United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended:

December 31, 20052006

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

For the transition period from __________ to __________

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None.

	Title of Class
MGE Energy, Inc.	Common Stock, $1 Par Value Per Share

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

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 [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

Indicate by checkmark whether the registrant 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, 2005,2006, was as follows:

The number of shares outstanding of each registrant's common stock as of February 1, 2006,2007, were as follows:

Documents Incorporated by Reference

Portions of MGE Energy, Inc.'s definitive proxy statement to be filed on or before April 17, 2006,16, 2007, 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 Relat eda nd Related Transactions.

Table of Contents

Filing Format

5

Forward-Looking Statements

5

Where to Find More Information

5

Definitions

6

PART I.

8

Item 1. Business.

8

Item 1A. Risk Factors.

15

Item 1B. Unresolved Staff Comments.

17

Item 2. Properties.

18

Item 3. Legal Proceedings.

19

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

19

PART II.

20

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

20

Item 6. Selected Financial Data.

21

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

22

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

48

Item 8. Financial Statements and Supplementary Data.

51

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

105

Item 9A. Controls and Procedures.

105

Item 9B. Other Information.

105

PART III.

106

Item 10. Directors, and Executive Officers of the Registrant.and Corporate Governance.

106

Item 11. Executive Compensation.

106

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

106

Item 13. Certain Relationships and Related Transactions.Transactions, and Director Independence.

106

Item 14. Principal Accountant Fees and Services.

107

PART IV.

108

Item 15. Exhibits and Financial Statement Schedules.

108

Signatures - MGE Energy, Inc.

114

Signatures - Madison Gas and Electric Company

115

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—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. The factors that could cause actual results to differ materially from the forward-looking statementsstatement s made b yby a registrant a) include those factors discussed in a) Item 1A. Risk Factors, b) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, c)and Item 8. Financial Statements and Supplementary Data, d)and b) other factors discussed in filings made by MGE Energy and MGEthat registrant with the 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 100 F Street, 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 web site maintained by the SEC athttp://www.sec.gov.www.sec.gov.

Our Internet site addresses arewww.mgeenergy.com and www.mge.com.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 and MGE's web sites shall not be deemed incorporated into, or to be a part of, 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 the following business segments:

•

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

•

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

•

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

•

Transmission Investments-Investments— investing in companies engaged in the business of providing electric transmission services, such as ATC. In the 4^thfourth quarter of 2005, the investment in ATC was transferred from the electric utilityMGE to MGE Transco.

•

All Other—investing in companies and property which relate to the regulated operations, financing the regulated operations, or providing construction services to the other subsidiaries through its wholly owned subsidiaries Corporate, MGE Construct, MAGAEL and CWDC.CWDC, and Corporate functions.

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 relateinclude a undivided interest in the assets of the West Campus Cogeneration Facility. Namely, pursuant to the ownershipWCCF Joint Ownership Agreement, MGE Power West Campus owns 55% of a controllingthe facility, which represents its interest in the electric generation plant of a natural gas-fired cogeneration facility ongenerating assets and the UW campus,owns 45% of the facility, which represents their interest in the steam and chilled water assets. Nonregulated energy operations also include an undivided 8.33% ownership interest in each of two 615 MW generating units being constructed in Oak Creek, Wisconsin.

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 Energy'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 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.

Electric Utility Operations

MGE generates and distributes electricity in a service area covering the 250-square-milea 315-square-mile area of Dane County, Wisconsin. Its service area includes the city of Madison, Wisconsin.

At December 31, 2005,2006, MGE supplied electric service to nearly 136,000135,000 customers, with approximately 121,00089% located in the cities of Fitchburg, Madison, Middleton, and Monona and 15,00011% in adjacent areas. Of the total number of customers, approximately 86.6%87% were residential and 13.4%13% were commercial or industrial. Electric revenues for 2006, 2005, and 2004 were comprised of the following:

Electric operations accounted for approximately 60.8%63.3%, 59.3%60.8%, and 60.2%59.3% of MGE's total 2006, 2005, 2004, and 20032004 regulated revenues, respectively.

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

MGE was a member of MAIN, a regional reliability group. As of December 31, 2005, the MAIN reliability council no longer exists. MGE has chosen to join the MRO as theirits regional reliability council. The essential purposes of the MRO are: (1) the development and implementation of regional and 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 Transmission

Reliability 2000 legislation enacted in Wisconsin. Part of that legislationWisconsin mandated, among other things, the creation of a statewide transmission company to own the investor-owned utilities' transmission assets. Pursuant to these provisions, effective January 1, 2001, MGE transferred all of its electric utility transmission assets to ATC in exchange for an ownership interest in ATC. At December 31, 2006, MGE Transco held a 3.9% ownership interest in ATC as a result of the aforementioned assets transferred and subsequent additional capital contributions made.

ATC is owned and governed by the utilities that contributed facilities or capital in accordance with Wisconsin law. 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.Midwest ISO. MGE is a non-transmission owning member of the MISO.Midwest ISO.

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 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, 2005, MGE Transco had approximately a 4.4% ownership interest in ATC.Regional Transmission Organizations

On February 1, 2002, MGE started taking network transmission service from the MISO. MISOMidwest ISO. Midwest ISO is a nonprofit RTO approved by FERC. The MISOMidwest ISO 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.

As a FERC approved RTO, MISOMidwest ISO is required to provide a real-time energy services and a market basedmarket-based mechanism for congestion management. On April 1, 2005, the MISOMidwest ISO implemented its bid-based energy market. At that time, MGE began offering substantially all of its generation on the MISOMidwest ISO market and purchasing much of its load requirement from the MISOMidwest ISO market in accordance with the MISOMidwest ISO Tariff.

Additionally, on May 1, 2004, MGE became a member of PJM. PJM is also an RTO. PJM is a neutral and independent party that coordinates and directs the operation of the region's transmission grid, administers a competitive wholesale electricity market, and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. MGE has three purchase power agreements, for a total of 115 MW, that are impacted by this market.

Fuel supply and generation

MGE satisfies its customers' electric demand with purchased power and internal generation. During the yearyears ended December 31, 2006, 2005, and 2004, MGE's generation was provided fromelectric energy delivery requirements were satisfied by the following sources:

Sources used dependeddepend on market prices, generating unit availability, weather, and customer demand.

