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





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



|Commission
      File No. | Name of Registrant, State of Incorporation, Address
      
      of Principal Executive Offices and Telephone No.                                              | IRS Employer
Identification No.
|------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
|000-49965                 | **MGE Energy, Inc.**
      
      *(a Wisconsin Corporation)*
      133 South Blair Street
      Madison, Wisconsin 53703
      (608) 252-7000                 | 39-2040501                     
|000-1125                  | **Madison Gas and Electric Company**
      
      *(a Wisconsin Corporation)*
      133 South Blair Street
      Madison, Wisconsin 53703
      (608) 252-7000 | 39-0444025                     
|                          | **www.mge.com and/or**
      
      **www.mgeenergy.com**
      *(Web sites)*                                                                                  |                                



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 and (2) have been subject
  to such filing requirements for the past 90 days: Yes [X] No [ ]

Indicate by check mark whether the registrants are an accelerated filer (as
  defined in Rule 12b-2 of the Exchange Act):

MGE Energy, Inc. Yes [X] No [ ] Madison Gas and Electric Company Yes [ ] No
  [X]

|**Number of shares outstanding of each
      class of common stock as of August 9, 2004**
|-----------------------------------------------------------------------------------------
|MGE Energy, Inc.                                                                         
|Madison Gas and Electric Company                                                         



**PART I. FINANCIAL INFORMATION.** 2

Filing Format 3

Forward-Looking Statements 3

Where to Find More Information 4

Definitions 4

Item 1. Financial Statements. 6

**MGE Energy, Inc.**

Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)
  6

Condensed Consolidated Statements of Cash Flows (unaudited) 7

Condensed Consolidated Balance Sheets (unaudited) 8

**Madison Gas and Electric Company**

Condensed Consolidated Statements of Income and Comprehensive Income (unaudited)
  9

Condensed Consolidated Statements of Cash Flows (unaudited) 10

Condensed Consolidated Balance Sheets (unaudited) 11

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

Notes to Condensed Consolidated Financial Statements (unaudited) 12

Item 2. Management's Discussion and Analysis of Financial Condition and Results
  of Operations. 27

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 37

Item 4. Controls and Procedures. 39

**PART II. OTHER INFORMATION.** 40

Item 1. Legal Proceedings. 40

Item 6. Exhibits and Reports on Form 8-K. 40

Signatures - MGE Energy, Inc. 42

Signatures - Madison Gas and Electric Company 43

**PART I. FINANCIAL INFORMATION.**

**Filing Format**

This combined 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 substantial portion of
  its assets, liabilities, revenues, expenses, and operations. Thus, all information
  contained in this report relates to, and is filed by, MGE Energy. Information
  that is specifically identified in this report as relating solely to MGE Energy,
  such as its financial statements and information relating to its nonregulated
  business, does not relate to, and is not filed by, MGE. MGE makes no representation
  as to that information.

**Forward-Looking Statements**

This report, and other documents filed by MGE Energy and MGE with the
  Securities and Exchange Commission (SEC) from time to time, contain forward-looking
  statements that reflect management's current assumptions and estimates regarding
  future performance and economic conditions--especially as they relate to future
  load growth, revenues, expenses, capital expenditures, financial resources,
  regulatory matters, and the scope and expense associated with future environmental
  regulation. These forward-looking statements are made pursuant to the provisions
  of the Private Securities Litigation Reform Act of 1995. Both MGE Energy
  and MGE caution investors that these forward-looking statements are subject
  to known and unknown risks and uncertainties that may cause actual results to
  differ materially from those projected, expressed, or implied. Some of those
  risks and uncertainties include:

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

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

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

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

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

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

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

Readers are cautioned not to place undue reliance on these forward-looking
  statements, which apply only as of the date of this report. MGE Energy
  and MGE undertake no obligation to publicly release any revision to these forward-looking
  statements to reflect events or circumstances after the date of this report.

**Where to Find More Information**

The public may read and copy any reports or other information that MGE Energy
  and MGE file with the SEC at the SEC's public reference room at 450 Fifth Street,
  NW, Washington, D.C. 20549. The public may obtain information on the operation
  of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents
  are also available to the public from commercial document retrieval services,
  the Web site maintained by the SEC at http://www.sec.gov, MGE Energy's
  Web site at http://www.mgeenergy.com, and MGE's Web site at http://www.mge.com.
  Copies may be obtained from our Web sites free of charge.

**Definitions**

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

|AEP                       | American Electric Power Company Inc.                                                                                            
|------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|AFUDC                     | allowance for funds used during construction                                                                                    
|AMR                       | automated meter reading                                                                                                         
|APBO                      | Accumulated Postretirement Benefit Obligation                                                                                   
|ATC                       | American Transmission Company LLC                                                                                               
|Alliant                   | Alliant Energy Corporation                                                                                                      
|Blount                    | Blount Station                                                                                                                  
|BOCM                      | Banc One Capital Markets, Inc.                                                                                                  
|CPCN                      | Certificate of Public Convenience and Necessity                                                                                 
|CO2                       | carbon dioxide                                                                                                                  
|Columbia                  | Columbia Energy Center                                                                                                          
|CWDC                      | Central Wisconsin Development Corporation                                                                                       
|DNR                       | Wisconsin Department of Natural Resources                                                                                       
|DOA                       | Wisconsin Department of Administration                                                                                          
|EITF                      | Emerging Issues Task Force                                                                                                      
|EPA                       | U.S. Environmental Protection Agency                                                                                            
|EPC                       | Engineering, Procurement, and Construction                                                                                      
|FASB                      | Financial Accounting Standards Board                                                                                            
|FERC                      | Federal Energy Regulatory Commission                                                                                            
|FIN                       | Financial Interpretation No.                                                                                                    
|FTR                       | Financial Transmission Rights                                                                                                   
|GCIM                      | gas cost incentive mechanism                                                                                                    
|interconnection agreement | Generation-Transmission Interconnection Agreement                                                                               
|heating degree days       | Measure of the extent to which the average daily temperature is below
      65 degrees Fahrenheit, increasing demand for heating
|Kewaunee                  | Kewaunee Nuclear Power Plant                                                                                                    
|kV                        | kilovolt                                                                                                                        
|kWh                       | kilowatt-hour                                                                                                                   
|LMP                       | Locational Marginal Pricing                                                                                                     
|MACT                      | Maximum available control technology                                                                                            
|MAGAEL                    | MAGAEL, LLC                                                                                                                     
|MGE                       | Madison Gas and Electric Company                                                                                                
|MGE Construct             | MGE Construct LLC                                                                                                               
|MGE Energy                | MGE Energy, Inc.                                                                                                                
|MGE Power                 | MGE Power LLC                                                                                                                   
|MGE Power Elm Road        | MGE Power Elm Road, LLC                                                                                                         
|MGE Power West Campus     | MGE Power West Campus, LLC                                                                                                      
|Midwest ISO               | Midwest Independent System Operator (a regional transmission organization)                                                      
|Moody's                   | Moody's Investors Service, Inc.                                                                                                 
|MW                        | megawatt                                                                                                                        
|Nasdaq                    | The Nasdaq National Stock Market                                                                                                
|NOx                       | nitrogen oxide                                                                                                                  
|NOx SIP Call              | Nitrogen oxide State Implementation Plan (federal rule 40 CFR Part 96,
      commonly referred to as the NOx SIP Call)          
|PGA clause                | Purchased Gas Adjustment clause                                                                                                 
|PJM                       | PJM Interconnection, LLC (a regional transmission organization)                                                                 
|PSCW                      | Public Service Commission of Wisconsin                                                                                          
|RTO                       | Regional Transmission Organization                                                                                              
|S&P                       | Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies,
      Inc.                                            
|SEC                       | Securities and Exchange Commission                                                                                              
|SFAS                      | Statement of Financial Accounting Standards (issued by the FASB)                                                                
|SO2                       | sulfur dioxide                                                                                                                  
|the State                 | State of Wisconsin                                                                                                              
|UW                        | University of Wisconsin-Madison                                                                                                 
|VIE                       | Variable Interest Entity                                                                                                        
|WCCF                      | West Campus Cogeneration Facility                                                                                               
|WDOJ                      | Wisconsin Department of Justice                                                                                                 
|WELA                      | Wisconsin Environmental Law Advocates                                                                                           
|Working capital           | current assets less current liabilities                                                                                         
|WPL                       | Wisconsin Power and Light Company                                                                                               
|WPSC                      | Wisconsin Public Service Corporation                                                                                            

**Item 1. Financial Statements.**







|                                                                        | Three Months Ended June 30, |       | Six Months Ended
      June 30, | 
|----------------------------------------------------------------------- | --------------------------- | ----- | ------------------------------- | 
|                                                                        | 2004                        |       | 2003                            | 
|**Revenues:**                                                           |                             |       |                                 | 
|Regulated utility operations                                            | $84,732                     |       | $82,648                         | 
|Nonregulated operations                                                 | 682                         |       | -                               | 
|**Total Revenues**                                                      | 85,414                      |       | 82,648                          | 
|                                                                        |                             |       |                                 | 
|**Expenses:**                                                           |                             |       |                                 | 
|Fuel for electric generation                                            | 11,870                      |       | 9,540                           | 
|Purchased power                                                         | 11,919                      |       | 11,616                          | 
|Natural gas purchased                                                   | 13,671                      |       | 14,140                          | 
|Other operations and maintenance                                        | 28,005                      |       | 26,817                          | 
|Depreciation and amortization                                           | 6,150                       |       | 6,049                           | 
|Other general taxes                                                     | 3,104                       |       | 2,853                           | 
|*Total Operating Expenses*                                              | 74,719                      |       | 71,015                          | 
|**Operating Income**                                                    | 10,695                      |       | 11,633                          | 
|                                                                        |                             |       |                                 | 
|Other income                                                            | 1,190                       |       | 885                             | 
|Interest expense, net                                                   | (2,724)                     |       | (2,876)                         | 
|Income before income taxes                                              | 9,161                       |       | 9,642                           | 
|Income tax provision                                                    | (3,481)                     |       | (3,809)                         | 
|**Net Income**                                                          | $ 5,680                     |       | 5,833                           | 
|                                                                        |                             |       |                                 | 
|Other Comprehensive Income (net of tax)                                 | 248                         |       | -                               | 
|**Total Comprehensive Income**                                          | $ 5,928                     |       | $ 5,833                         | 
|                                                                        |                             |       |                                 | 
|**Earnings per Share of Common Stock**
      
      (basic and diluted) |                             |       |                                 | 
|$0.30                                                                   | $0.33                       | $1.04 | $0.86                          
|                                                                        |                             |       |                                 | 
|Dividends paid per share of common stock                                | $0.338                      |       | $0.336                          | 
|                                                                        |                             |       |                                 | 
|**Weighted Average Shares Outstanding** (basic and diluted)             | 18,657                      |       | 17,787                          | 

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







|                                                                                                                      | Six Months Ended
      June 30,
|--------------------------------------------------------------------------------------------------------------------- | -------------------------------
|                                                                                                                      | 2004                           
|**Operating Activities:**                                                                                             |                                
|Net income                                                                                                            | $19,324                        
|Items not affecting cash:                                                                                             |                                
|Depreciation and amortization                                                                                         | 12,211                         
|Deferred income taxes                                                                                                 | 4,058                          
|Amortization of investment tax credits                                                                                | (251)                          
|Amortization of debt issuance costs and bond discount                                                                 | 260                            
|Other                                                                                                                 | (439)                          
|Equity in earnings of ATC                                                                                             | (2,038)                        
|Dividend income from ATC                                                                                              | 1,473                          
|Prepayment to ATC                                                                                                     | -                              
|Gain on the sale of property                                                                                          | (579)                          
|Changes in working capital, excluding cash equivalents, current long-term
      debt maturities, and short-term debt: |                                
|Decrease in current assets                                                                                            | 21,288                         
|Increase (decrease) in current liabilities                                                                            | 791                            
|Other noncurrent items, net                                                                                           | (808)                          
|*Cash provided by operating activities*                                                                               | 55,290                         
|                                                                                                                      |                                
|**Investing Activities:**                                                                                             |                                
|Capital expenditures                                                                                                  | (50,035)                       
|Advance to ATC related to WCCF                                                                                        | (2,001)                        
|ATC - capital call                                                                                                    | (1,757)                        
|Proceeds from sale of property                                                                                        | 612                            
|Other                                                                                                                 | 556                            
|*Cash used for investing activities*                                                                                  | (52,625)                       
|                                                                                                                      |                                
|**Financing Activities:**                                                                                             |                                
|Issuance of common stock                                                                                              | 13,562                         
|Cash dividends on common stock                                                                                        | (12,557)                       
|Repayments of debt                                                                                                    | (20,000)                       
|Borrowings of debt                                                                                                    | 17,200                         
|*Cash (used for) provided by financing activities*                                                                    | (1,795)                        
|                                                                                                                      |                                
|**Change in Cash and Cash Equivalents**                                                                               | 870                            
|Cash and cash equivalents at beginning of period                                                                      | 2,020                          
|Cash and cash equivalents at end of period                                                                            | $ 2,890                        



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







|                                                                                                          | June 30,
      2004 |  | **Dec. 31,**
      
      **2003**
|--------------------------------------------------------------------------------------------------------- | ------------------- |  | ----------------------------------
|**ASSETS**                                                                                                |                     |  |                                   
|**Current Assets:**                                                                                       |                     |  |                                   
|Cash and cash equivalents                                                                                 | $ 2,890             |  | **$ 2,020**                       
|Restricted cash                                                                                           | 2,938               |  | **3,364**                         
|Accounts receivable, less allowance for doubtful accounts of
      
