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

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

IRS Employer
Identification
No.000-49965

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

39-2040501000-1125

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

39-0444025  Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
have been subject to such filing requirements for the past 90 days: Yes [X]
No [ ]  Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of "large accelerated filer," "accelerated
filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting CompanyMGE Energy,
Inc.
XMadison
Gas and Electric Company


X  Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act).  MGE Energy, Inc. and Madison Gas
and Electric Company: Yes [ ] No [X]  Number of Shares Outstanding of Each Class of Common Stock
as of July 31, 2008MGE Energy,
Inc.
Common
stock, $1.00 par value, 22,211,548 shares outstanding.Madison
Gas and Electric Company
Common
stock, $1.00 par value, 17,347,889 shares outstanding (all of which are
owned beneficially and of record by MGE Energy,
Inc.).   Page 1    Table of Contents  PART I. FINANCIAL
INFORMATION. Filing
Format 3 Forward-Looking
Statements 3 Where to
Find More Information 3 Definitions,
Abbreviations, and Acronyms Used in the Text and Notes of this Report 4 Item 1.
Financial Statements. 6 MGE Energy,
Inc. Consolidated
Statements of Income (unaudited) 6 Consolidated
Statements of Cash Flows (unaudited) 7 Consolidated
Balance Sheets (unaudited) 8 Madison Gas and
Electric Company Consolidated
Statements of Income (unaudited) 9 Consolidated
Statements of Cash Flows (unaudited) 10 Consolidated
Balance Sheets (unaudited) 11 MGE Energy,
Inc., and Madison Gas and Electric Company Notes to
Consolidated Financial Statements (unaudited) 12 Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations. 30 Item 3.
Quantitative and Qualitative Disclosures About Market Risk. 51 Item 4.
Controls and Procedures. 53 Item 4T.
Controls and Procedures. 53 PART II. OTHER INFORMATION. Item 1.
Legal Proceedings. 54 Item 6.
Exhibits. 54 Signatures
- MGE Energy, Inc. 55 Signatures
- Madison Gas and Electric Company 56   Page 2    PART
I. FINANCIAL INFORMATION.   Filing Format  This combined quarterly report on Form 10-Q is being
filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and
Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and
represents a majority of its assets, liabilities, revenues, expenses, and
operations. Thus, all information contained in this report relates to, and is
filed by, MGE Energy. Information that is specifically identified in this
report as relating solely to MGE Energy, such as its financial statements
and information relating to its nonregulated business, does not relate to, and
is not filed by, MGE. MGE makes no representation as to that information. The
terms "we" and "our" as used in this report refer to MGE Energy and its
consolidated subsidiaries, unless otherwise indicated.   Forward-Looking Statements  This report, and other documents filed by MGE Energy
and MGE with the Securities and Exchange Commission (SEC) from time to time,
contain forward-looking statements that reflect management's current assumptions
and estimates regarding future performance and economic conditionsespecially as
they relate to future load growth, revenues, expenses, capital expenditures,
financial resources, regulatory matters, and the scope and expense associated
with future environmental regulation. These forward-looking statements are made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Words such as "believe," "expect," "anticipate," "estimate,"
"could,""should," "intend," and other similar words generally identify
forward-looking statements. Both MGE Energy and MGE caution investors that
these forward-looking statements are subject to known and unknown risks and
uncertainties that may cause actual results to differ materially from those
projected, expressed, or implied.  The factors that could cause actual results to differ
materially from the forward-looking statements made by a registrant include (a)
those factors discussed in the following sections of the Registrants' 2007
Annual Report on Form 10-K: ITEM 1A. Risk Factors and ITEM 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations as
updated by Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations in this report, and (b) other factors
discussed herein and in other filings with the SEC by the Registrants.  Readers are cautioned not to place undue reliance on
these forward-looking statements, which apply only as of the date of this
report. MGE Energy and MGE undertake no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this report.   Where to Find More Information  The public may read and copy any reports or other
information that MGE Energy and MGE file with the SEC at the SEC's public
reference room at 100 F Street, NE, Washington, D.C. 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. These documents are also available to the public from
commercial document retrieval services, the Web site maintained by the SEC at
http://www.sec.gov, MGE Energy's Web site at
http://www.mgeenergy.com, and MGE's Web site at
http://www.mge.com. Copies may be obtained from our Web sites free of
charge. Information contained on MGE Energy's and MGE's Web sites shall not
be deemed incorporated into, or to be a part of, this report.    Page 3    Definitions, Abbreviations,
and Acronyms Used in the Text and Notes of this Report  AFUDC
allowance for funds used during
constructionALJ
Administrative Law JudgeAlliant
Alliant Energy CorporationARB
Accounting Research BulletinATC
American Transmission Company LLCARO
Asset Retirement ObligationBACT
Best Available Control TechnologyBART
Best Available Retrofit TechnologyBlount
Blount StationCAIR
Clean Air Interstate RuleCAMR
Clean Air Mercury RuleCAVR
Clean Air Visibility RuleColumbia
Columbia Energy Centercooling degree days
Measure of the extent to which the average daily
temperature is above 65 degrees Fahrenheit, increasing demand for
coolingCWDC
Central Wisconsin Development CorporationDistribution Agreement
Distribution Agreement between MGE Energy and
J.P. Morgan Securities Inc.Dth
dekathermsEGU
electric generating unitEITF
Emerging Issues Task ForceElm Road
Elm Road Generating StationEPA
U.S. Environmental Protection AgencyFAS
Financial Accounting StandardFASB
Financial Accounting Standards BoardFERC
Federal Energy Regulatory CommissionFIN
FASB Interpretation No.FSP
FASB Staff PositionFTR
Financial Transmission RightsGCIM
gas cost incentive mechanismGHG
greenhouse gasGW-hr
gigawatthourheating degree days (HDD)
Measure of the extent to which the average daily
temperature is below 65 degrees Fahrenheit, increasing demand for
heatingIBEW
International Brotherhood of Electric
WorkersIRS
Internal Revenue ServicekV
kilovoltkWh
kilowatt-hourLIBOR
London interbank offered rateLMP
Locational Marginal PricingMACT
Maximum available control technologyMAGAEL
MAGAEL, LLCMGE
Madison Gas and Electric CompanyMGE Construct
MGE Construct LLCMGE Energy or MGEE
MGE Energy, Inc.MGE Power
MGE Power LLCMGE Power Elm Road
MGE Power Elm Road, LLCMGE Power West Campus
MGE Power West Campus, LLCMGE Transco
MGE Transco Investment LLCMISO
Midwest Independent System Operator (a regional
transmission organization)Moody's
Moody's Investors Service, Inc.MW
megawattMWh
megawatt-hourNasdaq
The Nasdaq National Stock
Market  Page 4     NOx
nitrogen oxideNR
Natural ResourcesNSPS
new source performance
standardsNYMEX
New York Mercantile ExchangePGA
Purchased Gas Adjustment clausePJM
PJM Interconnection, LLC (a regional transmission
organization)PSCW
Public Service Commission of WisconsinRTO
Regional Transmission OrganizationS&P
Standard & Poor's Ratings Group, a division of
McGraw-Hill CompaniesSAB
Staff Accounting BulletinSEC
Securities and Exchange CommissionSFAS
Statement of Financial Accounting Standards (issued
by the FASB )SO2
sulfur dioxideStock Plan
Direct Stock Purchase and Dividend Reinvestment
Plan of MGE EnergyUW
University of Wisconsin-MadisonVIE
variable interest entityWCCF
West Campus Cogeneration FacilityWDNR
Wisconsin Department of Natural ResourcesWEPCO
Wisconsin Electric Power Companyworking capital
current assets less current liabilitiesWPDES
Wisconsin Pollutant Discharge Elimination
SystemWPL
Wisconsin Power and Light
Company   Page 5     Item
1. Financial Statements.  MGE Energy, Inc. Consolidated Statements of Income (unaudited) (In thousands, except per-share amounts)   Three Months Ended
June 30,

Six Months Ended
June 30,2008

2007

2008

2007Operating Revenues:Regulated revenues
$122,951

$109,244

$310,874

$275,851Nonregulated revenues
1,786

1,301

3,859

2,580Total Operating
Revenues
124,737

110,545

314,733

278,431Operating Expenses:Fuel for electric
generation
12,756

13,476

28,950

27,236Purchased power
14,623

18,594

36,302

40,075Natural gas purchased
26,463

17,992

104,406

85,335Other operations and
maintenance
38,567

31,823

74,663

63,528Depreciation and
amortization
9,893

8,023

19,290

16,080Other general taxes
4,193

3,914

8,572

7,821Total Operating
Expenses
106,495

93,822

272,183

240,075Operating Income
18,242

16,723

42,550

38,356Other income, net
1,690

1,745

2,266

3,060Interest expense, net
(3,435)

(3,175)

(6,868)

(6,715)Income before income taxes
16,497

15,293

37,948

34,701Income tax provision
(5,940)

(5,327)

(13,554)

(12,433)Net Income
$10,557

$9,966

$24,394

$22,268Earnings per Share of Common Stock
(basic and diluted)
$0.48

$0.47

$1.11

$1.05Dividends paid per share of common stock
$0.355

$0.348

$0.710

$0.697Average Shares Outstanding(basic and
diluted)
22,105

21,375

22,047

21,201  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 6    MGE Energy, Inc. Consolidated Statements of Cash Flows (unaudited) (In thousands)   Six Months Ended
June 30,2008

2007Operating Activities:Net income
$24,394

$22,268Items not affecting cash:Depreciation and
amortization
19,290

16,080Deferred income taxes
1,167

(2,222)Amortization of investment tax
credits
(175)

(205)Amortization of debt issuance
costs and discount
279

284Provision for doubtful accounts
receivable
1,931

1,778AFUDC - equity funds
(644)

(545)Employee benefit plan
expenses
3,947

4,080Equity earnings in ATC
(3,310)

(2,958)Gain on sale of property
(293)

-Reserve for fuel refund
-

587Other items
972

509Changes in working
capital:Decrease in current
assets
23,497

19,244Decrease in current
liabilities
(8,260)

(8,129)Dividend income from ATC
2,485

2,089Cash contributions to pension
and other postretirement plans
(6,520)

(4,895)Other noncurrent items,
net
3,759

3,808Cash Provided by Operating
Activities
62,519

51,773Investing Activities:Capital expenditures
(61,136)

(48,405)Capital contributions to
investments
(1,415)

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

(208)Proceeds from sale of
property
302

724Other
727

378Cash Used for Investing
Activities
(61,789)

(47,636)Financing Activities:Issuance of common stock
7,599

25,617Cash dividends paid on common
stock
(15,652)

(14,793)Increase (decrease) in
short-term debt, net
9,000

(13,500)Cash Provided by (Used for)
Financing Activities
947

(2,676)Change in Cash and Cash Equivalents
1,677

1,461Cash and cash equivalents at
beginning of period
3,789

3,003Cash and cash equivalents at end
of period
$5,466

$4,464  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 7    MGE Energy, Inc. Consolidated Balance Sheets (unaudited) (In thousands)   June 30,
2008

December 31,
2007ASSETSCurrent Assets:Cash and cash equivalents
$5,466

$3,789Restricted cash
214

2,896Accounts receivable, less
reserves of $3,898 and $3,709, respectively
36,501

43,668Other accounts receivable, less
reserves of $157 and $114, respectively
4,491

3,397Unbilled revenues
19,254

30,370Materials and supplies, at lower
of average cost or market
15,010

14,809Fossil fuel
4,767

5,136Stored natural gas, at lower of
average cost or market
25,639

28,483Prepaid taxes
14,132

14,696Regulatory assets -
current
-

189Other current assets
11,547

8,242Total Current
Assets
137,021

155,675Other long-term receivables
6,339

6,166Special billing projects
591

999Regulatory assets
51,083

53,375Other deferred assets and other
9,123

5,881Property, Plant, and Equipment, Net
701,905

638,774Construction work in progress
175,263

205,214Total Property, Plant, and
Equipment
877,168

843,988Other Property and Investments
47,315

45,503Total Assets
$1,128,640

$1,111,587LIABILITIES AND CAPITALIZATIONCurrent Liabilities:Long-term debt due within one
year
$30,000

$30,000Short-term debt
112,500

103,500Accounts payable
40,063

58,498Accrued interest and
taxes
4,792

3,964Deferred income taxes
1,076

4,153Regulatory liabilities -
current
7,988

2,924Pension liability -
current
607

607Other current liabilities
17,085

16,466Total Current
Liabilities
214,111

220,112Other Credits:Deferred income taxes
112,085

107,393Investment tax credit -
deferred
2,912

3,087Regulatory liabilities
23,469

20,885Accrued pension and other
postretirement benefits
71,239

74,056Other deferred liabilities and
other
29,162

25,982Total Other
Credits
238,867

231,403Capitalization:Common shareholders'
equity
443,285

427,726Long-term debt
232,377

232,346Total
Capitalization
675,662

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

-Total Liabilities and
Capitalization
$1,128,640

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

Six Months Ended
June 30,2008

2007

2008

2007Operating Revenues:Regulated electric
revenues
$84,031

$80,947

$166,470

$157,711Regulated gas revenues
38,920

28,297

144,404

118,140Nonregulated revenues
1,786

1,301

3,859

2,580Total Operating
Revenues
124,737

110,545

314,733

278,431Operating Expenses:Fuel for electric
generation
12,756

13,476

28,950

27,236Purchased power
14,623

18,594

36,302

40,075Natural gas purchased
26,463

17,992

104,406

85,335Other operations and
maintenance
38,391

31,709

74,423

63,315Depreciation and
amortization
9,893

8,023

19,290

16,080Other general taxes
4,193

3,914

8,572

7,820Income tax provision
5,033

4,533

12,242

11,073Total Operating
Expenses
111,352

98,241

284,185

250,934Operating Income
13,385

12,304

30,548

27,497Other Income and Deductions:AFUDC - equity funds
112

300

644

545Equity earnings in ATC
1,704

1,513

3,310

2,958Income tax provision
(693)

(627)

(838)

(1,091)Other deductions, net
(119)

(74)

(1,680)

(453)Total Other Income and
Deductions
1,004

1,112

1,436

1,959Income before interest
expense
14,389

13,416

31,984

29,456Interest Expense:Interest on long-term
debt
4,000

3,893

7,995

7,786Other interest, net
184

(71)

553

23AFUDC - borrowed funds
(46)

(127)

(267)

(231)Net Interest
Expense
4,138

3,695

8,281

7,578Net Income Before Minority Interest
$10,251

$9,721

$23,703

$21,878Minority interest, net of tax
(3,005)

(2,736)

(6,151)

(5,449)Net Income
$7,246

$6,985

$17,552

$16,429  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 9    Madison Gas and Electric Company Consolidated Statements of Cash Flows (unaudited) (In thousands)   Six Months Ended
June 30,2008

2007Operating Activities:Net income
$17,552

$16,429Items not affecting cash:Depreciation and
amortization
19,290

16,080Deferred income taxes
1,167

(2,224)Amortization of investment tax
credits
(175)

(205)Amortization of debt issuance
costs and discount
279

284Provision for doubtful accounts
receivable
1,931

1,778AFUDC - equity funds
(644)

(545)Employee benefit plan
expenses
3,947

4,080Equity earnings in ATC
(3,310)

(2,958)Minority interest, net of
tax
6,151

5,449Gain on sale of property
(293)

-Reserve for fuel refund
-

587Other items
1,677

1,532Changes in working
capital:Decrease in current
assets
22,686

18,130Decrease in current
liabilities
(7,251)

(6,523)Dividend income from ATC
2,485

2,089Cash contributions to pension
and other postretirement plans
(6,520)

(4,895)Other noncurrent items,
net
3,724

3,770Cash Provided by Operating
Activities
62,696

52,858Investing Activities:Capital expenditures
(61,136)

(48,405)Capital contributions to
investments
(1,315)

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

(208)Proceeds from sale of
property
302

724Other
618

522Cash Used for Investing
Activities
(61,798)

(47,392)Financing Activities:Cash dividends paid to parent by
MGE
-

(13,121)Cash dividends paid to parent
from Power West Campus and Transco
(6,308)

(5,735)Equity contributions received by
Power Elm Road and Transco
24,785

23,100Decrease in short-term debt,
net
(18,000)

(8,500)Cash Provided by (Used for)
Financing Activities
477

(4,256)Change in Cash and Cash Equivalents
1,375

1,210Cash and cash equivalents at
beginning of period
1,859

1,246Cash and cash equivalents at end
of period
$3,234

$2,456  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.   Page 10    Madison Gas and Electric Company Consolidated Balance Sheets (unaudited) (In thousands)   ASSETS
June 30, 2008

December 31, 2007Utility Plant(At Original Cost, in Service):Electric
$761,808

$691,162Gas
274,586

268,032Nonregulated
110,067

110,020Gross
plant in service
1,146,461

1,069,214Less
accumulated provision for depreciation
(444,687)

(430,572)Net
plant in service
701,774

638,642Construction
work in progress
175,263

205,214Total
Utility Plant
877,037

843,856Other property
and investments
2,158

2,777Investment in
ATC
42,889

40,799Total
Other Property and Investments
45,047

43,576Current
Assets:Cash
and cash equivalents
3,234

1,859Restricted
cash
214

2,896Accounts
receivable, less reserves of $3,898 and $3,709, respectively
36,501

