MGE Energy Inc.
Annual Report 2007

Plain-text annual report

2007 Summary Annual Report innovation at work innovation at work Table of Contents 1 2 6 8 10 12 14 15 16 17 17 18 20 21 2007 Highlights To Our Shareholders New energy solutions at work Putting our economy to work Environmental commitments that work Community connections at work Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Balance Sheets Consolidated Statements of Capitalization Cumulative Five–Year Total Return Comparison Corporate Leadership Shareholder Information 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 natural gas and electric service in south-central and western Wisconsin. Assets total $1.1 billion. In 2007, revenue was more than $537 million. See the Corporate Profile on page 21. About the Cover We put innovation to work when we constructed our first wind farm—built in 1999 in Kewaunee County, Wis. At the time, it was the largest wind project east of the Mississippi. Nathanial and Olivia Theys are now growing up everyday with this wind technology in their backyard. As the next generation of energy consumers, they will benefit from a cleaner environment and a responsible energy future. Building on this vision and initiative, MGE Energy recently completed its second major wind farm in Iowa. Our $58 million, 30-megawatt wind farm began operation in early 2008. As you read this report, you’ll learn how we constantly build on our experience and knowledge to manage our company. We put innovation to work for our customers and loyal investors. Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% 2007 Highlights Projected CO2 Emission Rate (lbs. per kilowatt-hour) 2.01 1.80 MGE Energy (MGEE) Wisconsin U.S. Source: U.S. Bureau of Economic Analysis Madison Year at a Glance (Thousands, except per-share amounts) 2005 2015 2007 2006 Increase/ (Decrease) % Change Wind Energy Capacity (megawatts) Projected CO2 Emission Rate (lbs. per kilowatt-hour) 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) 2005 2015 2007 1.80 2.01 11 87 2008 $ 537,594 48,825 $ 2.27 $ 1.41 $ 62.1 % 21,520 21,950 12.1 % 19.88 $ 35.47 $ $ 778,567 $ 1,111,587 3,431,509 215,193 Dividends Paid Per Share (rounded) MGEE Assets ($ billions) $1.41 $1.112 $.982 $.917 $.829 $.726 $0.60 $.982 2006 5.9 MGEE Assets 15.1 ($ billions) 10.2 $.917 1.4 (8.0) 4.6 4.6 1.0 8.9 (3.0) 2005 1.5 13.2 2.5 6.0 $1.112 2007 $.726 $ $ $ $ 507,546 $ 30,048 6,402 42,423 $ 0.21 2.06 $ 0.02 1.39 $ $.829 (5.4 ) 67.5 % 956 20,564 975 20,975 0.12 12.0 % 1.63 18.25 $ $ (1.11 ) 36.58 $ $ $ 767,266 $ 11,301 $ 982,232 $ 129,355 83,808 3,347,701 12,199 202,994 2003 2004 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 2003 2004 2005 2006 1977 2007 2007 2003 2004 2005 2006 2007 For detailed financial information, see the 2007 MGE Energy Form 10-K. 1 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 1977 2007 2003 2004 2005 2006 2007 Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% Wisconsin U.S. Madison Source: U.S. Bureau of Economic Analysis Wind Energy Capacity (megawatts) 87 11 2007 2008 Dividends Paid Per Share (rounded) $1.41 $0.60 to our shareholders built on innovation Gary J. Wolter, MGE Energy Chairman, President and Chief Executive Officer, with the city of Madison, Wisconsin’s state capital, in the background. 2 F or generations, we have put innovation to work at MGE Energy. It is embedded in our culture. For us, innovation is not just a new product or technology. Instead, innovation is fundamental to how we conduct and build our business. It is an integral part of our process. At MGE Energy, we encourage our employees to gener- ate ideas and take initiative—to imagine how things can be better. Because of our innovative approach, MGE Energy stands out year after year as an industry leader—in financial performance, in serving customers and in environmental stewardship. We create the solutions that address the challenges we face. Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% Projected CO2 Emission Rate (lbs. per kilowatt-hour) 2.01 1.80 Wisconsin U.S. Madison Source: U.S. Bureau of Economic Analysis 2005 2015 MGEE Assets ($ billions) $.982 $1.112 $.917 $.829 $.726 2003 2004 2005 2006 2007 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 2003 2004 2005 2006 2007 Projected CO2 Emission Rate (lbs. per kilowatt-hour) 2.01 1.80 2005 2015 MGEE Assets ($ billions) $.982 $1.112 $.917 $.829 $.726 2003 2004 2005 2006 2007 3 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 Wind Energy Capacity (megawatts) 87 11 2007 2008 Dividends Paid Per Share (rounded) $1.41 $0.60 1977 2007 Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% Top Credit Quality (MGE) S&P Corporate Credit: AA- Outlook: Stable Wisconsin Madison U.S. Source: U.S. Bureau of Economic Analysis Moody’s Secured: Aa2 Outlook: Stable Wind Energy Capacity (megawatts) 87 11 2007 2008 Dividends Paid Per Share (rounded) $1.41 $0.60 1977 2007 2003 2004 2005 2006 2007 Financial performance Innovation turns creativity into success. Innovation drives business growth, increases the bottom line and produces results for our shareholders. MGE Energy reached a milestone when its assets topped $1 billion in 2007. In the last five years, assets have grown from $726 million to $1.1 billion. This steady growth in assets helped produce record earnings of $2.27 per share in 2007. Sales growth in electric deliveries to the residential and commercial sectors also contributed to these earnings. Your company has produced record earnings for four of the last five years. In 2007, your