      $2,672 and $2,735, respectively | 32,749              |  | 37,713                            
|Unbilled revenues                                                                                         | 13,727              |  | **21,644**                        
|Materials and supplies, at lower of average cost or market                                                | 8,974               |  | **7,851**                         
|Fossil fuel, at lower of average cost or market                                                           | 5,153               |  | **5,054**                         
|Stored natural gas, at lower of average cost or market                                                    | 13,559              |  | **18,598**                        
|Prepaid taxes                                                                                             | 9,804               |  | **14,063**                        
|Other prepayments                                                                                         | 1,825               |  | **2,156**                         
|*Total Current Assets*                                                                                    | 91,619              |  | **112,463**                       
|                                                                                                          |                     |  |                                   
|Special billing projects                                                                                  | 17,824              |  | **14,574**                        
|Regulatory assets                                                                                         | 11,555              |  | **8,241**                         
|Deferred charges                                                                                          | 16,332              |  | **17,605**                        
|                                                                                                          |                     |  |                                   
|**Property, Plant, and Equipment, Net**                                                                   | 457,212             |  | **449,022**                       
|Construction work in progress                                                                             | 117,849             |  | **88,489**                        
|*Total Property, Plant, and Equipment*                                                                    | 575,061             |  | **537,511**                       
|                                                                                                          |                     |  |                                   
|**Other Property and Investments**                                                                        | 34,236              |  | **31,293**                        
|                                                                                                          |                     |  |                                   
|**Total Assets**                                                                                          | $746,627            |  | **$721,687**                      
|                                                                                                          |                     |  |                                   
|**LIABILITIES AND CAPITALIZATION**                                                                        |                     |  |                                   
|**Current Liabilities:**                                                                                  |                     |  |                                   
|Long-term debt - due within one year                                                                      | $ 15,000            |  | **$ 20,000**                      
|Short-term debt                                                                                           | 33,880              |  | **31,680**                        
|Accounts payable                                                                                          | 38,403              |  | **35,043**                        
|Accrued taxes                                                                                             | 878                 |  | **-**                             
|Accrued interest                                                                                          | 3,095               |  | **2,968**                         
|Other current liabilities                                                                                 | 12,300              |  | **15,874**                        
|*Total Current Liabilities*                                                                               | 103,556             |  | **105,565**                       
|                                                                                                          |                     |  |                                   
|**Other Credits:**                                                                                        |                     |  |                                   
|Deferred income taxes                                                                                     | 79,583              |  | **75,525**                        
|Investment tax credit - deferred                                                                          | 4,640               |  | **4,891**                         
|Regulatory liabilities                                                                                    | 29,599              |  | **34,469**                        
|Other deferred liabilities                                                                                | 43,338              |  | **35,963**                        
|*Total Other Credits*                                                                                     | 157,160             |  | **150,848**                       
|                                                                                                          |                     |  |                                   
|**Capitalization:**                                                                                       |                     |  |                                   
|Common stockholders' equity                                                                               | 283,681             |  | **263,070**                       
|Long-term debt                                                                                            | 202,230             |  | **202,204**                       
|*Total Capitalization*                                                                                    | 485,911             |  | **465,274**                       
|                                                                                                          |                     |  |                                   
|Commitments and contingencies                                                                             | -                   |  | **-**                             
|                                                                                                          |                     |  |                                   
|**Total Liabilities and Capitalization**                                                                  | $746,627            |  | **$721,687**                      

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







|                                    | Three Months Ended June 30, |  | Six Months Ended
      June 30,
|----------------------------------- | --------------------------- |  | -------------------------------
|                                    | 2004                        |  | 2003                           
|**Operating Revenues:**             |                             |  |                                
|Regulated electric revenues         | $61,426                     |  | $58,607                        
|Regulated gas revenues              | 23,306                      |  | 24,041                         
|*Total Operating Revenues*          | 84,732                      |  | 82,648                         
|                                    |                             |  |                                
|**Operating Expenses:**             |                             |  |                                
|Fuel for electric generation        | 11,870                      |  | 9,540                          
|Purchased power                     | 11,919                      |  | 11,616                         
|Natural gas purchased               | 13,671                      |  | 14,140                         
|Other operations and maintenance    | 27,923                      |  | 26,768                         
|Depreciation and amortization       | 6,150                       |  | 6,049                          
|Other general taxes                 | 3,098                       |  | 2,846                          
|Income tax provision                | 2,721                       |  | 3,490                          
|*Total Operating Expenses*          | 77,352                      |  | 74,449                         
|**Net Operating Income**            | 7,380                       |  | 8,199                          
|                                    |                             |  |                                
|**Other Income and Deductions:**    |                             |  |                                
|AFUDC - equity funds                | 150                         |  | 113                            
|Equity earnings in ATC              | 942                         |  | 933                            
|Income tax provision                | (516)                       |  | (336)                          
|Other income (deductions)           | 149                         |  | (168)                          
|*Total Other Income and Deductions* | 725                         |  | 542                            
|Income before interest expense      | 8,105                       |  | 8,741                          
|                                    |                             |  |                                
|**Interest Expense:**               |                             |  |                                
|Interest on long-term debt          | 2,808                       |  | 2,891                          
|Other interest                      | 33                          |  | 33                             
|AFUDC - borrowed funds              | (59)                        |  | (48)                           
|*Net Interest Expense*              | 2,782                       |  | 2,876                          
|**Net Income**                      | $ 5,323                     |  | $ 5,865                        
|                                    |                             |  |                                
|**Total Comprehensive Income**      | $ 5,323                     |  | $ 5,865                        



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







|                                                                                                                      | Six Months Ended
      June 30,
|--------------------------------------------------------------------------------------------------------------------- | -------------------------------
|                                                                                                                      | 2004                           
|**Operating Activities:**                                                                                             |                                
|Net income                                                                                                            | $18,258                        
|Items not affecting cash:                                                                                             |                                
|Depreciation and amortization                                                                                         | 12,211                         
|Deferred income taxes                                                                                                 | 3,867                          
|Amortization of investment tax credits                                                                                | (251)                          
|Amortization of debt issuance costs and bond discount                                                                 | 260                            
|Other                                                                                                                 | (148)                          
|AFUDC - equity funds                                                                                                  | (291)                          
|Equity in earnings of ATC                                                                                             | (2,038)                        
|Dividend income from ATC                                                                                              | 1,473                          
|Prepayment to ATC                                                                                                     | -                              
|Changes in working capital, excluding cash equivalents, current long-term
      debt maturities, and short-term debt: |                                
|Decrease in current assets                                                                                            | 24,282                         
|(Decrease) in current liabilities                                                                                     | (7,826)                        
|Other noncurrent items, net                                                                                           | (775)                          
|*Cash provided by operating activities*                                                                               | 49,022                         
|                                                                                                                      |                                
|**Investing Activities:**                                                                                             |                                
|Capital expenditures                                                                                                  | (50,035)                       
|Advance to ATC related to WCCF                                                                                        | (2,001)                        
|AFUDC - borrowed funds                                                                                                | (115)                          
|ATC - capital call                                                                                                    | (1,757)                        
|Other                                                                                                                 | 671                            
|*Cash used for investing activities*                                                                                  | (53,237)                       
|                                                                                                                      |                                
|**Financing Activities:**                                                                                             |                                
|Equity contributions from parent                                                                                      | 9,970                          
|Cash dividends to parent                                                                                              | (12,402)                       
|Affiliate financing of WCCF                                                                                           | 329                            
|Short-term debt repayments                                                                                            | (20,000)                       
|Equity contribution received by MGE Power West Campus                                                                 | 26,796                         
|Other                                                                                                                 | (86)                           
|*Cash provided by (used for) financing activities*                                                                    | 4,607                          
|                                                                                                                      |                                
|**Change in Cash and Cash Equivalents**                                                                               | 392                            
|Cash and cash equivalents at beginning of period                                                                      | 450                            
|Cash and cash equivalents at end of period                                                                            | $ 842                          

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

**Madison Gas and Electric Company**



|***(In thousands)***
      
      **ASSETS**                                                              | June 30,
      
      2004 |  | **Dec. 31,**
      
      **2003**
|--------------------------------------------------------------------------------------------------------- | -------------------------- |  | ----------------------------------
|**Utility Plant** (At Original Cost, in Service):                                                         |                            |  |                                   
|Electric                                                                                                  | $ 586,655                  |  | **$ 573,326**                     
|Gas                                                                                                       | 236,973                    |  | **232,401**                       
|Gross plant in service                                                                                    | 823,628                    |  | **805,727**                       
|Less accumulated provision for depreciation                                                               | (366,416)                  |  | **(356,705)**                     
|Net plant in service                                                                                      | 457,212                    |  | **449,022**                       
|Construction work in progress                                                                             | 117,849                    |  | **88,489**                        
|*Total Utility Plant*                                                                                     | 575,061                    |  | **537,511**                       
|Other property and investments                                                                            | 2,873                      |  | **2,679**                         
|Investment in ATC                                                                                         | 30,208                     |  | **27,886**                        
|*Total Other Property and Investments*                                                                    | 33,081                     |  | **30,565**                        
|**Current Assets:**                                                                                       |                            |  |                                   
|Cash and cash equivalents                                                                                 | 842                        |  | **450**                           
|Restricted cash                                                                                           | 2,938                      |  | **3,364**                         
|Accounts receivable, less allowance for doubtful accounts of
      
      $2,672 and $2,735, respectively | 26,669                     |  | 34,453                            
|Unbilled revenues                                                                                         | 13,727                     |  | **21,644**                        
|Materials and supplies, at lower of average cost or market                                                | 8,974                      |  | **7,851**                         
|Fossil fuel, at lower of average cost or market                                                           | 5,153                      |  | **5,054**                         
|Stored natural gas, at lower of average cost or market                                                    | 13,559                     |  | **18,598**                        
|Prepaid taxes                                                                                             | 9,859                      |  | **14,305**                        
|Other prepayments                                                                                         | 1,810                      |  | **2,128**                         
|*Total Current Assets*                                                                                    | 83,531                     |  | **107,847**                       
|Special billing projects                                                                                  | 17,824                     |  | **14,574**                        
|Regulatory assets                                                                                         | 11,555                     |  | **8,241**                         
|Other deferred charges                                                                                    | 16,290                     |  | **17,334**                        
|**Total Assets**                                                                                          | $ 737,342                  |  | **$ 716,072**                     
|**CAPITALIZATION AND LIABILITIES**                                                                        |                            |  |                                   
|Common stockholder equity                                                                                 | $ 272,645                  |  | **$ 256,819**                     
|Minority interest                                                                                         | 26,796                     |  | **-**                             
|Long-term debt                                                                                            | 202,230                    |  | **202,204**                       
|*Total Capitalization*                                                                                    | 501,671                    |  | **459,023**                       
|**Current Liabilities:**                                                                                  |                            |  |                                   
|Long-term debt - due within one year                                                                      | 15,000                     |  | **20,000**                        
|Short-term debt - commercial paper                                                                        | 500                        |  | **15,500**                        
|Accounts payable                                                                                          | 28,490                     |  | **32,826**                        
|Affiliate payables                                                                                        | 19,247                     |  | **18,918**                        
|Accrued taxes                                                                                             | 122                        |  | **-**                             
|Accrued interest                                                                                          | 3,093                      |  | **2,967**                         
|Other current liabilities                                                                                 | 11,920                     |  | **15,658**                        
|*Total Current Liabilities*                                                                               | 78,372                     |  | **105,869**                       
|**Other Credits:**                                                                                        |                            |  |                                   
|Deferred income taxes                                                                                     | 79,473                     |  | **75,606**                        
|Investment tax credit - deferred                                                                          | 4,640                      |  | **4,891**                         
|Regulatory liabilities                                                                                    | 29,599                     |  | **34,469**                        
|Pension liability                                                                                         | 35,491                     |  | **29,947**                        
|Other deferred liabilities                                                                                | 8,096                      |  | **6,267**                         
|*Total Other Credits*                                                                                     | 157,299                    |  | **151,180**                       
|Commitments and contingencies                                                                             | -                          |  | **-**                             
|**Total Capitalization and Liabilities**                                                                  | $ 737,342                  |  | **$ 716,072**                     

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

Notes to Condensed Consolidated Financial Statements (unaudited)
  June 30, 2004

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.
  MGE Energy is a holding company. MGE, a wholly owned subsidiary of MGE Energy,
  is a regulated
  electric and gas utility headquartered in Madison, Wisconsin. MGE generates
  and distributes electricity
  to nearly 132,000 customers in a 250-square-mile area of Dane County. MGE also
  purchases and
  distributes natural gas to more than 129,000 customers in a 1,375-square-mile
  service territory in seven
  south-central Wisconsin Counties. Other wholly owned subsidiaries of MGE Energy
  include CWDC,
  MAGAEL, MGE Construct, and MGE Power. MGE Power owns 100% of MGE Power West
  Campus
  and MGE Power Elm Road, which have been formed to construct and own new electric
  generation
  projects.
  The accompanying condensed consolidated financial statements as of June 30,
  2004, and for the three
  and six months then ended are unaudited but include all adjustments that MGE
  Energy and MGE
  management consider necessary for a fair presentation 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, 2003, but
  does not include all
  disclosures required by generally accepted accounting principles. These notes
  should be read in
  conjunction with the financial statements and the notes on pages 55 through
  84 of the 2003 Form 10-K.
  Certain amounts in prior periods' financial statements and related notes have
  been reclassified to
  conform to the 2004 presentation.2. Basis of Consolidation - MGE.

