2006 Summary Annual Report POWERINGTOMORROW powering tomorrow About the Cover MGE Energy is ready to power tomorrow with the Energy 2015 Plan, which renews our commitment to wind power, energy conservation and cleaner, more efficient power plants. It is critical that we add new electric generation and expand our natural gas system to reliably meet growing energy needs in our vibrant local economy. It is equally important to focus on energy efficiency and clean, renewable energy. We are dedicated to serving our customers and producing strong results for shareholders. Table of Contents 1 2006 Highlights 2 To Our Shareholders 6 Powering a Responsible Tomorrow 8 Powering a Vibrant Tomorrow 10 Powering a Clean Tomorrow 12 Powering Tomorrow Together 14 Consolidated Statements of Income 15 Consolidated Statements of Cash Flows 16 Consolidated Balance Sheets 17 Consolidated Statements of Capitalization 17 Cumulative Five–Year Total Return Comparison 18 Corporate Leadership 20 Shareholder Information 21 Corporate Profile MGE Energy, Inc. MGE Energy is an investor-owned public utility holding company headquartered in the state capital of 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 $982 million. In 2006, revenue was nearly $508 million. See the Corporate Profile on page 21. 2006 Highlights MGE EnERGY (MGEE) Year at a Glance (Thousands, except per-share amounts) Operating Revenues net Income Basic and Diluted Earnings Per Share Dividends Declared Per Share Dividend Payout Ratio Average Shares Outstanding Shares Outstanding at Year End Return on Average Common Equity Book Value Per Share Market Price Per Share (Dec. 31) Total Market Value (Dec. 31) Total Assets Total Electric Sales (KWh) Total Gas Deliveries (therms) 2006 2005 Increase/ (Decrease) Change % Dividends Declared Per Share Dividends Declared Per Share (rounded) (rounded) $ 507,546 42,423 $ 2.06 $ 1.39 $ 67.5 % 20,564 20,975 12.0 % 17.90 $ 36.58 $ $ 767,266 $ 982,232 3,347,701 202,994 $ $ $ $ 513,370 $ 32,091 $ $ 1.57 1.37 $ $1.39 $1.39 87.3 % 20,436 20,454 9.4 % 16.81 $ 33.91 $ $ 693,595 2006 1975 2006 $ 916,907 3,463,967 219,983 (5,824) 10,332 0.49 0.02 (19.8 ) 128 521 2.6 1.09 $ 2.67 $ $ 73,671 $ 65,325 (116,266 ) (16,989 ) $0.53 $0.53 1975 $100 $100 (1.1) 32.2 31.2 1.5 (22.7) 0.6 2.5 27.7 6.5 7.9 10.6 7.1 (3.4) (7.7) 2001 2001 MGEE MGEE Cumulative Five-Year Cumulative Five-Year Total Return Comparison Total Return Comparison (assumes dividends reinvested) (assumes dividends reinvested) $181 $181 $172 $172 $171 $171 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 Russell 2000 Russell 2000 EEI Index EEI Index MGEE Assets MGEE Assets ($ millions) ($ millions) $917 $917 $982 $982 $829 $829 MGEE Five-Year Investment Growth MGEE Five-Year Investment Growth Earnings Per Share Earnings Per Share $172 $172 $38 $38 $34 $34 $100 $100 $1.69 $1.69 $1.71 $1.71 $1.77 $1.77 $1.57 $1.57 $2.06 $2.06 $726 $726 $650 $650 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 Initial Investment Initial Investment Dividend Dividend Appreciation Appreciation Price Appreciation Price Appreciation For detailed financial information, see the 2006 MGE Energy Form 10-K. 1 shareholders powering tomorrow Gary J. Wolter, MGE Energy Chairman, President and Chief Executive Officer, at the MGE Innovation Center – a business incubator that has helped launch more than 70 high-tech firms since 1989. One of our most important responsibilities is providing a reliable energy supply for the future. In 2006, we rolled out Energy 2015 – our 10-year plan for meeting customers’ needs. I am pleased to report that with our comprehensive and balanced Energy 2015 Plan, MGE Energy is prepared to power tomorrow. We recognize our obligation to deliver reliable energy. Where others see just an obligation, we see an opportunity to engage our customers. Several years ago, we held “Community Energy Conversations” with customers. We listened to their concerns and ideas. Energy 2015 reflects our customers’ values by balancing reliability, affordability and environmental stewardship. For our shareholders, Energy 2015 demonstrates our commitment to the key business fundamentals that have kept our company strong. I am proud of our accomplishments. The Energy 2015 Plan is well underway. It combines more renewable energy, new cleaner coal generation and a renewed conservation commitment. As part of our ongoing efforts, our natural gas system will also be strengthened. This mix of resources will reliably serve one of the most vibrant local economies in the country. Powering tomorrow with Energy 2015 is our commitment to a responsible energy future with a balanced and reliable energy supply. We will not stray from the sound business principles that produce outstanding service to our customers and solid financial results for our investors. 