Board of Directors raised the regular quarterly dividend to $0.355 per share on the company’s common stock. The amount of the dividend increase was double 2006’s change and the largest increase in 15 years. Cash dividends paid in 2007 totaled $1.41 per share. MGE Energy is one of only 95 U.S. companies and one of six electric utilities to raise dividends annually for 30 or more consecutive years. Independent rating agencies have taken note of our performance. Madison Gas and Electric Co. (MGE), our main subsidiary, maintained the highest bond rating (AA-) of all investor-owned, combination utilities in the nation from Standard & Poor’s. Likewise, Moody’s Investor Service gives MGE the high mark of Aa2 for its sound business strategy and supportive regulatory environment. MGE Energy’s financial performance earned one of Value Line’s top ratings for financial strength and its highest ranking for a safe investment. Energy future Technology is shaping the future of our industry. We are investing in new projects that provide reliable energy and environmental stewardship. I am proud that we recently commissioned a new 30-megawatt, MGE Energy wind farm. In the last year, our wind energy capacity increased from 11 to 87 megawatts with the new project and two other wind farms from which we purchase energy. to our shareholders This increase in renewable energy has allowed us to significantly expand our green pricing program and lower the cost of our green pricing for customers. Our Green Power Tomorrow program provides a clean mix of solar and wind power. While these renewable energy projects are moving forward, we also are developing new baseload energy. MGE Energy is investing in a cleaner coal power plant expansion on Lake Michigan. This state-of-the-art generation facility will supply affordable, reliable energy with far lower emission rates than standard coal-fired plants. Commitments to the environment As we modernize our fleet of electric generation, we recognize our responsibility to protect the environment. MGE developed a 10-year electric supply plan—called Energy 2015—that is anticipated to produce significantly lower emission rates. We expect the combination of more green energy, switching to new coal generation, greater customer conservation and new technologies to drive down emission rates for carbon dioxide, sulfur dioxide, nitrogen oxide, particulates and mercury. Part of the way we pursue environmental innovation is to invest in demonstration projects. For ex- ample, we have more than a dozen solar photovoltaic demonstrations in our service area. We learn which specific solar technologies are most effective in our climate and best serve our customers. Prospering economy Innovation goes hand-in-hand with the rapidly growing, knowledge-based economy in our service area. Madison is in the center of the Midwest’s I-Q Corridor. In fact, bizjournals.com lists Madison as the fourth “brainiest” medium-sized city in the nation. For years, our company has been in step with the area’s emerging economies—first the high-tech fields and more recently the biotech industry. Life sciences is a $5 billion industry in Wisconsin, and it’s centered in Madison. With $125 million earmarked for a new federal bioenergy research center here, we expect the biofuels sector to be the next significant frontier. Our service territory is not just a high-tech powerhouse. The greater Madison area also is a wonderful place to live. Middleton, a flourishing suburb, was named No. 1 of the 100 “Best Places to Live” nationally by Money magazine. It’s no wonder our area is growing. From 2000 to 2030, Dane County’s population is estimated to grow 36%—adding more than 150,000 new residents. Projects to meet growing demand This vibrant growth requires infrastructure to meet increasing energy demands. In addition to investing in new generation, we also continually improve the systems that deliver energy. Just southwest of Madison, Fitchburg and Verona are rapidly expanding. In 2007, MGE installed new natural gas lines and other facilities to boost gas capacity for this area. Minneapolis ★ Madison ★ Milwaukee ★ Chicago ★ The Midwest’s I-Q Corridor is a region packed with ideas and a knowledge-based economy— especially in biotech, biofuels and technology development. 4 Left photo: Tim Caruso (left) and Tony Masino help oversee an MGE natural gas expansion project. Right photo: Ken Alderson (left) and Scott Lindloff check control panels in MGE’s East Campus Substation. MGE made significant upgrades to the electric system serving parts of downtown Madison and the University of Wisconsin-Madison campus. To power this fast-growing area, the capacity of the East Campus Substation was increased by 50%. Three new building developments—with a total of $380 million in construction—are significantly increasing electric load within blocks of the substation. Employee innovation We encourage our employees to make business improvements through innovation. Our employees were resourceful in creating a flexible database to manage compliance with new federal electric reliability standards. These standards are designed to protect the country’s electric system. Other utilities have turned to MGE for advice on creating their own databases. Another group of creative employees faced a daunting task last summer. Raging floodwaters submerged parts of western Wisconsin where MGE provides natural gas service. Worst hit was the village of Gays Mills. Drawing on their ingenuity, our employees used the assistance of a swift- water