Summary Annual Report 2005 A new breed of energy company TABLE OF CONTENTS ABOUT THE COVER 1 2005 Highlights 2 To Our Shareholders 6 Listening to Shape the Future 8 Partnering to Grow the Community 10 Finding New Solutions 12 Responding to New Challenges 14 Consolidated Statements of Income 15 Consolidated Statements of Cash Flows 16 Consolidated Balance Sheets 17 Consolidated Statements of Capitalization 18 Corporate Leadership 20 Shareholder Information 21 Corporate Profile RELIABLE SERVICE At MGE Energy, we embrace the future while remaining true to our roots dating back more than 150 years. We are a “hybrid”– a new breed of energy MGE Energy, Inc. company, innovating and advancing while producing solid results. 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. Assets total nearly $917 million. In 2005, revenue exceeded $513 million. See the Corporate Profile on page 21. 2005 Daily Natural Gas Prices New York Mercantile Exchange $16 14 12 10 Property Value Growth 1985 – 2005 347% 341% 277% 269% A new breed of energy company 248% 2005 HIGHLIGHTS 6 8 118% 4 Jan Jun Dec MGE ENERGY (MGEE) Year at a Glance (Thousands, except per-share amounts) All Property Commercial Manufacturing Dane County Wisconsin Source: Wisconsin Department of Revenue 2005 2004 (Decrease) Change Increase/ Number of MGE Customers 2000 – 2005 (in thousands) 150 120 90 60 30 0 2000 2001 2002 2003 2004 2005 Gas Electric $ 513,370 32,091 $ 2000-2005 Stock Price Comparison 1.57 $ (% Change at Dec. 31) 1.37 $ 87.3% 50% Operating Revenues Net Income Basic and Diluted Earnings Per Share Dividends 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) MGEE 20,436 20,451 9.4% -1% -2% DJIA DJUA Nasdaq $ 16.81 -11% $ 33.91 $ 693,493 $ 916,907 3,463,967 219,983 Dividends Paid Per Share (rounded) $ 424,881 33,840 $ 1.77 $ 1.36 $ 76.8% 19,119 20,390 11.4% $0.53 16.59 $ $ 36.03 $ 734,652 $ 828,771 1975 3,144,182 221,612 $1.37 1,317 61 20.8% $ 88,489 -5.2% $ (1,749) -11.3% (0.20) $ .7% 0.01 $ 10.5% 13.7% 6.9% 0.3% -2.0% -17.5% 1.3% 0.22 $ -5.9% $ (2.12) -5.6% $ (41,159) 10.6% $ 88,136 2005 10.2% 319,785 -0.7% (1,629) MGEE Five-Year Investment Growth $88 $50 $38 $100 2000 2001 2002 2003 2004 2005 Initial Investment Dividend Appreciation Price Appreciation Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 12,151 12,051 12,766 2001 2002 2003 2004 2005 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Assets ($ millions) $829 $725 $917 U.S. Utility Rankings Below BBB- 12% AA- 1% A+ 1% A 8% $188 $148 $137 $629 $541 $100 BBB- 6% BBB 36% A 10% BBB+ 26% 2000 2001 2002 2003 2004 2005 2001 2005 Source: Standard and Poor’s, October 2005 MGEE Russell 2000 EEI Index For detailed financial information, see the 2005 MGE Energy Form 10-K. 1 To Our Shareholders Thomas Edison: “There is a way to do it better – find it.” GARY J. WOLTER, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER We accept Thomas Edison’s challenge to find a better way. MGE Energy blends strong business fundamentals with innovative practices. We remain committed to our high standards and performance, yet we always push the envelope for new ideas. MGE Energy finds a better way through vision, collaboration and creativity while remaining responsible to our customers, loyal investors and our fundamental values. Our success comes from combining our tried-and-true principles with new concepts and new ways of doing business. We’re a hybrid ... a new breed of energy company. 2 2005 Daily Natural Gas Prices New York Mercantile Exchange Number of MGE Customers 2000 – 2005 (in thousands) Property Value Growth 1985 – 2005 347% 341% 277% 269% 248% 118% 150 120 90 60 30 0 2000 2001 2002 2003 2004 2005 Gas Electric A new breed of energy company $16 14 12 10 8 6 4 Jan Jun Dec o it better – find it.” All Property Commercial Manufacturing Source: Wisconsin Department of Revenue Dane County Wisconsin ACCOMPLISHMENTS 2000-2005 Stock Price Comparison (% Change at Dec. 31) 50% -1% -2% -11% MGEE DJIA DJUA Nasdaq Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) $188 $148 $137 $100 2000 2001 2002 2003 2004 2005 MGEE Russell 2000 EEI Index We moved significant projects forward in 2005. These projects focus on our core business of reliable energy yet are dynamic, new approaches to our energy future. Dividends Paid Per Share (rounded) MGEE Five-Year Investment Growth $1.37 Through an innovative partnership with the University of Wisconsin, the 150-megawatt (MW) West Campus Cogeneration Facility began producing energy on time and on budget. We also exercised our option to participate in We Energies’ Oak Creek Power Plant, which will deliver 100 MW from new cleaner-coal technology starting in 2009. The company’s 8.33% ownership interest is approximately $190 million. By forming these key partnerships, we add new, state-of-the-art assets to serve customers and produce solid returns for our shareholders. $0.53 $88 $50 $38 $100 2005 1975 2005 Daily Natural Gas Prices New York Mercantile Exchange Madison Gas and Electric (MGE) also began competing in a new regional, Property Value Growth wholesale energy market that changes the way utilities buy and sell electricity. 1985 – 2005 The Midwest Independent System Operator (MISO) reaches 12 states and one 2004 Canadian province. MISO provides new opportunities to access energy in a broader region. MGE worked with other MISO stakeholders to ensure policies 277% 269% were in place to protect customers and investors in this new market. 341% Dividend Appreciation Initial Investment 347% 2001 2003 2002 2000 $16 14 2005 Price Appreciation 12 248% LONG-TERM PERFORMANCE 10 8 6 4 Jan $917 $829 MGEE Assets ($ millions) FINANCIAL STRENGTH MGE tops the Standard and Poor’s (S&P) bond rating list of integrated electric, gas $725 and combination utilities. MGE is the only combination utility out of 106 in the country to receive the AA- rating. S&P rated MGE above average for financial strength, man- agement and regulatory support. $541 $629 Dec Jun 2001 Public Utilities Fortnightly in 2005 ranked MGE Energy among the 40 “best energy companies” in the nation. These companies were recognized as the industry’s “brightest 2000-2005 Stock Price Comparison stars proven in performance and exceptional (% Change at Dec. 31) corporate management.” The ratings were based on profit margin, dividend yield, return on equity and return on assets from 2002–2004. 