Coal

MGE and two other utilities jointly own Columbia, a coal-fired generating facility, which accounts for 30% (225 MW) of MGE's net generating capability. Power from this facility is shared in proportion to each owner's ownership interest. MGE has a 22% ownership interest in two 512-MW coal-burning units at Columbia. The coal inventory supply for the units decreased from 41 days on December 31, 2004, to 35 days on December 31, 2005.other owners are Alliant, which operates Columbia, and WPSC. The co-owners' current goal is to maintain approximately a 35-day inventory. TheColumbia units burn low-sulfur coal obtained (pursuant to long-term contracts) from the Powder River Basin coal fields located in Wyoming and Montana.

MGE's share of the coal inventory supply for the units decreased from 44 days on December 31, 2005, to 31 days on December 31, 2006. The co-owners' current goal is to maintain approximately a 35-day inventory.

MGE also owns the Blount Generating Facility located in Madison, Wisconsin, which is fueled by coal and gas. On January 19, 2006, MGE announced a plan, subject to certain conditions, that includes discontinuing coal use at the end of 2011 at Blount. The plant will continue to run on natural gas but will be reduced from its current approximate 190 MW capacity to 100 MW when coal burning is discontinued.

Natural gas and oil

MGE owns gas fired combustion turbines. These turbines are primarily located in Madison and Marinette, Wisconsin and have a total of 174 MW of generating capacity.

See discussion above for discussion of the Blount Generating Facility and see below discussion under Nonregulated Operations for MGE's interest in a natural gas-fired cogeneration facility on the UW campus.

Renewable generation sources

On September 29, 2006, MGE formalized plans to acquire 29.7 MW or 18 turbines in a wind-powered electric generating facility to be constructed in Worth County, Iowa. MGE's share will represent 26.5% of a larger wind generation facility known as the Top of Iowa Phase II Wind Power Purchase AgreementProject. MGE currently estimates that its costs to complete this project will be approximately $59 million and that a majority of these capital expenditures will be made in 2007. At December 31, 2006, MGE had incurred $10.7 million of costs on the project, which is reflected in the construction work in progress balance on MGE and MGE Energy's consolidated balance sheets. Construction of this facility is expected to be completed by December 31, 2007. MGE expects regulatory recovery of these costs. If approval is granted by the PSCW, MGE expects recovery to begin in 2008.

Purchased power

As mentioned under the discussion on "Regional Transmission Organizations" above, at the time Midwest ISO implemented its bid based energy market, MGE began offering substantially all of its generation on the Midwest ISO market and purchasing much of its load requirement from the Midwest ISO market in accordance with the Midwest ISO Tariff. Accordingly, the Midwest ISO market is the source of MGE's purchased power needs.

MGE also has purchase power contracts with three companies residing in the PJM market. These contracts provide a means for MGE to participate in the PJM market via the receipt of FTRs. Under these agreements MGE has the contractual right to 115 MW of power.

On July 16, 2004, MGE signed a 20-year power purchase agreement for 40 MW of wind energy to be located near Waupun, Wisconsin. Construction has not begunAt December 31, 2006, construction on this project had not begun, and discussions are currently on-going related to its viability. As a result,viability were on-going. At December 31, 2006, no final decisions or financial commitments havehad been made. However, on February 21, 2007, MGE signed an amendment to this agreement. This amendment reduces the available MW under this agreement from 40 MW to 15 MW.

Gas Utility Operations

MGE transports and distributes natural gas in a service area covering 1,3501,625 square miles in seven south-central Wisconsin counties. Its service area includes the city of Madison, Wisconsin.

On December 31, 2005,2006, MGE supplied natural gas service to nearly 137,000more than 138,000 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 122,00089% were residential and 15,00011% were commercial or industrial. Gas revenues for 2006, 2005, and 2004 were comprised of the following:

Gas operations accounted for approximately 39.2%36.7%, 40.7%39.2%, and 39.8%40.7% of MGE's total 2006, 2005, 2004, and 20032004 regulated revenues, respectively.

MGE can curtail gas deliveries to its interruptible customers. Approximately 6% of gas sold in 2006 and 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 4,942,8224,935,272 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. 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, 2005.

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

•

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

•

59,608 Dth on NNG.

Nonregulated Energy Operations

MGE Energy, through its subsidiaries, is seekingseeks to develop generation sources that will assist MGE in meeting the electricity needs of its customers. 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, has constructed a natural gas-fired cogeneration facility on the UW campus. As of December 31, 2006, MGE Power West Campus had incurred $103.3 million (excluding capitalized interest) of costs on the project, which is reflected in Property, Plant, and Equipment on MGE and MGE Energy's consolidated balance sheets.

The facility has the 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 jointly own the facility.facility and each have an undivided interest. The UW owns a controlling45% of the facility, which represents its interest in the chilled-water and steam plants, whichassets. These assets are used to meet the UW's growing need for air-conditioning and steam-heat capacity. MGE Power West Campus owns a controlling55% of the facility, which represents its interest in the electric generation plant, which isgenerating assets. These assets are used to provide electricity to MGE's customers.

The total construction cost is estimated to be $187.6 million,UW's share of which $103.6 million is MGE Power West Campus' estimated portion. Asthe plant and portion of December 31, 2005, MGE Power West Campus had incurred $102.1 million (excluding capitalized interest) of costs on the project, which isearnings from the WCCF are not reflected in Property, Plant, and Equipment on MGE and MGE Energy's condensedthe consolidated balance sheets. Of this amount, $0.8 million has not yet been paid. MGE Power West Campus estimates an additional $1.5 million in capital expenditures for this project. These amounts primarily relate to water mitigation and laydown restoration costs. These amounts have not yet been incurred or included infinancial statements of MGE or MGE Energy's Property, Plant, and Equipment balance.Energy.

