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

*For the fiscal year ended:***December 31, 2002**
  [ ] 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                 | 39-2040501                           
|000-1125                  | **Madison Gas and Electric Company**(a Wisconsin Corporation)
      133 South Blair Street
      Madison, Wisconsin 53703
      (608) 252-7000 | 39-0444025                           
|                          | **www.mgeenergy.com**
      Web Site                                                                                                           |                                      







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

Indicate by checkmark whether the registrants (1) have filed all reports
  required to be filed by Section 13 or 15(d) of the Securities Exchange
  Act of 1934 during the preceding 12 months (or for such shorter period that
  the registrants were required to file such reports) and (2) have been subject
  to such filing requirements for the past 90 days. Yes X

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined
  in Rule 12b-2 of the Act).
  MGE Energy, Inc. - Yes X 
  Madison Gas and Electric Company - No X

The number of shares outstanding of each registrant's common stock as of March
  1, 2003.
  MGE Energy, Inc. - 17,638,797
  Madison Gas and Electric Company - 17,347,889





Portions of MGE Energy, Inc.'s definitive Proxy Statement to be filed prior
  to April 30, 2003, relating to its annual meeting of shareholders, are
  incorporated by reference into Part III of this annual report on Form 10-K.

Madison Gas and Electric Company meets the conditions set forth in General
  Instruction (I)(1)(a) and (b) of Form 10-K and is therefore omitting (i) the
  information otherwise required by Item 601 of Regulation S-K relating to
  a list of subsidiaries of the registrant as permitted by General Instruction
  (I)(2)(b), (ii) certain information otherwise required by Item 6 of
  Form 10-K relating to Selected Financial Data, (iii) certain information
  otherwise required by Item 10 of Form 10-K relating to Directors and Executive
  Officers as permitted by General Instruction (I)(2)(c), and (iv) certain information
  otherwise required by Item 11 of Form 10-K relating to executive compensation
  as permitted by General Instruction (I)(2)(c).

This combined Form 10-K is separately filed by MGE Energy, Inc. and Madison
  Gas and Electric Company. Information contained herein relating to any individual
  registrant is filed by such registrant in its own behalf. Neither registrant
  makes any representation as to information relating to the other registrant.

**Table of Contents**

**PART I.**

Item 1. Business.

Item 2. Properties.

Item 3. Legal Proceedings.

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

**PART II.**

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

Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures about Market
  Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on
  Accounting and Financial Disclosure.

**PART III.**

Item 10. Directors and Executive Officers of the Registrants.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners
  and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions.

Item 14. Controls and Procedures.

**PART IV.**

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

Signatures - MGE Energy, Inc.

Signatures - Madison Gas and Electric Company

Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
  Exchange Act of 1934

**Item 1. Business.**

MGE Energy, Inc. (MGE Energy), through its principal subsidiary Madison Gas
  and Electric Company (MGE), operates in two business segments:

- Electric operations--generating and distributing electricity.
  - Gas operations--purchasing and distributing natural gas.

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

MGE's utility operations represent substantially all of the assets, liabilities,
  revenues, and expenses of MGE Energy. MGE Energy's nonutility operations, relating,
  principally, to the development of a cogeneration project on the Madison campus
  of the University of Wisconsin (UW), are not significant at this time. Consequently,
  the following discussion focuses on the results of operations and financial
  condition of MGE.

MGE Energy was organized as a Wisconsin corporation in 2001. MGE was organized
  as a Wisconsin corporation in 1896. Their principal offices are located at 133 South
  Blair Street, Madison, Wisconsin 53703.

MGE Energy and MGE maintain a Web site at the address specified on the cover
  of this report where copies of its annual reports on Form 10-K, quarterly reports
  on Form 10-Q, current reports on Form 8-K, and any amendments thereto may be
  obtained free of charge. This address is inactive textural and the content of
  this Web site is not part of this Form 10-K.

**MGE**

As a public utility, MGE is subject to regulation by the Public Service Commission
  of Wisconsin (PSCW) and the Federal Energy Regulatory Commission (FERC). The
  PSCW has authority to regulate most aspects of MGE's business including rates,
  accounts, issuance of securities, and plant and transmission line siting. FERC
  has jurisdiction, under the Federal Power Act, over certain accounting practices
  and certain other aspects of MGE's business.

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

MGE's business is seasonal based on fluctuations in weather conditions.

**Electric Operation**

At December 31, 2002, MGE supplied electric service to nearly 130,000
  customers, of whom 115,000 were located in the cities of Fitchburg, Madison,
  Middleton, and Monona and 15,000 in adjacent areas. Of the total number of customers,
  approximately 113,000 were residential and 17,000 were commercial and industrial.
  Electric revenues for 2002 were comprised of residential (36%), commercial (48%),
  industrial (6%), sales to public authorities including the UW (7%), sales
  to other utilities, and other (3%). Electric operations accounted for 65% of
  MGE's total 2002 revenues.

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

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

MGE is part owner of the American Transmission Company LLC (ATC), a for-profit
  transmission company resulting from Reliability 2000 legislation (Part of 1999
  Wisconsin Act 9). Part of Reliability 2000 created a statewide transmission
  company to own the investor-owned utilities' transmission assets. The purpose
  of ATC is to provide reliable, economic transmission service to all customers
  in a fair and equitable manner. ATC plans, constructs, operates, maintains,
  and expands transmission facilities it owns to provide adequate and reliable
  transmission of power.

On February 1, 2002, MGE started taking network transmission service from
  the Midwest Independent Transmission System Operator, Inc. (Midwest ISO). Midwest
  ISO is a nonprofit Regional Transmission Organization approved by the FERC.
  The Midwest ISO is responsible for monitoring the electric transmission system
  that delivers power from generating plants to wholesale power transmitters.
  The Midwest ISO's role is to ensure equal access to the transmission system
  and to maintain or improve electric system reliability in the Midwest.

***Fuel Supply and Generation***

MGE estimates its net kilowatt-hour requirements for 2003 will be provided
  from the following sources: 64% from fossil-fueled steam plants, 33% from power
  purchases, and 3% from a combination of wind turbines, diesel generators, and
  combustion turbines. Actual sources used will depend on generating unit availability,
  weather, and customer demand.

MGE has a 22% ownership interest in two, 512-megawatt (MW) coal-burning units
  at the Columbia Energy Center (Columbia). The coal inventory supply for the
  units decreased from 49 days on December 31, 2001, to 46 days on December 31,
  2002. The co-owners' goal is to maintain approximately a 40-day inventory. The
  units burn low-sulfur coal obtained from the Powder River Basin coal fields
  located in Wyoming and Montana.

For information about a request from the U.S. Environmental Protection
  Agency (EPA) that affects Columbia, refer to the section on Air Quality under
  Environmental below.

**Gas Operations**

On December 31, 2002, MGE supplied natural gas service to more than 126,000
  customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona,
  Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of
  45 townships. Gas revenues for 2002 were comprised of residential (58%), commercial
  (37%), industrial (1%), and other (1%). Transportation service accounted for
  almost 3% of the total 2002 gas revenues. Gas operations accounted for 35% of
  MGE's total revenues.

MGE can curtail gas deliveries to its interruptible customers. Approximately
  4% of gas sold in 2002 was to interruptible customers.

***Gas Supply***

MGE has physical interconnections with ANR Pipeline Company (ANR) and Northern
  Natural Gas Company (NNG). MGE's primary service territory, which includes Madison
  and the surrounding area, receives deliveries at one NNG and four ANR gate stations.
  MGE also receives deliveries at NNG gate stations located in Elroy, Prairie du
  Chien, Viroqua, and Crawford County. Interconnections with two major pipelines
  provide competition in interstate pipeline service and a more reliable and economical
  supply mix, which includes gas from Canada and from the mid-continent and Gulf/offshore
  regions in the United States.

By contract, a total of 4,946,342 dekatherms can be injected into ANR's storage
  fields from April 1 through October 31. These gas supplies are then
  available for withdrawal during the subsequent heating season, November 1
  through March 31. ANR's storage fields are located in Michigan. Using storage
  allows MGE to buy gas supplies during the summer season, when prices are normally
  lower, and withdraw these supplies during the winter season, when prices are
  typically higher. Storage also gives MGE more flexibility in meeting daily load
  fluctuations.

During the winter months, when customer demand is high, MGE is primarily concerned
  with meeting its obligation to firm customers. MGE meets customer demand by
  using firm supplies under contracts finalized before the heating season, supplies
  in storage (injected during the summer), and other firm supplies purchased during
  the winter period.

The prior heating season (November 2001 through March 2002) was warmer
  than normal (16% fewer heating degree days). The current heating season (November 2002
  through March 2003) has been 2% warmer than normal (based on actual heating
  degree days through January) and storage quantities are at a normal level. A
  heating degree day is the number of degrees that the mean daily temperature
  is below 65 degrees Fahrenheit.

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

- 141,650 dekatherms (including 86,078 dekatherms of storage withdrawals) on
  ANR.
  - 54,719 dekatherms on NNG.
  - 2,457 dekatherms into Viroqua's NNG gate station.
  - 1,432 dekatherms into Crawford County's NNG gate station.

**Environmental**

MGE is subject to state and federal regulations concerning air quality, water
  quality, and solid waste disposal. Those regulations affect the manner in which
  MGE conducts its operations, the costs of those operations, as well as some
  capital and operating expenditures. It can also affect the siting, timing, and
  cost of new projects or other significant actions affecting the environment.
  MGE believes that it has met the requirements of current environmental regulations.
  MGE is not able to predict if compliance with future pollution control regulations
  will involve additional expenditures for pollution control equipment or plant
  modifications, operations curtailments, reductions in capacity or efficiency
  at existing plants, or delays in the construction and operation of future generating
  facilities.

The Wisconsin Department of Natural Resources (DNR) regulates pollution and
  environmental control matters at MGE's electric generating plants. The DNR has
  jurisdiction over air and water quality as well as solid and hazardous waste
  standards.

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

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

***Air Quality***

In the summer of 1997, the EPA finalized new, stricter federal air quality
  standards for ozone and fine particulate matter. Under the new standards, EPA
  anticipates designating new nonattainment areas by late 2003 or early 2004.
  Southeastern Wisconsin is expected to be classified as nonattainment. There
  is a possibility that Dane County, the location of the Blount Generating Station
  (Blount), will also be classified as nonattainment.

The DNR is required to develop a State Implementation Plan by 2007 to demonstrate
  how the state will attain and maintain compliance with the new ozone and fine
  particulate matter standards. The DNR is considering a plan that would require
  NOx and fine particulate limits for sources throughout the state
  rather than focusing reductions on just those sources located in the nonattainment
  areas. If this approach is taken, MGE may need to evaluate emission control
  options for its facilities in order to comply. The EPA has set 2010 as the deadline
  for states to meet the new standards. However, emission control requirements
  could be imposed in Wisconsin as early as the spring of 2006.

On October 27, 1998, the EPA issued final rules requiring more NOx
  emission reductions from sources in 22 states and the District of Columbia,
  including Wisconsin, to reduce the transport of ozone across state boundaries.
  However, a successful legal challenge resulted in excluding Wisconsin from part
  of this rule. After further modeling and research, the EPA is expected to revise
  or amend these rules to impose additional NOx emission reduction
  requirements on Wisconsin sources in order to help other states meet ambient
  ozone standards.

MGE is evaluating NOx compliance strategies, including fuel switching,
  emissions trading, purchased power agreements, new emission control devices,
  and/or installation of new fuel-burning and clean-coal technologies. Implementing
  any of these new measures would likely increase capital, operating, and maintenance
  expenditures.

Wisconsin's acid rain law imposes limitations on SO2 emissions.
  Blount and MGE's share of Columbia are required to meet a combined SO2
  emission rate of 1.20 pounds of SO2 per million Btu. MGE does
  not anticipate any capital expenditure in order to comply with this standard.

The DNR continues to develop rules to limit mercury emissions from coal-fired
  boilers. The proposed rules require sources emitting mercury to reduce emissions
  over 15 years. It also currently sets a ceiling of 10 pounds of mercury per
  year for smaller sources. Depending on the outcome of these regulations, they
  may require MGE to evaluate emission control options for its facilities
  in order to comply. These controls would likely increase capital expenditures
  and operating and maintenance expenses.

On January 1, 2000, Phase II of the 1990 Federal Clean Air Act amendments
  took effect, setting new emission limits for sulfur dioxide (SO2)
  and nitrogen oxide (NOx). MGE's generating units meet those limits.
  The units were modified well in advance to meet year 2000 NOx requirements.
  Early modifications at Blount allow MGE to postpone meeting more stringent Phase II
  NOx requirements at this plant until 2007.

In December 2000, February 2001, June 2002, and January 2003,
  Columbia received Requests for Information from the EPA to evaluate compliance
  with the Clean Air Act. Alliant Energy Corp. (Alliant), the plant operator,
  has responded to all requests and has not yet received a response from the EPA.
  On a broader basis, the EPA is assessing the regulatory consequences of investments
  in utility generation, energy efficiency, maintenance, and environmental protection.
  EPA is also assessing proposed multi-pollutant legislation. The EPA will be
  recommending clarification and revisions to the process in the future. The plant
  operator has not informed MGE of any likely increase in capital expenditures
  or operating and maintenance expenses arising from the EPA's inquiry.

In December 2002, the EPA issued proposed rules that will impose maximum
  achievable control technology limits for hazardous air-pollutant emissions for
  industrial boilers, combustion turbines, and stationary diesel generators. The
  EPA plans to have the final regulations published by 2004, and compliance deadlines
  are expected in 2007. The proposed rule for industrial boilers sets limits for
  particulate matter, hydrogen chloride, and mercury. The proposed rule for combustion
  turbines and stationary diesel generators sets limits for formaldehyde and carbon
  monoxide. Based on an initial review of the proposed rules, it is likely that
  emission control options will need to be evaluated for Blount and Columbia coal-fired
  boilers, such as scrubbers and/or baghouses. Control requirements for other
  generation facilities is less likely. Since the rules are still in the process
  of being developed and in the public comment stage, it is not possible to determine
  exactly what impact this would have for MGE's generation facilities.

***Water Quality***

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

The categorical-effluent discharge standards require each discharger to use
  effluent-treatment processes equivalent to categorical "best practicable" or
  "best available" technologies under compliance schedules established under the
  Federal Water Pollution Control Act. The DNR has published categorical regulations
  for chemical and thermal discharges from electric-steam generating plants.

In February 2003, Columbia received a Notice of Violation from the DNR
  for exceeding limits in its Wisconsin Pollutant Discharge Elimination System
  permit. The Columbia plant operator has been working with the DNR to resolve
  the issues set forth in the notice. Resolution of those issues may require additional
  capital expenditures to install and implement new treatment techniques. While
  it is possible that the DNR may also seek to impose a civil penalty, the operator
  believes it can resolve these issues to the DNR's satisfaction in a manner that
  will not have a material adverse effect on their companies' financial conditions
  or results of operations.

On April 9, 2002, the EPA issued a proposed rule under the National Pollution
  Discharge Elimination System (NPDES, 40 CFR Parts 9, 122, 123, 124, and 125)
  that establishes requirements for aquatic life entrapment and impingement in
  existing cooling water intake structures (also referred to as the 316(b) rule).
  If the proposed rule is finalized as written, capital improvements may be required.
  The final version of the rule is not expected for several years.

***Solid Waste***

MGE is listed as a potentially responsible party for a site the EPA has placed
  on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois,
  was used for storing and processing waste oil for several years. This site requires
  clean up under the Comprehensive Environmental Response, Compensation and Liability
  Act. A group of companies, including MGE, is currently working on cleaning up
  the site.

Management believes that its share of the final cleanup costs will not result
  in any materially adverse effects on MGE's operations, cash flows, or financial
  position. Insurance may cover a portion of the cleanup costs. Management
  believes that the cleanup costs not covered by insurance will be recovered in
  current and future rates. MGE estimates its future expense to clean up this
  site could range from $0.1 million to $0.2 million. At December 31,
  2002, MGE accrued a $0.1 million liability for these matters.

***Miscellaneous***

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

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

**Employees**

As of December 31, 2002, MGE had 683 full-time employees. Of these employees,
  242 are covered by a collective bargaining agreement with Local Union 2304
  of the International Brotherhood of Electrical Workers and 112 are covered by
  a collective bargaining agreement with Local Union No. 39 of the Office
  and Professional Employees International Union. Both collective bargaining agreements
  expire on May 1, 2003.

**Item 2. Properties.**

MGE's net generating capability in service at December 31, 2002, was as
  follows:

|Plants                                                                                                                                                                                                                                                          | Commercial Operation Date | Fuel            | Net Capability (MW) | No. of Units
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------------- | ------------------- | ------------
|Steam plants:                                                                                                                                                                                                                                                   |                           |                 |                     |             
|Columbia                                                                                                                                                                                                                                                        | 1975 & 1978               | Low-sulfur coal | 225 (1,2,3)         | 2           
|Blount (Madison)                                                                                                                                                                                                                                                | 1957 & 1961               | Coal/gas        | 97                  | 2           
|                                                                                                                                                                                                                                                                | 1938 & 1943               | Gas             | 39                  | 2           
|                                                                                                                                                                                                                                                                | 1949                      | Coal/gas        | 22                  | 1           
|                                                                                                                                                                                                                                                                | 1964-1968                 | Gas/oil         | 35                  | 4           
|Combustion turbines                                                                                                                                                                                                                                             | 1964-2000                 | Gas/oil         | 174                 | 6           
|Portable generators                                                                                                                                                                                                                                             | 1998-2001                 | Diesel          | 51                  | 55          
|Wind turbines                                                                                                                                                                                                                                                   | 1999                      | Wind            | 2                   | 17          
|Total                                                                                                                                                                                                                                                           |                           |                 | 645                 |             
|1 Base load generation
        2 MGE's 22% share of two 512-MW units located near Portage, Wisconsin.
        The other owners are Alliant, which operates Columbia, and Wisconsin Public
        Service Corporation.
        3 See Item 3, Legal Proceedings.

MGE sold its 17.8% ownership interest in Kewaunee Nuclear Power Plant (Kewaunee)
  to WPSC in 2001. Footnote 10 of the Notes to Consolidated Financial Statements
  in this report includes information regarding that sale along with a description
  of MGE's continuing obligations for Kewaunee beyond the closing date and MGE's
  decision to exercise an option to buy electric capacity and energy from WPSC
  for two years starting in 2001.

Major electric distribution lines and substations in service at December 31,
  2002, are as follows:

|                   | Miles      
|------------------ | -----------
|Distribution Lines | Overhead   
|69 kV              | 7          
|13.8 kV and under  | 967        
|                   |            
|Distribution       | Substations
|69-13.8 kV         | 22         
|13.8-4 kV          | 32         

On January 1, 2001, MGE transferred its electric transmission assets to
  ATC. In exchange for its transmission plant and related deferred taxes and deferred
  investment tax credits, MGE received approximately a 6% ownership interest in
  ATC. MGE expects to receive a return on its investment in ATC that is approximately
  equal to the return it would have earned by retaining its transmission facilities.
  A small portion of the 69-kilovolt (kV) lines and substations has been classified
  as distribution assets.

Gas facilities include 2,173 miles of distribution mains.

**Item 3. Legal Proceedings.**

**MGE Energy**

None.

**MGE**

In May 1999, MGE brought an arbitration proceeding against Wisconsin Power
  and Light Company (WPL) and Alliant, the parent company of WPL. The arbitration
  was based on a claim regarding WPL's merger into Alliant, the improper transfer
  of WPL's interest in Columbia to Alliant, and the manner in which it was running
  Columbia that triggered MGE's right to acquire WPL's interest in the plant at
  book value.

In March 2001, MGE received an arbitration decision in the dispute. While
  the arbitrators did not grant the specific relief MGE sought in the arbitration
  (the right to purchase WPL's interest in the plant), the arbitrators recognized
  one of MGE's primary arguments. MGE argued that WPL had transferred its interest
  in the Columbia plant to its parent company, Alliant, after the merger in 1998.
  The arbitrators required Alliant to fully assume the obligations of WPL as the
  operator and manager of the plant. The Dane County Circuit Court confirmed the
  arbitration award in late November 2001. In June 2002, an order enforcing
  the Circuit Court's judgment was entered and subsequently Alliant passed a resolution
  pursuant to the arbitration decision.

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

**MGE Energy and MGE**

None.

**PART II.**

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

**MGE Energy**

MGE Energy common stock is traded on The Nasdaq Stock Market (Nasdaq) under
  the symbol MGEE. On March 1, 2003, there were approximately 18,525 shareholders
  of record.

The following table shows high and low sale prices for the common stock on
  NASDAQ for each quarter over the past two years.

|               | Common stock price range
|-------------- | ------------------------
|               | High                    
|**2002**       |                         
|First quarter  | $29.35                  
|Second quarter | $28.64                  
|Third quarter  | $30.14                  
|Fourth quarter | $29.75                  
|**2001**       |                         
|First quarter  | $24.13                  
|Second quarter | $27.80                  
|Third quarter  | $26.50                  
|Fourth quarter | $27.63                  

**MGE**

As of March 1, 2003, there was outstanding 17,347,889 shares of common
  stock, all of which was held by MGE Energy. There is no market for shares of
  common stock of MGE. On August 12, 2002, MGE Energy became the holding
  company for MGE following a share exchange, and began trading on NASDAQ Prior
  to the share exchange, MGE traded on NASDAQ under the symbol MDSN.

**Dividends**

The following table sets forth MGE Energy's quarterly cash dividends paid during
  2002 and 2001:

|                                                                                                                                                                                                                                                               | **2002**  | **2001** 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | ---------
|*(Per share)*                                                                                                                                                                                                                                                  | 1st Qtr.* | 2nd Qtr.*
|MGE Energy                                                                                                                                                                                                                                                     | $0.333    | $0.333   
|*The dividends for the first two quarters of 2002 and during all of 2001
      were paid by MGE. As a result of the corporate reorganization described
      in Part I, Item 1, the dividends for the third and fourth quarters were
      paid by MGE Energy.

The following table sets forth MGE's quarterly cash dividends paid during 2002
  and 2001:

|                 | **2002** | **2001**
|---------------- | -------- | --------
|*(In thousands)* | 1st Qtr. | 2nd Qtr.
|MGE              | $5,707   | $5,749  

MGE Energy relies primarily on dividends from its principal subsidiary, MGE,
  as the source of funds to pay its dividends to its shareholders. Under the PSCW
  order authorizing MGE Energy to become the parent holding company for MGE, MGE
  may not pay a dividend to MGE Energy in excess of a "normal dividend payment"
  when its common equity ratio is below 55%. As of December 31, 2002, MGE's
  common equity ratio was 53.8%.

**Item 6. Selected Financial Data**



|                                                                                        | For the years ended December 31,
|--------------------------------------------------------------------------------------- | --------------------------------
|**Summary of Operations**                                                               | 2002                            
|Operating revenues:                                                                     |                                 
|Electric                                                                                | $224,987                        
|Gas                                                                                     | 122,109                         
|Total                                                                                   | 347,096                         
|Operating expenses                                                                      | 278,105                         
|Other general taxes                                                                     | 10,861                          
|Operating income                                                                        | 58,130                          
|Other income                                                                            | 2,335                           
|Interest expense                                                                        | (12,545)                        
|Income before taxes                                                                     | 47,920                          
|Income tax provision                                                                    | (18,727)                        
|Income before cumulative effect of a change in accounting principle                     | 29,193                          
|Cumulative effect of a change in accounting principle, net of tax benefit
      of $78* | -                               
|Net income                                                                              | $ 29,193                        
|Average shares outstanding                                                              | 17,311                          
|Earnings per share before cumulative effect of a change in accounting
      principle   | $1.69                           
|Cumulative effect of a change in accounting principle                                   | -                               
|Basic and diluted earnings per share                                                    | $1.69                           
|Dividends paid per share                                                                | $1.338                          
|                                                                                        |                                 
|**Assets**                                                                              |                                 
|Electric                                                                                | $415,849                        
|Gas                                                                                     | 139,608                         
|Assets not allocated                                                                    | 52,799                          
|Nonregulated                                                                            | 20,639                          
|Total                                                                                   | $628,895                        
|                                                                                        |                                 
|**Capitalization including Short-Term Debt**                                            |                                 
|Common shareholders' equity                                                             | $227,370                        
|Long-term debt**                                                                        | 192,149                         
|Short-term debt                                                                         | 34,298                          
|Total Capitalization                                                                    | $453,817                        

**The change in accounting principle in 2001 is due to MGE's adoption of
  SFAS No. 133.****Includes current maturities.*

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

**General**

MGE Energy, Inc. (MGE Energy), through its principal subsidiary Madison Gas
  and Electric Company (MGE), operates in two business segments:

- Electric operations generate and distribute electricity to nearly 130,000
  customers in Dane County, Wisconsin, which includes the City of Madison. MGE
  contracts with American Transmission Company (ATC) and others for transmission
  service.