2005 50% 30 YEARS OF DIVIDEND INCREASES MGE Energy paid an annual cash dividend of $1.37 per share in 2005. MGE Energy is one of only five U.S. investor-owned electric utilities to increase dividends for DJUA Nasdaq -11% MGEE DJIA -1% -2% $16 120 14 90 12 8 0 MGE Energy is proud to serve Wisconsin’s capital city and surrounding areas. We enjoy a 60 strong local economy. In 2005, nonresidential 10 30 construction in Dane County hit $565 million – the second straight record-setting year. 2005 Gas Electric 2004 2003 2001 2002 2000 6 4 30 consecutive years. We have paid cash Jun dividends annually since 1909. Dec Jan 118% U.S. Utility Rankings AA- 1% A+ 1% Below BBB- 12% All Property Commercial Manufacturing A 8% Dane County A 10% Wisconsin BBB- 6% Source: Wisconsin Department of Revenue BBB 36% BBB+ 26% Source: Standard and Poor’s, October 2005 Dividends Paid Per Share (rounded) $1.37 $0.53 Consistent dividend growth and gains in stock value produced a solid five-year total return. A $100 investment in 2000 increased to $188 in 2005, with dividends reinvested. Over the last five years MGE Energy stock outperformed the Dow Jones Utility and Industrial averages and Nasdaq Index. MGEE Five-Year Investment Growth 2000-2005 Stock Price Comparison (% Change at Dec. 31) 50% $88 $50 $38 -1% -2% -11% $100 1975 2005 MGEE DJIA DJUA Nasdaq 2000 2001 2002 2003 2004 2005 Initial Investment Dividend Appreciation Price Appreciation Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 Number of MGE Customers 2000 – 2005 (in thousands) 2005 Daily Natural Gas Prices New York Mercantile Exchange 150 12,151 12,051 12,766 Property Value Growth 347% Number of MGE Customers 2000 – 2005 (in thousands) 2001 2002 2003 2004 2005 1985 – 2005 341% 277% 269% 248% 118% 150 120 90 60 30 0 2000 2001 2002 2003 2004 2005 Gas Electric All Property Commercial Manufacturing Dane County Wisconsin Source: Wisconsin Department of Revenue Dividends Paid Per Share (rounded) $1.37 MGEE Five-Year Investment Growth $0.53 1975 3 $88 $50 $38 $100 Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 2005 12,151 12,051 12,766 2000 2001 2002 2003 2004 2005 2001 2002 2003 2004 2005 Initial Dividend Price Investment Appreciation Appreciation Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 12,151 12,051 12,766 2001 2002 2003 2004 2005 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) $188 $148 $137 MGEE Assets ($ millions) $725 $629 $541 Cumulative Five-Year $917 Total Return Comparison U.S. Utility Rankings $829 (assumes dividends reinvested) Below BBB- 1% AA- A+ 1% A 8% 12% BBB- 6% $100 $100 BBB 36% $629 $541 $188 $148 $137 A 10% BBB+ 26% MGEE Assets ($ millions) $829 $725 $917 U.S. Utility Rankings Below BBB- 1% AA- A+ 1% 12% A 8% BBB- 6% BBB 36% A 10% BBB+ 26% 2000 2001 2002 2003 2004 2005 2001 MGEE Russell 2000 EEI Index 2000 2005 2001 2002 2003 2004 2005 2001 2005 Source: Standard and Poor’s, October 2005 Source: Standard and Poor’s, October 2005 MGEE Russell 2000 EEI Index CONTINUED GROWTH A new breed of energy company 2005 Daily Natural Gas Prices New York Mercantile Exchange $16 14 12 10 8 6 4 Jan Jun Dec Number of MGE Customers 2000 – 2005 (in thousands) 150 120 2000-2005 Stock Price Comparison 90 (% Change at Dec. 31) 60 30 0 50% 2000 2001 2002 2003 2004 2005 Gas -1% Electric -2% -11% MGEE DJIA DJUA Nasdaq 2005 Daily Natural Gas Prices New York Mercantile Exchange $16 14 12 10 8 6 4 Property Value Growth 1985 – 2005 347% 341% 277% 269% 248% 118% Jan Jun Dec All Property Commercial Manufacturing Dane County Wisconsin Source: Wisconsin Department of Revenue EARNINGS MGE Energy produced earnings of $1.57 per share in 2005 compared to $1.77 per share in 2004. While we held the line on operating costs, earnings were impacted by substantial increases in the costs of purchased power and fuel to generate electricity. Number of MGE Customers 2000 – 2005 (in thousands) Property Value Growth 1985 – 2005 347% 341% 150 277% 269% Sharply higher natural gas prices have significantly impacted our industry. Following Hurricane Katrina, natural gas prices hit record highs in 2005. This directly affected our costs to produce electricity. We filed for a fuel surcharge with the Public Service Commission of Wisconsin and were able to recover some costs in the last two months of the year. We continue to operate in a supportive regulatory environment. 248% 120 60 90 118% Natural gas is a commodity traded in a national market. MGE, like other utilities, is subject to the market’s volatile prices. We work to control costs with hedging and aggressive buying strategies. In recent years, our customers’ gas costs were among the lowest in the state. MGE rates to deliver natural gas are fixed. MGE does not make more money from higher gas prices. Electric 2005 2004 2003 2002 2000 2001 Gas 0 All Property Commercial Manufacturing 30 Dane County Wisconsin Source: Wisconsin Department of Revenue VIBRANT LOCAL ECONOMY Madison and Dane County enjoy one of the strongest economies in the nation, with unemployment about 3% and local property values that outpace state averages. This vibrant local economy helps fuel MGE Energy and your investment in the company. The entrepreneur spirit is alive in Madison. We have more business incubator space per MGEE Five-Year Investment Growth capita than any other metro area in the country. We see steady technology transfer into new businesses from the University of Wisconsin-Madison, which is the country’s fourth-largest research institution and spends $721.2 million on research annually. $88 Dividends Paid Per Share (rounded) $1.37 Forbes Magazine lists Madison in the top 10 places to start a new business or career, while Expansion