43,668Affiliate
receivables
4

4Other
receivables, less reserves of $157 and $114, respectively
4,490

3,295Unbilled
revenues
19,254

30,370Materials
and supplies, at lower of average cost or market
15,010

14,809Fossil
fuel
4,767

5,136Stored
natural gas, at lower of average cost or market
25,639

28,483Prepaid
taxes
13,376

13,249Regulatory
assets - current
-

189Other
current assets
11,540

8,216Total
Current Assets
134,029

152,174Other long-term
receivables
5,767

5,485Special billing
projects
591

999Affiliate
receivable long-term
9,971

10,676Regulatory
assets
51,083

53,375Other deferred
assets and other
9,013

5,751Total
Assets
$1,132,538

$1,115,892CAPITALIZATION
AND LIABILITIESCommon
stockholder's equity
$346,561

$329,944Minority
interest
161,656

137,028Long-term
debt
232,377

232,346Total
Capitalization
740,594

699,318Current
Liabilities:Long-term
debt due within one year
30,000

30,000Short-term
debt - commercial paper
43,000

61,000Accounts
payable
40,057

58,263Affiliate
payables
2,088

2,115Accrued
interest and taxes
11,938

10,148Accrued
payroll related items
6,184

6,980Deferred
income taxes
1,076

4,153Regulatory
liabilities - current
7,988

2,924Pension
liability - current
607

607Other
current liabilities
10,710

9,450Total
Current Liabilities
153,648

185,640Other
Credits:Deferred
income taxes
111,514

106,924Investment
tax credit - deferred
2,912

3,087Regulatory
liabilities
23,469

20,885Accrued
pension and other postretirement benefits
71,239

74,056Other
deferred liabilities and other
29,162

25,982Total
Other Credits
238,296

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

-Total
Capitalization and Liabilities
$1,132,538

$1,115,892  The accompanying notes are an integral
part of the above unaudited consolidated financial statements.  Page 11    MGE Energy, Inc., and Madison Gas and Electric
Company Notes to Consolidated Financial Statements (unaudited) June 30, 2008   1. Basis of
Presentation - MGE Energy and MGE.  This report is a
combined report of MGE Energy and MGE. References in this report to
"MGE Energy" are to MGE Energy, Inc., and its subsidiaries. References
in this report to "MGE" are to Madison Gas and Electric Company.  In accordance
with FIN 46R, Consolidation of Variable Interest Entities - An Interpretation
of ARB No. 51, MGE is required to consolidate MGE Power West Campus and
MGE Power Elm Road. Both entities own electric generating assets and lease those
assets to MGE. MGE is considered the primary beneficiary of these entities as a
result of these leasing arrangements.  The accompanying
consolidated financial statements as of June 30, 2008, 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 statement of
their respective financial statements. All adjustments are of a normal,
recurring nature except as otherwise disclosed. The year-end consolidated
balance sheet information was derived from the audited balance sheet appearing
in MGE Energy's and MGE's annual reports on Form 10-K for the year ended
December 31, 2007, but does not include all disclosures required by
generally accepted accounting principles. These notes should be read in
conjunction with the financial statements and the notes on pages 53 through 102
of the 2007 Annual Report on Form 10-K.  2. Equity and
Financing Arrangements.  a. Common Stock -
MGE Energy.  MGE Energy
sells shares of its common stock through its Stock Plan. Those shares may be
newly-issued shares or shares that MGE Energy has purchased in the open
market for resale to participants in the Stock Plan.  For the six
months ended June 30, 2008, MGE Energy issued 226,634 new shares of
common stock under the Stock Plan for net proceeds of $7.6 million. For the
six months ended June 30, 2007, MGE Energy issued 375,604 new shares
of common stock under the Stock Plan for net proceeds of $12.9 million.  On
November 9, 2006, MGE Energy entered into a Distribution Agreement
with J.P. Morgan under which MGE Energy may offer and sell up to 1,500,000
shares of its common stock. During the six months ended June 30, 2008,
MGE Energy did not issue any shares of its common stock under this
agreement. During the six months ended June 30, 2007, MGE Energy
issued 383,500 shares of its common stock for $12.7 million in net proceeds
under this agreement.  b. Dilutive
Shares Calculation - MGE Energy  MGE Energy
does not have any dilutive securities.  c. Accumulated
Other Comprehensive Income (Loss) - MGE Energy and MGE.  The accumulated
other comprehensive income (loss) balance at June 30, 2008, includes the
unrealized gains and losses on available-for-sale securities and certain hedging
transactions. The following table illustrates the changes in accumulated other
comprehensive income (loss), net of taxes, from December 31, 2007, to
June 30, 2008, for MGE Energy and MGE:   (In thousands)
MGEE
MGEBalance, December 31, 2007
$1,643
$898Change in unrealized gain on available-for-sale
securities,
net of tax ($54 and $156)
(80)
(233)Change in cash flow hedges, net of tax ($470 and
$470)
(702)
(702)Balance, June 30, 2008
$861
$(37)  Page 12    3. Comprehensive
Income - MGE Energy and MGE.  The reporting of
other comprehensive income is required under the provisions of SFAS 130,
Reporting Comprehensive Income. Total comprehensive income represents the
change in equity during a period from transactions and other events and
circumstances from nonowner sources. MGE Energy's and MGE's total
comprehensive income is:  (In thousands)
Three Months Ended
June 30,

Six
Months Ended
June 30,2008
2007

2008
2007MGE EnergyNet
income
$10,557
$9,966

$24,394
$22,268Unrealized
(loss) gain on cash flow hedges, net of tax
($294
and $245, and $470 and $9)
(438)
365

(702)
14Unrealized gain
(loss) on available-for-sale securities,
net
of tax ($155 and $60, and $54 and $61)
231
90

(80)
91Total
comprehensive income
$10,350
$10,421

$23,612
$22,373MGENet
income
$7,246
$6,985

$17,552
$16,429Unrealized
(loss) gain on cash flow hedges, net of tax
($294
and $245, and $470 and $9)
(438)
365

(702)
14Unrealized gain
(loss) on available-for-sale securities,
net
of tax ($30 and $19, and $156 and $21)
45
28

(233)
32Total
comprehensive income
$6,853
$7,378

$16,617
$16,475  4. Investment in ATC -
MGE Energy and MGE.  ATC owns and operates electric
transmission facilities primarily in Wisconsin. MGE received an interest in ATC
when it, like other Wisconsin electric utilities, contributed its electric
transmission facilities to ATC. That interest is presently held by MGE Transco,
which is jointly owned by MGE and MGE Energy.  MGE Transco, through MGE, has a seat
on the Board of Directors of ATC and has a 20% ownership interest in ATC
Management, Inc. Due to MGE Transco's ability to exercise significant control
over management activities, MGE Transco has accounted for its investment in ATC
under the equity method of accounting. For the six months ended June 30,
2008 and 2007, MGE Transco recorded equity earnings from the investment in ATC
of $3.3 million (pretax) and $3.0 million (pretax), respectively.
Dividend income received from ATC was $2.5 million and $2.1 million
for the six months ended June 30, 2008 and 2007, respectively. During the
six months ended June 30, 2008, MGE Transco made capital contributions of
$1.3 million. During the six months ended June 30, 2007, MGE Transco
made no cash contributions to ATC. However, on February 15, 2007, MGE
(through MGE Transco) transferred $1.4 million in additional transmission
assets to ATC. In exchange, MGE Transco received an additional $0.7 million
investment in ATC and $0.7 million in cash consideration.  At June 30, 2008, MGE is the
majority owner and MGE Energy, the holding company, is the minority owner
of MGE Transco. MGE Energy's proportionate share of the equity and net
income of MGE Transco is classified within the MGE financial statements as
minority interest.   Page 13    ATC's
summarized financial data for the three and six months ended June 30, 2008
and 2007 is as follows:  (In thousands)Income statement data for the three months ended
June 30,
2008

2007Operating revenues
$116,084

$102,047Operating expenses
(53,244)

(50,358)Other income (expense)
2

(83)Interest expense, net
(17,122)

(13,673)Earnings before members' income taxes
$45,720

$37,933MGE's and MGE Energy's equity earnings in
ATC
$1,704

$1,513   (In thousands)Income statement data for the six months ended
June 30,
2008

2007Operating revenues
$225,176

$199,818Operating expenses
(104,160)

(98,838)Other expense
(146)

(326)Interest expense, net
(32,757)

(26,459)Earnings before members' income taxes
$88,113

$74,195MGE's and MGE Energy's equity earnings in
ATC
$3,310

$2,958  5. Taxes - MGE Energy and
MGE.  a. FIN 48.  On January 1, 2007,
MGE Energy and MGE adopted FIN 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109, Accounting for Income
Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with
SFAS No. 109. The interpretation applies to all tax positions
accounted for in accordance with SFAS No. 109 and requires a
recognition threshold and measurement standard for the financial statement
recognition and measurement of a tax position taken, or expected to be taken, in
an income tax return. FIN 48 defines the threshold for recognizing tax return
positions in the financial statements as "more likely than not" that the
position is sustainable, based on its merits. Subsequent recognition,
derecognition, and measurement is based on management's best judgment given the
facts, circumstances and information available at the reporting date.  For both MGE Energy and MGE,
there have been no changes to unrecognized tax benefits existing at
December 31, 2007, nor any additions for new tax positions, during the six
months ended June 30, 2008. During the six months ended June 30, 2008,
less than $0.1 million of interest was accrued on unrecognized tax
benefits.  b. Effective Tax Rate.  MGE Energy's effective income
tax rate for the three and six months ended June 30, 2008, is 36.0% and
35.7%, respectively, compared to 34.8% and 35.8% for the same periods in 2007.
The decrease in the six months' rates is primarily attributable to an increase
in federal tax credits from the production of electricity from wind energy, as a
result of placing the Top of Iowa III wind project into production in
February 2008.  MGE's effective income tax rate for
the three and six months ended June 30, 2008, is 35.8% and 35.6%,
respectively, compared to 34.7% and 35.7% for the same periods in 2007. The six
months' decrease is also primarily attributable to an increase in wind energy
tax credits.   Page 14    6. Elm Road - MGE Energy and
MGE.  a. Construction.  On November 4, 2005, MGE Power
Elm Road acquired a 8.33% ownership interest in each of two 615 MW generating
units being constructed in Oak Creek, Wisconsin (Oak Creek expansion). MGE Power
Elm Road's sole principal asset is the 8.33% undivided ownership interest in the
aforementioned coal-fired generating plants. The estimated share of capital
costs for that ownership interest in both units was approximately
$172 million (excluding capitalized interest). In July 2008, the Elm
Road construction contractor gave notice that it now forecasts the in-service
date of Unit 1 to be delayed by three months from the guaranteed in-service date
of September 29, 2009 and that the in-service date of Unit 2 is now
forecasted to be one month earlier than the guaranteed in-service date of
September 29, 2010. The notice stated that the delays in Unit 1 were caused
by severe weather, changes in local labor conditions from those anticipated by
the contractor and other factors. The notice also stated that the contractor is
analyzing the impacts of these events and expects to submit claims for schedule
extensions and cost relief. The claims are expected to be submitted before
December 31, 2008. At this time, because of the lack of information, the
operator is not able to predict the amount of the claims that may be submitted,
or the validity of such claims. However, the operator of the units has stated
its belief that the circumstances and events for which they continue to retain
price adjustment risk under the construction contract are force majeure, wage
escalation in excess of 4% as measured by published wage bulletins, delays
caused by the operator, requested change in scope or performance by the operator
and unforeseen sub-surface ground conditions. Management is unable to determine
the financial impact, if any, at this time.  At June 30, 2008,
$130.5 million (excluding capitalized interest) related to this project is
reflected in the construction work in progress balance on MGE's and
MGE Energy's consolidated balance sheets. MGE Power Elm Road calculates
capitalized interest in accordance with SFAS 34, Capitalization of
Interest Cost, on the Elm Road project. At June 30, 2008, MGE Power Elm
Road recorded a total of $8.4 million in capitalized interest related to
the Elm Road project which is reflected in the construction work in progress
balance on MGE's and MGE Energy's consolidated balance sheets.  b. Consolidation.  In connection with this project,
MGE Energy and its subsidiaries entered into various agreements, including
a facility lease agreement between MGE Power Elm Road (a nonregulated subsidiary
of MGE Energy) and MGE. The financial terms of the facility lease include a
capital structure of 55% equity and 45% long-term debt, and return on equity of
12.7%, a lease term of 30 years, and a 5% lease payment reduction in the first
five years.  Based on the nature and terms of the
leasing agreement and the relationship it establishes, MGE absorbs a majority of
the expected losses, residual value, or both, associated with the ownership of
MGE Power Elm Road. MGE also is the party most closely associated with MGE Power
Elm Road. As a result, MGE is the primary beneficiary and MGE Power Elm Road is
a VIE under FIN 46R. Accordingly, MGE Power Elm Road has been consolidated in
the financial statements of MGE.  MGE Energy's share of the equity
and net income (through its wholly owned subsidiary MGE Power) of MGE Power Elm
Road is classified within the MGE financial statements as minority interest.  c. Nonregulated Revenues.  MGE has approval from the PSCW to
defer the recovery of the payments made to MGE Power Elm Road for carrying costs
during construction of the facility, management fees, and community impact
mitigation costs. MGE estimates that the total carrying costs on the Elm Road
project will be $60.7 million. This estimate is subject to change based on
changes in interest rates, timing of capital expenditures, and the total project
cost. During 2008, MGE will recover $12.1 million in electric rates for its
investment in MGE Power Elm Road. Of this amount, $9.6 million relates to
carrying costs and $2.5 million relates to management fees, community
impact mitigation costs, and other related costs.   Page 15    MGE began
collecting the carrying costs in rates in 2006. These amounts are being
collected over multiple years. Of these costs, MGE estimates that
$22.4 million relates to the capitalized interest and the debt portion of
the facility. These costs will be recognized over the period in which the
facility will be depreciated. The remaining $38.3 million is estimated to
represent the equity portion and is being recognized over the period allowed for
recovery in rates. For the six months ended June 30, 2008,
$4.8 million related to the carrying costs were recovered in rates. Of this
amount, $1.5 million relates to the debt portion of the facility and was
deferred on the consolidated financial statements of MGE and MGE Energy.
The remaining $3.3 million represents the equity portion and was recognized
as nonregulated revenues in the consolidated financial statements of MGE and
MGE Energy.  d. WPDES Permit.  On November 29, 2007, the
Administrative Law Judge (the "ALJ") in the proceeding related to the previously
issued Wisconsin Pollution Discharge Elimination System ("WPDES") permit
determined that the two additional coal units that are part of the Oak Creek
expansion are "new facilities" under section 316(b) of the Federal Clean Water
Act. The ALJ did not vacate the WPDES permit or any other permit necessary to
continue construction of the two additional coal units, pointing out that, based
upon the present record, the water intake system currently under construction as
part of the Oak Creek expansion may be permittable under the standards that
apply to new facilities. The ALJ remanded the WPDES permit to the Wisconsin
Department of Natural Resources (the "WDNR") and directed the WDNR to reissue or
modify the permit to reflect "best technology available" to comply with the
standards applicable to new facilities under Wisconsin state law. As part of the
decision, the ALJ restated his prior opinion that the water intake system
currently under construction may not be operated so long as it remains a
contested matter.  The plant operator has advised us
that there are alternatives under the United States Environmental Protection
Agency's (the "EPA") rule for new facilities that would permit the use of the
once-through cooling system rather than the use of cooling towers. The operator
has requested the WDNR to issue a modified permit and has submitted additional
information to the WDNR supporting the request for approval of the once-through
cooling system under this rule.  On May 8, 2008, WDNR issued its
public notice that it intended to reissue the WPDES permit to allow for the
once-through cooling system that was under construction by Wisconsin Energy
Corporation. On June 6, 2008, EPA issued its concurrence letter on the
draft permit indicating it would not object to the modification of the WPDES
permit as drafted. A public information hearing on the intended reissued WPDES
permit was held on June 9, 2008 and the public comment period closed on
June 16, 2008. On July 31, 2008, the WDNR issued the final modified
permit, with no substantive changes from the previously issued draft permit.
This permit can be challenged in a hearing before the Wisconsin Division of
Hearings and Appeals or through judicial review.  On July 31, 2008, the joint
owners of the Oak Creek expansion reached an agreement with Clean Wisconsin,
Inc. and Sierra Club, the groups opposing the WPDES permit. Under the settlement
agreement, these groups have agreed to withdraw their opposition to the modified
WPDES permit for the expansion units at Oak Creek. The joint owners have
committed to various environmental projects, including projects designed to
address greenhouse gas emissions and water quality. MGE's share of those
commitments would involve payments of approximately $0.2 million in each of
2008 and 2009 and, subject to regulatory approval, further payments of
approximately $0.3 million annually over 25 years (2010-2035) to address
water quality issues in Lake Michigan.  We cannot predict the timing or
results, or the effect upon construction schedule or costs, of any decision by
any administrative or legal process that may follow.  7. Top of Iowa III Wind Project
- MGE Energy and MGE.  MGE has constructed a 29.7 MW
(18 turbines) wind-powered electric generating facility in Iowa. In
February 2008, the project was placed into service.  At June 30, 2008, MGE had
incurred $56.4 million of costs on the project and $2.9 million in
AFUDC, which are reflected in the property, plant, and equipment balance on
MGE's and MGE Energy's consolidated balance sheets. During the six months
ended June 30, 2008 and 2007, MGE had recorded $0.6 million and
$0.5 million, respectively, in AFUDC related to this project. MGE was
permitted to recover 100% AFUDC on the Top of Iowa III wind project during
construction of the facility.   Page 16    8. Pension and Postretirement Plans -
MGE Energy and MGE.  MGE maintains qualified and
nonqualified pension plans, health care, and life insurance benefits.
Additionally, MGE has deferred contribution 401(k) benefit plans.  a. Net Periodic Cost.  The following table presents the
components of MGE's and MGE Energy's net periodic benefit costs recognized
for the three and six months ended June 30, 2008 and 2007. A portion of the
net periodic benefit cost is capitalized within the consolidated balance
sheets.  Three Months Ended
June 30,

Six
Months Ended
June 30,(In
thousands)
2008
2007

2008
2007Pension
BenefitsComponents of
net periodic benefit cost:Service
cost
$1,301
$1,311

$2,605
$2,622Interest
cost
2,823
2,653

5,653
5,308Expected
return on assets
(3,337)
(3,084)

(6,682)
(6,169)Amortization
of:Transition
obligation
36
36

72
72Prior
service cost
111
111

222
222Actuarial
loss
98
218

197
436Net periodic
benefit cost
$1,032
$1,245

$2,067
$2,491Three Months Ended
June 30,

Six
Months Ended
June 30,(In
thousands)
2008
2007

2008
2007Postretirement
BenefitsComponents of
net periodic benefit cost:Service
cost
$466
$435

$933
$870Interest
cost
948
762

1,897
1,524Expected
return on assets
(323)
(288)

