MGE ENERGY INC - Quarter Report: 2011 March (Form 10-Q)

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended:

March 31, 2011

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

For the transition period from _______________ to _______________

Commission File No.		Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone No.		IRS Employer Identification No.
000-49965		MGE Energy, Inc. (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mgeenergy.com		39-2040501
000-1125		Madison Gas and Electric Company (a Wisconsin Corporation) 133 South Blair Street Madison, Wisconsin 53703 (608) 252-7000 www.mge.com		39-0444025

Indicate by check mark 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 registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes [X] No [ ]

Indicate by check mark whether the registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

MGE Energy, Inc. and Madison Gas and Electric Company: Yes [ ] No [X]

1

Table of Contents

PART I. FINANCIAL INFORMATION.

3

Filing Format

3

Forward-Looking Statements

3

Where to Find More Information

3

Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report

4

Item 1. Financial Statements.

6

MGE Energy, Inc.

6

Consolidated Statements of Income (unaudited)

6

Consolidated Statements of Cash Flows (unaudited)

7

Consolidated Balance Sheets (unaudited)

8

Consolidated Statements of Common Equity (unaudited)

9

Madison Gas and Electric Company

10

Consolidated Statements of Income (unaudited)

10

Consolidated Statements of Cash Flows (unaudited)

11

Consolidated Balance Sheets (unaudited)

12

Consolidated Statements of Common Equity (unaudited)

13

MGE Energy, Inc., and Madison Gas and Electric Company

14

Notes to Consolidated Financial Statements (unaudited)

14

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

45

Item 4. Controls and Procedures.

47

PART II. OTHER INFORMATION.

48

Item 1. Legal Proceedings.

48

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

48

Item 6. Exhibits.

48

Signatures - MGE Energy, Inc.

49

Signatures - Madison Gas and Electric Company

50

2

PART I. FINANCIAL INFORMATION.

Filing Format

This combined Form 10-Q 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 majority 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. The terms "we" and "our," as used in this report, refer to MGE Energy and its consolidated subsidiaries, unless otherwise indicated.

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. Words such as "believe," "expect," "anticipate," "estimate," "could," "should," "intend," and other similar words generally identify forward-looking statements. 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 statements made by a registrant (a) include those factors discussed in the Registrants' 2010 Annual Report on Form 10-K: Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report; and Item 8. Financial Statements and Supplementary Data - Note 18, as updated by Part I, Item 1. Financial Statements - Note 9 in this report, and (b) other factors discussed herein and in other filings made by that 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 also are available to the public from commercial document retrieval services, the website maintained by the SEC at http://www.sec.gov, MGE Energy's website at http://www.mgeenergy.com, and MGE's website at http://www.mge.com. Copies may be obtained from our websites free of charge. Information contained on MGE Energy's and MGE's websites shall not be deemed incorporated into, or to be a part of, this report.

3

Definitions, Abbreviations, and Acronyms Used in the Text and Notes of this Report
Abbreviations, acronyms, and definitions used in the text and notes of this report are defined below.
AFUDC	Allowance for Funds Used During Construction
Alliant	Alliant Energy Corporation
ASM	Ancillary Services Market
ATC	American Transmission Company LLC
BACT	Best Available Control Technology
Bechtel	Bechtel Power Corporation
Blount	Blount Station
CAA	Clean Air Act
CAIR	Clean Air Interstate Rule
Codification	Financial Accounting Standards Board Accounting Standards Codification
Columbia	Columbia Energy Center
cooling degree days	Measure of the extent to which the average daily temperature is above 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide cooling
CWDC	Central Wisconsin Development Corporation
DOE	U.S. Department of Energy
Dth	Dekatherms
Elm Road Units	Elm Road Generating Station
EPA	United States Environmental Protection Agency
ERISA	Employee Retirement Income Security Act
ERS	Elm Road Services, LLC
EGU	Electric Generating Unit
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FTR	Financial Transmission Rights
GHG	Greenhouse Gas
HAPs	Hazardous Air Pollutants
heating degree days (HDD)	Measure of the extent to which the average daily temperature is below 65 degrees Fahrenheit, which is considered an indicator of possible increased demand for energy to provide heating
ICI Boilers	Industrial, Commercial, or Institutional Boilers
IRS	Internal Revenue Service
kWh	Kilowatt-hour
MACT	Maximum Achievable Control Technology
MAGAEL	MAGAEL, LLC
MGE	Madison Gas and Electric Company
MGE Construct	MGE Construct LLC
MGE Energy	MGE Energy, Inc.
MGE Power	MGE Power LLC
MGE Power Elm Road	MGE Power Elm Road, LLC
MGE Power West Campus	MGE Power West Campus, LLC
MGE Transco	MGE Transco Investment LLC
MISO	Midwest Independent System Operator (a regional transmission organization)
MW	Megawatt
MWh	Megawatt-hour
NAAQS	National Ambient Air Quality Standards
NO2	Nitrogen Dioxide
NOV	Notice of Violation
NOx	Nitrogen Oxides
NSPS	New Source Performance Standards
OPRB	Other Postretirement Benefits

4

PGA	Purchased Gas Adjustment clause
PJM	PJM Interconnection, LLC (a regional transmission organization)
PM	Particulate Matter
PPA	Purchased power agreement
PSCW	Public Service Commission of Wisconsin
PSD	Prevention of Significant Deterioration
RTO	Regional Transmission Organization
SEC	Securities and Exchange Commission
SIP	State Implementation Plan
SO2	Sulfur Dioxide
the State	State of Wisconsin
Stock Plan	Direct Stock Purchase and Dividend Reinvestment Plan of MGE Energy
UW	University of Wisconsin at Madison
VIE	Variable Interest Entity
WCCF	West Campus Cogeneration Facility
WDNR	Wisconsin Department of Natural Resources
WEPCO	Wisconsin Electric Power Company
Working capital	Current assets less current liabilities
WPDES	Wisconsin Pollutant Discharge Elimination System
WPL	Wisconsin Power and Light Company
WPSC	Wisconsin Public Service Corporation

5

Item 1. Financial Statements.

