,808)
-
12,427
(163,436)Operating
income*
4,357
9,509
3,297
-
-
17,163Other income
(deductions), net*
392
(921)
-
961
-
432Interest
expense, net
(2,699)
(807)
(637)
-
-
(4,143)Income before
noncontrolling interest
2,050
7,781
2,660
961
-
13,452Noncontrolling
interest, net of tax
-
-
-
-
(3,146)
(3,146)Net income
(loss) attributable to MGE
$2,050
$7,781
$2,660
$961
$(3,146)
$10,306  *Amounts are shown net of the related tax expense,
consistent with the presentation on the consolidated MGE Income Statement.  The following table shows segment information for
MGE Energy's and MGE's assets and capital expenditures:  MGE Energy
(In
thousands)
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
All
Others
Consolidation/
Elimination
Entries
TotalAssets:March 31,
2009
$685,843
$248,220
$11,883
$275,243
$47,641
$380,771
$(409,312)
$1,240,289December 31,
2008
677,540
284,211
14,642
271,568
46,292
381,433
(407,411)
1,268,275Capital
Expenditures:Three months
ended Mar. 31, 2009
12,756
1,586
-
4,285
-
-
-
18,627Year ended
December 31, 2008
47,033
8,441
-
50,303
-
-
-
105,777   MGE
(In
thousands)
Electric
Gas
Assets not
Allocated
Nonregulated
Energy
Transmission
Investment
Consolidation/
Elimination
Entries
TotalAssets:March 31,
2009
$685,843
$248,220
$11,883
$274,993
$47,641
$(23,770)
$1,244,810December 31,
2008
677,540
284,211
14,642
271,318
46,292
(22,881)
1,271,122Capital
Expenditures:Three months
ended March 31, 2009
12,756
1,586
-
4,285
-
-
18,627Year ended
December 31, 2008
47,033
8,441
-
50,303
-
-
105,777   Page 30    17. Subsequent Events -
MGE Energy and MGE.  a. ATC Capital Contribution.  In April 2009, MGE Transco made
a voluntary $0.7 million capital contribution to ATC.  b. Rate Filing.  In April 2009, MGE filed an
application with the PSCW requesting a 4.5% increase to electric rates and a
2.3% increase to gas rates for 2010. The proposed increases cover costs for
MGE's share of the new Elm Road generating station, transmission reliability
enhancements, as well as infrastructure additions to the company's gas delivery
system.  c. Fuel Credit.  In April 2009, MGE filed an
application with the PSCW requesting a proposed credit of $0.00204 per kWh, due
to a decrease in actual electric fuel costs, when compared to those fuel costs
projected in MGE's most recent rate order. If approved, MGE estimates this
credit would reduce electric revenues by $4.6 million for 2009. This credit
is based upon newly computed annual average fuel costs for 2009, using actual
fuel costs for January, February and March and revised forecasts for
April through December 2009.    Page 31    Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.  General  MGE Energy is an investor-owned public utility
holding company operating through subsidiaries in five business segments:  · Electric utility operations,
conducted through MGE, · Gas utility operations, conducted
through MGE, · Nonregulated energy operations,
conducted through MGE Power and its subsidiaries, · Transmission investments,
representing our equity investment in ATC, and · All other, which includes corporate
operations and services as well as certain construction services.  Our principal subsidiary is MGE, which generates and
distributes electric energy, distributes natural gas, and represents a majority
portion of our assets, liabilities, revenues, and expenses. MGE generates and
distributes electricity to approximately 137,000 customers in Dane County,
Wisconsin, including the city of Madison, and purchases and distributes natural
gas to approximately 141,000 customers in the Wisconsin counties of Columbia,
Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.  Our nonregulated energy operations lease and own new
electric generating capacity to assist MGE. The nonregulated energy operations
include partial ownership of a cogeneration project on the UW-Madison campus and
an undivided 8.33% ownership interest in each of two 615 MW generating
units being constructed in Oak Creek, Wisconsin. These ownership interests are
leased to MGE pursuant to long-term leases. MGE operates the cogeneration
project, and a third party will operate the Elm Road units. The
ownership/leasing structure was adopted to capture some advantages under then
applicable state regulatory guidelines for MGE's participation in these
generation facilities. Due to the nature of MGE's participation in these
facilities, the results of our nonregulated operations are also consolidated
into MGE's consolidated financial position and results of operations under
applicable accounting standards.  Our primary focus today and for the foreseeable future is
our core utility customers at MGE as well as creating long-term value for
shareholders. MGE continues to face the challenge of providing its customers
with reliable power at competitive prices. MGE plans to meet this challenge by
investing in more efficient generation projects, including renewable energy
sources. In the future, MGE will continue to focus on growing earnings while
controlling operating and fuel costs. MGE will continue to maintain safe and
efficient operations in addition to providing customer value. We believe it is
critical to maintain a strong credit standing consistent with financial strength
in MGE as well as the parent company in order to accomplish these goals.  Overview  We earn our revenue and generate cash from operations by
providing electric and natural gas utility services, including electric power
generation and electric power and gas distribution. The earnings and cash flows
from the utility business are sensitive to various external factors, including,
but not limited to:  · Weather, and its impact on customer
sales of electricity and gas, · Economic conditions, including
current business and financing conditions, · Regulation and regulatory issues, · Energy commodity prices, · Equity price risk pertaining to
pension related assets, · Interest rates and our debt credit
rating, · Environmental laws and regulations,
including pending environmental rule changes, · Construction risk in connection with
the Elm Road generating units,  and other factors listed in "Item 1A. Risk Factors" of
the 2008 Annual Report on Form 10-K.  For the three months ended March 31, 2009,
MGE Energy's earnings were $15.0 million or $0.65 per share compared
to $13.8 million or $0.63 per share for the same period in the prior year.
MGE's earnings for the three months ended March 31, 2009, were
$11.3 million compared to $10.3 million for the same period in the
prior year.   Page 32    MGE Energy's income was
derived from our business segments as follows:  (In thousands)
Three Months Ended
March 31,Business Segment:
2009