(647)
(576)Amortization
of:Transition
obligation
107
107

214
214Prior
service cost
72
52

143
104Actuarial
loss
76
44

153
88Net periodic
benefit cost
$1,346
$1,112

$2,693
$2,224  b. Expected Cash Flows.  There are no required contributions
for the 2008 plan year. Likewise, there were no required contributions for the
2007 plan year. MGE elected to make discretionary deductible contributions of
$6.5 million during the six months ended June 30, 2008. MGE may elect
to make additional discretionary deductible contributions.  c. Pension Protection Act.  During the third quarter of 2006,
President Bush signed into law the Pension Protection Act of 2006, which will
affect the manner in which companies, including MGE and MGE Energy,
administer their pension plans. This legislation will require companies to,
amongst other things, increase the amount by which they fund their pension
plans, pay higher premiums to the Pension Benefit Guaranty Corporation if they
sponsor defined benefit plans, amend plan documents, and provide additional plan
disclosures in regulatory filings and to plan participants. This legislation
became effective on January 1, 2008. The U.S. Treasury Department's interim
guidance indicates that further guidance is forthcoming. MGE does not expect
significant changes in expected cash flows as a result of the Act. Absent
changes in plan design as a result of the Act, the Act is not expected to
materially impact MGE and MGE Energy's results of operations.   Page 17    9. Share-Based Compensation -
MGE Energy and MGE.  The MGE Energy Board approved a
Performance Unit Plan (the "Plan") on December 15, 2006. Under the Plan,
eligible participants may receive performance units that entitle the holder to
receive a cash payment equal to the value of a designated number of shares of
MGE Energy's common stock, plus dividend equivalent payments thereon, at
the end of the set performance period.  On January 1, 2007, the Board of
Directors granted 22,479 units based on the MGE Energy December 31,
2006, closing stock price. On January 18, 2008, the Board of Directors
granted 18,538 units based on the MGE Energy closing stock price as of that
date. These units are subject to either a four or five year graded vesting
schedule. Based on the provisions of SFAS 123R, Share-Based Payment,
on the grant date, MGE Energy and MGE measured the cost of the employee
services received in exchange for the award based on current market value of
MGE Energy common stock. The fair value of the awards has been subsequently
re-measured at June 30, 2008. Changes in fair value as well as the original
grant have been recognized as compensation cost. Because this amount will be
remeasured throughout the vesting period, the compensation cost is subject to
variability.  For nonretirement eligible employees,
stock based compensation costs are accrued and recognized using the graded
vesting method. Pursuant to the provisions of SFAS 123R and the terms of
the plan, compensation cost for retirement eligible employees or employees that
will become retirement eligible during the vesting schedule, are recognized on
an abridged horizon also using the graded vesting method.  During the six months ended
June 30, 2008 and 2007, MGE recorded $0.2 million and
$0.1 million, respectively, in compensation expense as a result of this
plan. No forfeitures or cash settlements occurred during the aforementioned
period.  10. Commitments and Contingencies.  a. Coal Contracts - MGE Energy
and MGE.  Fuel procurement for MGE's jointly
owned Columbia and Elm Road plants are handled by Alliant and Wisconsin Energy
Corporation, respectively, the operating companies. If any minimum purchase
obligations must be paid under these contracts, management believes these
obligations would be considered costs of service and recoverable in rates. As of
June 30, 2008, MGE's share of the total commitments for Columbia and Elm
Road plants are estimated to be $8.7 million for the remainder of 2008,
$19.1 million in 2009, $26.3 million in 2010, $5.4 million in
2011, and $4.4 million in 2012.  b. Natural Gas Supply Contracts -
MGE Energy and MGE.  MGE has natural gas supply
commitments which include market-based pricing. Total natural gas supply
commitments are estimated to be $51.8 million for the remainder of 2008,
$55.0 million for 2009, and $2.9 million for 2010. Management expects
to recover these costs in future customer rates.  c. Environmental - MGE Energy
and MGE.  MGE is listed as a potentially
responsible party for a site the EPA has placed on the national priorities
Superfund list. The Lenz Oil site in Lemont, Illinois, was used for storing and
processing waste oil for several years. This site requires clean up under the
Comprehensive Environmental Response, Compensation and Liability Act. A group of
companies, including MGE, is currently working on cleaning up the site.
Management believes that its share of the final cleanup costs will not result in
any materially adverse effects on MGE's operations, cash flows, or financial
position. Insurance may cover a portion of the cleanup costs. Management
believes that the cleanup costs not covered by insurance will be recovered in
current and future rates. At June 30, 2008, MGE accrued a $0.1 million
gross liability for this matter. The expected range of loss for this item is
estimated to be between $0.1 million and $0.2 million.  Effective March 31, 2006,
Wisconsin adopted the Energy Efficiency and Renewables Act that focuses on three
areas: increasing the use of renewable energy in Wisconsin, promoting the
development of renewable energy technologies, and strengthening the state's
energy efficiency programs. This new legislation requires that by 2015, 10% of
the state's electricity be generated from renewable resources. As part of this
initiative, MGE plans to add additional renewable energy resources, such as wind
farms. MGE expects the cost to comply with the Act and its accompanying
regulations will be recoverable through current and future rates.   Page 18    Air
quality regulations promulgated by the EPA and WDNR in accordance with the
Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose
restrictions on emission of particulates, sulfur dioxide (SO2),
nitrogen oxides (NOx), and other pollutants and require permits for
operation of emission sources. These permits have been obtained by MGE and must
be renewed periodically.  On March 12, 2008, the U.S. EPA
announced a new national ambient air quality standard for ozone which is more
stringent than the current standard (standard lowered from 0.08 to 0.0750 parts
per million). States (including Wisconsin) must monitor and collect data on
ozone levels in order to determine attainment or nonattainment status on a
county and/or area basis. Currently available monitoring data for Dane and
Columbia counties demonstrates attainment with this new standard. However, final
attainment designations will not be made until 2010 using the monitoring data
collected during the period 2007 through 2009. There is a possibility that
future monitoring data for one or both of these counties will demonstrate
nonattainment for this new ozone standard, which could result in additional
operating and capital expenditures at Columbia (located in Columbia county) and
Blount (located in Dane county). Similarly, new standards for particulate
emissions under 2.5 microns and monitoring data may result in a nonattainment
designation for Dane county and possibly Columbia county for particulate
emissions, which could also result in increased expenditures at Blount and
Columbia.  Various initiatives including, but
not limited to, the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule
(CAMR), maximum achievable control technology (MACT) standards, new source
performance standards (NSPS), Clean Air Visibility Rule (CAVR), the protection
of visibility by application of best available retrofit technologies (BART), and
existing and proposed state mercury emissions limits, are expected to result in
significant additional operating and capital expenditures at Columbia, Elm Road,
and Blount. There is some uncertainty concerning the mercury emission reduction
requirements in light of a February 8, 2008, U.S. Court of Appeals decision
vacating CAMR. Further, in February 2008, the WDNR proposed new revisions
to the state mercury rules under NR 446 that are significantly different than
CAMR and if finalized through state legislative review process, will further
increase mercury control compliance costs at these facilities. There is also
uncertainty concerning the NOxand SO2 emissions reduction
requirements of CAIR in light of a July 11, 2008, U.S. Court of Appeals
decision vacating CAIR.  In 1998, the EPA issued a rule that
imposed NOx emission budget for emission sources in Wisconsin. In
2000, the Court of Appeals for the District of Columbia invalidated a portion of
the rule as applied to Wisconsin; however, the Court stayed that portion of the
challenge concerning Wisconsin's alleged impacts on downwind, eight-hour ozone
nonattainment areas. EPA has also stayed that portion of the rule concerning
Wisconsin's alleged impacts on downwind eight-hour ozone nonattainment areas. If
that portion of the rule concerning eight-hour ozone nonattainment areas is
upheld, the resulting NOx emission budget for Wisconsin could
potentially affect the level of permissible NOx emissions from
Blount, Columbia, and WCCF.  The Columbia operator's current
estimates show that MGE's share of the capital expenditures required to comply
with various environmental initiatives will be between $130 million and
$200 million. According to current estimates, compliance with various
environmental initiatives is also expected to result in an increase to MGE's
pro-rata share of Columbia's ongoing operating expenses. The operator and MGE
management are continuing to explore various alternatives to comply with these
standards. Accordingly, actual capital expenditures may fall above or below the
range provided. These standards and initiatives may also result in additional
capital and operating expenditures at MGE's other generating facilities. MGE
expects that the costs to comply with these standards will be fully recoverable
through rates. The PSCW is permitting MGE to defer pre-certification and
pre-construction costs related to compliance with environmental regulations at
Columbia. Additionally, MGE is entitled to a carrying cost on the related
pre-construction costs at a 100% AFUDC rate. As of June 30, 2008, MGE had
incurred $1.0 million (excluding carrying costs) in expenditures at
Columbia related to environmental initiatives.  As of June 30, 2008, Columbia
entered into various contractual commitments with vendors for a small portion of
the aforementioned expenditures as well as other Columbia environmental
projects. MGE is indirectly a party to these agreements as a result of its joint
ownership of Columbia and is also contractually obligated, under the applicable
ownership and operating agreements, with respect to any commitments made. MGE
has a 22% ownership interest in Columbia. MGE's share of these commitments is
estimated to be $0.6 million for the remainder of 2008. These costs are
expected to be capitalized and included in the consolidated balance sheets of
MGE Energy and MGE.   Page 19    d. Chattel Paper Agreement and Other
Guarantees - MGE Energy and MGE.  MGE makes available to qualifying
customers a financing program for purchasing and installing energy-related
equipment that will provide more efficient use of utility service at the
customer's property. MGE is party to a chattel paper purchase agreement with a
financial institution under which it can sell or finance an undivided interest
with recourse, in up to $10.0 million of the financing program receivables,
until August 31, 2008. At June 30, 2008, MGE had sold an outstanding
$4.1 million interest in these receivables, which MGE accounted for as a
sale under SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities - A Replacement of FASB Statement
No. 125. MGE retains the servicing responsibility for these
receivables.  On January 1, 2007, MGE adopted
SFAS 156, Accounting for Servicing of Financial Assets, an amendment of
SFAS 140. SFAS 156 clarified when to separately account for
servicing rights, requires these rights to be initially measured at fair value,
and provides the option to subsequently account for those servicing rights at
either fair value or under the amortization method previously required under
SFAS 140. MGE continues to account for servicing rights under the
amortization method. Initial determination of the servicing asset fair value is
based on the present value of the estimated future cash flows. The discount rate
is based on the PSCW authorized weighted cost of capital.  MGE would be required to perform
under its guarantee if a customer defaulted on its loan. The energy-related
equipment installed at the customer sites is used to secure the customer loans.
The loan balances outstanding at June 30, 2008, approximate the fair value
of the energy-related equipment acting as collateral. The length of the MGE
guarantee to the financial institution varies from one to ten years depending on
the term of the customer loan. Principal payments for the next five years on the
loans are $0.6 million in 2008, $0.6 million in 2009,
$0.8 million in 2010, $0.5 million in 2011, and $0.3 million in
2012.  e. Other Legal Matters -
MGE Energy and MGE.  MGE is involved in various other
legal matters that are being defended and handled in the normal course of
business. MGE maintains accruals for such costs that are probable of being
incurred and subject to reasonable estimation. As of June 30, 2008, MGE has
a total of $1.5 million accrued in the financial statements for such
matters. The ultimate outcome of such matters is uncertain and may have an
adverse effect on MGE's results of operations, financial position, and cash
flows.  f. Venture Debt Commitment -
MGE Energy.  MGE Energy has a three year
agreement with a venture debt fund expiring in December 2010.
MGE Energy has committed to this venture debt fund up to a total of
$1.0 million at any given time. As of June 30, 2008, MGE Energy
has $0.7 million remaining in commitments. The timing of infusions is
dependent on the needs of the venture debt fund and is therefore uncertain at
this time.  g. ATC Capital Commitment -
MGE Energy and MGE.  On June 16, 2008, MGE Transco
elected to participate in a voluntary capital call for ATC. As a result, MGE
Transco contributed $1.1 million to ATC in July 2008.  11. Restructuring Activities -
MGE Energy and MGE.  On January 19, 2006, MGE
announced a plan, subject to certain conditions, that includes discontinuing
coal use at the end of 2011 at Blount. The plant will continue to run on natural
gas but will be reduced from its current approximate 190 MW capacity to 100 MW
when coal burning is discontinued. MGE has determined that certain employee
positions will be eliminated in 2011 as a result of this exit plan.  MGE has entered into severance
agreements providing severance benefits to the nonunion employees affected by
the exit plan. Additionally, MGE ratified a labor agreement with the IBEW
providing those union employees affected by the exit plan with involuntary and
voluntary severance benefits. MGE has accounted for the involuntary union and
nonunion severance benefits in accordance with the provisions of SFAS 146,
Accounting for Costs Associated with Exit or Disposal Activities. These
benefits were recognized initially at the respective communication dates based
on the fair value of the liability as of the termination date and are being
recognized ratably over the future service period of the employees. Benefits are
expected to be paid as follows: $0.2 million in 2010 and $1.2 million
in 2011. Total benefits paid as of June 30, 2008 were
$0.2 million.  Page 20    MGE will
recover in rates the costs associated with the discontinuance of coal at Blount.
As such, the severance charges for the nonunion and union employees have been
deferred and recognized on the consolidated balance sheet of MGE Energy and
MGE as a regulatory asset.  The following table presents the
activity in the restructuring accrual from December 31, 2007, through
June 30, 2008:   (In thousands)Balance at December 31, 2007
$609Additional expense, net (deferred)
106Cash payments during the period
(149)Balance at June 30, 2008
$566  The aforementioned exit plan has also
resulted in accelerated depreciation for the Blount assets expected to be
retired in 2011. These assets will be recovered in rates over a four year period
starting in 2008. For the six months ended June 30, 2008, $1.7 million
of accelerated depreciation expense had been recognized and recovered in
rates.  12. Derivative and Hedging Instruments
- MGE Energy and MGE.  As part of its regular operations,
MGE enters into contracts, including options, swaps, futures, forwards, and
other contractual commitments, to manage its exposure to interest rates,
commodity prices, and gas revenues. MGE evaluates its derivative contracts in
accordance with SFAS 133, Accounting for Derivative Instruments and
Hedging Activities, as amended and interpreted. To the extent that these
contracts are derivatives, MGE assesses whether or not the normal purchases or
normal sales exclusion applies. For contracts in which this exclusion cannot be
applied, SFAS 133 requires MGE Energy and MGE to recognize such
derivatives in the consolidated balance sheets at fair value, with changes in
the fair value of derivative instruments to be recorded in current earnings or
deferred in accumulated other comprehensive income (loss), depending on whether
a derivative is designated as, and is effective as, a hedge and depending on the
type of hedge transaction. If the derivative qualifies for regulatory deferral
subject to the provisions of SFAS 71, Accounting for the Effects of
Certain Types of Regulation, the derivatives are marked to fair value
pursuant to SFAS 133 and are offset with a corresponding regulatory asset
or liability.  In April 2007, the
FASB issued FSP 39-1, Amendment of FASB Interpretation No. 39
(FSP FIN 39-1). This pronouncement amends FIN 39, Offsetting of Amounts
Related to Certain Contracts, and allows companies to offset fair value
amounts recognized for the right to reclaim cash collateral (a receivable) or
the obligation to return cash collateral (a payable) against fair value amounts
recognized for derivative instruments executed with the same counterparty under
a master netting agreement. MGE and MGE Energy elected the net presentation
as prescribed by this pronouncement. FSP FIN 39-1 became effective for MGE and
MGE Energy as of January 1, 2008. The effects of applying this
pronouncement shall be recognized as a change in accounting principle through
retroactive application for all financial statements presented. The adoption of
this pronouncement did not have any impact on MGE's or MGE Energy's net
income. At June 30, 2008, MGE Energy and MGE did not have any cash
collateral to net against the net derivative positions with counterparties.  MGE's gas and electric segments
purchased and sold exchange traded and over-the-counter options, swaps, and
futures and, in addition, holds Financial Transmission Rights (FTRs) for certain
transmission paths in the MISO market. At June 30, 2008, the net market
value of all these aforementioned instruments exceeded their cost by
$5.4 million.  MGE has also entered into a ten-year
purchased power agreement which provides MGE with firm capacity and energy
beginning June 12, 2012, and ending on May 31, 2022 (the "base term").
The agreement also allows MGE the option to purchase power during a period of
time preceding the base term as well as an option to extend the contract after
the base term. The agreement is a derivative contract and is recognized at its
fair value on the balance sheet. The fair value of the contract at June 30,
2008, is $3.6 million. Also, the derivative qualifies for regulatory
deferral and is recognized with a corresponding regulatory liability.   Page 21    Under the
PGA clause and electric fuel rules, MGE may include in costs of fuel (natural
gas or power) the costs and benefits of the aforementioned fuel price risk
management tools. Because these costs and benefits are recoverable, the related
unrealized loss/gain is deferred on the balance sheet as a regulatory
asset/liability. All of the instruments outstanding as of June 30, 2008,
will expire in 12 months or less, except for the aforementioned ten-year
purchased power agreement. Depending on the nature of the instrument, the gain
or loss associated with these transactions will be reflected in natural gas
purchased, purchased power, or fuel used for electric generation in the delivery
month applicable to the instrument.  On September 26, 2007, MGE
entered into a non-exchange traded HDD collar. This agreement extended from
January 2008 until March 2008 and had a premium of $0.2 million.
Under this agreement, MGE was subject to a floor (3,450 HDD) and a ceiling
(3,600 HDD), based on forecasted heating degree days during the indicated
period. If actual heating degree days were below the floor, MGE was entitled to
receive a payment, and if actual heating degree days exceeded the ceiling, MGE
was obligated to make a payment. Any payment or receipt was limited to
$1.3 million. Actual heating degree days during the aforementioned period
were 3,971. Because this number exceeded the ceiling, MGE recorded a
$1.5 million expense (includes the $0.2 million premium) on the collar
in the first quarter of 2008. MGE accounted for the HDD collar using the
intrinsic value method pursuant to the requirements of EITF 99-2, Accounting
for Weather Derivatives.  Nonperformance of counterparties to
the non-exchange traded derivatives could expose MGE to credit loss. However,
MGE enters into transactions only with companies that meet or exceed strict
credit guidelines.  13. Regional Transmission
Organizations - MGE Energy and MGE.  On April 1, 2005, the MISO
implemented its bid-based energy market. MISO is a FERC approved RTO that is
required to provide a real-time market based mechanism for congestion
management. MGE is a participant in this market. On April 1, 2005, MGE
began offering substantially all of its generation on the MISO market and
purchasing much of its load requirement from the MISO market in accordance with
the MISO Tariff.  Additionally, on May 1, 2004,
MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent
party that coordinates and directs the operation of the region's transmission
grid, administers a competitive wholesale electricity market, and plans regional
transmission expansion improvements to maintain grid reliability and relieve
congestion. MGE has two purchase power agreements, for a total of 65 MW, that
are affected by this market.  MGE reports on a net basis
transactions on the MISO and PJM markets in which it buys and sells power within
the same hour to meet electric energy delivery requirements. This treatment
resulted in $40.3 million and $37.6 million reduction to sales for
resale and purchased power expense for the three months ended June 30, 2008
and 2007, respectively, and an $82.5 million and $78.4 million
reduction to sales for resale and purchased power expense for the six months
ended June 30, 2008 and 2007, respectively.  14. Rate Matters - MGE Energy and
MGE.  a. Rate proceedings.  On May 30, 2008, MGE filed with
the PSCW a limited scope reopener of its 2009 electric rates. The application
included an update to MGE's electric fuel costs monitored under the fuel rules
and an update to the Elm Road costs. If approved by the PSCW, the net effect of
the requested changes would result in a 6.99% increase, on average, in retail
electric rates.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric rates by 4.8% or $16.2 million and
increase gas rates by 2.8% or $7.8 million. The electric increase will
cover costs for MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs to discontinue coal use at the Blount Station. In addition to funding the
statewide energy programs, the natural gas rate increase covered costs for area
gas construction projects needed to accommodate customer growth. Authorized
return on common stock equity was set at 10.8% based on 57.4% utility common
equity.  Pursuant to the provisions of this
rate order, the fuel rules bandwidth effective January 1, 2008, is plus or
minus 2%. See description of fuel rules below.   Page 22    On
December 22, 2006, the PSCW approved a limited scope rate case reopener
related to MGE's current electric rates. This order approved an update to MGE's
electric fuel costs monitored under the fuel rules, an updated estimate of the
2007 Elm Road carrying costs, and a request for recovery of increased
ATC-related transmission costs through December 31, 2007. This order