MGE Energy,leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the entire facility. On April 26, 2005, the facility lease between MGE Construct had contractually assumed certain risks related to the construction of WCCF. In the EPC Agreement,and MGE Power West Campus is responsiblecommenced. The financial terms of the facility lease include a capital structure of 53% equity and 47% long-term debt, return on equity of 12.1%, and a lease term of 30 years. At the end of the lease term in 2035, MGE may, at its option, renew the facility lease for cost overrunsan additional term, purchase the generating facility at fair market value or allow the lease contract to end. In accordance with the provisions of SFAS No. 13, Accounting for Leases, MGE, as the lessee, accounts for the aforementioned lease arrangement as a capital lease and MGE Construct was responsiblePower West Campus, as the lessor, accounts for the construction process oflease as a direct financing leasing arrangement. Upon consolidation, certain accounts associated with the entire facility, paying liquidated damages relating to failure to achieve 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 was the guarantor of MGE's Construct's obligations under the EPC Agreement.leasing transaction ar e eliminated.

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 facility. MGE is collecting these costs in rates over a period of ten years. Of these costs, $4.1 million relate to the capitalized interest and the debt portion of the facility. These costs are recognized over the period in 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.Additionally, MGE Power West Campus records nonregulated revenues related to management, demolition, and removal fees.

Elm Road

On November 4, 2005, MGE Power Elm Road closed on the exercise of an option to acquire an undivided 8.33% 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$171 million which it intends to finance primarily through funds received from MGE Energy. MGE Energy expects that these funds will be raised through the sale of securitiescommon stock (via the Stock Plan), short-term debt, and normal operations. At December 31, 2005,2006, MGE Power Elm Road had incurred $24.4$53.5 million (excluding capitalized interest) of costs on the project, which is reflected in the Construction Work In Progress balance on MGE and MGE Energy's condensed consolidated balanc ebalance sheets. Of this amount, $2.1$3.3 million has not yet beenbee n paid.

On the date of acquisition, MGE Energy and its subsidiaries 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.

On November 1, 2005, MGE received approval from the PSCW to defer payments made to MGE Power Elm Road for carrying costs during construction of the facility, management fees, and community impact mitigation costs. MGE will beginbegan collecting the carrying costs in rates in 2006. MGE estimates total carrying costs to be approximately $54$54.3 million. This amount is expected to be collected over multiple years. Of these costs, $10$21.7 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$32.6 million is estimated to represent the equity portion and will beis being recognized over the period recovered in rates. MGE expects to begin collecting the management fees and community impact mitigation costs in rates in 2008. These costs are expected to be collected over a 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 op erationoperation of future generating facilities.

Air quality

Air quality regulations promulgated by the EPA and 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. SuchThese permits have been obtained by MGE and must be renewed periodically. Various initiatives, including the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), maximum achievable emissioncontrol technology (MACT) standards and Regional Haze Regulations, as well as existing and proposed state mercury emissions limits, may affectresult in additional operating and capital expenditure costs at Blount and Columbia.costs.

On May 12, 2005, the EPA promulgated theThe CAIR that is designed to mitigate the transport of fine particulate matterrequires NO_x and ozone pollution by imposing emission reduction requirements on SO₂ and NO_x in 29 eastern states and the District of Columbia, including Wisconsin. Theseemission reductions would be implemented in two phases and may includeincludes a regional cap-and-trade system. The first phase begins in 2009 for NO_xand 2010 for SO₂, and contemplates reductions of 55% and 40%, respectively, increasing in the second phase by 2015 to 65% and 70%, respectively; in each case over 2003 levels. In 2009 CAMR seeks to reduce mercury emissions from coal-fired power plants through a system of monitoring and several compliance options to reduce mercury emissions, including equipment installations and allowance trading options through a cap-and-trade system. Regional SO₂emissionsBlount and Columbia Stations would be reduced in 2010affected by approximately 40% below 2003 levelsboth CAIR and by approximately 70% below 2003 levels by 2015. Regional emissions of NO_xCAMR, and West Marinette and Fitchburg substations would be cutaffected by CAIR. The actual costs to MGE of such compliance are difficult to estimate but are expected to be recoverable in 2009 by approximately 55% below 2003 levels and in 2015 by approximately 65% below 2003 levels.rates, subject to PSCW approval.

The Clean Air Act also requires 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 (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 generation 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 that were constructed as a part of the facility. Com plying2007. Compliance with the MACT standards may increase capital expenditures and operating and maintenance expenses.

The EPA has also promulgated rules aimed at reducing mercury emissions from utility boilers. The EPA rules contain several compliance options. DNR is required by state statute to modify existing state mercury control rules to conform to the federal rules. As a joint owner of Columbia, MGE may have increasedaffect capital expenditures and operating and maintenance expenses if theat Blount and Columbia owners chooseStations.

Preliminary DNR air modeling indicates that emissions from Columbia may impair visibility at certain Class I Scenic Areas and may therefore be subject to control mercury emissionsRegional Haze and Best Available Retrofit Technology (BART) regulations. DNR expects to submit rules on BART to EPA by 2008. BART becomes effective in 2013. The actual costs of any compliance that may be required are difficult to estimate at Columbia.this time but are expected to be recovered in rates.

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 invalidated 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.facilities but are expected to be recoverable in rates.

In December 2000, February 2001, June 2002,The EPA recently lowered the acceptable 24-hour National Ambient Air Quality Standards (NAAQS) for fine particulate matter, i.e., particles that are 2.5 microns or smaller in diameter and January 2003, Alliant received requests fromis requiring states to monitor and collect data on fine particulate levels in order to establish attainment and nonattainment areas for the new standard. States (including Wisconsin) determine designation by county and/or area based on whether the county/area meets the NAAQS (designated as attainment) or the county does not meet the NAAQS (designated as nonattainment), as measured by air monitors placed in that county/area. Preliminary designations of attainment and nonattainment areas/counties are due to the EPA seeking information concerning Columbia's compliancein December 2007 with final designation in 2009 and implementation to begin after 2010. Results from air monitors during the Clean Air Act. The requests appear to be part2006 calendar year and beyond will play a role in designation status (attainment or nonattainment). Designations 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 innonattai nment could affect capital, expenditures or operatingoperational and maintenance expenses arising from the EPA's inquiry.at generating facilities. However, it is unknown at this time whether any of MGE's generating facilities would be impacted and to what extent.

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 significant additional capital expenditures.expenditures but are expected to be recoverable in rates.