rescue team to safely turn off submerged gas valves. Later, employees isolated the areas with the worst flooding to keep other customers in service. Director changes Londa J. Dewey, president of The QTI Group, was elected to the Board of Directors effective Feb. 1, 2008. Donna K. Sollenberger resigned from the board in 2007 after seven years of dedicated service. We wish her well in her new job in Houston. Built on innovation You can count on us to combine innovation and initiative with our sound business principles. We are committed to excellent customer service and outstanding shareholder returns. Thank you for your confidence in MGE Energy. Gary J. Wolter Chairman, President and Chief Executive Officer 5 We use new electric generation technologies to create a cleaner energy future. innovation new energy solutions at work Our experience with wind energy illustrates that innovation is core to how we conduct our business. In the early 1980s, we began monitoring potential wind sites. By 1984, MGE had three of its own pilot wind projects. In 1999, MGE took a bold step and constructed the largest wind farm east of the Mississippi. This wind farm remains an integral part of our growing renew- able energy mix. In the last year, we grew our wind power capacity by nearly eight times— from 11 to 87 megawatts. We are harvesting clean wind energy from a new $58 million MGE wind farm and purchasing energy from two other installations. Innovating with technology is one key to meeting tomorrow’s energy needs. 6 At MGE Energy’s new wind farm, a crane hoists the blades to the top of a 260-foot-tall tower. Modernizing generation assets. MGE’s Energy 2015 plan is a comprehensive 10-year electric generation strategy. We are retiring old, less efficient coal generation while investing in a cleaner coal power plant with state-of-the-art emission controls. Our renewable wind resources have increased nearly eight times. In 2005, MGE commissioned a natural gas-fired cogeneration facility, one of the cleanest and most efficient power plants in the Midwest. MGE works to provide the best balance of cost and efficiency to deliver reliable energy with the least environmental impacts. MGE Energy is a partner in We Energies’ Oak Creek power plant expansion. This cleaner coal facility is under construction and set to come online beginning in 2009. Improving reliability. We look for win-win situations that can benefit local businesses while improving electric reliability for all customers. In 1998, MGE launched a new program—the Backup Generation Service. Since then, the program’s success has been firmly established. Customers in the program pay a charge for the assurance of backup generation. If power to the customer’s facility is interrupted, the generator automatically starts. The program’s 55 generators also provide an additional 45 megawatts of generating capacity for MGE to use during peak electric use periods. Bob Connor (right), an MGE account manager, and Kevin Snitchler, a Dean Health System administrator, check the large generator behind them. The Dean West Clinic and Urgent Care uses backup generation service. Demonstrating technologies. For years, MGE has invested in pilot technology projects to better understand highly efficient and renewable energy systems. The geothermal heat pump, an evolving technology, is an example. MGE recently installed geothermal heat pumps to handle the heating and air-conditioning needs at Madison’s new Lussier Community Center. The unit extracts the earth’s heat and uses it to help warm the building in the winter and cool it in the summer. We expect an overall energy savings of 30%. MGE gains expertise from technology projects that we then share with customers. A geothermal heat pump uses a series of looped pipes to capture the earth’s temperature. Fluid circulates through the pipes and transfers the energy to pumps that amplify the heating or cooling. 7 MGE Energy helps seed future economic growth. We support the discoveries that spur our local high-tech, biotech economy. innovation putting our economy to work MGE has long encouraged business incubators. In 1989, the MGE Innovation Center opened with space for 12 tenants at the UW Research Park. The very first tenant was a small biotech start-up called Novagen—now a successful Madison-based company. In total, the Innovation Center has spawned over 70 high-tech and biotech firms. We have provided support for eight business incuba- tors. Madison has more business incubators per capita than most U.S. cities. In fact, Madison is one of 30 “Fast Cities” around the world, according to Fast Company magazine. Fast Cities are places “where the most important ideas and the organizations of tomorrow are centered.” MGE Energy is dedicated to promoting economic success. 8 Anthony Lauer is an associate scientist at Mirus Bio Corp.—a leader in gene therapy and gene silencing. Mirus is graduating from the MGE Innovation Center and expanding into a new facility with 50% more space. Tapping the potential. Bioenergy research is gaining a strong foothold in Madison with the new Great Lakes Bioenergy Research Center. The University of Wisconsin-Madison earned a $125 million federal grant to fund the new center, which will research ways to convert plant matter into fuel for automobiles and power plants. MGE is one of the center’s corporate partners and was instrumental in helping UW-Madison secure the grant. The center may become a magnet in Madison for bioenergy companies. Phyllis Wilhelm (left), MGE’s economic development director, and Molly Jahn, dean of the UW’s College of Agriculture and Life Sciences, collaborated to secure the bioenergy grant. 