- Gas operations purchase and distribute natural gas to more than 126,000 customers
  in seven Wisconsin counties (Columbia, Crawford, Dane, Iowa, Juneau, Monroe,
  and Vernon). MGE also contracts with various pipelines for transporting natural
  gas.

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

MGE's utility operations represent substantially all of the assets, liabilities,
  revenues, and expenses of MGE Energy. MGE Energy's nonutility operations, relating,
  principally, to the development of a cogeneration project on the Madison campus
  of the University of Wisconsin (UW), are not significant at this time. Consequently,
  with the exception of the discussion under Nonutility Energy Outlook under Results
  of Operations, the following discussion focuses on the results of operations
  and financial condition of MGE.

The following discussion provides information that management believes is relevant
  to an assessment and understanding of MGE Energy and MGE's consolidated results
  of operations and financial condition. This discussion should be read in conjunction
  with the consolidated financial statements and notes.

**Forward-Looking Statements**

This report, and certain other MGE Energy and MGE public documents, contain
  forward-looking statements that reflect management's current assumptions and
  estimates regarding future performance and economic conditions--especially as
  they relate to future revenues, expenses, financial resources, and regulatory
  matters. These forward-looking statements are made pursuant to the provisions
  of the Private Securities Litigation Reform Act of 1995. MGE Energy cautions
  investors that forward-looking statements are subject to known and unknown risks
  and uncertainties that may cause MGE Energy's actual results to differ materially
  from those projected, expressed, or implied. Some of those risks and uncertainties
  include:

- Weather
  - Economic and market conditions in MGE's service territory.
  - Magnitude and timing of capital expenditures.
  - Regulatory environment (including restructuring the electric utility industry
  in Wisconsin).
  - Availability and cost of power supplies.

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.

**Results of Operations**

**MGE Energy - Earnings Overview**

In 2002, MGE Energy's earnings were $29.2 million or $1.69 per share.
  MGE's 5.5% increase in electric retail sales and higher average rate per customer
  contributed to a 10.7% increase in electric revenues. Purchased power costs
  increased substantially. 2002 was the first full year MGE purchased 90 megawatts
  (MW) of capacity and energy to replace its share of generation lost from Kewaunee.
  MGE sold its interest in Kewaunee to Wisconsin Public Service Corporation (WPSC)
  in September 2001. As a result, MGE's operations and maintenance costs
  were lower in 2002. MGE's gas margin (revenues less the cost of gas) increased
  $4.2 million due to growth in gas deliveries.

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

Earnings in 2000 were $27.4 million or $1.67 per share. Electric operating
  income was up $5.9 million due to increased sales and new generating facilities
  that earn a return for investors. An 8.8% increase in total gas deliveries added
  $1.7 million to gas operating income. Two other factors contributed significantly
  to higher net income: gains on some performance-based natural gas incentives
  and lower pension costs due to strong performance in MGE's plan assets.

**MGE - Electric Sales and Revenues**

In 2002, electric retail sales rose 5.5% due to warmer-than-normal summer temperatures.
  Total cooling degree days were up 17.0% (see table). In 2001, total retail sales
  were down 1.8% because MGE changed its estimated unbilled sales calculation
  in the third quarter of that year.

Sales for resale were down 14.3% in 2002 due to lower off-peak sales during
  the first half of the year.

Electric operating revenues were up $21.8 million or 10.7% in 2002. The
  higher revenues are attributed to:

- Customer growth and greater use per customer ($11.0 million).

- An increase in electric rates ($8.9 million, Footnote 7).

- An increase in other electric revenues due in large part to a vendor settlement
  and a true-up for the spring 2000 outage at Kewaunee ($0.9 million).

- A rise in sales for resale (despite a drop in sales volume) because electricity
  was sold at a higher rate per kilowatt-hour ($1.0 million).

|Electric sales *(MW-hours)*      | 2002      | 2001      | % Change
|-------------------------------- | --------- | --------- | --------
|Residential                      | 839,005   | 771,094   | 8.8     
|Commercial                       | 1,640,190 | 1,543,866 | 6.2     
|Industrial                       | 296,220   | 314,448   | (5.8)   
|Other                            | 323,380   | 307,132   | 5.3     
|Total retail                     | 3,098,795 | 2,936,540 | 5.5     
|Resale - utilities               | 59,616    | 69,544    | (14.3)  
|Total sales                      | 3,158,411 | 3,006,084 | 5.1     
|                                 |           |           |         
|Cooling degree days (normal 607) | 752       | 643       | 17.0    

Cooling degree days measure the extent to which the average daily temperature
  rises above 65 degrees Fahrenheit, increasing demand for cooling.

In 2001, electric retail sales decreased 1.6% despite warmer-than-normal summer
  temperatures.

In 2001, total electric revenues remained the same, even though electric sales
  dropped slightly. Retail revenues were up $6.7 million or 3.5%. These increases
  offset an approximate $4.5 million reduction in the third quarter that
  resulted from a change in estimated unbilled revenues (described below). Significant
  items affecting retail revenues included:

- A 3.9% electric rate increase effective January 1, 2001, combined with
  customer growth and greater use per customer ($5.8 million, net of the
  unbilled adjustment).

- A $0.001 kilowatt-hour electric fuel surcharge effective May 9 through
  September 2, 2001 ($0.8 million; see Footnote 7).

The increase in retail revenues was offset by:

- A $1.4 million decrease in other electric revenues.

- A $5.3 million decrease in sales for resale because a contract expired
  with Wisconsin Public Power Inc. MGE sold 30 MWs of firm energy and capacity
  to Wisconsin Public Power from March 1999 through September 30, 2000.

As noted above, MGE adjusted unbilled revenues in the third quarter of 2001,
  reducing revenues by approximately $4.5 million. The adjustment was made
  after reviewing MGE's assumptions regarding electricity lost in the process
  of transmission and distribution, or line loss. Prior to the adjustment, MGE
  estimated line loss based on a computer-modeled study performed in 1985. At
  times, the study has been reviewed for reasonableness and adjustments made,
  as needed. An analysis of various operating and financial statistics in the
  third quarter of 2001 (including the unbilled-to-billed sales ratio) indicated
  the estimate for unbilled revenues needed adjusting. MGE's adjustment aligned
  the unbilled-to-billed ratio with the 40% to 50% range it would normally expect.

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

**MGE - Gas Sales and Revenues**

In 2002, retail gas deliveries increased 10.2% due to:

- Colder weather during most of the 2002 heating season. Total heating degree
  days were up 3.7% (see table).

- A larger customer base in southwestern Wisconsin. On December 28, 2001,
  MGE purchased the Prairie du Chien-area natural gas system from We Energies
  for $3.9 million. MGE gained approximately 3,600 residential and commercial
  customers in the Prairie du Chien area.

Transport deliveries increased 17.0% in 2002 as alternative fuel customers
  used more natural gas during the first half of the year. In 2001, transport
  sales declined as customers turned to other fuels when the price of natural
  gas hit record-high levels.

Despite growth in gas deliveries, retail gas revenues were down $8.4 million
  or 6.5% in 2002 due to lower gas costs. The average rate for residential customers
  was $0.78 per therm in 2002 compared to $0.91 per therm in 2001.

The following table shows total gas deliveries by customer class.

|Therms delivered *(In thousands)*  | 2002    | 2001    | % Change
|---------------------------------- | ------- | ------- | --------
|Residential                        | 91,470  | 82,637  | 10.7    
|Commercial and industrial          | 78,010  | 71,169  | 9.6     
|Total retail system                | 169,480 | 153,806 | 10.2    
|Transport                          | 55,614  | 47,524  | 17.0    
|Total gas deliveries               | 225,094 | 201,330 | 11.8    
|                                   |         |         |         
|Heating degree days (normal 7,247) | 6,957   | 6,706   | 3.7     

Heating degree days measure the extent to which the average daily temperature
  is below 65 degrees Fahrenheit, increasing demand for heating.

During 2001, retail gas deliveries were down 8.8%. Warmer weather in November and
  December resulted in lower gas use per customer. The average temperature
  for November and December 2001 was 38.5 degrees Fahrenheit, 65% warmer
  than the same period in 2000. Transport deliveries were up 5.2% primarily because
  customers who have the ability to switch fuels bought more gas to generate electricity
  or produce steam.

In 2001, gas revenues increased $9.6 million or 7.9%. Revenues were up
  due to significantly higher gas costs during the first half of the year and
  a 2.7% rate increase effective January 1, 2001 (see Footnote 7).

**MGE - Electric Fuel and Purchased Power**

In 2002, fuel used for electric generation decreased $2.1 million or 5.2%.

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

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

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

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

Increased purchased power costs in 2002 reduced MGE's electric margin (revenues
  less fuel and purchased power) by $2.4 million or 1.7%.

In 2001, fuel for electric generation increased $4.0 million or 10.9%.
  Fuel costs for MGE's electric generating units were up primarily due to the
  increased use of base-load power plants at a marginally higher fuel cost (especially
  in the second quarter) and the higher cost of natural gas used to generate electricity
  during the first half of the year. MGE customers set a record for peak demand
  (714 MWs) on August 7, 2001.

During 2001, purchased power decreased $0.7 million or 3.4%. This decrease
  is attributed to the following:

- In the first three quarters of 2001, MGE did not need to buy additional capacity
  from outside sources because its base-load units operated at full capacity.
  In the second quarter of 2000, MGE purchased more expensive open-market replacement
  power during a six-week scheduled refueling and maintenance outage at Kewaunee.

- MGE purchased only 15 MWs from Commonwealth Edison in 2001 compared
  to 30 MWs in 2000.

The purchased power decreases described above were partially offset by the
  following:

- MGE executed its option to purchase 90 MWs of electric capacity and
  energy at a fixed price from WPSC from September 24, 2001, through September 23,
  2003. This option was part of the Kewaunee sale agreement between WPSC and MGE
  (see Footnote 10).

Electric margin (revenues less fuel and purchased power) decreased $3.3 million
  or 2.2%, in 2001 reflecting constant revenues and the higher fuel costs as previously
  described.

**MGE - Natural Gas Purchased**

In 2002, natural gas purchased was down $12.6 million or 14.7%, primarily
  due to lower wellhead prices, on average. Natural gas prices (cost per therm)
  decreased more than 22.0% in 2002. A purchased gas adjustment clause (PGA) allows
  MGE to pass along to customers the cost of gas, subject to certain limited incentives.
  The PGA is authorized by the PSCW.

MGE gas margin (revenues less gas purchased) increased $4.2 million or
  9.4% in 2002. Customer growth increased deliveries and a 0.6% rate increase
  effective January 1, 2002, contributed to the rise in gas margins (see
  Footnote 7).

In 2001, natural gas purchased increased $8.6 million or 11.0%, despite
  retail deliveries declining 8.8%. Even though customer use was down due to the
  warmer-than-normal winter weather, the average cost per therm of natural gas
  was up 21.8% over 2000. Gas margins increased $1.0 million or 2.4% primarily
  due to a 2.7% rate increase effective January 1, 2001.

**MGE - Other Operations and Maintenance**

***Electric***

In 2002, electric operating expense decreased $0.8 million or 1.4%. The
  following changes contributed to lower electric operating expenses for the year.

- MGE sold its 17.8% ownership interest in Kewaunee to WPSC. As a result, operating
  expenses declined $5.3 million.

- Miscellaneous steam power expense decreased $1.1 million or 41.9%. MGE
  recovered through rates some carrying costs for actions taken at Columbia to
  reduce NOx emissions.

- Employee health and pension expenses increased $2.6 million or 61.8%,
  due to dramatically rising health care costs and lower investment returns on
  plan assets.

- Outside service expenses increased $1.2 million primarily due to forming
  the holding company and participating in Power the Future.

- Miscellaneous steam power expenses for Columbia increased $0.7 million
  or 27.8% as a result of increased administrative and general overheads ($0.4 million)
  and employee pensions and benefits ($0.3 million).

- Transmission wheeling costs rose $0.6 million or 5.7% due to relying
  on more purchased power.

- Miscellaneous electric operating expenses increased $0.5 million.

In 2001, electric operating expense increased $6.1 million or 11.7%. The
  following changes contributed to higher electric operating expense for the year.

- Increased transmission costs ($6.6 million). MGE started paying ATC
  a wheeling charge on January 1, 2001. The wheeling charge is offset by
  equity earnings for MGE's ownership interest in ATC. These equity earnings were
  recorded in other income.

- NOx accrual ($0.9 million). The PSCW authorized utilities
  to defer all project costs for complying with the federal US Environmental Protection
  Agency's (EPA) new requirements on NOx emissions. In its rate case
  (Docket 3270-UR-110), the PSCW allowed MGE to establish an escrow mechanism
  for these costs due to uncertainties regarding the amount and timing of NOx
  emissions remediation expenditures. The annual recovery allowed in rates is
  $1.6 million, of which $0.7 million is recorded in depreciation expense
  and $0.9 million in operating expense.

- Increased miscellaneous distribution expenses ($1.0 million).

Increases in electric operating expenses were offset somewhat by:

- Lower Kewaunee operating expenses ($2.2 million) due to three fewer
  months of expense after MGE sold its ownership interest in the plant (see Footnote
  10) and lower overhead for administrative and general.

- The PSCW decreasing MGE's energy conservation escrow amount ($0.8 million).

***Gas***

In 2002, gas operating expense increased $1.8 million or 8.3%. The following
  changes contributed to higher gas operating expenses for the year.

- Employee health and pension expenses increased $1.4 million or 64.0%
  due to dramatically rising health care costs and lower investment returns on
  plan assets.

- Other expenses increased $1.4 million due to increased administrative
  and general expenses ($0.4 million), increased injuries and damages ($0.3 million),
  and other miscellaneous expenses ($0.7 million).

- Outside service expenses increased $0.3 million or 44.4% primarily due
  to forming the holding company.

- Uncollectible account expenses were down $1.3 million or 75.8%. More
  customers paid their bills in 2002 as warmer-than-normal weather and lower-priced
  natural gas in the first quarter significantly reduced utility bills.

In 2001, gas operating expense increased $1.7 million or 8.2%. Uncollectible
  customer account balances were up due to significantly higher natural gas costs
  during the first half of the year ($1.0 million) and increased administrative
  and billing expenses ($0.7 million).

***Maintenance Expense***

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

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

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

In 2001, electric maintenance expense was down $4.5 million or 26.5% primarily
  due to:

- Three fewer months of expense at Kewaunee after MGE sold its ownership interest
  in the plant (see Footnote 10) combined with lower maintenance expense compared
  to 2000 ($1.8. million).

- Lower maintenance expense at Columbia ($1.2 million).

***Depreciation***

In 2002, depreciation expense decreased $6.3 million or 17.7%.

- Electric depreciation decreased $6.7 million. The decrease is attributed
  to reduced decommissioning expense ($4.0 million), the sale of Kewaunee
  assets ($3.4 million, see Footnote 10), and offset by increased depreciation
  expense for the addition of electric assets ($0.7 million).

- Gas depreciation expense increased because MGE added plant assets ($0.4 million).

In 2001, depreciation expense increased $0.6 million or 1.6%.

- Electric depreciation expense increased $0.7 million. The change in
  depreciation expense is attributed to increased earnings on the decommissioning
  trust fund ($0.6 million), a NOx accrual ($0.7 million),
  the addition of electric assets ($1.4 million), and somewhat offset by
  reduced transmission depreciation ($1.8 million, see Footnote 9) and the
  transfer of assets related to the Kewaunee sale ($0.5 million).

- There were no significant changes to gas depreciation in 2001.

***Other General Taxes***

Other general taxes, consisting mainly of the Wisconsin license fee tax and
  payroll taxes, were consistent between 2002 and 2001.

***Income Taxes***

The 2002 effective income tax rate increased to 39.1% from 36.8% for 2001 and
  36.5% for 2000 due to a combination of reasons.

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

In 2002, MGE recorded a net deferred tax expense of $0.4 million to fully
  accrue its deferred tax liability for utility property. MGE is evaluating its
  ability to recover these taxes in rates.

On August 12, 2002, MGE Energy became the holding company for MGE and
  other subsidiaries. Certain one-time intercompany transactions for state tax
  purposes and costs of capital associated with forming MGE Energy have resulted
  in permanent differences between financial and income tax reporting and have
  increased the state tax component of the effective income tax rate.

**Other Nonoperating Items**

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

- MGE transferred its Qualified Decommissioning Fund ($65.0 million, fair
  market value) and Nonqualified Decommissioning Fund ($28.1 million, fair
  market value) to WPSC with the sale of its 17.8% ownership interest in Kewaunee
  (Footnote 10). There was no impact on earnings. The lower decommissioning
  earnings on trust assets were offset by an equal decrease in accumulated depreciation
  expense. The related decrease in other income was $4.0 million.

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

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

In 2001, other income increased $6.7 million primarily due to:

- $3.3 million equity earnings in ATC (see Footnote 9).
  - A $0.8 million gain from weather hedge instruments.
  - A $0.6 million increase in earnings on the decommissioning funds.
  - A $1.6 million reduction in charitable contributions.

In 2000, other income decreased $3.1 million. MGE donated $1.3 million
  to the MGE Innovation Center and the MGE Foundation. These donations provide
  substantial benefits to the community and MGE's service territory. Other income
  was also down because there was a gain from MGE's gas marketing subsidiaries
  in 1999 and not in 2000. Earnings on the decommissioning fund were up $0.4 million
  in 2000.

**Interest Expense**

In 2002, interest expense decreased $1.2 million or 9.0%. Lower rates
  on MGE's $20.0 million variable rate debt (which matured on May 3,
  2002) reduced interest expense by $0.7 million. Lower short-term debt levels
  in the first quarter, coupled with significantly lower interest rates, reduced
  other interest expense by $0.5 million.

In 2001, total interest decreased $0.5 million or 3.6%. Lower short-term
  debt, due to proceeds received from ATC and the sale of Kewaunee, caused the
  decline in other interest expense of $0.6 million. In addition, MGE redeemed
  $6.1 million of its 6-1/2%, 2006 Series, Pollution Control Revenue Bonds,
  at par on November 1, 2001.

In 2000, total interest increased $2.1 million or 17.3%. Compared to 1999,
  MGE had higher levels of short-term debt and interest on $35.0 million
  in new long-term debt ($20.0 million issued on May 4, 2000, and $15.0 million
  issued on September 20, 2000).

**MGE - Electric and Gas Operations Outlook**

MGE anticipates electric and gas sales will grow at a compounded rate of 1.0%
  to 2.0% through 2007. Peak demand will grow an estimated 3.0% each year through
  2007.

MGE expects to maintain a competitive advantage because of its:

- Service territory, which has one of the strongest economies in the nation.
  It is distinguished by consistent growth; high employment and wages; and a diversified
  base of business, industry, government, and education.

- Competitive distribution costs, low percentage of industrial customers, and
  lower risk of stranded investments.

- Size and agility, which allow employees to respond quickly and offer more
  flexibility as customers' needs change.

MGE sold its ownership interest in Kewaunee in the fall of 2001. This will
  help eliminate the risk of future stranded investment. The capacity lost from
  Kewaunee will be replaced with purchased power contracts.

The PSCW has focused on improving the infrastructure needed in Wisconsin to
  ensure reliable service for consumers. MGE invests in new facilities to meet
  its customers' needs. It also advocates statewide solutions that will keep pace
  with the growing demand for energy.

**Nonutility Energy Outlook**

MGE Energy's primary focus is its core utility customers. The holding company
  structure will facilitate competitive new electric generation projects. It will
  also allow financial returns from these projects to be retained for the benefit
  of MGE's system and MGE Energy's shareholders.

MGE Energy's nonutility energy operations will be conducted through its subsidiaries,
  MGE Construct, LLC, and MGE Power, LLC. Both were formed in 2002 to
  construct and own new generating capacity. It is expected that, subject to PSCW
  approval in each instance, MGE Power will lease-back new generating facilities
  to MGE under regulated, long-term lease agreements.

**Power the Future Generation**

On February 23, 2001, MGE secured an option to own a portion of the advanced
  technology, coal-fired, base-load generation proposed in We Energies' Power
  the Future plan. The plan includes three new 600-MW coal-fired plants, which
  would be located in Wisconsin. The plan is subject to pending regulatory proceedings.
  We Energies filed its Certificate of Public Convenience and Necessity (CPCN)
  proposal with the PSCW in early 2002. A PSCW decision is expected on the plan
  in 2003.

Pursuant to an amended agreement reached on January 31, 2003, MGE has
  the option to acquire an undivided 8.33% (16.66% under certain conditions) ownership
  interest in each of the proposed coal plants, up to a total of 150 MWs
  for all three plants. If these options are fully exercised, that exercise would
  require an estimated $150 million to $175 million investment over
  ten years.

**West Campus Cogeneration Facility (WCCF)**

MGE Energy, through MGE Power and MGE Construct, has assumed responsibility
  from MGE for the construction and ownership of a proposed natural gas-fired
  cogeneration facility to be built on the Madison campus of the UW. As planned,
  the facility would have 20,000 tons of chilled water capacity, 500,000 pounds
  per hour of steam capacity, and approximately 150 MWs of electricity capacity.
  The facility would be jointly-owned by the State of Wisconsin, the UW, and MGE Power
  and would be leased and operated by MGE. The State and the UW would own a controlling
  interest in the chilled water and steam plants, which would be used to meet
  the growing UW need for air-conditioning and steam heat capacity. MGE Power
  would own a controlling interest in the electric generation plant, which would
  be used to provide electricity to MGE's customers. MGE Construct would
  be responsible for the construction of the facility.

The ownership, construction, and operation of the facility requires various
  state approvals as well as the completion of definitive agreements, including
  a construction agreement. As part of this process, the State is reviewing its
  alternatives before entering final agreements. Depending on the approval process,
  construction could start in 2003, with the facility coming on-line in 2005.
  MGE also requires PSCW approval in order to lease and operate the facility.
  On October 21, 2002, the PSCW deemed MGE's CPCN application complete. A
  PSCW decision is expected on MGE's participation in the facility during 2003.

The facility is expected to cost approximately $180 million. On November 29,
  2002, the State paid $11.9 million to MGE for its share of those costs
  under a September 2002 Pre-Certification Cost Sharing Agreement between
  MGE and the State. On December 31, 2002, MGE Power reimbursed MGE
  for the remainder of those costs as a part of MGE Power's assumption of
  the project. As of December 31, 2002, MGE Power had incurred $18.9 million
  of costs on the project, which is reflected as construction work in progress
  on MGE Energy's consolidated balance sheets. These costs largely represent amounts
  paid under long-lead time equipment contracts in order to meet project schedules,
  although, as noted, several approvals remain outstanding. A failure to obtain
  these approvals could terminate the project and could result in the write-off
  of these costs to the extent that the associated equipment and efforts cannot
  be put to alternative uses.