MGE Power West Campus is not a subsidiary of MGE; however, it has been included
  in the
  consolidated financial statements of MGE as of December 31, 2003, due to the
  adoption of FIN
  No. 46R (see Footnote 9.c.). MGE Power West Campus was created for the purpose
  of owning new
  generating assets including WCCF. These new generating assets are for the primary
  benefit of MGE's
  customers. The long-term lease arrangement between MGE and MGE Power West Campus
  creates a
  VIE relationship under FIN No. 46R. MGE is considered the primary beneficiary
  of this VIE because it
  will absorb a majority of the entity's expected losses, residual returns, or
  both.
  The consolidation of MGE Power West Campus resulted in a significant increase
  to certain balances
  such as construction work in progress of $77.9 million, an increase in long-term
  debt of $30.0 million,
  minority interest of $26.8 million, and affiliate payables of $19.2 million
  for the six months ended
  June 30, 2004. As MGE Power West Campus had no significant operations, the consolidation
  of this
  entity by MGE did not have a material impact on MGE's consolidated statements
  of income for the
  three or six months ended June 30, 2004.
  MGE Power West Campus is owned indirectly by MGE Energy. MGE Energy's proportionate
  share of
  the equity (through its wholly owned subsidiary MGE Power) of MGE Power West
  Campus is
  classified within the financial statements of MGE as minority interest. As of
  June 30, 2004, MGE
  Energy (through its wholly owned subsidiary MGE Power) had invested $26.8 million
  in MGE Power
  West Campus. This investment has no impact on the MGE consolidated statements
  of income. MGE
  has reflected $29.3 million of capital expenditures and $26.8 million in equity
  contributions received by
  MGE Power West Campus in the MGE consolidated statement of cash flows.3. Per-Share Amounts - MGE Energy.
  Earnings per share of MGE Energy common stock are computed on the basis of the
  weighted average of
  the daily number of shares outstanding in accordance with SFAS No. 128, Earnings
  Per Share. For the
  three months ended June 30, 2004 and 2003, respectively, there were 18,656,887
  and 17,787,360
  weighted average shares outstanding. Dividends declared and paid per share of
  common stock for the
  same three-month periods were $0.338 and $0.336, respectively.
  For the six months ended June 30, 2004 and 2003, there were 18,541,476 and 17,710,835
  weighted
  average shares outstanding. Dividends declared and paid per share of common
  stock for the same six-month
  periods were $0.676 and $0.672, respectively.
  MGE Energy does not hold any dilutive securities.4. Rate Matters - MGE.
  On May 5, 2004, MGE filed with the PSCW a request to increase electric rates
  by 8.5% and decrease
  gas rates by 1.0%. The electric rate request includes costs of commercial operation
  of WCCF and
  increased transmission expenses. The PSCW is conducting its audit, which will
  be completed in
  August 2004. An order is expected in the beginning of 2005.
  Under the fuel rules, if electric fuel costs are outside a 3.0% range higher
  or lower than the level set by
  the PSCW, MGE can apply for a fuel surcharge or may be required to return a
  fuel credit to its
  customers. During 2003, MGE submitted an application for a fuel cost credit.
  On August 14, 2003, the
  PSCW approved an interim fuel cost credit of $.00099 per kWh. The PSCW also
  required a full review
  of the actual and forecasted costs for 2003 with MGE's fuel rates subject to
  refund. The fuel credit
  began on August 14, 2003, and ended on January 13, 2004. The fuel credit from
  January 1 through
  January 13, 2004, totaled $0.4 million. The fuel credit totaled $4.4 million,
  of which $1.3 million
  represents the interim fuel credit and $3.1 million is the estimate for the
  additional fuel credit, as a result
  of PSCW review, to be refunded to customers. The additional fuel credit of $3.1
  million was credited to
  customers in the first quarter of 2004.
  On January 14, 2004, the PSCW authorized MGE to increase annual revenues by
  $12.8 million. The
  increase covers rising fuel costs for electric generation and addresses increased
  system demands for both
  gas and electric.
  Effective March 1, 2003, the PSCW authorized MGE to increase annual revenues
  by $27.1 million. The
  increase covered rising fuel costs and addressed increased system demands and
  costs to complete a new
  AMR project.5. Capitalization Matters - MGE Energy.
  On August 15, 2003, MGE Energy entered into a Distribution Agreement (Agreement)
  with BOCM.
  Under the terms of this Agreement, MGE Energy may periodically offer and sell
  up to 1,600,000 shares
  of its common stock through BOCM as its sales agent or to BOCM as principal.
  The sales will be made
  pursuant to a shelf registration statement MGE Energy filed with the SEC and
  which has been declared
  effective.
  Under the Agreement, MGE Energy has sold 44,000 shares of its common stock during
  the three
  months ended June 30, 2004, for net proceeds of $1.3 million. For the six months
  ended June 30, 2004,
  MGE Energy has sold 124,000 shares, for net proceeds of $3.8 million.
  MGE Energy also issues new shares of its common stock through its Dividend Reinvestment
  and Direct
  Stock Purchase Plan. For the three months ended June 30, 2004, MGE Energy has
  issued 181,000 new
  shares of common stock, through this plan, for net proceeds of $5.5 million.
  For the six months ended
  June 30, 2004, MGE Energy has issued 326,000 shares for net proceeds of $10.0
  million.6. Supplemental Cash Flow Information - MGE Energy and MGE.

|**MGE Energy**
      ***(In thousands)*** | **Three
      Months Ended June 30,** |  | **Six Months
      Ended June 30,**
|----------------------------------------- | ------------------------------------- |  | -----------------------------------
|                                          | **2004**                              |  | 2003                               
|Interest paid, net of amounts capitalized | **$ 3,410**                           |  | $ 3,306                            
|Income taxes paid                         | **3,850**                             |  | 6,250                              
|Income taxes refunded                     | **-**                                 |  | -                                  

|**MGE**
      *(In thousands)*            | **Three
      Months Ended June 30,** |  | **Six
      Months Ended June 30,**
|----------------------------------------- | ------------------------------------- |  | -----------------------------------
|                                          | **2004**                              |  | 2003                               
|Interest paid, net of amounts capitalized | **$ 3,272**                           |  | $ 3,346                            
|Income taxes paid                         | **3,700**                             |  | 6,250                              
|Income taxes refunded                     | **-**                                 |  | -                                  

7. Property, Plant, and Equipment - MGE Energy.
  MGE Energy, through its subsidiary MGE Power West Campus, calculates capitalized
  interest in
  accordance with SFAS No. 34, Capitalization of Interest Cost, on construction
  projects for periods
  where financing is provided by MGE Energy through interim debt. The interest
  rate capitalized is based
  upon the monthly short-term borrowing rate MGE Energy incurs for such funds
  and the interest rate
  related to MGE Power West Campus' long-term debt. For the six months ended June
  30, 2004, MGE
  Energy recorded $1.1 million in capitalized interest related to the cogeneration
  facility being
  constructed on the west campus of the UW.8. Pension and Postretirement Plans - MGE.
  MGE has elected to recognize the cost of its transition obligation (the accumulated
  postretirement
  benefit obligation as of January 1, 1993) by amortizing it on a straight-line
  basis over 20 years.

|                                         | Pension Benefits  
|---------------------------------------- | ------------------
|                                         | Three Months Ended
|                                         | June 30,          
|*(In thousands)*                         | 2004              
|Components of net periodic benefit cost: |                   
|Service cost                             | $ 678             
|Interest cost                            | 1,438             
|Expected return on assets                | (1,506)           
|Amortization of:                         |                   
|Transition obligation                    | 41                
|Prior service cost                       | 69                
|Actuarial gain                           | 142               
|SFAS 87 cost                             | 862               
|SFAS 88 charges:                         |                   
|Special termination benefit              | -                 
|Net periodic benefit cost                | $ 862             



|                                         | Postretirement
      Benefits
|---------------------------------------- | -----------------------------
|                                         | Three Months Ended           
|                                         | June 30,                     
|*(In thousands)*                         | 2004                         
|Components of net periodic benefit cost: |                              
|Service cost                             | $ 451                        
|Interest cost                            | 753                          
|Expected return on assets                | (181)                        
|Amortization of:                         |                              
|Transition obligation                    | 93                           
|Prior service cost                       | 41                           
|Actuarial gain                           | 262                          
|SFAS 87 cost                             | 1,419                        
|SFAS 88 charges:                         |                              
|Special termination benefit              | -                            
|Net periodic benefit cost                | $ 1,419                      

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization
  Act of 2003
  was signed into law authorizing Medicare to provide prescription drug benefits
  to retirees. FASB Staff
  Position No. (FSP) 106-2, Accounting and Disclosure Requirements Related to
  the Medicare
  Prescription Drug, Improvement and Modernization Act of 2003, was issued on
  May 19, 2004. The FSP
  provides guidance on accounting for the effects of the new Medicare prescription
  drug legislation by
  employers whose prescription drug benefits are actuarially equivalent to the
  drug benefit under
  Medicare Part D. FSP No. 106-2 is effective as of the first interim or annual
  period beginning after
  June 15, 2004.
  According to the FSP, if a company concludes that its single-employer defined
  benefit postretirement
  health care plan provides a drug benefit that is actuarially equivalent to the
  Medicare Part D benefit, the
  employer should recognize the subsidy in the measurement of the APBO under SFAS
  106, Employers'
  Accounting for Postretirement Benefits Other Than Pensions. The resulting reduction
  of the APBO
  should be accounted for as an actuarial gain. The subsidy's reduction of the
  employer's share of future
  costs under the plan should be reflected in current-period service cost.
  According to the FSP, if a company concludes that its drug benefits are not
  actuarially equivalent, no
  accounting for the subsidy is required.
  MGE's APBO or net periodic benefit cost at June 30, 2004, do not reflect any
  amount associated with
  this subsidy as MGE is currently unable to conclude whether the benefits provided
  by the plan are
  actuarially equivalent to the Medicare Part D benefit under the act. MGE will
  adopt the standards of this
  FSP for the period ending September 30, 2004.9. Adoption of Accounting Principles and Recently Issued Accounting Pronouncements
  - MGE
  Energy and MGE.a. SFAS No. 143.
  In 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.
  SFAS
  No. 143 provides accounting requirements for retirement obligations associated
  with tangible
  long-lived assets. MGE Energy and MGE were required to adopt SFAS No. 143 as
  of January 1,
  2003. Retirement obligations associated with long-lived assets included within
  the scope of SFAS
  No. 143 are those for which there is a legal obligation under existing or enacted
  law, statute,
  written or oral contract, or by legal construction under the doctrine of promissory
  estoppel.
  Effective January 1, 2003, MGE recorded an obligation for the fair value of
  its legal liability for
  asset retirement obligations associated with removing an electric substation,
  a combustion turbine
  generating unit, wind generating facilities, and photovoltaic generating facilities,
  all of which are
  located on property not owned by MGE. At June 30, 2004, this liability is estimated
  at $1.4 million
  and included in other deferred liabilities.
  At the point the liability for asset retirement is incurred, SFAS No. 143 requires
  capitalization of
  the costs to the related asset, property, plant, and equipment, net. For asset
  retirement obligations
  existing at the time of adoption, the statement requires capitalization of costs
  at the level that
  existed at the point of incurring the liability. These capitalized costs are
  depreciated over the same
  period as the related property. At the date of adoption, the depreciation expense
  for past periods
  was recorded as a regulatory asset in accordance with SFAS No. 71 because MGE
  believes the
  PSCW will allow it to recover these costs in future rates. Current depreciation
  of the asset
  retirement cost is also being deferred as a regulatory asset under SFAS No.
  71. MGE applies SFAS
  No. 71 and recognizes regulatory assets or liabilities for the timing differences
  between when we
  recover legal asset retirement obligations in rates and when MGE would recognize
  these costs
  under SFAS No. 143.
  The initial liability is accreted to its present value each period. MGE defers
  this accretion as a
  regulatory asset based on its determination that these costs can be collected
  from customers.
  MGE also may have asset retirement obligations relating to various assets, such
  as combustion
  turbine generating units, small distributed generating units, aboveground and
  underground storage
  tanks, facilities located at Columbia (co-owned with Alliant and WPSC), and
  certain electric and
  gas distribution facilities. These facilities are generally located on property
  owned by third parties,
  on which MGE is permitted to operate by lease, permit, easement, license, or
  service agreement,
  but also include some facilities located on property owned by MGE. The asset
  retirement
  obligations associated with these facilities cannot be reasonably determined
  due to the
  indeterminate life of the related assets.
  The following table shows costs as of December 31, 2003, and changes to the
  asset retirement
  obligation and accumulated depreciation during the six months ended June 30,
  2004.

|(In thousands)                | (a) Original Asset
      Retirement
      Obligation |  | (b)
      
      Accumulated
      Accretion |  | (c)
      
      (a + b)
      Asset
      Retirement
      Obligation |  | (d)
      
      Accumulated
      Depreciation-
      Related Asset
|----------------------------- | ---------------------------------------------------- |  | -------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------
|Balance, December 31, 2003    | $ 686                                                |  | $ 675                                        |  | $ 1,361                                                                |  | $ 175                                                               
|Changes through June 30, 2004 | -                                                    |  | 43                                           |  | 43                                                                     |  | 13                                                                  
|Balance, June 30, 2004        | $ 686                                                |  | $ 718                                        |  | $ 1,404                                                                |  | $ 188                                                               