resulted in a net 0.15% decrease, on average, in retail electric rates for 2007.
The PSCW also approved the recovery of 100% AFUDC on the Top of Iowa III wind
project beginning in November 2006 and continuing until construction on the
project ceased.  b. Fuel rules.  Actual electric fuel costs are
subject to reconciliation to the amount approved by the PSCW in MGE's rate order
covering the applicable period. Known as "fuel rules," the process can produce a
fuel surcharge for MGE or require MGE to make a refund in the form of a credit,
to the extent that the actual fuel costs are outside a range higher or lower
than the level authorized by the PSCW in that rate order.  Under fuel rules
effective January 1, 2008, MGE can apply for a fuel surcharge if its actual
electric fuel costs exceed 102% of the electric fuel costs allowed in its latest
rate order. Conversely, MGE can be required to provide a fuel credit to its
customers if actual electric fuel costs are less than 98% of the electric fuel
costs allowed in that order.  The PSCW approved
a $0.00239 per kWh interim fuel surcharge on MGE's electric rates effective
May 6, 2008, to cover increased fuel and purchased power expenses. This
interim fuel surcharge will result in an estimated $8.0 million increase in
electric revenues on an annual basis. For the three and six months ended
June 30, 2008, this interim surcharge resulted in a $1.2 million
increase to electric rates. However, pursuant to the provisions of this interim
order, MGE's electric revenues resulting from this interim surcharge are subject
to refund with interest at 10.8% should it ultimately be determined that the
interim fuel surcharge resulted in collections greater than actual costs. No
amount was estimated to be refunded under these provisions at June 30,
2008.  On April 26,
2007, the PSCW approved a $0.00339 per kWh interim fuel surcharge on MGE's
electric rates to cover increased fuel and purchased power expenses. On
August 31, 2007, MGE received a final decision which reduced the fuel
surcharge from $0.00339 per kWh to $0.00242 per kWh. These surcharges resulted
in a gross increase to electric rates of $6.9 million for the twelve months
ended December 31, 2007. For the interim period April 26, 2007,
through August 31, 2007, the difference between the interim surcharge and
the final surcharge was required to be refunded to customers. Accordingly, on
October 6, 2007, a refund of $1.3 million was applied to customers'
accounts.  As a result of a
decrease in electric fuel costs during the twelve months ended December 31,
2006, a fuel credit was approved by the PSCW. To account for this credit, MGE
recorded a $19.1 million reduction to other electric revenues. During the
year ended December 31, 2006, $16.8 million had been credited to
electric customers. An additional $2.4 million (includes interest) was
applied to customers' accounts in April 2007.  15. SFAS 157 Fair Value of Assets
and Liabilities - MGE Energy and MGE.  As of January 1, 2008, MGE and
MGE Energy adopted SFAS 157, Fair Value Measurements. The
adoption of this standard requires enhanced disclosures about MGE's and
MGE Energy's assets and liabilities carried at fair value.  SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. The standard clarifies that fair value should be based on the
assumptions market participants would use when pricing the asset or liability
including assumptions about risk. The standard also establishes a three level
fair value hierarchy based upon the observability of the assumptions used and
requires the use of observable market data when available. The levels are:  Level 1 - Pricing inputs are quoted
prices within active markets for identical assets or liabilities.  Level 2 - Pricing inputs are quoted
prices within active markets for similar assets or liabilities; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations that are correlated with or otherwise verifiable by
observable market data.   Page 23    Level 3 -
Pricing inputs are unobservable and reflect management's best estimate of what
market participants would use in pricing the asset or liability.  In February 2008, the
FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157, which delays the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and liabilities
until fiscal years beginning after November 15, 2008. MGE Energy and
MGE have elected to defer the adoption of the nonrecurring fair value
measurement disclosures of nonfinancial assets and liabilities. The adoption of
FSP FAS 157-2, effective January 1, 2009, is not expected to have any
material impact on MGE Energy and MGE.  The following table presents the
balances of assets and liabilities measured at fair value on a recurring basis
for MGE Energy and MGE.   (In thousands)
Fair Value as of June 30,
2008Total
Level 1
Level 2
Level 3MGE EnergyAssets:Derivatives, net
$9,077
$3,275
$-
$5,802Exchange-traded
investments
3,211
3,211
-
-Total Assets
$12,288
$6,486
$-
$5,802Liabilities:Deferred compensation
$1,083
$1,083
$-
$-Total Liabilities
$1,083
$1,083
$-
$-MGEAssets:Derivatives, net
$9,077
$3,275
$-
$5,802Exchange-traded
investments
1,535
1,535
-
-Total Assets
$10,612
$4,810
$-
$5,802Liabilities:Deferred compensation
$1,083
$1,083
$-
$-Total Liabilities
$1,083
$1,083
$-
$-  Derivatives include exchange-traded
derivative contracts, a ten-year purchased power agreement, and FTRs. Most
exchange-traded derivative contracts are valued based on unadjusted quoted
prices in active markets and are therefore classified as Level 1. A small number
of exchange-traded contracts are valued using quoted market pricing in markets
with insufficient volumes and are therefore classified as Level 3. The ten-year
purchased power agreement (see Footnote 12) was valued using an
internally-developed pricing model and therefore classified as Level 3. The
model includes both observable and unobservable inputs. FTRs are priced based
upon monthly auction results for identical or similar instruments in a closed
market with limited data available and are therefore classified as Level 3.  Investments include exchange-traded
investment securities valued using quoted prices on active exchanges and are
therefore classified as Level 1.  The deferred compensation plan allows
participants to defer certain cash compensation into a notional investment
account. These amounts are included within other deferred liabilities in the
balance sheets of MGE Energy and MGE. The notional investments earn
interest based upon the semiannual rate of U.S. Treasury Bills having a 26 week
maturity increased by 1% compounded monthly, with a minimum annual rate of 7%,
compounded monthly, and are therefore based upon observable market data and
classified as Level 1.   Page 24    The
following table summarizes the changes in Level 3 assets and liabilities
measured at fair value on a recurring basis for both MGE Energy and
MGE.   (In
thousands)
Three Months EndedJune 30, 2008Balance as of
April 1, 2008
$1,872Realized and
unrealized gains (losses):Included
in regulatory liabilities (assets)
3,890Included
in other comprehensive income
40Included
in earnings
347Included
in current assets
-Purchases,
sales, issuances, and settlements, net
(347)Transfers in
and/or out of Level 3
-Balance as of
June 30, 2008
$5,802Total gains
(losses) included in earnings attributed to the change in unrealized gains
(losses) related to assets and liabilities held at June 30, 2008
(a)
$-  (In
thousands)
Six
Months EndedJune 30, 2008Balance as of
January 1, 2008
$(444)Realized and
unrealized gains (losses):Included
in regulatory liabilities (assets)
6,193Included
in other comprehensive income
53Included
in earnings
1,214Included
in current assets
(7)Purchases,
sales, issuances, and settlements, net
(1,207)Transfers in
and/or out of Level 3
-Balance as of
June 30, 2008
$5,802Total gains
(losses) included in earnings attributed to the change in unrealized gains
(losses) related to assets and liabilities held at June 30, 2008
(a)
$-  The following table presents total realized and
unrealized gains (losses) included in income for Level 3 assets and liabilities
measured at fair value on a recurring basis during the three and six months
ended June 30, 2008, for both MGE Energy and MGE. (a).   (In
thousands)
Purchased Power Expense
Natural Gas Purchased Expense
Regulated Gas RevenuesTotal gains
(losses) included in earnings for the three months ended June 30,
2008
$347
$-
$-Total gains
(losses) included in earnings for the
six
months ended June 30, 2008
$1,308
$(47)
$(47)  (a) MGE's exchange-traded
derivative contracts, ten-year purchased power agreement, and FTRs are subject
to regulatory deferral under the provisions of SFAS 71. These derivatives
are therefore marked to fair value pursuant to SFAS 133 and are offset with
a corresponding regulatory asset or liability. A portion of MGE's derivative
contracts fall under the incentive mechanism within the PGA clause and
shareholders have the ability to receive 50% of the benefit or loss from these
deals if certain thresholds are achieved. Under these derivatives, only 50% of
the gains or losses are subject to regulatory deferral under SFAS 71. The
remaining 50%, the shareholder portion, is reflected in other comprehensive
income. As a result of the above described treatment, there are no unrealized
gains or losses that flow through earnings.   Page 25    16. New Accounting Pronouncements and
Legislation - MGE Energy and MGE.  a. Pension Protection Act.  See Footnote 8 for discussion of
this pronouncement.  b. FSP FIN 39-1.  See Footnote 12 for discussion
of this pronouncement.  c. FAS 160 and
FAS 141(R).  In December 2007, the
FASB issued FAS 160, Non-Controlling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 and FAS 141(R),
Business Combinations. These pronouncements will change the accounting
and reporting for business acquisitions and non-controlling interest in a
subsidiary. In addition, FAS 160 will change the accounting and reporting
for the deconsolidation of a subsidiary. FAS 160 and FAS 141(R) will
be effective for MGE and MGE Energy as of January 1, 2009. MGE and
MGE Energy are currently assessing the impact these pronouncements will
have on their financial statements.  d. FAS 161.  In March 2008, the
FASB issued FAS 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early adoption allowed. MGE and
MGE Energy have elected not to early adopt this pronouncement. Therefore,
FAS 161 will be effective for MGE and MGE Energy as of January 1,
2009. MGE and MGE Energy are currently assessing the impact this
pronouncement will have on their financial statements.   Page 26    17. Segment Information -
MGE Energy and MGE.  MGE Energy operates in the
following business segments: electric utility, gas utility, nonregulated energy,
transmission investment, and all other. See MGE Energy's and MGE's Form
10-K for additional discussion of each of these segments.  The following tables show segment
information for MGE Energy's operations for the indicated periods:   MGE Energy(In
thousands)
Electric
Gas
Nonregulated Energy
Transmission Investment
All
Others
Consolidation/ Elimination Entries
Consolidated TotalThree months
ended June 30, 2008Operating
revenues
$84,031
$38,920
$1,786
$-
$-
$-
$124,737Interdepartmental
revenues
129
3,397
3,719
-
-
(7,245)
-Total operating
revenues (loss)
84,160
42,317
5,505
-
-
(7,245)
124,737Depreciation and
amortization
(6,919)
(2,288)
(686)
-
-
-
(9,893)Other operating
expenses
(63,424)
(40,219)
(27)
(1)
(176)
7,245
(96,602)Operating income
(loss)
13,817
(190)
4,792
(1)
(176)
-
18,242Other
(deductions) income, net
(6)
(1)
-
1,704
(7)
-
1,690Interest
(expense) income, net
(2,725)
(769)
(644)
-
703
-
(3,435)Income (loss)
before taxes
11,086
(960)
4,148
1,703
520
-
16,497Income tax
(provision) benefit
(3,838)
461
(1,665)
(684)
(214)
-
(5,940)Net income
(loss)
$7,248
$(499)
$2,483
$1,019
$306
$-
$10,557Three months
ended June 30, 2007Operating
revenues
$80,947
$28,297
$1,301
$-
$-
$-
$110,545Interdepartmental
revenues
83
4,813
3,714
-
-
(8,610)
-Total operating
revenues (loss)
81,030
33,110
5,015
-
-
(8,610)
110,545Depreciation and
amortization
(5,228)
(2,109)
(686)
-
-
-
(8,023)Other operating
expenses
(62,823)
(31,444)
(27)
(1)
(114)
8,610
(85,799)Operating income
(loss)
12,979
(443)
4,302
(1)
(114)
-
16,723Other income,
net
181
44
-
1,513
7
-
1,745Interest
(expense) income, net
(2,392)
(674)
(629)
-
520
-
(3,175)Income (loss)
before taxes
10,768
(1,073)
3,673
1,512
413
-
15,293Income tax
(provision) benefit
(3,655)
577
(1,474)
(607)
(168)
-
(5,327)Net income
(loss)
$7,113
$(496)
$2,199
$905
$245
$-
$9,966Six months
ended June 30, 2008Operating
revenues
$166,470
$144,404
$3,859
$-
$-
$-
$314,733Interdepartmental
revenues
250
11,985
7,437
-
-
(19,672)
-Total operating
revenues (loss)
166,720
156,389
11,296
-
-
(19,672)
314,733Depreciation and
amortization
(13,401)
(4,517)
(1,372)
-
-
-
(19,290)Other operating
expenses
(135,426)
(136,846)
(52)
(1)
(240)
19,672
(252,893)Operating income
(loss)
17,893
15,026
9,872
(1)
(240)
-
42,550Other income
(deductions), net
478
(1,514)
-
3,310
(8)
-
2,266Interest
(expense) income, net
(5,424)
(1,576)
(1,281)
-
1,413
-
(6,868)Income before
taxes
12,947
11,936
8,591
3,309
1,165
-
37,948Income tax
provision
(3,649)
(4,654)
(3,448)
(1,329)
(474)
-
(13,554)Net
income
$9,298
$7,282
$5,143
$1,980
$691
$-
$24,394Six months
ended June 30, 2007Operating
revenues
$157,711
$118,140
$2,580
$-
$-
$-
$278,431Interdepartmental
revenues
199
11,008
7,427
-
-
(18,634)
-Total operating
revenues (loss)
157,910
129,148
10,007
-
-
(18,634)
278,431Depreciation and
amortization
(10,471)
(4,237)
(1,372)
-
-
-
(16,080)Other operating
expenses
(128,970)
(113,389)
(55)
(2)
(213)
18,634
(223,995)Operating income
(loss)
18,469
11,522
8,580
(2)
(213)
-
38,356Other income
(deductions), net
348
(256)
-
2,958
10
-
3,060Interest
(expense) income, net
(4,923)
(1,388)
(1,267)
-
863
-
(6,715)Income before
taxes
13,894
9,878
7,313
2,956
660
-
34,701Income tax
provision
(4,346)
(3,695)
(2,935)
(1,187)
(270)
-
(12,433)Net
income
$9,548
$6,183
$4,378
$1,769
$390
$-
$22,268    Page 27    The following tables show
segment information for MGE's operations for the indicated periods:  MGE(In
thousands)
Electric
Gas
Nonregulated Energy
Transmission Investment
Consolidation/ Elimination Entries
Consolidated TotalThree months
ended June 30, 2008Operating
revenues
$84,031
$38,920
$1,786
$-
$-
$124,737Interdepartmental
revenues
129
3,397
3,719
-
(7,245)
-Total operating
revenues (loss)
84,160
42,317
5,505
-
(7,245)
124,737Depreciation and
amortization
(6,919)
(2,288)
(686)
-
-
(9,893)Other operating
expenses*
(67,256)
(39,755)
(1,692)
(1)
7,245
(101,459)Operating income
(loss)*
9,985
274
3,127
(1)
-
13,385Other
(deductions) income, net*
(12)
(4)
-
1,020
-
1,004Interest
expense, net
(2,725)
(769)
(644)
-
-
(4,138)Income (loss)
before minority interest
7,248
(499)
2,483
1,019
-
10,251Minority
interest, net of tax
-
-
-
-
(3,005)
(3,005)Net income
(loss)
$7,248
$(499)
$2,483
$1,019
$(3,005)
$7,246Three months
ended June 30, 2007Operating
revenues
$80,947
$28,297
$1,301
$-
$-
$110,545Interdepartmental
revenues
83
4,813
3,714
-
(8,610)
-Total operating
revenues (loss)
81,030
33,110
5,015
-
(8,610)
110,545Depreciation and
amortization
(5,228)
(2,109)
(686)
-
-
(8,023)Other operating
expenses*
(66,463)
(30,863)
(1,501)
(1)
8,610
(90,218)Operating income
(loss)*
9,339
138
2,828
(1)
-
12,304Other income,
net*
166
40
-
906
-
1,112Interest
expense, net
(2,392)
(674)
(629)
-
-
(3,695)Income (loss)
before minority interest
7,113
(496)
2,199
905
-
9,721Minority
interest, net of tax
-
-
-
-
(2,736)
(2,736)Net income
(loss)
$7,113
$(496)
$2,199
$905
$(2,736)
$6,985Six months
ended June 30, 2008Operating
revenues
$166,470
$144,404
$3,859
$-
$-
$314,733Interdepartmental
revenues
250
11,985
7,437
-
(19,672)
-Total operating
revenues (loss)
166,720
156,389
11,296
-
(19,672)
314,733Depreciation and
amortization
(13,401)
(4,517)
(1,372)
-
-
(19,290)Other operating
expenses*
(138,977)
(142,089)
(3,500)
(1)
19,672
(264,895)Operating income
(loss)*
14,342
9,783
6,424
(1)
-
30,548Other income
(deductions), net*
380
(925)
-
1,981
-
1,436Interest
expense, net
(5,424)
(1,576)
(1,281)
-
-
(8,281)Income before
minority interest
9,298
7,282
5,143
1,980
-
23,703Minority
interest, net of tax
-
-
-
-
(6,151)
(6,151)Net income
(loss)
$9,298
$7,282
$5,143
$1,980
$(6,151)
$17,552Six months
ended June 30, 2007Operating
revenues
$157,711
$118,140
$2,580
$-
$-
$278,431Interdepartmental
revenues
199
11,008
7,427
-
(18,634)
-Total operating
revenues (loss)
157,910
129,148
10,007
-
(18,634)
278,431Depreciation and
amortization
(10,471)
(4,237)
(1,372)
-
-
(16,080)Other operating
expenses*
(133,284)
(117,212)
(2,990)
(2)
18,634
(234,854)Operating income
(loss)*
14,155
7,699
5,645
(2)
-
27,497Other income
(deductions), net*
316
(128)
-
1,771
-
1,959Interest
expense, net
(4,923)
(1,388)
(1,267)
-
-
(7,578)Income before
minority interest
9,548
6,183
4,378
1,769
-
21,878Minority
interest, net of tax
-
-
-
-
(5,449)
(5,449)Net income
(loss)
$9,548
$6,183
$4,378
$1,769
$(5,449)
$16,429  *Amounts are shown net of the related tax expense,
consistent with the presentation on the consolidated MGE Income Statement.  Page 28    The following table shows
segment information for MGE Energy's and MGE's assets and capital
expenditures:  MGE Energy
(In
thousands)
Electric
Gas
Assets not Allocated
Nonregulated Energy
Transmission Investment
All
Others
Consolidation/ Elimination Entries
TotalAssets:June 30,
2008
$632,561
$209,432
$11,104
$255,315
$42,898
$366,489
$(389,159)
$1,128,640December 31,
2007
614,949
234,002
14,876
227,415
40,808
342,491
(362,954)
1,111,587Capital
Expenditures:Six months ended
June 30, 2008
28,648
1,823
-
30,665
-
-
-
61,136Year ended
December 31, 2007
70,687
12,091
-
53,480
-
-
-
136,258   MGE
(In
thousands)
Electric
Gas
Assets not Allocated
Nonregulated Energy
Transmission Investment
Consolidation/ Elimination Entries
TotalAssets:June 30,
2008
$632,561
$209,432
$11,104
$255,065
$42,898
$(18,522)
$1,132,538December 31,
2007
614,949
234,002
14,876
227,165
40,808
(15,908)
1,115,892Capital
Expenditures:Six months ended
June 30, 2008
28,648
1,823
-
30,665
-
-
61,136Year ended
December 31, 2007
70,687
12,091
-
53,480
-
-
136,258  18. Subsequent Events -
MGE Energy and MGE.  a. ATC Capital Contribution.  On July 31, 2008, MGE Transco
made a voluntary $1.1 million capital contribution to ATC.  b. Investment Activity.  MGE Energy and MGE held shares
in a publicly traded company that was acquired by another company in
July 2008. MGE Energy and MGE tendered these shares in July 2008.
For MGE Energy, cash proceeds of $2.3 million were received in the
third quarter and resulted in a $1.9 million pretax gain. For MGE, cash
proceeds of $0.8 million were received in the third quarter and resulted in
a $0.5 million pretax gain.    Page 29    Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.  General  MGE Energy is a holding company operating through
subsidiaries in five business segments: electric utility operations, gas utility
operations, nonregulated energy operations, transmission investments, and all
other. Our principal subsidiary is MGE, which conducts our electric utility and
gas utility operations. MGE generates and distributes electricity to nearly
136,000 customers in Dane County, Wisconsin, including the city of Madison, and
purchases and distributes natural gas to nearly 140,000 customers in the
Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and
Vernon.  Our nonregulated energy operations have been formed to
own, for lease to MGE, new electric generating capacity. Our nonregulated energy
operations include a cogeneration project on the UW-Madison campus. Our
nonregulated energy operations also include an undivided 8.33% ownership
interest in each of two 615 MW generating units being constructed in Oak Creek,
Wisconsin. All of these operations are included in MGE's consolidated financial
statements as a result of the accounting requirements of FIN 46R,
Consolidation of Variable Interest Entities - An Interpretation of ARB
No. 51.  The transmission investment segment consists of our
investment in ATC. Our all other segment includes corporate operations and
services and certain construction services.  Our primary focus today and for the foreseeable future is
our core utility customers at MGE. MGE continues to face the challenge of
providing its customers with reliable power at competitive prices. MGE plans to
meet this challenge by building more efficient generation projects and
continuing its efforts to control operational costs. We believe it is critical
to maintain a strong credit standing and financial strength for MGE as well as
for the parent company in order to accomplish these goals.  Three Months
Ended June 30, 2008 and 2007  Executive Summary - MGE Energy and MGE  For the three months ended June 30, 2008,
MGE Energy's earnings were $10.6 million or $0.48 per share compared
to $10.0 million or $0.47 per share for the same period in the prior year.
MGE's earnings for the three months ended June 30, 2008, were
$7.2 million compared to $7.0 million for the same period in the prior
year.  The following discussion is based on the business
segments as discussed in Footnote 17.  Electric Utility  The electric utility segment contributed
$7.2 million of net income during the second quarter of 2008, a slight
increase of $0.1 million compared to the second quarter of 2007.  Electric revenues were $3.1 million or 3.8% higher
during the second quarter of 2008 compared to the same period last year. The
increase is partially related to a 4.8% rate increase approved by the PSCW,
effective January 1, 2008. The rate increase was to cover higher costs
pertaining to MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs associated with the discontinued use of coal at the Blount Station. Also
contributing to the electric revenue increase was an interim fuel surcharge,
which was a result of higher fuel costs than those costs provided in the
applicable rate order. The PSCW approved a $0.00239 per kWh interim fuel
surcharge on MGE's electric rates effective May 6, 2008, which resulted in
$1.2 million being collected during the three months ended June 30,
2008.  Gas Utility  The gas utility segment recorded a $0.5 million net
loss during the second quarter of 2008 which is comparable to the second quarter
of 2007. Gas margin (regulated gas revenues less natural gas purchased)
increased $2.2 million during the second quarter of 2008 compared to the
same period last year. MGE received a 2.8% rate increase from the PSCW,
effective January 1, 2008, to cover costs for area gas construction
projects needed to accommodate growth and funding of statewide energy efficiency
and renewable energy programs. Compared to the prior period, gas operating and
maintenance expenses increased $1.6 million primarily related to payments
required to be made to statewide energy efficiency and renewable resource
programs pursuant to Wisconsin legislation.  Page 30    Gas margin (regulated gas
revenues less natural gas purchased) is not a measurement defined under GAAP.
MGE Energy and MGE believe this measurement is useful in analyzing the gas
utility segment. However, it may not be comparable to measurements of other
companies. In addition, this measurement may not be more useful than the GAAP
information regarding the gas utility segment provided elsewhere in this
report.  Nonregulated Energy  The nonregulated energy segment contributed
$2.5 million of net income during the second quarter of 2008, an increase
of $0.3 million or 12.9% compared to the second quarter of 2007. The
increase is largely attributable to higher carrying costs recognized for the Elm
Road project. Carrying costs during construction of the nonregulated energy
projects, related to the equity portion, are recognized over the period of time
the costs are recovered in rates.  Capital expenditures during the second quarter of 2008
totaled $14.9 million for the Elm Road project.  Transmission Investment  Earnings from our interest in ATC increased
$0.1 million for the second quarter of 2008 compared to the same period
last year.  MGE Transco contributed $1.3 million for a voluntary
capital contribution to ATC in April 2008 and an additional
$1.1 million voluntary capital contribution in July 2008. ATC may
request additional voluntary capital contributions from the owners during 2008
and MGE Transco plans to participate in those contributions.  All Others  MGE Energy's corporate operations contributed
$0.3 million in earnings for the second quarter of 2008. These earnings are
a result of interdepartmental interest income recognized as a result of
capitalized interest on the Elm Road project.  Electric Utility Operations - MGE Energy and
MGE  Electric sales and revenues  The following table compares MGE's electric revenues and
electric kWh sales by customer class for each of the periods indicated:   Revenues