2 to our Dividends Declared Per Share (rounded) $1.39 A return to record earnings MGE Energy produced record earnings of $2.06 per share in 2006 – a return to our historic performance levels. Your company has produced record earnings for four of the last five years. The exception was 2005 when the company earned $1.57 per share. These results were adversely impacted by extremely high natural gas prices and purchased power costs. MGEE Five-Year Investment Growth $172 MGE Energy’s 2006 earnings growth is due, in part, to asset investments that meet the growing energy needs of our main subsidiary – the regulated utility Madison Gas and Electric Co. (MGE). With our Energy 2015 Plan, MGE Energy’s investments now include cleaner coal generation, more wind power and new natural gas infrastructure. $100 $34 $38 2001 2004 2003 2002 2005 2006 MGE Energy’s assets reached Initial $982 million in 2006. In the last five Investment years, assets have grown $332 million. Dividend Appreciation Price Appreciation $0.53 MGE Energy stock closed the year at $36.58, up $2.67 from Dec. 30, 2005. Since 2001, our year-end stock price 1975 rose 38%. 2006 In 2006, we marked our 31st consecutive year of increasing dividends. MGE Energy is one of only six investor-owned electric utilities to raise dividends annually for 30 or more years. Consistent dividend growth and gains in stock value produced a solid five- Earnings Per Share year return. A $100 investment in 2001 increased to $172 in 2006, with dividends reinvested. $2.06 $1.77 $1.71 $1.69 $1.57 MGEE Five-Year Investment Growth Our company is highly regarded by $172 independent rating organizations. $38 MGE maintained the highest bond rating (AA-) of all investor-owned, combination utilities in the nation from Standard & 2002 2003 2004 2005 2006 Poor’s. MGE Energy earned Value Line’s highest grade for investment safety and top marks for financial strength. 2005 2003 2002 2004 2006 2001 $100 $34 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) $181 $172 $171 $100 Dividends Declared Per Share (rounded) $1.39 2001 2002 2003 2004 2005 2006 MGEE Russell 2000 EEI Index Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) $181 $172 $171 $100 2001 2002 2003 2004 2005 2006 MGEE Russell 2000 EEI Index MGEE Assets ($ millions) $917 $982 $829 $0.53 1975 2006 MGEE Assets ($ millions) $917 $982 $829 $726 $650 Earnings Per Share $1.69 $1.71 $1.77 $1.57 $2.06 $726 $650 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Initial Investment Dividend Appreciation Price Appreciation Projected Economic Growth 2005 – 2010 33.5% 32.7% 28.9% 8% 6.5% 4.8% Jobs Total Personal Income Wisconsin U.S. Madison Thriving local economy We developed Energy 2015 to reliably power our exceptional local economy, which has strong potential for continued growth. Madison is a thriving economic center with good jobs and a great quality of life. Two strong indicators of this economic health are employment and total personal income. The Wisconsin Department of Revenue projects 8% job growth and a 33.5% increase in personal income from 2005 to 2010 in Madison. Our metro area is home to more than 500 high-tech and biotech companies that contribute more than $5.5 billion to the local economy and provide about 28,000 jobs annually. Wisconsin ranks in the world’s top five regions best positioned to become a hotbed of biotech innovation, according to the industry publication FierceBiotech. 3 2000-2006 Average Winter Gas Costs (cents per therm) $0.71 $0.67 MGE Other State Utilities Meeting energy needs We set Energy 2015 in motion to meet tomorrow‘s energy needs, while still providing excellent customer service today. In one week last summer, our employees were put to the test. First, MGE reliably met power needs as our customers set a new peak for electric use during hot weather. Then, three days later, a major storm knocked out electricity for 27,000 customers across our service area. The storm packed a powerful punch with wind gusts clocked as high as 82 mph. MGE crews faced the largest electric power outage in 15 years. We had service restored for all customers in less than 48 hours. Our skilled and dedicated employees met the challenge. Projected Economic Growth 2005 – 2010 33.5% 32.7% 28.9% 8% 6.5% 4.8% Jobs Total Personal Income Wisconsin U.S. Madison Following a severe summer storm in 2006, MGE crews quickly responded to widespread power outages (represented by the red dots) across our service area. Competitive in markets MGE successfully competes in national energy markets-ensuring affordable prices for customers and competitive returns for shareholders. 2000-2006 Average Winter Gas Costs (cents per therm) $0.71 $0.67 MGE Other State Utilities After riding a roller coaster of prices, the natural gas market leveled off last year. In 2006, MGE used its market experience to purchase natural gas below the benchmark set by state regulators. We saved customers over $4.1 million and achieved a performance-based return of $1.5 million (after tax) for shareholders. MGE provided customers with the lowest cost natural gas on average over the last six winters compared to other Wisconsin utilities. MGE is a member of a regional electric market called the Midwest ISO. It is one of the world’s largest energy markets, overseeing 93,600 miles of interconnected, high-voltage power lines. The Midwest ISO has improved reliability, leveled the playing field for transmission access and made it easier for us to buy and sell electricity to meet customer needs. 