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

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by checkmark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes X No

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

Indicate by checkmark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:

 MGE Energy, Inc.

Large accelerated filer

 X

Accelerated filer

Non-accelerated filer

 Madison Gas and Electric Company

Large accelerated filer

Accelerated filer

Non-accelerated filer

 X

Indicate by checkmark whether the registrants are accelerated filersregistrant is a shell company (as defined in Rule 12b-2 of the Act).

The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of each registrant as of June 30, 2004,2005, was as follows:

The number of shares outstanding of each registrant's common stock as of February 1, 2005,2006, were as follows:

Portions of MGE Energy, Inc.'s definitive proxy statement to be filed prior to April 29, 2005,17, 2006, relating to its annual meeting of shareholders, are incorporated by reference into Part III of this annual report on Form 10-K.

Madison Gas and Electric Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore omitting (i.(I.) the information otherwise required by Item 601 of Regulation S-K relating to a list of subsidiaries of the registrant as permitted by General Instruction (I)(2)(b), (ii.) the information otherwise required by Item 6 relating to Selected Financial Data, (iii.) the information otherwise required by Item 10 relating to Directors and Executive Officers as permitted by General Instruction (I)(2)(c), (iv.) the information otherwise required by Item 11 relating to executive compensation as permitted by General Instruction (I)(2)(c), (v.) the information otherwise required by Item 12 relating to Security Ownership of Certain Beneficial Owners and Management, and (vi.) the information otherwise required by Item 13 relating to Certain Relationships and RelatedRelat ed Transactions.

Filing Format

Forward-Looking Statements

Where to Find More Information

Definitions

PART I.

Item 1. Business.

Item 1A. Risk Factors.

Item 1B. Unresolved Staff Comments.

Item 2. Properties.

Item 3. Legal Proceedings.

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

PART II.

Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Item 6. Selected Financial Data.

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk - MGE Energy and MGE.

Item 8. Financial Statements and Supplementary Data.

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

Item 9A. Controls and Procedures.

Item 9B. Other Information.

PART III.

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

Item 11. Executive Compensation.

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

Item 13. Certain Relationships and Related Transactions.

Item 14. Principal Accountant Fees and Services.

PART IV.

Item 15. Exhibits and Financial Statement Schedules.

Signatures - MGE Energy, Inc.

Signatures - Madison Gas and Electric Company

Filing Format

This combined Form 10-K is being filed separately by MGE Energy, Inc. (MGE Energy) and Madison Gas and Electric Company (MGE). MGE is a wholly owned subsidiary of MGE Energy and represents a substantial portion of its assets, liabilities, revenues, expenses, and operations. Thus, all information contained in this report relates to, and is filed by, MGE Energy. Information that is specifically identified in this report as relating solely to MGE Energy, such as its financial statements and information relating to its nonregulated business, does not relate to, and is not filed by, MGE. MGE makes no representation as to that information.

Forward-Looking Statements

This report, and other documents filed by MGE Energy and MGE with the Securities and Exchange Commission (SEC) from time to time, contain forward-looking statements that reflect management's current assumptions and estimates regarding future performance and economic conditions--especiallyconditions—especially as they relate to future load growth, revenues, expenses, capital expenditures, financial resources, regulatory matters, and the scope and expense associated with future environmental regulation. These forward-looking statements are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Both MGE Energy and MGE caution investors that these forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected, expressed, or implied. SomeThe factors that could cause actual results to differ materially from the forward-looking statements made b y a registrant include those factors discussed in a) Item 1A. Risk Factors, b) Item 7. Management's Discussion and Analysis of those risksFinancial Condition and uncertainties include:

- Weather, which enters into the calculationResults of MGE's rates for serviceOperations, c) Item 8. Financial Statements and which affects the demand for electricity and gas and the projected and actual need for electric generation capacity to serve customers.

- Economic and market conditionsSupplementary Data, d) other factors discussed in MGE's service territory, which affect demand for electricity and gas and, consequently, our revenues and expenses as well as capital investment requirements to extend, improve, or reinforce the existing electricity and gas distribution systems.

- Magnitude and timing of capital expenditures, which affect capital needs, financing costs, and operating expenses.

- Regulatory environment in which we operate, which can affect the way in which we do business as well as the accounting treatment of expenses that we incur and our ability to continue carrying specified assets and liabilities on our books.

- Environmental regulation, which can affect the way in which we operate, our operating expenses, and our capital expenditures.

- Availability and cost of power supplies, which affect operating expenses and capital expenditure decisions with respect to sources of new generation.

- Completion of the West Campus Cogeneration Facility at the University of Wisconsin-Madison, which providesfilings made by MGE Energy and MGE with an opportunity if construction is completed on or ahead of schedule, but exposes it to liquidated damages if construction is delayed or the facility fails to operate according to specifications.SEC.

Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this report. MGE Energy and MGE undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this report.

Where to Find More Information

The public may read and copy any reports or other information that MGE Energy and MGE file with the SEC at the SEC's public reference room at 450 Fifth100 F Street, NW,NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services and the Webweb site maintained by the SEC at http://www.sec.gov,www.sec.gov.

Our Internet site addresses are www.mgeenergy.com and www.mge.com. On our sites, we have made available, free of charge, our most recent annual report on Form 10-K and proxy statement. We also provide, free of charge, our other filings with the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on MGE Energy's Web site at http://www.mgeenergy.com, and MGE's Web site at http://www.mge.com. Copies mayweb sites shall not be obtained from our Web sites freedeemed incorporated into, or to be a part of, charge.this report.

Definitions

Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.

PART I.

Item 1. Business.

MGE Energy operates in threethe following business segments:

-

•

Electric utility operations--generatingoperations—generating, purchasing, and distributing electricity through MGE.

-

•

Gas utility operations--purchasingoperations—purchasing and distributing natural gas through MGE.

-

•

Nonregulated energy operations--constructingoperations—constructing, owning, and owningleasing new electric generating capacity through its wholly owned subsidiaries MGE Construct,Power, MGE Power Elm Road and MGE Power West Campus.

•

Transmission Investments- investing in companies in the business of providing electric transmission services, such as ATC. In the 4^th quarter of 2005, the investment in ATC was transferred from the electric utility to MGE Energy becameTransco.

•

All Other—investing in companies and property which relate to the holding company forregulated operations, financing the regulated operations, or providing construction services to the other subsidiaries through its wholly owned subsidiaries Corporate, MGE on August 12, 2002, when shareholders exchanged their shares of MGE common stock for shares of MGE Energy common stock. The share exchange had no accounting effect on MGE's recorded assets, liabilities, revenues, or expenses.Construct, MAGAEL and CWDC.

MGE's utility operations represent a substantial portion of the assets, liabilities, revenues, expenses, and operations of MGE Energy. MGE Energy's nonregulated energy operations currently relate to the developmentownership of a controlling interest in the electric generation plant of a natural gas-fired cogeneration projectfacility on the UW-Madison campus.UW campus, and an undivided 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin.

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

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

MGE isEnergy's subsidiaries are also subject to regulation under local, state, and federal laws regarding air and water quality and solid waste disposal. See "Environmental" below.

MGE's business fluctuates based on changes

MGE Energy was organized as a Wisconsin corporation in weather conditions, with gas revenues generally higher during the winter months due to heating needs and electricity revenues generally higher2001. MGE was organized as a Wisconsin corporation in the summer months due to cooling needs.1896. Their principal offices are located at 133 South Blair Street, Madison, Wisconsin 53703.

Electric Utility Operations

MGE generates and distributes electricity in a service area covering the 250-square-mile area of Dane County, Wisconsin. Its service area includes the city of Madison, Wisconsin.

At December 31, 2004,2005, MGE supplied electric service to nearly 134,000136,000 customers, with approximately 119,000121,000 located in the cities of Fitchburg, Madison, Middleton, and Monona and 15,000 in adjacent areas. Of the total number of customers, approximately 116,00086.6% were residential and 18,00013.4% were commercial or industrial. Electric revenues for both2005 and 2004 and 2003 were comprised of residential (35%), commercial (49%), industrial (6%), sales to public authorities including the UW (8%), and sales to other utilities and other (2%). following:

Electric operations accounted for approximately 59%60.8%, 60%59.3%, and 65%60.2% of MGE's total 2005, 2004, and 2003 and 2002regulated revenues, respectively.