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

Three Months Ended June 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$25,432
$25,147
1.1%

172,281
184,565
(6.7)%Commercial
44,720
41,876
6.8%

439,140
451,376
(2.7)%Industrial
6,278
5,497
14.2%

82,191
80,763
1.8%Other -
retail/municipal
8,289
6,399
29.5%

107,087
91,588
16.9%Total
retail
84,719
78,919
7.3%

800,699
808,292
(0.9)%Sales for
resale
1,532
1,921
(20.2)%

14,298
23,991
(40.4)%Other revenues
(deductions)
(2,220)
107
(2,174.8)%

-
-
-Total
$84,031
$80,947
3.8%

814,997
832,283
(2.1)%Cooling degree
days (normal 180)




113
206
(45.1)%  Electric operating revenues increased $3.1 million
or 3.8% for the three months ended June 30, 2008, due to the following:   (In millions)
Three Months Ended June 30, 2008Rate
changes
$6.6Volume
(0.8)Sales for
resale
(0.4)Other
revenues
(2.3)Total
$3.1   Rates changes. Rates charged
to retail customers for the three months ended June 30, 2008, were 8.4% or
$6.6 million higher than those charged during the same period in the prior
year.  Page 31     On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric revenue by $16.2 million to cover
costs for MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs to discontinue coal use at the Blount Station.  On May 5, 2008, the PSCW
approved a $0.00239 per kWh interim fuel surcharge on MGE's electric rates to
cover increased fuel and purchased power expenses. This interim fuel surcharge
will result in an estimated $8.0 million increase in electric revenues on
an annual basis. The interim fuel surcharge was included in electric rates as of
May 6, 2008. For the three months ended June 30, 2008, this interim
surcharge resulted in a $1.2 million increase to electric rates. However,
pursuant to the provisions of this interim order, MGE's electric revenues
resulting from this interim surcharge are subject to refund with interest at
10.8% should it ultimately be determined that the interim fuel surcharge
resulted in collections greater than actual costs. No amount was estimated to be
refunded under these provisions at June 30, 2008.  On April 24, 2007, when the PSCW
completed their audit of 2006 electric fuel costs and issued a final order on
the 2006 fuel credit, $2.4 million (related to 2006 fuel costs and
including interest) was applied to customers' accounts.  On April 26, 2007, a $0.00339
per kWh interim fuel surcharge, subject to refund, was approved by the PSCW
which resulted in a $2.0 million increase to electric rates charged to
customers during the three months ended June 30, 2007.   Volume. During the three
months ended June 30, 2008, there was a 0.9% decrease in total retail sales
volumes when compared to the same period in the prior year. This decrease
represents decreased usage by residential and commercial customers, offset by an
increase in usage from industrial and other-retail/municipal customers.   Sales for resale. For the
three months ended June 30, 2008, sales for resale decreased
$0.4 million when compared to the same period in the prior year, reflecting
a decreased volume of sales. Sales for resale include transactions conducted on
the PJM and MISO markets reflecting our involvement in the PJM and MISO markets
since their establishment on May 1, 2004, and April 1, 2005,
respectively.   Other revenues. Other electric
revenues decreased $2.3 million for the three months ended June 30,
2008, compared to the same period in the prior year.  During the three months ended
June 30, 2008 and 2007, MGE recovered in electric rates carrying costs and
other fees related to WCCF and Elm Road. During the three months ended
June 30, 2008 and 2007, MGE recorded a $2.8 million and
$2.1 million reduction, respectively, to other electric revenues to
transfer the revenues from the electric segment to the nonregulated energy
operations segment. See discussion of these revenues in the "nonregulated energy
operating revenues" section.  During the three months ended
June 30, 2007, other electric revenues included a $2.4 million upward
adjustment to negate the impact on overall electric revenues for the 2006 fuel
refund provided to customers in April 2007. Note that this refund was
accrued in revenues during 2006, and was returned to customers via a reduction
in rates in April 2007. See "Rate changes" above for more information on
this refund. Furthermore, to account for the subject to refund provisions
implemented by the PSCW on April 26, 2007, during the three months ended
June 30, 2007, MGE recognized an obligation to make refunds to its
customers by recording a $0.6 million reduction to other electric
revenues.  Other miscellaneous electric revenues
for the three months ended June 30, 2008 increased $0.2 million
compared to the same period in 2007.  Electric fuel and purchased power  The expense for fuel used for electric generation
decreased $0.7 million or 5.3% during the three months ended June 30,
2008, compared to the same period in the prior year primarily as a result of a
decrease in fuel costs.  Purchased power expense decreased by $4.0 million or
21.4% during the three months ended June 30, 2008, compared to the same
period in the prior year. This decrease in expense reflects a $3.2 million
or 17.4% decrease in the per unit cost of purchased power and a
$0.8 million or 4.8% decrease in the volume of power purchased.  Page 32    Electric operating
expenses  Electric operating expenses increased $2.9 million
during the three months ended June 30, 2008, compared to the same period in
2007. The following changes contributed to the net change:   (In millions)
Three Months
Ended
June 30, 2008Increased production costs
$0.4Increased transmission costs
0.6Increased distribution expenses
0.2Decreased customer accounts expenses
(0.2)Increased customer service costs
1.1Decreased sales promotion expenses
(0.1)Increased other general and administrative
expenses
0.9Total
$2.9  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the three
months ended June 30, 2008, costs associated with funding these programs
increased customer service expense by $1.3 million.  Electric maintenance expense  For the three months ended June 30, 2008, electric
maintenance expense increased $2.3 million, when compared to the same
period in the prior year. This increase is attributable to increases of
$1.8 million in production maintenance and $0.5 million in
distribution expenses.  Electric depreciation expense  Depreciation expense at the electric segment increased by
$1.7 million for the three months ended June 30, 2008, when compared
to the same period in the prior year. This increase is related to higher levels
of electric assets, including the Top of Iowa III wind-powered electric
generating facility which was placed in service in the first quarter of 2008.
Also contributing to the increase is the accelerated depreciation of certain
Blount assets. For additional information on the Blount accelerated
depreciation, see Footnote 11.  Gas Utility Operations - MGE Energy and
MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:   Revenues

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

Three Months Ended June 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$19,817
$15,664
26.5%

12,314
12,049
2.2%Commercial/industrial
17,233
11,495
49.9%

14,606
11,829
23.5%Total
retail
37,050
27,159
36.4%

26,920
23,878
12.7%Gas
transportation
610
565
8.0%

7,715
7,267
6.2%Other
revenues
1,260
573
119.9%

-
-
-Total
$38,920
$28,297
37.5%

34,635
31,145
11.2%Heating degree
days (normal 856)




847
758
11.7%Average rate per
therm of retail customer




$1.376
$1.137
21.0%   Page 33    Gas revenues increased
$10.6 million or 37.5% for the three months ended June 30, 2008. These
changes are related to the following factors:   (In millions)
Three Months
Ended
June 30, 2008Gas
costs/rates
$5.7Gas
deliveries
4.2Transportation
and other effects
0.7Total
$10.6   Gas costs/rates. The average
retail rate per therm for the three months ended June 30, 2008, increased
21.0% compared to the same period in 2007. The primary contributor to this
increase is higher natural gas costs. Also, the PSCW authorized a 2.8%
increase in MGE's gas rates effective January 1, 2008, to cover increased
system demands and funding statewide energy programs.   Retail gas deliveries. The
12.7% increase in retail gas deliveries for the three months ended June 30,
2008, was attributable to an 11.7% increase in the heating degree days between
the periods and increased use by a large commercial customer.   Transportation and other
revenues. Transportation and other revenues increased a total of
$0.7 million primarily due to an increase in income realized under the
GCIM.  Under MGE's GCIM, if actual gas
commodity costs are above or below a benchmark set by the PSCW, then MGE's gas
sales service customers and shareholders share equally in any increased costs or
savings. The PSCW also allows MGE to resell gas pipeline capacity reserved to
meet peak demands but not needed every day to serve customers. Revenues from
capacity release that exceed or fall short of PSCW-targeted levels are shared
equally. For the three months ended June 30, 2008 and 2007, shareholders
received the benefit of $1.1 million and $0.4 million, respectively,
from capacity release revenues and commodity savings under the GCIM.  Natural gas purchased  For the three months ended June 30, 2008, natural
gas purchased increased by $8.5 million, compared to the same period in the
prior year. The cost per therm of natural gas increased 31.4% which resulted in
$6.3 million of additional expense. In addition, an 11.9% increase in the
volume of gas purchased resulted in $2.2 million of additional expense.  Gas operating expenses  Gas operating expenses increased $1.4 million for
the three months ended June 30, 2008, compared to the same period a year
ago. The following changes contributed to the net change:   (In millions)
Three Months
Ended
June 30, 2008Increased distribution costs
$0.2Increased customer service
costs
0.8Increased general and administrative
costs
0.4Total
$1.4  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the three
months ended June 30, 2008, costs associated with funding these programs
increased customer service expense by $0.9 million.  Gas maintenance expense  Gas maintenance expenses increased by $0.2 million
for the three months ended June 30, 2008, compared to the same period in
the prior year. This increase relates to an increase in distribution costs.   Page 34    Gas depreciation
expense  Gas depreciation expense increased $0.2 million for
the three months ended June 30, 2008, compared to the same period in the
prior year.  Other Income (Deductions), Net  During the three months ended June 30, 2008, the gas
and electric segments recognized a total of $0.1 million in AFUDC-equity
which is offset by $0.1 million of miscellaneous expenses.  For the three months ended June 30, 2007, the gas
and electric segments recognized a total of $0.3 million in AFUDC-equity.
This income was offset by $0.1 million in miscellaneous expense.  Interest Expense, Net  For the three months ended June 30, 2008, total
interest expense for the electric and gas segments increased $0.4 million
compared to the same period in the prior year.  Nonregulated Energy Operations - MGE Energy and
MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $0.5 million for the three months ended June 30, 2008, when
compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for both the three months ended June 30,
2008 and 2007, include $3.7 million in interdepartmental revenues related
to a leasing arrangement between MGE and MGE Power West Campus which commenced
on April 26, 2005. Upon consolidation, these interdepartmental revenues are
eliminated.  Also included in operating revenues is the recognition of
revenues related to the carrying costs for MGE Power West Campus and MGE Power
Elm Road. MGE received approval from the PSCW to collect approximately
$12.1 million in carrying costs incurred by MGE Power West Campus during
construction of the WCCF facility. MGE is collecting these costs in rates over a
period of ten years. A portion of this amount is being recognized over the
period recovered in rates and a portion is being recognized over the period in
which the facility is being depreciated (40 years). For the three months ended
June 30, 2008 and 2007, MGE Power West Campus recognized $0.2 million
and $0.3 million, respectively, related to carrying costs on the WCCF,
management, demolition, and removal fees.  MGE also received approval from the PSCW to collect
carrying costs expected to be incurred by MGE Power Elm Road during construction
of the Elm Road project. MGE estimates that the total carrying costs on the Elm
Road project will be $60.7 million. A portion of this amount is being
recognized over the period recovered in rates and a portion is being deferred
and will be recognized over the period in which the facility is depreciated. For
the three months ended June 30, 2008 and 2007, MGE Power Elm Road
recognized $1.5 million and $1.0 million, respectively, related to
carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For both the three months ended June 30, 2008 and
2007, interest expense, net at the nonregulated energy operations segment was
$0.6 million. Interest expense at the nonregulated energy segment for both
the three months ended June 30, 2008 and 2007, include $0.7 million in
interest expense incurred on $50 million of long-term, fixed-rate
borrowings at MGE Power West Campus.  Also included in the nonregulated interest expense is
interdepartmental interest expense and capitalized interest at MGE Power Elm
Road. During the three months ended June 30, 2008 and 2007, MGE Power Elm
Road was charged $1.2 million and $0.9 million, respectively, in
interest expense by Corporate on funds borrowed for the Elm Road Project. This
expense is eliminated upon consolidation for MGE Energy only. The interest
expense at MGE Power Elm Road is offset by $1.2 million and
$0.9 million, respectively, in capitalized interest. MGE Power Elm Road is
capitalizing interest on the Elm Road project.  During both the three months ended June 30, 2008 and
2007, MGE Power Elm Road recorded $0.1 million in interest income on cash
advanced to Elm Road Services, LLC for construction of transmission equipment
and work done by ATC related to the Elm Road project.   Page 35    Transmission Investment
Operations - MGE Energy and MGE  Transmission investment other income  For the three months ended June 30, 2008 and 2007,
other income at the transmission investment segment was $1.7 million and
$1.5 million, respectively. The transmission investment segment holds our
interest in ATC, and its income reflects our equity in the earnings of ATC.  All Other Nonregulated Operations -
MGE Energy  All other interest income, net  All other interest income, net for the three months ended
June 30, 2008 and 2007, was $0.7 million and $0.5 million,
respectively. Interest income for the three months ended June 30, 2008,
represents $1.2 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $0.5 million in interest expense on short
term debt. Interest income for the three months ended June 30, 2007,
represents $0.9 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $0.4 million in interest expense on
short-term debt. The interdepartmental interest income is eliminated upon
consolidation.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$0.3 million or 7.1% for the three months ended June 30, 2008, when
compared to the same period in 2007, primarily because MGE's license fee tax
increased. The annual license fee tax expense is based on adjusted operating
revenues of the prior year. Tax rates have not increased.  Consolidated Income Taxes  MGE Energy's effective income tax rate for the three
months ended June 30, 2008, is 36.0% compared to 34.8% for the same period
in 2007. The lower tax rate for the three months ended June 30, 2007, is
due to higher estimates of AFUDC-equity for 2007 associated with construction of
Top of Iowa III wind project.  MGE's effective income tax rate for the three months
ended June 30, 2008, is 35.8% compared to 34.7% for the same period in the
prior year. The lower tax rate for the three months ended June 30, 2007 is
due to higher estimates of AFUDC-equity for 2007 associated with construction of
Top of Iowa III wind project.  Minority Interest, Net of Tax  For the three months ended June 30, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$1.9 million and $0.9 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy earned $0.2 million, net of tax for its interest in MGE
Transco. These amounts are recorded as minority interest expense, net of tax, on
MGE's consolidated statement of income.  For the three months ended June 30, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$2.0 million and $0.6 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy had earned $0.1 million, net of tax, for its interest in
MGE Transco. These amounts are recorded as minority interest expense, net of
tax, on MGE's consolidated statement of income.  Six Months
Ended June 30, 2008 and 2007  Executive Summary - MGE Energy and MGE  For the six months ended June 30, 2008,
MGE Energy's earnings were $24.4 million or $1.11 per share compared
to $22.3 million or $1.05 per share for the same period in the prior year.
MGE's earnings for the six months ended June 30, 2008, were
$17.6 million compared to $16.4 million for the same period in the
prior year.  The following discussion is based on the business
segments as discussed in Footnote 17.   Page 36    Electric
Utility  The electric utility segment contributed
$9.3 million of net income during the six months ended June 30, 2008,
a slight decrease of $0.3 million compared to the same period in 2007.   Electric revenues were
$8.8 million or 5.6% higher during the six months ended June 30, 2008
compared to the same period last year. The increase is a result of a 0.5%
increase in retail sales and a 4.8% rate increase approved by the PSCW,
effective January 1, 2008. The rate increase was to cover higher costs
pertaining to MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs associated with the discontinued use of coal at the Blount Station. Also
contributing to the electric revenue increase was an interim fuel surcharge,
which was a result of higher fuel costs than those costs provided in the
applicable rate order. The PSCW approved a $0.00239 per kWh interim fuel
surcharge on MGE's electric rates effective May 6, 2008 which resulted in
$1.2 million being collected during the six months ended June 30,
2008.   The Top of Iowa III construction
project was placed in service during the first quarter of 2008. As of
June 30, 2008, MGE has incurred $56.4 million of costs on the 29.7 MW
wind-powered electric generating facility located in Iowa. MGE recorded
$0.6 million of AFUDC in the six months ended June 30, 2008 related to
the construction of the project.  Gas Utility  The gas utility segment contributed $7.3 million of
net income during the six months ended June 30, 2008, an increase of
$1.1 million or 17.8% compared to the same period in 2007. The increase is
largely attributable to higher gas margins as a result of colder weather
compared to the same period in 2007. Gas margin (regulated gas revenues less
natural gas purchased) increased $7.2 million during the six months ended
June 30, 2008 compared to the same period last year. The increase was
primarily attributable to 12.9% increase in gas retail sales. Heating degree
days were 12.1% higher for the period compared to last year as a result of
colder weather. MGE also received a 2.8% rate increase from the PSCW, effective
January 1, 2008, to cover costs for area gas construction projects needed
to accommodate growth and funding of statewide energy efficiency and renewable
energy programs. Partially offsetting the higher margin was a $1.3 million
expense (excludes premium) in 2008 for a weather hedge (heating degree day
collar). The weather hedge obligated MGE to pay additional costs if the weather
was colder than a prescribed ceiling or would have compensated MGE if weather
was warmer than a prescribed floor.  Gas margin (regulated gas revenues less natural gas
purchased) is not a measurement defined under GAAP. MGE Energy and MGE
believe this measurement is useful in analyzing the gas utility segment.
However, it may not be comparable to measurements of other companies. In
addition, this measurement may not be more useful than the GAAP information
regarding the gas utility segment provided elsewhere in this report.  Nonregulated Energy  The nonregulated energy segment contributed
$5.1 million of net income during the six months ended June 30, 2008,
an increase of $0.8 million or 17.5% compared to the same period in 2007.
The increase is largely attributable to higher carrying costs recognized for the
Elm Road project. Carrying costs during construction of the nonregulated energy
projects, related to the equity portion, are recognized over the period of time
the costs are recovered in rates.  Capital expenditures during the six months ended
June 30, 2008 totaled $30.5 million for the Elm Road project.  Transmission Investment  Earnings from our interest in ATC increased
$0.2 million for the six months ended June 30, 2008 compared to the
same period last year.  MGE Transco contributed $1.3 million for a voluntary
capital contribution to ATC in April 2008 and an additional
$1.1 million voluntary capital contribution in July 2008. ATC may
request additional voluntary capital contributions from the owners during 2008
and MGE Transco plans to participate in those contributions.  All Others  MGE Energy's corporate operations contributed
$0.7 million in earnings for the six months ended June 30, 2008. These
earnings are a result of interdepartmental interest income recognized as a
result of capitalized interest on the Elm Road project.  Page 37    Electric Utility Operations
- MGE Energy and MGE  Electric sales and revenues  The following table compares MGE's electric revenues and
electric kWh sales by customer class for each of the periods indicated:  Revenues