As of June 30, 2004, MGE's regulatory asset, included in deferred charges, is
  the total accumulated
  accretion ($0.7 million) and accumulated depreciation ($0.2 million) or $0.9
  million.
  Accumulated costs of removal that are non-SFAS 143 obligations are classified
  within the
  financial statements as regulatory liabilities. At June 30, 2004, and December
  31, 2003, there were
  $17.7 million and $18.2 million of these costs recorded as regulatory liabilities
  within the
  financials statements, respectively.b. FIN No. 45.
  In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure
  Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
  Others. This
  interpretation provides the disclosures to be made by a guarantor in interim
  and annual financial
  statements about obligations under certain guarantees. The interpretation also
  clarifies that a
  guarantor is required to recognize, at the inception of a guarantee, a liability
  for the fair value of
  the obligation.
  In connection with its "Shared Savings" program, MGE is party to a
  chattel paper purchase
  agreement with a financial institution under which it can sell or finance an
  undivided interest with
  recourse, in up to $7.5 million of the financing program receivables, until
  February 28, 2005 (see
  Footnote 14.e.). The liability for the fair value of the obligation associated
  with these loans is not
  material.
  MGE would be required to perform under the guarantee if the customer defaulted
  on its loan. The
  energy-related equipment installed at the customer sites is used to secure the
  customer loans. The
  length of the MGE guarantee to the financial institution varies from one to
  ten years depending on
  the term of the customer loan. Principal payments for the next five years on
  the loans are
  $0.4 million in 2004, $0.9 million in 2005, 2006, and 2007, and $1.0 million
  in 2008.c. FIN No. 46R.
  In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
  Entities - An
  Interpretation of ARB No. 51. In December 2003, the FASB issued the updated
  and final
  interpretation, FIN No. 46R. FIN No. 46R requires that an equity investor in
  a VIE have
  significant equity at risk (generally a minimum of 10%, which is an increase
  from 3% required
  under the previous guidance) and hold a controlling interest, evidenced by voting
  rights, and
  absorb a majority of the entity's expected losses, receive a majority of the
  entity's expected returns,
  or both. If the equity investor is unable to evidence these characteristics,
  the entity that retains
  these ownership characteristics will be required to consolidate the VIE as the
  primary beneficiary.
  FIN No. 46 was applicable immediately to VIEs created or obtained after January
  31, 2003. FIN
  No. 46R was effective on December 31, 2003, for interests in entities that were
  previously
  considered special purpose entities under then existing authoritative guidance.
  MGE Power West Campus, a subsidiary of MGE Energy, is a VIE of MGE pursuant
  to FIN
  No. 46R, as the equity investment by MGE Energy (through its wholly owned subsidiary
  MGE
  Power) in MGE Power West Campus at December 31, 2003, was not sufficient to
  permit the entity
  to finance its activities without additional support. MGE concluded a VIE relationship
  exists due to
  the long-term lease arrangement between MGE and MGE Power West Campus. MGE Power
  West
  Campus will lease a major portion of its assets, a power plant, to MGE, pursuant
  to this leasing
  arrangement, and MGE will absorb a majority of the expected losses, residual
  returns, or both. The
  VIE was consolidated into MGE as of December 31, 2003.
  FIN No. 46R also requires MGE to assess whether the participants within its
  Shared Savings
  program constitute VIEs in which MGE might be considered to be the consolidating
  entity. MGE
  has reviewed 65% of the total Shared Savings program balance and has determined
  that the
  provisions of FIN No. 46R are not applicable via the "business scope exception."
  For the
  remaining 35% of the total Shared Savings program balance, MGE has not performed
  this
  assessment. These entities are not legally obligated to provide the financial
  information to MGE
  that is necessary to determine whether MGE must consolidate these entities.
  MGE will continue to
  attempt to obtain information from these customers in order to determine whether
  they should be
  consolidated by MGE under the provisions of FIN No. 46R.10. WCCF - MGE Energy and MGE.
  MGE Energy, through MGE Power, MGE Power West Campus, and MGE Construct, is
  building a
  natural gas-fired cogeneration facility on the UW campus. As planned, the facility
  will have capacity to
  produce 20,000 tons of chilled water, 500,000 pounds per hour of steam, and
  approximately 150 MW of
  electricity. The UW and MGE Power West Campus will jointly own the facility.
  The UW will own a
  controlling interest in the chilled-water and steam plants, which will be used
  to meet the growing needs
  for air-conditioning and steam-heat capacity for the UW campus. MGE Power West
  Campus will own a
  controlling interest in the electric generation plant, which will be used to
  provide electricity to MGE's
  customers. MGE entered into a lease with MGE Power West Campus to lease the
  assets owned by MGE
  Power West Campus, and MGE will operate the entire facility. MGE Construct is
  responsible for the
  construction of the facility. A PSCW order approving the issuance of a CPCN
  for the WCCF was
  received on October 9, 2003. Construction on the project commenced in October
  2003, and the project
  is expected to be completed by spring 2005. In the second quarter of 2004, MGE
  Construct received a
  service fee of $0.7 million (pretax) from the State in relation to its role
  as EPC contractor for WCCF.
  This amount is classified as revenue from nonregulated operations within MGE
  Energy's financial
  statements. The total fee of $5.0 million will be recognized as services are
  rendered and will be
  collected over a 22-month period. MGE Construct has received $1.4 million (pretax)
  in service fees for
  the six months ended June 30, 2004.
  In accordance with the WCCF lease between MGE Power West Campus and MGE, MGE
  Power West
  Campus began billing MGE for carrying costs on WCCF. The carrying costs billed
  to MGE started on
  January 29, 2004, the date MGE received approval from the PSCW to defer these
  costs, and will
  continue through construction of the project. Carrying costs totaled $3.1 million
  for the six months
  ended June 30, 2004. These amounts are classified as regulatory assets within
  the financial statements.
  MGE Energy, MGE Power West Campus, and MGE Construct have assumed certain risks
  in regard to
  some of the executed agreements related to the WCCF. In the EPC Agreement, MGE
  Power West
  Campus is responsible for cost overruns and MGE Construct is responsible for
  the entire construction
  process for the facility, including paying liquidated damages relating to failure
  to achieve the
  Mechanical Completion Date Guarantee and/or the Acceptance Test Capacity Guarantee.
  MGE Energy
  has guaranteed MGE Construct's obligations under the EPC Agreement.
  The expected cost to construct WCCF is approximately $185 million in total,
  of which $105 million is
  MGE Power West Campus' estimated portion. As of June 30, 2004, MGE Power West
  Campus had
  incurred $77.9 million of costs on the project, which is reflected in construction
  work in progress on
  MGE Energy's and MGE's consolidated balance sheets. These costs represent amounts
  paid for
  equipment as well as other costs associated with construction of the facility.11. ATC - MGE.
  As of June 30, 2004, MGE holds a 5% interest in ATC and accounts for its investment
  in that interest
  under the equity method of accounting due to its ability to exercise significant
  control over management
  activities. MGE has a seat on the board of directors and owns 20% of the voting
  stock of ATC
  Management, Inc., which manages and operates ATC. MGE records as equity in earnings
  of the
  investee its share of ATC's earnings, amortization of the SFAS No. 109 regulatory
  liability, and deferred
  investment tax credits related to the transmission assets transferred to ATC.
  During the three and six
  months ended June 30, 2004, MGE recorded pretax equity earnings from its investment
  in ATC of
  $0.9 million and $2.0 million, respectively. MGE recorded transmission expense
  from ATC of
  $3.4 million and $6.7 million for the three and six months ended June 30, 2004,
  respectively.
  On November 21, 2002, MGE and ATC entered into an interconnection agreement
  related to
  transmission system upgrades for WCCF. MGE issued to ATC a "Notice to Proceed
  for the
  Procurement of the Equipment" for the system upgrades. MGE has advanced
  funds for construction to
  ATC for transmission equipment related to WCCF in the amount of $2.0 million
  for the six months
  ended June 30, 2004. The total advanced to ATC for this project is $12.5 million
  as of June 30, 2004.
  MGE will be reimbursed by ATC upon completion of the project.
  MGE has agreed to provide to ATC an additional capital commitment of $3.6 million
  in 2004. In the
  second quarter of 2004, MGE made its second of four capital installments. MGE
  has made $1.8 million
  in capital contributions for the six-month period ended June 30, 2004. MGE has
  a remaining capital
  commitment of $1.8 million for 2004.12. Power the Future Generation.
  On February 23, 2001, MGE secured an option to own a portion of the advanced
  technology, coal-fired,
  base-load generation facilities proposed in WE Energies' "Power the Future"
  plan. The plan includes
  three new 600-MW coal-fired plants to be located in Wisconsin. Pursuant to an
  amended agreement
  reached on January 31, 2003, MGE has the option to acquire an undivided 8.33%
  (16.66% under certain
  conditions) ownership interest in each of the proposed coal plants or up to
  approximately 50 MW per
  unit.
  The PSCW issued an order in November 2003 approving WE Energies' request for
  a CPCN for Units 1
  and 2. Four appeals have been filed challenging the order. In addition, two
  lawsuits have been filed in
  Dane County Circuit Court against the DNR, contending that the DNR did not comply
  with state laws
  when it participated with the PSCW in preparing the environmental impact statement
  for Units 1 and 2.
  Also, several parties have sought to contest the issuance of various environmental
  permits needed for
  the construction of the units. The resolution of these proceedings as well as
  the risks generally
  associated with construction of the units may adversely affect the costs and
  completion times for the
  units. At present, Unit 1 is scheduled to begin operating in 2009 and Unit 2
  is scheduled to begin
  operating in 2010.
  The PSCW issued an order on June 25, 2004, approving MGE's participation in
  Units 1 and 2 (should
  MGE choose to exercise its options) and approving a facility lease agreement
  between MGE Power Elm
  Road (a nonutility subsidiary of MGE Energy) and MGE. The financial terms of
  the facility lease
  include a capital structure of 55% equity and 45% long-term debt, a return on
  equity of 12.7%, a lease
  term of 30 years, and a 5% rent reduction in the first five years. MGE anticipates
  making a decision on
  whether to exercise the option by the middle of 2005. If the options on Units
  1 and 2 are exercised,
  MGE Energy's share of capital costs for an 8.33% ownership interest in both
  units would be an
  estimated $183 million. A substantial portion of those capital costs would be
  incurred from 2005
  through 2009, with more than half expected to be incurred during 2006 and 2007.
  (See Footnote 15 for
  subsequent event.)13. Segment Information - MGE Energy and MGE.
  MGE Energy and MGE operate in three business segments: electric utility operations,
  gas utility
  operations, and nonregulated energy operations. The electric utility business
  generates and distributes
  electricity and contracts for transmission service. The gas utility business
  purchases and distributes
  natural gas and contracts for the transportation of natural gas.
  The nonregulated energy operations are conducted through subsidiaries of MGE
  Energy other than
  MGE. These subsidiaries have been formed to own and construct new electric generating
  capacity. At
  present, they are undertaking the construction of WCCF, which started in the
  fall of 2003. The
  following table shows key information about all three of these segments, including
  the distribution of
  net assets, for the six months ended June 30, 2003 and 2004.
  MGE's general corporate expenses include the cost of executive management, corporate
  accounting and
  finance, information technology, risk management, human resources and legal
  functions, and employee
  benefits that are allocated to electric and gas based on formulas prescribed
  by the PSCW. Identifiable
  assets are those used in MGE's operations in each segment. Corporate assets
  consist primarily of cash
  and cash equivalents and deferred taxes.
  The following table shows segment information for MGE Energy's operations:

|*(In thousands)*                                                  |          
|----------------------------------------------------------------- | ---------
|**MGE Energy**
      ***Six Months Ended June 30,
        2004*** | Electric 
|Gross operating revenues                                          | $ 121,576
|Interdepartmental revenues                                        | (239)    
|Depreciation and amortization                                     | (8,573)  
|Other operating expenses                                          | (91,876) 
|Operating income                                                  | $ 20,888 
|                                                                  |          
|Six Months Ended June 30, 2003                                    |          
|Gross operating revenues                                          | $ 114,951
|Interdepartmental revenues                                        | (245)    
|Depreciation and amortization                                     | (8,325)  
|Other operating expenses                                          | (90,472) 
|Operating income                                                  | $ 15,909 

The electric and gas utility operations segments represent substantially all
  of the revenue-generating
  segments for MGE and substantially all of the revenue for MGE Energy. The following
  table shows segment information for MGE's operations:

|*(In thousands)*                                       |           |  |           |  |              |  |          
|------------------------------------------------------ | --------- |  | --------- |  | ------------ |  | ---------
|MGE
      ***Six Months Ended June 30,
        2004*** | Electric  |  | Gas       |  | Nonregulated |  | Total    
|Gross operating revenues                               | $ 121,576 |  | $ 103,194 |  | $ -          |  | $ 224,770
|Interdepartmental revenues                             | (239)     |  | (5,200)   |  | -            |  | (5,439)  
|Depreciation and amortization                          | (8,573)   |  | (3,638)   |  | -            |  | (12,211) 
|Other operating expenses                               | (98,266)  |  | (86,361)  |  | -            |  | (184,627)
|Operating income                                       | $ 14,498  |  | $ 7,995   |  | $ -          |  | $ 22,493 
|                                                       |           |  |           |  |              |  |          
|Six Months Ended June 30, 2003                         |           |  |           |  |              |  |          
|Gross operating revenues                               | $ 114,951 |  | $ 99,878  |  | $ -          |  | $ 214,829
|Interdepartmental revenues                             | (245)     |  | (3,442)   |  | -            |  | (3,687)  
|Depreciation and amortization                          | (8,325)   |  | (3,436)   |  | -            |  | (11,761) 
|Other operating expenses                               | (94,860)  |  | (84,577)  |  | -            |  | (179,437)
|Operating income                                       | $ 11,521  |  | $ 8,423   |  | $ -          |  | $ 19,944 

|*(In thousands)*
      **MGE Energy** | Electric  |  | Gas       |  | Assets not
      Allocated |  | Non-
      
      regulated |  | Total    
|------------------------------------- | --------- |  | --------- |  | -------------------------- |  | --------------------------- |  | ---------
|***Assets:***                         |           |  |           |  |                            |  |                             |  |          
|June 30, 2004                         | $ 455,776 |  | $ 159,572 |  | $ 41,372                   |  | $ 89,907                    |  | $ 746,627
|December 31, 2003                     | 445,728   |  | 165,577   |  | 55,839                     |  | 54,543                      |  | 721,687  
|                                      |           |  |           |  |                            |  |                             |  |          
|Capital Expenditures:                 |           |  |           |  |                            |  |                             |  |          
|Six Months ended June 30, 2004        | 17,256    |  | 5,275     |  | -                          |  | 27,504                      |  | 50,035   
|Year ended December 31, 2003          | 40,833    |  | 13,875    |  | -                          |  | 28,262                      |  | 82,970   
|                                      |           |  |           |  |                            |  |                             |  |          
|MGE                                   |           |  |           |  |                            |  |                             |  |          
|Assets:                               |           |  |           |  |                            |  |                             |  |          
|June 30, 2004                         | $ 455,776 |  | $ 159,572 |  | $ 43,175                   |  | $ 78,819                    |  | $ 737,342
|December 31, 2003                     | 445,728   |  | 165,577   |  | 55,839                     |  | 48,928                      |  | 716,072  
|                                      |           |  |           |  |                            |  |                             |  |          
|Capital Expenditures:                 |           |  |           |  |                            |  |                             |  |          
|Six Months ended June 30, 2004        | 17,256    |  | 5,275     |  | -                          |  | 27,504                      |  | 50,035   
|Year ended December 31, 2003          | 40,833    |  | 13,875    |  | -                          |  | 28,262                      |  | 82,970   