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

MGE iswas a member of MAIN, a regional reliability group. As of December 31, 2005, the MAIN members work togetherreliability council no longer exists. MGE has chosen to utilize better reserve generating capacityjoin the MRO as their regional reliability council. The essential purposes of the MRO are: (1) the development and coordinate long-range system planningimplementation of regional and day-to-day operations. MAIN seeks to maintain adequate planning reserve margins for generation in the region.NERC reliability standards, and (2) determining compliance with those standards, including enforcement mechanisms. The MRO also provides other services consistent with its reliability charter.

MGE Transco is part owner, along with other Wisconsin utilities, of ATC, a for-profit transmission company resulting from Reliability 2000 legislation enacted in Wisconsin. Part of that legislation mandated the creation of a statewide transmission company to own the investor-owned utilities' transmission assets. ATC's purpose is to provide reliable, economic transmission service to all customers in a fair and equitable manner. ATC plans, constructs, operates, maintains, and expands transmission facilities that it owns to provide adequate and reliable transmission of power. ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of the MISO. MGE is a non-transmission owning member of the MISO.

Effective January 1, 2001, MGE transferred all of its electric utility transmission assets to ATC in exchange for an ownership interest. ATC is owned and governed by the utilities that contributed facilities or capital in accordance with Wisconsin Act 9.law. On October 28, 2005, MGE transferred $37.6 million of their investment in ATC to MGE Transco. MGE Transco is a majority owned non-regulated subsidiary of MGE. On October 31, 2005, MGE Energy contributed $1.4 million to MGE Transco. In exchange for the funds contributed by MGE Energy to MGE Transco, MGE Energy received an ownership interest in MGE Transco. MGE Energy's share of the equity and net income of MGE Transco are reflected as minority interest within MGE's Consolidated Financial Statements. At December 31, 2004,2005, MGE Transco had approximately a 5%4.4% ownership interest in ATC. ATC is regulated by FERC for all rate terms and conditions of service and is a transmission-owning member of the Midwest ISO. MGE is a nontransmission-owning member of the Midwest ISO.

On February 1, 2002, MGE started taking network transmission service from the Midwest ISO. Midwest ISOMISO. MISO is a nonprofit RTO approved by FERC. The Midwest ISOMISO is responsible for monitoring the electric transmission system that delivers power from generating plants to wholesale power transmitters. Its role is to ensure equal access to the transmission system and to maintain or improve electric system reliability in the Midwest.

In connection with

As a FERC approved RTO, MISO is required to provide real-time energy services and a market based mechanism for congestion management. On April 1, 2005, the MISO implemented its role as a FERC-approved RTO, the Midwest ISO is developing a bid-based energy market. At that time, MGE began offering substantially all of its generation on the MISO market which is expected to be implemented on April 1, 2005. In connectionand purchasing much of its load requirement from the MISO market in accordance with the development of this energy market, the Midwest ISO is developing a market-based platform for valuing transmission congestion premised upon the LMP system that has been implemented in other states. It is expected that the LMP system will include the ability to mitigate or eliminate congestion costs through the use of FTRs. During December 2004 and January 2005, the Midwest ISO completed the initial allocation of FTRs. The FTRs will be available through an auction-based system run by the Midwest ISO. It is unknown at this time what financial impact the LMP congestion pricing system will have on MGE.MISO Tariff.

Fuel supply and generation

During the year ended December 31, 2005, MGE's net kWh requirements, for 2004, weregeneration was provided from the following sources: 64.7% from fossil-fueled steam plants, 33.6% from power purchases, and 1.7% from a combination of wind turbines, diesel generators, and combustion turbines.

Sources used depended on generating unit availability, weather, and customer demand.

MGE has a 22% ownership interest in two 512-MW coal-burning units at Columbia. The coal inventory supply for the units decreased from 45 days on December 31, 2003, to 41 days on December 31, 2004.2004, to 35 days on December 31, 2005. The co-owners' current goal is to maintain approximately a 35-day inventory. The units burn low-sulfur coal obtained (pursuant to long-term contracts) from the Powder River Basin coal fields located in Wyoming and Montana.

Wind Power Purchase Agreement

On July 16, 2004, MGE signed a 20-year power purchase agreement for 40 MW of wind energy to be located near Waupun, Wisconsin. The agreement would increase MGE's wind power output capacity from 12 MWConstruction has not begun on this project, and discussions are currently on-going related to 52 MW. This project is pending approval from the PSCW which is expected to be granted in 2005.its viability. As a result, no final decisions or financial commitments have been made.

Gas Utility Operations

MGE transports and distributes natural gas in a service area covering 1,350 square miles in seven south-central Wisconsin counties. Its service area includes the city of Madison, Wisconsin.

On December 31, 2004,2005, MGE supplied natural gas service to nearly 133,000137,000 customers in the cities of Elroy, Fitchburg, Lodi, Madison, Middleton, Monona, Prairie du Chien, Verona, and Viroqua; 24 villages; and all or parts of 45 townships. Of the total number of customers, approximately 118,000122,000 were residential and 15,000 were commercial or industrial. Gas revenues for 2005 and 2004 were comprised of residential (57%), commercial (38%), industrial (2%), and transportation service and other (3%). Gas revenues for 2003 were comprised of residential (58%), commercial (37%), industrial (2%), and transportation service and other (3%). the following:

Gas operations accounted for approximately 41%39.2%, 40%40.7%, and 35%39.8% of MGE's total 2005, 2004, and 2003 and 2002regulated revenues, respectively.

MGE can curtail gas deliveries to its interruptible customers. Approximately 5% of gas sold in 2005 and 2004 was to interruptible customers.

Gas supply

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

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

By contract, a total of 4,950,7704,942,822 Dth can be injected into ANR's storage fields in Michigan from April 1 through October 31. These gas supplies are then available for withdrawal during the subsequent heating season, November 1 through March 31. ANR's storage fields are located in Michigan. Using storage allows MGE to buy gas supplies during the summer season, when prices are normally lower, and withdraw these supplies during the winter season, when prices are typically higher. Storage also gives MGE more flexibility in meeting daily load fluctuations. Storage quantities were close to planned levels on December 31, 2004.2005.

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

- 147,650

•

161,150 Dth (including 86,078 Dth of storage withdrawals) on ANR.

- 56,818•

59,608 Dth on NNG.

- 2,790 Dth into Viroqua's NNG gate station.

Winter maximum daily quantities under these contracts are scheduled to increase an additional 13,500 Dth by November 2005.

Nonregulated Energy Operations

MGE Energy, through its subsidiaries, is seeking to develop generation sources that will assist MGE in meeting the electricity needs of its customers. It is currently engaged in the construction of a cogeneration facility on the UW-Madison campus and, with MGE, is examining other potential sources of electricity including new coal-fired plants through an initiative known as Power the Future.

Decisions on the type of energy source and its size, timing, ownership, and financing depend upon a number of factors including the growth of customer demand in MGE's service area and surrounding areas, the effectiveness of customer demand management efforts, the costs and availability of alternative power sources, the availability of transmission capacity, issues associated with siting power generation sources, available financing and ownership structures, regulatory treatment and recovery, construction lead times and risks, and other factors. The decisions tend to involve long-time horizons due to the lead time involved in siting and constructing new generation sources and the associated transmission infrastructure.

WCCF

MGE Energy, through MGE Power, MGE Power West Campus, and MGE Construct, is buildinghas constructed a natural gas-fired cogeneration facility on the UW campus. As planned,The facility has the facility will have capacity to produce 20,000 tons of chilled water, 500,000 pounds per hour of steam, and approximately 150 MW of electricity. The UW and MGE Power West Campus will jointly own the facility. The UW will ownowns a controlling interest in the chilled-water and steam plants, in accordance with the EPC Agreement. This interest will bewhich are used to help meet the UW's growing need for air-conditioning and steam-heat capacity. MGE Power West Campus will ownowns a controlling interest in the electric generation plant, which will beis used to provide electricity to MGE's customers. MGE entered into a lease with MGE Power West Campus to lease the assets owned by MGE Power West Campus, and MGE will operate the entire facility. MGE Construct

The total construction cost is responsible for the construction of the facility. A PSCW order approving the issuance of a CPCN for the WCCF was received on October 9, 2003. Construction on the project commenced in October 2003, and the project is expectedestimated to be completed by the second quarter$187.6 million, of 2005.