Sales(In
thousands, except cooling
degree
days)
Six
Months Ended June 30,

Six
Months Ended June 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$55,104
$52,457
5.0%

387,001
393,266
(1.6)%Commercial
87,828
80,698
8.8%

889,019
882,466
0.7%Industrial
10,303
9,453
9.0%

141,365
146,381
(3.4)%Other -
retail/municipal
15,008
12,736
17.8%

195,385
182,886
6.8%Total
retail
168,243
155,344
8.3%

1,612,770
1,604,999
0.5%Sales for
resale
2,792
3,971
(29.7)%

25,242
51,287
(50.8)%Other revenues
(deductions)
(4,565)
(1,604)
(184.6)%

-
-
-Total
$166,470
$157,711
5.6%

1,638,012
1,656,286
(1.1)%Cooling degree
days (normal 180)




113
211
(46.4)%  Electric operating revenues increased $8.8 million
or 5.6% for the six months ended June 30, 2008, due to the following:  (In millions)
Six
Months Ended
June 30, 2008Rate
changes
$12.2Volume
0.8Sales for
resale
(1.2)Other
revenues
(3.0)Total
$8.8   Rates changes. Rates charged
to retail customers for the six months ended June 30, 2008, were 7.8% or
$12.2 million higher than those charged during the same period in the prior
year.  On December 14, 2007, the PSCW
authorized MGE to increase 2008 electric revenue by $16.2 million to cover
costs for MGE's new wind energy projects, statewide energy efficiency and
renewable energy programs, transmission improvements by ATC, and accelerated
costs to discontinue coal use at the Blount Station.  On May 5, 2008, the PSCW
approved a $0.00239 per kWh interim fuel surcharge on MGE's electric rates to
cover increased fuel and purchased power expenses. This interim fuel surcharge
will result in an estimated $8.0 million increase in electric revenues on
an annual basis. The interim fuel surcharge was included in electric rates as of
May 6, 2008. During the six months ended June 30, 2008, this surcharge
resulted in $1.2 million increase to electric rates. However, pursuant to
the provisions of this interim order, MGE's electric revenues resulting from
this interim fuel surcharge are subject to refund with interest at 10.8% should
it ultimately be determined that the interim fuel surcharge resulted in
collections greater than actual costs. No amount was estimated to be refunded
under these provisions at June 30, 2008.  On April 24, 2007, when the PSCW
completed their audit of 2006 electric fuel costs and issued a final order on
the 2006 fuel credit, $2.4 million (related to 2006 fuel costs and
including interest) was applied to customers' accounts.  On April 26, 2007, a $0.00339
per kWh fuel surcharge, subject to refund, was approved by the PSCW which
resulted in a $2.0 million increase to electric rates charged to customers
during the three months ended June 30, 2007.   Volume. During the six months
ended June 30, 2008, there was a 0.5% increase in total retail sales
volumes when compared to the same period in the prior year. This increase
represents higher usage by commercial customers and other-retail/municipal
customers, offset by a decline in residential and industrial usage.   Page 38     Sales for resale. For the six
months ended June 30, 2008, sales for resale decreased $1.2 million
when compared to the same period in the prior year, reflecting a decreased
volume of sales. Sales for resale include transactions conducted on the PJM and
MISO markets reflecting our involvement in the PJM and MISO markets since their
establishment on May 1, 2004, and April 1, 2005, respectively.   Other revenues. Other electric
revenues decreased $3.0 million for the six months ended June 30,
2008, compared to the same period in the prior year.  During the six months ended
June 30, 2008 and 2007, MGE recovered in electric rates carrying costs and
other fees related to WCCF and Elm Road. During the six months ended
June 30, 2008 and 2007, MGE recorded a $5.5 million and
$4.1 million reduction, respectively, to other electric revenues to
transfer the revenues from the electric segment to the nonregulated energy
operations segment. See discussion of these revenues in the "nonregulated energy
operating revenues" section.  During the six months ended
June 30, 2007, other electric revenues included a $2.4 million upward
adjustment to negate the impact on overall electric revenues for the 2006 fuel
refund provided to customers in April 2007. Note that this refund was
accrued in revenues during 2006, and was returned to customers via a reduction
in rates in April 2007. See "Rate changes" above for more information on
this refund. Furthermore, to account for the subject to refund provisions
implemented by the PSCW on April 26, 2007, during the three months ended
June 30, 2007, MGE recognized an obligation to make refunds to its
customers by recording a $0.6 million reduction to other electric
revenues.  Other miscellaneous electric revenues
for the six months ended June 30, 2008, increased $0.2 million
compared to the same period during the prior year.  Electric fuel and purchased power  The expense for fuel used for electric generation
increased $1.7 million or 6.3% during the six months ended June 30,
2008, compared to the same period in the prior year. Additional internal
generation resulted in a $0.4 million increase of this expense and
increased fuel costs between the two periods resulted in a $1.3 million
increase of this expense.  Purchased power expense decreased by $3.8 million or
9.4% during the six months ended June 30, 2008, compared to the same period
in the prior year. This decrease in expense reflects a $2.2 million or 5.4%
decrease in the per unit cost of purchased power and a $1.6 million or 4.2%
decrease in the volume of power purchased.  Electric operating expenses  Electric operating expenses increased $6.2 million
during the six months ended June 30, 2008, compared to the same period in
2007. The following changes contributed to the net change:  (In millions)
Six
Months
Ended
June 30, 2008Increased
production costs
$0.9Increased
transmission costs
1.3Increased
distribution expenses
0.2Increased
customer service costs
2.1Decreased sales
promotion
(0.1)Increased other
general and administrative expenses
1.8Total
$6.2  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the six months
ended June 30, 2008, costs associated with funding these programs increased
customer service expense by $2.6 million.  Electric maintenance expense  For the six months ended June 30, 2008, electric
maintenance expense increased $1.9 million, when compared to the same
period in the prior year. This increase is attributable to increases of
$1.4 million in production maintenance, $0.4 million in distribution
maintenance, and $0.1 million in administrative and general.   Page 39    Electric depreciation
expense  Depreciation expense at the electric segment increased by
$2.9 million for the six months ended June 30, 2008, when compared to
the same period in the prior year. This increase is related to higher levels of
electric assets, including the Top of Iowa III wind-powered electric generating
facility which was placed in service in the first quarter of 2008. Also
contributing to the increase is the accelerated depreciation of certain Blount
assets. For additional information on the Blount accelerated depreciation, see
Footnote 11.  Gas Utility Operations - MGE Energy and
MGE  Gas deliveries and revenues  The following table compares MGE's gas revenues and gas
therms delivered by customer class during each of the periods indicated:  Revenues

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

Six
Months Ended June 30,2008
2007
%
Change

2008
2007
%
ChangeResidential
$78,945
$65,957
19.7%

60,912
56,245
8.3%Commercial/industrial
62,410
49,430
26.3%

60,769
51,558
17.9%Total
retail
141,355
115,387
22.5%

121,681
107,803
12.9%Gas
transportation
1,569
1,395
12.5%

20,243
18,442
9.8%Other
revenues
1,480
1,358
9.0%

-
-
-Total
$144,404
$118,140
22.2%

141,924
126,245
12.4%Heating degree
days (normal 4,366)




4,796
4,278
12.1%Average rate per
therm of retail customer




$1.162
$1.070
8.6%  Gas revenues increased $26.3 million or 22.2% for
the six months ended June 30, 2008. These changes are related to the
following factors:  (In millions)
Six
Months Ended
June 30, 2008Gas costs/rates
$9.9Gas deliveries
16.1Transportation and other effects
0.3Total
$26.3   Gas costs/rates. The average
retail rate per therm for the six months ended June 30, 2008, increased
8.6% compared to the same period in 2007. The PSCW authorized a 2.8% increase in
MGE's gas rates effective January 1, 2008, to cover increased system
demands and funding statewide energy programs. Also contributing to this
increase is higher natural gas costs.   Retail gas deliveries. The
12.9% increase in retail gas deliveries for the six months ended June 30,
2008, was attributable to a 12.1% increase in the heating degree days between
the periods and increased use by a large commercial customer.   Transportation and other
revenues. Transportation and other revenues increased a total of
$0.3 million.  Under MGE's GCIM, if actual gas
commodity costs are above or below a benchmark set by the PSCW, then MGE's gas
sales service customers and shareholders share equally in any increased costs or
savings. The PSCW also allows MGE to resell gas pipeline capacity reserved to
meet peak demands but not needed every day to serve customers. Revenues from
capacity release that exceed or fall short of PSCW-targeted levels are shared
equally. For the six months ended June 30, 2008 and 2007, shareholders
received the benefit of $1.1 million and $1.0 million, respectively,
from capacity release revenues and commodity savings under the GCIM.  Natural gas purchased  For the six months ended June 30, 2008, natural gas
purchased increased by $19.1 million, compared to the same period in the
prior year. The volume of gas purchased increased 12.9% which resulted in
$11.0 million of additional expense. In addition, the cost per therm of
natural gas increased 8.4% which resulted in $8.1 million of additional
expense.   Page 40    Gas operating
expenses  Gas operating expenses increased $2.8 million for
the six months ended June 30, 2008, compared to the same period a year ago.
The following changes contributed to the net change:  (In millions)
Six
Months Ended
June 30, 2008Increased
distribution costs
$0.2Increased
customer accounts costs
0.4Increased
customer service costs
1.5Increased
general and administrative costs
0.7Total
$2.8  As a result of the 2005 Wisconsin Act 141, each Wisconsin
utility is required to pay 1.2% of its annual operating revenues to the
statewide energy efficiency and renewable resource programs. MGE is allowed to
recover these costs in rates through its conservation escrow. For the six months
ended June 30, 2008, costs associated with funding these programs increased
customer service expense by $1.8 million.  Gas maintenance expense  Gas maintenance expenses increased by $0.3 million
for the six months ended June 30, 2008, compared to the same period in the
prior year. This increase relates to an increase in distribution and other
general and administrative costs.  Gas depreciation expense  Gas depreciation expense increased $0.3 million for
the six months ended June 30, 2008, compared to the same period in the
prior year.  Other Income (Deductions), Net  During the six months ended June 30, 2008, the gas
and electric segments recognized a total of $0.6 million in AFUDC-equity
and $0.3 million in gains on the sale of property. This income was offset
by a $1.5 million expense for a heating degree day collar, a
$0.3 million loss related to an equity investment, and $0.1 million of
miscellaneous expenses. See Footnote 12 for further discussion of the HDD
collar.  For the six months ended June 30, 2007, the gas and
electric segments recognized a total of $0.5 million in AFUDC-equity. This
income was offset by $0.3 million in premium expense for a heating degree
day collar and $0.1 million in miscellaneous expenses.  Interest Expense, Net  For the six months ended June 30, 2008, total
interest expense for the electric and gas segments increased $0.7 million
when compared to the same period in the prior year.  Nonregulated Energy Operations - MGE Energy and
MGE  Nonregulated energy operating revenues  Operating revenues from nonregulated energy operations
increased $1.3 million for the six months ended June 30, 2008, when
compared to the same period in the prior year. Operating revenues from
nonregulated energy operations for both the six months ended June 30, 2008
and 2007, include $7.4 million, in interdepartmental revenues related to a
leasing arrangement between MGE and MGE Power West Campus which commenced on
April 26, 2005. Upon consolidation, these interdepartmental revenues are
eliminated.  Also included in operating revenues is the recognition of
revenues related to the carrying costs for MGE Power West Campus and MGE Power
Elm Road. MGE received approval from the PSCW to collect approximately
$12.1 million in carrying costs incurred by MGE Power West Campus during
construction of the WCCF facility. MGE is collecting these costs in rates over a
period of ten years. A portion of this amount is being recognized over the
period recovered in rates and a portion is being recognized over the period in
which the facility is being depreciated (40 years). For the six months ended
June 30, 2008 and 2007, MGE Power West Campus recognized $0.5 million
and $0.6 million, respectively, related to carrying costs on the WCCF,
management, demolition, and removal fees.  Page 41    MGE also received approval
from the PSCW to collect carrying costs expected to be incurred by MGE Power Elm
Road during construction of the Elm Road project. MGE estimates that the total
carrying costs on the Elm Road project will be $60.7 million. A portion of
this amount is being recognized over the period recovered in rates and a portion
is being deferred and will be recognized over the period in which the facility
is depreciated. For the six months ended June 30, 2008 and 2007, MGE Power
Elm Road recognized $3.3 million and $2.0 million, respectively,
related to carrying costs on the Elm Road project.  Nonregulated energy interest expense,
net  For both the six months ended June 30, 2008 and
2007, interest expense, net at the nonregulated energy operations segment was
$1.3 million. Interest expense at the nonregulated energy segment for both
the six months ended June 30, 2008 and 2007, includes $1.4 million in
interest expense incurred on $50 million of long-term, fixed-rate
borrowings at MGE Power West Campus.  Also included in the nonregulated interest expense is
interdepartmental interest expense and capitalized interest at MGE Power Elm
Road. During the six months ended June 30, 2008 and 2007, MGE Power Elm
Road was charged $2.3 million and $1.7 million, respectively, in
interest expense by Corporate on funds borrowed for the Elm Road Project. This
expense is eliminated upon consolidation for MGE Energy only. The interest
expense at MGE Power Elm Road is offset by $2.3 million and
$1.7 million, respectively, in capitalized interest. MGE Power Elm Road is
capitalizing interest on the Elm Road project.  During both the six months ended June 30, 2008 and
2007, MGE Power Elm Road recorded $0.1 million in interest income on cash
advanced to Elm Road Services, LLC for construction of transmission equipment
and work done by ATC related to the Elm Road project.  Transmission Investment Operations - MGE Energy
and MGE  Transmission investment other income  For the six months ended June 30, 2008 and 2007,
other income at the transmission investment segment was $3.3 million and
$3.0 million, respectively. The transmission investment segment holds our
interest in ATC, and its income reflects our equity in the earnings of ATC.  All Other Nonregulated Operations -
MGE Energy  All other interest income, net  All other interest income, net for the six months ended
June 30, 2008 and 2007, was $1.4 million and $0.9 million,
respectively. Interest income for the six months ended June 30, 2008,
represents $2.3 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $0.9 million in interest expense on short
term debt. Interest income for the six months ended June 30, 2007,
represents $1.7 million in interdepartmental interest income from MGE Power
Elm Road, partially offset by $0.8 million in interest expense on
short-term debt. The interdepartmental interest income is eliminated upon
consolidation.  Consolidated Other General Taxes  MGE Energy's and MGE's other general taxes increased
$0.8 million or 9.6% for the six months ended June 30, 2008, when
compared to the same period in 2007, due to a combination of two factors
affecting the MGE license fee tax, which is a tax levied on gross sales in lieu
of property tax on utility property. First, higher sales increased the 2008 tax
compared to the 2007 tax. Secondly, the license fee tax for 2007 was reduced by
an audit settlement, achieved in March 2007, involving prior years' license
fee tax.  Consolidated Income Taxes  MGE Energy's effective income tax rate for the six
months ended June 30, 2008, is 35.7% compared to 35.8% for the same period
in 2007. This decrease is primarily attributable to an increased federal tax
credit for production of electricity from wind energy, as a result of placing
the Top of Iowa III wind project into production in February 2008.
Electricity generated from wind energy produces a 2.1 cents per kilowatt hour
federal tax credit. The Top of Iowa III wind project will substantially increase
the wind energy tax credit for 2008.  MGE's effective income tax rate for the six months ended
June 30, 2008, is 35.6% compared to 35.7% for the same period in the prior
year. The decrease is also primarily attributable to the increased wind energy
tax credit.  Page 42    Minority Interest, Net of
Tax  For the six months ended June 30, 2008,
MGE Energy (through its wholly owned subsidiary MGE Power) earned
$3.8 million and $2.1 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy earned $0.3 million, net of tax for its interest in MGE
Transco. These amounts are recorded as minority interest expense, net of tax, on
MGE's consolidated statement of income.  For the six months ended June 30, 2007,
MGE Energy (through its wholly owned subsidiary MGE Power) had earned
$3.9 million and $1.3 million, net of tax, for its interest in MGE
Power West Campus and MGE Power Elm Road, respectively. Additionally,
MGE Energy had earned $0.3 million, net of tax, for its interest in
MGE Transco. These amounts are recorded as minority interest expense, net of
tax, on MGE's consolidated statement of income.  Contractual Obligations and Commercial Commitments -
MGE Energy and MGE  Columbia Environmental Matters - MGE Energy
and MGE.  As of June 30, 2008, Columbia entered into various
contractual commitments with vendors for a small portion of the environmental
expenditures. MGE is indirectly a party to these agreements as a result of its
joint ownership of Columbia and is also contractually obligated, under the
applicable ownership and operating agreements, with respect to any commitments
made. MGE's share of these commitments is estimated to be $0.6 million for
the remainder of 2008. These costs are expected to be capitalized and included
in the consolidated balance sheet of MGE. See "Environmental Matters - Columbia"
below for additional information.  Elm Road Construction - MGE Energy and
MGE.  In July 2008, Bechtel, the Elm Road construction
contractor, gave notice that it now forecasts the in-service date of Unit 1 to
be delayed three months beyond the guaranteed contract date of
September 29, 2009. Bechtel also advised that it now forecasts the
in-service date of Unit 2 to be one month earlier than the guaranteed contract
date of September 29, 2010.  Bechtel states that reasons for the delay of Unit 1
include severe winter weather experienced during the winters of 2006-2007 and
2007-2008, exacerbated by severe rain storms in April and June of
2008, changes in local labor conditions from those anticipated by Bechtel, the
cumulative impact of a large number of change orders and delay in receiving full
notice to proceed in 2005 (which was a result of the court challenges by certain
opposition groups to the Certificate of Public Convenience and Necessity for the
Oak Creek expansion).  Bechtel's notice indicates that it is still analyzing the
impact of these events, and that it expects to submit claims for schedule
extensions and cost relief with required justification by the end of 2008. These
claims will be reviewed when they arrive to determine if Bechtel is entitled to
any schedule and/or cost relief.  The operator of the units has stated its belief that the
circumstances and events for which they continue to retain price adjustment risk
under the construction contract are force majeure, wage escalation in excess of
4% as measured by published wage bulletins, delays caused by the operator,
requested change in scope or performance by the operator and unforeseen
sub-surface ground conditions. Management is unable to determine the financial
impact, if any, at this time.  Other Legal Matters - MGE Energy and
MGE.  MGE is involved in various other legal matters that are
being defended and handled in the normal course of business. MGE maintains
accruals for such costs that are probable of being incurred and subject to
reasonable estimation. At June 30, 2008, MGE has a total of
$1.5 million accrued in the financial statements for such matters. The
ultimate outcome of such matters is uncertain and may have an adverse effect on
MGE's results of operations or cash flows.  Venture Debt Commitment -
MGE Energy.  MGE Energy has a three year agreement with a venture
debt fund expiring in December 2010. MGE Energy has committed to this
venture debt fund up to a total of $1.0 million at any given time. As of
June 30, 2008, MGE Energy has $0.7 million remaining in
commitments. The timing of infusions is dependent on the needs of the venture
debt fund and is therefore uncertain at this time.   Page 43    ATC Capital Commitment -
MGE Energy and MGE.  On June 16, 2008, MGE Transco elected to participate
in a voluntary capital call for ATC. As a result, MGE Transco contributed
$1.1 million to ATC in July 2008. In addition, MGE Transco contributed
$1.3 million to ATC in April 2008. Furthermore, MGE Transco has been
informed that ATC will be requesting additional capital contributions in 2008.
These additional capital contributions are voluntary. MGE Transco plans to
participate in these additional voluntary capital contributions.  Coal Contracts - MGE Energy and
MGE.  Fuel procurement for MGE's jointly owned Columbia and Elm
Road plants are handled by Alliant and Wisconsin Energy Corporation,
respectively, the operating companies. If any minimum purchase obligations must
be paid under these contracts, management believes these obligations would be
considered costs of service and recoverable in rates. As of June 30, 2008,
MGE's share of the total commitments for Columbia and Elm Road plants are
estimated to be $8.7 million for the remainder of 2008, $19.1 million
in 2009, $26.3 million in 2010, $5.4 million in 2011, and
$4.4 million in 2012.  Natural Gas Supply Contracts - MGE Energy and
MGE.  MGE has natural gas supply commitments which include
market-based pricing. Total natural gas supply commitments are estimated to be
$51.8 million for the remainder of 2008, $55.0 million for 2009, and
$2.9 million for 2010. Management expects to recover these costs in future
customer rates.  WPDES Settlement Agreement Contracts - MGE Energy
and MGE.  On July 31, 2008, the joint owners of the Oak Creek
expansion reached an agreement with Clean Wisconsin, Inc. and Sierra Club, the
groups opposing the WPDES permit. As part of this settlement, MGE has committed
to make approximate payments of $0.2 million in both 2008 and 2009.  There were no other material changes, other than from the
normal course of business, to MGE Energy's and MGE's contractual
obligations (representing cash obligations that are considered to be firm
commitments) and commercial commitments (representing commitments triggered by
future events) during the six months ended June 30, 2008. Further
discussion of the contractual obligations and commercial commitments is included
in Footnote 10 of this filing and Footnote 18 in MGE Energy's and
MGE's annual reports on Form 10-K for the year ended December 31, 2007.  Liquidity and
Capital Resources  Cash Flows  The following summarizes cash flows during the six months
ended June 30, 2008 and 2007, respectively:   MGE Energy