	MGE Energy, Inc.
	Consolidated Statements of Income (unaudited)
	(In thousands, except per-share amounts)
			Three Months Ended
			March 31,
			2011		2010
	Operating Revenues:
	Regulated electric revenues	$	86,007	$	81,994
	Regulated gas revenues		77,437		76,547
	Nonregulated revenues		1,161		1,102
	Total Operating Revenues		164,605		159,643
	Operating Expenses:
	Fuel for electric generation		11,049		8,901
	Purchased power		17,581		21,467
	Cost of gas sold		50,947		52,684
	Other operations and maintenance		39,413		41,030
	Depreciation and amortization		10,016		9,222
	Other general taxes		4,701		4,564
	Total Operating Expenses		133,707		137,868
	Operating Income		30,898		21,775
	Other income, net		2,386		4,721
	Interest expense, net		(4,850)		(3,908)
	Income before income taxes		28,434		22,588
	Income tax provision		(10,651)		(8,328)
	Net Income	$	17,783	$	14,260
	Earnings Per Share of Common Stock
	(basic and diluted)	$	0.77	$	0.62
	Dividends per share of common stock	$	0.375	$	0.368
	Average Shares Outstanding
	(basic and diluted)		23,114		23,114
	The accompanying notes are an integral part of the above consolidated financial statements.

6

	MGE Energy, Inc.
	Consolidated Statements of Cash Flows (unaudited)
	(In thousands)
			Three Months Ended
			March 31,
			2011		2010
	Operating Activities:
	Net income	$	17,783	$	14,260
	Items not affecting cash:
	Depreciation and amortization		10,016		9,222
	Deferred income taxes		1,622		(338)
	Provision for doubtful receivables		1,038		848
	Employee benefit plan expenses		3,394		3,149
	Equity earnings in ATC		(2,097)		(2,186)
	Gain on sale of property		(33)		(2,599)
	Other items		211		1,119
	Changes in working capital items:
	Decrease in current assets		29,753		16,392
	Decrease in current liabilities		(7,279)		(4,268)
	Dividend income from ATC		1,682		1,693
	Cash contributions to pension and other postretirement plans		(19,188)		(8,733)
	Other noncurrent items, net		1,135		1,449
	Cash Provided by Operating Activities		38,037		30,008
	Investing Activities:
	Capital expenditures		(9,843)		(14,415)
	Capital contributions to investments		(425)		(532)
	Purchase of investment - land		(1,794)		-
	Proceeds from sale of property		33		2,731
	Other		(452)		(52)
	Cash Used for Investing Activities		(12,481)		(12,268)
	Financing Activities:
	Cash dividends paid on common stock		(8,670)		(8,515)
	Repayment of long-term debt		(500)		(277)
	Issuance of long-term debt		30,000		50,000
	Decrease in short-term debt		(22,500)		(53,000)
	Other		(311)		-
	Cash Used for Financing Activities		(1,981)		(11,792)
	Change in Cash and Cash Equivalents:		23,575		5,948
	Cash and cash equivalents at beginning of period		7,110		4,704
	Cash and cash equivalents at end of period	$	30,685	$	10,652
	The accompanying notes are an integral part of the consolidated financial statements.

7

MGE Energy, Inc.
Consolidated Balance Sheets (unaudited)
(In thousands)
		March 31,	December 31,
ASSETS		2011		2010
Current Assets:
Cash and cash equivalents	$	30,685	$	7,110
Receivable - margin account		3,100		2,501
Accounts receivable, less reserves of $4,359 and $3,994, respectively		43,557		40,153
Other accounts receivable, less reserves of $576 and $595, respectively		3,869		4,082
Unbilled revenues		24,770		29,220
Materials and supplies, at average cost		15,968		17,642
Fossil fuel		7,321		6,758
Stored natural gas, at average cost		7,441		22,839
Prepaid taxes		11,333		22,496
Regulatory assets - current		1,098		1,732
Other current assets		6,313		7,769
Total Current Assets		155,455		162,302
Regulatory assets		122,248		121,085
Other deferred assets and other		11,188		10,654
Property, Plant, and Equipment:
Property, plant, and equipment, net		932,090		857,572
Construction work in progress		37,557		110,435
Total Property, Plant, and Equipment		969,647		968,007
Investments		58,593		55,845
Total Assets	$	1,317,131	$	1,317,893
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	2,667	$	1,667
Short-term debt		-		22,500
Accounts payable		27,881		32,555
Accrued interest and taxes		4,177		3,990
Accrued payroll related items		6,621		8,525
Deferred income taxes		553		2,398
Other current liabilities		9,590		9,577
Total Current Liabilities		51,489		81,212
Other Credits:
Deferred income taxes		170,406		166,774
Investment tax credit - deferred		2,006		2,081
Regulatory liabilities		21,731		23,772
Accrued pension and other postretirement benefits		106,558		123,648
Other deferred liabilities and other		67,812		60,975
Total Other Credits		368,513		377,250
Capitalization:
Common shareholders' equity		534,265		525,080
Long-term debt		362,864		334,351
Total Capitalization		897,129		859,431
Commitments and contingencies (see Footnote 9)		-		-
Total Liabilities and Capitalization	$	1,317,131	$	1,317,893
The accompanying notes are an integral part of the above consolidated financial statements.

8

MGE Energy, Inc.
Consolidated Statements of Common Equity (unaudited)
(In thousands, except per-share amounts)
									Accumulated
					Additional				Other
	Common Stock				Paid-in		Retained		Comprehensive
	Shares		Value		Capital		Earnings		(Loss)/Income		Total
2010
Beginning balance - Dec. 31, 2009	23,114	$	23,114	$	316,268	$	162,208	$	205	$	501,795
Net income							14,260				14,260
Other comprehensive income/(loss):
Net unrealized gain on investments,
net of $5 tax									8		8
Common stock dividends declared
($0.368 per share)							(8,515)				(8,515)
Ending Balance - Mar. 31, 2010	23,114	$	23,114	$	316,268	$	167,953	$	213	$	507,548
2011
Beginning balance - Dec. 31, 2010	23,114	$	23,114	$	316,268	$	185,556	$	142	$	525,080
Net income							17,783				17,783
Other comprehensive income/(loss):
Net unrealized gain on investments,
net of $48 tax									72		72
Common stock dividends declared
($.375 per share)							(8,670)				(8,670)
Ending Balance - Mar. 31, 2011	23,114	$	23,114	$	316,268	$	194,669	$	214	$	534,265
The accompanying notes are an integral part of the above consolidated financial statements.

