STAYING POWER Summary Annual Report 2004 150 years of growing with our communities visionary • dedicated accountable • reputable connected • confident supportive • strong proactive • prudent responsible • steadfast innovative • committed independent • agile resourceful • flexible prompt • reliable dependable • caring diligent • responsive Solar panels turn sunlight into electricity MGE Energy TABLE OF CONTENTS About the Cover 2004 HIGHLIGHTS 1 2004 Highlights 2 To Our Shareholders 6 Responsive 8 Proactive 10 Innovative 12 Responsible our roots date back to 1855, when a few visionary, bold leaders launched the madison 14 Consolidated Statements of Income 15 Consolidated Statements of Cash Flows 16 Consolidated Balance Sheets 17 Consolidated Statements of Capitalization gas light and coke co. today, 18 Corporate Leadership we celebrate our fundamental values that have energized growth. •producing solid financial results •engaging customers •planning carefully •delivering dependable service •applying innovative solutions these are hallmarks of our staying power – from the first flicker of gas light 150 years ago to solar technology today. we take seriously our responsibility to be a good community member. 150 years of STAYING POWER 20 Shareholder Information 21 MGE Energy Corporate Profile MGE Energy MGE Energy is an investor-owned public utility holding company headquartered in Madison, Wis. MGE Energy is the parent company of Madison Gas and Electric Co. The utility provides highly reliable natural gas and electric service and promotes economic development in south-central and western Wisconsin. In 2004, MGE Energy’s assets exceeded $827 million and revenues were nearly $425 million. See the MGE Energy Corporate Profile on page 21. “Even a cursory examination of its operating history evokes a wholesome respect for the constant managerial ability to make the business pay and pay well while other utilities were floundering through alternate waves and troughs of profit and loss.” – Wisconsin State Journal, March 1934 MGE Energy (MGEE) Year at a Glance (Thousands, except per-share amounts) Operating Revenues Net Income Basic and Diluted Earnings Per Share Dividend Paid Per Share Dividend Payout Ratio Average Shares Outstanding Shares Outstanding at Year End Return on Average Common Equity Book Value Per Share Market Price (Dec. 31) Total Market Value (Dec. 31) Total Assets Total Electric Sales (kwh) Total Gas Deliveries (therms) Increase/ 2004 2003 (Decrease) Change $ 424,881 33,840 $ 1.77 $ 1.36 $ 76.8% $ 402,570 30,640 $ 1.71 $ 1.35 $ 78.9% 19,119 20,390 17,894 18,344 11.4% 12.2% 16.59 $ $ 36.03 $ 734,652 $ 827,371 3,144,182 221,612 14.34 $ $ 31.45 $ 576,919 $ 725,158 3,182,319 230,359 1,225 2,046 5.5% $ 22,311 10.4% 3,200 $ 3.5% 0.06 $ 0.01 0.7% $ -2.1% -2.7% 6.8% 11.2% -0.8% -6.6% 15.7% 2.25 $ 14.6% $ 4.58 27.3% $ 157,733 14.1% $ 102,213 -1.2% (38,137) -3.8% (8,747) Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Five-Year Investment Growth $232 $175 $138 $100 $232 $79 $53 $100 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 MGEE EEI Index Russell 2000 Initial Investment Dividend Appreciation Price Appreciation For detailed financial information, see the 2004 MGE Energy Form 10-K. 1 We celebrate the STAYING POWER of a tenacious community energy company that thrives on fundamental values. To Our Shareholders July 2005 marks 150 years since our predecessor company, the Madison Gas Light and Coke Co., introduced gas service in downtown Madison. In this report, we celebrate the staying power of a tenacious community energy innovative • visionary company that thrives on fundamental values. We reflect on past independent • committed achievements to honor the utility pioneers who laid a solid resourceful • flexible to our staying power and guide our decisions today. foundation for growth. And we focus on the values that contributed prompt • reliable Gary J. Wolter, Chairman, President and Chief Executive Officer dependable • caring diligent • responsive proactive • dedicated accountable • reputable connected • confident unyielding financial strength Your company’s staying power is built on a solid financial base. We responsibly manage resources to meet customers’ needs and build long-term value for you, our loyal investors. Our results speak volumes. MGE Energy produced record earnings of $1.77 per share in 2004, up 6¢ a share over the previous record set in 2003. For five consecutive years, we have achieved the best financial results in company history. MGE Energy’s operations primarily reflect our utility subsidiary, Madison Gas and Electric Co. (MGE). Our commitment to be a strong income producer has not wavered since we started paying dividends annually in 1909. Our solid financial position allowed your board of directors to increase dividends each year for the past 29 years. Only 120 companies in the nation provided consistent dividend growth for 25 or more years. producing exemplary results MGE Energy’s stock price hit $36.03 per share at the closing bell on Dec. 31, up 15% from year-end 2003. Over the last five years, our stock price rose an impressive 79%. Our outstanding market performance surpassed several major indexes. The Dow Jones Utility Average (DJUA) was up only 18% while the Dow Jones Industrial Average (DJIA), Standard & Poor’s (S&P) 500 and Nasdaq posted five-year losses. Consistent dividend growth and significant gains in value produced an exceptional five-year total return. A $100 investment in 1999 more than doubled to $232 in 2004, with dividends reinvested. Our five-year compounded annual average return of 18.3% outpaced the Edison Electric Institute (EEI) and