Pursuant to a court order,In 2004, the EPA on July 9, 2004, promulgated final rules under Section 316(b) of the Clean Water Act addressing cooling water intake structures for existing large power plants. The rule is currently being challenged byA challenge to these rules was upheld in a coalition of statesJanuary 2007 court decision and environmental groups. Pursuant to the provisionssignificant parts of the rule MGE, in its current draft WPDES renewalwere remanded to the EPA for Blount, has been grantedfurther consideration. Absent an extensionappeal, EPA will need to no later than January 7, 2008,modify and/or reissue significant portions of the rule to comply with the various requirements.court's ruling. The new rulesruling, and EPA's actions in response, which may result in additional capital expenditures; however,change the compliance requirements, may affect the timing and costs associated with MGE's WPDES permit for Blount and possibly the WPDES permit for the Oak Creek/Elm Road facility. At this time, 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 a potentially responsible party for a site the EPA has placed on the national priorities Superfund list. The Lenz Oil site in Lemont, Illinois, 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, is currently working on cleaning up the site. Management believes that its share of the final cleanup costs for the Lenz Oil site 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 recovered in current and future rates. As of December 31, 2005,2006, a $0.1 million liability was accrued for this matter.

Global climate change

The ongoing issueUnited States is currently not a party to the United Nations' Kyoto Protocol that became effective for signatories on February 16, 2005. The Protocol process generally requires developed countries to cap greenhouse gas (GHG) emissions at certain levels during the 2008 to 2012 time period. Although GHG are not currently regulated, MGE recognizes that these gases—particularly carbon dioxide (CO₂), which is released in the burning of global warmingfossil fuels—may face future legislative or regulatory restrictions. Several bills to limit GHGs have been proposed in the U.S. Congress, and several states, including Wisconsin, have proposed actions. These restrictions 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, Nonetheless, MGE and the DNR signed an Environmental Cooperative Agreement under which MGE committedis taking steps to work toward superior environmental performancel ower its CO₂emission rates, including replacing coal operations at Blount. Among other things, the five-year agreement requires MGE to evaluate combustion efficiency improvements, enhanceits Blount Station with new, pollution controls on Boiler 8, increasecleaner coal generation, increased use of alternative fuels, attempt to increase beneficial reuse of fly ashrenewable energy (primarily wind), 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 is 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. The auditors had previously identified some possible compliance exceptions which were timely addressed and disclosed pursuant to a state statut 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.heightened customer conservation programs.

Employees

As of December 31, 2005,2006, MGE had 746740 employees. MGE employs 261254 employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electrical Workers, and 105106 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.April 30, 2009. There are also 5 employees covered by a collective bargaining agreement with Local Union No. 2-111 of the United Steel, Paper 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.November 1, 2009.

Financial Information About Segments

See Footnote 2125 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

Note: Ages, years of service, and positions as of December 31, 2006.

(a)

Executive officer of MGE Energy and MGE

(b)

Executive officer of MGE

(c)

Retired as of January 1, 2007

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 business is subject to regulation at the State and Federal levels. We are subject to regulation as a holding company by the PSCW. MGE is regulated by the PSCW as to its rates, terms and conditions 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, byupon 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,Midwest ISO, a FERC-approved RTO. Effective April 1, 2005, MISOMidwest ISO 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 MISOMidwest ISO 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 Unitsseveral generating units.

We have assumed risks under the agreements related to our undivided 8.33% ownership interest in two 615 MW coal-fired generating units being constructed in Oak Creek, Wisconsin. MGE Power Elm RoadWisconsin and our ownership interest in a 29.7 MW wind-powered generating facility being constructed in Worth County, Iowa. The completion of these projects 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,materials; the inability of the general contractor or subcontractors to perform under their contracts, strikes,contracts; strikes; adverse weather conditions,conditions; the inability to obtain necessary permits in a timely manner and changes in applicable laws or regulations,regulations; governmental actionsactions; and events in the global economy. IfIn addition, in the final costs for the constructioncase of the Elm Road units being constructed in Oak Creek, if the units' final construction costs exceed the fixed costs allowed in the PSCW order, this excess cannotwill not be recoveredrecoverable from MGE or its customers unless specifically allowed by the PSCW. Pr ojectAny Oak Creek project costs above the authorized amount, but below thea 5% cap, will be subject to a prudence determination made by the PSCW.

The start of construction was delayed by litigation related to environmental matters. Thus, We Energies estimates that project costs will increase. MGE Power Elm Road's estimated share of the increase is approximately $4.0 million. This represents an increase of approximately 2.4% in the total cost of the project. We Energies believes these costs are ultimately recoverable under the terms of the lease agreements, however, recovery is subject to final calculation of costs and also to review and approval by the PSCW.

In addition, although We Energies obtained the reissuance of a WPDES permit that is required for operation of the Oak Creek/Elm Road water intake and discharge system, litigation has continued regarding the applicable standard and the resulting reissuance. An adverse decision in those proceedings could further increase construction costs and delay operation.

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 allowanceallowances 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$57 million of variable-rate debt outstanding at December 31, 2005,2006, including $66.0$29.5 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 difficultmeans that we are exposed to satisfy our obligationsincreased financing costs and to pay dividends on our common stock atassociated cash payment as a result of changes in the current rate.short-term interest rates.

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 current and longer-term 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 suchcontractual counterparties to perform their obligations under power purchase agreements, commodity supply arrangements or other agreements may result in increased expenses for MGE andas a result of being forced to cover the shortfall in the spot or short-term market, where prices 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..be more volatile.

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 no operations of our own, our ability to pay dividends on our common stock is dependent on the earnings and cash flows of our operating 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 payment of dividends.

Item 1B. Unresolved Staff Comments.

MGE Energy and MGE

None.

Item 2. Properties.

MGE's netElectric Generation

Net generating capability in service at December 31, 2005,2006, was as follows:

(1)

Baseload generation.

(2)

MGE's 22% share of two 512-MW units. The other owners are Alliant, which operates Columbia, and WPSC.

(3)

On January 19, 2006, MGE announced that it would cease coal-fired generation at Blount in 2011, subject to certain conditions, including regulatory approvals.

(4)

Facility is jointly owned. MGE Power West Campus owns a controlling interest in the electric generation plant and the UW owns a controlling interest in the chilled-water and steam plants. MGE leases the electric generating assets owned by MGE Power West Campus and is responsible for operating the facility. Amounts shown represent MGE's share of the net capability.