9

	Madison Gas and Electric Company
	Consolidated Statements of Income (unaudited)
	(In thousands)
			Three Months Ended
			March 31,
			2011		2010
	Operating Revenues:
	Regulated electric revenues	$	86,007	$	81,994
	Regulated gas revenues		77,437		76,547
	Nonregulated revenues		1,161		1,102
	Total Operating Revenues		164,605		159,643
	Operating Expenses:
	Fuel for electric generation		11,049		8,901
	Purchased power		17,581		21,467
	Cost of gas sold		50,947		52,684
	Other operations and maintenance		39,235		40,911
	Depreciation and amortization		10,016		9,222
	Other general taxes		4,701		4,564
	Income tax provision		9,891		6,338
	Total Operating Expenses		143,420		144,087
	Operating Income		21,185		15,556
	Other Income and Deductions:
	AFUDC - equity funds		87		58
	Equity in earnings in ATC		2,097		2,186
	Income tax provision		(806)		(1,954)
	Other income, net		113		2,464
	Total Other Income and Deductions		1,491		2,754
	Income before interest expense		22,676		18,310
	Interest Expense:
	Interest on long-term debt		4,991		4,512
	Other interest, net		(147)		(402)
	AFUDC - borrowed funds		(35)		(23)
	Net Interest Expense		4,809		4,087
	Net Income	$	17,867	$	14,223
	Less Net Income Attributable to Noncontrolling Interest, net of tax		(5,933)		(5,096)
	Net Income Attributable to MGE	$	11,934	$	9,127
	The accompanying notes are an integral part of the above consolidated financial statements.

10

	Madison Gas and Electric Company
	Consolidated Statements of Cash Flows (unaudited)
	(In thousands)
			Three Months Ended
			March 31,
			2011		2010
	Operating Activities:
	Net income	$	17,867	$	14,223
	Items not affecting cash:
	Depreciation and amortization		10,016		9,222
	Deferred income taxes		1,412		(338)
	Provision for doubtful receivables		1,038		848
	Employee benefit plan expenses		3,394		3,149
	Equity earnings in ATC		(2,097)		(2,186)
	Gain on sale of property		(33)		(2,599)
	Other items		423		1,119
	Changes in working capital items:
	Decrease in current assets		28,893		7,529
	Increase (decrease) in current liabilities		(7,441)		1,863
	Dividend income from ATC		1,682		1,693
	Cash contributions to pension and other postretirement plans		(19,188)		(8,733)
	Other noncurrent items, net		1,110		1,430
	Cash Provided by Operating Activities		37,076		27,220
	Investing Activities:
	Capital expenditures		(9,843)		(14,415)
	Capital contributions to investments		(355)		(532)
	Proceeds from sale of property		33		2,731
	Other		55		(11)
	Cash Used for Investing Activities		(10,110)		(12,227)
	Financing Activities:
	Cash dividends paid to parent by MGE		(6,596)		(6,478)
	Distributions to parent from noncontrolling interest		(33,000)		(43,607)
	Equity contribution received by noncontrolling interest		356		533
	Affiliate financing of Elm Road		-		(4,193)
	Repayment of long-term debt		(500)		(277)
	Issuance of long-term debt		30,000		50,000
	Decrease in short-term debt		(3,500)		(5,500)
	Other		(309)		-
	Cash Used for Financing Activities		(13,549)		(9,522)
	Change in Cash and Cash Equivalents:		13,417		5,471
	Cash and cash equivalents at beginning of period		4,494		2,474
	Cash and cash equivalents at end of period	$	17,911	$	7,945
	The accompanying notes are an integral part of the consolidated financial statements.

11

Madison Gas and Electric Company
Consolidated Balance Sheets (unaudited)
(In thousands)
		March 31,	December 31,
ASSETS		2011		2010
Current Assets:
Cash and cash equivalents	$	17,911	$	4,494
Receivable - margin account		3,100		2,501
Accounts receivable, less reserves of $4,359 and $3,994, respectively		43,557		40,153
Affiliate receivables		538		638
Other accounts receivable, less reserves of $576 and $595, respectively		3,866		4,063
Unbilled revenues		24,770		29,220
Materials and supplies, at average cost		15,968		17,642
Fossil fuel		7,321		6,758
Stored natural gas, at average cost		7,441		22,839
Prepaid taxes		11,269		21,500
Regulatory assets - current		1,098		1,732
Other current assets		6,298		7,742
Total Current Assets		143,137		159,282
Affiliate receivable long-term		7,281		7,413
Regulatory assets		122,248		121,085
Other deferred assets and other		8,302		8,337
Property, Plant, and Equipment:
Property, plant, and equipment, net		931,957		857,442
Construction work in progress		37,557		110,435
Total Property, Plant, and Equipment		969,514		967,877
Investments		55,775		54,947
Total Assets	$	1,306,257	$	1,318,941
LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	2,667	$	1,667
Short-term debt		-		3,500
Accounts payable		27,881		32,524
Affiliate payables		3,076		24
Accrued interest and taxes		4,885		7,294
Accrued payroll related items		6,621		8,525
Deferred income taxes		553		2,398
Other current liabilities		8,836		9,472
Total Current Liabilities		54,519		65,404
Other Credits:
Deferred income taxes		167,796		164,399
Investment tax credit - deferred		2,006		2,081
Regulatory liabilities		21,731		23,772
Accrued pension and other postretirement benefits		106,558		123,648
Other deferred liabilities and other		67,812		60,977
Total Other Credits		365,903		374,877
Capitalization:
Common shareholders' equity		407,689		402,316
Noncontrolling interest		115,282		141,993
Total Equity		522,971		544,309
Long-term debt		362,864		334,351
Total Capitalization		885,835		878,660
Commitments and contingencies (see Footnote 9)		-		-
Total Liabilities and Capitalization	$	1,306,257	$	1,318,941
The accompanying notes are an integral part of the above consolidated financial statements.