Russell 2000 indexes. The EEI Index ranks our five-year total return among the top 15 mid-small cap utilities in the nation. MGE Energy’s financial performance earned one of Value Line’s top ratings for financial strength and its highest ranking for a safe investment. MGE maintained the highest S&P bond rating (AA) of all combination gas and electric utilities in the nation. S&P recognizes several company strengths including our “stable customer base, limited unregulated activities and supportive regulatory environment.” energizing a prosperous economy In 2004, Forbes and Inc. magazines identified Madison as one of the best places in the nation for business. Our customers confirm it. Nonresidential construction in Dane County hit a record $535 million in 2004. MGE’s new commercial service installations increased significantly – up 11.4% for gas and 20% for electric. Low interest rates and a healthy marketplace helped propel Dane County home sales to a record level for the third straight year. Experts predict our economy will continue its stellar performance. Job growth in Madison is expected to surpass the national average through 2008. And projections show Dane County will add nearly 100,000 residents by 2025. Vibrant economic growth brings new challenges for meeting customers’ energy needs and maintaining our exceptional quality of life. Key gas system projects help meet growing demand – from Madison’s east side to western Dane County. MGE Foreman Francis Stanek (left) and Steve Stehling, MGE Manager – Gas Systems Engineering, inspect a new gas main that increases pressure and reliability for fast-growing Mt. Horeb and communities to the west. Earnings Per Share $1.67 $1.62 $1.69 $1.71 $1.77 2000 2001 2002 2003 2004 Dividends Paid Per Share (rounded) $1.36 $0.53 1975 2004 1999-2004 Stock Price (% change at Dec. 31) 79% 18% -6% -18% -47% MGE Energy DJUA DJIA S&P 500 Nasdaq 1999-2004 Compounded Annual Average Total Return (assumes dividends reinvested) 18.3% 11.8% 6.6% MGE Energy EEI Index Russell 2000 supportive • strong 2 3 150 years of STAYING POWER firing up a new plant MGE is in the final stages of preparing the West Campus Cogeneration Facility (WCCF) to produce up to 150 megawatts (MW) of electricity by the summer of 2005. Located on the University of Wisconsin (UW)- Madison campus, this natural gas-fired plant also will expand the UW’s heating and cooling capacity. Siting WCCF in the heart of Madison required unprece- dented collaboration and flexibility. We listened carefully to stakeholders and found solutions. The result is a clean, highly efficient plant that is a vital source of local power. anticipating growth MGE has options to own up to 100 MW of power from two clean-coal plants planned in southeastern Wisconsin. In addition, projections show we need another 200 MW of power by 2014 to meet customers’ growing demand. A recent study also confirmed Dane County urgently needs four high-voltage transmission lines over the next 10 years. Environmentalists, public-interest groups and utilities worked side-by-side to evaluate a wide range of alternatives. This effort revealed that transmission lines are needed even with greater conservation. engaging customers With substantial infrastructure improvements on the horizon, we invited all electric customers to Community Energy Conversations meetings. Going neighborhood by neighborhood, we explained the area’s energy outlook and asked customers to share their ideas. No other utility in the country has involved customers to this extent in developing a balanced, reliable energy supply. Our customers’ priorities and values will help shape the energy future for our children and grandchildren. MGE is a national leader in engaging customers in planning for a responsible energy future. At neighborhood meetings, Greg Bollom (left), MGE’s Assistant Vice President – Energy Planning, explains the growing need for more power and encourages customers to weigh in with their opinions. harnessing more wind power In 2004, we signed a long-term agreement to buy 40 MW of wind energy from a facility proposed in east-central Wisconsin. With this purchase, 5% of MGE’s annual energy demand can be met with Wisconsin-based renewable energy sources. Wind farm construction could start in 2005, pending regulatory approval. going beyond regulations MGE was one of the first companies to enroll in the state’s Voluntary Emission Reduction Registry. This Department of Natural Resources (DNR) program recognizes efforts that go beyond regulatory compli- ance. Our achievements include burning paper-derived fuel (PDF) at Blount, operating compressed-natural gas vehicles, using ultra-low sulfur diesel fuel in generators and reducing emissions at our jointly owned coal plant. Our employees’ tireless efforts resulted in Blount Station receiving ISO 14001 certification. Blount is the first power plant in the state to meet this inter- national standard for environmental management. Our team already achieved some of the plant’s voluntary environmental goals. Blount burned a record 14,640 tons of PDF last year. This reduced emissions by replacing about three weeks’ worth of coal and saved landfill space by burning more than 2 million cubic feet of nonrecyclable material. A new contract for recycling fly ash also should keep more than 20,000 tons of this waste out of the landfill each year. acting now for clean air MGE helped launch a public-private partnership that is pioneering a voluntary effort to ensure Dane County continues meeting air-quality standards. The alterna- tive could result in mandatory regulations that would cost area businesses and residents millions of dollars. The