2008Electric Utility
$1,786

$2,050Gas Utility
8,995

7,781Nonregulated Energy
2,714

2,660Transmission Investment
1,186

961All Other
271

385Net Income
$14,952

$13,837  Our net income during the three months ended
March 31, 2009, primarily reflects the effects of the following
factors:  · A 2.8% decrease in electric revenue
reflecting lower demand and lower sales for resale due to decreased sales
opportunities.  · Gas revenues decreased
$2.6 million as a result of lower retail gas deliveries. As a result of the
GCIM, the gas utility received the benefit of $1.9 million from capacity
release revenues and commodity savings.  · In the first quarter of 2008, the gas
utility had expensed a $1.5 million settlement (includes premium)
associated with a weather hedge (heating degree collar) as a result of colder
than normal weather. The gas utility had no weather hedges during the first
quarter of 2009.  · Higher nonregulated energy revenues
primarily attributable to higher carrying costs, due to the greater capital
investment, recognized for the Elm Road project. Carrying costs during
construction of the nonregulated energy projects, related to the equity portion,
are recognized over the period of time the costs are recovered in rates.  · A $0.2 million increase in net
income from our interest in ATC.  During 2009, the following events occurred:  ATC: MGE Transco contributed $0.9 million for
voluntary capital contributions to ATC for the three months ended March 31,
2009. An additional voluntary capital contribution of $0.7 million was made
in April 2009.  2009 Fuel Credit: In April 2009, MGE filed an
application with the PSCW requesting a proposed credit of $0.00204 per kWh, due
to a decrease in actual electric fuel costs, when compared to those fuel costs
projected in MGE's most recent rate order. If approved, MGE estimates this
credit would reduce electric revenues by $4.6 million for 2009. This credit
is based upon newly computed annual average fuel costs for 2009, using actual
fuel costs for January, February and March and revised forecasts for
April through December 2009. In the three months ended March 31, 2009,
MGE estimated and accrued a $1.1 million adjustment to other electric
revenues as a result of this proposed fuel credit.  2008 Fuel Refund: As a result of
lower than expected fuel and purchased power costs in 2008, a fuel refund was
approved by the PSCW. The PSCW completed their audit and issued a final order in
March 2009, which applied a $5.7 million refund to customers'
accounts.  2010 Rate Filing: In April 2009, MGE filed an
application with the PSCW requesting a 4.5% increase to electric rates and a
2.3% increase to gas rates for 2010. The proposed increases cover costs for
MGE's share of the new Elm Road generating station, transmission reliability
enhancements, as well as infrastructure additions to the company's gas delivery
system.  During 2009, several items may affect us, including:  · General economic conditions: Economic
conditions both inside and outside our service area may affect, among other
things, the level of demand for our utility services, the collection of our
accounts receivable and the creditworthiness of counterparties with whom we do
business. We have in place lines of credit aggregating $195 million for
MGE Energy (including MGE) and $75 million for MGE to address our
liquidity needs.  · Elm Road Construction Claim: As
noted, the project contractor for the Elm Road units has made claims for
additional costs and for relief from the construction schedule. The project
operator, ERS, is addressing these claims, although it is expected that the
claims may ultimately be resolved through formal arbitration as provided in the
construction contract.  Page 33     · Environmental Initiatives: Various
environmental rules or initiatives are in a state of flux as a result of court
decisions and the change in the Presidential Administration. Such rules and
initiatives involve matters related to air emissions, water effluent and
greenhouse gases, all of which affect generation plant capital expenditures and
operating costs as well as future operational planning.  The following discussion is based on the business
segments as discussed in Footnote 16.  Three Months
Ended March 31, 2009 and 2008  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)
Three Months Ended March 31,

