MGE ENERGY INC - Quarter Report: 2012 June (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:

June 30, 2012

[ ] 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 their corporate Web sites, 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 registrants were 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.


	Large Accelerated Filer	Accelerated Filer	Non-accelerated Filer	Smaller Reporting Company
MGE Energy, Inc.	X
Madison Gas and Electric Company			X

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]


Number of Shares Outstanding of Each Class of Common Stock as of July 31, 2012
MGE Energy, Inc.	Common stock, $1.00 par value, 23,113,638 shares outstanding.
Madison Gas and Electric Company	Common stock, $1.00 par value, 17,347,894 shares outstanding (all of which are owned beneficially and of record by MGE Energy, Inc.).

Table of Contents

PART I. FINANCIAL INFORMATION.

Filing Format

Forward-Looking Statements

Where to Find More Information

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

Item 1. Financial Statements.

MGE Energy, Inc.

Consolidated Statements of Income (unaudited)

Consolidated Statements of Comprehensive Income (unaudited)

Consolidated Statements of Cash Flows (unaudited)

Consolidated Balance Sheets (unaudited)

Consolidated Statements of Common Equity (unaudited)

Madison Gas and Electric Company

Consolidated Statements of Income (unaudited)

Consolidated Statements of Comprehensive Income (unaudited)

Consolidated Statements of Cash Flows (unaudited)

Consolidated Balance Sheets (unaudited)

Consolidated Statements of Common Equity (unaudited)

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

Notes to Consolidated Financial Statements (unaudited)

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures.

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

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

Item 4. Mine Safety Disclosures.

Item 6. Exhibits.

Signatures - MGE Energy, Inc.

Signatures - Madison Gas and Electric Company

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' 2011 Annual Report on Form 10-K: Item 1A. Risk Factors, as updated by Part II. Item 1A. Risk Factors in this Report, 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 8 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.

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.

MGE Energy and Subsidiaries:
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
Other Defined Terms:
AFUDC	Allowance for Funds Used During Construction
ATC	American Transmission Company LLC
BART	Best Available Retrofit Technology
Blount	Blount Station
CAA	Clean Air Act
CAIR	Clean Air Interstate Rule
CAVR	Clean Air Visibility 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
CSAPR	Cross-State Air Pollution Rule
CWA	Clean Water Act
CWDC	Central Wisconsin Development Corporation
DOE	U.S. Department of Energy
Dth	Dekatherms, a quantity measure used in respect of natural gas
Elm Road Units	Elm Road Generating Station
EPA	United States Environmental Protection Agency
ERISA	Employee Retirement Income Security Act
EGU	Electric Generating Unit
FASB	Financial Accounting Standards Board
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
IRS	Internal Revenue Service
kWh	Kilowatt-hour, a measure of electric energy produced
MACT	Maximum Achievable Control Technology
MAP-21	Moving Ahead for Progress in the 21st Century Act
MATS	Mercury and Air Toxics Standards
MISO	Midwest Independent System Operator (a regional transmission organization)
MW	Megawatt, a measure of electric energy generating capacity
MWh	Megawatt-hour, a measure of electric energy produced
NAAQS	National Ambient Air Quality Standards
NGCC	Natural Gas Combined Cycle
NO2	Nitrogen Dioxide
NOV	Notice of Violation
NOx	Nitrogen Oxides
NSPS	New Source Performance Standards
OPRB	Other Postretirement Benefits
PGA	Purchased Gas Adjustment clause, a regulatory mechanism used to reconcile natural gas costs recovered in rates to actual costs
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
RICE	Reciprocating Internal Combustion Engine
SEC	Securities and Exchange Commission
SIP	State Implementation Plan
SO2	Sulfur Dioxide
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
Working capital	Current assets less current liabilities
WPDES	Wisconsin Pollutant Discharge Elimination System
WPL	Wisconsin Power and Light Company
WPSC	Wisconsin Public Service Corporation

Item 1. Financial Statements.