partnership seeks to reduce ground-level ozone (smog). The DNR declares a Clean Air Action Day when conditions indicate ozone levels could get high. Businesses, government agencies, schools and citizens then take steps to reduce air pollution. MGE Renewable Energy Generation* (total megawatt-hours) 276,725 83,753 1995–1999 2000–2004 * Electricity produced from methane gas; wind and solar power; and pre-consumer waste paper and plastic. Nonresidential Construction in Dane County ($ millions) $535 Burning a record amount of paper-derived fuel (PDF) at Blount Station in 2004 required close coordination between Charles Edwards (left), Madison General Fuels Plant Manager, and C. Ray Phillips, MGE Supervisor – Fuel and Environmental Compliance. PDF is a mixture of pre-consumer paper and plastic wrap that can’t be recycled. Since 1993, the PDF burned at Blount saved 91,800 tons of coal and nearly 22 million cubic feet of landfill space. Since transportation is the largest source of ozone pollution, MGE encourages employees to car pool, bike or walk to work. We also reduce emissions by conserving energy in our facilities, burning less coal or postponing ash and coal handling. $222 competing in a regional energy market MGE’s new $4 million energy management and market trading system helps ensure we are ready to compete in a changing wholesale power market. The Midwest Independent Transmission System Operator plans to launch an energy market that will change the way utilities in our region buy and sell electricity. Over the last three years, MGE joined with other Wisconsin stakeholders to advocate policies that protect customers and investors in this dynamic marketplace. Our voices were heard. The Federal Energy Regulatory Commission granted Wisconsin utilities safeguards against penalty charges for the next five years while our state’s overburdened transmission system is improved. achieving financial goals Relentless dedication drives us to work hard every day to improve operations, exceed customers’ expectations, be a good neighbor in our communities and provide you with a quality investment. Thank you for trusting MGE Energy to help achieve your financial goals. Gary J. Wolter Chairman, President and Chief Executive Officer 1995 2004 2004 Value Line Ratings Central Electric Utility Average MGE Energy Financial Strength Safe Investment* A 1 B+ 3 *1 is the highest safety ranking. MGE Energy Assets ($ millions) $827 $607 2000 2004 4 5 150 years of STAYING POWER STAYING POWER responsive innovative proactive responsible Flip a switch, LIGHTS. Turn up the thermostat, HEAT. Every minute. Every day of the year. We’re there when customers need us. W hen the natural gas-fired West Campus Cogeneration Facility (WCCF) starts operating in 2005, MGE customers will have another 150 megawatts of locally produced power to help meet their growing needs. WCCF also will expand heating and cooling capacity on the University of Wisconsin-Madison campus. This state-of-the-art facility will be one of the cleanest, most efficient plants in the Midwest. Over the last 15 years, MGE’s conservation initiatives helped customers save enough electricity to power more than 57,000 households for one year. But conservation alone won’t offset projected growth. MGE has options to own up to 100 MW of clean-coal electric generation planned in southeastern Wisconsin. In addition, we must determine how to meet another 200 MW of electric demand by 2014 to keep pace with growth. MGE invited all electric customers to Community Energy Conversations meetings to help plan for a responsible energy future. Customers learned about future energy needs – and the tradeoffs involved when choosing different types of generation. MGE gained insights into customers’ priorities, which will play an important role in our decision-making process. Fast action by Madison’s Rapid Response team and MGE convinced Schoep’s Ice Cream to stay and grow in Madison. Founded in 1928, Schoep’s will invest $8 million in a new refrigerated storage and distribution facility. MGE Business Development Manager John Drury (left), Schoep’s President Paul Thomsen and MGE Senior Marketing Representative Bob Maney worked together to help seal the deal. MGE and contract crews worked nearly around the clock to restore power after a tornado whipped through Madison in June 2004. It was the worst storm to hit this area in 10 years. Workers cleared debris and replaced damaged equipment. MGE service was restored to all customers within 72 hours. “It has been the policy of this Company to always be ready and able to meet the requirements of our customers promptly and adequately at all times.” –1925 MGE newspaper ad Through decades of significant growth, we have anticipated customers’ needs and delivered reliable service. It took careful planning and foresight to install poles, wires and pipes in the right places at the right time to satisfy customers. Our team also worked diligently in emergencies to restore service – day or night, in any weather. As a community energy company, we also have a long tradition of taking responsi- bility to help improve the quality of life for everyone who lives here. Our employees generously volunteer time to make a difference. Since 1968, the MGE Foundation also has funded thousands of requests from community groups and worthy causes. Tim Bliefernicht (left), MGE Construction Management Engineer, and Rodney Washington, President and CEO of Proactive Safety Consult- ants, review progress on MGE’s West Campus Cogeneration Facility. The plant is on schedule to start serving customers by summer 2005. 