Three Months Ended March 31,2009
2008
% Change

2009
2008
%
ChangeResidential
$27,936
$29,672
(5.9)%

209,070
214,720
(2.6)%Commercial
39,919
43,108
(7.4)%

436,768
449,879
(2.9)%Industrial
3,437
4,025
(14.6)%

57,652
59,174
(2.6)%Other -
retail/municipal
6,255
6,719
(6.9)%

86,840
88,298
(1.7)%Total
retail
77,547
83,524
(7.2)%

790,330
812,071
(2.7)%Sales for
resale
460
1,260
(63.5)%

3,045
10,944
(72.2)%Other
revenues
2,120
(2,345)
190.4%

-
-
-Total
$80,127
$82,439
(2.8)%

793,375
823,015
(3.6)%  Electric operating revenues decreased $2.3 million
or 2.8% for the three months ended March 31, 2009, due to the
following:   (In millions)Three months ended March 31,
2009Rate changes
$(3.9)Volume
(2.1)Sales for resale
(0.8)Other revenues
4.5Total
$(2.3)   Rates changes. Rates charged
to retail customers for the three months ended March 31, 2009, were 4.6% or
$3.9 million lower than those charged during the same period in the prior
year.  On December 18, 2008, under a
limited reopener, the PSCW authorized MGE to decrease 2009 rates for retail
electric customers by 0.74% or $2.7 million from 2008. The decrease in
retail electric rates is driven by a decrease in fuel and purchased power costs,
decrease in Elm Road costs and a decrease in ATC transmission costs. The PCSW
also approved deferred accounting for incremental pension and other
postretirement benefit costs above the levels currently included in rates.  As a result of
lower than expected fuel and purchased power costs in 2008, a fuel refund was
approved by the PSCW. In March 2009, the PSCW completed their audit of 2008
electric fuel costs and issued a final order approving the amount to be refunded
to customers. A refund of $5.7 million (includes interest) was applied to
customers' accounts in March 2009. See "Other revenues" discussion below
for more information on this refund.   Volume. During the three
months ended March 31, 2009, there was a 2.7% decrease in total retail
sales volumes when compared to the same period in the prior year.   Page 34     Sales for resale. Sales for
resale represent wholesale sales made to third parties who are not ultimate
users of the electricity. These sales may include spot market transactions on
the markets operated by MISO or PJM. These sales may also include bilateral
sales to other utilities or power marketers. Generating units are dispatched by
MISO based on cost considerations as well as reliability of the system. Sales
for resale typically occur when MGE has more generation and purchases online
than is needed for its own system demand. The excess electricity is then sold to
others in the market. For the three months ended March 31, 2009, sales for
resale decreased $0.8 million when compared to the same period in the prior
year, reflecting a decreased volume of sales.   Other revenues. Other electric
revenues increased $4.5 million for the three months ended March 31,
2009, compared to the same period in the prior year.  During the three
months ended March 31, 2009, MGE recorded $5.5 million in other
electric revenues to offset the impact of the 2008 fuel refund credited to
customers in March 2009. This refund reduced revenues during the twelve
months ended December 31, 2008, and was returned to customers via a reduction in
rates in March 2009. Offsetting this adjustment, as a result of lower than
expected fuel costs pertaining to 2009, a $1.1 million projected refund was
accrued as of March 31, 2009. See "Rate changes" discussion above for more
information on this refund.  Electric fuel and purchased power  The expense for fuel for electric generation decreased
$6.3 million or 39.0% during the three months ended March 31, 2009,
compared to the same period in the prior year. This decrease in expense reflects
a $3.3 million decrease related to volume and a $3.0 million decrease
related to fuel cost.  Purchased power expense increased by $3.4 million or
15.5% during the three months ended March 31, 2009, compared to the same
period in the prior year. This increase in expense reflects a $5.0 million
or 24.8% increase in the volume of power purchased offset by a $1.6 million
or 7.4% decrease in the per-unit cost of purchased power.  Electric operating and maintenance
expenses  Electric operating and maintenance expenses increased
$0.4 million during the three months ended March 31, 2009, compared to
the same period in 2008. The following changes contributed to the net
change:   (In millions)Three months ended March 31,
2009Decreased production costs
$(0.6)Increased transmission costs
0.4Decreased distribution expenses
(0.1)Increased customer accounts expenses
0.3Increased customer service costs
0.1Decreased other general and administrative
expenses
(0.1)Increased maintenance expenses
0.4Total
$0.4  Decreased production costs due to lower internal
generation, were partially offset by more maintenance expenses pertaining to
production. In addition, transmission costs increased primarily due to network
service fees pertaining to ATC.  Electric depreciation expense  Depreciation expense at the electric segment increased by
$0.6 million for the three months ended March 31, 2009, when compared
to the same period in the prior year. This increase is primarily due to the Top
of Iowa III wind generation facility being placed in service in late
February 2008.   Page 35    Gas Utility Operations -
MGE Energy and MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:   Revenues

Therms Delivered(In
thousands, except HDD and average rate per therm of retail
customer)
Three Months Ended March 31,

Three Months Ended March 31,2009
2008
%
Change

2009
2008
%
ChangeResidential
$54,700
$59,128
(7.5)%

46,540
48,598
(4.2)%Commercial/industrial
41,075
45,178
(9.1)%

45,774
46,163
(0.8)%Total
retail
95,775
104,306
(8.2)%

92,314
94,761
(2.6)%Gas
transportation
969
958
1.1%

12,992
12,528
3.7%Other
revenues
2,076
220
843.6%

-
-
-Total
$98,820
$105,484
(6.3)%

105,306
107,289
(1.8)%Heating degree
days (normal 3,480)