2.01 Projected CO2 Emission Rate (lbs. per kilowatt-hour) Healthy economy. Madison, with its wealth of high-tech and biotech companies, is well positioned to compete in the global economy of the 21st century. One important indicator is the growth of Madison’s gross domestic product (GDP), which is stronger than the state’s or nation’s. The GDP is a key instrument used to measure an economy. And, Madison’s success has not gone unnoticed. In 2007, Madison was named in the nation’s top 10 metro areas for income growth and in the top 15 metro areas for companies actively looking to expand or relocate their facilities. 1.80 Madison’s gross domestic product surpassed the state’s and nation’s from 2001 to 2005. The GDP measures the total market value of goods and services produced. 2005 2015 Locally grown. MGE’s Shared Savings financing program is about to reach the $25 million mark after 15 years of helping grow local businesses. Firms can use a Shared Savings loan to finance energy efficiency improve- ments to their businesses. The companies pay off the financing with savings $.982 in their energy budgets. Businesses save energy and money, while MGE is able to help support the local economy. A recent loan to Eflexgroup.com, an innovator in the flexible spending account industry, helped the company relocate to a new, larger corporate facility. MGEE Assets ($ billions) $1.112 $.726 $.829 $.917 Ric Joyner (left), COO of Eflexgroup.com, worked with Randy Popp, an MGE engineer, to secure a $200,000 loan for high-efficiency heating and cooling equipment. 2003 2004 2005 2006 2007 9 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% Wisconsin U.S. Source: U.S. Bureau of Economic Analysis Madison Wind Energy Capacity (megawatts) 87 11 2007 2008 Dividends Paid Per Share (rounded) $1.41 $0.60 1977 2007 2003 2004 2005 2006 2007 Innovation is key to our efforts to create a healthier environment. innovation environmental commitments that work More than 30 years ago, MGE and the Wisconsin Utilities Association built an experimental solar- powered home. As the technology advanced, so did we. In the mid-1980s, MGE conducted various solar photovoltaic energy research projects. By the early 2000s, solar technology was far more efficient. We launched new demonstration projects including solar installations on all the high schools in our electric service area. We learn about renewable technology options to find ways to offer innovative programs. Now, we are launching a new program to encourage customers to install their own solar units that feed into our electric grid. Renewable energy is growing at MGE Energy. 1010 New solar panels collect energy on the 100-year-old home of MGE customers Jean and Dr. Jonathan Patz, a university professor and a member of a U.N. climate change panel awarded the 2007 Nobel Peace Prize. Gross Domestic Product Growth (2001–2005 current dollars) 27.5% 23% 19.3% Projected CO2 Emission Rate (lbs. per kilowatt-hour) 2.01 1.80 Wisconsin U.S. Madison Source: U.S. Bureau of Economic Analysis 2005 2015 MGEE Assets ($ billions) $.982 $1.112 $.917 $.829 $.726 2003 2004 2005 2006 2007 Earnings Per Share $2.27 $2.06 $1.77 $1.71 $1.57 Wind Energy Capacity (megawatts) 87 11 2007 2008 Dividends Paid Per Share (rounded) $1.41 $0.60 1977 2007 2003 2004 2005 2006 2007 Reducing emissions. We work to protect our environment while providing reliable energy. MGE anticipates its Energy 2015 plan will produce lower emission rates across the board—even though electric use is growing. Energy 2015 is a balanced plan that combines building more renewable energy, retiring older coal facilities, switching to cleaner coal generation and encouraging greater customer conservation. This combination is projected to lower emission rates for carbon dioxide, sulfur dioxide, nitrogen oxide, particulates and mercury by 2015. Even though carbon dioxide (CO2) is not currently regulated, MGE is working to reduce CO2 emissions. We project a decrease in MGE’s CO2 emission rates. For more details, see our Environmental Responsibility Report on mgeenergy.com. Renewable fuels. MGE has supported Virent Energy System’s ground- breaking work to turn plant sugars into fuel for generators and engines. Virent is a local company commercializing technology that can help us move from a fossil-fuel economy to one using renewable fuels. In a demonstra- tion project, Virent’s SuperNatural™ gas prototype system fuels an internal combustion engine that can generate 10 kilowatts of electricity for MGE customers. We recognize how this type of visionary technology is needed to drive a cleaner future. Greg Keenan, vice president of business development at Virent Energy Systems, leads engineering and business development. MGE was an early, local supporter of Virent that has grown significantly since it was founded in 2002. Mercury free. MGE is a leader in installing mercury-free encoders in the meters on customers’ homes and businesses. When MGE decided to install an automated meter reading system, we asked the manufacturer to develop mercury-free encoders—which have now become the industry standard in the United States. We look for opportunities to go beyond compliance in day-to- day operations and pursue clean options. This small encoder allows MGE to read meters remotely. With about 275,000 encoders throughout our service area, it was important to us that the devices be mecury free and environmentally friendly. 