6 7 150 years of STAYING POWER STAYING POWER responsive innovative proactive responsible Bright IDEAS. Responsible ACTION. Anticipating needs. Partnering for progress. Investing in solutions. You can count on MGE. n i s n o c s i W e h t f o y s e t r u o C h p a r g o t o h P ( ) 3 0 3 3 2 # D I e g a m I , y t e i c o S l a c i r o t s i H MGE is ready for the new Midwest wholesale power market. Preparing for this industry change required three years of planning, design and renovation. It culminated with the installation of a $4 million state-of-the-art energy management and market trading system. The new equipment provides better data access and added flexibility for managing energy load and delivery. MGE is working with a broad-based, public-private group to measure the effectiveness of our new stormwater- filtering system – the first privately owned system in the state. MGE teamed up with the Wisconsin Department of Natural Resources, Department of Transportation, State Lab of Hygiene, U.S. Geological Survey and two private firms. We will test runoff from at least 15 storms. The results will help determine how well this system captures debris, toxins and nutrients before they reach Wisconsin’s lakes and rivers. A new energy trading system sharpens MGE’s competitive edge in the Midwest wholesale market- place. MGE’s Brenda Schultz, Energy Supply Operations Supervisor, uses the new tools to maximize generation assets in an increasingly complex energy market. MGE is a leading member of the Dane County Clean Air Coalition. Businesses, government agencies, schools and citizens work to curb ozone (smog) when high levels are predicted. Transportation is the biggest source. So MGE employees, like Customer Loyalty Manager Karen Matteoni, will bike to work while MGE takes other steps to reduce emissions. Madison resident Nikky Hoffmaster is a new homeowner who will enjoy greater comfort and lower energy bills – thanks to efficiency improve- ments funded by MGE grants. Since 1991, MGE has awarded grants surpassing $375,000 to help ensure the long-term affordability of more than 260 homes for lower-income families. In 1930, an ambitious program in downtown Madison replaced overhead poles and wires with under- ground electric lines. This network system was revolutionary for that era, typically found only in Chicago, New York and other large cities. The foresight of our utility pioneers has allowed down- town Madison customers to benefit from the most reliable form of utility-supplied power for more than 70 years. MGE also achieved one of the tightest, leak-proof gas systems in the country in 1983. We were one of the first utilities in the nation to replace cast-iron gas mains with steel pipe. MGE recently spearheaded an effort to create the Capital Ideas Technology Zone, which fostered greater cooperation among five communities and Dane County. As a result, nearly $1.1 million in state tax credits were awarded to six area firms. 8 9 150 years of STAYING POWER STAYING MGE employees played a vital role in obtaining ISO 14001 certification for Blount Station in Madison. MGE Maintenance Mechanic Bill Pulvermacher helps ensure the plant is in top condition. 10 POWER responsive innovative proactive responsible UNCONVENTIONAL thinking. Powerful RESULTS. Caring about people and the environment inspires MGE to go beyond what’s expected. ” A pioneering company that leads by example.” That’s how the Wisconsin Department of Natural Resources described MGE when announcing we were one of the first companies to participate in the state’s Voluntary Emission Reduction Registry. This program recognizes our efforts to go beyond regulatory compliance where sound science and cost-effective technologies exist. Blount Station was the first power plant in Wisconsin to receive the internationally recognized ISO 14001 certification for environmental management systems. This voluntary program requires annual goals and recertification every three years. Blount set a record for paper-derived fuel (PDF) usage in 2004. Burning 14,640 tons of PDF replaced enough coal for about three weeks of operation, reduced emissions and saved more than 2 million cubic feet of landfill space. PDF is a mixture of shredded pre-consumer paper and plastic wrap that can’t be recycled. A new contract for recycling fly ash should save more than 20,000 tons of waste from going to the landfill each year. The fly ash is used as structural fill in an Iowa limestone mine. Nanotechnology breakthroughs come in small packages at Platypus Technologies. In 2000, CEO Barbara Israel, Ph.D., started this firm in the MGE Innovation Center. Today, Platypus’ 21 employees have outgrown its incubator space. The company soon “graduates” to the Fitchburg Technology Campus where it will occupy 8,000 square feet. MGE’s wind power capacity will increase by 500% when we start buying 40 megawatts of clean energy from a new wind farm near Waupun, Wis. This new source of renewable energy will produce enough power to serve about 14,000 homes each year. Construction on the wind farm may begin in 2005 if approved by the Public Service Commission of Wisconsin. “The Company is cognizant of its obligation to generate power with the lowest possible amount of impurities from its power plant stacks, and has had a continuing program to reduce these emissions since 1945.” –1969 MGE Annual Report For more than 25 years, MGE has funded research and pilot projects to find cost-effective ways to tap into renewable energy. Today’s sources include our wind farm, alternate fuel and photovoltaic installations. We also buy clean electricity generated with methane gas at a Dane County landfill. Recognizing the value of a “brain-powered” economy, we launched the MGE Innovation Center in 1989. It has nurtured and stimulated the growth of more than 70 technology-based enterprises. 