The cost to construct WCCFwhich $103.6 million is expected to be approximately $185 million in total, of which MGE Power West Campus' portion will be $105 million.estimated portion. As of December 31, 2004,2005, MGE Power West Campus had incurred $95.7$102.1 million (excluding capitalized interest) of costs on the project, which is reflected in construction work in progressProperty, Plant, and Equipment on MGE and MGE Energy's and MGE'scondensed consolidated balance sheets. In 2004,Of this amount, $0.8 million has not yet been paid. MGE Construct received a total service fee of $2.7Power West Campus estimates an additional $1.5 million (pretax) from the State in relationcapital expenditures for this project. These amounts primarily relate to its role as EPC contractor for WCCF. The total fee of $5.0 million will be recognized as services are renderedwater mitigation and will be collected over a 22-month period that ends June 15, 2005.laydown restoration costs. These amounts have not yet been incurred or included in MGE or MGE Energy's Property, Plant, and Equipment balance.

MGE Energy, MGE Power West Campus, and MGE Construct havehad contractually assumed certain risks related to somethe construction of the executed agreements.WCCF. In the EPC Agreement, MGE Power West Campus is responsible for cost overruns and MGE Construct iswas responsible for the construction process of the entire facility, paying liquidated damages relating to failure to achieve the Mechanical Completion Date Guarantee and/or the Acceptance Test Capacity Guarantee.specified completion date guarantees and certain performance level guarantees. During 2005, MGE Construct achieved satisfactory completion on all guarantees and was not responsible for payment of any liquidated damages. MGE Energy iswas the guarantor of MGEMGE's Construct's obligations under the EPC Agreement.

MGE received approval from the PSCW to collect approximately $12.1 million in carrying costs incurred by MGE Power West Campus during construction of the Future Generation

On February 23, 2001,facility. MGE secured an optionis collecting these costs in rates over a period of ten years. Of these costs, $4.1 million relate to own athe capitalized interest and the debt portion of the advanced technology, coal-fired base-load generation facilities proposedfacility. These costs are recognized over the period in We Energies'which the facility is being depreciated (40 years). The remaining amount of $8.0 million represents the equity portion and is being recognized over the ten-year period for recovery in rates. As of December 31, 2005, $0.6 million has been recognized as revenue.

Elm Road

On November 4, 2005, MGE Power Elm Road closed on the Future plan. Pursuant toexercise of an amended agreement reached on January 31, 2003, MGE has the option to acquire an undivided 8.33% (16.66% under certain conditions) ownership interest in each of two 615 MW advanced technology, coal-fired generating units being constructed by We Energies in Oak Creek, Wisconsin. On that date, MGE Power Elm Road also made its initial payment for construction costs. MGE Power Elm Road's estimated share of capital costs for its 8.33% ownership interest in both units is approximately $170 million which it intends to finance primarily through funds received from MGE Energy. MGE Energy expects that these funds will be raised through the proposed coal plants or up to approximately 50 MW per unit. The PSCW issued an ordersale of securities (via the Stock Plan), short-term debt, and normal operations. At December 31, 2005, MGE Power Elm Road had incurred $24.4 million (excluding capitalized interest) of costs on the project, which is reflected in November 2003, approving We Energies' request for CPCN for two units totaling approximately 1,200 megawatts. The PSCW also issued an orderthe Construction Work In Progress balance on June 25, 2004, approving MGE's participation in each unit (should MGE choose to exerciseand MGE Energy's condensed consolidated balanc e sheets. Of this amount, $2.1 million has not yet been paid.

On the date of acquisition, MGE Energy and its options) and approvingsubsidiaries entered into various agreements, including a facility lease agreement. This facility lease agreement is between MGE Power Elm Road (a nonregulated subsidiary of MGE Energy) and MGE. The financial terms of the facility lease include a capital structure of 55% equity and 45% long-term debt, and return on equity of 12.7%, a lease term of 30 years, and a 5% rent reduction in the first five years. If the options on Units 1 and 2 are exercised, MGE Energy's share of capital costs for an 8.33% ownership interest in both units would be an estimated $183 million.

On November 29, 2004, the Dane County Circuit Court ruled on several lawsuits which challenged the PSCW's order authorizing We Energies to build two coal-fired generating facilities on the site of their existing Oak Creek Power Plant. The Dane County Circuit Court vacated the order and remanded the order back to1, 2005, MGE received approval from the PSCW to defer payments made to MGE Power Elm Road for additional proceedings. The Court determined that the PSCW committed errors in determining the completeness and approving the application filed by Wisconsin Energy Corporation on several different points.

On January 5, 2005, the Supreme Court of Wisconsin granted We Energies' December 14, 2004 request for a direct, expedited review of the lower court decision and agreed to consider all issues raised. The Court set a briefing schedule for February and March and set March 30, 2005, as the date for oral argument. A final decision is expected in the second quarter of 2005.

The resolution of this proceeding may adversely affect thecarrying costs during construction of the units. At present, Unit 1facility, management fees, and community impact mitigation costs. MGE will begin collecting the carrying costs in rates in 2006. MGE estimates total carrying costs to be approximately $54 million. This amount is scheduledexpected to be collected over multiple years. Of these costs, $10 million is estimated to relate to the capitalized interest and the debt portion of the facility. These costs will be recognized over the period in which the facility will be depreciated. The remaining $44 million is estimated to represent the equity portion and will be recognized over the period recovered in rates. MGE expects to begin operatingcollecting the management fees and community impact mitigation costs in 2009 and Unit 2 is scheduledrates in 2008. These costs are expected to begin operating in 2010. MGE anticipates makingbe collected over a decision on whether to exercise the options by the second quarter of 2005, pending the final ruling by the Court.four year period.

Environmental

MGE is subject to local, state, and federal regulations concerning air quality, water quality, and solid waste disposal. The EPA administers certain federal statutes relating to such matters. The DNR administers certain state statutes as to such matters and has primary jurisdiction over standards relating to air and water quality and solid and hazardous waste. Those regulations affect the manner in which MGE conducts its operations, the costs of those operations, as well as some capital and operating expenditures. It can also affect the siting, timing, and cost of new projects or other significant actions affecting the environment. MGE is not able to predict the direction of future regulations or if compliance with any such regulations will involve additional expenditures for pollution control equipment, plant modifications, or curtailment of operations. Such actions could reduce capacity or efficiency at existing plants or delay the construction and operationop eration of future generating facilities.

Air quality

Air quality regulations promulgated by the EPA and the DNR in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 impose restrictions on emission of particulates, sulfur dioxide (SO₂) nitrogen oxides (NO_x) and other pollutants and require permits for operation of emission sources. Such permits have been obtained by MGE and must be renewed periodically. Various initiatives, including the proposed Clean Air Interstate Rules, the MACTRule (CAIR), Clean Air Mercury Rule (CAMR), maximum achievable emission technology (MACT) standards and existing and proposed state mercury emissions limits, may affect operating and capital expenditure costs at Blount and Columbia.

In January 2004,

On May 12, 2005, the EPA proposed Clean Air Interstate Rulespromulgated the CAIR that wouldis designed to mitigate the transport of fine particulate matter and ozone pollution by imposing emission reduction requirements on SO₂ and NO_x in 29 eastern states and the District of Columbia.Columbia, including Wisconsin. These reductions would be implemented in two phases throughand may include a cap-and-trade system. Regional SO₂emissions would be reduced in 2010 by approximately 40% below current2003 levels and by approximately 70% below current2003 levels by 2015. EmissionsRegional emissions of NO_x would be cut in 20102009 by approximately 55% below current2003 levels and in 2015 by approximately 65% below current2003 levels.

The Clean Air Act Amendments also requirerequires the EPA to develop standards to control major sources of hazardous air pollutants to levels consistent with the lowest-emitting facilities in similar source categories.categories (i.e., MACT standards). The EPA has adopted final MACT standards for industrial, commercial, and institutional boilers, which will apply to MGE in 2007 (although no additional controls are anticipated). MGE operates several other emissions sources in its electric generationsgeneration operations that may be subject to the new MACT standards including electric utility steam generating units; combustion turbines; and reciprocating internal combustion engines. All sources, except the Blount and Columbia coal-fired units, are expected to be exempt from implementing additional emission-control strategies. WCCF is subject to the MACT standard for combustion turbines, but no additional controls are anticipated beyond those beingthat were constructed as a part of the facility. ComplyingCom plying with the MACT standards may increase capital expenditures and operating and maintenance expenses.