12

Madison Gas and Electric Company
Consolidated Statements of Common Equity (unaudited)
(In thousands)
								Accumulated
					Additional				Other		Non-
	Common Stock				Paid-in		Retained	Comprehensive			Controlling
	Shares		Value		Capital		Earnings	(Loss)/Income			Interest		Total
2010
Beginning balance - Dec. 31, 2009	17,348	$	17,348	$	192,417	$	180,905	$	112	$	178,943	$	569,725
Net income							9,127				5,096		14,223
Other comprehensive income/(loss):
Net unrealized gain on
investments, net of $9 tax									13				13
Cash dividends paid to parent
by MGE							(6,478)						(6,478)
Equity contribution received by
noncontrolling interest											533		533
Distributions to parent from
noncontrolling interest											(43,607)		(43,607)
Ending balance - Mar. 31, 2010	17,348	$	17,348	$	192,417	$	183,554	$	125	$	140,965	$	534,409
2011
Beginning balance - Dec. 31, 2010	17,348	$	17,348	$	192,417	$	192,480	$	71	$	141,993	$	544,309
Net income							11,934				5,933		17,867
Other comprehensive income/(loss):
Net unrealized gain on
investments, net of $23 tax									35				35
Cash dividends paid to parent
by MGE							(6,596)						(6,596)
Equity contribution received by
noncontrolling interest											356		356
Distributions to parent from
noncontrolling interest											(33,000)		(33,000)
Ending balance - Mar. 31, 2011	17,348	$	17,348	$	192,417	$	197,818	$	106	$	115,282	$	522,971
The accompanying notes are an integral part of the above consolidated financial statements.

13

MGE Energy, Inc., and Madison Gas and Electric Company

Notes to Consolidated Financial Statements (unaudited)

March 31, 2011

1.

Basis of Presentation - MGE Energy and MGE.

This report is a combined report of MGE Energy and MGE. References in this report to "MGE Energy" are to MGE Energy, Inc., and its subsidiaries. References in this report to "MGE" are to Madison Gas and Electric Company.

MGE Power West Campus and MGE Power Elm Road own electric generating assets and lease those assets to MGE. MGE has consolidated MGE Power West Campus and MGE Power Elm Road. Both entities are variable interest entities under applicable authoritative guidance. MGE is considered the primary beneficiary of these entities as a result of contractual agreements.

The accompanying consolidated financial statements as of March 31, 2011, and for the three months ended, are unaudited, but include all adjustments that MGE Energy and MGE management consider necessary for a fair statement of their respective financial statements. All adjustments are of a normal, recurring nature except as otherwise disclosed. The year-end consolidated balance sheet information was derived from the audited balance sheet appearing in MGE Energy's and MGE's 2010 Annual Report on Form 10-K, but does not include all disclosures required by accounting principles in the United States of America. These notes should be read in conjunction with the financial statements and the notes on pages 55 through 109 of the 2010 Annual Report on Form 10-K.

2.

Equity and Financing Arrangements.

a.

Common Stock - MGE Energy.

MGE Energy purchases stock in the open market for issuance pursuant to its Stock Plan. All MGE Energy common stock issued under the Stock Plan is sold pursuant to a registration statement that has been filed with the SEC and is currently effective.

MGE Energy may issue new shares of its common stock through the Stock Plan. For both the three months ended March 31, 2011 and 2010, MGE Energy did not issue any new shares of common stock under the Stock Plan.

b.

Dilutive Shares Calculation - MGE Energy.

MGE Energy does not hold any dilutive securities.

c.

Secured Debt - MGE Energy and MGE.

On February 28, 2011, MGE Power Elm Road issued $30 million of 4.74% senior secured notes due February 25, 2041. MGE Power Elm Road distributed the net proceeds from the sale of notes to MGE Energy, which used that distribution to repay existing short-term indebtedness, consisting of bank loans, which were used to finance a portion of the construction of the Elm Road Units. The notes provide for monthly principal and interest payments, which commenced on March 25, 2011, and continue until maturity. The principal payments are level over the life of the notes, for an effective average life of 15 years. The Note Purchase Agreement requires MGE Power Elm Road to maintain a debt service coverage ratio at the end of any calendar quarter of not less than 1.25 to 1.00 for the trailing 12-month period. The debt is secured by a collateral assignment of lease payments that MGE is making to MGE Power Elm Road for use of the Elm Road Units pursuant to the long-term lease. As of March 31, 2011, MGE Power Elm Road is in compliance with the covenant requirements.

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3.

Comprehensive Income - MGE Energy and MGE.

Total comprehensive income represents the change in equity during a period from transactions and other events and circumstances from nonowner sources. MGE Energy's and MGE's total comprehensive income is:

			Three Months Ended
	(In thousands)		March 31,
			2011		2010
	MGE Energy
	Net income	$	17,783	$	14,260
	Unrealized gain on available-for-sale securities, net of tax ($48 and $5)		72		8
	Total comprehensive income	$	17,855	$	14,268
	MGE
	Net income	$	17,867	$	14,223
	Unrealized gain on available-for-sale securities, net of tax ($23 and $9)		35		13
	Total comprehensive income	$	17,902	$	14,236
	Less: Comprehensive income attributable to noncontrolling interest		(5,933)		(5,096)
	Comprehensive income attributable to MGE	$	11,969	$	9,140

4.

Investment in ATC - MGE Energy and MGE.

ATC owns and operates electric transmission facilities primarily in Wisconsin. MGE received an interest in ATC when it, like other Wisconsin electric utilities, contributed its electric transmission facilities to ATC. That interest is presently held by MGE Transco, which is jointly owned by MGE Energy and MGE.

MGE Transco has accounted for its investment in ATC under the equity method of accounting. For the three months ended March 31, 2011 and 2010, MGE Transco recorded equity earnings from the investment in ATC of $2.1 million and $2.2 million, respectively. Dividend income received from ATC was $1.7 million for both the three months ended March 31, 2011 and 2010. In addition, during the three months ended March 31, 2011 and 2010, MGE Transco made $0.4 million and $0.5 million, respectively, in cash contributions to ATC.

MGE Energy and MGE's investment in ATC as of March 31, 2011 and December 31, 2010 was $55.0 million and $54.2 million, respectively.

During March 2010, MGE sold a parcel of land in Middleton, Wisconsin to ATC for $2.7 million, resulting in a gain of $2.6 million (pretax) in other income. The transaction was approved by the PSCW.

At March 31, 2011, MGE is the majority owner, and MGE Energy, the holding company, is the minority owner of MGE Transco. MGE Energy's proportionate share of the equity and net income of MGE Transco is classified within the MGE financial statements as noncontrolling interest.

ATC's summarized financial data for the three months ended March 31, 2011 and 2010, is as follows:

			Three Months Ended
	(In thousands)		March 31,
			2011		2010
	Operating revenues	$	139,617	$	138,491
	Operating expenses		(63,126)		(62,812)
	Other expense, net		(358)		(198)
	Interest expense, net		(21,897)		(20,364)
	Earnings before members' income taxes	$	54,236	$	55,117

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5.

Taxes - MGE Energy and MGE.

a.