(5)

Based on the terms of the joint plant agreement between MGE and the UW, the UW has the ability to reduce net capability of these units by approximately 27 MW in the winter and approximately 17 MW in the summer.

Electric and Gas Distribution Facilities

Major electric distribution lines and substations in service at December 31, 2005,2006, which are owned by MGE, are as follows:

Gas facilities include 2,373 miles of distribution mains, which are owned by MGE.

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.

Transmission Facilities

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 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 2,330 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.

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 Energy.Energy

MGE Energy common stock is traded on Nasdaq under the symbol MGEE. On MarchFebruary 1, 2006,2007, there were approximately 19,39818,877 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 MarchFebruary 1, 2006,2007, 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.Energy and MGE

The following table sets forth MGE Energy's quarterly cash dividends paid during 2005 and 2004:

MGE.

The following table sets forth MGE's quarterly cash dividends paiddeclared during 20052006 and 2004:2005:

See "Liquidity and Capital Resources - Capital Requirements and Investing Activities for MGE Energy and MGE"Financing Activities" 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:

*In March 2005, MGE Energy switched from issuing new shares of common stock for its Stock Plan to purchasing shares on the open market through a securities broker-dealer on behalf of the plan participants. These shares are then re-issued, as needed, under the Stock Plan. The share purchases are driven by share purchases under the Stock Plan. Thus, there is no specified limit and no specified termination date.

Total shares reissued under the Plan for the quarter ended December 31, 2005, were 118,667. Total treasury shares held at December 31, 2005 were 3,384. The cost basis of these shares is shown as a reduction to shareholders' equity on MGE Energy's condensed consolidated financial statements.

MGE.

NoneNone.

Item 6. Selected Financial Data.

MGE Energy

(In thousands, except per-share amounts)

*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 five business segments: electric utility operations, gas utility operations, nonregulated energy operations, transmission investments, and all other. Our principal subsidiary is MGE, which conducts our electric utility and gas utility operations and represents a substantial portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to nearly 136,000135,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to nearly 137,000more than 138,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.

Other subsidiaries, which constitute of ourOur nonregulated energy operations and all other segment, have been formed to ownlease and constructown new electric generating capacity. Our nonregulated energy operations relate principally to the leasing of the cogeneration project on the UW-Madison campus. The WCCF facility began producing electricity on April 26, 2005. TheOur nonregulated energy operations relating to this cogeneration plant are included in MGE's consolidated financial statements as a result of the accounting requirements of FIN 46R. On November 4, 2005, MGE Power Elm Road finalized an agreement to acquirealso include 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 energyBoth of these operations segment and isare included in MGE's consolidated financial statements as a result of the accounting requirements of FIN 46R. For the year ended December 31, 2005, this entity has an immaterial impact on MGE or MGE Energy's operations.

The transmission investment segment consists of our investment in ATC and the related equity earnings in ATC.earnings.

Our all other segment includes corporate operations and services, as well as certain construction services.

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. ItMGE 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

Year Ended December 31, 20052006, Versus the Year Ended December 31, 20042005

Executive Summary

In 2005,2006, our earnings were $42.4 million or $2.06 per share compared to $32.1 million or $1.57 per share compared to $33.8 million or $1.77 per share in the prior year. Results for 2005 were adversely impacted by the natural disasters in the Gulf of Mexico. These disasters and the related damage to the energy infrastructure, resulted in abnormally high fuel and purchased power costs that were not entirely recovered from our customers, and ultimately, lower 2005 earnings.

During 2005,2006, utility operations experienced an increase in electric revenues of $60.6 million.$7.9 million or 2.5%. This increase is attributable to an increase in rates, that became effectiveoffset by decreases in January 2005, an increase inretail volumes, sales for resale, and warmer temperatures, which increased demand forother electric revenues.

On December 12, 2005, the summer months. ThesePSCW authorized MGE to increase 2006 electric revenues by $35.9 million. This increase was implemented to cover forecasted increases werein fuel costs and the cost of additional facilities such as MGE Power West Campus and MGE Power Elm Road. During 2006, this authorized increase was partially offset by increasedan interim credit issued by the PSCW.

For the year ended December 31, 2006, actual electric fuel and purchased power costs.costs were lower than those included in the aforementioned rate order. In 2005,2006, fuel used for electric generation increased $22.0decreased $15.8 million or 51.1%,24.3% compared to 2004.2005. Additionally, purchased power expense increased by $29.7 million. These increases are largelydecreased $4.5 million or 5.5% compared to 2005. As a result of lower actual fuel costs during 2006, the PSCW approved an interim credit and electric rates during this period were subject to refund. In response, MGE recorded a $19.1 decrease to other electric revenues to reflect the refund and credit due to the natural disasters that have occurredcustomers. This amount includes $0.4 million in the Gulfcarrying costs incurred. As of Mexico and the reduced availabilityDecember 31, 2006, $16.8 million of natural gas supplies.this amount had been credited on customers bills. The remaining $2.3 million is expected to be refunded to customers in March 2007.

During the year ended December 31, 2005,2006, gas revenues increased $28.8 million.decreased $15.3 million or 7.6%. This increasedecrease is dueattributable to higher costsa 7.3% decrease in the cost per therm of gas slightly offset byand 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.deliveries.

Operation and maintenance expenses increased $8.5 million during the year ended December 31, 2006. This increase is primarily due to higher electric transmission expenses. These increases were partially offset by lower distribution expenses and general and administrative costs.expenses.

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, 20052006 and 2004:2005:

Electric operating revenues were up 24.2%2.5% in 20052006 due to the following:

•

Rates.On December 12, 2005, the PSCW authorized MGE to increase 2006 electric revenues by $35.9 million to cover rising fuel and purchased power costs and the cost of additional facilities needed to meet the rising electric needs of MGE's customers.

On March 9, 2006, the PSCW approved an interim fuel credit to reduce electric rates by $0.00069 per kWh as a result of lower January fuel costs than those in the aforementioned rate order. This credit was applied to rates as of March 9, 2006. Per the terms of the order issued on March 9, 2006, MGE's rates were also subject to refund. On May 25, 2006, the PSCW approved a stipulation filed by MGE. Under this stipulation, the interim credit was increased by $0.00454 per kWh. The aforementioned orders resulted in a $16.8 million reduction to customer bills for the year ended December 31, 2006.