11 150 years of STAYING POWER STAYING POWER responsive innovative proactive responsible Shared VISION. Traditional VALUES. Deeply rooted in our communities, MGE delivers on our responsibility to be a good neighbor. n i s n o c s i W e h t f o y s e t r u o C h p a r g o t o h P ( ) 3 5 1 5 2 # D I e g a m I , y t e i c o S l a c i r o t s i H The $205 million Overture Center helped stimulate a resurgence in downtown Madison development. The first phase of this nationally acclaimed arts center opened in fall 2004. When completed in 2006, the 400,000-square-foot facility will cover a city block adjacent to the state Capitol. MGE embarked on a multiyear expansion of Blount Substation to improve electric reliability for Madison’s fast-growing downtown and near east side. Over the past five years, about $466 million was invested in nonresidential construction in downtown Madison. In addition, a renewed interest in downtown living spurred development of about 660 condominiums – more than four times the units built from 1980 to 2000. Another 800 units are planned over the next five years. MGE and the American Transmission Co. built two bike paths in Madison. They increase safety and provide vital links to existing bike paths. The work was part of an underground transmission line project, which supplies electricity to the new Tokay Substation on Madison’s west side. MGE finished a three-year project in Prairie du Chien, replacing all copper services with plastic pipes. MGE Distribution Fitter LuWayne Mathson (standing) checks on the progress of work at a Prairie du Chien home. This upgrade improves reliability and safety for our natural gas customers. A business retention and expansion study reached more than 70 firms in Middleton. MGE partnered with the city, local chamber and Wisconsin Department of Commerce to help identify business needs and growth opportunities. Thousands of people attended Safety Saturday last summer, which featured more than 25 public safety agencies and businesses. This marked the eighth year MGE was a major sponsor of this event in downtown Madison. MGE recycled enough waste wood, cardboard and paper to save nearly 1,900 trees so far while building the West Campus Cogeneration Facility. About 1,500 tons of concrete and metal also were recovered and reused. With help from WasteCap Wisconsin, Inc., 85% of the construction waste was recycled, surpassing MGE’s goal. “It is our desire and intention to always give a full dollar’s worth of service for every dollar paid us, and to do our work mindful of our obligations to the community of which we are a part.” –1920s MGE newspaper ad In 2004, MGE received the Neighborhoods USA Notable Award for our long-term support to improve quality of life. MGE invested more than $500,000 in Neighborhood Revitalization Grants since 1998. The funds helped increase energy efficiency in five major low-income redevelopment projects. Since 1993, area businesses tapped into nearly $23 million in MGE’s Shared Savings loans for energy-efficient equipment. These measures saved about 2.1 million therms of gas and 10.5 million kilowatt-hours of electricity. 12 13 150 years of STAYING POWER CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (Thousands, except per-share amounts) Operating Revenues 2004 2003 2002 For the years ended December 31 (Thousands) Operating Activities Regulated ......................................................................................... $422,149 $401,547 $347,096 Nonregulated ................................................................................... 2,732 1,023 — Total Operating Revenues............................................................ 424,881 402,570 347,096 Operating Expenses Fuel for electric generation............................................................. 43,553 41,557 38,210 Purchased power.............................................................................. 52,052 49,521 44,607 Natural gas purchased..................................................................... 114,506 104,066 73,412 Other operations and maintenance ............................................... 115,185 111,636 92,514 Depreciation and amortization ...................................................... 24,917 23,344 29,362 Other general taxes ......................................................................... 12,715 11,592 10,861 Total Operating Expenses............................................................. 362,928 341,716 288,966 Operating Income ............................................................................... 61,953 60,854 58,130 Other income, net ............................................................................ 3,977 1,500 2,476 Interest expense ............................................................................... (11,434) (11,813 ) (12,686) Income before income taxes........................................................ 54,496 50,541 47,920 Income tax provision........................................................................ (20,656) (19,901 ) (18,727) Net Income........................................................................................... $ 33,840 $ 30,640 $ 29,193 Earnings Per Share of Common Stock – Basic and Diluted.............. Dividends Paid Per Share of Common Stock..................................... $ $ 1.77 1.36 $ $ 1.71 1.35 $ $ 1.69 1.34 Average Shares Outstanding – Basic and Diluted............................ 