The EPA has proposed, and the DNR has adopted,also promulgated rules aimed at reducing mercury emissions from utility boilers. The EPA rule containsrules contain several compliance options. DNR is required by state statute to modify existing state mercury control options and must be finalized by March 15, 2005, under applicable legal requirements. The DNR rule requires a 40% reduction in mercury emissions by 2010, and a 75% reduction by 2015, for investor-owned Wisconsin public utilities emitting 100 pounds or more of mercury annually on a system-wide basis. The DNR rule allows each affected utilityrules to average its mercury emission reduction requirement across its entire system of coal-fired boilers.conform to the federal rules. As a joint owner of Columbia, MGE may have increased capital expenditures and operating and maintenance expenses if the Columbia owners choose to control mercury emissions at Columbia.

In 1998, the EPA issued a rule that imposed a NO_x emission budget for emission sources in Wisconsin. In 2000, the Court of Appeals for the District of Columbia struckinvalidated a portion of the rule as applied to Wisconsin; however, the Court stayed that portion of the challenge concerning Wisconsin's alleged impacts on downwind, eight-hour ozone nonattainment areas. EPA has also stayed that portion of the rule concerning Wisconsin alleged impacts on downwind eight-hour ozone nonattainment areas. If that portion of the rule concerning eight-hour ozone nonattainment areas is upheld, the resulting NO_x emission budget for Wisconsin could potentially affect the level of permissible NO_x emissions from Blount, Columbia, and WCCF. The new NO_x limits could increase capital expenditures and operating and maintenance expenses at those facilities.

In December 2000, February 2001, June 2002, and January 2003, Alliant received requests from the EPA seeking information concerning Columbia's compliance with the Clean Air Act. The requests appear to be part of an industry-wide EPA initiative to assess the regulatory consequences of past investments in utility generation, energy efficiency, maintenance, and environmental protection. Alliant, the plant operator, has responded to all requests. Alliant has not informed MGE of any definitive increase in capital expenditures or operating and maintenance expenses arising from the EPA's inquiry.

Water quality

MGE is subject to water quality regulations issued by the DNR. These regulations include categorical-effluent discharge standards, which require the use of effluent-treatment processes equivalent to categorical "best practicable" or "best available" technologies under compliance schedules established under the Federal Water Pollution Control Act. The DNR has published categorical regulations for chemical and thermal discharges from electric-steam generating plants. The regulations limit discharges from MGE's plants into Lake Monona and other Wisconsin waters. The State has also proposed rules regarding thermal discharge which are subject to comment and further modification. Depending on the terms of the final rules, MGE may be required to make additional capital expenditures.

Pursuant to a court order, the EPA on July 9, 2004, promulgated final rules addressing cooling water intake structures for existing large power plants. The rule is currently being challenged by a coalition of states and environmental groups. Pursuant to the provisions of the rule, MGE, in its current draft WPDES renewal for Blount, has been granted an extension to no later than January 7, 2008, to comply with the various requirements. The new rules may result in additional capital expenditures; however, MGE is unable to determine the timing or amount, if any, of that impact.

MGE submitted a permit renewal application to the Wisconsin DNR for a WPDES permit for Blount. The DNR has received public comments and is expected to issue the permit in 2006.

Solid waste

MGE is listed as one of severala potentially responsible parties underparty for a site the Comprehensive Environmental Response, Compensation and Liability Act for cleanup costs at aEPA has placed on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois, known as the Lenz Oil Site, which was used for storing and processing waste oil for several years. This site requires clean up under the Comprehensive Environmental Response, Compensation and Liability Act. A group of companies, including MGE, estimatesis currently working on cleaning up the site. Management believes that its share of future expense tothe final cleanup thiscosts for the Lenz Oil site could range from $0.1 million to $0.3 million. At December 31, 2004, MGE accrued a $0.1 million liability for this matter.will not result in any materially adverse effects on MGE's operations, cash flows, or financial position. Insurance may cover a portion of the cleanup costs. Management believes that the cleanup costs not covered by insurance will be recoverablerecovered in current and future rates.

As a result of the Blount 69-kV transmission substation expansion, coal tar-contaminated soil and debris within the excavation zone are being removed and disposed of in accordance with a DNR-approved "Removal Action Work Plan." MGE has paid $1.5 million through December 31, 2004 in connection with2005, a $0.1 million liability was accrued for this cleanup, and expects to recover cleanup costs in future electric rates.matter.

Global climate change

The ongoing issue of global warming could result in significant costs to reduce CO₂ emissions from fossil fuel-fired generation sources such as coal. MGE does not yet know the amounts of these expenditures or the period of time over which they may be required.

Environmental Cooperative Agreement

On September 26, 2002, MGE and the DNR signed an Environmental Cooperative Agreement under which MGE committed to work toward superior environmental performance at Blount. Among other things, the five-year agreement requires MGE to evaluate combustion efficiency improvements, enhance new pollution controls on Boiler 8, increase use of alternative fuels, attempt to increase beneficial reuse of fly ash and bottom ash, study cogeneration possibilities, and upgrade MGE's environmental management system to be consistent with ISO 14001 standards. Implementing these and other actions required by the agreement areis expected to increase capital expenditures and operating and maintenance expenses over the next five years. In addition, MGE conducts voluntary audits of Blount's compliance with various environmental laws. In January 2005, theThe auditors had previously identified some possible compliance exceptions which were timely addressed and disclosed pursuant to a state statutestatut e that provides for qualified civil enforcement immunity. MGE believes that it has adequately responded to the audit's findings and does not anticipate any enforcement action by the state regulators.

Employees

As of December 31, 2004,2005, MGE had 738746 employees. MGE employs 262261 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers, and 104105 employees who are covered by a collective bargaining agreement with Local Union No. 39 of the Office and Professional Employees International Union. Both of these collective bargaining agreements expire on May 1, 2006. There are also five5 employees covered by a collective bargaining agreement with Local Union No. 7-01112-111 of Thethe United Steel, Paper Allied-Industrial, Chemical and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union. This collective bargaining agreement expires on October 29, 2006. MGE will negotiate with each of the unions above during 2006.

Financial Information About Segments

See Footnote 2021 of the Notes to Consolidated Financial Statements for financial information relating to MGE Energy's and MGE's business segments.

Executive Officers of the Registrants

Available Information

Item 1A. Risk Factors.

MGE Energy and its subsidiaries, including MGE, operate in a market environment that involves significant risks, many of which are beyond their control. The following risk factors may adversely affect their results of operations, cash flows and market price for their publicly traded securities. While MGE Energy and MGE believe they have identified and discussed below the key risk factors affecting their business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect their performance or financial condition in the future.

Regulatory Risk

We are subject to extensive government regulation in our business, which affects our costs and responsiveness to changing events and circumstances.

Our Internet site addressesbusiness is subject to regulation at the State and Federal levels. We are www.mgeenergy.comsubject to regulation as a holding company by the PSCW. MGE is regulated by the PSCW as to its rates, terms and www.mge.com. Onconditions of service; various business practices and transactions; financing; and transactions between it and its affiliates, including MGE Energy. MGE is also subject to regulation by the FERC, which regulates certain aspects of its business. The regulations adopted by the State and Federal agencies affect the manner in which we do business, our ability to undertake specified actions since pre-approval or authorization may be required, the costs of operations, and the level of rates charged to recover such costs. Our ability to attract capital is also dependent in part, by our ability to obtain a fair return from the PSCW.

We face risk for the recovery of fuel and purchased power costs when they exceed the base rate established in MGE's current rate structure.

MGE burns natural gas in several of its peak electric generation facilities, and in many cases, the cost of purchased power is tied to the cost of natural gas. MGE bears significant regulatory risk for the recovery from customers of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure.

We are subject to environmental laws and regulations which may affects our costs and business plans.

Our subsidiaries are subject to environmental laws and regulations that may increase our cost of operations, impact or limit our business plans, or expose us to environmental liabilities.

Numerous environmental regulations govern many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections, and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the financial or operational outcome of any related litigation that may arise.

In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

We cannot assure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have an adverse effect on our results of operations and on our ability to pay dividends on our common stock.

Our business may be negatively affected by the restructuring of the energy industry.

MGE is a member of the MISO, a FERC-approved RTO. Effective April 1, 2005, MISO implemented its bid-based energy market. MGE cannot predict the impact the new market may ultimately have on its electric operations. Also, the ability of MISO to maintain its members is an important factor in the success of its operations.

Operating Risk

We are affected by weather, which affects customer demand and can affect the operation of our facilities.