3,753
3,949
(5.0)%Average rate per
therm of retail customer




$1.037
$1.101
(5.8)%  Gas revenues decreased $6.7 million or 6.3% for the
three months ended March 31, 2009. These changes are related to the
following factors:   (In millions)Three months ended March 31,
2009Gas costs/rates
$(6.0)Gas deliveries
(2.6)Transportation and other effects
1.9Total
$(6.7)   Gas costs/rates. The average
retail rate per therm for the three months ended March 31, 2009, decreased
5.8% compared to the same period in 2008. The primary contributor to this
decrease is lower natural gas costs.   Retail gas deliveries. The
2.6% decrease in retail gas deliveries for the three months ended March 31,
2009, was attributable to a decrease in heating degree days between periods.   Transportation and other
revenues. Transportation and other revenues increased a total of
$1.9 million primarily due to an increase in income realized under the
GCIM.  Under MGE's GCIM, if actual gas
commodity savings and capacity release revenues are above or below a benchmark
set by the PSCW, then MGE's gas sales service customers and shareholders share
in any increased costs or savings per percentages set by the PSCW. For the three
months ended March 31, 2009, shareholders received the benefit of
$1.9 million from capacity release revenues and commodity savings under the
GCIM.  Cost of gas sold  For the three months ended March 31, 2009, cost of
gas sold decreased by $7.6 million, compared to the same period in the
prior year. The cost per therm of natural gas decreased 7.0% which resulted in
$5.3 million of reduced expense. In addition, a 3.0% decrease in the volume
of gas purchased resulted in $2.3 million less expense.  Gas operating and maintenance expenses  Gas operating and maintenance expenses increased
$0.2 million for the three months ended March 31, 2009, compared to
the same period a year ago. The increase is primarily due to an increase in
customer account costs.  Other Income (Deductions), Net  During the three months ended March 31, 2009, the
gas and electric segments recognized a total of $0.1 million in
AFUDC-equity and $0.1 million of miscellaneous expense.   Page 36    For the three months ended
March 31, 2008, the gas and electric segments recognized a total of
$0.5 million in AFUDC-equity and $0.3 million in gains on the sale of
property. This income was offset by a $1.5 million expense for a heating
degree day collar and a $0.3 million loss related to an equity investment.
See Footnote 11 for further discussion of the HDD collar.  Nonregulated Energy Operations - MGE Energy and
MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $0.1 million for the three months ended March 31, 2009, when
compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for both the three months ended March 31,
2009 and 2008, include $3.7 million in interdepartmental revenues related
to a leasing arrangement between MGE and MGE Power West Campus. 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 $59.6 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 March 31, 2009 and 2008, MGE Power Elm Road
recognized $2.0 million and $1.8 million, respectively, related to
carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For the three months ended March 31, 2009 and 2008,
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 March 31, 2009
and 2008, 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 March 31, 2009 and 2008, MGE Power Elm
Road was charged $0.9 million and $1.2 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 $0.9 million and
$1.2 million, respectively, in capitalized interest. MGE Power Elm Road is
capitalizing interest on the Elm Road project.  During both the three months ended March 31, 2009
and 2008, MGE Power Elm Road recorded $0.1 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 three months ended March 31, 2009 and 2008,
other income at the transmission investment segment was $2.0 million and
$1.6 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 interest income, net for both the three months
ended March 31, 2009 and 2008, was $0.7 million. Interest income for
the three months ended March 31, 2009, represents $0.9 million in
interdepartmental interest income from MGE Power Elm Road, partially offset by
$0.2 million in interest expense on short-term debt. Interest income for
the three months ended March 31, 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. The interdepartmental
interest income is eliminated upon consolidation.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$0.3 million or 6.5% for the three months ended March 31, 2009, when
compared to the same period in 2008, due to increased license fee tax. The
annual license fee tax expense is based on the prior year's adjusted operating
revenues. Tax rates have not increased.  Page 37    Consolidated Income
Taxes  MGE Energy's effective income tax rate for the three
months ended March 31, 2009, is 34.8% compared to 35.5% for the same period
in 2008. The lower tax rate for the three months ended March 31, 2009, is
attributable to an increase in federal tax credits from the production of
electricity from wind energy due to the Top of Iowa III wind generation
facility being placed in-service in late February 2008.  MGE's effective income tax rate for the three months
ended March 31, 2009, is 34.6% compared to 35.3% for the same period in the
prior year. The lower tax rate for the three months ended March 31, 2009,
is primarily attributable to an increase in federal tax credits from the
production of electricity from wind energy due to the Top of Iowa III wind
generation facility being placed in-service in late February 2008.  Under 2009 Act 2, effective for years beginning on or
after January 1, 2009, Wisconsin requires corporations to use combined
reporting to compute their Wisconsin income for income tax purposes. Formerly,
Wisconsin law required each corporation in a combined group to file separate
returns. The effect of the combined reporting statute in Wisconsin is not
expected to make any significant changes to the effective income tax rate or the