Magazine ranks Madison among the nation’s top “business opportunity metros.” $0.53 $38 $50 2005 Daily Natural Gas Prices New York Mercantile Exchange 1975 $16 2005 $100 Property Value Growth 1985 – 2005 347% 341% 2000-2005 Stock Price Comparison (% Change at Dec. 31) Dividends Paid Per Share (rounded) $1.37 MGEE Five-Year Investment Growth $88 14 12 10 8 6 50% -1% -2% -11% MGEE DJIA DJUA Nasdaq $0.53 1975 4 2005 $100 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) The Madison area continues to see steady population growth. In the last five years, Dane County’s $50 4 population rose more than 7%, compared to a 4% growth across Wisconsin. Our population is Jan Jun Dec $917 MGEE Assets ($ millions) projected to increase 15% by 2020 compared to a 9% growth statewide. $38 $829 Electricity Produced by Landfill Gas Below BBB- 12% (megawatt-hours) $725 All Property Commercial Manufacturing AA- A+ A Dane County 1% 1% 8% Source: Wisconsin Department of Revenue Wisconsin $188 $100 $148 $137 $629 $541 BBB- 6% 23,294 A 10% 15,489 BBB 36% Electricity Produced by Landfill Gas (megawatt-hours) Number of MGE Customers 2000 – 2005 (in thousands) 23,294 15,489 12,151 12,051 12,766 2001 2002 2003 2004 2005 150 120 90 60 30 0 2000 2001 2002 2003 Initial Investment Dividend 248% Appreciation 2005 2004 277% 269% Price Appreciation 118% 2000 2001 2002 2003 2004 2005 Gas Electric U.S. Utility Rankings 2000 2001 2002 2003 2004 2005 Initial Dividend Price Investment Appreciation Appreciation 12,151 12,051 12,766 2000-2005 Stock Price Comparison 2000 2001 2002 2003 2004 2005 2001 2005 (% Change at Dec. 31) 2001 2002 2003 2004 2005 Dividends Paid Per Share Source: Standard and Poor’s, October 2005 (rounded) $1.37 BBB+ 26% MGEE Five-Year Investment Growth MGEE Russell 2000 EEI Index 50% Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Assets ($ millions) $829 $725 $917 U.S. Utility Rankings Below BBB- 1% AA- A+ 1% 12% A 8% -1% -2% -11% $0.53 MGEE DJIA DJUA Nasdaq 1975 2005 $188 $148 $137 $629 $541 $100 BBB- 6% BBB 36% 2000 2001 2002 2003 2004 2005 2001 2005 Source: Standard and Poor’s, October 2005 MGEE Russell 2000 EEI Index A 10% BBB+ 26% $100 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Assets ($ millions) $829 $725 $917 U.S. Utility Rankings Below BBB- 1% AA- A+ 1% 12% A 8% $188 $148 $137 $629 $541 BBB- 6% BBB 36% A 10% BBB+ 26% 2000 2001 2002 2003 2004 2005 2001 2005 Source: Standard and Poor’s, October 2005 MGEE Russell 2000 EEI Index $88 $50 $38 $100 2000 2001 2002 2003 2004 2005 Initial Dividend Price Investment Appreciation Appreciation Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 12,151 12,051 12,766 2001 2002 2003 2004 2005 ENERGY 2015 PLAN MGE’s Energy 2015 is an innovative step forward to meet our customers’ needs. This plan takes a comprehensive approach that emphasizes reliability, sound economics and environmental responsibility. Energy 2015 includes new cleaner-coal resources, energy efficiency and renewable energy programs. We also will make significant changes at our Blount Station Power Plant. Though the plant currently meets or exceeds all environmental regulations, future federal coal regulations will require steep cuts in emissions. To comply with the new regulations, the company would need to make substantial investments and face major siting problems. Instead, MGE plans to retire the oldest, least efficient part of Blount at the end of 2011 and operate the facility only on cleaner-burning natural gas. By 2011, the new Oak Creek Power Plant near Milwaukee and new transmission lines are scheduled to be in place so we can continue delivering affordable energy to our customers. We believe that Energy 2015 is the best roadmap for a sound energy future. COMMUNITY INVOLVEMENT ENVIRONMENTAL STEWARDSHIP We work to protect the environment while providing reliable energy for our customers. MGE achieves this through a commitment to renewable energy, a strong efficiency ethic, innovative technologies and cleaner generation sources. MGE has a long history of supporting pioneering research that can improve our environment. We are funding two small- scale, yet ground-breaking generation projects – one using hydrogen fuel and one using methane gas. We developed these projects to better understand how new technologies might serve our cus- tomers and investors in the future. A new breed of energy company CARING FOR OUR CUSTOMERS AND COMMUNITY As always, we strive to care for the customers and communities we serve. Last year, MGE launched an eight-year “Energy Partnership for a Green Capital City” to encourage energy efficiency investments by the City of Madison. As a good corporate citizen, MGE invests in our communities through economic development and environmental stewardship. ACCEPTING THE CHALLENGE We are energized to this day by the challenge Thomas Edison gave in the 1800s, “There is a way to do it better – find it.” We incorporate strong business values with visionary approaches to produce steady dividend income and competitive returns for our MGE’s comprehensive Energy 2015 Plan calls for increased renewable energy, such as solar power (above), loyal investors. wind and biomass. The MGE Foundation also funded a three-year study that looked at the potential for prairie grasses to offset carbon dioxide emissions from power plants. This research was instrumental in helping determine how land-use practices could be used as part of a carbon-credit program. Energy 2015 is a bold step toward our environmental future. We plan to grow our wind resources by five to 10 times, encourage other renewable resources and engage every customer in energy efficiency efforts. While it is critical to add new electric generation, it is equally important to focus on energy efficiency and clean, renewable energy sources. Thank you for your confidence. Gary J. Wolter Chairman, President and Chief Executive Officer 5 A new breed of energy company – listens carefully to shape our future. Energy 2015 is MGE’s long-term strategy to meet our customers’ future energy needs. This comprehensive, balanced plan maintains our emphasis on reliability, affordability and environmental respon- sibility. It includes new cleaner-coal generation, wind resources and an energy efficiency initiative that will touch every customer in our service area. MGE used its series of “Community Energy Conversations” with customers as listening sessions to help inform the Energy 2015 Plan. This type of customer involvement is unprecedented in our industry. Innovative approaches Developing new technologies MGE held “Community Energy Conversations” with customers to discuss which energy options make the most sense for our community. We invited all of our electric customers to one of more than two-dozen sessions. Customers learned about future energy demands and generation options. MGE gained insights to better understand our customers’ values and needs. This open and honest dialogue helped shape our Energy 2015 Plan. Greg Bollom, Assistant Vice President of Energy Planning, meets with a group of customers at one of the Community Energy Conversations that MGE held throughout its electric service area. Critical funding for emerging technology companies is one way we energize our local economy. MGE recognized the need and partnered with others to establish a $2 million Venture Debt Fund that has invested in three high-tech companies with potential for long-term success. These loans help companies move from the start-up phase to producing products and a positive cash flow. The Venture Debt Fund provided financial support for Madison-based TrafficCast, Inc., that uses patented processes to provide traffic data to a range of map and travel services. The new firm has contracts with Yahoo, major cellular phone service providers and others. TrafficCast also established business last year in Shanghai, China. Connie Li is CEO for TrafficCast, which dynamically processes digital traffic, weather and construction data to predict travel times and delays in key cities. 6 2005 Daily Natural Gas Prices New York Mercantile Exchange Number of MGE Customers 2000 – 2005 (in thousands) Property Value Growth 1985 – 2005 347% 341% 277% 269% 248% 150 120 90 60 30 0 118% 2000 2001 2002 2003 2004 2005 Gas Electric $16 14 12 10 8 6 4 Jan Jun Dec All Property Commercial Manufacturing Dane County Wisconsin Source: Wisconsin Department of Revenue MGEE Five-Year Investment Growth Dividends Paid Per Share (rounded) $1.37 Local environmental results $88 $50 MGE helped tackle the challenge of economically producing electricity from methane gas in small- to medium-sized landfills. MGE joined a project that tests a new engine better suited for running on landfill gas. This project takes methane gas, normally burned off at landfills, and turns it into fuel that generates electricity. $100 $38 2005 We develop these projects because our customers value new technologies that can improve our environment while generating energy. In 2005, we were able to serve 3,235 homes from methane production. The amount of electricity generated by methane has Dividend Appreciation nearly doubled in five years. Price Appreciation Initial Investment 2003 2004 2002 2005 2001 2000 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Assets ($ millions) $829 $725 $917 U.S. Utility Rankings Below BBB- 12% AA- 1% A+ 1% A 8% $188 $148 $137 $629 $541 $100 BBB- 6% BBB 36% A 10% BBB+ 26% 2000 2001 2002 2003 2004 2005 2001 2005 Source: Standard and Poor’s, October 2005 MGEE Russell 2000 EEI Index 2000-2005 Stock Price Comparison (% Change at Dec. 31) 50% -1% -2% -11% MGEE DJIA DJUA Nasdaq $0.53 1975 MGE purchases electricity produced by methane gas from a local landfill. Additional generators in 2004 and 2005 boosted the landfill’s output. Electricity Produced by Landfill Gas (megawatt-hours) 23,294 15,489 12,151 12,051 12,766 2001 2002 2003 2004 2005 7 A new breed of energy company – partners to grow our community assets. Reports show the impact of the UW-Madison campus on the regional economy was more than $4.7 billion in 2002. Under the Campus Master Plan, UW-Madison will gain 6.9 million square feet by 2025. This growth will increase the university’s capacity for cutting-edge research that often migrates off campus to become successful new Madison- based businesses. Community partnerships resulted in the West Campus Cogeneration Facility that went on-line in 2005. This world-class facility is a new approach to the town-and-gown relationship. MGE’s partnership with the University of Wisconsin-Madison and the State of Wisconsin ensured a reliable energy supply for the city and campus without producing any net increase in emissions. Through the efficiency of state- of-the-art cogeneration, we can produce 150 megawatts for MGE customers as well as meet the heating and cooling needs of the expanding campus. Dedicating the West Campus Cogeneration Facility were (left to right) Wisconsin Gov. Jim Doyle, UW-Madison Chancellor John Wiley and MGE Chairman Gary Wolter. 8 Working together productively MGE helped form a Biomedical Collabor- ative that brings together leaders from local hospitals, the biomedical industry, the University of Wisconsin-Madison and other health care fields to shape a bright future for this essential industry. This economic development initiative helps position Madison as a regional and national health care leader. Health care contributes more than $2.1 billion each year to the local economy. Employment in Madison’s health care fields is expected to grow 10% in the next six years. For every job created in hospitals or clinics, an additional 1.9 jobs are generated in the metropolitan economy. Judy Keefe, a registered nurse in Meriter Hospital’s Newborn Intensive Care Unit, checks on Caden Klauser who was born prematurely weighing 1.8 pounds. A combination of high-skilled care and high-tech equipment nourished Caden to 4.15 pounds by the time he went home. Recognizing the need to encourage energy efficiency and environmental improvements, MGE and the City of Madison