4 Environmental responsibility Environmental stewardship is a central piece of our plans. It is critical that we focus on efficiency and clean, renewable energy as we add electric generation. We are expanding our wind power portfolio by nearly four times with an agreement to build and own 30 megawatts (MW) of wind energy. Construction is expected to begin this year on our new $59 million project in north-central Iowa. This latest renewable energy project builds on our commitment to wind power. In 1999, we developed the first large-scale wind farm in Wisconsin. Though carbon dioxide (CO2) emissions are not currently regulated, we recognize that CO2 may face future limits. Energy 2015’s focus on cleaner coal generation, renewable energy and increased conservation can help reduce CO2 rates. From 2005 to 2015, our total system energy demand is estimated to increase, yet our CO2 rates are projected to decrease. Our Energy 2015 Plan helps mitigate CO2 impacts and manages potential risks. We have a deep commitment to ensure a cleaner tomorrow for us all. Facing the future Powering tomorrow with Energy 2015 allows us to achieve our mutual goals of reliable, economic and responsible energy for customers and solid results for our loyal investors. Thank you for your trust in MGE Energy. Gary J. Wolter, Chairman, President and Chief Executive Officer 5 MGE serves the Madison metro area—the seat of state government and home to the University of Wisconsin-Madison. Our residents have exceptional education credentials with 45% completing bachelor’s degrees. Dane County ranks 16th for college graduates out of 3,141 counties nationwide. Renewable energy resources By the end of 2007, we estimate that MGE will supply about 5% of its annual energy demand using renewable resources. A new 30-megawatt wind farm and other wind resources will add to our existing mix of wind, solar and alternate fuel sources. MGE also plans to triple the amount of wind power in its green pricing program to match growing customer demand. Customers who pay a small premium can offset all carbon dioxide emissions from electricity used in their homes. Solar photovoltaic panels capture the sun’s energy at numerous installations throughout our service area. MGE provides customers with simple but powerful suggestions to save energy, such as using set-back thermostats. Cleaner coal generation Investing in new, cleaner coal generation is a smart step toward affordable and more efficient power. We are partners in We Energies’ Oak Creek power plant expansion that is scheduled to deliver 100 megawatts to MGE by 2010. This plant will use advanced environmental control technologies to dramatically reduce air emissions compared to older coal-fired plants. Construction of the Oak Creek power plant expansion on Lake Michigan’s shore is moving forward. MGE Energy will own 8.33% of the new plant. (Photo courtesy of We Energies) 6 poweringa RESPONSIBLEtomorrow Increased energy efficiency We are engaging every customer in energy efficiency efforts with our unique Power Tomorrow program. Through this innova- tive program, we help customers save energy and money while reducing their environmental footprints. Tony Masino (left) and Dave Stafford, both in MGE’s Gas Operations, install a pipe to serve the growing campus of Epic Systems Corp., a medical software company and major MGE customer. Electric improvements Significant growth in electric use is projected for our service area. In 2006, MGE invested about $39 million in new electric infrastructure – such as substations – to meet our communities’ vibrant growth. George Reed (left) and Paul Roltgen, both in MGE’s Electric Division, work at a new substation south of Madison. Natural gas system upgrades MGE strategically improves its natural gas system to match customer growth. Three new significant business devel- opments, begun in 2006, are projected to increase our system’s total gas load by 4%. We upgrade our gas system by adding more pipelines and increasing pressure to reliably and safely serve our customers. 7 Energy 2015MGE Energy will power tomorrow with Energy 2015. We are putting this balanced energy supply plan into action with cleaner coal generation, renewable resources and a strong commitment to energy efficiency. Our innovative plan allows us to both meet growing energy needs and be responsible environmental stewards. Major steps in agriculture Wisconsin’s rich agricultural tradition is becoming increasingly high-tech. To encourage this trend, MGE supports the new Wisconsin Bio-Ag Gateway in Madison. City and business leaders are working to develop this center of bio-ag technology firms. The campus is designed to bring together cutting-edge technologies in agriculture, biotechnology and manu- facturing to produce and commercialize products and services. Sara Sherwin, a research scientist at Danisco USA, monitors dairy cultures. Danisco, a worldwide leader in food ingredients, is constructing a new research facility at the Bio-Ag Gateway campus. The new building will increase Danisco’s research facilities in Madison by two and a half times. Wisconsin Institutes for Discovery A new public-private bioscience research facility will be constructed in Madison. The $150 million Wisconsin Institutes for Discovery (WID) will bring together scientists to attack the problems of disease and expand scientific knowledge. With researchers from the University of Wisconsin-Madison, the country’s fourth largest research institution, WID will help spur additional economic development with pioneering collaborative research. (Rendering courtesy of Flad & Associates/Anderson Illustration Associates) 8 powering tomorrow a VIBRAnT Moving forward as a region Economic development does not end at the city limits. A new regional effort will better position our strong local economy in the global marketplace. A group of forward-looking civic and business leaders formed the Collaboration Council to spotlight our region for a brighter future. now, a new regional economic development organization is accelerating entrepreneurship and growth in our area, while retaining the key industry sectors that drive our economy. The new organization will also work to protect and tout our region’s high quality of life and shared values. Smart growth We are committed to smart growth to make the best use of the land and developments we already have. That’s why we worked with the City of Madison and developers on an exciting renovation of the Hilldale Mall area in Madison. This renewal is adding 70,000 square feet of retail space, new housing, restaurants and the first Sundance Cinema in the country dedicated to independent films. The project more than doubled our gas and electric load in this area while giving a new spark to our city’s west side. Community and county leaders support the vision of growing our region’s economy while preserving our quality of life. MGE’s gas and electric employees worked closely with developers during the Hilldale Mall’s renovation. 9 powering a CLEAn tomorrow new wind energy MGE Energy’s new 30-megawatt wind project will adjoin the existing Top of Iowa Wind Farm in north-central Iowa. Our new $59 million project will provide enough electricity to power about 12,000 homes annually. We expect operation to begin later this year. This is our second major wind project. In 1999, MGE built Wisconsin’s first large-scale wind farm. Reducing greenhouse gases Energy 2015 is a balanced plan to meet our customers’ growing electricity needs. The plan – which further develops cleaner coal generation, wind power and energy efficiency efforts – also can help reduce carbon dioxide (CO2) emissions. From 2005 to 2015, MGE’s CO2 rates are projected to decrease while total system electric demand is estimated to increase. We also continue many voluntary environmental efforts to help reduce greenhouse gases, such as landfill gas generation. MGE is helping to test a new engine designed to economically produce electricity from methane gas at small- to medium-sized landfills. This Stirling engine gets an overhaul at a local landfill. 10 MGE is committed to environmental stewardship. This annual report is printed on recycled paper produced with renewable energy. Cogeneration commitments The West Campus Cogeneration Facility completed its first full year of operation in 2006. Though the natural gas-fired plant is one of the cleanest in the Midwest, we worked closely with the community to take steps beyond current environmental regulations. As pledged, we offset emissions from the cogeneration facility by making modifications at other energy-producing facilities. We surpassed our commitments in offsetting particulate matter, nitrous oxides and sulfur dioxide. Zach Kastern, Operations and Maintenance, is one of the employees who helped the West Campus Cogneration Facility meet the summer power demands. MGE set a new electric peak of 732 megawatts in July 2006. Building on research MGE has long supported pilot projects that demonstrate renewable energy sources. Our customers value new technologies that can improve our environment. Since 2000, we have backed carbon sequestration research, solar installa- tions and landfill gas generation. A recent collaboration supports the world’s first demonstration project that converts plant byproducts into hydrogen to power electric generators. Dave Toso, an MGE engineer, explains solar power to Madison East High School students. MGE installed different types of photovoltaic technology at high schools to study their performance and economics. 11 MGE energy experts and community partners answer customers’ questions at one of our Power Tomorrow energy efficiency work- shops we are holding across our electric service area. Teaching others to save Based on the high value our customers place on conservation, MGE is holding a series of Power Tomorrow workshops. This multiyear energy efficiency program was built into our Energy 2015 Plan. Residential customers appreciate the one-on-one opportunities to ask energy- related questions and get customized information to help shape their energy and environmental footprints. With future generations in mind, we joined with water resource experts to protect our area’s lakes – beautiful gems surrounding our capital city. 12 powering TO MORROW together Partnerships help customers We understand the challenges facing our customers on fixed or low incomes. That’s why we partner with more than twenty community