tax accrual.  Noncontrolling Interest, Net of Tax  The noncontrolling interest, net of tax reflects the
accounting required for MGE Energy's interest in the West Campus and Elm
Road generating projects. MGE Energy owns 100% of MGE Power West Campus and
MGE Power Elm Road; however, due to the leasing arrangements for these projects
with MGE, the entities are considered VIEs under FIN 46(R) and their results are
consolidated with those of MGE, the primary beneficiary of the VIEs. Also
included in noncontrolling interest, net of tax is MGE Energy's interest in
MGE Transco.  For the three months ended March 31, 2009,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$1.9 million and $1.2 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 noncontrolling interest expense, net of
tax, on MGE's consolidated statement of income.  For the three months ended March 31, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$1.9 million and $1.1 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 noncontrolling interest expense, net
of tax, on MGE's consolidated statement of income.  Contractual Obligations and Commercial Commitments -
MGE Energy and MGE  There were no 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 three months ended March 31, 2009, except as
noted below. Further discussion of the contractual obligations and commercial
commitments is included in Footnote 9 of this filing and Footnote 18
and "Contractual Obligations and Commercial Commitments for MGE Energy and
MGE" under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in MGE Energy's and MGE's annual reports on Form
10-K for the year ended December 31, 2008.  Columbia Environmental Matters - MGE Energy
and MGE  As of March 31, 2009, MGE's share of various
contractual commitments with vendors for environmental expenditures at Columbia
is estimated to be $0.3 million for the remainder of 2009. These costs are
expected to be capitalized and included in the consolidated balance sheet of
MGE. See "Environmental Matters - Columbia" below for additional information
regarding expected environmental expenditures at Columbia.  Elm Road Construction - MGE Energy and
MGE  In December 2008, we received notice from Elm Road
Services, LLC (ERS) that it had received a letter from Bechtel Power Corporation
(Bechtel) containing Bechtel's formal claim for schedule and cost relief on the
construction of the Elm Road units. Bechtel has asserted two claims for cost and
schedule relief in its letter to ERS. Although ERS is in the process of
analyzing the claims and its responses to them, it has stated its belief that
both claims are without merit. It has also stated its view that the only
circumstances and events for which the Elm Road units owners currently retain
price adjustment risk under the contract are force majeure, wage escalation in
excess of 4% annually as measured by published wage bulletins, delays caused by
ERS, changes in scope or performance requested by ERS, and unforeseen
sub-surface ground conditions. ERS has stated that it currently believes Bechtel
was fully compensated for any and all impacts of the  Page 38    delayed start as indicated in
certain change orders entered into between ERS and Bechtel prior to the start of
construction of the Elm Road units. Furthermore, ERS has stated that it does not
believe that the contract provides for relief based upon the cumulative impact
of change orders. ERS has invoked the dispute resolution process provided for in
the contract in order to address the claims made by Bechtel under the contract.
ERS and Bechtel have since agreed to combine these issues and Bechtel's claims
into one mediation. ERS anticipates mediating all issues before the end of the
year and if this is unsuccessful, the contract calls for binding arbitration
which ERS anticipates will be concluded in 2010. We are unable to predict the
results of these claims or their effect on the costs recoverable under the
existing facility leases, in the event that the outcome of the claims should
cause total construction costs of the Elm Road units to exceed the amounts
authorized in the PSCW order. Although Bechtel has made significant progress in
much of the construction plan, it has fallen behind in moving from construction
to start-up. Bechtel has informed ERS that it has developed a recovery plan and
is adding resources in an effort to recover the lost time. See Footnote 6
for additional information regarding the claims made by Bechtel and the ERS
response to those claims.  ATC Capital Commitment - MGE Energy and
MGE  On March 17, 2009, MGE Transco elected to
participate in a voluntary capital call for ATC. As a result, MGE Transco
contributed $0.7 million to ATC in April 2009. The amount and timing
of future voluntary capital calls is uncertain and primarily dependent on the
operations and expansion of ATC.  Credit Facilities -
MGE Energy and MGE  On March 31, 2009, MGE amended
its existing agreement dated August 29, 2008, with JPMorgan Chase Bank, N.A., as
lender, which provides MGE with a $20 million committed credit facility.
The principal purpose of the amendment was to extend the expiration date of the
original agreement from March 31, 2009, to March 30, 2010. The credit
facility continues to be used as a backup facility to MGE's commercial paper
program. As of March 31, 2009, no borrowings were outstanding under the
credit facility. The amendment also changed the interest rate provisions of the
original agreement. As amended, borrowings under the credit facility may bear
interest at either (i) a LIBOR-based rate for an applicable interest period,
plus 1.50% or (ii) an Alternate Base Rate, plus 1%. The Alternate Base Rate is
defined as the greater of (1) JPMorgan Chase Bank, N.A.'s prime rate, (2) the
Federal Funds Effective Rate (as defined in the original agreement) plus 0.50%
and (3) the one-month LIBOR-based rate plus 1%. The amendment also changed the
non-use fee to 0.150% per annum on the unused commitment under the credit
facility.  Liquidity and
Capital Resources  Cash Flows  The following summarizes cash flows during the three
months ended March 31, 2009 and 2008, respectively:   MGE Energy