On December 21, 2004, the PSCW authorized MGE to increase 2005 electric revenues by $27.4 millionmillion. Due to cover risingthe natural disasters in the Gulf of Mexico and the abnormally high fuel costs commercial operation of WCCF, and increased transmission expenses.

Onthat resulted, on November 11, 2005, the PSCW approved MGE's request for an interim fuel surcharge to increase electric rates insurcharge. During 2005, due to a significant increase in fuel costs. MGE recorded $1.7 million in additional electric revenues during 2005 under this interim order.

The PSCW also 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 was included in customers' 2004 bills, resulting in a reduction to 2004 rates. Additionally, during 2003 a fuel credit in the amount of $4.0 million was recognized. Of this amount, $3.2 million was refunded to customers in the first quarter of 2004. This also resulted in a reduction to 2004 electric rates, and contributed to the aforementioned change.

•

Sales for resale. During 2005,2006, sales for resale increased $16.6decreased $11.9 million. Sales for resale include transactions conducted on the PJM and MISOMidwest ISO markets reflecting our involvement in the PJM and MISOMidwest ISO markets since their establishment on May 1, 2004, and April 1, 2005, respectively. This increase is attributable to MGE's involvement in these markets.

MGE has recorded transactions on the PJM and MISOMidwest ISO markets in which we are buying and selling power within the same period to meet our electric energy delivery requirements on a net basis. This treatment resulted in a $122.2$154.4 million and $3.2$122.2 million reduction to sales for resale and purchased power expense for the years ended December 31, 20052006, and December 31, 2004,2005, respectively. The decrease in sales for resale for the year ended December 31, 2006, when compared to the same period in the prior year is largely attributable to a change in the relationship between the cost of purchased power and the cost of internal generation. Namely, during 2006 the cost to purchase power in certain periods was less than the cost to internally generate. Accordingly, MGE was purchasing more power from the market than they were selling power into the market for the year ended December 31, 2006, when compared to the same period in 2005.

•

Volume. During 2005,2006, there was a 4.9% increase0.7% decrease in total retail sales volumes. This increasedecrease is primarily attributable to warmer temperatures.cooler temperatures during the summer months. Cooling degree days for the year ended December 31, 2005, increased 88.2%2006, decreased 24.8% from 450 for the year ended December 31, 2004 to 847 for the year ended December 31, 2005.

•

Other Revenues. Other electric revenues decreased $3.9 million2005, to 637 for the year ended December 31, 2005,2006.

•

Other Revenues.Other electric revenues decreased $6.7 million for the twelve months ended December 31, 2006, compared to the same period in the prior year. During 2005,the twelve months ended December 31, 2006, MGE began recovering in electric rates the payments to MGE Power West Campus for carrying costs on construction expenditures for the WCCF. The electric revenues were offset byrecorded a net $2.3 million reduction to other electric revenues to account for the effects of the interim orders described above under "Rates."

During the year ended December 31, 2006, MGE recovered in electric rates carrying costs on WCCF and Elm Road. MGE recorded a $5.2 million adjustment to other electric revenues to eliminate the recognition of revenue related to these costs in the electric segment as revenue related to these amounts arecarrying costs is recorded by MGE Power Elm Road and MGE Power West Campus. Campus (see discussion of these revenues in the "nonregulated operations revenue" section).

For the year ended December 31, 2005, MGE recorded a total reduction of $0.8 million was recordedadjustment to other electric revenues.

Additionally, duringrevenues to eliminate the first quarterrecognition of 2004,revenues related to carrying costs on MGE reversed the 2003 fuel credit liability, which was refunded to customers during the first quarter of 2004. The actual fuel refund decreased retail revenues and was offset by an increase in other electric revenues. The fuel credit liability was previously recorded from August 2003 to January 2004 as a reduction in other electric revenues.Power West Campus.

Electric fuel and purchased power

In 2005,2006, fuel used for electric generation increased $22.0decreased $15.8 million, or 51.1%24.3%, compared to 2004. This increase is due to an increase in the costs of internal generation and an increase in internally generated power.2005. The per-unit cost of internal generation increased 45.6%decreased 11.3% for the year ended December 31, 2005,2006, when compared to the same period in the prior year, reflecting the increaseddecreased cost of natural gas . That increase is largelygas. Recall that fuel costs in 2005 were abnormally high due to the natural disasters that have occurred in the Gulf of Mexico and the reduced availability toreduction in natural gas supplies. supplies that resulted.

The volume of internal generation increased 3.8%also decreased during this period reflecting a shift between internal generation and purchased power. Namely, MGE found that during certain time periods it was more cost effective to satisfy demand through purchased power, rather than internal generation.

Despite a 14.5% increase in the volume of purchased power for the year ended December 31, 2005 when compared to the same period in the prior year.

Purchased2006, purchased power expense increaseddecreased by $29.7$4.5 million, or 57.1%, for 2005, compared to 2004.5.5%. This increasedecrease reflects a 33.4% increase17.5% decrease in the per-unit-cost and a 17.7%partially offset by the aforementioned increase in the volume of purchased power.volume.

MGE has recorded transactions on the PJM and MISOMidwest ISO markets in which we are buying and selling power within the same period to meet our electric energy delivery requirements on a net basis. This treatment resulted in a $122.2$154.4 million and $3.2$122.2 million reduction to purchased power expense for the years ended December 31, 20052006, and December 31, 2004,2005, respectively.

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Electric operating expenses

Electric operating expense increased $13.9$7.9 million in 2005.2006. The following changes contributed to the net change in electric operating expenses for 2005:2006:

(a)

This increase relates to the commencement of the leasing arrangement between MGE and MGE Power West Campus inon April 26, 2005. In accordance with the terms of this leasing arrangement, the electric segment recorded $15.0 million and $10.1 million in rent expense for the yearyears ended December 31, 2005.2006, and December 31, 2005, respectively. Upon consolidation, this amount is eliminated.

(b)

The increase in transmission costs reflects a rate increase , which became effective on January 1, 2005, and an increase in the volume of transmitted electricity over 2004.