**Liquidity And Capital Resources**

**Cash Flows**

The following summarizes MGE Energy's cash flows during 2002, 2001, and 2000:

|*Thousands of dollars*       | 2002     | 2001     | 2000    
|---------------------------- | -------- | -------- | --------
|Cash provided by/(Used for): |          |          |         
|Operating activities         | $56,729  | $74,684  | $47,774 
|Investing activities         | (86,377) | (24,533) | (84,841)
|Financing activities         | 30,225   | (52,037) | 39,426  

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

In 2002, cash provided by operating activities decreased $18.0 million
  or 24.0%. Working capital (current assets less current liabilities) decreased
  $0.8 million primarily due to an increase in customer payables. MGE deposited
  $5.0 million in an escrow account and granted ATC a security interest in
  the collateral. ATC will provide system upgrades for MGE in conjunction with
  the WCCF proposed on the UW-Madison campus. The collateral account complies
  with the Interconnection Agreement between ATC and MGE dated November 22,
  2002.

Depreciation and other amortization expenses decreased $8.3 million, mainly
  because MGE sold its ownership interest in Kewaunee. Deferred income taxes for
  2002 decreased $8.0 million compared to 2001. The significantly larger
  deferred tax expense in 2001 was attributable to the sale of Kewaunee, which
  resulted in reversal of temporary differences associated with the plant and
  decommissioning funds.

In 2001, cash provided by operating activities increased $26.9 million
  or 56.3%. Decreases in customer receivables ($13.1 million) and unbilled
  revenues ($11.4 million) were offset by higher stored gas inventories of
  $6.8 million and a $4.4 million reduction in accounts payable. Deferred
  income taxes increased in 2001 due to the sale of Kewaunee.

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

In 2002, cash used for investing activities increased $61.8 million. Utility
  plant additions were up $17.5 million due to installing an automated meter
  reading (AMR) system, installing NOx emissions equipment at Columbia,
  and upgrading MGE substations to improve reliability. Capital expenditures related
  to the WCCF totaled $18.9 million. In 2001, MGE received a $15.0 million
  capital distribution from ATC and $15.4 million for selling its interest
  in Kewaunee.

In 2001, MGE's cash used for investing activities was down $60.3 million
  or 71.1% mainly because of a significant decrease in plant additions. In 2000,
  MGE paid $31.6 million for an 83-MW gas-fired combustion turbine. MGE also
  received a capital distribution of $15.0 million from ATC for debt repayment
  and a cash payment of $15.4 million from the sale of Kewaunee (see Footnote
  10).

MGE Energy's and MGE's liquidity are primarily affected by their construction
  requirements. Capital expenditures in 2002 totaled $78.3 million, which
  included $18.9 million of capital commitments for the WCCF. MGE's capital
  requirements were higher in 2002 due to installing an AMR system ($17.6 million),
  upgrading MGE substations to improve reliability ($4.7 million), and installing
  NOx emissions equipment at Columbia ($2.4 million). MGE anticipates
  2003 capital expenditures will be $51.6 million and include substation
  improvements ($5.1 million), AMR project costs ($3.4 million), and
  upgrading its Energy Management System ($1.8 million).

Capital expenditures for 2003 through 2007 will average an estimated $46 million
  per year (excluding the WCCF and MGE's option to purchase a portion of Power
  the Future coal plants). The following table shows MGE's estimated expenditures
  for 2003, actual for 2002, and the three-year average for 1999 to 2001.

|Capital expenditures (including nuclear fuel)  
|-----------------------------------------------
|*(In thousands)*For the years ended December 31
|Electric:                                      
|Production                                     
|Transmission                                   
|Distribution and general                       
|Nuclear fuel                                   
|Total electric                                 
|Gas                                            
|Common                                         
|Total                                          

In 2002, MGE used internally generated funds and short-term debt to satisfy
  most of its capital requirements. For the larger capital investments, MGE issues
  additional long-term debt and common stock. MGE Energy used existing lines of
  credit to satisfy capital commitments related to the WCCF.

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

In 2002, cash provided by financing activities was $30.2 million. Short-term
  debt increased $24.8 million. Two long-term debt issues occurred in the
  fourth quarter of 2002. A $20.0 million issue replaced the $20.0 million
  in debt that matured in May, which was rolled into short-term debt at that time.
  Another $15.0 million issue financed capital expenditures for the AMR project,
  which had been financed with short-term debt.

MGE Energy's capitalization ratios were as follows:

|Capital structure ratios                                                                     | 2002  | 2001 
|-------------------------------------------------------------------------------------------- | ----- | -----
|Common shareholders' equity*                                                                 | 51.1% | 53.7%
|Long-term debt*                                                                              | 41.5% | 43.9%
|Short-term debt                                                                              | 7.4%  | 2.4% 
|*Does not include accumulated other comprehensive loss;
        includes current maturities.

In 2001, cash used for financing activities was $52.0 million as MGE reduced
  its short-term debt by $34.5 million. MGE reduced short-term debt and redeemed
  $6.1 million in long-term debt by using the cash distribution from ATC
  and cash received from the sale of its interest in Kewaunee. MGE raised $10.9 million
  by issuing common stock for its Dividend Reinvestment and Direct Stock Purchase
  Plan (the Plan). MGE issues new shares of common stock for the Plan to improve
  cash flow and capitalization ratios.

MGE's First Mortgage Bonds are currently rated Aa2 by Moody's Investors Service,
  Inc. (Moody's) and AA by Standard & Poor's Corp. (S&P). MGE's medium-term
  notes are rated Aa3 by Moody's and AA- by S&P. MGE's dealer-issued commercial
  paper carries the highest ratings assigned by Moody's and S&P. MGE Energy
  is not yet rated because it has not issued any debt securities.

MGE's access to the capital markets, including the commercial paper market,
  and its financing costs in those markets are dependent on its securities' ratings.
  None of MGE's borrowing is subject to default or prepayment due to downgrading
  of securities' ratings.

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

MGE Energy and MGE's contractual obligations as of December 31, 2002,
  representing cash obligations that are considered to be firm commitments, are
  as follows:

|*In thousands*                |          |  | Payment due within: |           | Due after
|----------------------------- | -------- |  | ------------------- | --------- | ---------
|                              | Total    |  | 1 Year              | 2-3 Years | 4-5 Years
|Long-term debt                | $193,500 |  | $ -                 | $20,000   | $15,000  
|Short-term debt               | 34,298   |  | 34,298              | -         | -        
|Operating leases              | 9,516    |  | 1,592               | 1,678     | 1,054    
|Purchase obligations          | 203,925  |  | 33,900              | 46,900    | 40,600   
|Other long-term obligations   | 1,140    |  | 285                 | 570       | 285      
|Total contractual obligations | $442,379 |  | $70,075             | $69,148   | $56,939  

For additional information about:

- Long-term debt consisting of secured First Mortgage Bonds and unsecured medium-term
  notes, see Footnote 6.c. of the Notes to Consolidated Financial Statements.

- Short-term debt consisting of commercial paper issued by MGE, which is supported
  by unused lines of credit from banks and bank loans to MGE Energy, see Footnote
  6.d. of the Notes to Consolidated Financial Statements.

- Operating leases, see Footnote 8 of the Notes to Consolidated Financial Statements.

- Purchase obligations consisting of obligations to purchase electricity and
  to purchase and transport natural gas, see Footnote 8 of the Notes to Consolidated
  Financial Statements.

- Other long-term obligations, see Footnotes 1.c. and 10 of the Notes to Consolidated
  Financial Statements.

MGE Energy and MGE's commercial commitments as of December 31, 2002, representing
  commitments triggered by future events and including financing arrangements
  to secure obligations of MGE Energy and MGE, and guarantees by MGE, are as follows:

|*In thousands*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |         |  | Expiration within: |  | Due after
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------- |  | ------------------ |  | ---------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | Total   |  | 1 Year             |  | 2-3 Years
|MGE - Available lines of credit (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | $40,000 |  | $40,000            |  | $ -      
|MGE - Bank letter of credit (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 5,000   |  | 5,000              |  | -        
|MGE Energy - Available lines of credit (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 45,000  |  | 45,000             |  | -        
|MGE - Guarantees (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 6,775   |  | 1,138              |  | 1,738    
|(a) Lines of credit consisting of a 364-day credit facility to support commercial
      paper issuances. At December 31, 2002, there were no borrowings against
      the credit facility. Additionally, at December 31, 2002, there was
      $13.5 million of commercial paper outstanding.
      (b) MGE has a letter of credit with a commercial bank established as
        collateral for equipment purchases that ATC will make to provide necessary
        system upgrades for the WCCF.
      (c) MGE Energy has established two temporary lines of credit, one for
        temporary financing of the capital commitments for the WCCF ($40.0 million)
        and one for general corporate purposes ($5.0 million). Both lines
        expire in the first half of 2003. Additionally, at December 31, 2002,
        MGE Energy had $20.8 million in bank loans outstanding.
      (d) MGE has guaranteed repayment of certain receivables it has sold to
        a financial institution under a Chattel Paper Agreement (see Footnote
        8 of the Notes to Consolidated Financial Statements).

**Other Factors**

Due to the performance of the United States debt and equity markets, the value
  of assets held in trusts to satisfy the obligations of pension and postretirement
  benefit plans has decreased. These factors may also result in additional future
  funding requirements of the pension and postretirement benefit plans.

**Business And Regulatory Environment**

**Electric Transmission - ATC**

On January 1, 2001, MGE transferred substantially all of its electric
  transmission facilities to ATC in exchange for approximately a 6.0% interest
  in this joint venture. ATC is comprised of Wisconsin investor-owned utilities
  and some Wisconsin municipal utilities, cooperatives, and power supply agencies.

Effective October 24, 2002, the PSCW authorized an electric rate surcharge
  of $4.5 million or 2.0% for MGE to recover deferred costs associated with
  ATC's formation and ongoing incremental transmission costs during 2001 and 2002.
  The surcharge will be in effect for a 12-month period ending October 23,
  2003.

On November 21, 2002, MGE and ATC entered into a Generation-Transmission
  Interconnection Agreement related to transmission system upgrades due to the
  WCCF. MGE issued to ATC a "Notice to Proceed for the Procurement of the Equipment"
  for the system upgrades. In accordance with the agreement, MGE had to provide
  ATC with a form of security, such as a Letter of Credit or a collateral account,
  in the amount of $5.0 million. MGE set up a collateral (escrow) account
  to satisfy the security interest to ATC until MGE was able to secure a Letter
  of Credit from a commercial bank, which it received on December 30, 2002.
  The collateral account was terminated on January 2, 2003. MGE will make
  an estimated $10 million capital payment for transmission equipment and
  work done by ATC throughout 2003 related to the WCCF. MGE expects to be reimbursed
  by ATC for its capital outlay once the project is completed.

**Kewaunee**

Effective September 23, 2001, MGE sold to WPSC its 17.8% ownership interest
  in Kewaunee. In exchange for a cash payment of $15.4 million, MGE transferred
  its net book value of utility plant ($8.2 million), net nuclear fuel ($7.9 million),
  inventories ($1.5 million), and other assets ($0.1 million). These
  assets were offset by $2.3 million owed to WPSC. On the closing date, MGE
  also transferred its Qualified Decommissioning Fund ($65.0 million fair
  market value) and Nonqualified Decommissioning Fund ($28.1 million fair
  market value), which decreased accumulated depreciation by an equal amount.
  This transaction occurred in accordance with an agreement between MGE and WPSC
  dated September 29, 1998. That agreement required certain continuing obligations
  of MGE and WPSC after the closing date, as described below.

MGE made monthly contributions to the MGE Nonqualified Decommissioning Fund
  from September 23, 2001, in the amount of approximately $0.7 million
  (the level authorized by the PSCW) through December 31, 2002. These costs
  were recovered from customers in rates. MGE's decommissioning liability is limited
  to the fund balances at the closing date plus all decommissioning collections
  through 2002. MGE's Nonqualified Decommissioning Fund is shown on the balance
  sheet in the Utility Plant section. As of December 31, 2002, this fund
  totaled $8.8 million (pretax fair market value) and was offset by an equal
  amount recorded in accumulated provision for depreciation. The securities and
  uninvested cash balances in the fund, net of trust investment expenses and taxes
  on investment income, were transferred to the WPSC Nonqualified Decommissioning
  Fund on January 3, 2003.

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

A surcharge imposed by the National Energy Policy Act of 1992 requires nuclear
  power companies to fund the decontamination and decommissioning of US Department
  of Energy facilities that process nuclear fuel. As a result, the Kewaunee co-owners
  are required to pay a surcharge on uranium enrichment services purchased from
  the federal government prior to October 23, 1992. On an inflation-adjusted
  basis, MGE's portion of the obligation related to Kewaunee is approximately
  $1.1 million at December 31, 2002. MGE is required to continue paying
  its portion of this annual assessment.

In accordance with the sale agreement, MGE exercised its option in June 2001
  to buy electric capacity and energy at a fixed price from WPSC. MGE purchased
  90 MWs of electric capacity and energy from September 24, 2001, through
  December 31, 2002, and will continue to do so through September 23,
  2003, to help meet customers' electric needs.

**Formation of Holding Company**

On August 12, 2002, MGE Energy became the holding company for MGE following
  a share exchange. Each share of MGE common stock was exchanged for one share
  of MGE Energy common stock. MGE Energy's consolidated financial statements reflect
  this transaction for all periods presented. MGE Energy's operations are based
  primarily on the operations of MGE. Consequently, MGE constitutes a majority
  of the assets, liabilities, and results of operations of MGE Energy and is expected
  to continue to do so for the foreseeable future.

**Industry Restructuring in Wisconsin**

Wisconsin has focused on building the infrastructure needed to provide reliable
  electric service to customers. State regulators realize a competitive market
  cannot exist when supply is short. The PSCW will decide when it is appropriate
  for retail competition to proceed in the electric industry. MGE cannot predict
  what impact future PSCW actions may have on its future financial condition,
  cash flows, and results of operations. However, MGE believes it is well-positioned
  to compete.

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

**Gas Cost Incentives**

Under MGE's gas cost incentives, if actual gas commodity costs are above or
  below a benchmark set by the PSCW, then MGE's gas sales service customers and
  shareholders share equally in any increased costs or savings up to $1.5 million.
  Any costs or savings that exceed $1.5 million will be passed on to gas
  sales service customers. The PSCW allows MGE to resell gas pipeline capacity
  reserved to meet peak demands but not needed every day to serve customers. Revenues
  from capacity release that exceed or fall short of PSCW-targeted levels are
  shared equally. In 2002, MGE shareholders benefited $0.5 million (after
  tax) from capacity release revenues and commodity savings under the gas cost
  incentives.

**Critical Accounting Policies**

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

***Revenues***

Revenues from the sale of electricity and gas to customers are generally recorded
  when electricity/gas is delivered to those customers. The quantity of those
  sales is measured by customers' meters. Due to the large volume of those meters,
  it is impractical to read all of them at month end and, thus, those meters are
  read on a systematic basis throughout the month based on established meter-reading
  schedules. Consequently, at the end of any month, there exists a quantity of
  electricity and gas that has been delivered to customers but has not been captured
  by the meter readings. As a result, management must estimate revenue related
  to electricity and gas delivered to customers between their meter read dates
  and the end of the period. These estimates include:

- The amount of electricity expected to be lost in the process of its transmission
  and distribution to customers (line loss) and, therefore, the amount of electricity
  actually delivered to customers.

- The mix of sales between customer rate classes, which is based upon historical
  utilization assumptions.

MGE believes that the ratio of unbilled-to-billed electric sales should typically
  fall in a 40% to 50% range on a monthly basis. A ratio outside that range would
  indicate a need for further review and analysis. It should be noted that a small
  change in line loss could have a significant impact on estimated electric unbilled
  revenues.

***Pension Plans***

MGE maintains qualified and nonqualified pension plans. MGE also provides health
  care and life insurance benefits for its retired employees. MGE's pensions are
  funded through an outside trust. The recent declines in the stock market have
  resulted in equally consistent declines in the investments in the trusts. The
  years 2000 through 2002 have been the worst three-year period of pension plan
  financing ever, which produced the lowest returns since 1929 through 1932. Due
  to the loss in asset value, MGE is required to record an additional minimum
  pension liability and corresponding charge to equity at the end of the year.

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

- *Assumed Return on Assets*. An assumption as to the rate of return
  on plan assets reflecting the average rate of earnings expected on the funds
  invested or to be invested to provide for the benefits included in the projected
  benefit obligation. For the year 2002, MGE used a 9.5% assumed return on assets.
  This rate was set at the end of 2001. One of the approaches MGE used in determining
  its assumed return assets is based on historical returns. As of December 31,
  2001, the ten-year historical return was 11.9%. For 2003, MGE has reduced the
  assumed return on assets to 9.0%.

- *Discount Rate*. The discount rate for SFAS 87 pension cost purposes
  is a rate at which pension obligations could be effectively settled. MGE bases
  its rate on high-grade bond yields with a 25 basis point adder. This adder is
  based on the relatively long duration of pension plan liabilities, benefit payments
  that are in the form of an annuity, and the rate used has historically been
  at the top of the range. Moody's Aa Corporate Bond Yield was 6.52% on December 31,
  2002. This approach generated a 6.75% discount rate (i.e., 6.52% + 0.25%).

- *Medical Trend Assumptions*. The health care cost trend rate is the
  assumed rate of increase in per capita health care charges. For 2002, the health
  trend was reset to 10% with the ultimate trend of 5% reached in 2007. In 2003,
  the health trend was again reset to 14% with the ultimate trend of 5% reached
  in 2012.

***Accounting for Derivative Instruments***

MGE accounts for derivative financial instruments under SFAS No. 133,
  *Accounting for Derivatives and Hedging Activities*. Under the provisions
  of SFAS No. 133, all derivatives are recognized on the balance sheet at
  their fair value. Fair value is determined using current quoted market prices.
  If a contract is designated as a cash flow hedge, the change in its market value
  is generally deferred as a component of other comprehensive income until the
  transaction it is hedging is completed. Conversely, the change in the market
  value of a derivative not designated as a cash flow hedge is recorded in current
  period earnings. A cash flow hedge is a hedge of a forecasted transaction or
  the variability of cash flows to be received or paid related to a recognized
  asset or liability. To qualify as a cash flow hedge, the fair value changes
  in the derivative must be expected to offset 80% to 120% of the changes in fair
  value or cash flows of the hedged item.

In the third quarter of 2002, MGE received approval from the PSCW to establish
  a regulatory asset or liability for the deferral of the effects of mark-to-market
  accounting as required by SFAS No. 133 on contracts related to MGE's regulated
  operations.

***Regulatory Assets/Liabilities***

Regulatory assets represent costs that have been deferred to future periods
  when it is probable or certain that the regulator will allow future recovery
  of those costs through rates. MGE bases its assessment of recovery by precedents
  established by the regulatory body. Regulatory liabilities represent previous
  collections from customers to fund future expected costs or amounts received
  in rates that are expected to be refunded to customers in future periods. These
  costs typically include the recovery of stranded costs due to deregulation,
  deferral of energy costs, the normalization of income taxes, and the deferral
  of losses incurred on debt retirements. The accounting for these regulatory
  assets and liabilities is in accordance with the provisions of SFAS No. 71.

MGE continually assesses whether the regulatory assets continue to meet the
  criteria for probability of future recovery. This assessment considers factors
  such as changes in the regulatory environment, recent rate orders to other regulated
  entities under the same jurisdiction, and the status of any pending or potential
  deregulation legislation. If future recovery of costs becomes no longer probable,
  the assets and liabilities would be recognized as current period revenue or
  expense.

Amortization of regulatory assets is provided over the recovery period as allowed
  in the related regulatory agreement. It is also included in depreciation and
  amortization expense. The most significant regulatory assets recorded by MGE
  include demand-side management programs, decommissioning and decontaminating
  enrichment facilities, environmental costs, deferred charges related to the
  setup of ATC, deferred charges on the interest expense of its 2027A Series First
  Mortgage Bonds, deferred charges related to the effects of mark-to-market accounting
  as required by SFAS No. 133, and deferred charges related to tax recovery
  on AFUDC equity (see Footnote 1.f.).

**New Accounting Pronouncements**

***SFAS Nos. 141 and 142***

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
  No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill
  and Other Intangible Assets*, that supersede Accounting Principles Board
  (APB) Opinion No. 16, *Business Combinations*, and APB Opinion No. 17,
  *Intangible Assets*. The two statements modify the method of accounting
  for business combinations and address the accounting and reporting for goodwill
  and intangible assets. SFAS No. 141 is effective for all business combinations
  initiated after June 30, 2001 and, with acquisitions completed after June 30,
  2001, for all business combinations accounted for by the purchase method for
  which the date of acquisition is completed after June 30, 2001. SFAS No. 142
  is effective for fiscal years beginning after December 15, 2001. The adoption
  of SFAS No. 141 and 142 had no impact on the consolidated financial statements.

***SFAS No. 143***

In June 2001, the FASB issued SFAS No. 143, *Accounting for Asset
  Retirement Obligations*. SFAS No. 143, which is effective January 1,
  2003, requires entities to record the fair value of a legal liability for an
  asset retirement obligation in the period in which it is incurred. When a new
  liability is recorded beginning in 2003, the entity will capitalize the cost
  of the liability by increasing the carrying amount of the related long-lived
  asset. The liability is accreted to its present value each period, and the capitalized
  cost is depreciated over the useful life of the related asset. Upon settlement
  of the liability, an entity settles the obligation for its recorded amount or
  incurs a gain or loss upon settlement.

MGE adopted SFAS No. 143 on January 1, 2003. MGE completed an assessment
  of the specific applicability and implications of SFAS No. 143. MGE found
  that SFAS No. 143 has specific applicability to various electric generating
  and substation facilities located on leased property, as well as various electric
  and gas distribution facilities installed on easements or permits. The asset
  retirement obligation associated with electric generating and substation facilities
  is approximately $1 million. The asset retirement obligations associated
  with the electric and gas distribution facilities cannot be reasonably estimated
  due to an indeterminate life of the associated assets.

MGE believes that the adoption of SFAS No. 143 results primarily in timing
  differences in the recognition of the legal asset retirement obligations and
  the asset retirement costs which MGE is currently recovering in rates and will
  be deferring such differences under SFAS No. 71. Early in 2003, MGE received
  assurance from the PSCW that the adoption of SFAS No. 143 would not result
  in a change to the current ratemaking process at this time.

***SFAS No. 144***

In August 2001, the FASB issued SFAS No. 144, *Accounting for
  the Impairment or Disposal of Long-Lived Assets*, which supersedes SFAS
  No. 121, *Accounting for the Impairment of Long-lived Assets and for
  Long-lived Assets to be Disposed of*, and the accounting and reporting provisions
  of APB No. 30, *Reporting the Results of Operations, Reporting the Effects
  of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
  Occurring Events and Transactions*. SFAS No. 144 addresses financial
  accounting and reporting for the impairment or disposal of long-lived assets
  and is effective for fiscal years beginning after December 15, 2001, and
  interim periods within those fiscal years. This statement had no material impact
  on the consolidated financial statements.

***SFAS No. 145***

In May 2002, the FASB issued SFAS No. 145, *Rescission of FASB
  Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
  and Technical Corrections as of April 2002*. SFAS No. 145 rescinds
  both FASB Statement No. 4 (SFAS 4), *Reporting Gains and Losses from
  Extinguishment of Debt*, and the amendment to SFAS 4, FASB Statement No. 64
  (SFAS 64), *Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements*.
  SFAS No. 145 is effective for transactions occurring after May 15,
  2002. This statement does not have a material impact on the consolidated financial
  statements.

***SFAS No. 146***

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

***SFAS No. 148***

In December 2002, the FASB issued SFAS No. 148, *Accounting for
  Stock-Based Compensation- Transition and Disclosure*. This statement amends
  FASB Statement No. 123, *Accounting for Stock-Based Compensation*,
  to provide alternative methods of transition for a voluntary change to the fair
  value-based method of accounting for stock-based employee compensation. In addition,
  the statement amends the disclosure requirements of Statement 123 to require
  prominent disclosures in both annual and interim financial statements about
  the method of accounting for stock-based employee compensation and the effect
  of the method used on reported results. MGE Energy has no stock options as of
  December 31, 2002, and therefore SFAS No. 148 will have no impact.

***EITF Issue 02-3***

EITF Issue 02-3, *Accounting for Contracts Involved in Energy Trading and
  Risk Management Activities* (EITF 02-3), issued by the FASB EITF in June 2002,
  requires revenues and energy costs related to energy trading contracts to be
  presented on a net basis in the income statement. This EITF has no current impact
  on the consolidated financial statements.