14. Commitments and Contingencies - MGE Energy and MGE.a. Coal Contracts.
  MGE has no coal contracts that contain minimum purchase or fixed obligations.
  Fuel procurement for
  MGE's jointly owned Columbia is handled by Alliant, the operating company. If
  any minimum
  purchase obligations must be paid under these contracts, management believes
  such obligations would
  be considered costs of service and recoverable in rates.b. Energy Commitments.
  MGE has several purchased power and transmission contracts to help meet future
  electric supply
  requirements. As of June 30, 2004, MGE's total annual commitments for purchased
  power contracts
  for capacity and transmission are estimated to be $16.8 million in 2004, $14.5
  million in 2005,
  $14.6 million in 2006, $11.3 million in 2007, and $9.6 million in 2008. Management
  expects to
  recover these costs in future customer rates.c. Natural Gas Transportation and Storage Contracts.
  MGE's natural gas supply transportation and storage contracts require fixed
  monthly payments for
  firm supply and firm pipeline transportation and storage capacity. The pricing
  components of the
  fixed monthly payments for the transportation and storage contracts are established
  by FERC but may
  be subject to change. The annual payments are estimated to be $15.1 million
  in 2004, $14.2 million in
  2005, $14.5 million in 2006, $14.4 million in 2007, and $14.2 million in 2008.
  Management expects
  to recover these costs in future customer rates.d. Environmental.
  MGE is subject to local, state, and federal regulations concerning air quality,
  water quality, and solid
  waste disposal. Those regulations affect the manner in which MGE conducts its
  operations, the costs
  of those operations, as well as some capital and operating expenditures. It
  can also affect the siting,
  timing, and cost of new projects or other significant actions affecting the
  environment. MGE believes
  it has met the requirements of current environmental regulations. MGE is not
  able to predict the
  direction of future regulations or if compliance with any such regulations will
  involve additional
  expenditures for pollution control equipment, plant modifications, or curtailment
  of operations. Such
  actions could reduce capacity or efficiency at existing plants or delay the
  construction and operation
  of future generating facilities.
  The EPA and the DNR regulate pollution and environmental control matters at
  MGE's electric
  generating plants. The DNR has primary jurisdiction over air and water quality
  as well as solid and
  hazardous waste standards.
  The ongoing issue of global warming could result in significant costs to reduce
  CO2 emissions from
  fossil-fueled generation sources such as coal and gas-fired plants. MGE does
  not yet know the
  amounts of these expenditures or the period of time over which they may be required.
  The National Environmental Policy Act and the Wisconsin Environmental Policy
  Act require MGE to
  conduct a complete environmental review and issue a detailed environmental impact
  statement before
  obtaining necessary authorizations or permits from regulatory agencies for certain
  projects. This may
  apply to new projects such as generating plants, electric transmission lines,
  or other major actions that
  could significantly affect the environment.Air quality
  Eight-hour ozone standard. In 1997, the EPA promulgated a new eight-hour ozone
  ambient
  air-quality standard. In April 2004, the EPA designated Dane County as in attainment
  with that
  eight-hour ozone standard based upon data showing Dane County air quality to
  be in attainment with
  that standard. This designation could be revised based upon future air-quality
  data.
  Dane County ozone levels have been increasing over time. MGE is working with
  the DNR and other
  Dane County air-emission sources to make voluntary reductions of ozone precursor
  emissions and
  prevent the county from being classified as a nonattainment area. If Dane County
  were classified as a
  nonattainment area, MGE facilities in Dane County may need to meet new limits
  for ozone precursor
  emissions.
  Proposed and final MACT standards. Section 112 of the 1990 Clean Air Act Amendments
  requires
  the EPA to develop standards to control major sources of hazardous air pollutants
  to levels generally
  consistent with the lowest-emitting facilities in similar source categories.
  MGE operates several
  sources that may be subject to MACT standards, including electric steam generating
  units;
  combustion turbines; reciprocating internal combustion engines; and industrial,
  commercial, and
  institutional boilers. All sources, except Blount and Columbia coal-fired units,
  are expected to be
  exempt from implementing additional emission-control strategies. WCCF is subject
  to the MACT
  standard for combustion turbines, but no additional controls are anticipated
  other than those being
  constructed. The EPA has signed final MACT standards for electric-steam generating
  units, and MGE
  will be required to comply with these new limits in 2007 if the rules are published
  in the same form.
  Complying with the MACT standards would likely increase capital expenditures
  and operating and
  maintenance expenses.
  Proposed Wisconsin mercury emission reduction rule. The DNR has promulgated
  an administrative
  rule (NR 446) that requires reduction of mercury emissions of 40% by 2010 and
  75% by 2015 for
  "major utilities" located in Wisconsin, i.e., those investor-owned
  public utilities emitting 100 pounds
  or more of mercury annually on a system-wide basis. The rule allows each utility
  to average their
  mercury emission reduction requirement across their entire system of coal-fired
  boilers. As a joint
  owner of Columbia, MGE may have increased capital expenditures and operating
  and maintenance
  expenses if the owners choose to control mercury emissions at Columbia.
  NOx SIP Call. On October 27, 1998, the EPA issued the "NOx SIP Call"
  rule that imposed a NOx
  emission budget for emission sources in Wisconsin. The NOx SIP Call was premised
  upon two
  theories: the downwind contribution of Wisconsin air emissions to existing one-hour
  ozone
  nonattainment areas and the downwind contribution of Wisconsin air emissions
  to potential future
  eight-hour nonattainment areas.
  On March 2, 2000, the Court of Appeals for the District of Columbia held that
  the EPA "acted
  unlawfully by including Wisconsin in the [NOx] SIP Call" for purposes of
  the State's alleged impacts
  to downwind one-hour ozone nonattainment areas. However, that portion of the
  rule concerning
  Wisconsin's alleged impacts on downwind, eight-hour ozone nonattainment areas
  has been stayed. If
  that stay is lifted and that portion of the NOx SIP Call concerning eight-hour
  ozone nonattainment
  areas is upheld, the resulting NOx emission budget for Wisconsin could potentially
  affect the level of
  permissible NOx emissions from Blount, Columbia, and WCCF. The new NOx limits
  could increase
  capital expenditures and operating and maintenance expenses at those facilities.
  Clean Air Interstate Rule. In January 2004, the EPA proposed Interstate Air
  Quality rules that would
  mitigate the transport of fine particulate matter and ozone pollution by imposing
  emission reduction
  requirements on SO2 and NOx in 29 eastern states and the District of Columbia.
  These reductions
  would be implemented in two phases through a cap-and-trade system. SO2 emissions
  would be
  reduced by 3.6 million tons by 2010 (approximately 40% below current levels)
  and by another
  2 million tons per year when the rules are fully implemented (approximately
  70% below current
  levels). Emissions of NOx would be cut by 1.5 million tons by 2010 (approximately
  55% below
  current levels) and 1.8 million tons annually in 2015 (approximately 65% below
  current levels). The
  EPA is expected to finalize the rule by the end of 2005. Complying with the
  rule would likely increase
  capital expenditures as well as operating and maintenance expenses at Blount
  and Columbia.
  In a separate but closely related action, the EPA also proposed a Utility Mercury
  Reduction Rule for
  controlling mercury emissions from utility boilers. The draft rule proposes
  several control options.
  The EPA is expected to finalize the rule by the end of 2004. Complying with
  the rule would likely
  increase capital expenditures as well as operating and maintenance expenses
  at Blount and Columbia.
  Columbia. In December 2000, February 2001, June 2002, and January 2003, Alliant
  received
  Requests for Information from the EPA seeking information concerning Columbia's
  compliance with
  the Clean Air Act. The requests appear to be part of an EPA initiative to assess
  the regulatory
  consequences of past investments in utility generation, energy efficiency, maintenance,
  and
  environmental protection within the utility sector. WPL, the plant operator,
  has responded to all
  requests, but MGE has not been informed of any response from the EPA. The plant
  operator has not
  informed MGE of any definitive increase in capital expenditures or operating
  and maintenance
  expenses arising from the EPA's inquiry.Water quality
  MGE is subject to water-quality regulations issued by the DNR. These regulations
  include
  categorical-effluent discharge standards and general water-quality standards.
  The regulations limit
  discharges from MGE's plants into Lake Monona and other Wisconsin waters.
  The categorical-effluent discharge standards require each discharger to use
  effluent-treatment
  processes equivalent to categorical "best practicable" or "best
  available" technologies under
  compliance schedules established under the Federal Water Pollution Control Act.
  The DNR has
  published categorical regulations for chemical and thermal discharges from electric-steam
  generating
  plants.
  On March 25, 2004, the State filed a complaint in state court against Alliant,
  as operator of Columbia,
  seeking forfeitures, penalties, and injunctive relief for exceeding limits in
  its Wisconsin Pollutant
  Discharge Elimination System permit. In addition, Alliant and WPL were named
  in a Federal Water
  Pollution Control Act citizen suit action alleging similar violations. In July
  2004, Alliant, WDOJ, and
  WELA settled the matter for $150,000 and a commitment to implement upgrades
  to the facility's
  wastewater system. MGE owns a 22% share of Columbia along with the other co-owners
  Alliant and
  WPSC. MGE has recorded a liability at June 30, 2004, for its pro-ratable share
  of the monetary
  settlement.
  EPA has promulgated new rules establishing performance standards for cooling
  water intake
  structures at large power plants. The rule is currently subject to a legal challenge
  by a coalition of
  states and environmental groups. The rule, as currently drafted, applies to
  facilities that can withdraw
  at least 50 million gallons per day of water and use 25% or more of that withdrawal
  for cooling. The
  EPA water rule may have an impact on MGE's Blount plant that may result in additional
  capital
  expenditures. MGE cannot predict at this time what the impact would be.Solid waste
  MGE is listed as a potentially responsible party for a site the EPA has placed
  on the national priorities
  Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing
  and processing waste oil for
  several years. This site requires clean up under the Comprehensive Environmental
  Response,
  Compensation and Liability Act. A group of companies, including MGE, is currently
  working on
  cleaning up the site.
  Management believes that its share of the final cleanup costs will not result
  in any materially adverse
  effects on MGE's operations, cash flows, or financial position. Insurance may
  cover a portion of the
  cleanup costs. Management believes that the cleanup costs not covered by insurance
  will be recovered
  in current and future rates. At December 31, 2003, MGE accrued a $0.1 million
  liability for this
  matter.
  As a result of the Blount 69-kV transmission substation expansion, coal tar-contaminated
  soil and
  debris within the excavation zone were removed and disposed of in accordance
  with a DNR-approved
  "Removal Action Work Plan." MGE has paid $1.4 million in expenses
  to complete this cleanup, and
  expects to recover cleanup costs in future electric rates. Carrying costs associated
  with the cleanup
  expenditures will not be recoverable.Environmental Cooperative Agreement
  On September 26, 2002, MGE and the DNR signed an Environmental Cooperative Agreement
  under
  which MGE committed to work toward superior environmental performance at its
  Blount plant.
  Among other things, the five-year agreement requires MGE to evaluate combustion
  efficiency
  improvements, enhance new pollution control on Boiler 8, increase use of alternative
  fuels, attempt to
  increase beneficial reuse of fly ash and bottom ash, study cogeneration possibilities,
  and upgrade
  MGE's environmental management system to be consistent with ISO 14001 Standards.
  Implementing
  these and other actions required by the agreement will increase capital expenditures
  and operating and
  maintenance expenses over the next five years.
  As part of the agreement, MGE conducted a voluntary audit of Blount's compliance
  with various
  environmental laws. The auditors identified several conformance exceptions which
  were addressed
  and disclosed pursuant to a state statute that provides for qualified civil
  enforcement immunity. MGE
  believes that it has adequately responded to the audit's findings and does not
  anticipate any further
  action by state regulators.e. Chattel Paper Agreement - 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 $7.5 million
  of the financing
  program receivables, until February 28, 2005. At June 30, 2004, MGE had sold
  an outstanding
  $6.3 million interest in these receivables, which MGE accounted for as a sale
  under SFAS No. 140,
  Accounting for Transfers and Servicing of Financial Assets and Extinguishment
  of Liabilities - A
  Replacement of FASB Statement No. 125. MGE retains the servicing responsibility
  for these
  receivables.
  MGE maintains responsibility for collecting and remitting loan payments from
  customers to the
  financial institution and does not retain any interest in the assets sold to
  the financial institution. MGE
  has recorded a servicing asset of $0.3 million and $0.2 million as of June 30,
  2004 and 2003,
  respectively.
  The loan assets are sold to the financial institution at cost, which approximates
  fair value in view of
  their market rates of interest. During the six months ended June 30, 2004 and
  2003, MGE received
  approximately $0.6 million and $0.4 million, respectively, of cash from the
  financial institution for the
  sale of loan assets. During those same periods, payments of $1.3 million and
  $1.0 million,
  respectively, were made by MGE to the financial institution.f. West Campus Cogeneration Facility.Petition for Judicial Review
  On November 6, 2003, Friends of Responsible Energy (FORE), an unincorporated
  citizen association,
  filed a petition with the Dane County, Wisconsin, Circuit Court seeking judicial
  review of various
  decisions made by the PSCW, the DNR, the UW, and the Wisconsin Department of
  Administration in
  connection with the WCCF. Those decisions include the grant of a CPCN by the
  PSCW and various
  environmental determinations made by the governmental parties. FORE alleges
  that those decisions
  were arbitrary, capricious, and contrary to law and seeks to have them set aside
  or remanded for
  further review.
  MGE Energy, along with MGE and MGE Power West Campus, has intervened as a party
  to the
  proceeding. MGE Energy believes the suit is not likely to cause any material
  adverse change in the
  WCCF or its construction schedule.WCCF Purchase Commitments
  MGE has entered into various contracts for the purchase of gas and steam turbines
  and miscellaneous
  equipment for the WCCF. These contracts have been assigned or are in the process
  of being assigned
  to MGE Construct. MGE Construct has entered into a contract to purchase chiller
  equipment. All
  contracts are summarized in the following table.

|*(In thousands)*               | Contract Total |  | Payments through
      June 30, 2004 |  | Remaining
      
      Contract Amounts
|------------------------------ | -------------- |  | ------------------------------------ |  | ---------------------------------------
|Gas turbines                   | $ 30,190       |  | $ 30,060                             |  | $ 130                                  
|Steam turbine                  | 7,805          |  | 7,805                                |  | -                                      
|Heat-recovery steam generators | 11,993         |  | 11,993                               |  | -                                      
|Chiller equipment              | 6,689          |  | 6,020                                |  | 669                                    
|Project management             | 8,400          |  | 6,001                                |  | 2,399                                  
|Miscellaneous equipment        | 31,161         |  | 21,366                               |  | 9,795                                  
|Total                          | $ 96,238       |  | $ 83,245                             |  | $ 12,993                               