19,119 17,894 17,311 2004 2003 2002 $ 33,840 $ 30,640 $ 29,193 Net income........................................................................................ Items not affecting cash: Depreciation and amortization ................................................... Deferred income taxes.................................................................. Amortization of investment tax credits ...................................... Equity in earnings in ATC*............................................................ Amortization of debt issuance costs and bond expense ........... Other items ................................................................................... Dividend income from ATC ............................................................. Prepayments to ATC......................................................................... Gain on the sale of property........................................................... Changes in working capital, excluding cash and cash equivalents, current long-term debt maturities and short-term debt: Increase in current assets .......................................................... Increase in current liabilities..................................................... Special billing projects – ATC .......................................................... Other noncurrent items, net ........................................................... Cash Provided by Operating Activities........................................ 24,917 8,832 (502) (4,236) 516 639 3,055 — (938) (26,495) 8,004 10,657 4,025 62,314 Investing Activities Capital expenditures........................................................................ ATC – capital contribution............................................................... Advance to ATC related to WCCF**................................................ Increase in nuclear decommissioning fund.................................... Proceeds from sale of property....................................................... Other................................................................................................. Cash Used for Investing Activities................................................ (95,747) (3,475) (2,308) — 1,592 (277) (100,215) Financing Activities Issuance of common stock, net....................................................... Cash dividends paid on common stock........................................... Repayment of long-term debt ........................................................ Issuance of long-term debt, net ...................................................... Increase/(decrease) in short-term debt........................................... Other................................................................................................. Cash Provided by Financing Activities......................................... 63,154 (25,943) (20,000) — 21,595 636 39,442 23,344 8,075 (516 ) (3,687 ) 484 (514 ) 2,640 5,000 — (13,412 ) 5,740 — 9,937 67,731 (82,970 ) — (9,223 ) — — (410 ) (92,603 ) 23,162 (24,137 ) (20,000 ) 50,000 (2,618 ) (200 ) 26,207 29,362 4,186 (520) (3,316) 368 (380) 2,714 (5,000) — (13,170) 13,336 — (527) 56,246 (77,001) — (1,281) (7,804) — (623) (86,709) 13,597 (23,170) (20,000) 35,000 24,798 484 30,709 Change in Cash and Cash Equivalents .............................................. Cash and cash equivalents at beginning of period ....................... Cash and cash equivalents at end of period.................................. 1,541 2,020 3,561 $ 1,335 685 2,020 $ 246 439 685 $ * American Transmission Co. ** West Campus Cogeneration Facility For detailed financial information, see the 2004 MGE Energy Form 10-K. For detailed financial information, see the 2004 MGE Energy Form 10-K. 14 150 years of STAYING POWER 150 years of STAYING POWER 15 CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF CAPITALIZATION 2004 2003 At December 31 (Thousands) 2004 2003 At December 31 (Thousands) Assets Current Assets Cash and cash equivalents ................................................................................... Restricted cash ...................................................................................................... Accounts receivable, less reserves of $2,755 and $2,735, respectively ............. Other accounts receivable.................................................................................... Unbilled revenues................................................................................................. Materials and supplies, at lower of average cost or market.............................. Fossil fuel, at lower of average cost or market.................................................. Stored natural gas, at lower of average cost or market ................................... Prepaid taxes......................................................................................................... Deferred income taxes ......................................................................................... Other prepayments .............................................................................................. Total Current Assets .......................................................................................... $ 3,561 876 34,130 22,910 24,880 9,107 5,523 21,712 14,510 — 5,029 142,238 $ 2,020 764 30,236 7,477 21,644 7,851 5,054 18,598 14,063 1,206 3,816 112,729 Common Shareholders’ Equity Common stock – par value $1 per share: Authorized 50,000,000 shares Outstanding 20,389,619 and 18,343,913 shares, respectively............................ $ 20,390 $ 18,344 Additional paid-in capital .................................................................................... 