***FIN 45***

In November 2002, the FASB issued Financial Interpretation No. (FIN) 45,
  *Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
  Indirect Guarantees of Indebtedness of Others*. This interpretation provides
  the disclosures to be made by a guarantor in interim and annual financial statements
  about obligations under certain guarantees. The interpretation also clarifies
  that a guarantor is required to recognize, at the inception of a guarantee,
  a liability for the fair value of the obligation. The initial recognition and
  measurement requirements are effective prospectively for guarantees issued or
  modified after December 31, 2002. However, the disclosure requirements
  of the interpretation are effective for this Form 10-K and included in
  Footnote 8.

***FIN 46***

In January 2003, the FASB issued FIN 46, *Consolidation of Variable
  Interest Entities*, that addresses conditions when an entity should be consolidated
  based upon variable interests rather than voting interests. Variable interests
  are ownership interests or contractual relationships that enable the holder
  to share in the financial risks and rewards resulting from the activities of
  a Variable Interest Entity (VIE). A VIE is a corporation, partnership, trust,
  or any other legal structure used for business purposes that either does not
  have equity investors with voting rights or has equity investors that do not
  provide sufficient financial resources for the entity to support its activities.

In order to apply FIN 46, MGE must evaluate every entity with which it
  is involved through variable interests to determine whether the entity is a
  VIE and, if it is, whether or not MGE is the primary beneficiary of the entity.
  The primary beneficiary of a VIE is the entity that receives the majority of
  the entity's expected losses, residual returns, or both. As a result, FIN 46
  could result in consolidation of an entity that MGE is associated with other
  than by (and even in the absence of) a voting ownership interest. FIN 46
  is not believed to have a material impact on the consolidated financial statements.

**Inflation**

The current financial statements report operating results in terms of historical
  cost, but they do not evaluate the impact of inflation. Because utilities can
  depreciate only the historical cost of utility plant, there may not be adequate
  cash flows from existing plant to replace this investment. Under PSCW rate treatment,
  projected operating costs, including the impacts of inflation, are recovered
  in revenues.

**Item 7A. Quantitative and Qualitative Disclosures about Market Risk.**

**Market Risks**

MGE is 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.

**Interest Rate Risk**

MGE issues commercial paper at varying interest rates for its short-term borrowings
  (see Footnote 6.d.). MGE also has $15.0 million in variable rate long-term
  debt outstanding as of December 31, 2002. Borrowing levels under commercial
  paper arrangements vary from period to period depending upon capital investments
  and other factors. Future short-term interest expense and payments will reflect
  both future short-term interest rates and borrowing levels. MGE has a swap agreement
  with a commercial bank at a notional amount of $5.0 million, backed by
  MGE's commercial paper. MGE pays a fixed rate of 6.91% on the swap, which was
  used to replace a portion of MGE's 7.70%, 2028 Series, First Mortgage Bonds.
  MGE manages its interest rate risk by limiting its variable rate exposure and
  continually monitoring the effects of market changes on interest rates. MGE
  is not exposed to changes in interest rates on a substantial portion of its
  long-term debt until that debt matures and is refinanced at market rates. MGE
  records the changes in the fair market value of its commercial paper swap agreement
  currently in the income statement as required by SFAS No. 133 each period,
  which is then offset by a corresponding regulatory asset or liability in accordance
  with the PSCW.

**Commodity Price Risk**

MGE has commodity price risk exposure with respect to the price of natural
  gas, electricity, coal, and oil. MGE employs established policies and procedures
  to reduce the market risks associated with changing commodity prices, including
  the use of commodity and financial instruments (see Footnote 5). MGE's commodity
  risks are somewhat mitigated by the current ratemaking process in place for
  recovering electric fuel, purchased energy, and the cost of natural gas purchased
  for resale. MGE's electric fuel costs are subject to fuel rules, established
  by the PSCW, which further mitigate commodity risk. Under fuel rules, if electric
  fuel costs exceed or fall below a 3.0% bandwidth set by the PSCW, MGE can apply
  for a fuel surcharge or may have a fuel credit to its customers. Under the PGA
  authorized by the PSCW, MGE passes through to customers the cost of gas, subject
  to certain limited incentives.

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

**Weather Risk**

MGE's sales forecasts are set by the PSCW based upon estimated temperatures,
  which approximate 20-year averages. MGE's electric revenues are sensitive to
  the summer cooling season, and to some extent, to the winter heating season.
  A significant portion of MGE's gas system demand is driven by heating. MGE's
  gas margin (revenues less gas purchased) are collected under a combination of
  fixed and volumetric rates set by the PSCW based on "normal weather." As a result
  of weather-sensitive demand and volumetric rates, a portion of MGE's gas margin
  is at risk for warmer-than-normal weather. MGE uses weather derivatives, pursuant
  to its risk management program, to reduce the impact of weather volatility on
  its gas margins.

A summary of actual weather information in the utility segment's service territory
  during 2002, 2001, and 2000, as measured by degree days, may be found above
  in Results of Operations.

**Regulatory Recovery Risk**

The electric operations of MGE burn natural gas in several of its peak power
  plants or as a supplemental fuel at several coal-fired plants--and in many cases
  the cost of purchased power is tied to the cost of natural gas. MGE bears significant
  regulatory risk for the recovery of such fuel and purchased power costs when
  they are higher than the base rate established in its current rate structure.

As noted above in Commodity Price Risk, the electric operations of MGE operate
  under a "fuel rules" adjustment clause for fuel and purchased power costs associated
  with the generation and delivery of electricity. This clause establishes a base
  rate for fuel and purchased power. MGE assumes the risks and benefits of variances
  that are within a 3.0% bandwidth. For 2002 and 2001, fuel and purchased power
  costs included in MGE's base fuel rates were $85.1 million and $60.1 million,
  respectively. In 2002, the base fuel rates included a fuel credit in the amount
  of $1.2 million.

**Equity Price Risks**

MGE currently funds its liabilities related to employee benefits through trust
  funds. These funds, which include investments in debt and equity securities,
  are managed by various investment managers. Changes in market value of these
  investments can have an impact on the future expenses related to these liabilities.
  MGE's risk of expense and annuity payments, as a result of changes in the market
  value of the trust funds, is mitigated in part through future rate actions by
  the PSCW.

**Credit Risks**

Credit risk is the loss that may result from counterparty nonperformance. MGE
  is exposed to credit risk primarily through its merchant energy business. MGE
  uses credit policies to manage its credit risk, which includes utilizing an
  established credit approval process, monitoring counterparty limits, employing
  credit mitigation measures such as collateral or prepayment arrangements, and
  using netting agreements.

Due to the possibility of extreme volatility in the prices of energy commodities
  and derivatives, the market value of contractual positions with individual counterparties
  could exceed established credit limits or collateral provided by those counterparties.
  If such a counterparty were then to fail to perform its obligations under its
  contract (for example, fail to deliver the electricity MGE originally contracted
  for), MGE could sustain a loss that could have a material impact on its financial
  results.

Additionally, if a counterparty were to default and MGE were to liquidate all
  contracts with that entity, MGE's credit loss would include the loss in value
  of mark-to-market contracts, the amount owed for settled transactions, and additional
  payments, if any, to settle unrealized losses on accrual contracts.

MGE is obligated to provide service to all electric and gas customers within
  its respective franchised territories. As a result, MGE has a broad customer
  base. For the year ended December 31, 2002, MGE's ten largest electric
  customers represented approximately 18.3% of its retail electric revenues. MGE's
  ten largest gas customers represented approximately 5.4% of its gas revenues.
  Credit risk for electric and gas is managed by MGE's credit and collection policies,
  which are consistent with state regulatory requirements.

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

**Reports of Independent Accountants**

**To the Board of Directors and Shareholders of MGE Energy, Inc.**

In our opinion, the consolidated financial statements listed in the index appearing
  under Item 15(a)(1) present fairly, in all material respects, the financial
  position of MGE Energy, Inc. and its subsidiaries at December 31, 2002
  and December 31, 2001, and the results of their operations and their cash
  flows for each of the three years in the period ended December 31, 2002
  in conformity with accounting principles generally accepted in the United States
  of America. In addition, in our opinion, the financial statement schedule listed
  in the accompanying index appearing under Item 15(a)(2) presents fairly,
  in all material respects, the information set forth therein when read in conjunction
  with the related consolidated financial statements. These financial statements
  and financial statement schedule are the responsibility of the company's management;
  our responsibility is to express an opinion on these financial statements and
  financial statement schedule based on our audits. We conducted our audits of
  these statements in accordance with auditing standards generally accepted in
  the United States of America, which require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are free
  of material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements, assessing
  the accounting principles used and significant estimates made by management,
  and evaluating the overall financial statement presentation. We believe that
  our audits provide a reasonable basis for our opinion.

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

/s/ PricewaterhouseCoopers LLPChicago, Illinois
  February 6, 2003

**To the Board of Directors and Shareholder of Madison Gas and Electric
  Company**

In our opinion, the financial statements listed in the index appearing under
  Item 15(a)(1) present fairly, in all material respects, the financial position
  of Madison Gas and Electric Company and its subsidiaries at December 31,
  2002 and December 31, 2001, and the results of their operations and their
  cash flows for each of the three years in the period ended December 31,
  2002 in conformity with accounting principles generally accepted in the United
  States of America. In addition, in our opinion, the financial statement schedule
  listed in the accompanying index appearing under Item 15(a)(2) presents
  fairly, in all material respects, the information set forth therein when read
  in conjunction with the related financial statements. These financial statements
  and financial statement schedule are the responsibility of the company's management;
  our responsibility is to express an opinion on these financial statements and
  financial statement schedule based on our audits. We conducted our audits of
  these statements in accordance with auditing standards generally accepted in
  the United States of America, which require that we plan and perform the audit
  to obtain reasonable assurance about whether the financial statements are free
  of material misstatement. An audit includes examining, on a test basis, evidence
  supporting the amounts and disclosures in the financial statements, assessing
  the accounting principles used and significant estimates made by management,
  and evaluating the overall financial statement presentation. We believe that
  our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLPChicago, Illinois
  February 6, 2003



|                                                                                       | For the years ended
      December 31,
|-------------------------------------------------------------------------------------- | --------------------------------------
|                                                                                       | 2002                                  
|**Operating Revenues:**                                                                |                                       
|Regulated utility operations                                                           | $347,096                              
|                                                                                       |                                       
|**Operating Expenses:**                                                                |                                       
|Fuel for electric generation                                                           | 38,210                                
|Purchased power                                                                        | 44,607                                
|Natural gas purchased                                                                  | 73,412                                
|Other operations and maintenance                                                       | 92,514                                
|Depreciation and amortization                                                          | 29,362                                
|Other general taxes                                                                    | 10,861                                
|*Total Operating Expenses*                                                             | 288,966                               
|**Operating Income**                                                                   | 58,130                                
|                                                                                       |                                       
|Other income                                                                           | 2,335                                 
|Interest expense                                                                       | (12,545)                              
|Income before income taxes                                                             | 47,920                                
|**Income Tax Provision**                                                               | (18,727)                              
|Income before cumulative effect of a change in accounting
      principle              | 29,193                                
|Cumulative effect of a change in accounting principle,
      net of tax benefit of $78 | -                                     
|**Net Income**                                                                         | $ 29,193                              
|                                                                                       |                                       
|**Earnings Per Share of Common Stock** (basic
      and diluted):                      |                                       
|Income before cumulative effect of a change in accounting
      principle              | $1.69                                 
|Cumulative effect of a change in accounting principle                                  | -                                     
|**Net Income**                                                                         | $1.69                                 
|                                                                                       |                                       
|Dividends paid per share of common stock                                               | $1.34                                 
|                                                                                       |                                       
|**Average Shares Outstanding** (basic
      and diluted)                               | 17,311                                

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



|                                                                                     | For the years ended December 31,
|------------------------------------------------------------------------------------ | --------------------------------
|                                                                                     | 2002                            
|**Operating Activities:**                                                            |                                 
|Net income                                                                           | $29,193                         
|Items not affecting cash:                                                            |                                 
|Depreciation and amortization                                                        | 29,362                          
|Deferred income taxes                                                                | 3,629                           
|Amortization of nuclear fuel                                                         | -                               
|Amortization of investment tax credits                                               | (520)                           
|Equity in earnings in ATC                                                            | (3,316)                         
|Cumulative effect of change in accounting principle, net of tax benefit
      of $78 | -                               
|Other items                                                                          | (380)                           
|Dividend income from ATC                                                             | 2,714                           
|Collateral to ATC                                                                    | (5,000)                         
|Changes in working capital items:                                                    |                                 
|Receivables, net                                                                     | (11,214)                        
|Inventories                                                                          | 2,375                           
|Unbilled revenues                                                                    | (2,053)                         
|Prepayments                                                                          | (2,278)                         
|Accounts payable                                                                     | 9,883                           
|Accrued taxes and interest                                                           | 51                              
|Other                                                                                | 4,036                           
|Other noncurrent items, net                                                          | 247                             
|*Cash Provided by Operating Activities*                                              | 56,729                          
|**Investing Activities:**                                                            |                                 
|Capital expenditures                                                                 | (78,282)                        
|Increase in nuclear decommissioning fund                                             | (7,804)                         
|Capital distribution from ATC                                                        | -                               
|Sale of interest in nuclear plant                                                    | -                               
|Purchase of gas service territory                                                    | (78)                            
|Other                                                                                | (213)                           
|*Cash Used for Investing Activities*                                                 | (86,377)                        
|**Financing Activities:**                                                            |                                 
|Issuance of common stock                                                             | 13,597                          
|Cash dividends on common stock                                                       | (23,170)                        
|Long-term debt maturity                                                              | (20,000)                        
|Issuance of long-term debt                                                           | 35,000                          
|Increase/(decrease) in short-term debt                                               | 24,798                          
|*Cash Provided by/(Used for) Financing Activities*                                   | 30,225                          
|**Change in Cash and Cash Equivalents**                                              | 577                             
|Cash and cash equivalents at beginning of period                                     | 2,421                           
|Cash and cash equivalents at end of period                                           | $ 2,998                         

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



|                                                                      | At December 31,
|--------------------------------------------------------------------- | ---------------
|                                                                      | 2002           
|**ASSETS**                                                            |                
|Utility plant in service (at original cost, in service)               | $769,250       
|Less accumulated provision for depreciation                           | (365,243)      
|Net plant in service                                                  | 404,007        
|Construction work in progress                                         | 47,539         
|Nuclear decommissioning fund                                          | 8,782          
|*Total Utility Plant*                                                 | 460,328        
|Other property and investments                                        | 35,493         
|                                                                      |                
|**Current Assets:**                                                   |                
|Cash and cash equivalents                                             | 2,998          
|Accounts receivable, less reserves of $2,659 and $3,764, respectively | 36,275         
|Unbilled revenues                                                     | 18,539         
|Materials and supplies, at lower of average cost or market            | 8,147          
|Fossil fuel, at lower of average cost or market                       | 5,213          
|Stored natural gas, at lower of average cost or market                | 12,948         
|Prepaid taxes                                                         | 10,827         
|Other prepayments                                                     | 2,024          
|*Total Current Assets*                                                | 96,971         
|**Deferred Charges**                                                  | 36,103         
|**Total Assets**                                                      | $628,895       
|                                                                      |                
|**CAPITALIZATION AND LIABILITIES**                                    |                
|Common shareholders' equity                                           | $227,370       
|Long-term debt                                                        | 192,149        
|*Total Capitalization*                                                | 419,519        
|                                                                      |                
|**Current Liabilities:**                                              |                
|Long-term debt due within one year                                    | -              
|Short-term debt - commercial paper                                    | 34,298         
|Accounts payable                                                      | 32,039         
|Accrued interest                                                      | 3,161          
|Other current liabilities                                             | 11,049         
|*Total Current Liabilities*                                           | 80,547         
|                                                                      |                
|**Other Credits:**                                                    |                
|Deferred income taxes                                                 | 62,450         
|Investment tax credit - deferred                                      | 5,407          
|Other deferred liabilities                                            | 60,972         
|*Total Other Credits*                                                 | 128,829        
|Commitments and Contingencies (Note 9)                                | -              
|**Total Capitalization and Liabilities**                              | $628,895       

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



**MGE Energy, Inc.
      Consolidated Statements of Capitalization*(In thousands)***



|                                                                                                    | At December 31,
|--------------------------------------------------------------------------------------------------- | ---------------
|                                                                                                    | 2002           
|**Common Shareholders' Equity:**                                                                    |                
|Common stock - par value $1 per share:                                                              |                
|Authorized 50,000,000 shared                                                                        |                
|Outstanding 17,574,796 and 17,071,554 shares, respectively                                          | $ 17,575       
|Additional paid-in capital                                                                          | 146,181        
|Retained earnings                                                                                   | 73,039         
|Accumulated other comprehensive loss                                                                | (9,425)        
|Total Common Shareholders' Equity                                                                   | 227,370        
|                                                                                                    |                
|**Redeemable Preferred Stock**,
      cumulative, $25 par value, 1,175,000 authorized, but unissued | -              
|                                                                                                    |                
|**First Mortgage Bonds:**                                                                           |                
|8.50%, 2022 Series                                                                                  | -              
|6.75%, 2027A Series, Industrial Development Revenue Bonds                                           | -              
|6.70%, 2027B Series, Industrial Development Revenue Bonds                                           | -              
|7.70%, 2028 Series                                                                                  | 21,200         
|Total First Mortgage Bonds                                                                          | 21,200         
|                                                                                                    |                
|**Other Long-Term Debt:**                                                                           |                
|Variable rate, due 2004                                                                             | 15,000         
|6.91%, due 2004                                                                                     | 5,000          
|7.49%, due 2007                                                                                     | 15,000         
|6.02%, due 2008                                                                                     | 30,000         
|4.875% 2012 Series, Industrial Development Revenue Bonds                                            | 19,300         
|5.875% 2034 Series, Industrial Development Revenue Bonds                                            | 28,000         
|6.58%, due 2012                                                                                     | 15,000         
|5.26%, due 2017                                                                                     | 20,000         
|7.12%, due 2032                                                                                     | 25,000         
|Other Long-term Debt                                                                                | 172,300        
|                                                                                                    |                
|Unamortized discount and premium on bonds, net                                                      | (1,351)        
|Total Long-term Debt                                                                                | 192,149        
|                                                                                                    |                
|**Total Capitalization**                                                                            | $419,519       

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



|                                                                | Common Stock | Additional
      Paid-in
      Capital | Retained
      Earnings | Accumulated Other
        Comprehensive (Loss)/Income | Comprehensive
      Income
|--------------------------------------------------------------- | ------------ | -------------------------------------- | ----------------------- | ----------------------------------------------------- | --------------------------
|**2000**                                                        | Shares       | Value                                  |                         |                                                       |                           
|Beginning balance - December 31, 1999                           | 16,161       | $16,161                                | $114,155                | $56,345                                               | $ (975)                   
|Net income                                                      |              |                                        |                         | 27,355                                                |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                                       |                           
|Minimum pension liability adjustment, net of $70 tax benefit    |              |                                        |                         |                                                       | (105)                     
|Total comprehensive income                                      |              |                                        |                         |                                                       |                           
|Common stock dividends ($1.32 per share)                        |              |                                        |                         | (21,588)                                              |                           
|Common stock issued                                             | 458          | 458                                    | 8,506                   |                                                       |                           
|Ending balance - December 31, 2000                              | 16,619       | $16,619                                | $122,661                | $ 62,112                                              | $(1,080)                  
|                                                                |              |                                        |                         |                                                       |                           
|2001                                                            |              |                                        |                         |                                                       |                           
|Net income                                                      |              |                                        |                         | 27,245                                                |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                                       |                           
|Minimum pension liability adjustment, net of $132 tax provision |              |                                        |                         |                                                       | 197                       
|Total comprehensive income                                      |              |                                        |                         |                                                       |                           
|Common stock dividends ($1.33 per share)                        |              |                                        |                         | (22,341)                                              |                           
|Common stock issued                                             | 453          | 453                                    | 10,426                  |                                                       |                           
|Ending balance - December 31, 2001                              | 17,072       | $17,072                                | $133,087                | $ 67,016                                              | $(883)                    
|                                                                |              |                                        |                         |                                                       |                           
|2002                                                            |              |                                        |                         |                                                       |                           
|Net income                                                      |              |                                        |                         | 29,193                                                |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                                       |                           
|Minimum pension liability adjustment, net of $5,727 tax benefit |              |                                        |                         |                                                       | (8,542)                   
|Total comprehensive income                                      |              |                                        |                         |                                                       |                           
|Common stock dividends ($1.34 per share)                        |              |                                        |                         | (23,170)                                              |                           
|Common stock issued                                             | 503          | 503                                    | 13,094                  |                                                       |                           
|Ending balance - December 31, 2002                              | 17,575       | $17,575                                | $146,181                | $73,039                                               | $(9,425)                  

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



|                                                                                               | For years ended December 31,
|---------------------------------------------------------------------------------------------- | ----------------------------
|                                                                                               | 2002                        
|**Operating Revenues:**                                                                        |                             
|Regulated electric revenues                                                                    | $224,987                    
|Regulated gas revenues                                                                         | 122,109                     
|*Total Operating Revenues*                                                                     | 347,096                     
|                                                                                               |                             
|**Operating Expenses:**                                                                        |                             
|Fuel for electric generation                                                                   | 38,210                      
|Purchased power                                                                                | 44,607                      
|Natural gas purchased                                                                          | 73,412                      
|Other operations                                                                               | 80,775                      
|Maintenance                                                                                    | 11,724                      
|Depreciation and amortization                                                                  | 29,362                      
|Other general taxes                                                                            | 10,861                      
|Income tax provision                                                                           | 17,573                      
|*Total Operating Expenses*                                                                     | 306,524                     
|**Net Operating Income**                                                                       | 40,572                      
|                                                                                               |                             
|**Other Income and Deductions:**                                                               |                             
|AFUDC - equity funds                                                                           | 380                         
|Equity in earnings in ATC                                                                      | 3,316                       
|Income tax provision                                                                           | (889)                       
|Other                                                                                          | (1,421)                     
|*Total Other Income*                                                                           | 1,386                       
|Income before interest expense and cumulative effect of a change in accounting
      principle | 41,958                      
|                                                                                               |                             
|**Interest Expense:**                                                                          |                             
|Interest on long-term debt                                                                     | 12,032                      
|Other interest                                                                                 | 508                         
|AFUDC - borrowed funds                                                                         | (213)                       
|*Net Interest Expense*                                                                         | 12,327                      
|Net income before cumulative effect of a change in accounting
      principle                  | 29,631                      
|Cumulative effect of a change in accounting principle, net of tax benefit
      of $78         | -                           
|**Net Income**                                                                                 | $ 29,631                    