15. Subsequent Events.Fuel Credit
  On July 22, 2004, the PSCW decided to reopen MGE's current rate order docket
  to commence a limited
  scope proceeding under fuel rules to determine if a fuel credit is required
  for 2004. Under fuel rules, if
  electric fuel costs are outside a 3.0% annual threshold set by the PSCW, MGE
  may request a fuel
  surcharge or may be required to return a fuel credit to its customers. If a
  determination is made by the
  PSCW in this proceeding that a fuel credit is required, the time period for
  determining the credit begins
  July 22, 2004.
  The Company is unable to estimate the financial impact of these proceedings
  at this time.Credit Agreement
  On July 14, 2004, MGE entered into a $45 million, three-year, unsecured revolving
  credit agreement
  with a group of banks. It is expected that the credit agreement will be used
  principally to support MGE's
  commercial paper program. Interest rates on the advances under the credit agreement
  are based on either
  the London Interbank Offering Rate (LIBOR) or prime plus, in the case of the
  LIBOR-based rate, an
  adder based upon the credit rating of MGE at the time of borrowing. The credit
  agreement requires that
  MGE maintain a ratio of consolidated indebtedness to consolidated total capitalization
  of not more that
  0.65 to 1.00. That ratio excludes amounts attributable to MGE Power West Campus,
  which is
  consolidated into MGE as a result of the application of FIN No. 46R. The credit
  agreement also includes
  restrictions on mergers, asset sales, and liens. The new credit facility replaces
  $40 million of unsecured,
  uncommitted lines of credit.Wind Power Purchase Agreement
  On July 16, 2004, MGE signed a 20-year power purchase agreement for 40 MW of
  wind energy to be
  located near Waupun, Wisconsin. The agreement increases MGE's wind power output
  capacity from
  12 MW to 52 MW.Power the Future Participation
  On July 23, 2004, a petition was filed by one individual in Dane County Circuit
  Court challenging the
  PSCW's order authorizing MGE's participation in Units 1 and 2 of WE Energies'
  Power the Future Plan.Item 2. Management's Discussion and Analysis of Financial Condition and Results
  of Operations.General
  MGE Energy is a holding company operating through subsidiaries in three business
  segments: electric utility
  operations, gas utility operations, and nonregulated energy operations. Our
  principal subsidiary is MGE, which
  conducts our electric utility and gas utility operations. MGE generates and
  distributes electricity to nearly
  132,000 customers in Dane County, Wisconsin, including the city of Madison,
  and purchases and distributes
  natural gas to more than 129,000 customers in the Wisconsin counties of Columbia,
  Crawford, Dane, Iowa,
  Juneau, Monroe, and Vernon. Other subsidiaries, which constitute our nonregulated
  energy operations, have
  been formed to own and construct new electric generating capacity. Those subsidiaries
  are currently undertaking
  the construction of a 150-MW, electricity, steam, and chilled-water cogeneration
  facility on the UW campus.
  MGE's electric and gas utility operations represent a substantial part of our
  assets, liabilities, revenues, and
  expenses. Consequently, the following discussion focuses mainly on the results
  of operations and financial
  condition of MGE.Executive Summary - MGE Energy and MGE
  In the second quarter of 2004, our utility operations experienced an increase
  in electric retail sales volumes of
  2.8% while retail gas deliveries decreased 10.9%. Electric revenues increased
  $2.8 million for the three months
  ended June 30, 2004, due to the increase in retail volumes as well as increases
  in rates, while gas revenues
  decreased $0.7 million due to a decline in gas deliveries. Total operation and
  maintenance expenses increased
  $1.2 million due to higher uncollectible accounts, higher distribution and maintenance
  costs, and higher
  administrative costs. MGE Energy also experienced lower interest costs as a
  result of the generally lower
  interest rates for our variable-rate debt during the quarter resulting in a
  $0.2 million decrease in interest expense.
  We anticipate relying on short- and long-term borrowings to support construction
  of WCCF and the associated
  capital expenditures. We also anticipate a need for additional equity capital
  during 2004 beyond the amounts we
  are able to raise through our Dividend Reinvestment and Direct Stock Purchase
  Plan.
  Our primary focus today and for the foreseeable future is our core utility customers
  at MGE. MGE continues to
  face the challenge of providing its customers with reliable power at competitive
  prices. MGE plans to meet this
  challenge by building more efficient generation projects and continuing its
  efforts to control operational costs.
  We believe it is critical to maintain both a strong credit standing and financial
  strength in MGE as well as in the
  parent company in order to accomplish these goals.Results of Operations
  Substantially all of MGE Energy's results of operations are attributable to
  the operations of its utility subsidiary
  MGE. MGE Energy's other significant business activity relates to the development
  of a cogeneration project,
  which is under construction. Consequently, the following discussion focuses
  mainly on MGE's results of
  operations for the three and six months ended June 30, 2004, in comparison to
  the same periods in the prior
  year.Electric Utility OperationsElectric sales and revenues
  The following tables compare MGE's electric retail revenues and electric kWh
  sales by customer class for the
  periods indicated:

|*(In thousands)*         | Revenues                          |  | kWh Sales                        
|------------------------ | --------------------------------- |  | ---------------------------------
|                         | Three months ended
      June 30, |  | Three months ended
      June 30,
|                         | 2004                              |  | 2003                             
|Residential              | $ 20,086                          |  | $ 18,968                         
|Commercial               | 30,889                            |  | 28,878                           
|Industrial               | 4,358                             |  | 4,181                            
|Other - retail/municipal | 4,894                             |  | 4,483                            
|Total retail             | 60,227                            |  | 56,510                           
|Sales for resale         | 590                               |  | 1,582                            
|Other revenues           | 609                               |  | 515                              
|Total                    | $ 61,426                          |  | $ 58,607                         

|*(In thousands)*         | Revenues                        |  | kWh Sales                      
|------------------------ | ------------------------------- |  | -------------------------------
|                         | Six months ended
      June 30, |  | Six months ended
      June 30,
|                         | 2004                            |  | 2003                           
|Residential              | $ 41,754                        |  | $ 38,433                       
|Commercial               | 58,187                          |  | 55,165                         
|Industrial               | 7,793                           |  | 7,636                          
|Other - retail/municipal | 8,702                           |  | 8,281                          
|Total retail             | 116,436                         |  | 109,515                        
|Sales for resale         | 830                             |  | 4,052                          
|Other revenues           | 4,071                           |  | 1,139                          
|Total                    | $ 121,337                       |  | $ 114,706                      

Electric operating revenues were up $2.8 million or 4.8% for the three months
  ended June 30, 2004, and
  $6.6 million or 5.8% for the six months ended June 30, 2004, compared to the
  same periods in the prior year.
  The increase was due to the following factors:

|*(In millions)*                     | Three months ended June 30,
      2004 |  | Six months ended
      
      June 30, 2004
|----------------------------------- | -------------------------------------- |  | -------------------------------------------
|Increase in Retail Rates            | $2.2                                   |  | $3.7                                       
|Increase in Retail Volume           | 1.5                                    |  | 3.3                                        
|Increase in Other Electric Revenues | 0.1                                    |  | 2.9                                        
|(Decrease) in Sales for Resale      | (1.0)                                  |  | (3.3)                                      
|                                    | $2.8                                   |  | $6.6                                       

Rates. The PSCW authorized increases in MGE's electric rates effective
  January 14, 2004, and March 1, 2003, to cover rising fuel costs for electric
  generation and increased system demands. Retail revenues reflect a fuel credit
  in the amount of $3.1 million, which was refunded to customers in the first
  quarter of 2004. The liability for this fuel credit was previously accrued from
  August 2003 through January 2004 as a decrease to other electric revenues (see
  Footnote 4 - Rate Matters).Volume. There was a 3.0% increase in total retail sales volumes for the
  six months ended June 30, 2004, which is mainly attributable to increases in
  sales from large commercial customers and sales from residential customers.Other effects. Other electric revenues increased for the six months ended
  June 30, 2004, compared to the same period in the prior year due to the reversal
  of the fuel credit liability, which was refunded to customers in the first quarter
  of 2004. The actual fuel refund decreased retail revenues and is offset by an
  increase in other electric revenues.Sales for resale. The decrease in sales for resale reflects lower sales
  volume due to the expiration of a contract with Alliant to sell 25 MW of electric
  capacity. The contract was in effect from January through August 2003. Sales
  for resale also include transactions conducted on the PJM market. On May 1,
  2004, PJM began managing the flow of wholesale electricity over ComEd's transmission
  lines and administering open, competitive wholesale electricity trading markets.
  MGE has three
  purchase power agreements that are impacted by ComEd's integration into the
  PJM market. MGE has recorded certain transactions on the PJM market on a net
  basis resulting in a $1.2 million reduction to sales for resale and purchased
  power expense for the three and six months ended June 30, 2004.Electric fuel and purchased power
  Fuel used for electric generation increased $2.3 million or 24.4% during the
  three months ended June 30, 2004, and $3.0 million or 14.9% during the six months
  ended June 30, 2004, compared to the same periods in the prior year. This increase
  is primarily due to the increase in electric generation at MGE's base-load plants.
  MGE's internal generation increased 7.1% for the six months ended June 30, 2004,
  mainly due to a 16.5% increase during the first quarter of 2004. This large
  increase was the result of the Columbia facility being off line frequently during
  the first quarter of 2003 but back on line for the first quarter of 2004.
  Purchased power expense increased $0.3 million for the three months ended June
  30, 2004. This increase represents a 11.0% increase in the per-unit cost, offset
  by a 8.0% decrease in the volume of purchased power. Purchased power expense
  decreased $2.1 million for the six months ended June 30, 2004. The decrease
  is due to a 15.0% decrease in the volume of purchased power offset by a 8.0%
  increase in per-unit cost. These aforementioned fluctuations include a $1.2
  million reduction to purchased power expense which resulted from recording certain
  transactions on the PJM market on a net basis.Gas Utility OperationsGas deliveries and revenues
  The following tables compare MGE's gas retail revenues and gas delivered by
  customer class for the periods indicated:

|                                       | Revenues                          |  | Therms delivered                 
|-------------------------------------- | --------------------------------- |  | ---------------------------------
|                                       | Three months ended
      June 30, |  | Three months ended
      June 30,
|*(In thousands)*                       | 2004                              |  | 2003                             
|Residential                            | $ 13,362                          |  | $ 13,893                         
|Commercial/industrial                  | 8,984                             |  | 9,203                            
|Total retail                           | 22,346                            |  | 23,096                           
|Gas transportation                     | 653                               |  | 717                              
|Other revenues                         | 307                               |  | 228                              
|Total                                  | $ 23,306                          |  | $ 24,041                         
|Heating degree days
      (normal 861) |                                   |  |                                  



|                                         | Revenues                        |  | Therms delivered               
|---------------------------------------- | ------------------------------- |  | -------------------------------
|                                         | Six months ended
      June 30, |  | Six months ended
      June 30,
|*(In thousands)*                         | 2004                            |  | 2003                           
|Residential                              | $ 56,811                        |  | $ 56,158                       
|Commercial/industrial                    | 38,440                          |  | 37,249                         
|Total retail                             | 95,251                          |  | 93,407                         
|Gas transportation                       | 1,734                           |  | 1,768                          
|Other revenues                           | 1,009                           |  | 1,261                          
|Total                                    | $ 97,994                        |  | $ 96,436                       
|Heating degree days
      (normal 4,406) |                                 |  |                                

Gas revenues decreased $0.7 million, or 3.1%, for the three months ended June
  30, 2004, and increased $1.6 million or 1.6% for the six months ended June 30,
  2004, compared to the same periods in the prior year.
  These changes are related to the following factors:

|*(In millions)*             | Three months ended June 30,
      2004 |  | Six months ended June 30,
      2004
|--------------------------- | -------------------------------------- |  | ------------------------------------
|Gas costs/rates             | $1.6                                   |  | $7.8                                
|Gas deliveries              | (2.4)                                  |  | (6.0)                               
|Other miscellaneous effects | 0.1                                    |  | (0.2)                               
|Total                       | ($0.7)                                 |  | $1.6                                
|Average rate per therm      | $0.998                                 |  | $0.915                              

Gas costs/rates. The PSCW authorized increases in MGE's gas rates effective
  January 14, 2004, and March 1, 2003, to cover increased system demands. The
  average rate per therm for the six months ended June 30, 2004, increased 9.0%
  compared to the same period in the prior year. Retail gas deliveries. The 6.4%
  decrease in retail gas deliveries for the six months ended June 30, 2004, was
  mainly the result of cooler temperatures, reflected by a 6.8% decrease in the
  number of heating degree days during the six months ended June 30, 2004, compared
  to the same period in the prior year.Natural gas purchased
  For the three months ended June 30, 2004, natural gas purchases decreased by
  $0.5 million, mainly due to a 10.9% decrease in the volume of gas purchased
  during the period. For the six months ended June 30, 2004, natural gas purchases
  increased by $0.4 million due to a $2.9 million increase in the cost of natural
  gas offset by a $2.5 million decrease in the volume of gas purchased.Other Nonregulated Revenues - MGE Energy
  For the three and six months ended June 30, 2004, MGE Construct received $0.7
  million and $1.4 million, respectively, from the State. These payments were
  for services rendered in relation to MGE Construct's role as EPC contractor
  for the WCCF.Operations and Maintenance Expense - MGE
  Operations and maintenance expense increased $1.2 million and $1.7 million for
  the three and six months ended June 30, 2004, compared to the same periods in
  the prior year, respectively. These increases are primarily attributable to
  increases in electric production expenses, overhead line maintenance expense,
  and administrative and customer service expenses. These increases are partially
  offset by reductions in operational expenses at Columbia.Depreciation and Amortization - MGE Energy and MGE
  For the three months ended June 30, 2004, depreciation expense increased by
  $0.1 million or 1.7% compared to the same period in the prior year. For the
  six months ended June 30, 2004, depreciation expense increased $0.5 million
  or 3.8% from the same period in the prior year. These increases are attributable
  to an increase in the gross property, plant, and equipment balance between the
  two periods.Other General Taxes - MGE Energy
  The 8.8% increase in other general taxes for MGE Energy for both the three and
  six months ended June 30, 2004, compared to the same periods in the prior year
  is due to an increase in MGE's license fee tax. Wisconsin's license fee tax
  is in lieu of property tax on utility property. The tax is estimated and prepaid
  one year ahead of expense recognition, then finally determined as a percentage
  of adjusted operating revenues from the prior calendar year and amortized to
  expense on a straight-line basis.Income Taxes - MGE Energy
  MGE Energy's effective income tax rate is 39.1% for the six months ended June
  30, 2004. This is comparable to the effective income tax rate for the six months
  ended June 30, 2003 (39.3%).Other Income - MGE Energy
  For the three months ended June 30, 2004, MGE Energy's other income increased
  $0.3 million due to an increase in ATC earnings, compared to the prior year,
  and a gain on investments. For the six months ended June 30, 2004, other income
  increased $1.0 million. Factors contributing to this increase include a gain
  on the sale of assets of $0.6 million, an increase in ATC earnings of $0.2 million,
  and a gain on investments.Interest Expense - MGE Energy
  During the three and six months ended June 30, 2004, MGE Energy's net interest
  expense decreased $0.2 million compared to the same periods in the prior year.
  The decrease is due to lower interest rates on variable rate long-term debt.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 and six months ended
  June 30, 2004. Further discussion of the contractual obligations and commercial
  commitments is included in MGE Energy's and MGE's annual reports on Form 10-K
  for the year ended December 31, 2003.Liquidity and Capital ResourcesCash Flows
  The following summarizes cash flows during the six months ended June 2004 and
  2003, respectively:

|                             | MGE Energy |  | MGE     
|---------------------------- | ---------- |  | --------
|*(Thousands of dollars)*     | 2004       |  | 2003    
|Cash provided by (used for): |            |  |         
|Operating activities         | $ 55,290   |  | $ 55,266
|Investing activities         | (52,625)   |  | (56,467)
|Financing activities         | (1,795)    |  | 8,522   