1111 We work hard to listen and stay connected. This is how we make a difference in the communities we serve. innovation community connections at work Responding to customer needs is a long-standing commitment. In the 1980s, when the United States faced an energy crisis, MGE stepped up its conser- vation efforts. Our home energy audit program ranked second in the nation in 1983. More recently, open discussions at our town- hall meetings, called Community Energy Conversations, helped us better understand our customers’ preferences for future energy supply. The discussions shaped our Energy 2015 plan. Former MGE Chairman Frederick Mackie (above) explained our position well in 1976: “We do want our customers and stockholders to understand the decisions we must make are for the sake of running our business properly and in response to their needs. This presents a real chal- lenge, but we believe it can be met.” It’s a challenge we still meet today. 12 Mayra Medrano, an MGE customer service representative, meets with MGE green power customers Vickie Hackbarth and Mark Shimasaki. Solar lighting. MGE and the University of Wisconsin-Madison worked closely with the community to plan the West Campus Cogeneration Facility. This natural gas-fired plant provides electricity to MGE customers and heating/ cooling to the campus. MGE and UW-Madison joined with others and made commitments to improve our local environment. Now, we are completing our final commitment with solar lighting along a new campus bike path. This $220,000 photovoltaic technology project draws attention to renewable energy while providing safe lighting at night. The bike path opens in 2008. Bob Stoffs (left), an MGE community services manager, and Rob Kennedy, a UW- Madison transportation supervisor, check a solar panel during bike path construction. Community ties. We continuously create opportunities for stakeholders to engage with us. MGE asked community members to serve on an advisory committee to help shape our Environmental Cooperative Agreement with the Wisconsin Department of Natural Resources. We recently renewed the voluntary five-year agreement that commits us to superior environmental performance at Blount Generating Station. Several Community Environmental Advisory Group members meet at MGE including (left to right) John Shenot, DNR environmental assistance coordinator; Rich Bogovich, a local environmentalist; Michael Ricciardi, MGE’s environmental director; and Judy Olson, former Madison alderperson. Power of working together. When we partner with others, we can reach customers more effectively. For example, we are working with the City of Madison on the city’s Clean Energy Challenge to reduce greenhouse gases. Some of our most rewarding collaborations involve teaching the next generation. MGE reaches thousands of students through classroom programs. Last summer, we took another step with the Boys and Girls Club and sponsored a series of energy education projects. Jesse Shields (right), an MGE marketing representative, helps Anthony Washington cook a hot dog in a solar oven. Children at the Boys and Girls Club of Dane County constructed solar ovens to learn more about clean, renewable energy sources. 13 Consolidated Statements of Income For the years ended December 31 (in thousands, except per-share amounts) Operating Revenues 2007 2006 2005 Regulated revenues ............................................................................................................ $ 532,413 $ 504,138 $ 511,517 Nonregulated revenues ..................................................................................................... 5,181 3,408 1,853 Total Operating Revenues ............................................................................................ 537,594 507,546 513,370 Operating Expenses Fuel for electric generation ............................................................................................. 56,694 49,227 65,016 Purchased power ................................................................................................................ 77,594 77,164 81,676 Natural gas purchased ...................................................................................................... 140,838 129,331 146,110 Other operations and maintenance .............................................................................. 130,831 126,086 117,552 Depreciation and amortization....................................................................................... 32,199 31,342 29,275 Other general taxes ........................................................................................................... 15,771 15,402 13,269 Total Operating Expenses ............................................................................................ 453,927 428,552 452,898 Operating Income .................................................................................................................. 83,667 78,994 60,472 Other income, net .............................................................................................................. 6,069 4,329 4,938 Interest expense .................................................................................................................. ( 13,056 ) (15,001 ) (13,448 ) Income before income taxes ...................................................................................... 