The demand for electricity and gas is affected by weather. Very warm and very cold temperatures, especially for prolonged periods, can dramatically increase the demand for electricity for cooling and heating, respectively, as opposed to the softening effect of more moderate temperatures. Our electric revenues are sensitive to the summer cooling season and, to a lesser extent, the winter heating season. Similarly, very cold temperatures can dramatically increase the demand for gas for heating. A significant portion of our gas system demand is driven by heating. Extreme summer conditions or storms may stress electric transmission and distribution systems, resulting in increased maintenance costs and limiting the ability to meet peak customer demand.

We are affected by economic activity within our service area.

Higher levels of development and business activity generally increase the numbers of customers and their use of electricity and gas. Likewise, periods of recessionary economic conditions generally adversely affect our results of operations.

Our ability to manage our purchased power costs is influenced by a number of uncontrollable factors.

We are exposed to additional purchased power costs to the extent that our power needs cannot be fully covered by the supplies available from our existing facilities and contractual arrangements. Those needs, and our costs, could be affected by:

•

Increased demand due to, for example, weather, customer growth, or customer obligations,

•

The inability to transmit our contracted power from its generation source to our customers due to transmission line constraints, outages, or equipment failures,

•

Reductions in the availability of power from our owned or contracted generation sources due to equipment failures, shortages of fuel or environmental limitations on operations, and

•

Failure to perform on the part of any party from which we purchase capacity or energy.

An unexpected change in demand or the availability of generation or transmission facilities can expose us to increased costs of sourcing electricity in the short-term market where pricing may be more volatile.

Our financial performance depends on the equipment and facilities in our distribution system being operational.

Weather conditions, accidents, catastrophic events, and failures of equipment or facilities can disrupt or limit our ability to deliver electricity and gas. Efforts to repair or replace equipment and facilities may not be successful, or we may be unable to make the necessary improvements to our distribution system, causing service interruptions. The resulting interruption of services could result in lost revenues and additional costs.

We face construction risk in connection with the completion of the Elm Road Coal Generating Units

We have assumed risks under the agreements related to our undivided 8.33% ownership interest in two 615 MW generating units being constructed in Oak Creek, Wisconsin. MGE Power Elm Road is subject to usual construction risks over which we will have limited or no control and which might adversely affect project costs and completion time. These risks include, but are not limited to, shortages of, the inability to obtain or the cost of labor or materials, the inability of the general contractor or subcontractors to perform under their contracts, strikes, adverse weather conditions, the inability to obtain necessary permits in a timely manner and changes in applicable laws or regulations, governmental actions and events in the global economy. If the final costs for the construction of the Elm Road units exceed the fixed costs allowed in the PSCW order, this excess cannot be recovered from MGE or its customers unless specifically allowed by the PSCW. Pr oject costs above the authorized amount, but below the 5% cap will be subject to a prudence determination made by the PSCW.

Financial Risk

We are exposed to commodity price risk relating to our purchases of natural gas, electricity, coal and oil.

We face commodity price risk exposure with respect to our purchases of natural gas, electricity, coal and oil, SO₂ allowance and risk through our use of derivatives, such as futures, forwards and swaps, to manage that commodity price risk. We could experience increased costs as a result of volatility in the market values of those commodities. We could also experience losses on our derivative contracts as a result of that market value volatility or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these derivative contracts involves our exercise of judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the value of the reported fair value of these contracts.

We are exposed to interest rate risk.

We are exposed to interest rate risk on our variable rate financing. MGE Energy had $82.5 million of variable-rate debt outstanding at December 31, 2005, including $66.0 million for MGE. Borrowing levels under commercial paper arrangements vary from period to period depending upon capital investments and other factors. Such interest rate risk may make it more difficult to satisfy our obligations and to pay dividends on our common stock at the current rate.

Market performance affects our employee benefit plan asset values.

The performance of the capital markets affects the values of the assets that are held in trust to satisfy the future obligations under our pension and postretirement benefit plans. We have significant obligations in these areas and hold significant assets in these trusts. A decline in the market value of those assets may increase our funding requirements for these obligations.

We are exposed to credit risk primarily through our regulated energy business.

Credit risk is the loss that may result from counterparty nonperformance. We face credit risk primarily through MGE's regulated energy business. Failure of such counterparties to perform their obligations may result in increased expenses for MGE and may negatively impact the dividend we receive from MGE and, thus, our results of operations and our ability to pay dividends on our common stock..

As a holding company, we are dependent on upstream cash flows from our subsidiaries for the payment of dividends on our common stock.

As a holding company, we have made available, freeno operations of charge, our most recent annual reportown, our ability to pay dividends on Form 10-Kour common stock is dependent on the earnings and proxy statement. We also provide, freecash flows of charge, our other filings withoperating subsidiaries and their ability to pay upstream dividends or to repay funds to us. Prior to funding us, our subsidiaries have financial obligations that must be satisfied, including among others, debt service and obligations to trade creditors, and are subject to contractual and regulatory restrictions on the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.payment of dividends.

Item 2. Properties.

MGE's net generating capability in service at December 31, 2004,2005, was as follows:

Major electric distribution lines and substations in service at December 31, 2004,2005, are as follows:

A significant portion of the electric and gas distribution facilities is located over or under highways, streets, other public places or property owned by others, for which permits, grants, easements or licenses, deemed satisfactory by MGE but without examination of underlying land titles, have been obtained.

As required by Wisconsin law, MGE and other Wisconsin electric utilities transferred their electric transmission assets to ATC on January 1, 2001. MGE received an approximate 5.0%4.4% ownership interest in ATC in exchange for its transmission plant and related deferred taxes and deferred investment tax credits. MGE receives a return on its investment in ATC that is approximately equal to the return it would have earned by retaining its transmission facilities. A small portion of the 69 kV lines and substations has been classified as distribution assets.

Gas facilities include 2,2772,330 miles of distribution mains.

Item 3. Legal Proceedings.

MGE Energy and MGE

MGE Energy and its subsidiaries, including MGE, from time to time are involved in various legal proceedings that are handled and defended in the ordinary course of business. While MGE Energy and MGE are unable to predict the outcome of these matters, management does not believe, based upon currently available facts, that the ultimate resolution of any of such proceedings would have a material adverse effect on their overall financial condition or results of operations.

MGE

On April 30, 2004, a jury verdict in the Charing Cross matter was received in favor of MGE. The plaintiffs moved to have the trial judge set aside the jury verdict and find in favor of the plaintiffs. On October 18, 2004, the trial judge denied the plaintiffs' motion to set aside the verdict and entered a verdict in favor of MGE. On December 3, 2004, the time for the plaintiffs to appeal expired and no appeal was filed.

Also see "Environmental" under Item 1, Business, for a description of several environmental proceedings involving MGE.

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

MGE Energy and MGE

None.

PART II.

Item 5. Market for Registrants' Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

Market for Common Equity

MGE EnergyEnergy.

MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On March 1, 2005,2006, there were approximately 19,28319,398 registered shareholders of record. The following table shows high and low sale prices for the common stock on Nasdaq for each quarter over the past two years.

MGE

MGE.

As of March 1, 2005,2006, there were 17,347,889 outstanding shares of common stock, all of which were held by MGE Energy. There is no public trading market for shares of common stock of MGE.

Dividends

MGE Energy.

The following table sets forth MGE Energy's quarterly cash dividends paid during 20042005 and 2003:2004:

MGE.

The following table sets forth MGE's quarterly cash dividends paid during 20042005 and 2003:2004:

See "Liquidity and Capital Resources - Capital Requirements and Investing Activities for MGE Energy and MGE" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, for a description of restrictions applicable to dividend payments by MGE.

Issuer Purchases of Equity Securities

MGE Energy.

The below table gives information on a monthly basis regarding purchases made by MGE Energy of its common stock:

Item 6. Selected Financial Data.

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

**Includes current maturities.

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

Results of Operations.

General

MGE Energy is a holding company operating through subsidiaries in threefive business segments: electric utility operations, gas utility operations, and nonregulated energy operations.operations, transmission investments, and all other. Our principal subsidiary is MGE, which conducts our electric utility and gas utility operations.operations and represents a substantial portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to nearly 134,000136,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to nearly 133,000137,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.

Other subsidiaries, which constitute of our nonregulated energy operations and all other segment, have been formed to own and construct new electric generating capacity. Those subsidiaries are currently undertaking the construction of a 150 MW, electricity, steam, and chilled-water cogeneration facility on the UW-Madison campus.