Accounting for Uncertainty in Income Taxes.

MGE Energy and MGE account for the difference between the tax benefit amount taken on prior year tax returns, or expected to be taken on a current year tax return, and the tax benefit amount recognized in the financial statements as an unrecognized tax benefit.

MGE Energy will file an application with its 2010 tax returns to change its tax method of accounting for gas repairs. This method change accelerates tax deductions for repairs in accordance with Treasury Regulations and case law, as compared to the prior method of claiming tax depreciation on project costs. During the three months ended March 31, 2011, MGE Energy and MGE established a liability in the amount of $1.2 million for the tax uncertainty related to the change in tax method of accounting for repairs. At March 31, 2011, MGE Energy and MGE have an unrecognized tax benefit in the amount of $5.6 million for the tax uncertainty primarily related to the change in tax method of accounting for electric and gas repairs. At December 31, 2010, the unrecognized tax benefit was $4.4 million primarily for the tax uncertainty related to the change in tax method of accounting for electric repairs.

b.

Effective Tax Rate.

MGE Energy's effective income tax rate for the three months ended March 31, 2011, is 37.5% compared to 36.9% for the same period in 2010; and MGE's effective income tax rate for the three months ended March 31, 2011, is 37.5%, compared to 36.8% for the same period in 2010. The increase in effective tax rate is, in part, attributable to a lower domestic manufacturing deduction.

6.

Elm Road - MGE Energy and MGE.

MGE Power Elm Road owns an 8.33% ownership interest in each of two 615 MW coal-fired generating units in Oak Creek, Wisconsin. Unit 1 entered commercial operation on February 2, 2010. Unit 2 entered commercial operation on January 12, 2011. MGE Power Elm Road's sole principal asset is that ownership interest in those generating units. Each owner provides its own financing and reflects its respective portion of the facility and costs in its financial statements. MGE Power Elm Road has leased the Elm Road Units to MGE pursuant to separate facility lease agreements for each unit. These leases were authorized by order of the PSCW in accordance with applicable provisions of Wisconsin law that authorized financing of new generation through facility leases. The PSCW order establishes a cap on the construction costs that may be passed through the lease agreements to MGE and its customers, through rates. Additional costs attributable to force majeure events, as defined in the leases, do not count against this cap, but are subject to PSCW review and determination that the costs were prudently incurred.

As of March 31, 2011, $195.1 million related to this project was placed in-service on MGE Energy's and MGE's consolidated balance sheets.

MGE has approval from the PSCW to defer the recovery of the payments made to MGE Power Elm Road for carrying costs during construction of the generating units. The total carrying costs on the Elm Road Units is $62.2 million.

MGE began collecting the carrying costs in rates in 2006. These amounts are being collected over multiple years. Of these costs, $17.0 million relates to the capitalized interest and the debt portion of the units. These costs will be recognized over the period in which the generating units will be depreciated. The remaining $45.2 million represents the equity portion and is being recognized over the period allowed for recovery in rates.

During 2011, MGE will recover $4.8 million in carrying costs associated with the Elm Road Units. For the three months ended March 31, 2011, $1.2 million related to the carrying costs were recovered in rates. Of this amount, $0.3 million relates to the debt portion of the units and was deferred on the consolidated financial statements of MGE Energy and MGE. The remaining $0.9 million represents the equity portion and was recognized as nonregulated revenues in the consolidated financial statements of MGE Energy and MGE.

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7.

Pension and Other Postretirement Plans - MGE Energy and MGE.

MGE maintains qualified and nonqualified pension plans, health care, and life insurance benefits. Additionally, MGE has deferred contribution 401(k) benefit plans.

The following table presents the components of MGE Energy's and MGE's net periodic benefit costs recognized for the three months ended March 31, 2011 and 2010. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets. The PSCW allowed MGE to defer the 2009 incremental pension and OPRB costs above the amounts recovered in rates. During the three months ended March 31, 2011 and 2010, $0.7 million has been recovered in rates.

			Three Months Ended
	(In thousands)		March 31,
			2011		2010
	Pension Benefits
	Components of net periodic benefit cost:
	Service cost	$	1,540	$	1,534
	Interest cost		3,080		3,041
	Expected return on assets		(3,531)		(2,974)
	Amortization of:
	Prior service cost		109		111
	Actuarial loss		946		876
	Net periodic benefit cost	$	2,144	$	2,588
	Postretirement Benefits
	Components of net periodic benefit cost:
	Service cost	$	487	$	483
	Interest cost		982		990
	Expected return on assets		(396)		(309)
	Amortization of:
	Transition obligation		107		107
	Prior service cost		27		28
	Actuarial loss		111		110
	Net periodic benefit cost	$	1,318	$	1,409

8.

Share-Based Compensation - MGE Energy and MGE.

Under the Performance Unit Plan, eligible participants may receive performance units that entitle the holder to receive a cash payment equal to the value of a designated number of shares of MGE Energy's common stock, plus dividend equivalent payments thereon, at the end of the set performance period.

In addition to units granted in 2007 through 2010, on January 21, 2011, 15,655 units were granted based on the MGE Energy closing stock price as of that date. These newly-granted units are subject to a five-year graded vesting schedule. On the grant date, MGE Energy and MGE measured the cost of the employee services received in exchange for the award based on the current market value of MGE Energy common stock. The fair value of the awards has been subsequently re-measured at March 31, 2011, as required by applicable accounting standards. Changes in fair value as well as the original grant have been recognized as compensation cost. Since this amount will be re-measured throughout the vesting period, the compensation cost is subject to variability.

For nonretirement eligible employees, stock based compensation costs are accrued and recognized using the graded vesting method. Compensation cost for retirement eligible employees or employees that will become retirement eligible during the vesting schedule are recognized on an abridged horizon also using the graded vesting method.

During the three months ended March 31, 2011 and 2010, MGE recorded $0.1 million and $0.2 million, respectively, in compensation expense as a result of the Performance Unit Plan. In January 2011, cash payments of $0.5 million were distributed pertaining to the 2006 Performance Unit Plan. No forfeitures occurred during the three months ended March 31, 2011 or 2010. At March 31, 2011, $1.2 million of these awards were vested.

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9.

Commitments and Contingencies.

a.

Environmental - MGE Energy and MGE.