MGE(In thousands)
2008
2007

2008
2007Cash provided by/(used for):Operating activities
$62,519
$51,773

$62,696
$52,858Investing activities
(61,789)
(47,636)

(61,798)
(47,392)Financing activities
947
(2,676)

477
(4,256)  Cash Provided by Operating Activities  MGE Energy  MGE Energy's consolidated net cash provided by
operating activities is derived mainly from the electric and gas operations of
its principal subsidiary, MGE.  Cash provided by operating activities for the six months
ended June 30, 2008, was $62.5 million, an increase of
$10.7 million when compared to the same period in the prior year.  MGE Energy's net income increased $2.1 million
for the six months ended June 30, 2008, when compared to the same period in
the prior year.   Page 44    Depreciation for the six
months ended June 30, 2008, was $19.3 million compared to
$16.1 million in the same period in the prior year. This increase is
primarily attributable to higher levels of assets, including the Top of Iowa III
wind-powered electric generating facility which was placed in service in the
first quarter of 2008 as well as accelerated depreciation of certain Blount
assets. For additional information on the Blount accelerated depreciation, see
Footnote 11.  Deferred taxes increased
$3.4 million for the six months ended June 30, 2008 compared to the
six months ended June 30, 2007, primarily due to bonus tax depreciation as
a result of the Economic Stimulus Act of 2008.  Working capital accounts contributed to
$15.2 million in cash provided by operating activities for the six months
ended June 30, 2008, compared to $11.1 million during the same period
in the prior year. Part of this change is related to the $2.4 million 2006
fuel refund returned to customers in April 2007.  During the six months ended June 30, 2008 and 2007,
MGE Energy made $6.5 million and $4.9 million, respectively, in
discretionary contributions to the pension and other postretirement plans. See
Footnote 8 for further discussion of MGE Energy's Pension and Other
Postretirement Benefits.  MGE  Cash provided by operating activities for the six months
ended June 30, 2008, was $62.7 million, an increase of
$9.8 million when compared to the same period in the prior year.  MGE's net income increased $1.1 million for the six
months ended June 30, 2008, when compared to the same period in the prior
year.  Depreciation for the six months ended June 30, 2008,
was $19.3 million compared to $16.1 million in the same period in the
prior year. This increase is primarily attributable to higher levels of assets,
including the Top of Iowa III wind-powered electric generating facility which
was placed in service in the first quarter of 2008 as well as accelerated
depreciation of certain Blount assets. For additional information on the Blount
accelerated depreciation, see Footnote 11.  Deferred taxes increased
$3.4 million for the six months ended June 30, 2008 compared to the
six months ended June 30, 2007, primarily due to bonus tax depreciation as
a result of the Economic Stimulus Act of 2008.  Working capital accounts contributed to
$15.4 million in cash provided by operating activities for the six months
ended June 30, 2008, compared to $11.6 million during the same period
in the prior year. Part of this change is related to the $2.4 million 2006
fuel refund returned to customers in April 2007.  During the six months ended June 30, 2008 and 2007,
MGE made $6.5 million and $4.9 million, respectively in discretionary
contributions to the pension and other postretirement plans. See Footnote 8
for further discussion of MGE's Pension and Other Postretirement Benefits.  Cash Used for Investing Activities  MGE Energy  MGE Energy's cash used for investing activities
increased $14.2 million for the six months ended June 30, 2008, when
compared to the same period in the prior year.  Capital expenditures for the six months ended
June 30, 2008, were $61.1 million. This amount represents a
$12.7 million increase from the expenditures made in the same period in the
prior year. This increase is related to increased construction activity for Elm
Road of $4.6 million, $6.0 million in capital expenditures for the Top
of Iowa III wind generation project, and $2.2 million in other utility
capital expenditures. These increases were partially offset by a decrease of
$0.1 million in capital expenditures related to WCCF.  During the six months ended June 30, 2008,
MGE Energy made a cash capital contribution of $1.3 million to ATC.
During the six months ended June 30, 2007, MGE Energy did not make any
cash capital contributions to ATC. However, during the six months ended
June 30, 2007, MGE (through MGE Transco) transferred $1.4 million in
certain transmission assets to ATC. In exchange for this transfer, MGE Transco
received $0.7 million in cash proceeds and $0.7 million in an
additional investment in ATC.   Page 45    During the six months ended
June 30, 2008, proceeds from the sale of property were $0.3 million.
These proceeds primarily relate to the sale of non-utility property.  MGE  MGE's cash used for investing activities increased
$14.4 million for the six months ended June 30, 2008, when compared to
the same period in the prior year.  Capital expenditures for the six months ended
June 30, 2008, were $61.1 million. This amount represents a
$12.7 million increase from the expenditures made in the same period in the
prior year. This increase is related to increased construction activity for Elm
Road of $4.6 million, $6.0 million in capital expenditures for the Top
of Iowa III wind generation project, and $2.2 million in other utility
capital expenditures. These increases were partially offset by a decrease of
$0.1 million in capital expenditures related to WCCF.  During the six months ended June 30, 2008, MGE made
a cash capital contribution of $1.3 million to ATC. During the six months
ended June 30, 2007, MGE did not make any cash capital contributions to
ATC. However, during the six months ended June 30, 2007, MGE (through MGE
Transco) transferred $1.4 million in certain transmission assets to ATC. In
exchange for this transfer, MGE Transco received $0.7 million in cash
proceeds and $0.7 million in an additional investment in ATC.  During the six months ended June 30, 2008, proceeds
from the sale of property were $0.3 million. These proceeds primarily
relate to the sale of non-utility property.  Cash Provided by (Used for) Financing
Activities  MGE Energy  Cash provided by MGE Energy's financing activities
was $0.9 million for the six months ended June 30, 2008, compared to
cash used for financing activities of $2.7 million for the six months ended
June 30, 2007.  MGE Energy received $7.6 million and
$25.6 million in cash proceeds as the result of stock issued during the six
months ended June 30, 2008 and 2007, respectively.  For the six months ended June 30, 2008, net short
term debt borrowings were $9.0 million compared to net short term debt
repayments of $13.5 million for the same period in the prior year.  For the six months ended June 30,
2008, dividends paid were $15.7 million compared to $14.8 million for
same period in the prior year.  On March 31, 2008, MGE's $20 million unsecured
line of credit expired. Aggregate commitments on bank lines of credit for
MGE Energy and its subsidiaries as of June 30, 2008, were
$135.0 million. As of June 30, 2008, outstanding borrowings on such
lines of credit totaled $112.5 million, and $22.5 million was
available for borrowing.  MGE  During the six months ended June 30, 2008, cash
provided by MGE's financing activities was $0.5 million compared to cash
used for financing activities of $4.3 million in the same period in the
prior year.  No cash dividends were paid from MGE to MGE Energy
for the six months ended June 30, 2008. For the six months ended
June 30, 2007, cash dividends made from MGE to MGE Energy were
$13.1 million.  For the six months ended June 30, 2008, equity
contributions received from Power Elm Road and Transco were $24.8 million
compared to $23.1 for the same period in the prior year.  For the six months ended June 30, 2008, net short
term debt repayments were $18.0 million compared to $8.5 million for
the same period in the prior year.  On March 31, 2008, MGE's $20 million unsecured
line of credit expired. Aggregate commitments on bank lines of credit for MGE as
of June 30, 2008, were $55.0 million. As of June 30, 2008,
outstanding borrowings on such lines of credit totaled $43.0 million, and
$12.0 million was available for borrowing.   Page 46    Capitalization
Ratios  MGE Energy's capitalization ratios were as
follows:  MGE EnergyJune 30,
2008
Dec. 31,
2007Common shareholders' equity
54.2%
53.9%Long-term debt*
32.1%
33.1%Short-term debt
13.7%
13.0%*Includes the current portion of long-term
debt.  MGE Energy's and MGE's Capital
Requirements  As of June 30, 2008, MGE and MGE Energy had a
working capital deficit (current liabilities exceeded current assets). This
deficit is in part due to MGE funding the majority of its capital commitments
for the Top of Iowa III wind project and the Elm Road project with short-term
debt and the reclassification of $30.0 million of long-term debt which
matures in September 2008, from a long-term to a current liability. MGE
intends to refinance the $30 million medium-term note with an additional
long-term debt facility. MGE intends to fund future capital commitments for the
Elm Road projects with funds generated from normal operations, the issuance of
long-term debt, and financing received from MGE Energy. MGE Energy
intends to raise the funds for such financing primarily through the issuance of
equity securities and short-term debt, as needed.  MGE Energy's and MGE's liquidity are primarily
affected by their capital requirements. During the six months ended
June 30, 2008, capital expenditures for MGE Energy and MGE totaled
$61.1 million, which included $30.5 million of capital expenditures
for Elm Road, $0.2 million of capital expenditures for MGE Power West
Campus, $7.7 million for the Top of Iowa III wind project, and
$22.7 million of capital expenditures for other utility operations.  The following table shows MGE's current credit ratings.
The ratings presented reflect the current views of these rating agencies and are
subject to change. MGE Energy is not yet rated because it has not issued
any debt securities.  Standard & Poor's
Moody'sFirst Mortgage
Bonds
AA-
Aa2Unsecured Medium
Term Notes
AA-
Aa3Commercial
Paper
A1+
P1  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.  Environmental Matters  The following discussion is limited to updates or
developments in environmental matters that occurred during the six months ended
June 30, 2008. Further discussion of environmental matters is included in
MGE Energy's and MGE's annual reports on Form 10-K for the year ended
December 31, 2007.  State mercury rules  In June 2008, the Wisconsin Natural Resources Board
approved the final NR 446 rule which is now subject to legislative review under
Wisconsin's process. The state's rule is significantly different from the
federal CAMR that was vacated in February 2008 by the U.S. Court of Appeals
for the District of Columbia Circuit. See Item 1. Business in MGE Energy's
and MGE's annual reports on Form 10-K for the year ended December 31, 2007,
for additional discussion of the federal CAMR. NR 446 will require large
coal-fired Electric Generating Units (EGUs larger than 150 MW) to reduce mercury
emissions by 90% beginning in 2015, or choose a multi-pollutant reduction
approach, which allows a stepped approach to mercury reduction while reducing
NOx and SO2emissions at prescribed rates. Smaller
coal-fired EGUs, those between 25  150 MW in size, will need to apply Best
Available Control Technology (BACT) to achieve mercury reductions. This rule
will require additional pollution controls at Columbia, and may cost Blount and
Elm Road additional capital and operating costs. Exact costs are unknown at this
time.   Page 47    Federal National Ambient
Air Quality Standards  On March 12, 2008, the U.S. EPA announced a new
national ambient air quality standard for ozone which is more stringent than the
current standard (standard lowered from 0.08 to 0.0750 parts per million).
States (including Wisconsin) must monitor and collect data on ozone levels in
order to determine attainment or nonattainment status on a county and/or area
basis. Currently available monitoring data for Dane and Columbia counties
demonstrates attainment with this new standard. However, final attainment
designations will not be made until 2010 using the monitoring data collected
during the period 2007 through 2009. There is a possibility that future
monitoring data for one or both of these counties will demonstrate nonattainment
for this new ozone standard, which could result in additional operating and
capital expenditures at Columbia (located in Columbia county) and Blount
(located in Dane county). Similarly, new standards for particulate emissions
under 2.5 microns and monitoring data may result in a nonattainment designation
for Dane county and possibly Columbia county for particulate emissions, which
could also result in increased expenditures at Blount and Columbia.  Federal Clean Air Interstate Rule
(CAIR)  On July 11, 2008, the DC Circuit Court of Appeals
vacated and remanded the EPA's Clean Air Interstate Rule (CAIR). See Part I.
Item 1. Business, Environmental, Air Quality in the December 31, 2007 10-K
for additional information on CAIR. It is unclear at this time how the EPA will
respond to the Court of Appeals decision. The State of Wisconsin's NR 432 deals
with NOXallocations under CAIR, and portions of Wisconsin's Best
Available Retrofit Technology (BART) rule defer to CAIR when dealing with
emissions from EGUs subject to CAIR. It is unclear what steps the State will be
taking to resolve these rules in light of the CAIR vacatur.  Global Climate Change  On March 27, 2008, the U.S. EPA sent letters to
various environmental committees in the U.S. Senate and House of Representatives
announcing their plans to address their obligations under the Supreme Court's
ruling in Massachusetts v. EPA. The letters to Congress indicated that
the EPA sees any Green House Gas regulations that they develop to be
far-reaching and likely to include both mobile and stationary sources. In
July 2008, the EPA issued an Advance Notice of Proposed Rulemaking seeking
comment on a large array of possible regulatory actions it is contemplating
under the federal Clean Air Act to reduce greenhouse gas emissions. The proposed
rules impact virtually all aspects of the economy including electric and natural
gas utilities. The EPA document follows last year's U.S. Supreme Court decision
requiring the EPA to regulate greenhouse gas emissions under the Clean Air Act
if it finds that they endanger public health or welfare. The document seeks
comment on whether the EPA should make that finding and, if so, the types of
regulations it should adopt. There will be a 120 day comment period commencing
when the document is published in the Federal Register. It is unknown at this
time what impact, if any, such a finding would have on us.  A final report from Governor Doyle's Global Warming Task
Force was approved on July 24, 2008, concluding over a year's work by the
task force.  WPDES permit  On November 29, 2007, the Administrative Law Judge
(the "ALJ") in the proceeding related to the previously issued Wisconsin
Pollution Discharge Elimination System ("WPDES") permit determined that the two
additional coal units that are part of the Oak Creek expansion are "new
facilities" under section 316(b) of the Federal Clean Water Act. The ALJ did not
vacate the WPDES permit or any other permit necessary to continue construction
of the two additional coal units, pointing out that, based upon the present
record, the water intake system currently under construction as part of the Oak
Creek expansion may be permittable under the standards that apply to new
facilities. The ALJ remanded the WPDES permit to the Wisconsin Department of
Natural Resources (the "WDNR") and directed the WDNR to reissue or modify the
permit to reflect "best technology available" to comply with the standards
applicable to new facilities under Wisconsin state law. As part of the decision,
the ALJ restated his prior opinion that the water intake system currently under
construction may not be operated so long as it remains a contested matter.  The plant operator has advised us that there are
alternatives under the United States Environmental Protection Agency's (the
"EPA") rule for new facilities that would permit the use of the once-through
cooling system rather than the use of cooling towers. The operator has requested
the WDNR to issue a modified permit and has submitted additional information to
the WDNR supporting the request for approval of the once-through cooling system
under this rule.   Page 48    On May 8, 2008, WDNR
issued its public notice that it intended to reissue the WPDES permit to allow
for the once-through cooling system that was under construction by Wisconsin
Energy Corporation. On June 6, 2008, EPA issued its concurrence letter on
the draft permit indicating it would not object to the modification of the WPDES
permit as drafted. A public information hearing on the intended reissued WPDES
permit was held on June 9, 2008 and the public comment period closed on
June 16, 2008. On July 31, 2008, the WDNR issued the final modified
permit, with no substantive changes from the previously issued draft permit.
This permit can be challenged in a hearing before the Wisconsin Division of
Hearings and Appeals or through judicial review.  On July 31, 2008, the joint owners of the Oak Creek
expansion reached an agreement with Clean Wisconsin, Inc. and Sierra Club, the
groups opposing the WPDES permit. Under the settlement agreement, these groups
have agreed to withdraw their opposition to the modified WPDES permit for the
expansion units at Oak Creek. The joint owners have committed to various
environmental projects, including projects designed to address greenhouse gas
emissions and water quality. MGE's share of those commitments would involve
payments of approximately $0.2 million in each of 2008 and 2009 and,
subject to regulatory approval, further payments of approximately
$0.3 million annually over 25 years (2010-2035) to address water
quality issues in Lake Michigan.  We cannot predict the timing or results, or the effect
upon construction schedule or costs, of any decision by any administrative or
legal process that may follow.  Columbia  MGE and two other utilities jointly own Columbia, a
coal-fired generating facility, which accounts for 225 MW (29%) of MGE's net
generating capability. Various environmental initiatives are expected to result
in significant additional operating and capital expenditures at Columbia. The
operator's current estimates show that MGE's share of the capital expenditures
required to comply with various environmental initiatives will be between
$130 million and $200 million. According to current estimates,
compliance with various environmental initiatives is also expected to result in
an increase to MGE's pro-rata share of Columbia's ongoing operating expenses.
The operator and MGE management are continuing to explore various alternatives
to comply with these standards. Accordingly, actual capital expenditures may
fall above or below the range provided. MGE expects that the costs to comply
with these standards will be fully recoverable through rates.  Restructuring Activities  On January 19, 2006, MGE announced a plan, subject
to certain conditions, that includes discontinuing coal use at the end of 2011
at Blount. The plant will continue to run on natural gas but will be reduced
from its current approximate 190 MW capacity to 100 MW when coal burning is
discontinued. MGE has determined that certain employee positions will be
eliminated in 2011 as a result of this exit plan.  MGE has entered into severance agreements providing
severance benefits to the nonunion employees affected by the exit plan.
Additionally, MGE ratified a labor agreement with the IBEW providing those union
employees affected by the exit plan with involuntary and voluntary severance