MGE(In thousands)
2009
2008

2009
2008Cash provided by/(used for):Operating activities
$49,832
$45,777

$49,166
$45,405Investing activities
(18,538)
(28,109)

(18,544)
(28,119)Financing activities
(29,400)
(18,252)

(28,998)
(17,949)  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 three
months ended March 31, 2009, was $49.8 million, an increase of
$4.1 million when compared to the same period in the prior year primarily
due to the American Recovery and Reinvestment Act of 2009.  MGE Energy's net income increased $1.1 million
for the three months ended March 31, 2009, when compared to the same period
in the prior year.  Deferred taxes increased $2.7 million for the three
months ended March 31, 2009, compared to the three months ended
March 31, 2008, primarily due to bonus tax depreciation allowed for Federal
income tax purposes on certain property placed in service during 2009, as a
result of the American Recovery and Reinvestment Act of 2009.  Page 39    Working capital accounts
resulted in $26.1 million in cash provided by operating activities for the
three months ended March 31, 2009, compared to $27.2 million in cash
provided by operating activities during the same period in the prior year.  MGE  Cash provided by operating activities for the three
months ended March 31, 2009, was $49.2 million, an increase of
$3.8 million when compared to the same period in the prior year primarily
due to the American Recovery and Reinvestment Act of 2009.  MGE's net income increased $1.0 million for the
three months ended March 31, 2009, when compared to the same period in the
prior year.  Deferred taxes increased $2.7 million for the three
months ended March 31, 2009, compared to the three months ended
March 31, 2008, primarily due to bonus tax depreciation allowed for Federal
income tax purposes on certain property placed in service during 2009, as a
result of the American Recovery and Reinvestment Act of 2009.  Working capital accounts resulted in $25.7 million
in cash provided by operating activities for the three months ended
March 31, 2009, compared to $27.2 million in cash provided by
operating activities during the same period in the prior year.  Cash Used for Investing Activities  MGE Energy  MGE Energy's cash used for investing activities
decreased $9.6 million for the three months ended March 31, 2009, when
compared to the same period in the prior year.  Capital expenditures for the three months ended
March 31, 2009, were $18.6 million. This amount represents a
$9.9 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to lower construction activity of
$11.4 million related to Elm Road and a $1.2 million decrease of
capital expenditures related to the Top of Iowa III wind generation
project's completion in February 2008. These decreases were partially
offset by an increase of $2.8 million in other utility capital
expenditures.  During the three months ended March 31, 2009,
MGE Transco made a cash capital contribution, funded by MGE Energy, of
$0.9 million to ATC. During the three months ended March 31, 2008, no
cash capital contributions were made to ATC.  MGE  MGE's cash used for investing activities decreased
$9.6 million for the three months ended March 31, 2009, when compared
to the same period in the prior year.  Capital expenditures for the three months ended
March 31, 2009, were $18.6 million. This amount represents a
$9.9 million decrease from the expenditures made in the same period in the
prior year. This decrease is related to lower construction activity of
$11.4 million related to Elm Road and a $1.2 million decrease of
capital expenditures related to the Top of Iowa III wind generation
project's completion in February 2008. These decreases were partially
offset by an increase of $2.8 million in other utility capital
expenditures.  During the three months ended March 31, 2009, MGE
Transco made a cash capital contribution of $0.9 million to ATC. During the
three months ended March 31, 2008, no cash capital contributions were made
to ATC.  Cash Used for Financing Activities  MGE Energy  Cash used for MGE Energy's financing activities was
$29.4 million for the three months ended March 31, 2009, compared to
$18.3 million of cash used for MGE Energy's financing activities for
the three months ended March 31, 2008.  MGE Energy received $4.4 million and
$3.6 million in cash proceeds as the result of stock issued during the
three months ended March 31, 2009 and 2008, respectively.  Page 40    For the three months ended
March 31, 2009, dividends paid were $8.3 million compared to
$7.8 million for same period in the prior year. This increase was a result
of higher dividend per share ($0.362 vs. $0.355) and an increase in the number
of shares outstanding.  For the three months ended March 31, 2009, net
short-term debt repayments were $25.5 million compared to
$14.0 million for the same period in the prior year.  MGE  During the three months ended March 31, 2009, cash
used for MGE's financing activities was $29.0 million compared to of
$17.9 million of cash used for MGE's financing activities in the same
period in the prior year.  For the three months ended March 31, 2009, net
short-term debt repayments were $27.5 million compared to
$27.0 million for the same period in the prior year.  Equity contributions received by noncontrolling interest
decreased $11.3 million as a result of MGE Power Elm Road requiring less
funding for construction of property, plant and equipment.  Capitalization Ratios  MGE Energy's capitalization ratios were as
follows:  MGE EnergyMar. 31, 2009
Dec. 31, 2008Common shareholders' equity
56.8%
54.7%Long-term debt
31.7%
31.1%Short-term debt
11.5%
14.2%  MGE Energy's and MGE's Capital
Requirements  As of March 31, 2009, 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 three months ended
March 31, 2009, capital expenditures for MGE Energy and MGE totaled
$18.6 million, which included $4.2 million of capital expenditures for
Elm Road and $14.3 million of capital expenditures for utility operations.  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  A security rating is not a recommendation to buy, sell,
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating agency. MGE's access to the capital markets, including the
commercial paper market and its financing costs in those markets, is dependent
on its securities' ratings. None of MGE's borrowings is subject to default or
prepayment due to downgrading of securities' ratings, although such a down
grading could increase fees and interest charges under MGE Energy's and
MGE's credit facilities.  Environmental Matters  The following discussion is limited to updates or
developments in environmental matters that occurred during the three months