229,682 168,574 Retained earnings................................................................................................. 87,439 79,542 Accumulated other comprehensive income (loss).............................................. 686 (3,390) Total Common Shareholders’ Equity ................................................................ 338,197 263,070 Deferred Charges..................................................................................................... 40,299 43,625 First Mortgage Bonds Property, Plant and Equipment, Net ...................................................................... Construction work in progress ............................................................................ Total Property, Plant, and Equipment.............................................................. Other Property and Investments............................................................................ Total Assets........................................................................................................ 480,154 127,244 607,398 37,436 $827,371 449,022 88,489 537,511 31,293 $725,158 Liabilities and Capitalization Current Liabilities Long-term debt due within one year .................................................................. Short-term debt – commercial paper.................................................................. Accounts payable.................................................................................................. Accrued interest and taxes................................................................................... Deferred income taxes ......................................................................................... Other current liabilities........................................................................................ Total Current Liabilities..................................................................................... Other Credits Deferred income taxes ......................................................................................... Investment tax credit – deferred......................................................................... Regulatory liabilities............................................................................................. Accrued pension and other postretirement benefits ........................................ Other deferred liabilities...................................................................................... Total Other Credits............................................................................................ Capitalization Common shareholders’ equity................................................................................ Long-term debt........................................................................................................ Total Capitalization........................................................................................... Commitments and Contingencies........................................................................... Total Liabilities and Capitalization......................................................................... $ — 53,275 42,488 3,101 581 16,116 115,561 89,627 4,389 28,764 42,138 6,438 171,356 338,197 202,257 540,454 — $827,371 $ 20,000 31,680 34,103 3,028 — 15,814 104,625 79,936 4,891 33,623 29,947 6,862 155,259 263,070 202,204 465,274 — $725,158 7.70%, 2028 Series................................................................................................ 1,200 1,200 Other Long-Term Debt 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 6.12%, due 2028................................................................................................... 20,000 5.68%, due 2033................................................................................................... 30,000 15,000 30,000 19,300 28,000 15,000 20,000 25,000 20,000 30,000 Total Other Long-Term Debt ............................................................................ 202,300 202,300 Unamortized discount and premium on bonds, net ......................................... (1,243 ) (1,296) Total Long-Term Debt ....................................................................................... 202,257 202,204 Total Capitalization ........................................................................................... $540,454 $465,274 For detailed financial information, see the 2004 MGE Energy Form 10-K. For detailed financial information, see the 2004 MGE Energy Form 10-K. 16 150 years of STAYING POWER 150 years of STAYING POWER 17 CORPORATE LEADERSHIP Directors of MGE Energy and MGE Officers of MGE Energy and MGE Richard E. Blaney Retired President Richard Blaney Seeds Inc. Age 68 Director since 1974 F. Curtis Hastings Chairman J. H. Findorff & Son, Inc. Commercial and industrial general contractors Age 59 Director since 1999 Regina M. Millner President R.M.M. Enterprises Inc. Attorney, analyst and broker Age 60 Director since 1996 Frederic E. Mohs Partner Mohs, MacDonald, Widder & Paradise, Attorneys at Law Age 67 Director since 1975 John R. Nevin Executive Director, Center for Product Management; Executive Director, Grainger Center for Supply Chain Management; and Professor, School of Business, University of Wisconsin-Madison Age 61 Director since 1998 Donna K. Sollenberger President and Chief Executive Officer University of Wisconsin Hospital and Clinics Age 55 Director since 2000 H. Lee Swanson Chairman of the Board and President, SBCP Bancorp, Inc., and Chairman of the Board, State Bank of Cross Plains Age 66 Director since 1988 Gary J. Wolter Chairman, President and Chief Executive Officer MGE Energy, Inc., and