benefits. The nonunion and union benefits are expected to be paid follows:
$0.2 million in 2010 and $1.2 million in 2011.  MGE will recover in rates the costs associated with the
discontinuance of coal at Blount. As such, the severance charges for these
employees have been deferred and recognized on the consolidated balance sheet of
MGE Energy and MGE as a regulatory asset.  Other Regulatory Matters  Fuel filing  On May 30, 2008, MGE filed with the PSCW a limited
scope reopener of its 2009 electric rates with the PSCW. The application
included an update to MGE's electric fuel costs monitored under the fuel rules
and an update to the Elm Road costs. If approved by the PSCW, the net effect of
the requested changes would result in a 6.99% increase, on average, in retail
electric rates.   Page 49    Fuel
surcharge  On May 5, 2008, the PSCW approved a $0.00239 per kWh
interim fuel surcharge on MGE's electric rates. This interim fuel surcharge will
result in an estimated $8.0 million increase in electric revenues on an
annual basis. The interim fuel surcharge was included in electric rates as of
May 6, 2008. Pursuant to the provisions of this interim order, MGE's
electric revenues resulting from this interim surcharge are subject to refund
with interest at 10.8% should it ultimately be determined that the interim fuel
surcharge resulted in collections greater than actual costs.  New Accounting
Principles  Pension Protection Act  During the third quarter of 2006, President Bush signed
into law the Pension Protection Act of 2006, which will affect the manner in
which companies, including MGE and MGE Energy, administer their pension
plans. This legislation will require companies to, amongst other things,
increase the amount by which they fund their pension plans, pay higher premiums
to the Pension Benefit Guaranty Corporation if they sponsor defined benefit
plans, amend plan documents and provide additional plan disclosures in
regulatory filings and to plan participants. This legislation became effective
as of January 1, 2008. The U.S. Treasury Department's interim guidance
indicates that further guidance is forthcoming. MGE does not expect significant
changes in expected cash flows as a result of the Act. Absent changes in plan
design as a result of the Act, the Act is not expected to materially impact MGE
and MGE Energy's results of operations.  FSP FIN 39-1  In April 2007, the FASB issued FSP 39-1,
Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). This
pronouncement amends FIN 39, Offsetting of Amounts Related to Certain
Contracts, and allows companies to offset fair value amounts recognized for
the right to reclaim cash collateral (a receivable) or the obligation to return
cash collateral (a payable) against fair value amounts recognized for derivative
instruments executed with the same counterparty under a master netting
agreement. MGE and MGE Energy elected the net presentation as prescribed by
this pronouncement. FSP FIN 39-1 became effective for MGE and MGE Energy as
of January 1, 2008. The effects of applying this pronouncement shall be
recognized as a change in accounting principle through retroactive application
for all financial statements presented. The adoption of this pronouncement did
not have any impact on MGE or MGE Energy's net income. At June 30,
2008, MGE Energy and MGE did not have any cash collateral to net against
the net derivative positions with counterparties.  FAS 160 and FAS 141(R)  In December 2007, the FASB issued FAS 160,
Non-Controlling Interests in Consolidated Financial Statements, an amendment
of ARB No. 51 and FAS 141(R), Business Combinations. These
pronouncements will change the accounting and reporting for business
acquisitions and noncontrolling interest in a subsidiary. In addition,
FAS 160 will change the accounting and reporting for the deconsolidation of
a subsidiary. FAS 160 and FAS 141(R) will be effective for MGE and
MGE Energy as of January 1, 2009. MGE and MGE Energy are
currently assessing the impact these pronouncements will have on their financial
statements.  FAS 161  In March 2008, the FASB issued FAS 161,
Disclosures about Derivative Instruments and Hedging Activities. The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early adoption allowed. MGE and MGE Energy have elected not to early adopt
this pronouncement. Therefore, FAS 161 will be effective for MGE and
MGE Energy as of January 1, 2009. MGE and MGE Energy are
currently assessing the impact this pronouncement will have on their financial
statements.   Page 50    Item
3. Quantitative and Qualitative Disclosures About Market Risk.  MGE Energy and MGE are potentially exposed to market
risk associated with interest rates, commodity prices, weather, and equity
returns. MGE currently has no exposure to foreign currency risk. MGE manages
some risk exposure through risk management policies and uses derivative
instruments. MGE's market risk has not changed between 2007 and 2008. MGE does
not enter into speculative trading transactions.  Weather Risk  MGE's sales forecasts, used to establish rates, are set
by the PSCW based upon estimated temperatures, which approximate 20-year
averages. MGE's electric revenues are sensitive to the summer cooling season
and, to some extent, to the winter heating season. A significant portion of
MGE's gas system demand is driven by heating. MGE's gas revenues are collected
under a combination of fixed and volumetric rates set by the PSCW based on
"normal weather." As a result of weather-sensitive demand and volumetric rates,
a portion of MGE's gas revenue is at risk for warmer-than-normal weather. MGE
may use weather derivatives, pursuant to its risk management program, to reduce
the impact of weather volatility on its gas revenues.  MGE may also be impacted by extreme weather conditions
such as hurricanes or tornados. Such conditions may damage critical operating
assets or may negatively impact the price of commodity and other costs.  A summary of actual weather information in the utility
segment's service territory during the three and six months ended June 30,
2008, as measured by degree days, may be found in results of operations.  Commodity Price Risk  MGE has commodity price risk exposure with respect to the
price of natural gas, electricity, coal, emission credits, and oil. MGE employs
established policies and procedures to reduce the market risks associated with
changing commodity prices. MGE's commodity risks are somewhat mitigated by the
current ratemaking process in place for recovering electric fuel cost, purchased
energy costs, and the cost of natural gas. MGE's electric fuel costs are subject
to fuel rules established by the PSCW.  MGE's electric operations burn natural gas in several of
its peak power plants or as a supplemental fuel at several coal-fired plants
and, in many cases, the cost of purchased power is tied to the cost of natural
gas. MGE bears significant regulatory risk for the recovery of such fuel and
purchased power costs when they are higher than the base rate established in its
current rate structure.  Under the electric fuel rules, MGE may be required to
refund to customers if its actual fuel costs fall outside the lower end of the
range and would be allowed to request a surcharge if those actual fuel costs
exceed the upper end of the range. The range is defined by the PSCW and has been
modified throughout the years based on market conditions and other relevant
factors. Pursuant to the PSCW order issued on December 14, 2007, MGE's
electric fuel rules monitored range is a plus or minus 2% range. MGE assumes the
risks and benefits of variances that are within the 2% bandwidth. For 2008 as
updated for the interim fuel surcharge, fuel and purchased power costs included
in MGE's base fuel rates are $126.8 million. See Footnote 14.b. for
additional information. MGE's gas segment is governed by the purchased gas
adjustment clause (PGA). Under the PGA, MGE is able to pass through to customers
the cost of gas, subject to certain limited incentives. Under both the electric
fuel rules and PGA clause, MGE may include in the cost of fuel (natural gas or
power) the costs and benefits of fuel price risk management tools implemented
under the risk management plan approved by the PSCW.  MGE also reduces price risk caused by market fluctuations
via physical contracts and financial contracts, including futures, swaps,
options, and forwards. The financial contracts currently being cash-flow hedged
are no greater than one year, except for the ten-year purchased power agreement
described below.  At June 30, 2008, MGE has financial gas and electric
commodity contracts to hedge commodity price risk in the gas and electric
segments. These contracts are primarily comprised of exchange-traded option and
future contracts to manage the cost of gas. MGE also holds FTRs which are used
to hedge the risk of increased electric transmission congestion charges. At
June 30, 2008, the net market value of all these aforementioned instruments
exceeded their costs by $5.4 million.   Page 51    MGE has also entered into a
ten-year purchased power agreement which provides MGE with firm capacity and
energy beginning June 12, 2012, and ending on May 31, 2022 (the "base
term"). The agreement also allows MGE the option to purchase power during a
period of time preceding the base term as well as an option to extend the
contract after the base term. The agreement is a derivative contract and is
recognized at its fair value on the balance sheet. The fair value of the
contract at June 30, 2008, is $3.6 million.  Interest Rate Risk  Both MGE and MGE Energy have short-term borrowings
at varying interest rates. MGE issues commercial paper for its short-term
borrowings, while MGE Energy draws from its current credit facility to meet
its short-term borrowing needs. Borrowing levels vary from period to period
depending upon capital investments and other factors. Future short-term interest
expense and payments will reflect both future short-term interest rates and
borrowing levels. MGE Energy and MGE manage interest rate risk by limiting
their variable rate exposure and continually monitoring the effects of market
changes on interest rates. MGE is not exposed to changes in interest rates on a
substantial portion of its long-term debt until that debt matures and is
refinanced at market rates.  Equity Price Risk - Pension-Related Assets  MGE currently funds its liabilities related to employee
benefits through trust funds. These funds, which include investments in debt and
equity securities, are managed by various investment managers. Changes in market
value of these investments can have an impact on the future pension and
postretirement expenses.  Credit Risk - Counterparty  Credit risk is the loss that may result from counterparty
nonperformance. MGE is exposed to credit risk primarily through its merchant
energy business. MGE uses credit policies to manage its credit risk, which
includes utilizing an established credit approval process, monitoring
counterparty limits, employing credit mitigation measures such as collateral or
prepayment arrangements, and using netting agreements.  Due to the possibility of extreme volatility in the
prices of energy commodities and derivatives, the market value of contractual
positions with individual counterparties could exceed established credit limits
or collateral provided by those counterparties. If such a counterparty were then
to fail to perform its obligations under its contract (for example, fail to
deliver the electricity MGE originally contracted for), MGE could sustain a loss
that could have a material impact on its financial results.  Additionally, if a counterparty were to default and MGE
were to liquidate all contracts with that entity, MGE's credit loss would
include the loss in value of mark-to-market contracts; the amount owed for
settled transactions; and additional payments, if any, to settle unrealized
losses on accrual contracts.  MGE is obligated to provide service to all electric and
gas customers within its respective franchised territories. MGE's franchised
electric territory includes a 315 square-mile area in Dane County, Wisconsin,
and MGE's franchised gas territory includes a service area covering 1,625 square
miles in Wisconsin. Based on results for the year ended December 31, 2007,
no one customer constituted more than 7% of total operating revenues for MGE and
MGE Energy. Credit risk for electric and gas is managed by MGE's credit and
collection policies, which are consistent with state regulatory
requirements.  Cash, cash equivalents, and customer accounts receivable
are the financial instruments that potentially subject MGE Energy and MGE
to concentrations of credit risk. MGE Energy and MGE place their cash and
cash equivalents with high credit-quality financial institutions. MGE has
limited concentrations of credit risk from customer accounts receivable because
of the large number of customers and strong economy in its service
territory.   Page 52    Item
4. Controls and Procedures.  During the second quarter of 2008, MGE Energy's
management, including the principal executive officer and principal financial
officer, evaluated its disclosure controls and procedures related to the
recording, processing, summarization, and reporting of information in its
periodic reports that it files with the SEC. These disclosure controls and
procedures have been designed to ensure that material information relating to
MGE Energy, including its subsidiaries, is accumulated and made known to
MGE Energy's management, including these officers, by other employees of
MGE Energy and its subsidiaries as appropriate to allow timely decisions
regarding required disclosure, and that this information is recorded, processed,
summarized, evaluated, and reported, as applicable, within the time periods
specified in the SEC's rules and forms. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision making can be
faulty and breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Also, MGE Energy does not control or manage certain of its
unconsolidated entities and thus, its access and ability to apply its procedures
to those entities is more limited than is the case for its consolidated
subsidiaries.  As of June 30, 2008, the principal executive officer
and the principal financial officer concluded that MGE Energy's disclosure
controls and procedures were effective to accomplish their objectives.
MGE Energy intends to continually strive to improve its disclosure controls
and procedures to enhance the quality of its financial reporting.  During the quarter ended June 30, 2008, there were
no changes in MGE Energy's internal controls over financial reporting that
materially affected, or are reasonably likely to materially affect,
MGE Energy's internal control over financial reporting.  Item 4T. Controls
and Procedures.  During the second quarter of 2008, MGE's management,
including the principal executive officer and principal financial officer,
evaluated its disclosure controls and procedures related to the recording,
processing, summarization, and reporting of information in its periodic reports
that it files with the SEC. These disclosure controls and procedures have been
designed to ensure that material information relating to MGE, including its
subsidiaries, is accumulated and made known to MGE's management, including these
officers, by other employees of MGE and its subsidiaries as appropriate to allow
timely decisions regarding required disclosure, and that this information is
recorded, processed, summarized, evaluated, and reported, as applicable, within
the time periods specified in the SEC's rules and forms. Due to the inherent
limitations of control systems, not all misstatements may be detected. These
inherent limitations include the realities that judgments in decision making can
be faulty and breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Also, MGE does not control or manage certain of its unconsolidated
entities and thus, its access and ability to apply its procedures to those
entities is more limited than is the case for its consolidated subsidiaries.  As of June 30, 2008, the principal executive officer
and the principal financial officer concluded that MGE's disclosure controls and
procedures were effective to accomplish their objectives. MGE intends to
continually strive to improve its disclosure controls and procedures to enhance
the quality of its financial reporting.  During the quarter ended June 30, 2008, there were
no changes in MGE's internal control over financial reporting that materially
affected, or are reasonable likely to materially affect, MGE's internal control
over financial reporting.   Page 53    PART
II. OTHER INFORMATION.  Item 1. Legal
Proceedings.  MGE Energy and MGE  MGE Energy and MGE from time to time are involved in
various legal proceedings that are handled and defended in the ordinary course
of business. While MGE Energy and MGE are unable to predict the outcome of
these matters, management does not believe, based upon currently available
facts, that the ultimate resolution of any of such proceedings would have a
material adverse effect on their overall financial condition or results of
operations except as disclosed in MGE Energy's and MGE's annual report on
Form 10-K for the year ended December 31, 2007.  Item 4. Submission
of Matters to a Vote of Security Holders.  MGE Energy's Annual Meeting of Shareholders was held
on May 20, 2008, in Middleton, Wisconsin. Listed below are the nominees for
Class I Directors and the results of the voting.  Class I Directors - Term Expiring in 2011Londa J. Dewey

Regina M. MillnerFor Votes
17,778,684

17,766,579Withhold
Authority
535,717

547,822Shares Not
Voted
3,685,187

3,685,187  No votes were cast for any other nominee. The directors
continuing in office are:  Class II Directors

Class III DirectorsTerm Expires in 2009

Term Expires in 2010H. Lee
Swanson

Richard E.
BlaneyJohn R.
Nevin

Frederic E.
MohsGary J.
Wolter

F. Curtis
Hastings  Shareholders ratified the selection of
PricewaterhouseCoopers LLP as our independent registered public accounting firm
for 2008. With respect to the ratification of the selection of
PricewaterhouseCoopers LLP to act as our independent registered public
accounting firm, shareholders voted:  Voted
SharesFor
18,026,078Against
90,715Abstained
197,608Shares Not
Voted
3,685,187Total
21,999,588 Item 6.
Exhibits.  12 Statement regarding computation of
ratio of earnings to fixed charges for Madison Gas and Electric Company  Certifications Pursuant to Rule 13a-14(a) and 15d-14(a)
of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2008, filed by the following officers
for the following companies:  31.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 31.2 Filed by Terry A. Hanson for
MGE Energy, Inc. 31.3 Filed by Gary J. Wolter for Madison
Gas and Electric Company 31.4 Filed by Terry A. Hanson for Madison
Gas and Electric Company  Certifications Pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code (Sarbanes-Oxley Act of 2002) as to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008, filed by the
following officers for the following companies:  32.1 Filed by Gary J. Wolter for
MGE Energy, Inc. 32.2 Filed by Terry A. Hanson for
MGE Energy, Inc. 32.3 Filed by Gary J. Wolter for Madison
Gas and Electric Company 32.4 Filed by Terry A. Hanson for Madison
Gas and Electric Company  Page 54    Signatures - MGE Energy, Inc.  Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.   MGE ENERGY, INC.Date: August 7, 2008
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: August 7, 2008
/s/ Terry A. HansonTerry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Chief Financial and Accounting
Officer)    Page 55    Signatures - Madison Gas and Electric Company  Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.   MADISON GAS AND ELECTRIC COMPANYDate: August 7, 2008
/s/ Gary J. WolterGary J. Wolter
Chairman, President and Chief Executive Officer
(Duly Authorized Officer)Date: August 7, 2008
/s/ Terry A. HansonTerry A. Hanson
Vice President, Chief Financial Officer and
Secretary
(Chief Financial and Accounting
Officer)   Page 56