formed the Energy Partnership for a Green Capital City. With this new initiative, MGE commits $1.8 million for “green energy projects” over eight years. In the Energy Partnership’s first year, MGE helped put cleaner ultra-low sulfur diesel fuel in Metro Transit buses nearly one year before it became mandatory. While it is critical to add new electric generation to meet energy needs in our vibrant area, it is equally important to focus on energy efficiency and our environment. Caring while conserving Luanne Fax (center), an MGE Residential Services Manager, shows Mary and Jim Pertzborn their new ENERGYSTAR® oven. Energy efficiency was built into their home makeover project. MGE put a fresh face on energy efficiency by joining a local effort to create “A Caring Home Makeover” – a takeoff from a popular TV show. Partnering with local TV station WKOW and the National Association of Remodeling Industry, MGE helped a Madison family remodel their home and improve its energy efficiency. More than 130 vendors joined in this remarkable effort. MGE used weekly TV reports to educate customers on how they can conserve energy. MGE is dedicated to energy efficiency. We have helped customers reduce electric use and avoid the need for 98 additional megawatts of generating capacity since 1987. MGE’s new Energy 2015 Plan will help our customers take further energy- saving steps. 9 A new breed of energy company – finds Corn, a native plant dating back thousands of years, can now be transformed into hydrogen fuel. MGE partnered with a local firm in the world’s first demon- stration project to convert corn, soybean and other plant byproducts into hydrogen and other fuels to power electric generators. Virent Energy Systems has a cost-effective, patented process that is extremely clean, producing low to no emissions. The energy from this pilot project feeds into MGE’s electric grid. Though we rely on traditional generation sources, we also fund visionary research and pilot projects to develop renewable energy. Tapping into the age-old energy of corn and other renewable biomass may help fuel our energy future. new solutions in our own backyard. 10 Cleaner energy for a bright future Cleaner-coal technology allows us to rely on coal – stable prices and plentiful supplies – while reducing regulated air emissions. MGE Energy became a partial owner in the new cleaner-coal generation units at the Oak Creek Power Plant. Investors will earn a 12.7% return on this investment. This power plant on Lake Michigan is under- going major expansion by We Energies. The two new generation units will be completed in 2009 and 2010. MGE’s agreement is for 100 megawatts to help meet our customers’ growing energy needs. The expansion will boost the coal plant’s energy production while advances in environmental control technologies will dramatically reduce air emissions. Madison East High School students worked with Teacher Nathan Madsen (left) and Jim Jenson, MGE’s Community Education Manager, to build a battery-powered vehicle. Student Nick Hogan gives a behind-the-wheel demonstration. We challenged a new generation to think outside the box and change the way we use energy. The MGE Foundation provided $3,200 for materials so Madison’s East High School students could design, build and test a battery-powered vehicle. We helped open their eyes to new technology and reinforce the value of teamwork. This next generation will help plan our energy future. The students participated in Wisconsin’s first “Electrathon America” driving competition and took first place in maneuverability. High-tech teamwork Ralph Kauten (right), Quintessence Biosciences Chairman and CEO, and Vladimir Trubetskoy, Director of Polymer Chemistry, work with a team of researchers on cancer therapies. Rendering of the Oak Creek Power Plant The MGE Innovation Center helps new high-tech businesses put down their roots in our community. The center is under- going a $1 million renovation to create 20 more incubator spaces. Currently, the center has 60 fully occupied suites. The expansion demonstrates the high level of technology transfer from UW-Madison into new businesses. The high-tech sector last year contributed nearly $5 billion to the local economy and accounted for 26,000 jobs. “The MGE Innovation Center allows us to interact and share ideas and resources with other biotech companies. Colla- boration is important as we build our expertise,” said Ralph Kauten, CEO of Quintessence Biosciences. The MGE Innovation Center has helped more than 70 early-stage companies grow since 1989. 11 A new breed of energy company – responds to new challenges. MGE was at the table as the new Midwest Independent System Operator, a new regional energy market, took shape. This dynamic energy market includes 12 states and one Canadian province. In 2005, utilities began trading in the market under rules that MGE helped shape to protect our customers and investors. The new market transforms the way utilities buy and sell electricity and plan transmission needs while maintaining dependable energy. This market opens the doors to electricity from a larger region. We prepared for this change for four years – including planning, training and computer upgrades. We remain active to improve market rules and represent our customers. Improving performance Jenkins Research and Manufacturing is a local machine shop that works closely with its customers to improve the performance of their products. Jenkins produces parts for a diverse group of growing Madison-area companies including Trek Bicycle, TomoTherapy and Sub-Zero. MGE stepped up with competitive financing that allowed Jenkins to install the advanced equipment required to keep pace with one of its customer’s rapidly changing demands. Through MGE’s action, Jenkins improved productivity – reducing production time from 48 hours to 16 hours on a key product. MGE collaborates with key businesses like Jenkins Research and Manufacturing. Jenkins’ Gerald Easley inspects a precision metal part for a