76,680 68,322 51,962 Income tax provision ......................................................................................................... (27,855 ) (25,899 ) (19,871 ) Net Income ............................................................................................................................... $ 48,825 $ 42,423 $ 32,091 Earnings Per Share of Common Stock (basic and diluted) ...................................... $ 2.27 Dividends Paid Per Share of Common Stock ............................................................... $ 1.41 $ $ 2.06 1.39 $ $ 1.57 1.37 Average Shares Outstanding (basic and diluted) ........................................................ 21,520 20,564 20,436 14 innovation at work For detailed financial information, see the 2007 MGE Energy Form 10-K. Consolidated Statements of Cash Flows For the years ended December 31 (in thousands) 2007 2006 2005 Operating Activities Net income ........................................................................................................................... $ 48,825 $ 42,423 $ 32,091 Items not affecting cash: Depreciation and amortization .................................................................................. Deferred income taxes .................................................................................................. Amortization of investment tax credits .................................................................. AFUDC – equity funds .................................................................................................. Equity earnings in ATC* ................................................................................................ Employee benefit plan expenses ............................................................................... Provision for doubtful accounts receivable ............................................................ Amortization of debt issuance costs and discount .............................................. Reserve for fuel refund ................................................................................................. Gain on sale of investments ....................................................................................... Other items ...................................................................................................................... 32,199 750 (410 ) (1,927 ) (6,047 ) 8,101 3,080 543 — (778 ) 1,950 31,342 5,241 (432 ) (554 ) (5,317 ) 10,178 3,230 595 2,312 — 653 Changes in working capital items: (Increase) decrease in current assets ................................................................... Increase (decrease) in current liabilities ............................................................. Proceeds from Congestion Cost and Line Loss Allocation Agreement ............... Dividend income from ATC* ............................................................................................. Cash contributions to pension and other postretirement plans ............................ Other noncurrent items, net ........................................................................................... Cash Provided by Operating Activities..................................................................... (12,312 ) 3,818 2,545 4,441 (6,346 ) (1,846 ) 76,586 13,042 (4,299 ) — 4,003 (5,779 ) 4,401 101,039 Investing Activities Capital expenditures .......................................................................................................... Capital contributions to ATC* and other investments ............................................. Repayment from ATC* related to WCCF** ..................................................................... Proceeds from sale of property to ATC* ....................................................................... Advance to Wisconsin Electric Power Co. for ATC* work related to Elm Road ....... Other ...................................................................................................................................... Cash Used for Investing Activities ............................................................................ (136,258 ) (255 ) — 724 (138 ) 1,136 (134,791 ) 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 ............................................................................................. Increase (decrease) in short-term debt ....................................................................... Other ...................................................................................................................................... Cash Provided by/(Used for) Financing Activities ................................................. 32,786 — (30,295 ) (15,000 ) 25,000 46,500 — 58,991 (92,575 ) (1,974 ) — — (808 ) 916 (94,441 ) 17,050 119 (28,513 ) — 30,000 (25,500 ) (82 ) (6,926 ) 29,275 10,900 (460 ) (414 ) (4,871 ) 9,665 2,080 493 — — 1,109 (32,323 ) 8,515 — 3,550 (5,536 ) (697 ) 53,377 (85,771 ) (1,686 ) 12,964 — (1,599 ) 359 (75,733 ) 2,259 (119 ) (28,054 ) — 20,000 29,225 (1,128 ) 22,183 Change in Cash and Cash Equivalents ........................................................................... Cash and cash equivalents at beginning of period .................................................. Cash and cash equivalents at end of period .............................................................. $ 786 3,003 3,789 (328 ) 3,331 3,003 $ (173 ) 3,504 3,331 $ * American Transmission Co. ** West Campus Cogeneration Facility For detailed financial information, see the 2007 MGE Energy Form 10-K. innovation at work 15 Consolidated Balance Sheets 2007 2006 At December 31 (in thousands) Assets Current Assets Cash and cash equivalents ............................................................................................................................ $ Restricted cash .................................................................................................................................................. Accounts receivable, less reserves of $3,709 and $3,489, respectively ........................................... Other accounts receivable, less reserves of $114 and $107, 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 ....................................................................................................................................... 