Madison Gas and Electric Co. Age 50 Director since 2000 Gary J. Wolter* Chairman, President and Chief Executive Officer Age 50 Years of Service, 20 Terry A. Hanson* Vice President, Chief Financial Officer and Secretary Age 53 Years of Service, 23 Jeffrey C. Newman* Vice President and Treasurer Age 42 Years of Service, 20 Lynn K. Hobbie Senior Vice President Age 46 Years of Service, 19 Mark T. Maranger Senior Vice President Age 56 Years of Service, 3 James G. Bidlingmaier Vice President – Administration and Chief Information Officer Age 58 Years of Service, 32 Kristine A. Euclide Vice President and General Counsel Age 52 Years of Service, 3 Scott A. Neitzel Vice President – Energy Supply Policy Age 44 Years of Service, 7 Peter J. Waldron Vice President – Energy Supply Operations Age 47 Years of Service, 24 Gregory A. Bollom Assistant Vice President – Energy Planning Age 44 Years of Service, 22 Joseph P. Pellitteri Assistant Vice President – Human Resources Age 56 Years of Service, 5 John M. Yogerst Assistant Vice President – Gas Operations Age 47 Years of Service, 24 Audit Committee Directors Blaney, Hastings, Millner, Mohs, Nevin, Sollenberger and Swanson. Executive Committee Directors Blaney, Mohs, Swanson and Wolter. Note: Ages as of Dec. 31, 2004. Compensation Committee Directors Blaney, Mohs and Swanson. Personnel Committee Directors Hastings, Millner, Mohs, Nevin and Sollenberger. * Officers of MGE Energy and MGE. All others are MGE officers. Note: Ages and years of service as of Dec. 31, 2004. 18 150 years of STAYING POWER 150 years of STAYING POWER 19 SHAREHOLDER INFORMATION MGE ENERGY CORPORATE PROFILE 2005 Annual Shareholder Meeting Tuesday, May 10, 2005 Marriott Madison West 1313 John Q. Hammons Drive Greenway Center Middleton, Wis. Stock Listing • MGE Energy common stock trades on The Nasdaq Stock Market® • Stock symbol: MGEE • Listed in newspaper stock tables as MGE or MGE Engy Shareholder Services Dividend Reinvestment and Direct Stock Purchase Plan MGE Energy’s Dividend Reinvestment and Direct Stock Purchase Plan allows investors to: • Buy common stock directly through the company. • Reinvest dividends or receive cash payments. • Deposit certificates for safekeeping. 2005 Expected Record and Dividend Payment Dates MGEE Common Stock Record Dates Payment Dates March 1 June 1 March 15 June 15 September 1 September 15 December 1 December 15 Shareholder Services: (from left) Katherine Grunke, Ken Frassetto, Jerilyn Geishirt, Lynne Harper, Linda Carignan. For Assistance and Transfer Agent Inquiries Contact MGE Energy Shareholder Services by phone, mail or e-mail. E-mail: investor@mgeenergy.com We welcome calls from shareholders. Please notify us promptly if: • A stock certificate is lost or stolen. • A dividend check or statement is not received within 10 days of the scheduled payment date. • Your name or address changes. Reports Available More financial information is available upon request or on the company’s Web site, including: • Form 10-K (filed with the Securities and Exchange Commission). • A Statistical Supplement to this annual report. National Association of Investors Corporation MGE Energy is a corporate sponsor of the NAIC and participates in a number of programs including the Low Cost Investment Plan, Investor’s Information Report (Green Sheet), Own Your Own Shares of America and regional investor fairs. Web Address: www.betterinvesting.org Web Address: www.mgeenergy.com Madison Area: (608) 252-4744 Continental U.S.: 1-800-356-6423 Business Hours: 8:00 a.m. to 4:30 p.m. (Central Time) Monday through Friday Mailing Address: MGE Energy Shareholder Services Location: Post Office Box 1231 Madison, WI 53701-1231 133 South Blair Street Madison, WI 53703 Co-Transfer Agent & Registrar Continental Stock Transfer & Trust Co. 17 Battery Place, 8th Floor New York, NY 10004 Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP One North Wacker Drive Chicago, IL 60606 MGE Energy is the parent company of Madison Gas and Electric Co. (MGE), which serves natural gas and electric customers in south-central and western Wisconsin. MGE Electric Services Generation and Distribution Customers: 134,000 Population: 282,000 Area: 250 square miles Communities served: Cross Plains, Fitchburg, Madison, Maple Bluff, Middleton, Monona and Shorewood Hills. Generating facilities: Blount Station, West Campus Cogeneration Facility, combustion turbines and solar units at Madison, the Columbia Energy Center at Portage, a natural gas combustion turbine at Marinette and the MGE Wind Farm in Kewaunee County. MGE Natural Gas Services Purchase and Distribution Customers: 133,000 Population: 391,000 Area: 1,350 square miles MGE Combustion Turbine MGE Wind Farm Elroy Viroqua Columbia Plant Prairie du Chien Madison Counties served: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and Vernon. MGE Gas/Electric Service MGE Gas Service Learn more at www.mgeenergy.com MGE Power LLC Est. 2002 MGE Construct LLC Est. 2002 Central Wisconsin Development Corp. Est. 1986 MAGAEL, LLC Est. 1973 MGE Power West Campus, LLC Est. 2003 Madison Gas and Electric Co. Est. 1896 Divisions Viroqua Gas Co. Acq. 1992 Elroy Gas Co. Acq. 1993 Prairie du Chien Gas Co. Acq. 2001 20 150 years of STAYING POWER 150 years of STAYING POWER 21 OUR HISTORY 1855 madison gas light & coke co. 1871 madison city gas light & coke co. 1888 madison electric co. 1892 four lakes light & power co. 1896 madison gas & electric co. (mge) owned by united gas improvement 1899 mge owned by american light & traction 1949 mge independent, publicly owned utility 2002 mge energy, inc., mge main subsidiary P.O. Box 1231 Madison, WI 53701-1231 www.mgeenergy.com