local customer. y h p a r g o t o h P l a a v e N d i v a D : o t o h P 12 Building a talented workforce Delivering reliable energy depends on a skilled workforce. That’s why MGE takes an original approach to recruit well-trained workers. A national study shows that a significant number of U.S. utility work- ers will reach retirement age in the next five years. There is also a shortage of new workers entering the skilled trades. MGE anticipated these national trends. In addition to the typical approach of working with high schools, technical colleges and job fairs, MGE produced a recruitment video. Packed with interesting visuals, it explains utility operations jobs to students and why they should consider a career at MGE. These new recruits ensure a reliable energy future. MGE recruits bright people for challenging utility careers. Debra Loeks, MGE’s Employment Manager, hired Shane Abing (left), Line Technician Apprentice, Community education and Ben Fruzen, Pipe Layer in Gas Operations. At MGE, we have a long- standing commitment to energy conservation and working with our customers. Record-high natural gas prices made the past heating season difficult for many customers. That’s why we developed a comprehensive plan to com- municate frequently with our customers, giving them advice and tools to control their energy use and costs. We worked with nonprofit and community groups to educate our customers. Annette Miller (right), an MGE Community Services Manager, explains how a setback ther- mostat can help customer Shiva Bidar-Sielaff save on her heating bills. 13 CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31 (in thousands, except per-share amounts) Operating Revenues 2005 2004 2003 Regulated ......................................................................................... $511,517 $422,149 $401,547 Nonregulated ................................................................................... 1,853 2,732 1,023 Total Operating Revenues............................................................ 513,370 424,881 402,570 Operating Expenses Fuel for electric generation............................................................. 65,016 43,033 41,013 Purchased power.............................................................................. 81,676 51,984 49,449 Natural gas purchased..................................................................... 146,110 114,646 104,163 Other operations and maintenance ............................................... 117,552 115,633 112,155 Depreciation and amortization ...................................................... 29,275 24,917 23,344 Other general taxes ......................................................................... 13,269 12,715 11,592 Total Operating Expenses............................................................. 452,898 362,928 341,716 Operating Income ............................................................................... 60,472 61,953 60,854 Other income, net ............................................................................ 4,938 3,927 1,888 Interest expense ............................................................................... (13,448) (11,384 ) (12,201) Income before income taxes........................................................ 51,962 54,496 50,541 Income tax provision........................................................................ (19,871) (20,656 ) (19,901) Net Income........................................................................................... $ 32,091 $ 33,840 $ 30,640 Earnings Per Share of Common Stock (basic and diluted)............... Dividends Paid Per Share of Common Stock..................................... $ $ 1.57 1.37 $ $ 1.77 1.36 $ $ 1.71 1.35 Average Shares Outstanding (basic and diluted) ............................. 20,436 19,119 17,894 For detailed financial information, see the 2005 MGE Energy Form 10-K. 14 A new breed of energy company CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (in thousands) Operating Activities 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 ................................................................................... Gain on the sale of property ....................................................... Changes in working capital: Increase in current assets .......................................................... Increase in current liabilities..................................................... Prepayments to ATC*....................................................................... Other noncurrent items, net ........................................................... Cash Provided by Operating Activities........................................ Investing Activities Capital expenditures........................................................................ ATC* – capital contribution............................................................. Dividend income from ATC* ........................................................... Repayment (advance) from/to ATC* related to WCCF**................ Proceeds from sale of property....................................................... Advance to Wisconsin Electric Power Co. for ATC* work ................. Capital calls....................................................................................... Other................................................................................................. Cash Used for Investing Activities................................................ Financing Activities Issuance of common stock, net....................................................... Purchase of treasury stock ............................................................... 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......................................... 