3,789 2,896 43,668 3,397 30,370 14,809 5,136 28,483 14,696 189 8,242 155,675 6,166 999 53,375 5,881 638,774 Property, Plant and Equipment, Net ............................................................................................................. 205,214 Construction work in progress ..................................................................................................................... 843,988 Total Property, Plant, and Equipment ..................................................................................................... Other Property and Investments .................................................................................................................... 45,503 Total Assets ................................................................................................................................................... $ 1,111,587 Liabilities and Capitalization Current Liabilities Long-term debt due within one year ......................................................................................................... $ 30,000 103,500 Short-term debt ................................................................................................................................................ 58,498 Accounts payable .............................................................................................................................................. 3,964 Accrued interest and taxes ............................................................................................................................ 4,153 Deferred income taxes ..................................................................................................................................... 2,924 Regulatory liabilities – current ..................................................................................................................... 607 Pension liability – current .............................................................................................................................. 16,466 Other current liabilities .................................................................................................................................. 220,112 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....................................................................................................................................... 107,393 3,087 20,885 74,056 25,982 231,403 Capitalization Common shareholders’ equity ........................................................................................................................... Long-term debt ..................................................................................................................................................... Total Capitalization ..................................................................................................................................... Commitments and Contingencies .................................................................................................................... 427,726 232,346 660,072 — Total Liabilities and Capitalization ....................................................................................................... $ 1,111,587 $ 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 5,874 632,474 95,949 728,423 41,189 $ 982,232 $ 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 16 innovation at work For detailed financial information, see the 2007 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 2007 2006 Issued 21,950,335 and 20,975,392 shares, respectively ....................................................................... $ 21,950 280,217 123,916 1,643 427,726 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 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 .............................................................................................................................................. 6.247%, due 2037 ............................................................................................................................................ Total Other Long-Term Debt ..................................................................................................................... — 30,000 19,300 28,000 15,000 20,000 30,000 25,000 20,000 30,000 20,000 25,000 262,300 15,000 30,000 19,300 28,000 15,000 20,000 30,000 25,000 20,000 30,000 20,000 — 252,300 Long-term debt due within one year ......................................................................................................... Unamortized discount ..................................................................................................................................... (30,000 ) (1,154 ) (15,000 ) (1,216 ) Total Long-Term Debt ................................................................................................................................. 