Cash Provided by Operating Activities
  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 MGE Energy's operating activities was $55.3 million for the
  six months ended June 30, 2004. Current assets decreased $21.3 million for the
  six months ended June 30, 2004, primarily due to decreases in unbilled and billed
  receivables ($12.9 million), stored natural gas and materials ($3.8 million),
  and prepayments ($4.6 million). Current liabilities increased $0.8 million for
  the six months ended June 30, 2004, primarily due to a increase in accounts
  payable.
  As of June 30, 2004, MGE Energy had a working capital deficit (current liabilities
  exceed current assets) of $11.9 million. MGE Energy is currently financing the
  majority of capital commitments of WCCF with a shortterm bank line of credit.
  During the next year, MGE Energy plans to issue both long-term debt and equity
  securities to reduce the existing short-term bank loans and to fund future capital
  expenditures.Cash Used for Investing Activities
  Cash used for MGE Energy's investing activities decreased $3.8 million or 6.8%
  for the six months ended June 30, 2004, compared to the same period in the prior
  year. This decrease is primarily attributable to a $3.7 million decrease in
  capital expenditures for the six months ended June 30, 2004, compared to the
  same period in the prior year. Capital expenditures related to WCCF decreased
  $0.4 million for the six months ended June 30, 2004, compared to the same period
  in the prior year. In 2003, MGE Energy's capital expenditures related to WCCF
  included the State's portion. In November 2003, the State reimbursed MGE Construct
  for its share of construction costs incurred throughout 2003. MGE Construct
  now bills the State monthly for its share of the cost of WCCF in accordance
  with the EPC Agreement. MGE utility plant additions also decreased $3.3 million
  during the six months ended June 30, 2004, compared to the same period in the
  prior year. Additional factors contributing to a decrease in cash used for investing
  activities for the six-month period ended June 30, 2004, include $0.6 million
  in proceeds for the sale of property, a $0.6 million reduction in advances to
  ATC related to WCCF, and $0.7 million in additional cash received from other
  investing activities. These changes were offset by two additional capital contributions
  made by MGE to ATC for the six months ended June 30, 2004. Total capital contributions
  to ATC for the six-month period were $1.8 million.
  Cash used for MGE's investing activities increased $26.4 million or 98.6% for
  the six months ended June 30, 2004, compared to the same period in the prior
  year. As of December 31, 2003, MGE Power West Campus is being consolidated into
  MGE in accordance with FIN No. 46R (see Footnote 9.c.) Therefore, for the six
  months ended June 30, 2004, MGE's cash used for investing activities includes
  the capital expenditures related to WCCF. MGE also made two additional capital
  contributions to ATC totaling $1.8 million. These uses of cash were offset by
  a $0.6 million reduction in advances to ATC related to WCCF, $0.7 million in
  additional cash provided by other investing activities, and a $3.3 million reduction
  in utility plant additions.Cash Provided by (Used for) Financing and Capital Resources
  Cash used for MGE Energy's financing activities was $1.8 million for the six
  months ended June 30, 2004, compared to cash provided by financing activities
  of $8.5 million for the same period in the prior year. During the six months
  ended June 30, 2004, MGE recorded net debt repayments of $2.8 million compared
  to net borrowings of $11.9 million for the same period in the prior year. During
  the second quarter of 2004, MGE repaid $5.0 million of the current portion of
  their long-term debt, offset by interim borrowings of $2.2 million. Proceeds
  from the issuance of common stock increased $5.1 million for the six months
  ended June 30, 2004, when compared to the same period in the prior year. This
  increase is a result of shares issued under the Distribution Agreement through
  BOCM and increased shares issued through the Dividend Reinvestment and
  Direct Stock Purchase Plan. Cash dividends for the six months ended June 30,
  2004, increased $0.7 million or 5.5% compared to the same period in the prior
  year.
  MGE Energy has an established line of credit in the amount of $60 million for
  the temporary financing of the capital commitments for the WCCF. At June 30,
  2004, MGE Energy had $33.4 million drawn on this line of credit and recorded
  as bank loans outstanding.
  Cash provided by MGE's financing activities increased $26.7 million for the
  six months ended June 30, 2004, compared to the same period in the prior year.
  This change is primarily the result of the consolidation of MGE Power West Campus
  into MGE in accordance with FIN No. 46R. MGE's financing activities includes
  an equity contribution made from MGE Energy to WCCF for $26.8 million and $0.3
  million of affiliate financing for WCCF. Cash dividends to the parent decreased
  $5.4 million for the six months ended June 30, 2004, compared to the same period
  in the prior year. These changes were offset by additional debt repayments of
  $6.5 million. Bank lines of credit available to MGE as of June 30, 2004, were
  $40 million. MGE also has a letter of credit with a commercial bank (established
  as collateral for equipment purchases) that ATC will use to provide necessary
  system upgrades for the WCCF.Capitalization Ratios
  MGE Energy's capitalization ratios were as follows:

|                                                        | MGE Energy         
|------------------------------------------------------- | -------------------
|                                                        | June 30,
      2004
|Common shareholders' equity                             | 53.1%              
|Long-term debt*                                         | 40.6%              
|Short-term debt                                         | 6.3%               
|**Includes the current portion
      of long-term debt*

MGE Energy's and MGE's Capital Requirements
  MGE Energy's and MGE's liquidity is primarily affected by their capital requirements.
  During the six months ended June 30, 2004, capital expenditures for MGE Energy
  and MGE totaled $50.0 million, which included $29.3 million of capital expenditures
  for WCCF and $20.7 million of capital expenditures for utility operations. MGE
  Energy's and MGE's 2004 capital commitments related to WCCF are estimated to
  be $27.1 million. MGE Energy plans to finance these capital expenditures through
  the issuance of both debt and equity securities. MGE Energy has a current shelf
  registration statement for the sale of $176 million of equity and debt securities
  that is effective with the SEC. MGE Energy expects to use the proceeds from
  securities sold under the registration statement to finance future capital expenditures,
  redeem or refund debt incurred in connection with the WCCF, or for other general
  corporate purposes.
  MGE anticipates 2004 regulated capital expenditures will be approximately $45
  million. MGE uses its internally generated funds and short-term debt to satisfy
  a majority of its capital requirements. For larger capital investments, MGE
  would expect to finance these with additional long-term debt and capital contributions
  from MGE Energy.
  The following table shows MGE's current credit ratings. MGE Energy is not yet
  rated because it has not issued any debt securities.

|                                                                              | Standard & Poor's             |  | Moody's                      
|----------------------------------------------------------------------------- | ----------------------------- |  | -----------------------------
|First Mortgage Bonds
      Unsecured Medium Term Notes
      Commercial Paper | AA
      
      AA-
      A1+ |  | Aa2
      
      Aa3
      P1

MGE's access to the capital markets, including the commercial paper market and
  its financing costs in those markets, is dependent on its securities' ratings.
  None of MGE's borrowings is subject to default or prepayment due to downgrading
  of securities' ratings, although MGE's future interest expense may be affected
  by a change in those ratings.
  WCCF
  The cost to construct WCCF is expected to be approximately $185 million in total,
  of which MGE Power West Campus' portion will be $105 million. MGE Construct
  bills the State monthly for its share of the cost of WCCF in accordance with
  the EPC Agreement. As of June 30, 2004, MGE Power West Campus had incurred $77.9
  million of costs on the project, which is reflected in construction work in
  progress on MGE Energy's and MGE's consolidated balance sheets. For the six
  months ended June 30, 2004, MGE Construct received a service fee of $1.4 million
  (pretax) from the State in relation to its role as EPC contractor for WCCF.
  The total fee of $5.0 million will be recognized as services are rendered and
  will be collected over a 22-month period. MGE Energy, MGE Power West Campus,
  and MGE Construct have assumed certain risks related to some of the executed
  agreements. In the EPC Agreement, MGE Power West Campus is responsible for cost
  overruns and
  MGE Construct is responsible for the entire construction process for the facility,
  including paying liquidated damages relating to failure to achieve the Mechanical
  Completion Date Guarantee and/or the Acceptance Test Capacity Guarantee. MGE
  Energy is the guarantor of MGE Construct's obligations under the EPC Agreement.
  Adoption of Accounting PrinciplesSFAS No. 143
  In 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.
  SFAS No. 143 provides
  accounting requirements for retirement obligations associated with tangible
  long-lived assets. MGE Energy and
  MGE were required to adopt SFAS No. 143 as of January 1, 2003. Retirement obligations
  associated with
  long-lived assets included within the scope of SFAS No. 143 are those for which
  there is a legal obligation
  under existing or enacted law, statute, written or oral contract, or by legal
  construction under the doctrine of
  promissory estoppel.
  Effective January 1, 2003, MGE recorded an obligation for the fair value of
  its legal liability for asset retirement
  obligations associated with removing an electric substation, a combustion turbine
  generating unit, wind
  generating facilities, and the photovoltaic generating facilities, all of which
  are located on property not owned
  by MGE. At June 30, 2004, this liability is estimated at $1.4 million and included
  in other deferred liabilities.
  At the point the liability for asset retirement is incurred, SFAS No. 143 requires
  capitalization of the costs to the
  related asset, property, plant, and equipment, net. For asset retirement obligations
  existing at the time of
  adoption, the statement requires capitalization of costs at the level that existed
  at the point of incurring the
  liability. These capitalized costs are depreciated over the same period as the
  related property. At the date of
  adoption, the depreciation expense for past periods was recorded as a regulatory
  asset in accordance with SFAS
  No. 71 because MGE believes the PSCW will allow it to recover these costs in
  future rates. Current depreciation
  of the asset retirement cost is also being deferred as a regulatory asset under
  SFAS No. 71. MGE applies SFAS
  No. 71 and recognizes regulatory assets or liabilities for the timing differences
  between when we recover legal
  asset retirement obligations in rates and when MGE would recognize these costs
  under SFAS No. 143.
  The initial liability is accreted to its present value each period. MGE defers
  this accretion as a regulatory asset
  based on its determination that these costs can be collected from customers.
  MGE also may have asset retirement obligations relating to various assets, such
  as combustion turbine
  generating units, small distributed generating units, aboveground and underground
  storage tanks, facilities
  located at Columbia (co-owned with Alliant and Wisconsin Public Service Corporation),
  and certain electric and
  gas distribution facilities. These facilities are generally located on property
  owned by third parties, on which
  MGE is permitted to operate by lease, permit, easement, license, or service
  agreement, but also include some
  facilities located on property owned by MGE. The asset retirement obligations
  associated with these facilities
  cannot be reasonably determined due to the indeterminate life of the related
  assets.
  The following table shows costs as of December 31, 2003, and changes to the
  asset retirement obligation and
  accumulated depreciation during the six months ended June 30, 2004.

|(In thousands)                | (a) Original Asset
      Retirement
      Obligation |  | (b)
      
      Accumulated
      Accretion |  | (c)
      
      (a + b)
      Asset
      Retirement
      Obligation |  | (d)
      
      Accumulated
      Depreciation-
      Related Asset
|----------------------------- | ---------------------------------------------------- |  | -------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------
|Balance, December 31, 2003    | $ 686                                                |  | $ 675                                        |  | $ 1,361                                                                |  | $ 175                                                               
|Changes through June 30, 2004 | -                                                    |  | 43                                           |  | 43                                                                     |  | 13                                                                  
|Balance, June 30, 2004        | $ 686                                                |  | $ 718                                        |  | $ 1,404                                                                |  | $ 188                                                               