Electric maintenance expense

In 2005,2006, electric maintenance expense decreased $0.2increased $1.1 million, or 1.5%8.4%, due to a decreaseincrease in the maintenance of distribution assets ($0.71.0 million), partially offset by an increase in and the maintenance of production assets, including turbinegeneral and generator overhauls $0.5 million.administrative facilities ($0.1 million).

Electric depreciation

Electric depreciation expense increased $1.9$0.8 million in 2005.2006. This increase is attributable to higher levels ofadditions to electric plant assets.production assets at the Columbia and Blount facilities.

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, 20052006 and 2004:2005:

Gas revenues increased 16.7%decreased 7.6% in 20052006 due to the following:

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Gas costs/rates. Gas costs increaseddecreased significantly for the year ended December 31, 2006, from those costs experienced for the year ended December 31, 2005. MGE's natural gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in 2005. Therates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective monthly adjustments to rates. As a result of a decrease in gas prices, MGE's average rate per therm for residentialretail customers in 2005 increased 13.1%2006 decreased 3.3%. 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 2005,2006, retail gas deliveries increased 1.0%decreased 4.5%. This increasedecrease is primarily attributable to additional commercial and industrial use.

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Gas transportation. In 2005, there was a 6.9% decrease in deliveries. This decrease represents customers switching from gas to other fuel options, due to the higher price of gas.

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Other revenues. Other revenues increased $1.4 million in 2005. This increase relates to increases in miscellaneous gas income under MGE's GCIM.

Natural gas purchased

In 2005, natural gas purchased increased $31.5 million, or 27.4%. This increase is primarily due to higher average wellhead prices. Natural gas prices (cost per therm) increased 27.5% in 2005. 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. This increase was slightly offset by a decrease in the volume of natural gas purchased (0.1%)warmer temperatures. Heating degree days for the year ended December 31, 2005.

Gas operating expenses

Gas operating expense decreased $1.5 million, or 5.3%, in 2005. The following changes contributed2006, were 6,520 compared to the net change in gas operating expense6,840 for the year:

Gas maintenance expenses

For the year ended December 31, 2005, compared to the same period in the prior year,year.

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Transportation and other gas maintenance expense increasedrevenues.In 2006, there was a $0.3 million decrease in transportation and other gas revenues. This decrease represents a $0.2 million decrease in transportation revenues and a $0.1 million or 3.8%. This increase is attributable to an increasedecrease in revenues earned under the maintenance of distribution assets.

Gas depreciation

Gas depreciation expense increased $0.5 million in 2005 as a result of additionalGCIM and other miscellaneous gas plant assets.

Gas cost incentives

revenues. 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. In 20052006 and 2004,2005, MGE shareholders received the benefit of $2.7$2.5 million and $1.4$2.7 million from capacity release revenues and commodity savings under the GCIM, respectively.

Other Income (Loss)Natural gas purchased

Other incomeIn 2006, natural gas purchased decreased $16.8 million, or 11.5%. This decrease is primarily due to lower average wellhead prices. Natural gas prices (cost per therm) decreased 7.3% in 2006. As mentioned, in 2005 natural gas prices were atypically high due to the natural disasters that occurred in the Gulf of Mexico. For the year ended December 31, 2006, the amount of natural gas purchased also decreased from those levels experienced for the same period in the prior year. Due primarily to lower retail sales volumes, the volume of natural gas purchased decreased 4.6% for the year ended December 31, 2005,2006.

Gas operating expenses

Gas operating expense increased $4.1 million, or 15.3%, in 2006. The following changes contributed to the net change in gas operating expense for the year:

Gas maintenance expenses

Gas maintenance expense for the year ended December 31, 2006, did not change from the $2.3 million experienced for the same period in the prior year. This expense primarily relates to maintenance work performed on distribution assets.

Gas depreciation

Gas depreciation expense increased $0.4 million in 2006 as a result of additional gas plant assets. For example, during the year ended December 31, 2006, additional mains, services, and meters were placed in service.

Other Income (Expense)

Other expense for the year ended December 31, 2006, for the electric and gas segments was $0.1$1.0 million, compared to other expenseincome of $0.9$0.1 million for the same period in the prior year. During 2006, the gas and electric segments recognized a total of $2.2 million in charitable contributions. This expense was partially offset by $0.6 million in AFUDC-equity and $0.6 million in other miscellaneous income. The other miscellaneous income includes a $0.6 million gain on our heating degree day instrument.

For the year ended December 31, 2005, the gas and electric segments recognized a total of $0.4 million in AFUDC-equity funds and a $0.1 million gain on the sale of assets. This income was offset by $0.2 million in charitable contributions recorded in the electric and gas segments and $0.2 million in miscellaneous expense, net.

For the year ended December 31, 2004, the gas and electric segments recognized a total of $0.5 million in AFUDC-equity funds and $0.8 million in miscellaneous income. This income was offset by $2.2 million in charitable contributions recorded in the electric and gas segments.

Interest Expense

For the year-ended December 31, 2005,2006, total interest expense for the electric and gas segments increased $0.7$1.2 million when compared to the same period in the prior year. For the year ended December 31, 2005,2006, there was a $0.9$1.3 million increase in interest expense on short-term debt at the electric and gas segments as a result of increased interest rates and higher levels of short-term debt.debt for much of the year. These increases were offset by a $0.2$0.1 million decreaseincrease in interest expense on long-term debtAFUDC-debt income at the electric and gas segments.

Nonregulated Energy Operations

Nonregulated Energy operating revenues

Operating revenues from nonregulated energy operations were $10.7$18.4 million for the year ended December 31, 2005.2006. This amount includes $10.1$15.0 million in interdepartmental revenues. The interdepartmental revenues relate to the leasing arrangement between MGE and MGE Power West Campus which commenced on April 26, 2005. In accordance with the provisions of this leasing arrangement, the Non-regulatedNonregulated Energy Operations, via MGE Power West Campus, recorded $15.0 million and $10.1 million in lease revenue for the yearyears ended December 31, 2005.2006, and December 31, 2005, respectively. Upon consolidation, this interdepartmental amount is eliminated.