ended March 31, 2009. 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, 2008.   Page 41    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.
In April 2009, the owners filed a Certificate of Authority with the PSCW
requesting authorization of an emissions reduction project. The operator's
current estimates show that MGE's share of the capital expenditures required to
comply with this environmental initiative will be approximately
$140 million. According to the current estimate, compliance with this
project is also expected to result in an increase to Columbia's ongoing
operating expenses. MGE expects that the costs pertaining to this project will
be fully recoverable through rates.  Vacatur of CAMR and the Development of Maximum
Achievable Control Standards for Electric Utilities  On February 9, 2009, the Justice Department, on
behalf of the EPA, asked the U.S. Supreme Court to dismiss EPA's request
(petition for certiorari) that the Court review the D.C. Circuit Court's vacatur
of the Clean Air Mercury Rule (CAMR). This withdraw paves the way for the EPA to
develop Maximum Achievable Control Technology (MACT) standards for electric
utilities. It is unclear at this time how quickly MACT standards will be created
for electric utilities and how they will affect MGE's operations, however,
earlier versions of the MACT rule for electric utilities focused on mercury
emissions from electric utilities that burned oil and coal for distribution in
commerce. The implementation of the MACT standards will likely affect our
facilities that burn coal and oil, however, we are uncertain of the exact cost
at this time.  Global Climate Change Developments  EPA's Determination of Endangerment from Greenhouse
Gases  On April 17, 2009, the EPA announced two proposed
findings related to greenhouse gases: In the first finding, the EPA announced
that it has found that greenhouse gases pose a danger to public health and
welfare. This announcement is considered a proposed endangerment finding under
the Clean Air Act (CAA), subject to a public comment period for 60 days. The
EPA's second proposed finding is that the combined emissions from motor vehicles
contribute to the atmospheric concentrations of six greenhouse gases. If one or
both of these proposed endangerment findings are made final, it provides a means
for the EPA to regulate GHGs under the CAA. MGE is already addressing GHG's
through voluntary actions and MGE will continue to monitor proposed GHG
legislation and regulation.  EPA Rule on Greenhouse Gas Reporting  On March 10, 2009, the EPA signed the proposed
mandatory GHG reporting rule (published in the Federal Register on
April 10, 2009). The proposed rule requires reporting in 2011for emissions
in 2010 from (1) specific source categories regardless of emissions levels
(including MGE business activities such as electric production, fuel combustion,
and propane and natural gas storage), and (2) facilities not specifically listed
as source categories that emit 25,000 metric tons of GHG emissions (in carbon
dioxide equivalents) per year. The proposed rule will require reporting of six
GHG emission categories: carbon dioxide (CO2), methane (CH4), nitrous
oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC), sulfur
hexafluoride (SF6), and other fluorinated gases. The proposed rule is
currently in its public comment stage so it is difficult to assess at this time
the exact impact on MGE.  Proposed Climate Change Legislation  In late March 2009, leaders of the House Energy and
Commerce Committee (Reps. Henry Waxman and Ed Markey) unveiled a 648 page draft
global warming and energy bill called "The American Clean Energy and Security
Act of 2009." The bill is proceeding through the Legislative process.  The proposed legislation has four titles: (1) a "clean
energy" title that, among other things, creates a nationwide renewable
electricity standard that requires 25 percent renewables by 2025; (2) an "energy
efficiency" title that increases energy efficiency across all sectors of the
economy, including buildings, appliances, transportation, and industry; (3) a
"global warming" title that calls for a cap-and-trade program that would reduce
U.S. emissions of greenhouse gases by 3 percent below 2005 levels in 2012, 20
percent below 2005 levels by 2020 and 83% below 2005 levels by 2050; and (4) a
"transitioning" title that seeks to promote green jobs during the transition to
a clean energy economy.  The draft does not contain details of the cap-and-trade
program and does not address how the emission allowances will be
distributed.   Page 42    MGE is a producer of GHG
emissions, primarily from the fossil fuel generating facilities it utilizes to
meet customers' energy needs, as well as from natural gas pipeline system and
fleet vehicles. Climate change and the regulatory response to it could
significantly affect our operations in a number of ways, including but not
limited to, increased operating costs and capital expenditures, restrictions on
energy supply options, permitting difficulties and emission limits. However, the
financial consequences of this compliance cannot be determined until final
legislation is passed. MGE management would expect to seek and receive rate
recovery of such compliance costs, yet the probability and specific impact of
such regulation cannot be reasonably estimated at this time. MGE will continue
to monitor proposed climate change legislation and regulation.  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:
$0.1 million in 2010 and $1.2 million in 2011.  MGE will recover in rates the costs associated with the
discontinuance of coal at Blount. As such, the severance charges for these
employees have been deferred and recognized on the consolidated balance sheet of
MGE Energy and MGE as a regulatory asset.  In March 2009, MGE received notification from MISO
that in order to meet national electric system reliability standards, MGE will
need to keep Blount available at full capacity until MISO declares that the
90 MW are no longer needed for system reliability. To comply with the MISO
directive, MGE will delay plans for retiring 90 MW of generation equipment
at Blount. The transition from burning coal to burning only natural gas will
still occur by the end of 2011. After 2011, the entire plant will be operated
exclusively on natural gas. MGE will be working with MISO to develop a detailed
agreement for this continued operation, which among other things will include a
mechanism for cost recovery. MGE management will also begin working on an
implementation plan.  Other Regulatory Matters  Fuel Credit  In April 2009, MGE filed an application with the
PSCW requesting a proposed credit of $0.00204 per kWh, due to a decrease in
actual electric fuel costs, when compared to those fuel costs projected in MGE's