2005 2004 2003 $ 32,091 $ 33,840 $ 30,640 29,275 10,900 (460) (4,871) 493 695 — (30,243) 8,515 — 3,432 49,827 (85,771) (1,376) 3,550 12,964 — (1,599) (310) 359 (72,183) 2,259 (119) (28,054) — 20,000 29,225 (1,128) 22,183 24,917 8,832 (502 ) (4,236 ) 516 639 (938 ) (15,776 ) 7,942 — 4,330 59,564 (95,747 ) (3,475 ) 3,055 (2,308 ) 1,592 — — (644 ) (97,527 ) 63,154 — (25,943 ) (20,000 ) — 21,595 698 39,504 23,344 8,075 (516) (3,687) 484 (514) — (13,412) 5,723 5,000 11,009 66,146 (82,970) — 2,640 (9,223) — — — (1,539) (91,092) 23,162 — (24,137) (20,000) 50,000 (2,618) (183) 26,224 Change in Cash and Cash Equivalents .............................................. Cash and cash equivalents at beginning of period ....................... Cash and cash equivalents at end of period.................................. (173) 3,504 3,331 $ 1,541 1,963 3,504 $ 1,278 685 $ 1,963 * American Transmission Co. ** West Campus Cogeneration Facility For detailed financial information, see the 2005 MGE Energy Form 10-K. A new breed of energy company 15 CONSOLIDATED BALANCE SHEETS 2005 2004 At December 31 (in thousands) Assets Current Assets Cash and cash equivalents ................................................................................... Restricted cash ...................................................................................................... Accounts receivable, less reserves of $2,734 and $2,665, respectively ............. Other accounts receivable, less reserves of $93 and $90, respectively .............. Unbilled revenues................................................................................................. Materials and supplies, at lower of average cost or market.............................. Fossil fuel .............................................................................................................. Stored natural gas, at lower of average cost or market ................................... Prepaid taxes......................................................................................................... Other prepayments .............................................................................................. Total Current Assets .......................................................................................... Other long-term receivables ................................................................................... Special billing projects............................................................................................. Regulatory assets ..................................................................................................... Deferred Charges..................................................................................................... Property, Plant and Equipment, Net ...................................................................... Construction work in progress ............................................................................ Total Property, Plant, and Equipment.............................................................. Other Property and Investments............................................................................ Total Assets........................................................................................................ Liabilities and Capitalization Current Liabilities 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......................................................................... $ 3,331 2,556 49,272 9,079 30,432 15,326 5,501 27,983 12,436 4,989 160,905 3,969 1,786 34,024 11,120 611,419 56,238 667,657 37,446 $916,907 $ 82,500 49,502 3,328 4,061 13,589 152,980 99,329 3,929 21,748 55,504 17,222 197,732 343,883 222,312 566,195 — $916,907 $ 3,504 3,044 34,220 22,820 24,880 9,107 5,523 21,712 14,510 4,967 144,287 1,417 3,121 24,419 12,110 480,725 127,244 607,969 35,448 $828,771 $ 53,275 42,488 3,101 2,994 16,195 118,053 87,214 4,389 29,366 42,138 7,157 170,264 338,197 202,257 540,454 — $828,771 For detailed financial information, see the 2005 MGE Energy Form 10-K. 16 A new breed of energy company CONSOLIDATED STATEMENTS OF CAPITALIZATION At December 31 (in thousands) Common Shareholders’ Equity Common stock – par value $1 per share: Authorized 50,000,000 shares 2005 2004 Issued 20,454,496 and 20,389,619 shares, respectively ...................................... $ 20,454 $ 20,390 Common stock held in treasury, at cost (3,384 shares)...................................... (119 ) — Additional paid-in capital .................................................................................... 231,877 229,682 Retained earnings................................................................................................. 91,476 87,439 Accumulated other comprehensive income (net of tax) ................................... 195 686 Total Common Shareholders’ Equity ................................................................ 343,883 338,197 First Mortgage Bonds 7.70%, 2028 Series................................................................................................ 1,200 1,200 Other Long-Term Debt 7.49%, due 2007.................................................................................................... 6.02%, due 2008................................................................................................... 4.875% 2012 Series, Industrial Development Revenue Bonds .......................... 5.875% 2034 Series, Industrial Development Revenue Bonds .......................... 6.58%, due 2012................................................................................................... 5.26%, due 2017................................................................................................... 7.12%, due 2032................................................................................................... 6.12%, due 2028................................................................................................... 5.68%, due 2033................................................................................................... 5.19%, due 2033................................................................................................... 