organizations to hold a series of Community Energy Resource Fairs. These fairs offer a convenient way for individuals to get information about budgeting and saving energy. Saving energy and managing budgets offers our customers a more secure future. Huong Coleman, an MGE customer advisor, works with representatives from community groups. Watershed protection MGE made an unprecedented effort to mitigate potential impacts to our area’s watershed when planning the 150-megawatt West Campus Cogeneration Facility in 2002. For the first time in Dane County, water resource experts came together to draw up a comprehensive water plan to accommodate a new project. Though the plant’s water withdrawal is negligible on area lakes, we worked together to ensure our community’s watershed was protected for today and tomorrow. Creating better programs We are working with consumer groups to research how to reduce electric load when demand is high. Reducing this peak demand can help offset the need for future power plants. MGE surveyed customers who participate in its Power Control program, which allows us to turn off home air conditioners. On some of the hottest summer days, we turned off their air-conditioning for several hours. We looked at their comfort and willing- ness to participate in future programs. By understanding customers’ needs, MGE can design future programs to better serve our customers while saving energy and managing costs. Jonathan Beers (right), an MGE residential services manager, meets with Diana Bott who participates in MGE’s Power Control program. 13 Consolidated Statements of Income For the years ended December 31 (in thousands, except per-share amounts) Operating Revenues 2006 2005 2004 Regulated revenues ........................................................................................ $ 504,138 $ 511,517 $ 422,149 Nonregulated revenues .................................................................................. 3,408 1,853 2,732 Total Operating Revenues ........................................................................... 507,546 513,370 424,881 Operating Expenses Fuel for electric generation ............................................................................. 49,227 65,016 43,033 Purchased power ............................................................................................ 77,164 81,676 51,984 Natural gas purchased ................................................................................... 129,331 146,110 114,646 Other operations and maintenance .............................................................. 126,086 117,552 115,633 Depreciation and amortization ...................................................................... 31,342 29,275 24,917 Other general taxes ........................................................................................ 15,402 13,269 12,715 Total Operating Expenses ............................................................................ 428,552 452,898 362,928 Operating Income ............................................................................................... 78,994 60,472 61,953 Other income, net ............................................................................................ 4,329 4,938 3,927 Interest expense .............................................................................................. (15,001 ) (13,448 ) (11,384 ) Income before income taxes ...................................................................... 68,322 51,962 54,496 Income tax provision ....................................................................................... (25,899 ) (19,871 ) (20,656 ) Net Income ........................................................................................................... $ 42,423 $ 32,091 $ 33,840 Earnings Per Share of Common Stock (basic and diluted) ............................. Dividends Paid Per Share of Common Stock ................................................... $ $ 2.06 1.39 $ $ 1.57 1.37 $ $ 1.77 1.36 Average Shares Outstanding (basic and diluted) ............................................ 20,564 20,436 19,119 14 Powering Tomorrow For detailed financial information, see the 2006 MGE Energy Form 10-K. Consolidated Statements of Cash Flows For the years ended December 31 (in thousands) 2006 2005 2004 Operating Activities Net income ....................................................................................................... Items not affecting cash: Depreciation and amortization .................................................................. Deferred income taxes ................................................................................ Amortization of investment tax credits ...................................................... Equity earnings in ATC* ................................................................................ Employee benefit plan expenses ............................................................... Provision for doubtful accounts receivable ............................................... Amortization of debt issuance costs and discount .................................. Other items ................................................................................................... Reserve for fuel refund ................................................................................ Gain on the sale of property ....................................................................... Changes in working capital items: Decrease (increase) in current assets .................................................... (Decrease) increase in current liabilities ................................................ Dividend income from ATC* ............................................................................ Cash contributions to pension and other post-retirement plans ................ Other noncurrent items, net ........................................................................... Cash Provided by Operating Activities ...................................................... Investing Activities Capital expenditures ....................................................................................... Capital contributions in ATC* and other investments .................................. Repayment (advance) from/to ATC* related to WCCF** ................................ Proceeds from sale of property ...................................................................... Advance to Wisconsin Electric Power Co. for ATC* work ................................. Other ................................................................................................................. Cash Used for Investing Activities .............................................................. $ 42,423 $ 32,091 $ 33,840 31,342 5,241 (432 ) (5,317 ) 10,178 3,230 595 99 2,312 — 13,042 (4,299 ) 4,003 (5,779 ) 4,401 101,039 (92,575 ) (1,974 ) — — (808 ) 916 (94,441 ) 29,275 10,900 (460 ) (4,871 ) 9,665 2,080 493 695 — — (32,323 ) 8,515 3,550 (5,536 ) (697 ) 53,377 (85,771 ) (1,686 ) 12,964 — (1,599 ) 359 (75,733 ) 24,917 8,832 (502 ) (4,236 ) 9,068 2,080 516 639 — (938 ) (17,856 ) 7,942 3,055 (2,328 ) (2,410 ) 62,619 (95,747 ) (3,650 ) (2,308 ) 1,592 — (469 ) (100,582 ) Financing Activities Issuance of common stock, net ..................................................................... Issuance (purchase) of treasury stock ............................................................ Cash dividends paid on common stock ........................................................ Repayment of long-term debt ........................................................................ Issuance of long-term debt ............................................................................. (Decrease) increase in short-term debt ......................................................... Other ................................................................................................................. Cash (Used for) Provided by Financing Activities ...................................... 17,050 119 (28,513 ) — 30,000 (25,500 ) (82 ) (6,926 ) 2,259 (119 ) (28,054 ) — 20,000 29,225 (1,128 ) 22,183 63,154 — (25,943 ) (20,000 ) — 21,595 698 39,504 Change in Cash and Cash Equivalents ............................................................ Cash and cash equivalents at beginning of period .................................... Cash and cash equivalents at end of period ............................................... $ (328 ) 3,331 3,003 (173 ) 3,504 3,331 $ 1,541 1,963 3,504 $ * American Transmission Co. ** West Campus Cogeneration Facility For detailed financial information, see the 2006 MGE Energy Form 10-K. Powering Tomorrow 15 Consolidated Balance Sheets 2006 2005 At December 31 (in thousands) Assets Current Assets Cash and cash equivalents ...................................................................................................... Restricted cash ........................................................................................................................... Accounts receivable, less reserves of $3,489 and $2,734, respectively ............................. Other accounts receivable, less reserves of $107 and $93, 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 ............................................................................................................................. Regulatory assets – current ...................................................................................................... Other current assets .................................................................................................................. Total Current Assets ............................................................................................................... Other long-term receivables ........................................................................................................ Special billing projects .................................................................................................................. Regulatory assets .......................................................................................................................... Other deferred charges ................................................................................................................ $ 3,003 4,243 33,397 4,508 26,038 15,052 6,010 31,465 13,748 4,270 7,679 149,413 4,631 1,861 50,841 5,874 Property, Plant and Equipment, Net ............................................................................................ Construction work in progress ................................................................................................. Total Property, Plant, and Equipment ................................................................................... Other Property and Investments ................................................................................................. Total Assets ............................................................................................................................. 632,474 95,949 728,423 41,189 $ 982,232 Liabilities and Capitalization Current Liabilities Long-term debt due within one year ....................................................................................... Short-term debt .......................................................................................................................... Accounts payable ...................................................................................................................... Accrued interest and taxes ....................................................................................................... Deferred income taxes .............................................................................................................. Regulatory liabilities – current ................................................................................................... Pension liabilities – current ....................................................................................................... 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 ............................................................................................... 15,000 57,000 45,063 3,430 3,917 2,943 614 15,894 143,861 101,700 3,497 24,207 76,050 20,285 225,739 375,348 237,284 612,632 — $ 982,232 $ 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 16 Powering Tomorrow For detailed financial information, see the 2006 MGE Energy Form 10-K. Consolidated Statements of Capitalization At December 31 (in thousands) Common Shareholders’ Equity Common stock – par value $1 per share: Authorized 50,000,000 shares 2006 2005 Issued 20,975,392 and 20,454,496 shares, respectively ...................................................... Common stock held in treasury, at cost (3,384 shares in 2005) .......................................... Additional paid-in capital ......................................................................................................... Retained earnings ..................................................................................................................... Accumulated other comprehensive income, net of tax ........................................................ Total Common Shareholders’ Equity ..................................................................................... $ 20,975 — 248,406 105,386 581 375,348 $ 20,454 (119 ) 231,877 91,476 195 343,883 Redeemable Preferred Stock Cumulative, $25 par value, 1,175,000 authorized but unissued .......................................... — — 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 ........................................................................................................................ 5.25%, due 2017 ........................................................................................................................ 7.12%, due 2032 ........................................................................................................................ 6.12%, due 2028 ........................................................................................................................ 5.68%, due 2033 ....................................................................................................................... 5.19%, due 2033 ........................................................................................................................ Total Other Long-Term Debt .................................................................................................. 15,000 30,000 19,300 28,000 15,000 20,000 30,000 25,000 20,000 30,000 20,000 252,300 15,000 30,000 19,300 28,000 15,000 20,000 — 25,000 20,000 30,000 20,000 222,300 Long-term debt due within one year ....................................................................................... Unamortized discount ............................................................................................................... (15,000 ) (1,216 ) — (1,188 ) Total Long-Term Debt ............................................................................................................. 