Also included in operating revenues is the recognition of $0.6 million in revenues related to carrying costs.costs for MGE Power West Campus and MGE Power Elm Road (2006 only). 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 WCCF facility. MGE is collecting these costs in rates over a period of ten years. Of these costs, $4.1 million relaterelates to the capitalized interest and the debt portion of the facility. These costs are recognized over the period in which the facility is being depreciated (40 years). The remaining amount of $8.0 million represents the equity portion and is recognized over the ten-year period for recovery in rates. On April 26,For the years ended December 31, 2006, and December 31, 2005, the WCCF facility lease between MGE and MGE Power West Campus commencedrecognized $1.1 million and $0.6 million, respectively, related to carrying costs on WCCF, manage ment, demolition, and removal fees.

MGE also received approval from the PSCW to collect carrying costs expected to be incurred by MGE Power West Campus began recognizing revenueElm Road during construction of the Elm Road project. Current forecasts estimate the total carrying costs to be incurred to be $54.3 million. A portion of this amount is being recognized over the period allowed for recovery in rates ($32.6 million) and a portion is being deferred and will be recognized over the period in which the facility is depreciated ($21.7 million). For the year ended December 31, 2006, MGE Power Elm Road recognized $2.3 million related to these carrying costs.costs on the Elm Road project.

Nonregulated Energyenergy operations and maintenance expense

For the yearyears ended December 31, 2006, and December 31, 2005, other operations and maintenance expense decreased $0.1 million, when comparedremained consistent. These expenses primarily relate to the same period in the prior year. This is primarily related to lower administrative and general expenses at MGE Power West Campus.Campus and MGE Power Elm Road.

Nonregulated Energyenergy depreciation expense

Depreciation expense began when the WCCF commenced generationoperations on April 26, 2005 and2005. Depreciation expense for the year ended December 31, 2006, was $2.7 million compared to $1.9 million for the year ended December 31, 2005, reflecting a partial year of depreciation in 2005.

Nonregulated Energyenergy interest expense, net

For the yeartwelve months ended December 31, 2005,2006, interest expense, net at the nonregulated energy operations segment increased $1.5$1.1 million or 100%, compared to the same period in the prior year. Interest expense at the nonregulated energy segment for the year ended December 31, 2006, represents interest expense on the long-term borrowings held by MGE Power West Campus. On September 30, 2003, MGE Power West Campus issued $30.0 million of 5.68% senior secured notes maturing September 25, 2033 and on October 27, 2005, issued $20.0 million of 5.19% senior secured notes also due September 25, 2033. Interest expense for the twelve months ended December 31, 2006, and December 31, 2005, related to these borrowings was $2.8 million and $1.9 million, respectively.

Also included in the nonregulated interest expense is interdepartmental interest expense at MGE Power Elm Road and MGE Power West Campus. During the twelve months ended December 31, 2006, and December 31, 2005, MGE Power Elm Road was charged $1.9 million and $0.2 million, respectively, in interest expense by Corporate on funds borrowed for the Elm Road Project. This expense is eliminated upon consolidation. During the year ended December 31, 2005, MGE Power West Campus recorded $0.4 million in interdepartmental interest expense. This expense is also eliminated upon consolidation.

The interest expense at MGE Power Elm Road is offset by $1.9 million and $0.2 million in capitalized interest during the twelve months ended December 31, 2006, and December 31, 2005, respectively. Under the provision of SFAS 34, MGE Power Elm Road is capitalizing interest on the Elm Road Project. During construction of the WCCF, MGE Power West Campus also recorded capitalized interest in accordance with the provisions of SFAS 34. As such, during 2004, $2.1During the twelve months ended December 31, 2005, $0.7 million in capitalized interest was recognized as an offset to interest expense. On April 26, 2005, when the electric generation facilities of WCCF began generating electricity, MGE Power West Campus discontinued the capitalization of interest, as the project was deemed to be substantially complete. As such, during the year ended 2005, only $0.7 million of capitalized interest was recorded.

Additionally, interest expense increased as a result of a new long-term facility. On October 27, 2005, MGE Power West Campus issued $20.0 million of 5.19% senior secured notes due September 25, 2033. Interest expense forFor the year ended December 31, 2005,2006, MGE Power Elm Road recorded $0.1 million in interest income on the cash advanced to Elm Road Services, LLC for construction of transmission equipment and work done by ATC related to this facility was $0.1 million.Elm Road.

Transmission Investment Operations

Transmission Investmentinvestment other income (loss)

For the year ended December 31, 2005,2006, other income at the transmission investment segment was $4.9$5.3 million, compared to $4.2$4.9 million for the same period in the prior year. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings ofin ATC.

All Other Nonregulated Operations

All Other nonregulatedother revenues

During the twelve months ended December 31, 2006, the All Other segment did not record any revenues. However, MGE Construct received service fees of $1.3 million and $2.7 million from the State in 2005 and 2004, respectively.2005. The service fees earned relate to MGE Construct's role as EPC contractor for WCCF. This amount is classified as nonregulated revenue within MGE Energy's financial statements. The total fee of $5.0 million had been recognized at December 31, 2005. This amount was recognized as services were rendered and was collected over a 22-month period.

All Otherother operations and maintenance expense

All other operations and maintenance expense for the year ended December 31, 2005, decreased2006, increased $0.2 million when compared to the same period in the prior year. This decreaseincrease is related to a decreaseincrease in general and administrative expense at corporate.

All Other nonregulated other income (expense)

Other income (expense) decreased $0.6 million or 100% for For the year ended December 31, 2005, when compared to the same period in the prior year. For the year ended December 31, 2004, the all other nonregulated segment recorded a $0.6$0.2 million gain as a result of the salesettlement of assets. This relates to the gain on the sale of land held by Magael.disputed legal fees.

All Otherother interest income (expense)

All other interest income for the year ended December 31, 20052006, was $0.1$0.8 million compared to interest expense$0.1 million for the year ended December 31, 2004 of $0.1 million.2005. Interest income for the twelve months ended December 31, 2006, and December 31, 2005, includes $1.9 million and $0.2 million in interdepartmental income from MGE Power Elm Road. Additionally, for the year ended December 31, 2005, this balance includes $0.4 million in interdepartmental income from MGE Power West Campus. This increaseinterest income is largely due toeliminated upon consolidation. This interest earnedincome for the year ended December 31, 2006, is offset in part by $1.1 million in interest expense on outstanding other receivables.short-term debt. Interest expense on these borrowings was $0.5 million for the same period in the prior year.

Consolidated Other General Taxes

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.