15,000 30,000 19,300 28,000 15,000 20,000 25,000 20,000 30,000 20,000 15,000 30,000 19,300 28,000 15,000 20,000 25,000 20,000 30,000 — Total Other Long-Term Debt ............................................................................ 222,300 202,300 Unamortized discount.......................................................................................... (1,188 ) (1,243) Total Long-Term Debt ....................................................................................... 222,312 202,257 Total Capitalization ........................................................................................... $566,195 $540,454 For detailed financial information, see the 2005 MGE Energy Form 10-K. A new breed of energy company 17 CORPORATE LEADERSHIP DIRECTORS OF MGE ENERGY AND MGE Richard E. Blaney Retired President Richard Blaney Seeds Inc. Age 69 Director since 1974 F. Curtis Hastings Chairman J. H. Findorff & Son, Inc. Commercial and industrial general contractors Age 60 Director since 1999 Regina M. Millner President RMM Enterprises Inc. Attorney, analyst and broker Age 61 Director since 1996 Frederic E. Mohs Partner Mohs, MacDonald, Widder & Paradise, Attorneys at Law Age 68 Director since 1975 John R. Nevin Executive Director, Center for Brand and Product Management; Executive Director, Grainger Center for Supply Chain Management; and Professor, School of Business, University of Wisconsin-Madison Age 62 Director since 1998 Donna K. Sollenberger President and Chief Executive Officer University of Wisconsin Hospital and Clinics Age 56 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 67 Director since 1988 Gary J. Wolter Chairman, President and Chief Executive Officer MGE Energy, Inc., and Madison Gas and Electric Co. Age 51 Director since 2000 Audit Committee Directors Blaney, Hastings, Millner, Mohs, Nevin, Sollenberger and Swanson.* Executive Committee Directors Blaney, Mohs, Swanson and Wolter. Compensation Committee Directors Blaney, Mohs* and Swanson. Governance Committee Directors Blaney, Hastings, Millner, Mohs,* Nevin, Sollenberger and Swanson. * Committee Chair Note: Ages as of Dec. 31, 2005. 18 A new breed of energy company CORPORATE LEADERSHIP OFFICERS OF MGE ENERGY AND MGE Gary J. Wolter* Chairman, President and Chief Executive Officer Age 51 Years of Service, 21 Terry A. Hanson* Vice President, Chief Financial Officer and Secretary Age 54 Years of Service, 24 Jeffrey C. Newman* Vice President and Treasurer Age 43 Years of Service, 21 Lynn K. Hobbie Senior Vice President Age 47 Years of Service, 20 Mark T. Maranger Senior Vice President Age 57 Years of Service, 4 James G. Bidlingmaier Vice President – Administration and Chief Information Officer Age 59 Years of Service, 33 Kristine A. Euclide Vice President and General Counsel Age 53 Years of Service, 4 Scott A. Neitzel Vice President – Energy Supply Policy Age 45 Years of Service, 8 Peter J. Waldron Vice President – Energy Supply Operations Age 48 Years of Service, 25 Gregory A. Bollom Assistant Vice President – Energy Planning Age 45 Years of Service, 23 Joseph P. Pellitteri Assistant Vice President – Human Resources Age 57 Years of Service, 6 John M. Yogerst Assistant Vice President – Gas Operations Age 48 Years of Service, 25 * Officers of MGE Energy and MGE. All others are MGE officers. Note: Ages and years of service as of Dec. 31, 2005. A new breed of energy company 19 SHAREHOLDER INFORMATION 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. 2006 EXPECTED RECORD AND DIVIDEND PAYMENT DATES MGEE Common Stock Record Dates March 1 June 1 Sept. 1 Dec. 1 Payment Dates March 15 June 15 Sept. 15 Dec. 15 FOR ASSISTANCE AND TRANSFER AGENT INQUIRIES Contact MGE Energy Shareholder Services by phone, mail or e-mail. investor@mgeenergy.com E-mail: www.mgeenergy.com Web Address: 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 S. Blair St. 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 N. Wacker Drive Chicago, IL 60606 2006 ANNUAL SHAREHOLDER MEETING Tuesday, May 23, 2006 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 Shareholder Services: (from left) Katherine Grunke, Ken Frassetto, Jerilyn Geishirt, Kari Foster, Lynne Harper. 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. Materials 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). • Dividend Reinvestment and Direct Stock Purchase Plan. National Association of Investors Corp. 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 20 A new breed of energy company CORPORATE PROFILE MGE Energy is the parent company of Madison Gas and Electric Co. (MGE) and its divisions, which serve natural gas and electric customers in south-central and western Wisconsin. MGE Power owns assets in the West Campus Cogeneration Facility in Madison, Wis., and the Elm Road coal plant under construction at Oak Creek, Wis. MGE Transco Investment owns interest in the American Transmission Co. through its members, MGE and MGE Energy. MGE Construct provides construction services for building new generation facilities. Central Wisconsin Development Corp. promotes business growth in MGE’s service area. MAGAEL holds title to properties acquired for future utility plant expansion. MGE ELECTRIC SERVICES Generation and Distribution Customers: 136,000 Population: 286,000 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: 137,000 Population: 397,000 Area: 1,350 square miles Counties served: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and Vernon. Learn more at www.mgeenergy.com MGE Combustion Turbine MGE Wind Farm Elroy Viroqua Columbia Plant Prairie du Chien Madison MGE Gas/Electric Service MGE Gas Service Madison Gas and Electric Co. Est. 1896 MGE Transco Investment LLC Est. 2005 MGE Construct LLC Est. 2002 Central Wisconsin Development Corp. Est. 1986 MAGAEL, LLC Est. 1973 Viroqua Gas Division Acq. 1992 Elroy Gas Division Acq. 1993 Prairie du Chien Gas Division Acq. 2001 MGE Power LLC Est. 2002 MGE Power West Campus, LLC Est. 2003 MGE Power Elm Road, LLC Est. 2003 A new breed of energy company 21 P.O. Box 1231 Madison, WI 53701-1231 www.mgeenergy.com