most recent rate order. If approved, MGE estimates this credit would reduce
electric revenues by $4.6 million for 2009. This credit is based upon newly
computed annual average fuel costs for 2009, using actual fuel costs for
January, February and March and revised forecasts for
April through December 2009.  Rate filing  In April 2009, MGE filed an application with the
PSCW requesting a 4.5% increase to electric rates and a 2.3% increase to gas
rates for 2010. The proposed increases cover costs for MGE's share of the new
Elm Road generating station, transmission reliability enhancements, as well as
infrastructure additions to the company's gas delivery system.  New Accounting
Principles  See Footnote 15 for discussion of new accounting
pronouncements.   Page 43    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 the use of derivative
instruments. MGE's risk management policy prohibits 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 of MGE Energy's
and MGE's 2008 annual report on Form 10-K 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
historical averages. MGE's electric revenues are sensitive to the summer cooling
season and, to some extent, to the winter heating season. A significant portion
of MGE's gas system demand is driven by heating. MGE's gas 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 conditions may damage 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 months ended March 31, 2009,
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 peaking 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 would be required to
make a refund to customers if the fuel rules costs fall outside the lower end of
the range and would be allowed to request a surcharge if the fuel rules costs
exceeded the upper end of the range. The range is defined by the PSCW and has
been modified throughout the years based on market conditions and other relevant
factors. Currently, MGE is subject to a plus or minus 2% range. MGE assumes the
risks and benefits of variances that are within the 2% bandwidth. For 2009, fuel
and purchased power costs included in MGE's base fuel rates are
$123.2 million. See Footnote 13.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 derivative contracts, including futures,
swaps, options, forwards, and other contractual commitments. The maximum length
of time over which cash flows related to energy commodities can be hedged is two
years.  At March 31, 2009, MGE has financial gas and
electric commodity contracts to hedge commodity price risk in the gas and
electric segments. These contracts are primarily comprised of exchange-traded
option and future contracts to manage the cost of gas. MGE also holds FTRs which
are used to hedge the risk of increased congestion charges. At March 31,
2009, the cost basis of these instruments exceeded their fair value by
$10.8 million. Under the PGA clause and electric fuel rules, MGE may
include in the costs of fuel (natural gas or power) the costs and benefits of
the aforementioned fuel price risk management tools. Because these
costs/benefits are recoverable, the related unrealized loss/gain has been
deferred on the balance sheet as a regulatory asset/liability.   Page 44    During 2009, MGE has also
entered into futures and basis swaps to take advantage of physical and financial
arbitrage opportunities between supply basins and pricing spreads between future
months' gas supply. Until thresholds have been achieved, ratepayers receive 100%
of the benefits or loss from these deals. If certain thresholds are achieved,
MGE shareholders have the ability to receive 40% of the benefits or loss from
these deals whereas ratepayers have the ability to receive 60% of the benefits
or loss from these deals. At March 31, 2008, none of these instruments were
outstanding.  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 March 31,
2009, reflects a loss position of $8.6 million.  Interest Rate Risk  Both MGE Energy and MGE 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 expenses related to
these liabilities. The value of employee benefit plans trusts' assets have
declined in value by approximately 9.4% during the three months ended
March 31, 2009.  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. As of March 31, 2009, no counterparties have
defaulted.  MGE is obligated to provide service to all electric and
gas customers within its respective franchised territories. MGE's franchised
electric territory includes a 316 square-mile area in Dane County, Wisconsin,
and MGE's franchised gas territory includes a service area covering 1,631 square
miles in Wisconsin. Based on results for the year ended December 31, 2008,
no one customer constituted more than 9% of total operating revenues for
MGE Energy and MGE. 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 45    Item
4. Controls and Procedures.  During the first quarter of 2009, 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 March 31, 2009, 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 March 31, 2009, 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 first quarter of 2009, 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 March 31, 2009, 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 March 31, 2009, 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 46    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, 2008.  Also see Footnote 6a, 9a and 9c for a description of
several proceedings involving MGE.   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 March 31, 2009, filed by the following officers
for the following companies:  31.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 31.2 Filed by Jeffrey C. Newman for
MGE Energy, Inc. 31.3 Filed by Gary J. Wolter for Madison
Gas and Electric Company 31.4 Filed by Jeffrey C. Newman for Madison
Gas and Electric Company  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 March 31, 2009, filed by the
following officers for the following companies:  32.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 32.2 Filed by Jeffrey C. Newman for
MGE Energy, Inc. 32.3 Filed by Gary J. Wolter for Madison
Gas and Electric Company 32.4 Filed by Jeffrey C. Newman for Madison
Gas and Electric Company   Page 47    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: May 7, 2009
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: May 7, 2009
/s/ Jeffrey C. NewmanJeffrey C. Newman
Vice President, Chief Financial Officer, Secretary
and Treasurer
(Chief Financial and Accounting
Officer)     Page 48    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: May 7, 2009
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: May 7, 2009
/s/ Jeffrey C. NewmanJeffrey C. Newman
Vice President, Chief Financial Officer, Secretary
and Treasurer
(Chief Financial and Accounting
Officer)   Page 49