232,346 237,284 Total Capitalization .................................................................................................................................... $ 660,072 $ 612,632 Cumulative Five–Year Total Return Comparison Assumes $100 invested on Dec. 31, 2002, in each of the Company's Common Stock, Russell 2000 and the EEI Index. Cumulative Five-Year Total Return Comparison (assumes dividends reinvested) MGEE Russell 2000 EEI Index $400 $100 $0 2002 2003 2004 2005 2006 2007 MGEE Russell 2000 EEI Index 2002 $ 100 2003 2004 2005 2006 2007 $ 123 $ $ 147 $ 144 $ 161 $ 163 $ 100 147 $ 174 $ 182 $ 216 $ 212 $ 100 $ 123 $ 152 $ 176 $ 213 $ 248 For detailed financial information, see the 2007 MGE Energy Form 10-K. innovation at work 17 Corporate Leadership Frederic E. Mohs Partner Mohs, MacDonald, Widder & Paradise, Attorneys at Law Age 70 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 64 Director since 1998 H. Lee Swanson Chairman of the Board and President, SBCP Bancorp, Inc., and Chairman of the Board, State Bank of Cross Plains Age 69 Director since 1988 Gary J. Wolter Chairman, President and Chief Executive Officer MGE Energy, Inc., and Madison Gas and Electric Co. Age 53 Director since 2000 Directors of MGE Energy and MGE Richard E. Blaney Retired President Richard Blaney Seeds Inc. Age 71 Director since 1974 Londa J. Dewey President The QTI Group, Inc. A human resources and staffing company Age 47 Director since 2008 F. Curtis Hastings Chairman J. H. Findorff & Son, Inc. Commercial and industrial general contractors Age 62 Director since 1999 Regina M. Millner President RMM Enterprises Inc. Attorney, analyst and broker Age 63 Director since 1996 Note: Ages as of Dec. 31, 2007. For detailed information on board members, see the MGE Energy Proxy Statement. 18 innovation at work Officers of MGE Energy and MGE Gary J. Wolter* Chairman, President and Chief Executive Officer Age 53 Years of Service, 23 Terry A. Hanson* Vice President, Chief Financial Officer and Secretary Age 56 Years of Service, 26 Jeffrey C. Newman* Vice President and Treasurer Age 45 Years of Service, 23 Lynn K. Hobbie Senior Vice President Age 49 Years of Service, 22 James G. Bidlingmaier Vice President – Administration and Chief Information Officer Age 61 Years of Service, 35 Kristine A. Euclide Vice President and General Counsel Age 55 Years of Service, 6 Scott A. Neitzel Vice President – Energy Supply Age 47 Years of Service, 10 Peter J. Waldron Vice President and Operations Officer Age 50 Years of Service, 27 Gregory A. Bollom Assistant Vice President – Energy Planning Age 47 Years of Service, 25 Craig A. Fenrick Assistant Vice President – Electric Transmission and Distribution Age 48 Years of Service, 25 Joseph P. Pellitteri Assistant Vice President – Human Resources Age 59 Years of Service, 8 John M. Yogerst Assistant Vice President – Gas Operations Age 50 Years of Service, 27 * Officers of MGE Energy and MGE. All others are MGE officers. Note: Ages and years of service as of Dec. 31, 2007. innovation at work 19 Shareholder Information 2008 Annual Shareholder Meeting Tuesday, May 20, 2008 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 We welcome inquiries 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. Shareholder Services: (from left) Jerilyn Geishirt, Lynne Harper, Kari Foster, Ken Frassetto. 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. 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. 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: betterinvesting.org 20 innovation at work 2008 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 Contact MGE Energy Shareholder Services E-mail: Web Address: Madison Area: Continental U.S.: Business Hours: investor@mgeenergy.com 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. Contact shareholder services for 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. Eliminate Duplicate Proxy Mailings If you receive more than one proxy mailing from MGE Energy, you can reduce the mailbox clutter. • Registered shareholders: call or e-mail MGE Energy • Brokerage shareholders: contact your broker Sign Up For Electronic Delivery You may choose to receive e-mail alerts when annual meeting invitations, proxy materials, the annual report and newsletters are available on our Web site. Registered shareholders can sign up by visiting mgeenergy.com/paperless. If your MGEE shares are held in a brokerage account, contact your broker. Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP One N. Wacker Drive Chicago, IL 60606 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: 290,000 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, Columbia Energy Center at Portage, natural gas combustion turbine at Marinette, MGE wind farm in Kewaunee County, Top of Iowa Wind Farm in north-central Iowa and Elm Road Power Plant expansion at Oak Creek, scheduled for completion in 2009 and 2010. MGE Natural Gas Services Purchase and Distribution Customers: 140,000 Population: 404,000 Area: 1,625 square miles Counties served: Columbia, Crawford, Dane, Iowa, Juneau, Monroe and Vernon Learn more at 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 Powe r West Campus, LLC Est. 2003 MGE Power Elm Road, LLC Est. 2003 innovation at work 21 P.O. Box 1231 Madison, WI 53701-1231 mgeenergy.com MGE is committed to environmental stewardship. This report is printed on recycled paper produced with renewable energy. 

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