As of June 30, 2004, MGE's regulatory asset, included in deferred charges, is
  the total accumulated accretion
  ($0.7 million) and accumulated depreciation ($0.2 million) or $0.9 million.
  Accumulated costs of removal that are non-SFAS 143 obligations are classified
  within the financial statements
  as regulatory liabilities. At June 30, 2004, and December 31, 2003, there were
  $17.7 million and $18.2 million
  of these costs recorded as regulatory liabilities within the financials statements,
  respectively.
  FIN No. 45.
  In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure
  Requirements for
  Guarantees, Including Indirect Guarantees of Indebtedness of Others. This interpretation
  provides the
  disclosures to be made by a guarantor in interim and annual financial statements
  about obligations under certain
  guarantees. The interpretation also clarifies that a guarantor is required to
  recognize, at the inception of a
  guarantee, a liability for the fair value of the obligation.
  MGE makes available to qualifying customers a financing program for the purchase
  and installation of
  energy-related equipment that will provide more efficient use of utility service
  at the customer's property. MGE
  is party to a chattel paper purchase agreement with a financial institution
  under which it can sell or finance an
  undivided interest with recourse, in up to $7.5 million of the financing program
  receivables, until February 28,
  2005. Loans totaling $0.6 million have been sold to the financial institution
  during 2004. The liability for the
  fair value of the obligation associated with these loans is not material.
  MGE would be required to perform under the guarantee if the customer defaulted
  on its loan. The energy-related
  equipment installed at the customer sites is used to secure the customer loans.
  The length of the MGE guarantee
  to the financial institution varies from one to ten years depending on the term
  of the customer loan. Principal
  payments for the next five years on the loans are $0.4 million in 2004, $0.9
  million in 2005, 2006, and 2007,
  and $1.0 million in 2008.FIN No. 46R.
  In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
  Entities - An Interpretation of
  ARB No. 51. In December 2003, the FASB issued the updated and final interpretation,
  FIN No. 46R. FIN
  No. 46R requires that an equity investor in a VIE have significant equity at
  risk (generally a minimum of 10%,
  which is an increase from 3% required under the previous guidance) and hold
  a controlling interest, evidenced
  by voting rights, and absorb a majority of the entity's expected losses, receive
  a majority of the entity's expected
  returns, or both. If the equity investor is unable to evidence these characteristics,
  the entity that retains these
  ownership characteristics will be required to consolidate the VIE as the primary
  beneficiary. FIN No. 46 was
  applicable immediately to VIEs created or obtained after January 31, 2003. FIN
  No. 46R was effective on
  December 31, 2003, for interests in entities that were previously considered
  special purpose entities under
  then-existing authoritative guidance.
  MGE Power West Campus is a VIE of MGE pursuant to FIN No. 46R, as the equity
  investment by MGE
  Energy in MGE Power West Campus at December 31, 2003, was not sufficient to
  permit the entity to finance its
  activities without additional support. MGE concluded a VIE relationship exists
  due to the long-term lease
  arrangement between MGE and MGE Power West Campus. MGE Power West Campus will
  lease a major
  portion of its assets, a power plant, to MGE, pursuant to this leasing arrangement
  and MGE will absorb a
  majority of the expected losses, residual returns, or both. The VIE was consolidated
  into MGE as of
  December 31, 2003.
  FIN No. 46R also requires MGE to assess whether the participants within its
  "Shared Savings" program
  constitute VIEs in which MGE might be considered to be the consolidating entity.
  MGE has reviewed 65% of
  the total Shared Savings program balance and has determined that the provisions
  of FIN No. 46R are not
  applicable via the "business scope exception." For the remaining 35%
  of the total Shared Savings program
  balance, MGE has not performed this assessment. These entities are not legally
  obligated to provide the
  financial information to MGE that is necessary to determine whether MGE must
  consolidate these entities. MGE
  will continue to attempt to obtain information from these customers in order
  to determine whether they should
  be consolidated by MGE.FSP No. 106-2
  On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization
  Act of 2003 was
  signed into law authorizing Medicare to provide prescription drug benefits to
  retirees. FASB Staff Position
  No. (FSP) No. 106-2, Accounting and Disclosure Requirements Related to the Medicare
  Prescription Drug,
  Improvement and Modernization Act of 2003, was issued on May 19, 2004. The FSP
  provides guidance on
  accounting for the effects of the new Medicare prescription drug legislation
  by employers whose prescription
  drug benefits are actuarially equivalent to the drug benefit under Medicare
  Part D. FSP No. 106-2 is effective as
  of the first interim or annual period beginning after June 15, 2004 (see Footnote
  8 for further discussion).
  Regulatory Issues - Transmission
  The Midwest ISO is in the process of developing a bid-based energy market, which
  is currently proposed to be
  implemented on March 1, 2005. In connection with the development of this energy
  market, the Midwest ISO is
  developing a market-based platform for valuing transmission congestion premised
  upon the LMP system that
  has been implemented in certain states. It is expected that the LMP system will
  include the ability to mitigate or
  eliminate congestion costs through the use of FTRs. The Midwest ISO will initially
  allocate FTRs, and it is
  anticipated that additional FTRs will be available through an auction-based
  system run by the Midwest ISO. It is
  unknown at this time the quantity of FTRs that will be allocated by the Midwest
  ISO or what the financial
  impact of the LMP congestion pricing system might have on MGE.
  ComEd and AEP (PJM companies) have joined PJM rather than the Midwest ISO and
  have filed with FERC a
  "Hold Harmless Proposal." Had the PJM companies joined the Midwest
  ISO instead, both Wisconsin and
  Michigan utilities would have received a portion of the revenues for point-to-point
  transmission service for
  certain transactions under the "Agreement of Transmission Owners of the
  Midwest ISO." A group of Wisconsin
  and Michigan utilities (which includes MGE) formed a coalition ("WI/MI
  Coalition") and filed a Hold Harmless
  Agreement counterproposal with FERC.
  On March 18, 2004, FERC rejected the PJM companies Hold Harmless Proposal, finding
  that it did not
  adequately hold the WI/MI Coalition harmless from adverse impacts associated
  with transmission congestion
  and loop flow from the PJM companies RTO choices and that a trial-type evidentiary
  hearing should be held to
  address these issues. The FERC decision suggested that the PJM companies propose
  a "Service Agreement"
  which adopts the Hold Harmless Proposal, subject to the outcome of various proceedings,
  and that the proposal
  contains a contractual mechanism to ensure the PJM companies provide appropriate
  compensation to the WI/MI
  Coalition for adverse impacts. On April 6, 2004, the PJM companies filed with
  FERC a "Hold Harmless Service
  Agreement" for PJM's tariff. On April 27, 2004, FERC accepted the Hold
  Harmless Service Agreement subject
  to refund and the outcome of a hearing on the question of the appropriate compensation
  to the WI/MI Coalition
  for any adverse impacts related to ComEd's decision to join PJM.Item 3. Quantitative and Qualitative Disclosures About Market Risk.Market Risks
  MGE Energy, through MGE, and MGE are potentially exposed to market risks associated
  with interest rates,
  commodity prices, weather, regulatory recovery, and equity returns. Neither
  MGE Energy nor MGE have any
  current exposure to foreign currency risk. MGE manages some risk exposure through
  risk management policies
  and uses derivative instruments.Interest Rate Risk
  MGE Energy and MGE manage interest rate risk by limiting their variable rate
  exposure and by continually
  monitoring the effects of market changes on interest rates. MGE is not exposed
  to changes in interest rates on a
  substantial portion of its long-term debt until that debt matures and is refinanced
  at market rates. MGE has
  $15.0 million in variable rate long-term debt outstanding as of June 30, 2004.
  Borrowing levels under
  commercial paper arrangements vary from period to period depending upon capital
  investments and other
  factors.Commodity Price Risk
  MGE has commodity price risk exposure with respect to the price of natural gas,
  electricity, coal, and oil. MGE
  employs established policies and procedures to reduce the market risks associated
  with changing commodity
  prices including the use of commodity and financial instruments. MGE's commodity
  risks are somewhat
  mitigated by the current ratemaking process in place for recovering electric
  fuel, purchased energy, and the cost
  of natural gas purchased for resale. MGE's electric fuel costs are subject to
  fuel rules established by the PSCW,
  which further mitigate commodity risk. Under the fuel rules, if electric fuel
  costs fall outside a 3.0% bandwidth
  set by the PSCW, MGE can apply for a fuel surcharge or may be required to issue
  a fuel credit to its customers.
  Under the PGA clause authorized by the PSCW, MGE passes through to customers
  the cost of gas, subject to
  certain limited incentives.
  Under the fuel rules, MGE may include the costs and benefits of fuel price risk
  management tools implemented
  under a risk management plan approved by the PSCW. In 2003, the PSCW approved
  MGE's Electric
  Procurement Risk Management Program, with conditions, through December 31, 2004.
  No transactions have
  occurred under this program through June 30, 2004.Weather Risk
  MGE's sales forecasts, used to establish rates, are set by the PSCW based upon
  estimated temperatures, which
  approximate 20-year averages. MGE's electric revenues are sensitive to the summer
  cooling season and, to some
  extent, to the winter heating season. A significant portion of MGE's gas system
  demand is driven by heating.
  MGE's gas margin (revenues less gas purchased) 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 margin is at risk for warmer-than-normal weather. MGE may
  use weather derivatives,
  pursuant to its risk management program, to reduce the impact of weather volatility
  on its gas margins.Regulatory Recovery Risk
  MGE burns natural gas in several of its peak electric generation facilities
  as a supplemental fuel, and in many
  cases, the cost of purchased power is tied to the cost of natural gas. MGE bears
  regulatory risk for the recovery
  from customers of such fuel and purchased power costs when they are higher than
  the base rate established in its
  current rate structure.Equity Price Risks
  MGE currently funds its liabilities related to employee benefits through contributions
  to, and investment
  earnings on, trust funds. Changes in the market value of the employee benefits
  trust funds affect MGE's expense
  and annuity payment. MGE seeks to mitigate some of its risk in this matter through
  future rate actions by the
  PSCW.Credit Risks
  Credit risk is the loss that may result from counterparty nonperformance. MGE
  Energy, through 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.Item 4. Controls and Procedures.
  During the second quarter of 2004, each registrant's management, including its
  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 by each registrant to ensure that
  material information relating to
  that registrant, including its subsidiaries, is made known to that registrant's
  management, including its principal
  executive officer and its principal financial officer, by other employees of
  that registrant and its subsidiaries, and
  that this information is recorded, processed, summarized, evaluated, and reported,
  as applicable, within the time
  periods specified in the SEC's rules and forms. Due to the inherent limitations
  of control systems, not all
  misstatements may be detected. These inherent limitations include the realities
  that judgments in decision
  making can be faulty and breakdowns can occur because of simple error or mistake.
  Additionally, controls can
  be circumvented by the individual acts of some persons, by collusion of two
  or more people, or by management
  override of the control. Each registrant's controls and procedures can only
  provide reasonable, not absolute,
  assurance that the above objectives have been met. Also, the registrants do
  not control or manage certain of their
  unconsolidated entities and thus, their access and ability to apply their procedures
  to those entities is more
  limited than is the case for their consolidated subsidiaries.
  As of June 30, 2004, the principal executive officer and principal financial
  officer of each registrant concluded
  that such registrant's disclosure controls and procedures were effective to
  accomplish their objectives. Each
  registrant intends to continually strive to improve its disclosure controls
  and procedures to enhance the quality
  of its financial reporting.PART II. OTHER INFORMATION.Item 1. Legal Proceedings.MGE Energy and MGE
  Both WELA and the WDOJ had filed complaints in federal and state courts, respectively,
  against WPL and
  Alliant alleging violations of the Federal Water Pollution Control Act at the
  Columbia generating station. In
  July 2004, Alliant, WELA, and WDOJ settled the actions for $150,000 and Alliant's
  commitment to implement
  upgrades to Columbia's wastewater system. MGE owns a 22% share of Columbia along
  with the other
  co-owners, Alliant and WPSC. MGE has recorded a liability at June 30, 2004,
  for their pro-ratable share of the
  monetary settlement.
  Item 4. Submission of Matters to a Vote of Security Holders.
  MGE Energy's Annual Meeting of Shareholders was held on May 11, 2004, in Middleton,
  Wisconsin.
  Shareholders voted for the election of three persons to serve as Class III Directors
  to hold office until 2007.
  Listed below are the nominees for Class III Directors and the results of the
  voting.

|                   | For        |  | Withhold Authority
|------------------ | ---------- |  | ------------------
|                   |            |  |                   
|Richard E. Blaney  | 14,613,448 |  | 326,936           
|Frederic E. Mohs   | 14,583,484 |  | 356,900           
|F. Curtis Hastings | 14,625,372 |  | 315,012           

No votes were cast for any other nominee. The directors continuing office
  until the 2005 annual meeting are
  Regina M. Millner and Donna K. Sollenberger. David C. Mebane retired from the
  board on May 11, 2004. The
  directors continuing in office until the 2006 annual meeting are John R. Nevin,
  H. Lee Swanson, and
  Gary J. Wolter.
  On May 11, 2004, MGE Energy, as MGE's sole shareholder, executed a shareholder's
  consent electing
  Richard E. Blaney, Frederic E. Mohs, and F. Curtis Hastings as Class III Directors
  to the Board of Directors of
  MGE. The remaining persons on MGE's Board of Directors who continued in office
  as directors are Regina M.
  Millner, John R. Nevin, Donna K. Sollenberger, H. Lee Swanson, and Gary J. Wolter.Item 6. Exhibits and Reports on Form 8-K.Item 6(a) - Exhibits
  10.1 Credit Agreement
  Statements regarding computation of ratio of earnings to fixed charges:
  12.1 MGE Energy, Inc.
  12.2 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 June 30, 2004, filed by
  the following officers for the
  following companies:
  31.1 Filed by Gary J. Wolter for MGE Energy, Inc.
  31.2 Filed by Terry A. Hanson for MGE Energy, Inc.
  31.3 Filed by Gary J. Wolter for Madison Gas and Electric Company
  31.4 Filed by Terry A. Hanson for Madison Gas and Electric Company
  Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States
  Code (Sarbanes-Oxley Act of
  2002) as to the Quarterly Report on Form 10-Q for the quarter ended June 30,
  2004, filed by the following
  officers for the following companies:
  32.1 Filed by Gary J. Wolter for MGE Energy, Inc.
  32.2 Filed by Terry A. Hanson for MGE Energy, Inc.
  32.3 Filed by Gary J. Wolter for Madison Gas and Electric Company
  32.4 Filed by Terry A. Hanson for Madison Gas and Electric Company
  Item 6(b) - Reports on Form 8-K
  On April 30, 2004, MGE Energy, Inc. and Madison Gas and Electric Company furnished
  a Current Report on
  Form 8-K dated April 30, 2004, reporting the issuance of a press release announcing
  MGE Energy, Inc.'s
  earnings for the first quarter.

|                     | **MGE ENERGY, INC.**                                                                                                              
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------
|Date: August 9, 2004 | /s/ Gary J. Wolter                                                                                                                
|                     | Gary J. Wolter
      Chairman, President and Chief Executive
        Officer
      (Duly Authorized Officer)                      
|Date: August 9, 2004 | /s/ Terry A. Hanson                                                                                                               
|                     | Terry A. Hanson
      Vice President, Chief Financial Officer
        and Secretary
      (Chief Financial and Accounting Officer)



|                     | **MADISON GAS AND ELECTRIC COMPANY**                                                                                              
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------
|Date: August 9, 2004 | /s/ Gary J. Wolter                                                                                                                
|                     | Gary J. Wolter
      Chairman, President and Chief Executive
        Officer
      (Duly Authorized Officer)                      
|Date: August 9, 2004 | /s/ Terry A. Hanson                                                                                                               
|                     | Terry A. Hanson
      Vice President, Chief Financial Officer
        and Secretary
      (Chief Financial and Accounting Officer)