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

MGE's electric and gas utility operations represent a substantial part of our assets, liabilities, revenues, and expenses. Our nonregulated energy operations relatingrelate principally to the developmentleasing of athe cogeneration project on the UW-Madison campus,campus. The WCCF facility began producing electricity on April 26, 2005. The nonregulated energy operations relating to this cogeneration plant are limited to service fees received from the State by MGE Construct as the facility remains under construction. Operations on this facility are expected to begin during the second quarter of 2005. Consequently, the following discussion focuses mainly on the results of operations andincluded in MGE's consolidated financial condition of MGE.

Executive Summary

In 2004, our utility operations experienced an increase in electric and gas revenues. Additionally, operation and maintenance expenses increased due to higher fees for outside professional services due to the Sarbanes-Oxley Act, higher distribution costs, and higher overall customer service and administrative costs. This increase was slightly offset by lower pension and benefit expenses, lower transmission expenses, and a decrease in interest expensestatements as a result of generally lower levelsthe accounting requirements of short-FIN 46R. On November 4, 2005, MGE Power Elm Road finalized an agreement to acquire an undivided 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin. This entity is also included in the non-regulated energy operations segment and long-term debt duringis included in MGE's consolidated financial statements as a result of the latter portionaccounting requirements of 2004.

Our liquidity and capital position remained strong during 2004. On September 15, 2004, MGE Energy completed the sale of 1,265,000 shares of common stock at a net sale price of $30.815 per share. The Company's proceeds, net of underwriters' fees and other expenses, were approximately $39.0 million. These funds were utilized to repay short-term borrowing incurred duringFIN 46R. For the year to finance the constructionended December 31, 2005, this entity has an immaterial impact on MGE or MGE Energy's operations.

The transmission investment segment consists of WCCF and for general corporate purposes. We anticipate relying on short- and long-term borrowings to support the remaining construction and capital expenditures for the cogeneration facility that MGE Power West Campus is constructing on the UW-Madison campus.our equity earnings in ATC.

Our primary focus today and for the foreseeable future is our core utility customers at MGE. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. It plans to meet this challenge by building more efficient generation projects and continuing its efforts to control its operational costs. We believe it is critical to continue maintaining a strong credit standing and financial strength in MGE as well as the parent company in order to accomplish these goals.

Results of Operations

Earnings Overview -

Year Ended December 31, 2005 Versus the Year Ended December 31, 2004

Executive Summary

In 2005, our earnings were $32.1 million or $1.57 per share compared to $33.8 million or $1.77 per share in the prior year. During 2005, utility operations experienced an increase in electric revenues of $60.6 million. This increase is attributable to an increase in rates that became effective in January 2005, an increase in sales for resale, and warmer temperatures, which increased demand for the summer months. These increases were offset by increased fuel and purchased power costs. In 2005, fuel used for electric generation increased $22.0 million, or 51.1%, compared to 2004. Additionally, purchased power expense increased by $29.7 million. These increases are largely due to the natural disasters that have occurred in the Gulf of Mexico and the reduced availability of natural gas supplies.

During the year ended December 31, 2005, gas revenues increased $28.8 million. This increase is due to higher costs of gas, slightly offset by a decrease in transportation revenues. For the year ended December 31, 2005, natural gas purchased increased $31.5 million or 27.4%, largely due to higher natural gas prices.

Operation and maintenance expenses increased due to higher electric transmission expenses. These increases were partially offset by lower distribution expenses and general and administrative costs.

Electric Utility Operations

Electric sales and revenues

The following table compares MGE's electric retail revenues and electric kWh sales by customer class during the years ended December 31, 2005 and 2004:

MGE Energy and MGE's other general taxes increased 4.4% in 2005 primarily because MGE's license fee tax increased. The annual license fee tax expense is based on adjusted operating revenues of the prior year. Tax rates have not increased.

Consolidated Income Taxes

MGE Energy's effective income tax rate is 38.2% for 2005 compared to 37.9% in 2004. The higher income tax rate is primarily due to a higher state tax rate as a result of a tax settlement in 2005 for the Wisconsin 1990 to 1996 exam cycle.

Minority Interest, Net of Tax

For the year ended December 31, 2005, MGE Energy (through its wholly owned subsidiary MGE Power) had earned $5.4 million and less than $0.1 million, net of tax, for its interest in MGE Power West Campus and MGE Power Elm Road, respectively. Additionally, MGE Energy had earned less than $0.1 million, net of tax for its interest in MGE Transco. These amounts are recorded as minority interest expense, net of tax, on MGE's Consolidated Statement of Income.

Year Ended December 31, 2004 Versus Year Ended December 31, 2003

Executive Summary

In 2004, our earnings were $33.8 million, or $1.77 per share. Gas retail deliveries declined slightly, but retail electric sales increased 1.6%. MGE's increase in base rates to cover, in large part rising fuel costs, led to an increase in utility revenues. Operations and maintenance costs increased due to higher fees for outside professional services, overall customer service and administrative costs, and higher distribution costs. During 2004, MGE Energy benefitedbenefitted from lower pension and benefit expenses, lower transmission costs, and decreased interest costs due to lower levels of short and long-term debt during the latter portion of 2004.

In 2003, our earnings were $30.6 million, or $1.71 per share. Electric retail sales declined slightly, but retail gas deliveries increased 6.4%. During 2003, MGE's increase in base rates, which were primarily due to rising fuel costs, led to an increase in utility revenues. Operations and maintenance costs increased due to higher costs for employee benefits (health care, pension, etc.), transmission wheeling charges, distribution costs, and maintenance. These costs were somewhat offset by a decrease in depreciation costs, as MGE was no longer required to contribute to the decommissioning fund for Kewaunee in 2003. Also, MGE Energy benefited from lower interest costs due to refinancing a large portion of its long-term debt in 2002, and the lower interest rates on its variable rate and short-term debt in 2003.

In 2002, MGE Energy's earnings were $29.2 million, or $1.69 per share. MGE's 5.5% increase in electric retail sales, coupled with an increase in base rates to cover rising fuel costs, contributed to a 10.7% increase in electric revenues. Purchased power costs increased substantially. 2002 was the first full year MGE purchased 90 MW of capacity and energy to replace its share of generation lost from Kewaunee. MGE sold its interest in Kewaunee to WPSC in September 2001. As a result, MGE's operations and maintenance costs were lower in 2002. MGE's gas margin increased $4.2 million, due to growth in gas deliveries.

Electric Utility Operations

Electric sales and revenues

The following table compares MGE's electric retail revenues and electric kWh sales by customer class during each of the years ended December 31:31, 2004 and 2003:

Electric operating revenues were up 3.6% and 7.4% in 2004, and 2003, due to the following:

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•

Rates.The PSCW authorized increases in MGE's electric rates effective January 14, 2004, to cover rising fuel costs and increased system demands. In 2004, MGE recorded a reduction to electric revenues of $3.4 million, to reflect a fuel credit refund due to customers as a result of a PSCW proceeding initiated on August 10, 2004. Of this amount, $1.8 million has been included in customers' 2004 bills and $1.6 million was refunded to customers in January 2005.

The 2003 retail revenues reflect a fuel credit in the amount of $4.0 million. Of this amount, $1.2 million was reflected in customers' 2003 bills and $2.8 million was refunded to customers in the first quarter of 2004. An additional $0.4 million was recorded and refunded to customers' in January 2004, related to the 2003 proceedings. The liability for this fuel credit was previously accrued from August 2003 through January 2004, as a decrease to other electric revenues.

The PSCW also authorized increases in MGE's electric rates effective March 1, 2003, and January 1, 2002, to cover rising fuel costs, increased system demands, and the installation of an AMR system. Revenues in 2003 also reflect a surcharge of 2% on electric rates, effective October 24, 2002, and ending October 23, 2003, which the PSCW authorized to recover deferred costs associated with forming ATC and ongoing incremental transmission costs.

-•

Volume.During 2004, there was a 1.6% increase in total retail sales volumes. This increase is primarily attributable to additional commercial and industrial users coming on-line in 2004, and business growth at some of MGE's preexisting, large commercial and industrial users.

In 2003, electric retail sales volumes decreased 0.7% due to cooler-than-normal summer temperatures.

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Other effects.Revenues.Other electric revenues increased $5.8 million for the year ended December 31, 2004, compared to the prior year. This increase is due to the reversal of the 2003 fuel credit liability, which was refunded to customers in the first quarter of 2004.

In 2003, the fuel credit liability was recorded in other electric revenues. However, the 2004 fuel credit liability was allocated directly to the appropriate customer classes rather than in other electric effects. The actual fuel refund decreased retail revenues and is offset by an increase in other electric revenues.