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



|                                                                                     | For the years ended December 31,
|------------------------------------------------------------------------------------ | --------------------------------
|**Operating Activities:**                                                            | 2002                            
|Net income                                                                           | $29,631                         
|Items not affecting cash:                                                            |                                 
|Depreciation and amortization                                                        | 29,362                          
|Deferred income taxes                                                                | 3,629                           
|Amortization of nuclear fuel                                                         | -                               
|Amortization of investment tax credits                                               | (520)                           
|AFUDC - equity funds                                                                 | (380)                           
|Equity in earnings in ATC                                                            | (3,316)                         
|Cumulative effect of change in accounting principle, net of tax benefit
      of $78 | -                               
|Other items                                                                          | -                               
|Dividend income from ATC                                                             | 2,714                           
|Collateral account - ATC                                                             | (5,000)                         
|Changes in working capital items:                                                    |                                 
|Receivables, net                                                                     | (11,230)                        
|Inventories                                                                          | 2,375                           
|Unbilled revenues                                                                    | (2,053)                         
|Prepayments                                                                          | (2,047)                         
|Accounts payable                                                                     | 6,995                           
|Accrued taxes and interest                                                           | 47                              
|Other                                                                                | 3,923                           
|Other noncurrent items, net                                                          | (147)                           
|*Cash Provided by Operating Activities*                                              | 53,983                          
|**Investing Activities:**                                                            |                                 
|Additions to utility plant and nuclear fuel                                          | (59,430)                        
|AFUDC - borrowed funds                                                               | (213)                           
|Increase in nuclear decommissioning fund                                             | (7,804)                         
|Purchase of gas service territory                                                    | (78)                            
|Capital distribution from ATC                                                        | -                               
|Sale of interest in nuclear plant                                                    | -                               
|*Cash Used for Investing Activities*                                                 | (67,525)                        
|**Financing Activities:**                                                            |                                 
|Equity contributions from parent                                                     | 4,497                           
|Issuance of common stock                                                             | 7,471                           
|Cash dividends on common stock                                                       | -                               
|Cash dividends to parent                                                             | (17,316)                        
|Long-term debt maturities/redemptions                                                | (20,000)                        
|Issuance of long-term debt                                                           | 35,000                          
|Increase/(decrease) in short-term debt                                               | 4,000                           
|*Cash Used for Financing Activities*                                                 | 13,652                          
|**Change in Cash and Cash Equivalents**                                              | 110                             
|Cash and cash equivalents at beginning of period                                     | 2,421                           
|Cash and cash equivalents at end of period                                           | $ 2,531                         

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



|                                                                      | At December 31,
|--------------------------------------------------------------------- | ---------------
|**ASSETS**                                                            | 2002           
|**Utility Plant** (at original cost, in service):                     |                
|Electric                                                              | $547,139       
|Gas                                                                   | 222,111        
|Gross plant in service                                                | 769,250        
|Less accumulated provision for depreciation                           | (365,243)      
|Net plant in service                                                  | 404,007        
|Construction work in progress                                         | 28,686         
|Nuclear decommissioning fund                                          | 8,782          
|*Total Utility Plant*                                                 | 441,475        
|Other property and investments                                        | 7,550          
|Investment in ATC                                                     | 26,839         
|*Total other property and investments*                                | 34,389         
|**Current Assets:**                                                   |                
|Cash and cash equivalents                                             | 2,531          
|Accounts receivable, less reserves of $2,659 and $3,764, respectively | 36,291         
|Unbilled revenues                                                     | 18,539         
|Materials and supplies, at lower of average cost or market            | 8,147          
|Fossil fuel, at lower of average cost or market                       | 5,213          
|Stored natural gas, at lower of average cost or market                | 12,948         
|Prepaid taxes                                                         | 10,619         
|Other prepayments                                                     | 2,001          
|*Total Current Assets*                                                | 96,289         
|Other deferred charges                                                | 36,103         
|**Total Assets**                                                      | $608,256       
|**CAPITALIZATION AND LIABILITIES**                                    |                
|Common shareholders' equity                                           | $230,534       
|Long-term debt                                                        | 192,149        
|*Total Capitalization*                                                | 422,683        
|**Current Liabilities:**                                              |                
|Long-term debt due within one year                                    | -              
|Short-term debt - commercial paper                                    | 13,500         
|Accounts payable                                                      | 29,151         
|Accrued interest                                                      | 3,157          
|Accrued payroll - related items                                       | 5,811          
|Other current liabilities                                             | 5,125          
|*Total Current Liabilities*                                           | 56,744         
|**Other Credits:**                                                    |                
|Deferred income taxes                                                 | 62,450         
|Investment tax credit - deferred                                      | 5,407          
|Regulatory liability (SFAS No. 109)                                   | 10,931         
|Other regulatory liabilities                                          | 5,262          
|Other deferred liabilities                                            | 44,779         
|*Total Other Credits*                                                 | 128,829        
|Commitments and Contingencies (Note 9)                                |                
|**Total Capitalization and Liabilities**                              | $608,256       

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



|                                                                                                    | At December 31,
|--------------------------------------------------------------------------------------------------- | ---------------
|                                                                                                    | 2002           
|**Common Shareholders' Equity**                                                                     |                
|Common stock - par value $1 per share:                                                              |                
|Authorized 50,000,000 shared                                                                        |                
|Outstanding 17,347,889 and 17,071,554 shares, respectively                                          | $ 17,348       
|Additional paid-in capital                                                                          | 144,779        
|Retained earnings                                                                                   | 77,832         
|Accumulated other comprehensive loss                                                                | (9,425)        
|Total Common Shareholders' Equity                                                                   | 230,534        
|                                                                                                    |                
|**Redeemable Preferred Stock**,
      cumulative, $25 par value, 1,175,000 authorized, but unissued | -              
|                                                                                                    |                
|**First Mortgage Bonds**                                                                            |                
|8.50%, 2022 Series                                                                                  | -              
|6.75%, 2027A Series, Industrial Development Revenue Bonds                                           | -              
|6.70%, 2027B Series, Industrial Development Revenue Bonds                                           | -              
|7.70%, 2028 Series                                                                                  | 21,200         
|Total First Mortgage Bonds                                                                          | 21,200         
|                                                                                                    |                
|**Other Long-term Debt**                                                                            |                
|Variable rate, due 2004                                                                             | 15,000         
|6.91%, due 2004                                                                                     | 5,000          
|7.49%, due 2007                                                                                     | 15,000         
|6.02%, due 2008                                                                                     | 30,000         
|4.875% 2012 Series, Industrial Development Revenue Bonds                                            | 19,300         
|5.875% 2034 Series, Industrial Development Revenue Bonds                                            | 28,000         
|6.58%, due 2012                                                                                     | 15,000         
|5.26%, due 2017                                                                                     | 20,000         
|7.12%, due 2032                                                                                     | 25,000         
|Other Long-term Debt                                                                                | 172,300        
|                                                                                                    |                
|Unamortized discount and premium on bonds, net                                                      | (1,351)        
|Total Long-term Debt                                                                                | 192,149        
|                                                                                                    |                
|**Total Capitalization**                                                                            | $422,683       

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



|                                                                | Common Stock | Additional
      Paid-in
      Capital | Retained
      Earnings | Accumulated Other Comprehensive (Loss)/Income | Comprehensive
      Income
|--------------------------------------------------------------- | ------------ | -------------------------------------- | ----------------------- | --------------------------------------------- | --------------------------
|**2000**                                                        | Shares       | Value                                  |                         |                                               |                           
|Beginning balance - December 31, 1999                           | 16,161       | $16,161                                | $114,155                | $56,345                                       | $(975)                    
|Net income                                                      |              |                                        |                         | 27,355                                        |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                               |                           
|Minimum pension liability adjustment, net of $70 tax benefit    |              |                                        |                         |                                               | (105)                     
|Total comprehensive income                                      |              |                                        |                         |                                               |                           
|Common stock dividends ($1.32 per share)                        |              |                                        |                         | (21,588)                                      |                           
|Common stock issued                                             | 458          | 458                                    | 8,506                   |                                               |                           
|Ending balance - December 31, 2000                              | 16,619       | $16,619                                | $122,661                | $ 62,112                                      | $(1,080)                  
|                                                                |              |                                        |                         |                                               |                           
|2001                                                            |              |                                        |                         |                                               |                           
|Net income                                                      |              |                                        |                         | 27,245                                        |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                               |                           
|Minimum pension liability adjustment, net of $132 tax provision |              |                                        |                         |                                               | 197                       
|Total comprehensive income                                      |              |                                        |                         |                                               |                           
|Common stock dividends ($1.33 per share)                        |              |                                        |                         | (22,341)                                      |                           
|Common stock issued                                             | 453          | 453                                    | 10,426                  |                                               |                           
|Ending balance - December 31, 2001                              | 17,072       | $17,072                                | $133,087                | $ 67,016                                      | $(883)                    
|                                                                |              |                                        |                         |                                               |                           
|2002                                                            |              |                                        |                         |                                               |                           
|Net income                                                      |              |                                        |                         | 29,631                                        |                           
|Other comprehensive income/(loss):                              |              |                                        |                         |                                               |                           
|Minimum pension liability adjustment, net of $5,727 tax benefit |              |                                        |                         |                                               | (8,542)                   
|Total comprehensive income                                      |              |                                        |                         |                                               |                           
|Common stock dividends ($1.34 per share)                        |              |                                        |                         | (17,316)                                      |                           
|Transfer of subsidiary equity to parent                         |              |                                        |                         | (1,499)                                       |                           
|Common stock issued                                             | 276          | 276                                    | 11,692                  |                                               |                           
|Ending balance - December 31, 2002                              | 17,348       | $17,348                                | $144,779                | $77,832                                       | $(9,425)                  

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





This report is a combined report of MGE Energy, Inc. and Madison Gas and Electric
  Company. 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. The footnotes are applicable to MGE Energy in its entirety.

**1. Summary of Significant Accounting Policies**

**a. General**

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

MGE is an investor-owned public utility headquartered in Madison, Wisconsin.
  MGE generates and distributes electricity to nearly 130,000 customers in a 250-square-mile
  area of Dane County. MGE also purchases and distributes natural gas to more
  than 126,000 customers in 1,375 square miles of service territory in seven south-central
  Wisconsin counties.

The consolidated financial statements reflect the application of certain accounting
  policies described in this note. All significant intercompany accounts and transactions
  have been eliminated in consolidation.

In order to prepare consolidated financial statements in conformity with generally
  accepted accounting principles, management must make estimates and assumptions
  that affect reported amounts of assets and liabilities at the dates of the financial
  statements, reported amounts of revenues and expenses during the reported periods,
  and disclosure of contingencies. Actual results could differ from management's
  estimates.

Accounting policies for regulated operations are in accordance with those
  prescribed by the regulatory authorities having jurisdiction, principally the
  Public Service Commission of Wisconsin (PSCW), the Federal Energy Regulatory
  Commission (FERC), and the Securities and Exchange Commission under the Public
  Utility Holding Company Act of 1935.

**b. MGE - Revenues**

Revenues from the sale of electricity and gas to customers are generally recorded
  when electricity/gas is delivered to those customers. The quantity of those
  sales is measured by customers' meters. Due to the large volume of those meters,
  it is impractical to read all of them at month end and, thus, those meters are
  read on a systematic basis throughout the month based on established meter-reading
  schedules. Consequently, at the end of any month, there exists a quantity of
  electricity and gas that has been delivered to customers but has not been captured
  by the meter readings. As a result, management must estimate revenue related
  to electricity and gas delivered to customers between their meter read date
  and the end of the period.

In order to estimate unbilled revenues as of the end of a particular period,
  MGE performs a series of calculations based upon actual and estimated numbers
  and assumptions. MGE begins by calculating the amount of electricity and gas
  available for sale within its system during that period based upon known inputs,
  i.e., electricity and gas purchases from third parties, gas from storage, and
  MGE-generated electricity. These amounts are then adjusted to deduct the amounts
  actually included within customers' bills for that period. In the case of electricity,
  the amount is further reduced by an estimate of the quantity of electricity
  lost in the process of transmitting and distributing it to customers. The resulting
  available-for-sale quantities are then allocated to various customer classes
  based upon historical utilization patterns for those customers, and MGE applies
  published tariffs to determine the associated revenues. Utilization patterns
  are based upon assumptions regarding weather, economic conditions, and consistency
  of use over the period in question and can be affected by variations in those
  items. The resulting estimate is then compared to other available statistics,
  including accounts receivable and billed sales for the particular period, in
  order to confirm its reasonableness. MGE believes that the ratio of unbilled-to-billed
  electric sales should typically fall in a 40% to 50% range on a monthly basis.
  A ratio outside that range would indicate a need for further review and analysis.

Gas revenues are subject to an adjustment clause related to periodic changes
  in the cost of gas. MGE has been operating under a gas cost incentive mechanism
  since 1999. Under this mechanism, if actual gas commodity costs are above or
  below a benchmark set by state regulators, MGE's gas sales service customers
  and shareholders share equally in the higher costs or savings up to $1.5 million.
  Any costs or savings that exceed $1.5 million will be passed on to the
  gas sales service customers.

**c. MGE - Nuclear Fuel**

The 1992 National Energy Policy Act requires all utilities that have used
  federal enrichment facilities to pay a special assessment for decontaminating
  and decommissioning these facilities. This special assessment is based on past
  enrichment. MGE has accrued in other regulatory liabilities and deferred in
  deferred charges an estimated $1.1 million for its portion of the special
  assessment. MGE believes any additional costs will be recovered in future rates.

Effective September 23, 2001, MGE sold its 17.8% ownership interest in
  Kewaunee to Wisconsin Public Service Corporation (WPSC) (see Footnote 10).

**d. MGE - Property, Plant, and Equipment**

MGE's utility plant is stated at the original cost of construction, which
  includes indirect costs consisting of payroll taxes, pensions, postretirement
  benefits, other fringe benefits, administrative and general costs, and an allowance
  for funds used during construction (AFUDC).

AFUDC represents the approximate cost of debt and equity capital devoted to
  plant under construction. MGE presently capitalizes AFUDC at a rate of 10.58%
  on 50.0% of average construction work in progress. The AFUDC rate approximates
  MGE's cost of capital. The portion of the allowance that applies to borrowed
  funds is presented in the Consolidated Statements of Income as a reduction of
  interest expense, and equity funds is presented as other income. Although the
  allowance does not represent current cash income, it is recovered under the
  ratemaking process over the service lives of the related properties.

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

MGE Energy's nonregulated businesses capitalize interest costs under Statement
  of Financial Accounting Standards (SFAS) No. 34, *Capitalizing Interest
  Costs*, for costs incurred to finance its power plant construction projects
  and real estate developed for internal use.

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

**e. MGE - Depreciation**

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

|         | 2002 |  | 2001 |  | 2000
|-------- | ---- |  | ---- |  | ----
|Electric | 2.8% |  | 3.4% |  | 3.2%
|Gas      | 3.3% |  | 3.3% |  | 3.4%

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

Included in accumulated provision for depreciation is a regulatory liability
  in the amount of $17.4 million representing future removal costs collected
  through depreciation.

Effective September 23, 2001, MGE transferred the assets of its external
  decommissioning trusts to external trusts of WPSC. This transfer was part of
  the Kewaunee sale agreement between WPSC and MGE (see Footnote 10). The
  agreement required MGE to continue funding its external decommissioning trust
  through the end of 2002 at the PSCW authorized level of approximately $0.7 million
  per month. These costs were recovered from customers in rates. At the beginning
  of 2003, the remaining assets of the MGE external trust were transferred to
  the external trust of WPSC. The trusts are shown on the balance sheet in the
  Utility Plant section.

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

As of December 31, 2002, the decommissioning trust totaled $8.8 million,
  its pretax fair market value. Realized earnings on the trusts were $0.1 million,
  $4.1 million, and $3.5 million for the years ended December 31,
  2002, 2001, and 2000, respectively. Unrealized earnings (loss) of the trusts
  totaled $(1.2 million), $0 million, and $28.0 million at December 31,
  2002, 2001, and 2000, respectively.

**f. MGE - Regulatory Matters**

Pursuant to SFAS No. 71, *Accounting for the Effects of Certain Types
  of Regulation*, MGE capitalizes (as deferred charges) incurred costs that
  are expected to be recovered in future electric and natural gas rates. MGE also
  records (as other credits) obligations to customers to refund previously collected
  revenue or to spend revenue collected from customers on future costs.

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

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

|                                                                                                                                                                                                                                                                  | 2002    |             | 2001
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ----------- | ----
|*(In thousands)*                                                                                                                                                                                                                                                  | Assets  | Liabilities |     
|Demand-side management                                                                                                                                                                                                                                            | $ -     | $ -         |     
|Decommissioning and decontamination                                                                                                                                                                                                                               | 1,140   | 1,140       |     
|Environmental costs                                                                                                                                                                                                                                               | 492     | -           |     
|Regulatory liability - SFAS No. 109                                                                                                                                                                                                                               | -       | 10,931      |     
|Gas supply derivatives                                                                                                                                                                                                                                            | -       | 483         |     
|Deferred charges related to ATC                                                                                                                                                                                                                                   | 3,652   | -           |     
|Deferred charges related to interest - 2027A Series                                                                                                                                                                                                               | 844     | -           |     
|Nitrogen oxide escrow                                                                                                                                                                                                                                             | -       | 996         |     
|Deferred charges - SFAS No. 133                                                                                                                                                                                                                                   | 546     | -           |     
|Deferred charges - tax recovery related to AFUDC equity                                                                                                                                                                                                           | 2,640   | -           |     
|Other                                                                                                                                                                                                                                                             | 994     | 2,643       |     
|Subtotal - regulatory assets/liabilities                                                                                                                                                                                                                          | 10,308  | 16,193      |     
|Pension and deferred compensation assets/liabilities                                                                                                                                                                                                              | 6,450   | 39,316      |     
|Unamortized debt expense*                                                                                                                                                                                                                                         | 7,464   | -           |     
|Customer advances for construction                                                                                                                                                                                                                                | -       | 2,114       |     
|Other deferred items                                                                                                                                                                                                                                              | 11,881  | 3,349       |     
|Subtotal - deferred assets/liabilities                                                                                                                                                                                                                            | 25,795  | 44,779      |     
|Total                                                                                                                                                                                                                                                             | $36,103 | $60,972     |     
|*Unamortized debt expense includes costs associated with the issuance of
      long-term debt. These costs are amortized over the respective lives of the
      associated debt instruments. MGE recovers these costs in rates as a cost
      of long-term debt.

Demand-side management expenditures are for programs to promote energy efficiency.
  The demand-side management asset balance is for conservation expenditures that
  were previously capitalized. MGE recovers a carrying cost on this asset. MGE
  has not incurred any expenditures for capitalized conservation since 1997. The
  capitalized conservation balance as of December 31, 1999, has been recovered
  in rates over a four-year amortization period, which ended December 2002.

The demand-side management liability balance is for MGE's conservation escrow
  expenditures. Costs for demand-side management programs are estimated in MGE's
  rates. To the extent the costs are over or under spent compared to the estimate
  included in rates, MGE will be required in its next rate case to seek recovery
  on any amounts overspent and return to ratepayers any amounts underspent.

Costs related to decommissioning and decontamination will be recovered in
  rates through September 2007 (see Footnote 1.c.)

Environmental costs MGE has received regulatory treatment on include clean
  up of two landfill sites and costs of certain nitrogen oxide (NOx)
  related expenditures. The regulators have allowed MGE to recover carrying costs
  on certain NOx-related expenditures. These costs are amortized over
  varying time periods between four years for cleanup of sites and ten years for
  NOx-related expenditures.

MGE has a limited number of physical and financial gas commodity contracts
  that are defined as derivatives under SFAS No. 133, *Accounting for
  Derivative Instruments and Hedging Activities*. The derivative amounts recorded
  as a result of these gas contracts is offset with a corresponding regulatory
  asset or liability because these transactions are part of the Purchased Gas
  Adjustment Clause (PGA) authorized by the PSCW and not subject to the gas cost
  incentive sharing mechanism. This regulatory liability will be returned in the
  first quarter of 2003.

Deferred charges in connection with the start-up of the American Transmission
  Company (ATC) are being deferred under SFAS No. 71, as MGE believes it
  is probable that MGE will obtain recovery of these costs in future rates based
  on the PSCW's order in Docket O5-EI-121. MGE is earning a current return
  on the deferred charges related to this regulatory asset, which will be recovered
  over the next biennial rate case, which is 2003-2004.

Deferred charges on the interest expense of the 2027A Series relates to the
  incremental difference in the interest that MGE earned on its construction bond
  fund and the actual interest that MGE paid out. That incremental difference
  between interest earned and interest expensed is currently being amortized over
  the remaining life of the bonds as part of the rate recovery allowed by the
  PSCW.

The PSCW has authorized utilities to defer all project costs associated with
  the compliance of the federal US Environmental Protection Agency's (EPA)
  new requirements on NOx emissions. In MGE's rate case (Docket 3270-UR-110),
  due to the uncertainty regarding the level and timing of NOx emissions
  remediation expenditures, the PSCW allowed MGE to establish an escrow mechanism
  for these costs. The annual recovery allowed in rates is $1.6 million,
  of which $0.7 million is recorded in depreciation expense and $0.9 million
  in operating expense. Charges to the NOx escrow for 2002 totaled
  $1.1 million for carrying costs of the capitalized expenditures, $0.9 million
  for depreciation expense of the related asset, and $0.2 million for deferred
  NOx costs associated with the Blount Generating Station (Blount).
  MGE earns a return on the unrecovered portion, which will be amortized over
  a ten-year period.

In the third quarter of 2002, MGE received approval from the PSCW to establish
  a regulatory asset or liability for the deferral of the effects of mark-to-market
  accounting as required by SFAS No. 133 on contracts related to MGE's regulated
  operations. Management believes that it is the PSCW's intent to allow a utility
  to recover its actual costs imbedded in the contract, if the costs are deemed
  reasonable and prudent. MGE believes its interpretation of the PSCW's letter
  required MGE to record a gain or loss from the application of SFAS No. 133,
  as either a regulatory asset or liability. MGE has recorded a regulatory asset
  of $0.5 million for the cumulative mark-to-market value of its derivative
  contracts, the commercial paper swap agreement, and the Columbia coal contract
  as of December 31, 2002.

AFUDC equity represents the after-tax equity cost associated with utility
  plant construction, and results in a temporary difference between the book and
  tax basis of such plant. Deferred income taxes are provided on this temporary
  difference in accordance with SFAS No. 109, *Accounting for Income Taxes*.
  It is probable under PSCW regulation that MGE will recover in future rates the
  future increase in taxes payable represented by the deferred income tax liability.
  Deferred charges--tax recovery related to AFUDC equity represents the revenue
  requirement related to recovery of these future taxes payable, calculated at
  current statutory tax rates.

**g. MGE Energy - Statement of Cash Flows**

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

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

|*(In thousands)*                         | 2002    |  | 2001    |  | 2000   
|---------------------------------------- | ------- |  | ------- |  | -------
|Interest paid, net of amount capitalized | $12,408 |  | $13,551 |  | $13,822
|Income taxes paid                        | 17,223  |  | 10,347  |  | 16,078 
|Income taxes received                    | (759)   |  | (570)   |  | -      
|Noncash financing item                   | 1,499   |  | -       |  | -      

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

The amortization of debt issuance costs for the years ended 2002, 2001, and
  2000 are included in the line item "Other noncurrent items, net" in the cash
  flow statement from operating activities and is not separated in a separate
  line as it is immaterial.

**h. MGE - Comprehensive Income**

Comprehensive income includes all changes in equity during a period except
  those resulting from investments by and distributions to shareholders. Comprehensive
  income is reflected in the Consolidated Statements of Common Equity and Comprehensive
  Income.

**i. MGE - Hedge Accounting**

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

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

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

MGE has a swap agreement with a commercial bank for a notional amount of $5.0 million,
  backed by MGE's commercial paper. MGE pays a fixed rate of 6.91% on the swap,
  which was used to replace a portion of MGE's 7.70%, 2028 Series, First Mortgage
  Bonds. This swap agreement did not meet the criteria for hedge accounting due
  to the term of the swap being four years while the item being hedged has a 30-day
  maturity. Therefore, MGE's commercial paper swap agreement has been classified
  as a derivative and the changes in fair market value are recorded each quarter
  in the income statement.

MGE has a 22.0% ownership interest in the coal-fired Columbia Energy Center
  (Columbia), which is operated by Alliant Energy Corp. (Alliant). Alliant has
  entered into a long-term coal supply agreement with Dynegy Marketing and Trade.
  The contract contains certain put options and consequently, in accordance with
  the terms of SFAS No. 133, the contract is recorded at fair value on the
  balance sheet. Gains and losses are recorded in other income.

In the third quarter of 2002, MGE received approval from the PSCW to establish
  a regulatory asset or liability for the deferral of the effects of mark-to-market
  accounting as required by SFAS No. 133 on contracts related to MGE's regulated
  operations. Management believes that it is the PSCW's intent to allow a utility
  to recover its actual costs imbedded in the contract, if the costs are deemed
  reasonable and prudent. MGE believes its interpretation of the PSCW's letter
  required MGE to record a gain or loss from the application of SFAS No. 133,
  as either a regulatory asset or liability. MGE has recorded a regulatory asset
  of $0.5 million for the cumulative mark-to-market value of its derivative
  contracts, the commercial paper swap agreement, and the Columbia coal contract
  (described earlier) as of December 31, 2002.