Solid waste

Lenz Oil Site

MGE is listed as a potentially responsible party for a site on the EPA's 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 cleanup under the Comprehensive Environmental Response, Compensation and Liability Act. As of December 31, 2009, the EPA has agreed on a remedy for the Lenz Oil site. The remedy included a five year $2.2 million implementation plan. The EPA has asked all potentially responsible parties to pay upfront for this five year implementation plan. MGE has provided money for site cleanup, however, the cleanup process has not begun. We will not know if additional costs exist at the site until cleanup is completed. At March 31, 2011, MGE's portion is less than $0.1 million. 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.

Proposed Regulation of Coal Combustion Byproducts

The EPA published a proposed rule on May 4, 2010, that regulates coal combustion byproducts from the electric generating sector. The proposed regulations may require new or additional monitoring of storage sites, may re-classify ash and other coal combustion byproducts, and may regulate ash storage site structural design. MGE is evaluating the impact of these proposed regulations on our operations and cannot estimate the potential costs associated with a finalized rule.

Water quality

MGE is subject to water quality regulations issued by the WDNR. These regulations include 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 WDNR 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.

EPA Cooling Water Intake Rules (Section 316(b))

On March 28, 2011, the EPA proposed and asked for public comment on standards to reduce entrainment and impingement of fish and other aquatic life from existing structures designed to take in cooling water for plants such as power plants. This rule is commonly referred to as Phase II of 316(b). The proposed rule includes provisions for structures designed to take in as little as two million gallons per day. MGE is currently evaluating how and to what extent this proposed rule affects our generating facilities.

WPDES Thermal Discharge Rule

WDNR rules to regulate thermal effluent discharges from point sources in Wisconsin became effective on October 1, 2010. As WPDES permits are issued or renewed, MGE will need to meet the revised rule requirements. MGE submitted a thermal analysis with its most recent Blount WPDES permit application that showed thermal impacts within the acceptable limits of the rule. MGE is waiting to hear from the WDNR on their review of the analysis. If the WNDR does not concur with MGE's analysis, additional studies could be required.

WPDES Phosphorus Nutrient Standards

The WDNR is in the process of developing water quality standards for phosphorus in streams, rivers, and inland lakes, including effluent limitations for dischargers. Blount and WCCF both currently discharge phosphorus under their WPDES permits, and it is likely both facilities may have phosphorus limitations added to their permits. It is unclear at this time if current phosphorus use at our plants will meet the future standards. Because of this uncertainty, we cannot estimate the effect that compliance with developing water quality standards will have on the operation of our generating facilities and our future results of operations, cash flows, and financial position.

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WPDES Mercury Discharge Limit

WPDES permit holders in certain industries, including coal-fired electric power plants, are required to meet mercury effluent limits. If permit holders do not meet the mercury limits, then they must apply for a variance as part of their next permit renewal with the WDNR. MGE has applied for a mercury variance for Blount as part of its permit renewal, which was submitted in the fall of 2010. If the variance is not approved, MGE may have operational or capital costs associated with meeting the mercury effluent limits when the permit is renewed. We cannot estimate the effect that compliance with developing mercury water quality standards will have on the operation of our generating facilities and our future results of operations, cash flows, and financial position.

Air quality

Air quality regulations promulgated by the EPA and the WDNR 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. These permits have been obtained by MGE and must be renewed periodically.

Various initiatives, including the EPA's proposed Transport Rule, maximum achievable control technology (MACT) standards, new source performance standards (NSPS) and the Clean Air Visibility Rule (also known as the Regional Haze Rule), as well as state mercury emissions limits, may result in additional operating and capital expenditure costs for electric generating units.

Maximum Achievable Control Technologies (MACT) and National Emissions Standards for Hazardous Air Pollutants

On March 16, 2011, the EPA proposed and asked for public comments on pollution control standards to limit mercury, acid gases and other hazardous air pollutants from new and existing electric generating units (EGU) in power plants. This proposed rule is commonly referred to as EGU MACT. The current version of this proposed rule establishes numerical limits for HAPs, work practice methods, and other standards based on several defined subcategories of EGUs. MGE is still evaluating this rule and cannot determine at this time how this rule will affect our current generation fleet.

On March 21, 2011, the EPA finalized its MACT rule for industrial, commercial and institutional (ICI) boilers commonly referred to as Boiler MACT. The final rule includes provisions for ICI boilers that burn fossil fuels including coal, oil and natural gas. MGE owns some smaller natural gas and oil-burning boilers that are governed under this rule. MGE is currently evaluating the final rule to determine how it will affect our operations.

EPA's Proposed Transport Rule (To Replace the Clean Air Interstate Rule (CAIR))

On July 6, 2010, the EPA issued a proposed initial rule called the "Transport Rule" designed to address ozone and fine particulate air pollution from 31 states in the eastern portion of the United States. The 31 states will need to reduce NO_x and/or SO₂ air emissions, which are "pre-cursors" or cause the formation of particulate matter and/or ozone pollution. Wisconsin has been identified as a state contributing to particulate matter only and thus will need to control annual SO₂ and NO_x emissions, but will not need to control ozone-season NO_x. We expect that our power plants will be affected and we will need either to secure allowances or to implement strategies to reduce NO_x and SO₂ emissions. The EPA is targeting 2012 for implementation of the Transport Rule.

National Ambient Air Quality Standards (NAAQS) for Ozone, Nitrogen Dioxide and Sulfur Dioxide

The EPA has developed National Ambient Air Quality Standards (NAAQS) for six compounds currently identified as criteria pollutants: nitrogen dioxide (NO₂), particulate matter (PM), ozone, SO₂, lead and carbon monoxide. The NAAQS for criteria pollutants establish acceptable ambient air levels based on effects to human health and the environment, and changes to those NAAQS can affect compliance requirements and associated capital and operating costs. The EPA is required to review NAAQS every five years. MGE is currently tracking three NAAQS developments; (1) the EPA's January 2010 proposed revisions to its Ozone NAAQS, (2) modeling requirements for the EPA's January 2010 final revisions to NO₂ NAAQS, and (3) the WDNR's attainment/nonattainment designations associated with the EPA's June 2010 final revisions to its SO₂ NAAQS. These three NAAQS developments have a potential to effect capital and maintenance costs at our generating facilities.