-•

Sales for resale. During 2004, sales for resale decreased $4.2 million. The decrease in sales for resale represents lower sales volume due to the expiration of a contract with Alliant to sell 25 MW of electric capacity. The contract was in effect from January 2003 through August 2003. Sales for resale also includes transactions conducted on the PJM market since the establishment andour involvement in the PJM market since its establishment on May 1, 2004.

On May 1, 2004, PJM began managing the flow of wholesale electricity over ComEd transmission lines and administering open, competitive wholesale electricity trading markets. MGE has three purchase power agreements that are impacted by ComEd's integration in the PJM market.

MGE has recorded certain transactions on the PJM market in which we are buying and selling power within the same period to meet our electric energy delivery requirements on a net basis resultingbasis. This treatment resulted in a $3.2 million reduction to sales for resale and purchased power expense for the year ended December 31, 2004.

Electric fuel and purchased power

In 2004, fuel used for electric generation increased $2.0 million, or 4.8%4.9%, compared to 2003. This increase is due to an increase in the year-to-date electric generation at MGE's baseload plants ($1.7 million) and a slight increase in rates ($0.3 million). MGE's internal generation increased 4.2% during 2004, when compared to 2003, mainly due to a 16.5% increase during the first quarter of 2004. This large increase was the result of the Columbia facility being off line during a portion of the first quarter of 2003, but back on line for the first quarter of 2004. The per-unit cost of internal generation increased 0.6% for the year ended December 31, 2004, when compared to the same period in the prior year.

Purchased power expense increased by $2.5 million, or 5.1%, for 2004, compared to 2003. This increase represents a 18.7% increase in the per-unit-cost partially offset by a 11.3% decrease in the volume of purchased power.

These fluctuations include a $3.2 million reduction to purchased power expense in 2004, which resulted from the netting of transactions in the PJM market in which we were buying and selling power within the same period to meet our electric energy delivery requirements.

In 2003, fuel used for electric generation increased $3.3 million, or 8.8%, primarily due to a rise in the cost of natural gas used at certain MGE generating plants. MGE's internal generation increased 2.5% in 2003. Purchased power expense increased $4.9 million, or 11.0%, primarily due to an increase in the cost of natural gas ($6.4 million). The average price for purchased power was $39.31 per MWh in 2003, compared to $34.21 in 2002, an increase of 14.9%. The increase in purchased power expense was partially offset by a 3.4% decrease in volume ($1.5 million) resulting from the expiration of a 90-MW purchased power agreement with WPSC in September 2003.

Electric operating expenses

Electric operating expense decreased $0.3 million, or (0.4%), in 2004, and increased $13.3 million, or 35.4%, in 2003.2004. The following changes contributed to the net change in electric operating expenses for the indicated year:

Maintenance expense

In 2004, electric maintenance expense increased $0.4 million, or 2.8%. This is primarily due to, reflecting an increase in the maintenance of production assets, including turbine and generator overhauls ($0.6 million). This increase was partially offset by a $0.2 million decrease in maintenance of distribution assets.

In 2003, electric maintenance expense increased $3.6 million, or 30.8%. This increase is due to the following factors:

- Increase in maintenance of distribution assets ($2.1 million), including substation work, transformers, and overhead and underground lines. Maintenance and system upgrades help to improve the reliability of MGE's electric distribution system.Electric depreciation

- Increase in other maintenance sources, including electric generating assets and Columbia ($1.5 million).

Depreciation

Electric depreciation expense increased $1.1 million in 2004, and decreased $6.6 million in 2003.2004. The increase in electric depreciation expense in 2004 reflects higher levels of electric plant assets.

The decrease in 2003 Gross electric depreciation expense reflects lower decommissioning expense ($8.2 million) as a result of the sale of Kewaunee, offset in part by $1.6assets at December 31, 2004 were $612.6 million, of increased depreciation associated with an increase incompared to gross electric plant assets.assets of $573.1 million at December 31, 2003.

Gas Utility Operations

Gas deliveries and revenues

The following table compares MGE's gas retail revenues and gas delivered by customer class during each of the years ended December 31:31, 2004 and 2003:

Gas revenues increased 7.5% in 2004 and 30.9% in 2003 due to the following:

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•Gas costs/rates. The PSCW authorized increases in MGE's gas rates effective January 14, 2004, and March 1, 2003, to cover increased system demands. Gas costs increased significantly in both 2004 and 2003. The average rate per therm for residential customers in 2004 increased 12.6%. Additionally in 2003, the average rate per therm for residential customers increased 23%. See Footnote 16 of the Notes to Consolidated Financial Statements for additional information on gas base rates.

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•Retail gas deliveries. In 2004, retail gas deliveries decreased 4.2%. This decrease is attributable to warmer-than-normal temperatures as reflected by the 5.9% decrease in heating degree days.

• Gas transportation. In 2003, there was a 6.4% increase in retail gas deliveries. This increase was due to colder-than-normal temperatures, as reflected in the 5.9% increase in heating degree days.

-Gas transportation. In 2004, and 2003, there was a 2.5% and 10.1% decrease in deliveries, respectively. These decreases representdeliveries. This decrease represents customers switching from gas to other fuel options, due to the higher price of gas.

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• Other effects.revenues. Other effects decreased $0.1 million in 2004. This decrease relates to decreases in miscellaneous gas income. In 2003, there wasincome as a $0.7 million increase in other effects. This increase reflects a $0.6 million increase in the GCIM and other miscellaneous increases totaling $0.1 million.result of MGE's GCIM.

Natural gas purchased

In 2004, natural gas purchased increased $10.4$10.5 million, or 10.0%10.1%. This increase is primarily due to higher average wellhead prices. Natural gas prices (cost per therm) increased 14.8% in 2004. A PGA clause allows MGE to pass along to customers the cost of gas, subject to certain limited incentives. The PGA is authorized by the PSCW. A similar effect was felt in 2003 when natural gas purchased increased $30.7 million, or 41.8%. Natural gas prices (cost per therm) increased more than 33% in 2003.

Gas operating expenses

Gas operating expense increased $3.2 million, or 11.4%, in 2004, and increased $2.3 million, or 21.4%, in 2003.2004. The following changes contributed to the net change in gas operating expense for the indicated year:

Depreciation

Gas depreciation

Gas depreciation expense increased $0.5 million and $0.6 million in 2004, and 2003, respectively, as a result of additional gas plant assets.

Gas cost incentives

Under MGE's GCIM, if actual gas commodity costs are above or below a benchmark set by the PSCW, then MGE's gas sales service customers and shareholders share equally in any increased costs or savings. The PSCW allows MGE to resell gas pipeline capacity reserved to meet peak demands but not needed every day to serve customers. Revenues from capacity release that exceed or fall short of PSCW-targeted levels are shared equally. Beginning February 1, 2004, the PSCW lowered the formula used in establishing the benchmark for gas commodity costs. The benchmark moved to 99.5% of what it would have been under the prior formula. This change was intended to better reflect market conditions. In 2004 and 2003, MGE shareholders benefitedbenefitted $1.4 million from capacity release revenues and commodity savings under the GCIM.

In 2003,

Other Income (Loss)

For the year ended December 31, 2004, other expense at the gas and electric segments was $0.9 million, compared to $1.8 million for the same year in the prior year. During the year ended December 31, 2005, the gas and electric segments recognized a total of $0.5 million in AFUDC-equity funds and $0.8 million in miscellaneous income. This income was offset by $2.2 million in charitable contributions recorded in the electric and gas segments.

For the year ended December 31, 2004, the gas and electric segments recognized a total of $0.5 million in AFUDC-equity funds and $0.6 million in miscellaneous income. This income was offset by $2.9 million in charitable contributions recorded in the electric and gas segments.

Interest Expense

For the year ended December 31, 2004, interest expense at the electric and gas segments decreased $0.9 million, compared to the same period in the prior year. This decrease is due to a $0.7 million decrease on interest expense incurred by the gas and electric segments on long-term debt. This is a result of lower levels of long-term debt outstanding during the third and fourth quarters. Additionally, there was a $0.2 million decrease in interest expense on short-term debt expense incurred by the gas and electric segments. During the latter portion of 2004, there were lower levels of short-term debt as a result of the proceeds raised in the equity offering.

Nonregulated Energy Operations

Nonregulated Energy operations and maintenance expense

Other operations and maintenance expense increased $0.2 million for the year ended December 31, 2004, when compared to the same period in the prior year. This increase primarily relates to higher administrative and general expenses at MGE shareholders benefited $1.4Power West Campus.