237,284 222,312 Total Capitalization ................................................................................................................ $ 612,632 $ 566,195 Cumulative Five–Year Total Return Comparison Assumes $100 invested on Dec. 31, 2001, in each of the Company's Common Stock, Russell 2000 and the EEI Index. Dividends Declared Per Share (rounded) $1.39 $0.53 1975 2006 Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) $181 $172 $171 $100 2001 2002 2003 2004 2005 2006 MGEE Russell 2000 EEI Index MGEE Russell 2000 EEI Index 2001 $ 100 2002 2003 2004 2005 2006 $ 106 $ 131 $ 156 $ 153 $ 172 $ 100 $ 80 $ 117 $ 139 $ 145 $ 171 $ 100 $ 85 $ 105 $ 129 $ 150 $ 181 For detailed financial information, see the 2006 MGE Energy Form 10-K. Powering Tomorrow 17 MGEE Five-Year Investment Growth Earnings Per Share MGEE Assets ($ millions) $917 $982 $829 $1.69 $1.71 $1.77 $1.57 $2.06 $726 $650 $172 $38 $34 $100 2001 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Initial Investment Dividend Appreciation Price Appreciation Corporate Leadership Directors of MGE Energy and MGE Richard E. Blaney Retired President Richard Blaney Seeds Inc. Age 70 Director since 1974 F. Curtis Hastings Chairman J. H. Findorff & Son, Inc. Commercial and industrial general contractors Age 61 Director since 1999 Regina M. Millner President RMM Enterprises Inc. Attorney, analyst and broker Age 62 Director since 1996 Frederic E. Mohs Partner Mohs, MacDonald, Widder & Paradise, Attorneys at Law Age 69 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 63 Director since 1998 Donna K. Sollenberger President and Chief Executive Officer University of Wisconsin Hospital and Clinics Age 57 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 68 Director since 1988 Gary J. Wolter Chairman, President and Chief Executive Officer MGE Energy, Inc., and Madison Gas and Electric Co. Age 52 Director since 2000 Audit Committee Directors Blaney, Hastings, Millner, Mohs, Nevin, Sollenberger and Swanson.* Executive Committee Directors Blaney, Mohs, Swanson and Wolter. * Committee Chair Note: Ages as of Dec. 31, 2006. 18 Powering Tomorrow Compensation Committee Directors Blaney, Mohs* and Swanson. Governance Committee Directors Blaney, Hastings, Millner, Mohs,* Nevin, Sollenberger and Swanson. Corporate Leadership Officers of MGE Energy and MGE Gary J. Wolter* Chairman, President and Chief Executive Officer Age 52 Years of Service, 22 Terry A. Hanson* Vice President, Chief Financial Officer and Secretary Age 55 Years of Service, 25 Jeffrey C. Newman* Vice President and Treasurer Age 44 Years of Service, 22 Lynn K. Hobbie Senior Vice President Age 48 Years of Service, 21 James G. Bidlingmaier Vice President – Administration and Chief Information Officer Age 60 Years of Service, 34 Kristine A. Euclide Vice President and General Counsel Age 54 Years of Service, 5 Scott A. Neitzel Vice President – Energy Supply Age 46 Years of Service, 9 Peter J. Waldron Vice President and Operations Officer Age 49 Years of Service, 26 Gregory A. Bollom Assistant Vice President – Energy Planning Age 46 Years of Service, 24 Craig A. Fenrick Assistant Vice President – Electric Transmission and Distribution Age 47 Years of Service, 24 Joseph P. Pellitteri Assistant Vice President – Human Resources Age 58 Years of Service, 7 John M. Yogerst Assistant Vice President – Gas Operations Age 49 Years of Service, 26 * Officers of MGE Energy and MGE. All others are MGE officers. Note: Ages and years of service as of Dec. 31, 2006. Powering Tomorrow 19 Shareholder Information 2007 Annual Shareholder Meeting Tuesday, May 22, 2007 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 Powering Tomorrow 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. 2007 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. E-mail: Web Address: Madison Area: Continental U.S.: Business Hours: investor@mgeenergy.com www.mgeenergy.com (608) 252-4744 1-800-356-6423 8:00 a.m. to 4:30 p.m. (Central Time) Monday through Friday MGE Energy Shareholder Services Post Office Box 1231 Madison, WI 53701-1231 133 S. Blair St. Madison, WI 53703 Mailing Address: Location: Online Account Access Registered shareholders can now access their account information online. Visit MGE Energy's Web site to log on through the secure My Shareholder Account link. A letter mailed to shareholders includes detailed informa- tion and a security code to help you set up private access to your account. Go to the home page at mgeenergy.com and click the My Shareholder Account button. 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 Corporate Profile Wisconsin MGE Combustion Turbine MGE Wind Farm Elroy Viroqua Columbia Plant Prairie du Chien Madison MGE Gas/Electric Service MGE Gas Service 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. Top of Iowa Wind Farm Iowa Des Moines MGE Electric Services Generation and Distribution Customers: 135,000 Population: 288,000 Area: 315 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, MGE Wind Farm in Kewaunee County and the Top of Iowa Wind Farm in north-central Iowa, scheduled for completion in 2007. MGE Natural Gas Services Purchase and Distribution Customers: 138,000 Population: 401,000 Area: 1,625 square miles Counties served: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and Vernon. Learn more at www.mgeenergy.com 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 Powering Tomorrow 21 P.O. Box 1231 Madison, WI 53701-1231 www.mgeenergy.com MGE is committed to environmental stewardship. This annual report is printed on recycled paper produced with renewable energy.