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Current Climate Change Regulations

On May 13, 2010, the EPA released its final Prevention of Significant Deterioration (PSD) revisions and its Title V Greenhouse Gas "Tailoring Rule" under Section 111 of the Clean Air Act (CAA). Under these rule revisions, facilities that meet a 25,000 metric ton GHG threshold would need to obtain or modify their Title V air permits during their next permit renewal to include GHGs as permitted air emissions. New or modified facilities meeting additional GHG (and other air emissions) thresholds would need to request a revision to their permit under PSD and apply best available control technologies (BACT) to minimize their releases of GHG emissions. Current technologies for minimizing GHGs are scarce. As these technologies advance, meeting BACT may require substantial capital expenses and additional permitting requirements may be developed under this section of the CAA.

Columbia

MGE and two other utilities jointly own Columbia, a coal-fired generating facility, which accounts for 225 MW (26%) of MGE's net generating capability. Based upon current available information, compliance with various environmental requirements and initiatives is expected to result in significant additional operating and capital expenditures at Columbia and may affect those expenditures at other MGE generating facilities.

Certificate of Authority

In April 2009, the Columbia owners requested authorization from the PSCW for an emissions reduction project as a result of an environmental initiative. On March 11, 2011 the PSCW issued a Certificate and Order authorizing the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. The operator's current estimates show that MGE's share of the capital expenditures required to comply with this project will be approximately $140 million and are expected to occur between 2011 - 2014 timeframe. According to the current estimate, this project is expected to result in an increase to Columbia's ongoing operating expenses. MGE expects that the costs pertaining to this project will be fully recoverable through rates. The PSCW has permitted MGE to defer pre-certification costs related to compliance with environmental regulations at Columbia. Additionally, MGE is entitled to a carrying cost on the related construction costs at a 100% AFUDC rate. As of March 31, 2011, MGE had incurred $1.0 million (excluding carrying costs) in deferred pre-certification and construction expenditures at Columbia related to the proposed project.

Title V Operating Permit Petition

In September 2008, the WDNR issued a Title V renewal operating permit to WPL for Columbia. WPL is the plant operator and permit holder, and owns 46.2% of Columbia. Wisconsin Public Service Corporation (WPSC) owns a 31.8% interest, and MGE owns a 22% interest in Columbia. A citizen group petitioned the EPA to object to the issuance of the permit renewal. In October 2009, the EPA issued an order granting in part and denying in part the petition and sent the operating permit back to the WDNR for further review based on the EPA order. In September 2010, the WDNR acted on the order by issuing a draft construction permit and a revised operation permit for public comment. In February 2011, the WDNR issued a letter stating its determination not to issue either the proposed construction permit or a revised operation permit for Columbia. Thus, MGE believes the permits currently in effect for Columbia remain in place at this time. In February 2011, the citizen group involved filed an action against the EPA in the U.S. District Court for the Western District of Wisconsin seeking to have the EPA take over the permit process. Proceedings in the matter have been stayed until June 2011.

Columbia Clean Air Act Litigation

In December 2009, the EPA sent a Notice of Violation (NOV) to MGE as one of the co-owners of Columbia. The NOV alleges that WPL and the Columbia co-owners failed to comply with appropriate pre-construction review and permitting requirements and as a result violated the PSD program requirements, Title V Operating Permit requirements of the CAA and the Wisconsin SIP.

In September 2010, Sierra Club filed a civil lawsuit against WPL alleging violations of the CAA at Columbia and other Wisconsin facilities operated by WPL. Proceedings have been stayed until May 11, 2011 to explore settlement options. The trial date has been scheduled for April 2012.

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In response to similar EPA CAA enforcement initiatives, certain utilities have elected to settle with the EPA, while others have elected to litigate. If the EPA and/or Sierra Club successfully prove their claims that projects completed in the past at Columbia required either state or federal CAA permits, MGE may, under the applicable statutes, be required to pay civil penalties in amounts of up to $37,500 per day for each violation and/or complete actions for injunctive relief. Payment of fines and/or injunctive relief could be included in a settlement outcome. Injunctive relief contained in settlements or court-ordered remedies for other utilities in similar matters required the installation of pollution control technology, changed operating conditions (including use of alternative fuels other than coal), caps for emissions and limitations on generation (including retirement of generating units) and other supplemental environmental projects. Should similar remedies be required for final resolution of these matters at Columbia, MGE would likely incur additional capital and operating expenditures. MGE and the other co-owners of Columbia are exploring settlement options with the EPA and Sierra Club while simultaneously defending against these allegations. WPL has informed MGE that WPL believes the projects at Columbia were routine or not projected to increase emissions and therefore did not violate the permitting requirements of the CAA. At this time, MGE is unable to predict the impact of these claims on its financial condition or results of operations but believes that should there ultimately be an adverse outcome, it could have a significant effect.

b.

Chattel Paper Agreement and Other Guarantees - MGE Energy and MGE.

MGE makes available to qualifying customers a financing program for the purchase and installation of energy-related equipment that will provide more efficient use of utility service at the customer's property. MGE is party to a chattel paper purchase agreement with a financial institution under which it can sell or finance an undivided interest with recourse, in up to $10.0 million of the financing program receivables, until August 31, 2011. At March 31, 2011, MGE has outstanding a $3.8 million interest in these receivables. MGE retains the servicing responsibility for these receivables. As of March 31, 2011, the servicing asset recognized by MGE is $0.1 million.

MGE accounts for servicing rights under the amortization method. Initial determination of the servicing asset fair value is based on the present value of the estimated future cash flows. The discount rate is based on the PSCW authorized weighted cost of capital.

MGE would be required to perform under its guarantee if a customer defaulted on its loan. The energy-related equipment installed at the customer sites is used to secure the customer loans. The loan balances outstanding at March 31, 2011, approximate the fair value of the energy-related equipment acting as collateral. The length of the MGE guarantee to the financial institution varies from one to ten years depending on the term of the underlying customer loan. Principal payments for the remainder of 2011 and the next four years on the loans are:

	(In thousands)
	2011	$	514
	2012		513
	2013		546
	2014		365
	2015		678

c.

Other Legal Matters.

MGE is involved in various other legal matters that are being defended and handled in the normal course of business. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. MGE has accrued for such matters in the financial statements. The ultimate outcomes of such matters are uncertain and may have an adverse effect on MGE Energy's and MGE's results of operations, financial position, or cash flows.

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d.

Natural Gas Transportation and Storage Contracts - MGE Energy and MGE.