MGE has a limited number of physical and financial gas commodity contracts
  that are defined as derivatives under SFAS No. 133. These gas instruments
  are primarily comprised of exchange-traded option contracts to manage the cost
  of gas and over-the-counter financial floating-to-fixed price swaps and calls
  for the Winter Set-Price Firm Gas Sales Service pilot program. The derivative
  amounts recorded as a result of these gas contracts is offset with a corresponding
  regulatory asset or liability because these transactions are part of the PGA
  clause and not subject to the gas cost incentive sharing mechanism. As of December 31,
  2002, MGE has recorded an asset from gas supply derivatives and a corresponding
  regulatory liability of $0.5 million related to these contracts.

**k. MGE - New Accounting Pronouncements**

***SFAS Nos. 141 and 142***

In June 2001, the Financial Accounting Standards Board (FASB) issued
  SFAS No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill
  and Other Intangible Assets*, that supersede Accounting Principles Board
  (APB) Opinion No. 16, *Business Combinations*, and APB Opinion No. 17,
  *Intangible Assets*. The two statements modify the method of accounting
  for business combinations and address the accounting and reporting for goodwill
  and intangible assets. SFAS No. 141 is effective for all business combinations
  initiated after June 30, 2001 and, with acquisitions completed after June 30,
  2001, for all business combinations accounted for by the purchase method for
  which the date of acquisition is completed after June 30, 2001. SFAS No. 142
  is effective for fiscal years beginning after December 15, 2001. The adoption
  of SFAS No. 141 and 142 had no impact on the consolidated financial statements.

***SFAS No. 143***

In June 2001, the FASB issued SFAS No. 143, *Accounting for Asset
  Retirement Obligations*. SFAS No. 143, which is effective January 1,
  2003, requires entities to record the fair value of a legal liability for an
  asset retirement obligation in the period in which it is incurred. When a new
  liability is recorded beginning in 2003, the entity will capitalize the cost
  of the liability by increasing the carrying amount of the related long-lived
  asset. The liability is accreted to its present value each period, and the capitalized
  cost is depreciated over the useful life of the related asset. Upon settlement
  of the liability, an entity settles the obligation for its recorded amount or
  incurs a gain or loss upon settlement.

MGE adopted SFAS No. 143 on January 1, 2003. MGE completed an assessment
  of the specific applicability and implications of SFAS No. 143. MGE found
  that SFAS No. 143 has specific applicability to various electric generating
  and substation facilities located on leased property, as well as various electric
  and gas distribution facilities installed on easements or permits. The asset
  retirement obligation associated with electric generating and substation facilities
  is approximately $1 million. The asset retirement obligations associated
  with the electric and gas distribution facilities cannot be reasonably estimated
  due to an indeterminate life of the associated assets.

MGE believes that the adoption of SFAS No. 143 results primarily in timing
  differences in the recognition of the legal asset retirement obligations and
  the asset retirement costs which MGE is currently recovering in rates and will
  be deferring such differences under SFAS No. 71. Early in 2003, MGE received
  assurance from the PSCW that the adoption of SFAS No. 143 would not result
  in a change to the current ratemaking process at this time.

***SFAS No. 144***

In August 2001, the FASB issued SFAS No. 144, *Accounting for
  the Impairment or Disposal of Long-lived Assets*, which supersedes SFAS
  No. 121, *Accounting for the Impairment of Long-lived Assets and for
  Long-lived Assets to be Disposed of*, and the accounting and reporting provisions
  of APB No. 30, *Reporting the Results of Operations, Reporting the Effects
  of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
  Occurring Events and Transactions*. SFAS No. 144 addresses financial
  accounting and reporting for the impairment or disposal of long-lived assets
  and is effective for fiscal years beginning after December 15, 2001, and
  interim periods within those fiscal years. This statement had no material impact
  on the consolidated financial statements.

***SFAS No. 145***

In May 2002, the FASB issued SFAS No. 145, *Rescission of FASB
  Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
  and Technical Corrections as of April 2002*. SFAS No. 145 rescinds
  both FASB Statement No. 4 (SFAS 4), *Reporting Gains and Losses from
  Extinguishment of Debt*, and the amendment to SFAS 4, FASB Statement No. 64
  (SFAS 64), *Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements*.
  SFAS No. 145 is effective for transactions occurring after May 15,
  2002. This statement does not have a material impact on the consolidated financial
  statements.

***SFAS No. 146***

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

***SFAS No. 148***

In December 2002, the FASB issued SFAS No. 148, *Accounting for
  Stock-Based Compensation- Transition and Disclosure*. This statement amends
  FASB Statement No. 123, *Accounting for Stock-Based Compensation*,
  to provide alternative methods of transition for a voluntary change to the fair
  value-based method of accounting for stock-based employee compensation. In addition,
  the statement amends the disclosure requirements of Statement 123 to require
  prominent disclosures in both annual and interim financial statements about
  the method of accounting for stock-based employee compensation and the effect
  of the method used on reported results. MGE Energy has no stock options as of
  December 31, 2002, and therefore SFAS No. 148 will have no impact.

***EITF Issue 02-3***

EITF Issue 02-3, *Accounting for Contracts Involved in Energy Trading and
  Risk Management Activities* (EITF 02-3), issued by the FASB EITF in June 2002,
  requires revenues and energy costs related to energy trading contracts to be
  presented on a net basis in the income statement. This EITF has no current impact
  on the consolidated financial statements.

***FIN 45***

In November 2002, the FASB issued Financial Interpretation No. (FIN) 45,
  *Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
  Indirect Guarantees of Indebtedness of Others*. This interpretation provides
  the disclosures to be made by a guarantor in interim and annual financial statements
  about obligations under certain guarantees. The interpretation also clarifies
  that a guarantor is required to recognize, at the inception of a guarantee,
  a liability for the fair value of the obligation. The initial recognition and
  measurement requirements are effective prospectively for guarantees issued or
  modified after December 31, 2002. However, the disclosure requirements
  of the interpretation are effective for this Form 10-K and included in
  Footnote 8.

***FIN 46***

In January 2003, the FASB issued FIN 46, *Consolidation of Variable
  Interest Entities*, that addresses conditions when an entity should be consolidated
  based upon variable interests rather than voting interests. Variable interests
  are ownership interests or contractual relationships that enable the holder
  to share in the financial risks and rewards resulting from the activities of
  a Variable Interest Entity (VIE). A VIE is a corporation, partnership, trust,
  or any other legal structure used for business purposes that either does not
  have equity investors with voting rights or has equity investors that do not
  provide sufficient financial resources for the entity to support its activities.

In order to apply FIN 46, MGE must evaluate every entity with which it
  is involved through variable interests to determine whether the entity is a
  VIE and, if it is, whether or not MGE is the primary beneficiary of the entity.
  The primary beneficiary of a VIE is the entity that receives the majority of
  the entity's expected losses, residual returns, or both. As a result, FIN 46
  could result in consolidation of an entity that MGE is associated with other
  than by (and even in the absence of) a voting ownership interest. FIN 46
  is not believed to have a material impact on the consolidated financial statements.

**l. MGE - Impairment of Long-lived Assets**

MGE continually reviews plant and equipment, other intangible assets and property,
  and goodwill, if any, for impairment whenever events or changes in circumstances
  indicate that the carrying amount of the assets may not be recoverable.
  MGE's policy for determining when long-lived assets are impaired is to recognize
  an impairment loss if the sum of the expected future cash flows (undiscounted
  and without interest charges) from an asset is less than the carrying amount
  of that asset. If an impairment loss is recognized, the amount that will be
  recorded will be measured as the amount by which the carrying amount of the
  asset exceeds the fair value of the asset. MGE believes there is no impairment
  of long-lived assets in accordance to SFAS No. 144 at December 31,
  2002.

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

Under the liability method prescribed by SFAS 109, income taxes are deferred
  for all temporary differences between pretax financial and taxable income and
  between the book and tax basis of assets and liabilities using the tax rates
  scheduled by law to be in effect when the temporary differences reverse. Future
  tax benefits are recognized to the extent that realization of such benefits
  is more likely than not. A valuation allowance is recorded for those benefits
  which do not meet this criterion.

Regulation and SFAS No. 109 have resulted in a regulatory liability related
  to income taxes. Excess deferred income taxes result from past taxes provided
  at rates higher than current rates. The SFAS No. 109 regulatory liability
  and deferred investment tax credit reflect the revenue requirement associated
  with the return of these tax benefits to customers.

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

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

MGE Energy, through its utility operations, pays a license fee tax to the
  State of Wisconsin in lieu of property taxes on property used in utility operations.
  License fee tax is calculated as a percent of adjusted operating revenues of
  the prior year. The electric tax rate is 3.19% and the gas tax rate is 0.97%.
  Estimated tax is prepaid (Prepaid taxes) one year in advance of expense recognition.
  License fee tax expense, included in Other general taxes, was $7.8 million,
  $7.7 million, and $6.9 million for the years ended December 31,
  2002, 2001, and 2000, respectively.

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

**n. Reclassification**

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

**2. MGE - Joint Plant Ownership**

MGE and two other utilities jointly own Columbia, a coal-fired generating
  facility, which accounts for 34.9% (225 megawatts) of MGE's net generating capability.
  Power from this facility is shared in proportion to each company's ownership
  interest. MGE has a 22.0% ownership interest in Columbia. The other owners are
  Alliant, which operates Columbia, and WPSC.

Information regarding MGE's sale in 2001 of its 17.8% ownership interest in
  Kewaunee to WPSC, MGE's obligations relative to Kewaunee continuing beyond the
  closing date, and MGE's exercise in 2001 of an option to buy electric capacity
  and energy for a two-year period from WPSC is included in Footnote 10.

Each owner provides its own financing and reflects its respective portion
  of facilities and operating costs in its financial statements. MGE's interest
  in this facility, included in its gross utility plant in service, and the related
  accumulated depreciation reserves at December 31 were as follows:

|                         | Columbia
|------------------------ | --------
|*(In thousands)*         | 2002    
|Utility plant            | $ 94,169
|Accumulated depreciation | (58,147)
|Net plant                | $ 36,022

**3. Income Taxes**

***MGE Energy Income Taxes***

MGE Energy files a consolidated federal income tax return that includes the
  operations of all subsidiary companies. The consolidated income tax provision
  before cumulative effect of a change in accounting principle (2001 only) consists
  of the following provision (benefit) components for the years ended December 31:

|*(In thousands)*                 | 2002    |  | 2001    |  | 2000   
|-------------------------------- | ------- |  | ------- |  | -------
|Current payable:                 |         |  |         |  |        
|Federal                          | $10,677 |  | $ 6,634 |  | $14,280
|State                            | 4,384   |  | 1,100   |  | 3,273  
|Net-deferred:                    |         |  |         |  |        
|Federal                          | 4,073   |  | 6,487   |  | (878)  
|State                            | 113     |  | 2,569   |  | (196)  
|Amortized investment tax credits | (520)   |  | (849)   |  | (727)  
|Total income taxes               | $18,727 |  | $15,941 |  | $15,752

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

|                                           | 2002   |  | 2001   |  | 2000  
|------------------------------------------ | ------ |  | ------ |  | ------
|Statutory federal income tax rate          | 35.0%  |  | 35.0%  |  | 35.0% 
|Amortized investment tax credits           | (1.1)% |  | (2.0)% |  | (1.7)%
|State income taxes, net of federal benefit | 5.5%   |  | 5.0%   |  | 5.0%  
|Credit for electricity from wind energy    | (0.9)% |  | (0.9)% |  | (0.9)%
|Valuation allowance                        | -      |  | -      |  | (1.1)%
|Other, individually insignificant          | 0.6%   |  | (0.3)% |  | 0.2%  
|Effective income tax rate                  | 39.1%  |  | 36.8%  |  | 36.5% 

The significant components of deferred tax liabilities (assets) that appear
  on MGE Energy's Consolidated Balance Sheets and also on MGE's Balance Sheets
  as of December 31 are as follows:

|*(In thousands)*                        | 2002     |  | 2001    
|--------------------------------------- | -------- |  | --------
|Property-related                        | $66,959  |  | $56,988 
|Investment in ATC                       | 11,530   |  | 10,134  
|Nuclear plant decommissioning liability | -        |  | 3,598   
|Bond transactions                       | 2,637    |  | 1,651   
|Energy conservation                     | -        |  | 523     
|Pension expense                         | 2,798    |  | 2,703   
|Other                                   | 2,390    |  | 2,351   
|Gross deferred income tax liabilities   | 86,314   |  | 77,948  
|Accrued expenses                        | (7,061)  |  | (6,478) 
|Retirement benefits, other than pension | (2,928)  |  | (2,429) 
|Deferred tax regulatory account         | (6,557)  |  | (8,895) 
|Minimum pension liability adjustment    | (6,319)  |  | (592)   
|Other                                   | (1,367)  |  | (1,104) 
|Gross deferred income tax assets        | (24,232) |  | (19,498)
|Less valuation allowance                | 368      |  | 371     
|Net deferred income tax assets          | (23,864) |  | (19,127)
|Deferred income taxes                   | $62,450  |  | $58,821 

The valuation allowance reduces MGE Energy's deferred tax assets for state carryforward
  losses to estimated realizable value due to the uncertainty of future income
  estimates in various state tax jurisdictions.

For tax purposes, as of December 31, 2002, MGE Energy had approximately
  $7.6 million of state tax net operating loss deductions that expire in
  2013, if unused.

***MGE Income Taxes***

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

|*(In thousands)*                 | 2002    |  | 2001    |  | 2000   
|-------------------------------- | ------- |  | ------- |  | -------
|Current payable:                 |         |  |         |  |        
|Federal                          | $10,877 |  | $ 6,634 |  | $14,280
|State                            | 3,919   |  | 1,100   |  | 3,273  
|Net-deferred:                    |         |  |         |  |        
|Federal                          | 4,073   |  | 6,487   |  | (878)  
|State                            | 113     |  | 2,569   |  | (196)  
|Amortized investment tax credits | (520)   |  | (849)   |  | (727)  
|Total income taxes               | $18,462 |  | $15,941 |  | $15,752

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

|                                           | 2002  
|------------------------------------------ | ------
|Statutory federal income tax rate          | 35.0% 
|Amortized investment tax credits           | (1.1)%
|State income taxes, net of federal benefit | 4.9%  
|Credit for electricity from wind energy    | (0.9)%
|Valuation allowance                        | -     
|Other, individually insignificant          | 0.5%  
|Effective income tax rate                  | 38.4% 

**4. MGE - Pension Plans**

MGE maintains qualified and nonqualified pension plans. MGE also provides
  health care and life insurance benefits for its retired employees. The "Change
  in Benefit Obligation" table below provides a reconciliation of benefit obligations,
  plan assets, and funded status of the plans.

The projected benefit obligation, accumulated benefit obligation, and fair
  value of assets for pension plans and welfare plans with accumulated benefit
  obligations in excess of the fair value of assets are as follows:

|*(In thousands)*               | Pension Benefits |        | Postretirement
      Benefits
|------------------------------ | ---------------- | ------ | -----------------------------
|As of December 31,             | 2002             | 2001   |                              
|Projected benefit obligation   | $117,410         | $7,753 |                              
|Accumulated benefit obligation | 100,404          | 7,198  |                              
|Fair value of assets           | 79,821           | -      |                              

During 2001, MGE's nonqualified pension plan had an accumulated benefit obligation
  greater than the fair value of assets and, according to SFAS 132, required
  additional disclosure of that plan's projected benefit obligation, accumulated
  benefit obligation, and fair value of assets. MGE's qualified pension plans
  had assets in excess of accumulated benefit obligation and therefore did not
  require the additional disclosure during 2001.

In 2002, MGE's nonqualified and qualified pension plans both had an accumulated
  benefit obligation greater than the fair value of assets and, according to SFAS 132,
  required additional disclosure of the projected benefit obligation, accumulated
  benefit obligation, and fair value of assets.

MGE has elected to recognize the cost of its transition obligation (the accumulated
  postretirement benefit obligation as of January 1, 1993) by amortizing
  it on a straight-line basis over 20 years.

MGE maintains two defined contribution 401(k) benefit plans for its employees.
  MGE's costs of the 401(k) plans were $0.6 million in 2002, $0.6 million
  in 2001, and $0.6 million in 2000.

***Sensitivity of retiree welfare results***. The assumed
  health care cost percentage was 10.0% for 2002. Assumed health care trend rates
  have a significant effect on the amounts reported for health care plans. The
  1% sensitivity for the "total service and interest cost components" is based
  on the 10% medical trend rate schedule (since the service and interest cost
  components disclosed correspond to the 2002 year). The health care cost trend
  was reset to 14% for 2003. The rate is assumed to decrease to 5% for 2012 and
  remain at that level thereafter. The 1% sensitivity for the "postretirement
  benefit obligation" is based on the 14% medical trend rate schedule since the
  liability disclosed is calculated as of December 31, 2002.

The following table shows how an assumed 1% increase or 1% decrease in health
  care cost trends could impact postretirement benefits in 2002 dollars.

|*(In thousands)*                                     | 1% Increase |  | 1% Decrease
|---------------------------------------------------- | ----------- |  | -----------
|Effect on total service and interest cost components | $ 607       |  | $ (497)    
|Effect on postretirement benefit obligation          | $7,573      |  | $(6,243)   

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

|*(In thousands)*                                    | Pension Benefits |  | Postretirement
      Benefits
|--------------------------------------------------- | ---------------- |  | -----------------------------
|                                                    | 2002             |  | 2001                         
|**Change in Benefit Obligation**                    |                  |  |                              
|Net benefit obligation at beginning of year         | $101,593         |  | $ 91,685                     
|Service cost                                        | 2,603            |  | 2,502                        
|Interest cost                                       | 7,514            |  | 7,073                        
|Plan participants' contributions                    | -                |  | -                            
|Plan amendments                                     | -                |  | (125)                        
|Actuarial loss                                      | 9,277            |  | 3,896                        
|Gross benefits paid                                 | (3,577)          |  | (3,438)                      
|Net benefit obligation at end of year               | $117,410         |  | $101,593                     
|                                                    |                  |  |                              
|**Change in Plan Assets**                           |                  |  |                              
|Fair value of plan assets at beginning of year      | $ 91,739         |  | $98,506                      
|Actual return on plan assets                        | (10,225)         |  | (4,712)                      
|Employer contributions                              | 1,884            |  | 1,383                        
|Plan participants' contributions                    | -                |  | -                            
|Gross benefits paid                                 | (3,577)          |  | (3,438)                      
|Fair value of plan assets at end of year            | $ 79,821         |  | $91,739                      
|                                                    |                  |  |                              
|Funded status at end of year                        | $(37,589)        |  | $ (9,854)                    
|Unrecognized net actuarial (gain)/loss              | 32,925           |  | 5,014                        
|Unrecognized prior service cost                     | 4,094            |  | 4,551                        
|Unrecognized net transition obligation              | 1,271            |  | 1,375                        
|Net amount recognized at end of year                | $ 701            |  | $ 1,086                      
|                                                    |                  |  |                              
|Amounts recognized in the balance sheet consist of: |                  |  |                              
|Prepaid benefit cost                                | $ 6,450          |  | $ 6,100                      
|Accrued benefit liability                           | (5,749)          |  | (5,014)                      
|Additional minimum liability                        | (21,284)         |  | (2,184)                      
|Intangible asset                                    | 5,540            |  | 708                          
|Accumulated other comprehensive income              | 15,744           |  | 1,476                        
|Net amount recognized at end of year                | $ 701            |  | $ 1,086                      



|*(In thousands)*                               | Pension Benefits |  | Postretirement Benefits
|---------------------------------------------- | ---------------- |  | -----------------------
|                                               | 2002             |  | 2001                   
|**Components of Net Periodic Benefit Cost**    |                  |  |                        
|Service cost                                   | $2,603           |  | $2,502                 
|Interest cost                                  | 7,514            |  | 7,073                  
|Expected return on assets                      | (8,556)          |  | (9,217)                
|Amortization of:                               |                  |  |                        
|Transition obligation                          | 104              |  | 104                    
|Prior service cost                             | 457              |  | 466                    
|Actuarial gain/(loss)                          | 147              |  | (166)                  
|Regulatory effect based on phase-in            | -                |  | -                      
|Net periodic benefit cost                      | $2,269           |  | $ 762                  
|                                               |                  |  |                        
|Weighted-average Assumptions as of December 31 |                  |  |                        
|Discount rate                                  | 6.75%            |  | 7.25%                  
|Expected return on plan assets                 | 9.50%            |  | 9.50%                  
|Rate of compensation increase                  | 4.50%            |  | 4.50%                  

The expected return on plan assets was reset to 9.0% for 2003.

**5. MGE - Fair Value of Financial Instruments**

At December 31, 2002 and 2001, the carrying amount of cash, cash equivalents,
  and outstanding commercial paper approximates fair market value due to the short
  maturity of those investments and obligations. MGE's nuclear decommissioning
  trust is recorded at fair market value. The estimated fair market value of MGE's
  long-term debt and interest rate swap agreements are based on quoted market
  prices at December 31. The estimated fair market value of MGE's financial
  instruments are as follows:

|                                           | 2002                    |            | 2001
|------------------------------------------ | ----------------------- | ---------- | ----
|*(In thousands)*                           | Carrying
        Amount | Fair Value |     
|Assets:                                    |                         |            |     
|Cash and cash equivalents (MGE Energy)     | $ 2,998                 | $ 2,998    |     
|Decommissioning fund (MGE)                 | 8,782                   | 8,782      |     
|Liabilities:                               |                         |            |     
|Short-term debt (MGE Energy)               | 34,298                  | 34,298     |     
|Long-term debt (MGE)                       | 188,500                 | 205,319    |     
|Other long-term debt swap agreements (MGE) | -                       | (411)      |     

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 its cash and cash equivalents with high
  credit-quality financial institutions. MGE has limited concentrations of credit
  risk from customer accounts receivable because of the large number of customers
  and strong economy in its service territory.

MGE has an interest rate swap agreement with a commercial bank totaling $5.0 million
  for 2002 and 2001, with effective interest rates of 1.7% and 4.0%, respectively.
  This agreement has a fixed rate and is backed by MGE's commercial paper. MGE
  believes the counterparties to the agreement will meet their obligations based
  on their high credit ratings. This swap agreement does not meet the criteria
  for hedge accounting due to the term of the swap being four years while the
  item being hedged has a 30-day maturity. Therefore, MGE records the changes
  in the fair market value currently in the income statement as required by SFAS
  No. 133 each quarter which is offset by a corresponding regulatory asset
  or liability (Footnote 1j).

MGE purchased and sold exchange-traded option contracts to manage the cost
  of gas and purchased over-the-counter financial floating-to-fixed price swaps
  and calls to fix the price of gas for the Winter Set-Price Firm Gas Sales Service
  pilot program. These contracts have terms of January, February, and March 2003.
  Under MGE's natural gas risk management program, approved by the PSCW, the cost
  of the financial option and swap contracts (as well as the gains or losses realized)
  will be recovered under the PGA and will not affect net income. The fair value
  of these financial contracts was an asset of $0.5 million on the balance
  sheet at December 31, 2002.

Nonperformance of counterparties to the nonexchange-traded derivatives could
  expose MGE to credit loss. However, MGE enters into transactions only with companies
  that meet or exceed strict credit guidelines. MGE considers it has minimal risk
  for counter-party default.

**6. Capitalization Matters**

**a. MGE Energy - Common Stock**

Effective in August 2002, MGE Energy assumed the responsibility for the
  Dividend Reinvestment and Direct Stock Purchase Plan (the Plan). MGE Energy
  issues new shares for the Plan. Issuing new shares rather than buying shares
  on the open market helps improve cash flow and strengthens MGE Energy's capital
  structure.

In 2002, a total of 503,000 new shares of common stock were issued under the
  Plan. The $13.6 million in proceeds were allocated to common stock and
  amounts received in excess of par value (see Consolidated Statements of Common
  Equity and Comprehensive Income).