Transmission Investment Operations

Other income

For the year ended December 31, 2004, the transmission investment segment recorded $4.2 million in equity earnings from ATC, compared to $3.7 million for the year ended December 31, 2003. This resulted in a $0.5 million increase in other income between the periods.

All Other Nonregulated Operations

All Other nonregulated operating revenues

MGE Construct received service fees of $2.7 million and $1.0 million from capacity release revenuesthe State in 2004 and commodity savings under2003, respectively. The service fees covered MGE Construct's role as EPC contractor for WCCF. This amount is classified as revenue from nonregulated operations within MGE Energy's financial statements. This amount was recognized as services were rendered and was collected over a 22-month period.

All Other nonregulated operations and maintenance expense

All other operations and maintenance expense increased $0.1 million for the GCIM.year ended December 31, 2004, when compared to the same period in the prior year. This increase is a result of increased general and administrative expenses in 2004 at Corporate.

All Other nonregulated other income (expense)

For the year ended December 31, 2004, the All Other segment recorded a $0.6 million gain of the sale of assets. This gain was related to the sale of land held by Magael.

All Other nonregulated interest expense, net

Interest expense for the year ended December 31, 2004, was $0.1 million, compared to interest income of less than $0.1 million for the year ended December 31, 2003.This increase is due to an increase in levels of short-term borrowings.

Consolidated Other General Taxes

MGE Energy's other general taxes increased 9.7% in 2004 primarily because MGE's license fee tax increased. The annual license fee tax expense is based on adjusted operating revenues of the prior year. Tax rates have not increased.

Consolidated Income Taxes

MGE Energy's effective income tax rate is 37.9% for 2004 compared to 39.4% in 2003. The lower effective income tax rate is primarily due to accounting for the Medicare Part D federal subsidy and the favorable resolution of a tax contingency, for which a liability had been established.

The 2003 effective income tax rate of 39.4% was up slightly from the 2002 rate of 39.1% due to constant amounts of tax credits (amortized investment tax credits and credit for electricity from wind energy) in relation to pretax income.

Other Nonregulated Operating Income

MGE Construct received service fees of $2.7 million and $1.0 million from the State in 2004 and 2003, respectively. The service fees covered MGE Construct's role as EPC contractor for WCCF. This amount is classified as revenue from nonregulated operations within MGE Energy's financial statements. The total fee of $5.0 million will be recognized as services are rendered and will be collected over a 22-month period.

Other operations and maintenance expense increased $0.2 million in 2004 for MGE Power West Campus. This is primarily related to higher administrative and general expenses.

Other Nonoperating Items

Other income increased $2.5 million in 2004 due to a $0.9 million gain on the sale of assets, an increase in ATC earnings of $0.6 million, a decrease in charitable contributions of $0.7 million, and $0.3 million in additional tax settlements.

In 2003, other income decreased $1.0 million because charitable contributions were higher.

Interest Expense

In 2004, interest expense decreased $0.4 million, or 3.2%, due to the following factors:

- Lower levels of long-term debt outstanding during the third and fourth quarters.

- Lower levels of short-term debt in the third quarter as a result of the proceeds raised in the equity offering.

In 2003, interest expense decreased $0.9 million, or 6.9%, due to the following factors:

- MGE refinanced a large portion of its long-term debt in 2002.

- Lower short-term interest rates coupled with reduced borrowing levels.

Liquidity and Capital Resources

Cash Flows

The following summarizes cash flows for MGE Energy and MGE during 2005, 2004, 2003, and 2002:2003:

Cash Provided by Operating Activities

MGE Energy

MGE Energy's consolidated net cash provided by operating activities is derived mainly from the electric and gas operations of its principal subsidiary, MGE.

2005 vs. 2004

Cash provided by operating activities decreased $9.7 million for the year ended December 31, 2005, when compared to the same period in the prior year. This decrease is attributable to a slight decrease in net income and increased amounts of inventories, receivables, unbilled revenues, and payables. For the year ended December 31, 2005, unbilled revenues increased $5.6 million compared to $3.2 million in the prior year and trade and other receivables increased $16.8 million compared to $6.1 million in the prior year. This increase is primarily attributable to increased revenues period over period as a result of higher rates and increased volumes. During 2005, there was a $6.2 million increase in materials and supplies and a $6.3 million increase in natural gas held in storage. The increase in the materials and supplies account is attributable to a significant increase in the cost of SO₂ emission allowances. These allowances are classified within inventory at the lower of market or average cost on the consolidated balance sheet. The increase in stored natural gas and accounts payable is largely attributable to the increase in the price of natural gas. These increases were slightly offset by a decrease in prepaid taxes and the collection of a $2.5 million retainage receivable. During 2005, MGE Construct collected $2.5 million of the retainage receivable from the State under the EPC agreement related to the construction of the WCCF. Additionally, there was a $2.1 million increase in deferred tax expense and a $4.4 million increase in depreciation expense between 2005 and 2004, primarily provided by the WCCF.

Other non-current items, net contributed $3.4 million to cash flows from operations for the year ended December 31, 2005, compared to $4.3 million in 2004.

2004 vs. 2003

Cash provided by operating activities was $62.3$59.6 million in 2004. Working capital increased $18.5 million. This resulted from2004, compared to $66.1 million for the same period in the prior year. During 2004, there was a $26.5$15.8 million increase in current asset balances and an $8.0a $7.9 million rise in current liability balances. Current assets were up due to increases in trade and other receivables ($16.86.1 million), stored natural gas ($4.8 million), unbilled revenues ($3.2 million), and prepayments ($1.71.6 million). Current liabilities were up due to increases in accounts payable ($8.4 million). This increase in accounts payable was offset by a $0.3$0.4 million decrease in other current liabilities. A change in other noncurrent items, net, of $4.0 million, also contributed to the increase in cash provided by operating activities. During 2004, the receivable from ATC for funds advanced in connection with WCCF transmission system upgrades became current. This resulted in a $10.7 million change in the special billing projects-ATC balance.

In 2003, cash provided by operating activities increased $11.5 million, or 20.4%. Working capital increased $7.7 million primarily due to increases in unbilled revenues ($3.1 million), stored natural gas ($5.2 million), prepayments ($3.7 million), and accounts receivable ($1.4 million) and a decrease in accrued interest and taxes ($0.4 million). These changes were offset by higher accounts payable of $2.5 million and other current liabilities of $3.7 million.

Deferred income taxes increased $8.1 million in 2003, due to the impact of 50% additional bonus depreciation, which went into effect in May  2003. An increase in other noncurrent items, net, of $9.9$4.3 million, also contributed to the increase in cash provided by operating activities.

MGE

2005 vs. 2004

Cash provided by operating activities was $60.5$29.3 million for 2005 compared to $57.7 million for 2004. Working capitalThis decrease is attributable to a slight decrease in net income and increased $19.1 million. This resulted fromamounts of inventories, receivables, unbilled revenues, and payables. The decrease in net income is largely due to increased fuel costs in 2005. The increases in unbilled revenues and accounts receivable is primarily attributable to increased revenues period over period as a $24.5result of higher rates and increased volumes. The increase in the materials and supplies account is related to a significant increase in the cost of SO₂ emission allowances. These allowances are classified within inventory at the lower of market or average cost on the consolidated balance sheet. The increase in stored natural gas is a result of the increase in the price of natural gas.

These increases were offset by a decrease in prepaid taxes and an increase in accrued taxes and interest. Additionally, there was a $4.4 million increase in currentdepreciation expense between 2005 and 2004, primarily provided by the WCCF, a $2.1 million increase in deferred tax expense, and $5.4 million in minority interest expense, net of tax. This amount relates to net income earned by MGE Energy from its interest in MGE Power West Campus and MGE Transco.

2004 vs. 2003

Cash provided by operating activities was $57.7 million for 2004, compared to $70.7 million in 2003. Current asset balances increased $13.8 million increase and a $5.4$5.3 million increase in the current liabilities balances. Current assets rose due to increases in trade and other receivables ($14.13.5 million), stored natural gas ($4.8 million), unbilled revenues ($3.2 million), and prepayments ($2.32.2 million). Current liabilities were higher due to increases in accounts payable ($5.9 million), offset by a $0.4$0.5 million decrease in other current liabilities. A change in other noncurrent items, net, of $3.9$4.2 million also contributed to the increase in cash provided by operating activities. During 2004, the receivable from ATC for funds advanced in connection with WCCF transmission system upgrades became current. This resulted in a $10.7 million change in the special billing projects-ATC balance.