MGE's natural gas transportation and storage contracts require fixed monthly payments for firm supply pipeline transportation and storage capacity. The pricing components of the fixed monthly payments for the transportation and storage contracts are established by FERC but may be subject to change. As of March 31, 2011, the fixed payments for firm supply pipeline transportation and storage capacity for the remainder of 2011 and the next four years are as follows:

	(In thousands)
	2011	$	10,681
	2012		17,071
	2013		17,037
	2014		16,842
	2015		16,688

e.

Coal Contracts - MGE Energy and MGE.

Fuel procurement for MGE's jointly owned Columbia and Elm Road Units are handled by WPL and WEPCO, respectively, the operating companies. If any minimum purchase obligations must be paid under these contracts, management believes these obligations would be considered costs of service and recoverable in rates. The following table identifies MGE's share, as of March 31, 2011, of the total coal commitments for the Columbia and Elm Road Units for the remainder of 2011 and the next four years.

	(In thousands)
	2011	$	19,716
	2012		29,462
	2013		13,288
	2014		3,608
	2015		-

f.

Smart Grid Investment Grant - MGE Energy and MGE.

MGE has been approved by the U.S. Department of Energy (DOE) under the federal stimulus program for a $5.5 million grant for smart grid projects. The DOE grant requires MGE to match the grant funding, bringing the total cost of the proposed projects to more than $11 million. The proposed projects will install technologies to boost efficiency, enhance service and improve reliability for customers. The stimulus grant will help fund the following projects: advanced metering infrastructure, plug-in hybrid electric vehicles support, and distribution management. As of March 31, 2011, MGE has spent $3.5 million related to these projects and has outstanding agreements to purchase $0.9 million in smart grid related products for the remainder of 2011.

10.

Blount Station - MGE Energy and MGE.

In 2006, MGE announced a plan to reduce capacity at Blount from 190 MW to 100 MW by the end of 2011. As part of the plan, coal use at Blount will be discontinued. MGE has determined that certain employee positions will be eliminated as a result of this plan.

In March 2009, MGE received notification from MISO that in order to meet national electric system reliability standards, MGE will need to keep Blount available at its full capacity until MISO declares that the 90 MW are no longer needed for system reliability. Currently, MGE estimates the reduction in capacity will occur in 2013. The transition from burning coal to burning only natural gas will still occur by the end of 2011. After the transition, the entire plant will be operated exclusively on natural gas.

MGE has entered into agreements providing severance benefits to employees affected by the exit plan. These benefits are being recognized ratably over the expected future service period of the employees. Total benefits expected to be paid are $0.3 million in both 2012 and 2013. Total benefits paid as of March 31, 2011 are $1.1 million.

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MGE continues to recover in rates the costs associated with the severance benefits at Blount in the year of expected cash payment. The severance charges to be recovered in rates have been deferred and recognized on the consolidated balance sheet of MGE Energy and MGE as a regulatory asset.

The following table presents the activity in the restructuring accrual from December 31, 2010, through March 31, 2011:

	(In thousands)
	Balance at December 31, 2010	$	259
	Additional expense, net		41
	Cash payments during the period		(24)
	Balance at March 31, 2011	$	276

The exit plan has also resulted in accelerated depreciation for the Blount assets expected to be retired in 2011 and 2013. The majority of these assets are being recovered in rates over a four-year period that began in 2008, with the remaining balance recovered by the end of 2013. For the three months ended March 31, 2011 and 2010, $0.8 million of accelerated depreciation expense had been recognized and recovered in rates each year.

11.

Derivative and Hedging Instruments - MGE Energy and MGE.

a.

Purpose.

As part of its regular operations, MGE enters into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage its exposure to commodity prices and gas revenues. To the extent that these contracts are derivatives, MGE assesses whether or not the normal purchases or normal sales exclusion applies. For contracts to which this exclusion cannot be applied, MGE Energy and MGE recognize such derivatives in the consolidated balance sheets at fair value. The majority of MGE's derivative activities are conducted in accordance with its electric and gas risk management program, which is approved by the PSCW and limits the volume MGE can hedge with specific risk management strategies. The maximum length of time over which cash flows related to energy commodities can be hedged ranges from eighteen months to four years. If the derivative qualifies for regulatory deferral, the derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. The deferred gain or loss is recognized in earnings in the delivery month applicable to the instrument. Gains and losses related to hedges qualifying for regulatory treatment are recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.

b.

Notional Amounts.

The gross notional volume of open derivatives is as follows:

		March 31, 2011		December 31, 2010
	Commodity derivative contracts	535,575 MWh		544,820 MWh
	Commodity derivative contracts	3,300,000 Dth		5,420,000 Dth
	FTRs	1,066 MW		2,609 MW

c.

Financial Statement Presentation.

MGE Energy and MGE offset fair value amounts recognized for the right to reclaim collateral (a receivable) or the obligation to return collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement. At March 31, 2011, MGE Energy and MGE did not have any cash collateral netted against the net derivative positions. At December 31, 2010, MGE Energy and MGE had $0.5 million in collateral that was netted against the net derivative positions with counterparties.

23

MGE purchases and sells exchange-traded and over-the-counter options, swaps, and future contracts. These arrangements are primarily entered into to help stabilize the price risk associated with gas or power purchases. These transactions are employed by both MGE's gas and electric segments. Additionally, as a result of the firm transmission agreements that MGE holds on transmission paths in the MISO and PJM markets, MGE holds FTRs. An FTR is a financial instrument that entitles the holder to a stream of revenues or charges based on the differences in hourly day-ahead energy prices between two points on the transmission grid. The fair values of these instruments are reflected as a regulatory asset/liability depending on whether they are in a net loss/gain position. Depending on the nature of the instrument, the gain or loss associated with these transactions will be reflected as cost of gas sold, fuel for electric generation, or purchased power expense in the delivery month applicable to the instrument. At March 31, 2011, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $0.5 million. At December 31, 2010, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $0.2 million.

MGE has also entered into a ten-year purchased power agreement which provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE the option to purchase power during a period of time preceding that base term as well as an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the balance sheet. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at March 31, 2011 and December 31, 2010, reflects a loss position of $22.2 million and $19.0 million, respectively. The actual fuel cost will be recognized in purchased power expense in the month of purchase.

The following table summarizes the fair value of the derivative instruments on the balance sheet. All derivative instruments in this table are presented on a gross basis and are calculated prior to the netting of instruments with the same counterparty under a master netting agreement as well as the netting of collateral. For financial statement purposes, MGE Energy and MGE have netted instruments with the same counterparty under a master netting agreement as well as the netting of collateral.