In 2001, a total of 453,000 new shares of common stock were issued under the
  Plan. The $10.9 million proceeds were allocated to common stock and amounts
  received in excess of par value (see Consolidated Statements of Common Equity
  and Comprehensive Income).

At December 31, 2002, MGE Energy had $73.0 million of retained earnings
  available for dividends. However, MGE is restricted by the PSCW to paying normal
  common stock dividends when its common equity falls below 55%.

**b. MGE - Preferred Stock**

MGE has 1,175,000 shares of $25 par value redeemable preferred stock, cumulative,
  that is authorized but unissued at December 31, 2002.

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

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

MGE has the following call provisions for the First Mortgage Bonds:

|Bond Series        | First Call Date   | Call Price
|------------------ | ----------------- | ----------
|7.70%, 2028 Series | February 15, 2003 | 104.26%   

MGE's outstanding First Mortgage Bonds contain certain debt covenant restrictions
  with respect to dividends. The covenant restricts the payment of dividends or
  any other distribution or purchase of shares to the existing earned surplus
  (retained earnings) on MGE common stock. As of December 31, 2002, MGE's
  earned surplus exceeded all such payments for all years covered under this report.

On April 4, 2002, MGE issued two unsecured taxable debt issues: a $15 million,
  6.58% Medium Term Note maturing on April 1, 2012, and a $25 million,
  7.12% Medium Term Note maturing on April 1, 2032. Interest on these notes
  will be paid semiannually on April 1 and October 1. The proceeds from
  these issues were used to redeem the $40 million, 8.50%, 2022 Series, First
  Mortgage Bonds on April 15, 2002. The call premium on this bond was $1.7 million
  and is recoverable through rates.

On April 25, 2002, MGE issued two unsecured tax-exempt debt issues. The
  $28 million, 5.875%, Industrial Development Revenue Bonds (IRB) mature
  on October 1, 2034, and the $19.3 million, 4.875%, IRBs mature on
  October 1, 2027. The $19.3 million issue has a ten-year mandatory
  call on October 1, 2012. Interest on these notes will be paid semiannually
  on April 1 and October 1. The proceeds from these two issues were
  used to redeem the $28 million, 6.75%, 2027A Series, IRBs and the $19.3 million,
  6.70%, 2027B Series, IRBs on May 28, 2002. The IRBs were issued by the
  City of Madison for the benefit of MGE. The call premiums associated with these
  bonds was $0.9 million and is recoverable through rates.

On October 1, 2002, MGE issued $20.0 million in unsecured Medium
  Term Notes at 5.26%, maturing on September 29, 2017. Interest on the notes
  will be paid semiannually on April 1 and October 1. The proceeds from
  this issuance were used to repay outstanding commercial paper. MGE used the
  proceeds from the commercial paper issuances to repay a portion of its $20.0 million
  variable rate debt, which matured on May 3, 2002.

On November 27, 2002, MGE issued $15.0 million in unsecured variable
  rate Medium Term Notes, maturing on November 26, 2004. Interest on the
  notes will be paid quarterly on the third Wednesday of March, June, September,
  and December. The variable rate, based on the three-month London Interbank Offering
  Rate (LIBOR) plus 12.5 basis point, was 1.535% as of December 31, 2002.
  The proceeds from this issuance were used to repay outstanding commercial paper.
  MGE used the proceeds from the commercial paper issuances to finance capital
  expenditures including the installation of an automated meter reading system.

Below is MGE's aggregate maturities for all long-term debt for years following
  the December 31, 2002, balance sheet.

|*In thousands*
|--------------
|Year          
|2003          
|2004          
|2005          
|2006          
|2007          
|Future years  
|Total         

**d. MGE Energy and MGE - Notes Payable to Banks, Commercial Paper and Lines of
  Credit**

For short-term borrowings, MGE generally issues commercial paper (issued at
  the prevailing discount rate at the time of issuance), which is supported by
  unused bank lines of credit. Through negotiations with three banks, MGE has
  $40 million in bank lines of credit.

MGE Energy has established two temporary lines of credit, one for temporary
  financing of the capital commitments for the West Campus Cogeneration Facility
  (WCCF) ($40 million) and one for general corporate purposes ($5 million).

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

|*(In thousands)*               | 2002    | 2001    | 2000   
|------------------------------ | ------- | ------- | -------
|**MGE**                        |         |         |        
|As of December 31:             |         |         |        
|Available lines of credit      | $40,000 | $40,000 | $55,000
|Commercial paper outstanding   | $13,500 | $9,500  | $44,000
|Weighted-average interest rate | 1.40%   | 2.11%   | 6.73%  
|During the year:               |         |         |        
|Maximum short-term borrowings  | $33,500 | $44,000 | $44,000
|Average short-term borrowings  | $14,359 | $12,803 | $17,117
|Weighted-average interest rate | 1.82%   | 5.27%   | 6.58%  
|                               |         |         |        
|**MGE Energy**                 |         |         |        
|As of December 31:             |         |         |        
|Available lines of credit      | $45,000 | -       | -      
|Short-term debt outstanding    | $34,298 | -       | -      
|Weighted-average interest rate | 2.09%   | -       | -      
|During the year:               |         |         |        
|Maximum short-term borrowings  | $34,298 | -       | -      
|Average short-term borrowings  | $14,613 | -       | -      
|Weighted-average interest rate | 1.83%   | -       | -      

**7. MGE - Rate Matters**

Effective March 1, 2003, the PSCW authorized MGE to increase revenues
  by $27.1 million (a 9.1% increase in electric rates and a 5.4% increase
  in gas rates). The increase in electric rates covers rising fuel costs and addresses
  increased system demands. Both the electric and natural gas rate increases include
  costs to complete a new automated meter reading project, costs of system upgrades,
  and increased operating expenses. The PSCW authorized MGE a 12.3% return on
  its common shareholders equity.

Effective October 24, 2002, the PSCW authorized an electric rate surcharge
  of $4.5 million or 2% to recover costs that had been deferred, associated
  with the formation of ATC and ongoing incremental transmission costs during
  2001 and 2002 associated with ATC. The surcharge will be in effect for a twelve-month
  period ending October 23, 2003 (see Footnote 9 for additional information
  on ATC).

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

Effective January 1, 2002, the PSCW authorized MGE to increase revenues
  by $12 million (a 5.7% increase in electric rates and a 0.6% increase in
  natural gas rates). The increase was associated with a limited reopener to address
  specific issues affecting 2002. These issues included the full-year impact of
  selling its ownership interest in Kewaunee Nuclear Power Plant (Kewaunee), rising
  fuel costs, and installing an automated meter reading system.

The PSCW approved MGE's request for a temporary electric fuel surcharge of
  2.7% effective May 9 through September 2, 2001. The temporary rate
  increase covered the higher cost of natural gas used to generate electricity.
  Revenues collected from this surcharge were subject to refund, pending the PSCW's
  review of any excess revenues collected by MGE while the surcharge was in effect.
  The increase to revenue as a result of the surcharge, net of refunds to customers,
  was $1.0 million.

In January 2001, the PSCW authorized an electric rate increase of $7.5 million
  or 3.9% to cover rising fuel costs and increased system demands; a natural gas
  rate increase of $3.4 million or 2.7% for improving the gas delivery system;
  and a return on common stock equity of 12.9%.

**8. MGE Energy and MGE - Commitments**

***Coal Contracts***

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

***Purchased Power Contracts***

MGE has several purchased power contracts to help meet future electric supply
  requirements. As of December 31, 2002, MGE's total commitments for energy
  and purchased power contracts for capacity are estimated to be $18.4 million
  in 2003, $12.1 million in 2004, $10.9 million in 2005, $10.0 million
  in 2006, and $9.5 million in 2007. Management expects to recover these
  costs in future customer rates.

Related to the purchased power contracts, MGE has negotiated firm transmission
  contracts with Commonwealth Edison which are estimated to be $1.1 million
  for the years 2003 through 2006 and $0.8 million in 2007. Management also
  expects to recover these costs in future customer rates.

***Natural Gas Transportation and Storage Contracts***

MGE has natural gas transportation and storage contracts that provide for
  the availability of firm pipeline transportation and storage capacity under
  which it must make fixed monthly payments. The pricing component of the fixed
  monthly payment for these contracts is established but may be subject to
  change by the FERC. These payments are estimated to be $14.4 million in
  2003, $12.1 million in 2004, $9.6 million in 2005, 2006, and 2007.
  Management expects to recover these costs in future customer rates.

In December 2002, MGE entered into an agreement with ANR Pipeline Company
  to contract for additional firm pipeline transportation capacity related to
  ANR's proposed WestLeg Expansion. This agreement has a number of conditions
  including, but not limited to, receipt and acceptance by both parties of all
  regulatory approvals and construction of the pipeline. MGE also has the right
  to delay or cancel a portion of the additional transportation capacity if the
  PSCW has not issued a Certificate of Public Convenience and Necessity (CPCN)
  for the WCCF by July 1, 2003, that is acceptable to it.

On January 16, 2003, MGE entered into an agreement with Northern Natural
  Gas Company to amend and extend two existing firm pipeline transportation capacity
  contracts through October 31, 2011, subject to approval by the PSCW. If
  these two contracts are amended and extended, estimated fixed monthly payments
  for natural gas transportation and storage contracts are expected to be $0.3 million
  higher in 2003, $1.8 million higher in 2004, and $3.7 million higher
  in 2005, 2006, and 2007. Management expects it would be able to recover these
  costs in future customer rates.

***Environmental***

On January 1, 2000, Phase II of the 1990 Federal Clean Air Act amendments
  took effect, setting new emission limits for sulfur dioxide (SO2)
  and NOx. MGE's generating units meet those limits. The units were
  modified well in advance to meet year 2000 NOx requirements. Early
  modifications at Blount allow MGE to postpone meeting more stringent Phase II
  NOx requirements at this plant until 2007.

On October 27, 1998, the EPA issued final rules requiring more NOx
  emission reductions from sources in 22 states and the District of Columbia,
  including Wisconsin, to reduce the transport of ozone across state boundaries.
  However, a successful legal challenge resulted in excluding Wisconsin from part
  of this rule. After further modeling and research, the EPA is expected to revise
  or amend these rules to impose additional NOx emission reduction
  requirements on Wisconsin sources in order to help other states meet ambient
  standards.

MGE is evaluating NOx compliance strategies, including fuel switching,
  emissions trading, purchased power agreements, new emission control devices,
  and/or installation of new fuel-burning and clean-coal technologies. Implementing
  any of these new measures would likely increase capital, operating, and maintenance
  expenditures.

Wisconsin's acid rain law imposes limitations on SO2 emissions.
  Blount and MGE's share of Columbia are required to meet a combined SO2
  emission rate of 1.20 pounds of SO2 per million Btu. MGE does
  not anticipate any capital expenditure in order to comply with this standard.

In December 2000, the EPA announced it would create rules to limit the
  amount of mercury emitted by coal- and oil-fired electric-steam generating facilities.
  EPA plans to have the proposed rules published no later than December 15,
  2003, and final regulations published no later than December 15, 2004.
  The Wisconsin Department of Natural Resources is also developing rules to limit
  mercury emissions from coal-fired boilers. The proposed rules require sources
  emitting mercury to reduce emissions over 15 years. Depending on the outcomes
  of these regulations, they may require MGE to evaluate emission control options
  for its facilities in order to comply. These controls would likely increase
  capital expenditures and operating and maintenance expenses.

In December 2000, February 2001, June 2002, and January 2003,
  Columbia received Requests for Information from the EPA to evaluate compliance
  with the Clean Air Act. Alliant, the plant operator, has responded to these
  requests and has not yet received a response from the EPA. On a broader basis,
  the EPA is assessing the regulatory consequences of past investments in utility
  generation, energy efficiency, maintenance, and environmental protection. EPA
  is also assessing proposed multi-pollutant legislation. The EPA will be recommending
  clarifications and revisions to these regulatory programs in the future. The
  plant operator has not informed MGE of any likely increase in capital expenditures
  or operating and maintenance expenses arising from the EPA's inquiry.

MGE is listed as a potentially responsible party for a site the EPA has placed
  on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois,
  was used for storing and processing waste oil for several years. This site requires
  clean up under the Comprehensive Environmental Response, Compensation and Liability
  Act. A group of companies, including MGE, is currently working on cleaning up
  the site.

Management believes that its share of the final cleanup costs will not result
  in any materially adverse effects on MGE's operations, cash flows, or financial
  position. Insurance may cover a portion of the cleanup costs. Management
  believes that the cleanup costs not covered by insurance will be recovered in
  current and future rates. MGE estimates its future expense to clean up this
  site could range from $0.1 million to $0.2 million. At December 31,
  2002, MGE accrued a $0.1 million liability for these matters.

***Chattel Paper Agreement***

MGE makes available to qualifying customers a financing program for the purchase
  and installation of energy-related equipment that will provide more efficient
  use of utility service at the customer's property. MGE is party to a chattel
  paper purchase agreement with a financial institution under which it can sell
  or finance an undivided interest with recourse, in up to $7.5 million of
  the financing program receivables until February 28, 2004. At December 31,
  2002 and 2001, respectively, MGE had sold a $6.8 million and $5.6 million
  interest in these receivables, which MGE accounted for as a sale under SFAS
  No. 140, *Accounting for Transfers and Servicing of Financial Assets
  and Extinguishment of Liabilities - a Replacement of FASB Statement No. 125*.

MGE maintains responsibility for collecting and remitting loan payments from
  customers to the financial institution and does not retain any interest in the
  assets sold to the financial institution. As of December 31, 2002, MGE
  has recorded a servicing asset of $0.2 million. In 2002, a gain of $0.2 million
  was recognized in connection with sale of loan assets. In 2001, no gain or loss
  was recognized. The loan assets are sold to the financial institution at cost,
  which approximates fair value in view of their market rates of interest. During
  2002 and 2001, MGE received approximately $3.3 million and $2.2 million,
  respectively, of cash from the financial institution for the sale of loan assets.
  During those same years, payments of $2.4 million and $2.0 million,
  respectively, were made by MGE to the financial institution.

MGE would be required to perform under the guarantee if the customer defaulted
  on their loan. The energy-related equipment installed at the customer sites
  is used to secure the customer loans. The length of the MGE guarantee to the
  financial institution varies from 1 to 10 years depending on the term of the
  customer loan. Principal payments for the next five years on the loans are as
  follows: $1.1 million in 2003, $0.9 million in 2004, $0.8 million
  in 2005 and 2006, and $0.7 million in 2007.

***New Generation***

On February 23, 2001, MGE announced that it had secured an option agreement
  to own a portion of the advanced technology, coal-fired, base-load generation
  included in We Energies' Power the Future proposal. The proposal includes three,
  600-megawatt (MW) coal-fired units of new generation. Pursuant to an amended
  agreement reached on January 31, 2003, MGE's option is to acquire an undivided
  8.33% (16.66% under certain conditions) ownership interest in each of the proposed
  coal plants, for up to a maximum of 150 MWs total. This will require an
  estimated investment over a ten-year period of $150 million to $175 million.
  We Energies filed its CPCN with the PSCW in early 2002. A decision from the
  PSCW on the coal facilities is expected in 2003. MGE may exercise its option
  up to 110 days after PSCW approval is issued.

***WCCF***

MGE Energy and the University of Wisconsin-Madison (UW) have proposed building
  a natural gas-fired cogeneration plant to help meet the future needs of the
  university and MGE customers. This facility is designed to produce steam heat
  and chilled water air-conditioning for the university and up to 150 MWs
  of electricity to help meet the growing customer demand in the Madison area.
  The electric generation assets will be controlled by MGE Power and the
  steam and chilled water assets will be controlled by the State of Wisconsin.
  A PSCW decision is expected on the plant during 2003.

In July 2001, MGE entered into a contract with GE Packaged Power Inc.
  for the purchase of two gas turbines for the cogeneration plant. In June 2002,
  MGE entered into a contract with General Electric Company for the purchase of
  a steam turbine. The cost for the turbines is $37.3 million, of which $20.4 million
  has already been paid. Remaining payments include $16.9 million in 2003.
  Other miscellaneous equipment contracts total $6.5 million, of which $0.3 million
  has been paid.

***Leases***

Future minimum rental payments at December 31, 2002, under agreements
  classified as operating leases with noncancellable terms in excess of one year
  are as follows:

|*In thousands*                      |       
|----------------------------------- | ------
|2003                                | $1,592
|2004                                | 1,013 
|2005                                | 665   
|2006                                | 530   
|2007                                | 524   
|Thereafter                          | 5,192 
|Total minimum future lease payments | $9,516

Rental expense under operating leases totaled $1.6 million for each of
  the years 2002, 2001, and 2000.

**9. MGE - ATC**

On January 1, 2001, MGE transferred substantially all of its electric
  transmission facilities to ATC in exchange for approximately a 6% interest in
  this joint venture. ATC is comprised of Wisconsin investor-owned utilities and
  some Wisconsin municipal utilities, cooperatives, and power supply agencies.

MGE accounts for this investment on the equity method of accounting. MGE records
  as equity in earnings of the investee its share of ATC's earnings, amortization
  of the SFAS No. 109 regulatory liability and deferred investment tax credits
  related to the transmission assets transferred to ATC. MGE recorded $3.3 million
  (pretax) of equity earnings from its investment in ATC in 2002.

Effective October 24, 2002, the PSCW authorized an electric rate surcharge
  of $4.5 million or 2% for MGE to recover deferred costs associated with
  the ATC formation and ongoing incremental transmission costs during 2001 and
  2002. The surcharge will be in effect for a twelve-month period ending October 23,
  2003.

On November 21, 2002, MGE and ATC entered into a Generation-Transmission
  Interconnection agreement related to transmission system upgrades due to the
  WCCF. MGE issued to the ATC a "Notice to Proceed for the Procurement of the
  Equipment" for the system upgrades. In accordance with the agreement, MGE had
  to provide ATC with a form of security, such as a Letter of Credit or a collateral
  account, in the amount of $5.0 million. MGE set up a collateral (escrow)
  account to satisfy the security interest to ATC until MGE was able to secure
  a Letter of Credit from a commercial bank, which it received on December 30,
  2002. The collateral account was terminated on January 2, 2003. MGE will
  make an estimated $10 million capital payment for transmission equipment
  and work done by ATC throughout 2003 related to the WCCF. MGE expects to be
  reimbursed by ATC for its capital outlay once the project is completed.

**10. MGE - Kewaunee**

Effective September 23, 2001, MGE sold to WPSC its 17.8% ownership interest
  in Kewaunee. In exchange for a cash payment of $15.4 million, MGE transferred
  its net book value of utility plant ($8.2 million), net nuclear fuel ($7.9 million),
  inventories ($1.5 million), and other assets ($0.1 million). These
  assets were offset by $2.3 million owed to WPSC. On the closing date, MGE
  also transferred its Qualified Decommissioning Fund ($65.0 million fair
  market value) and Nonqualified Decommissioning Fund ($28.1 million fair
  market value), which decreased accumulated depreciation by an equal amount.
  This transaction occurred in accordance with an agreement between MGE and WPSC
  dated September 29, 1998. That agreement required certain continuing obligations
  of MGE and WPSC after the closing date, as described below.

MGE made monthly contributions to the MGE Nonqualified Decommissioning Fund
  from September 23, 2001, in the amount of approximately $0.7 million
  (the level authorized by the PSCW) through December 31, 2002. These costs
  are currently recovered from customers in rates. MGE's decommissioning liability
  is limited to the fund balances at the closing date plus all decommissioning
  collections through 2002. MGE's Nonqualified Decommissioning Fund is shown on
  the balance sheet in the Utility Plant section. As of December 31, 2002,
  this fund totaled $8.8 million (pretax fair market value) and is offset
  by an equal amount recorded in accumulated provision for depreciation. The securities
  and uninvested cash balances in the fund, net of trust investment expenses and
  taxes on investment income, were transferred to WPSC Nonqualified Decommissioning
  Fund on January 3, 2003.

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

A surcharge imposed by the National Energy Policy Act of 1992 requires nuclear
  power companies to fund the decontamination and decommissioning of US Department
  of Energy facilities that process nuclear fuel. As a result, the Kewaunee CO-owners
  are required to pay a surcharge on uranium enrichment services purchased from
  the federal government prior to October 23, 1992. On an inflation-adjusted
  basis, MGE's portion of the obligation related to Kewaunee is approximately
  $1.1 million at December 31, 2002. MGE is required to continue paying
  its portion of this annual assessment.

In accordance with the agreement, MGE exercised its option in June 2001
  to buy electric capacity and energy at a fixed price from WPSC. MGE purchased
  90 MWs of electric capacity and energy from September 24, 2001, through
  December 31, 2002, and will continue to do so through September 23,
  2003, to help meet customers' electric needs.

**11. WCCF**

MGE Energy, through MGE Power and MGE Construct, has assumed responsibility
  from MGE for the construction and ownership of a proposed natural gas-fired
  cogeneration facility to be built on the Madison campus of the UW. As planned,
  the facility would have 20,000 tons of chilled water capacity, 500,000 pounds
  per hour of steam capacity, and approximately 150 MWs of electricity capacity.
  The facility would be jointly-owned by the State of Wisconsin, the UW, and MGE Power
  and would be leased and operated by MGE. The State and the UW would own a controlling
  interest in the chilled water and steam plants, which would be used to meet
  the growing UW need for air-conditioning and steam heat capacity. MGE Power
  would own a controlling interest in the electric generation plant, which would
  be used to provide electricity to MGE's customers. MGE Construct would
  be responsible for the construction of the facility.

The ownership, construction, and operation of the facility requires various
  state approvals as well as the completion of definitive agreements, including
  a construction agreement. As part of this process, the State is reviewing its
  alternatives before entering final agreements. Depending on the approval process,
  construction could start in 2003, with the facility coming on-line in 2005.
  MGE also requires PSCW approval in order to lease and operate the facility.
  On October 21, 2002, the PSCW deemed MGE's CPCN application complete. A
  PSCW decision is expected on MGE's participation in the facility during 2003.

The facility is expected to cost approximately $180 million. On November 29,
  2002, the State paid $11.9 million to MGE for its share of those costs
  under a September 2002 Pre-Certification Cost Sharing Agreement between
  MGE and the State. On December 31, 2002, MGE Power reimbursed MGE
  for the remainder of those costs as a part of MGE Power's assumption of
  the project. As of December 31, 2002, MGE Power had incurred $18.9 million
  of costs on the project, which is reflected as construction work in progress
  on MGE Energy's consolidated balance sheets. These costs largely represent amounts
  paid under long-lead time equipment contracts in order to meet project schedules,
  although, as noted, several approvals remain outstanding. A failure to obtain
  these approvals could terminate the project and could result in the write-off
  of these costs to the extent that the associated equipment and efforts cannot
  be put to alternative uses.

**12. MGE - Purchased Power Agreements**

MGE has several purchased power agreements with various counterparties. Some
  of the counterparties have experienced severe liquidity issues. MGE management
  and external counsel have been reviewing the situation and at this time cannot
  determine what the impacts, if any, there would be.

**13. MGE - Segments of Business**

MGE has two main business segments, electric and gas, which are both regulated.
  The electric business generates and distributes electricity and contracts for
  transmission service. The gas business purchases and distributes natural gas
  and contracts for the transportation of natural gas. The table below shows key
  information about MGE's electric and gas operations, including the distribution
  of net assets, for the years ended December 31.

General corporate expenses include the cost of executive management, corporate
  accounting and finance, information technology, risk management, human resources
  and legal functions, and employee benefits that are allocated to electric and
  gas based on formulas prescribed by the PSCW. Identifiable assets are those
  used in MGE's operations in each segment. Corporate assets consist primarily
  of cash and cash equivalents and deferred taxes.

|*(In thousands)*                                    | 2002     | 2001     | 2000    
|--------------------------------------------------- | -------- | -------- | --------
|**Electric Operations**                             |          |          |         
|Gross operating revenues                            | $225,453 | $203,570 | $203,553
|Interdepartmental revenues eliminated               | (466)    | (392)    | (377)   
|Total revenues                                      | 224,987  | 203,178  | 203,176 
|Operation and maintenance expenses                  | 149,914  | 129,009  | 124,101 
|Depreciation and amortization                       | 23,072   | 29,791   | 29,137  
|Other general taxes                                 | 8,514    | 8,634    | 8,296   
|Pretax operating income                             | 43,487   | $ 35,744 | $ 41,642
|Income tax provision                                | 12,442   | 10,353   | 11,534  
|Net operating income                                | $ 31,045 | $ 25,391 | $ 30,108
|                                                    |          |          |         
|Electric Construction and Nuclear Fuel Expenditures | $ 43,873 | $ 33,722 | $ 65,312
|                                                    |          |          |         
|**Gas Operations**                                  |          |          |         
|Gross operating revenues                            | $126,639 | $136,638 | $127,038
|Interdepartmental revenues eliminated               | (4,530)  | (6,105)  | (6,106) 
|Total revenues                                      | 122,109  | 130,533  | 120,932 
|Operation and maintenance expenses                  | 98,814   | 109,672  | 99,229  
|Depreciation and amortization                       | 6,290    | 5,868    | 5,944   
|Other general taxes                                 | 2,347    | 2,230    | 1,884   
|Pretax operating income                             | 14,658   | $ 12,763 | $ 13,875
|Income tax provision                                | 5,131    | 3,483    | 3,882   
|Net operating income                                | $ 9,527  | $ 9,280  | $ 9,993 
|                                                    |          |          |         
|Gas Construction Expenditures                       | $ 15,033 | $ 8,244  | $ 8,294 
|                                                    |          |          |         
|**Assets (December 31)**                            |          |          |         
|Electric                                            | $415,849 | $372,997 | $395,622
|Gas                                                 | 139,608  | 131,174  | 123,486 
|Assets not allocated                                | 52,799   | 39,903   | 52,496  
|Total                                               | $608,256 | $544,074 | $571,604

**14. Quarterly Summary of Operations (Unaudited)**

|*(In thousands, except per-share amounts)*                                                                                                                                                                                                                                                                                                           | Quarters Ended
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------
|                                                                                                                                                                                                                                                                                                                                                     | March 31      
|**2002**                                                                                                                                                                                                                                                                                                                                             |               
|Operating revenues:                                                                                                                                                                                                                                                                                                                                  |               
|Regulated electric revenues                                                                                                                                                                                                                                                                                                                          | $50,820       
|Regulated gas revenues                                                                                                                                                                                                                                                                                                                               | 47,452        
|Total                                                                                                                                                                                                                                                                                                                                                | 98,272        
|Operating expenses                                                                                                                                                                                                                                                                                                                                   | 78,001        
|Operating income                                                                                                                                                                                                                                                                                                                                     | 20,271        
|Interest and other income                                                                                                                                                                                                                                                                                                                            | (2,220)       
|Income tax provision                                                                                                                                                                                                                                                                                                                                 | (7,029)       
|Earnings on common stock                                                                                                                                                                                                                                                                                                                             | $11,022       
|Earnings per common share                                                                                                                                                                                                                                                                                                                            | $0.64         
|Dividends per share                                                                                                                                                                                                                                                                                                                                  | $0.333        
|                                                                                                                                                                                                                                                                                                                                                     |               
|**2001**                                                                                                                                                                                                                                                                                                                                             |               
|Operating revenues:                                                                                                                                                                                                                                                                                                                                  |               
|Regulated electric revenues                                                                                                                                                                                                                                                                                                                          | $49,438       
|Regulated gas revenues                                                                                                                                                                                                                                                                                                                               | 72,592        
|Total                                                                                                                                                                                                                                                                                                                                                | 122,030       
|Operating expenses                                                                                                                                                                                                                                                                                                                                   | 104,647       
|Operating income                                                                                                                                                                                                                                                                                                                                     | 17,383        
|Interest and other income                                                                                                                                                                                                                                                                                                                            | (1,809)       
|Income tax provision                                                                                                                                                                                                                                                                                                                                 | (5,960)       
|Earnings on common stock before cumulative
      effect of a change in accounting principle                                                                                                                                                                                                                                                          | 9,614         
|Cumulative effect of a change in accounting principle, net of tax benefit
      of $78                                                                                                                                                                                                                                                               | (117)         
|Earnings on common stock                                                                                                                                                                                                                                                                                                                             | $ 9,497       
|Income before cumulative effective of a change in accounting principle                                                                                                                                                                                                                                                                               | $0.58         
|Cumulative effect of a change in accounting principle                                                                                                                                                                                                                                                                                                | (0.01)        
|Earnings per common share                                                                                                                                                                                                                                                                                                                            | $0.57         
|Dividends per share                                                                                                                                                                                                                                                                                                                                  | $0.331        
|**Notes**:
      - The quarterly results of operations within a year are not comparable
        because of seasonal and other factors.
      - The sum of earnings per share of common stock for any four quarters
        may vary slightly from the earnings per share of common stock for
        the equivalent 12-month period due to rounding.

MGE Energy's operations are based primarily on its utility subsidiary MGE.

**Fourth Quarter 2002 vs. 2001**

MGE's fourth quarter earnings reflected an increase in electric and gas revenues,
  attributed to colder weather during the fourth quarter of 2002. Increased operating
  expenses lowered operating income during this same time period. Higher fuel
  and purchased power costs during the fourth quarter resulted from the increased
  cost of gas used for electric generation and a higher volume of purchased power.
  Operations and maintenance expenses were higher due to rising health care, pension
  and other employee benefits, increased transmission wheeling costs, injuries
  and damages, and outside services. The decrease in other income in 2002 is attributed
  to a 2001 weather hedge benefit, due to abnormally warm weather in November and
  December 2001.

**Third Quarter 2002 vs. 2001**

MGE's utility revenues increased during the third quarter 2002 due in large
  part to in increase in electric retail sales. In the third quarter 2001, electric
  revenues were decreased by approximately $4.5 million (pretax), reflecting
  a revised estimate of electric unbilled revenues. Purchased power increased
  primarily due to MGE purchasing 90 MWs of electric capacity from WPSC to
  replace MGE's share of Kewaunee that it sold in 2001. The increased purchased
  power costs were somewhat offset by decreases in operations, maintenance and
  depreciation expense related to the Kewaunee plant. Other income decreased in
  the third quarter of 2002 primarily due to decreased decommissioning earnings.
  The lower decommissioning earnings are also reflected in the decrease in depreciation
  expense.

**Item 9. Changes in and Disagreements with Accountants on Accounting
  and Financial Disclosure.**

**MGE Energy and MGE**

None.

**PART III.**

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

**MGE Energy**

***Directors***

Information concerning the Directors of MGE Energy is contained in the definitive
  proxy statement under the section "Election of Directors" filed prior to April 30,
  2003, with the Securities and Exchange Commission, which is incorporated herein
  by reference.

**Executive Officers** (elected annually by Directors)

|Executive                            | Title                                                                                                                                                                                                                                                                                    | Effective
      Date                                             | Service Years as an
      Officer
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------
|Gary J. Wolter* Age: 48              | Chairman of the Board, President and Chief Executive Officer
      President and Chief Executive Officer                                                                                                                                                                                 | 02/01/02
      02/01/00                                          | 13                               
|Lynn K. Hobbie** Age: 44             | Senior Vice President 
      Vice President - Marketing                                                                                                                                                                                                                                  | 02/01/00 05/01/96                                                | 8                                
|Mark T. Maranger** 
      Age: 54    | Senior Vice President, MGE 
      President and CEO, Wisconsin Fuel and Light Company                                                                                                                                                                                                    | 04/09/01 
      1996-2001                                        | 1                                
|James G. Bidlingmaier** Age: 56      | Vice President - Admin. and Chief Information Officer 
      Executive Director - Information Management Systems                                                                                                                                                                         | 02/01/00
      09/01/94                                          | 3                                
|Kristine A. Euclide** 
      Age: 50 | Vice President and General Counsel, MGE 
      Partner, in the law firm of Stafford Rosenbaum LLP
      Executive Assistant to County Executive of Dane County, WI in which capacity
        she served as a senior policy advisor to the chief-elected official in
        Dane County. | 11/15/01 
      1982-05/97
      06/99-11/01
        05/97-05/99 | 1                                
|Terry A. Hanson* 
      Age: 51      | Vice President, Chief Financial Officer and Secretary 
      Vice President and Chief Financial Officer
      Vice President - Finance                                                                                                                                                   | 10/01/01 05/01/00
      11/01/97                                 | 11                               
|Jeffrey C. Newman* 
      Age: 40    | Vice President and Treasurer 
      Treasurer                                                                                                                                                                                                                                            | 01/01/01 11/01/97                                                | 5                                

Note: Ages, years of service and positions as of February 1, 2003.

*Executive officer of MGE Energy and MGE
  **Executive officer of MGE

**Item 11. Executive Compensation.** (See Item 12.)

**Item 12. Security Ownership of Certain Beneficial Owners and Management
  and Related Stockholder Matters.**

**MGE Energy**

The required information for Items 11 and 12 is included in MGE Energy's definitive
  proxy statement under the section "Executive Compensation," not including "Report
  on Executive Compensation" and "Company Performance," and under the section
  "Beneficial Ownership of Common Stock by Directors and Executive Officers" filed
  with the Securities and Exchange Commission prior to April 30, 2003, which
  is incorporated herein by reference.

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

**MGE Energy and MGE**

None.

**Item 14. Controls and Procedures.**

**MGE Energy**

Within the 90 days prior to the filing of this report, 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 Securities and Exchange Commission (SEC). These disclosure controls
  and procedures have been designed to ensure that material information relating
  to MGE Energy, including its subsidiaries, is made known to MGE Energy's management,
  including these officers, by other employees of MGE Energy and its subsidiaries,
  and that this information is recorded, processed, summarized, evaluated, and
  reported, as applicable, within the time periods specified in the SEC's rules
  and forms. Due to the inherent limitations of control systems, not all misstatements
  may be detected. These inherent limitations include the realities that judgments
  in decision-making can be faulty and that breakdowns can occur because of simple
  error or mistake. Additionally, controls can be circumvented by the individual
  acts of some persons, by collusion of two or more people, or by management override
  of the control. MGE Energy's controls and procedures can only provide reasonable,
  not absolute, assurance that the above objectives have been met. Also, MGE Energy
  does not control or manage certain of its unconsolidated entities and as such,
  the disclosure controls and procedures with respect to such entities are more
  limited than those it maintains with respect to its consolidated subsidiaries.

As of February 5, 2003, these officers concluded that, subject to the
  limitations noted above, the design of the disclosure controls and procedures
  provides reasonable assurance that they can accomplish their objectives. MGE
  Energy intends to continually strive to improve its disclosure controls and
  procedures to enhance the quality of its financial reporting.

There have been no significant changes in MGE Energy's internal controls or
  in other factors that could significantly affect these controls subsequent to
  the date of their evaluation.

**MGE**

Within the 90 days prior to the filing of this report, 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 made known
  to MGE's management, including these officers, by other employees of MGE, and
  that this information is recorded, processed, summarized, evaluated, and reported,
  as applicable, within the time periods specified in the SEC's rules and forms.
  Due to the inherent limitations of control systems, not all misstatements may
  be detected. These inherent limitations include the realities that judgments
  in decision-making can be faulty and that breakdowns can occur because of simple
  error or mistake. Additionally, controls can be circumvented by the individual
  acts of some persons, by collusion of two or more people, or by management override
  of the control. MGE's controls and procedures can only provide reasonable, not
  absolute, assurance that the above objectives have been met. Also, MGE does
  not control or manage certain of its unconsolidated entities and as such, the
  disclosure controls and procedures with respect to such entities are more limited
  than those it maintains with respect to its consolidated subsidiaries.

As of February 5, 2003, these officers concluded that, subject to the
  limitations noted above, the design of the disclosure controls and procedures
  provides reasonable assurance that they can accomplish their objectives. MGE
  intends to continually strive to improve its disclosure controls and procedures
  to enhance the quality of its financial reporting.

There have been no significant changes in MGE's internal controls or in other
  factors that could significantly affect these controls subsequent to the date
  of their evaluation.

**PART IV.**

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

(a) 1. Financial Statements

MGE Energy, Inc.
  Report of Independent Accountants 
  Consolidated Statements of Income for the years ended December 31, 2002,
  2001, and 2000 
  Consolidated Statements of Cash Flows for the years ended December 31,
  2002, 2001, and 2000 
  Consolidated Balance Sheets as of December 31, 2002 and 2001 
  Consolidated Statements of Capitalization as of December 31, 2002 and 2001
  
  Consolidated Statements of Common Equity and Comprehensive Income as of December 31,
  2002, 2001, and 2000 
  Notes to Consolidated Financial Statements

Madison Gas and Electric Company
  Report of Independent Accountants 
  Statements of Income for the years ended December 31, 2002, 2001, and 2000
  
  Statements of Cash Flows for the years ended December 31, 2002, 2001, and
  2000 
  Balance Sheets as of December 31, 2002 and 2001 
  Statements of Capitalization as of December 31, 2002 and 2001 
  Statements of Common Equity and Comprehensive Income as of December 31,
  2002, 2001, and 2000 
  Notes to Consolidated Financial Statements

**2. Financial Statement Schedules.**

Schedule II - Valuation and Qualifying Accounts for MGE Energy, Inc. and Madison
  Gas and Electric Company.

All other schedules have been omitted because they are not applicable or not
  required, or because the required information is shown in the consolidated financial
  statements or notes thereto.

**3. All Exhibits Including Those Incorporated by Reference.**

Exhibits. An asterisk (*) indicates a management contract or compensatory
  plan or arrangement.

3.1 Amended and Restated Articles of Incorporation of the Registrant are incorporated
  herein by reference to Exhibit 3.1 to the Registrant's Registration Statement
  on Form S-4 (Registration No. 333-72694.)

3.2 Amended and Restated By-Laws of the Registrant are incorporated herein
  by reference to Exhibit 3.2 to the Registrant's Registration Statement
  on Form S-4 (Registration No. 333-72694.)

3.3 Articles of Incorporation as in effect at May 6, 1996. (Incorporated
  by reference to Exhibit 3.(i) with 1996 Form 10-K in File No. 0-1125.)

3.4 Amended Bylaws as in effect at August 16, 2002.

4.1 Indenture of Mortgage and Deed of Trust between MGE and Firstar Trust
  Company, as Trustee, dated as of January 1, 1946, and filed as Exhibit 7-D
  to SEC File No. 0-1125 and the following indentures supplemental thereto
  are incorporated herein by reference:

|Supplemental Indenture | Dated as of | Exhibit No. | SEC File No.      
|---------------------- | ----------- | ----------- | ------------------
|Seventeenth            | 02/01/1993  | 4F          | 0-1125 (1992 10-K)

4.2 Indenture between MGE and Bank One, N.A., as Trustee, dated as of September 1,
  1998. (Incorporated by reference to Exhibit 4B with 1999 Form 10-K
  in File No. 0-1125.)

10.1 Copy of Joint Power Supply Agreement with Wisconsin Power and Light Company
  and Wisconsin Public Service Corporation dated February 2, 1967. (Incorporated
  by reference to Exhibit 4.09 in File No. 2-27308.)

10.2 Copy of Joint Power Supply Agreement (Exclusive of Exhibits) with Wisconsin
  Power and Light Company and Wisconsin Public Service Corporation dated July 26,
  1973, amending Exhibit 5.04. (Incorporated by reference to Exhibit 5.04A in
  File No. 2-48781.)

10.3 Copy of revised Agreement for Construction and Operation of Columbia
  Generating Plant with Wisconsin Power and Light Company and Wisconsin Public
  Service Corporation dated July 26, 1973. (Incorporated by reference to
  Exhibit 5.07 in File No. 2-48781.)

10.4* Form of Severance Agreement. (Incorporated by reference to Exhibit
  10F with 1994 Form 10-K in File No. 0-1125.)

12 Statement regarding computation of ratio of earnings to fixed charges.

12.1 MGE Energy, Inc.

12.2 Madison Gas and Electric Company

21 Subsidiaries of MGE Energy, Inc.

23 Consent of Independent Accountants.

23.1 MGE Energy, Inc.

23.2 Madison Gas and Electric Company

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18
  United States Code (Sarbanes-Oxley Act of 2002) as to the Annual Report on Form 10-K
  for the year ended December 31, 2002, filed by the following officers for
  the following companies:

Exhibit 99-1 - Filed by Gary J. Wolter for MGE Energy, Inc.
  Exhibit 99-2 - Filed by Terry A. Hanson for MGE Energy, Inc.
  Exhibit 99-3 - Filed by Gary J. Wolter for Madison Gas and Electric Company
  Exhibit 99-4 - Filed by Terry A. Hanson for Madison Gas and Electric Company

**4. Reports on Form 8-K.**

No current report on Form 8-K was filed for the quarter ended December 31,
  2002.



|                                                                  |                                | Additions                                      |                                            |                               
|----------------------------------------------------------------- | ------------------------------ | ---------------------------------------------- | ------------------------------------------ | ------------------------------
|                                                                  | Balance at beginning of period | (1)
      
      Charged to costs and expenses | (2)
      
      Charged to other accounts | Net Accounts
      written off
|Fiscal Year 2000: 
      Accumulated provision for uncollectibles | (1,391,057)                    | (2,032,909)                                    | -                                          | 1,352,862                     
|Fiscal Year 2001:
      Accumulated provision for uncollectibles  | (2,071,104)                    | (2,887,124)                                    | -                                          | 1,193,901                     
|Fiscal Year 2002:
      Accumulated provision for uncollectibles  | (3,764,327)                    | (1,149,000)                                    | -                                          | 2,254,073                     

**Signatures - MGE Energy, Inc.**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
  Act of 1934, the registrant has duly caused this report to be signed on its
  behalf by the undersigned, hereunto duly authorized.

|                     | **MGE ENERGY, INC.**(Registrant)               
|-------------------- | -----------------------------------------------
|                     |                                                
|Date: March 26, 2003 | /s/ Gary J. Wolter                             
|                     | Chairman, President and Chief Executive Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
  has been signed below by the following persons on behalf of the registrant and
  in the capacities indicated on March 26, 2003.

|/s/ Gary J. Wolter        | Chairman, President and Chief Executive Officer and Director
      (Principal Executive Officer)                          
|------------------------- | --------------------------------------------------------------------------------------------------------------------------
|/s/ Terry A. Hanson       | Vice President, Chief Financial Officer and Secretary (Principal
      Financial Officer and Principal Accounting Officer)
|/s/ David C. Mebane       | Vice Chairman of the Board and Director                                                                                   
|/s/ Richard E. Blaney     | Director                                                                                                                  
|/s/ F. Curtis Hastings    | Director                                                                                                                  
|/s/ Regina M. Millner     | Director                                                                                                                  
|/s/ Frederic E. Mohs      | Director                                                                                                                  
|/s/ John R. Nevin         | Director                                                                                                                  
|/s/ Donna K. Sollenberger | Director                                                                                                                  
|/s/ H. Lee Swanson        | Director                                                                                                                  

**Signatures - Madison Gas and Electric Company**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
  Act of 1934, the registrant has duly caused this report to be signed on its
  behalf by the undersigned, hereunto duly authorized.

|                     | **MADISON GAS AND ELECTRIC COMPANY**(Registrant)
|-------------------- | ------------------------------------------------
|                     |                                                 
|Date: March 26, 2003 | /s/ Gary J. Wolter                              
|                     | Chairman, President and Chief Executive Officer 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
  has been signed below by the following persons on behalf of the registrant and
  in the capacities indicated on March 26, 2003.

|/s/ Gary J. Wolter        | Chairman, President and Chief Executive Officer and Director
      (Principal Executive Officer)                          
|------------------------- | --------------------------------------------------------------------------------------------------------------------------
|/s/ Terry A. Hanson       | Vice President, Chief Financial Officer and Secretary (Principal
      Financial Officer and Principal Accounting Officer)
|/s/ David C. Mebane       | Vice Chairman of the Board and Director                                                                                   
|/s/ Richard E. Blaney     | Director                                                                                                                  
|/s/ F. Curtis Hastings    | Director                                                                                                                  
|/s/ Regina M. Millner     | Director                                                                                                                  
|/s/ Frederic E. Mohs      | Director                                                                                                                  
|/s/ John R. Nevin         | Director                                                                                                                  
|/s/ Donna K. Sollenberger | Director                                                                                                                  
|/s/ H. Lee Swanson        | Director                                                                                                                  

**Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
  Exchange Act of 1934**

I, Gary J. Wolter, certify that:

1. I have reviewed this annual report on Form 10-K of MGE Energy, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement
  of a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information
  included in this annual report, fairly present in all material respects the
  financial condition, results of operations and cash flows of the registrant
  as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that material
  information relating to the registrant, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and
  procedures as of a date within 90 days prior to the filing date of this annual
  report (the "Evaluation Date"); and

c. Presented in this annual report our conclusions about the effectiveness
  of the disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
  our most recent evaluation, to the registrant's auditors and the audit committee
  of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrant's ability to record, process, summarize,
  and report financial data and have identified for the registrant's auditors
  any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
  annual report whether or not there were significant changes in internal controls
  or in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.
  /s/ Gary J. Wolter 
  Chairman, President and Chief Executive Officer
  March 26, 2003

**Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
  Exchange Act of 1934**

I, Terry A. Hanson, certify that:

1. I have reviewed this annual report on Form 10-K of MGE Energy, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement
  of a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information
  included in this annual report, fairly present in all material respects the
  financial condition, results of operations and cash flows of the registrant
  as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that material
  information relating to the registrant, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and
  procedures as of a date within 90 days prior to the filing date of this annual
  report (the "Evaluation Date"); and

c. Presented in this annual report our conclusions about the effectiveness
  of the disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
  our most recent evaluation, to the registrant's auditors and the audit committee
  of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrant's ability to record, process, summarize,
  and report financial data and have identified for the registrant's auditors
  any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
  annual report whether or not there were significant changes in internal controls
  or in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.
  /s/ Terry A. Hanson 
  Vice President, Chief Financial Officer and Secretary 
  March 26, 2003

**Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
  Exchange Act of 1934**

I, Gary J. Wolter, certify that:

1. I have reviewed this annual report on Form 10-K of Madison Gas and Electric
  Company.

2. Based on my knowledge, this annual report does not contain any untrue statement
  of a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information
  included in this annual report, fairly present in all material respects the
  financial condition, results of operations and cash flows of the registrant
  as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that material
  information relating to the registrant, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and
  procedures as of a date within 90 days prior to the filing date of this annual
  report (the "Evaluation Date"); and

c. Presented in this annual report our conclusions about the effectiveness
  of the disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
  our most recent evaluation, to the registrant's auditors and the audit committee
  of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrant's ability to record, process, summarize,
  and report financial data and have identified for the registrant's auditors
  any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
  annual report whether or not there were significant changes in internal controls
  or in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.
  /s/ Gary J. Wolter 
  Chairman, President and Chief Executive Officer
  March 26, 2003

**Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities
  Exchange Act of 1934**

I, Terry A. Hanson, certify that:

1. I have reviewed this annual report on Form 10-K of Madison Gas and Electric
  Company.

2. Based on my knowledge, this annual report does not contain any untrue statement
  of a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information
  included in this annual report, fairly present in all material respects the
  financial condition, results of operations and cash flows of the registrant
  as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a. Designed such disclosure controls and procedures to ensure that material
  information relating to the registrant, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure controls and
  procedures as of a date within 90 days prior to the filing date of this annual
  report (the "Evaluation Date"); and

c. Presented in this annual report our conclusions about the effectiveness
  of the disclosure controls and procedures based on our evaluation as of the
  Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
  our most recent evaluation, to the registrant's auditors and the audit committee
  of registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies in the design or operation of internal controls
  which could adversely affect the registrant's ability to record, process, summarize,
  and report financial data and have identified for the registrant's auditors
  any material weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
  annual report whether or not there were significant changes in internal controls
  or in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.
  /s/ Terry A. Hanson 
  Vice President, Chief Financial Officer and Secretary 
  March 26, 2003