MGE Energy, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except per-share amounts)


		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Operating Revenues:
Regulated electric revenues	$	96,339	$	90,834	$	186,275	$	176,841
Regulated gas revenues		18,629		25,062		75,648		102,499
Nonregulated revenues		2,253		1,363		4,557		2,524
Total Operating Revenues		117,221		117,259		266,480		281,864

Operating Expenses:
Fuel for electric generation		11,481		11,599		20,332		22,648
Purchased power		17,314		14,392		36,860		31,973
Cost of gas sold		7,801		13,052		42,646		63,999
Other operations and maintenance		41,278		40,657		84,227		80,070
Depreciation and amortization		9,712		10,357		19,336		20,373
Other general taxes		4,554		4,005		9,554		8,706
Total Operating Expenses		92,140		94,062		212,955		227,769
Operating Income		25,081		23,197		53,525		54,095

Other income, net		2,549		2,153		5,119		4,539
Interest expense, net		(4,764)		(5,055)		(9,868)		(9,905)
Income before income taxes		22,866		20,295		48,776		48,729
Income tax provision		(8,596)		(7,572)		(18,458)		(18,223)
Net Income	$	14,270	$	12,723	$	30,318	$	30,506

Earnings Per Share of Common Stock
(basic and diluted)	$	0.62	$	0.55	$	1.31	$	1.32

Dividends per share of common stock	$	0.383	$	0.375	$	0.766	$	0.750

Average Shares Outstanding
(basic and diluted)		23,114		23,114		23,114		23,114

MGE Energy, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Net Income	$	14,270	$	12,723	$	30,318	$	30,506
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities, net of tax ($24 and $6, and $29 and $54)		36		9		43		81
Reclassification of realized gain on available-for-sale securities, net of tax ($- and $10, and $-and $10)		-		(15)		-		(15)
Comprehensive Income	$	14,306	$	12,717	$	30,361	$	30,572

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

MGE Energy, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


		Six Months Ended June 30,
		2012		2011
Operating Activities:
Net income	$	30,318	$	30,506
Items not affecting cash:
Depreciation and amortization		19,336		20,373
Deferred income taxes		14,657		9,263
Provision for doubtful receivables		1,207		1,013
Employee benefit plan expenses		9,222		6,818
Equity earnings in ATC		(4,484)		(4,267)
Other items		1,102		725
Changes in working capital items:
Decrease in current assets		15,323		29,171
Decrease in current liabilities		(10,948)		(8,629)
Dividend income from ATC		3,494		3,327
Cash contributions to pension and other postretirement plans		(21,593)		(19,932)
Other noncurrent items, net		3,152		(945)
Cash Provided by Operating Activities		60,786		67,423

Investing Activities:
Capital expenditures		(39,553)		(28,591)
Capital contributions to investments		(938)		(691)
Purchase of investment - land		(2)		(1,801)
Other		(338)		(90)
Cash Used for Investing Activities		(40,831)		(31,173)

Financing Activities:
Cash dividends paid on common stock		(17,687)		(17,340)
Repayment of long-term debt		(29,334)		(1,167)
Issuance of long-term debt		28,000		30,000
Decrease in short-term debt		-		(22,500)
Other		(815)		(299)
Cash Used for Financing Activities		(19,836)		(11,306)

Change in Cash and Cash Equivalents:		119		24,944
Cash and cash equivalents at beginning of period		41,169		7,110
Cash and cash equivalents at end of period	$	41,288	$	32,054

Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures	$	4,779	$	963

The accompanying notes are an integral part of the unaudited consolidated financial statements.

MGE Energy, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands)


ASSETS		June 30, 2012		December 31, 2011
Current Assets:
Cash and cash equivalents	$	41,288	$	41,169
Receivable - margin account		2,695		2,477
Accounts receivable, less reserves of $3,727 and $3,662, respectively		30,551		36,744
Other accounts receivable, less reserves of $616 and $439, respectively		5,381		5,318
Unbilled revenues		22,311		25,754
Materials and supplies, at average cost		16,875		14,758
Fossil fuel		8,928		5,468
Stored natural gas, at average cost		12,716		19,575
Prepaid taxes		21,242		22,251
Regulatory assets - current		9,643		7,347
Other current assets		7,056		8,270
Total Current Assets		178,686		189,131
Regulatory assets		235,570		205,835
Other deferred assets and other		6,830		8,018
Property, Plant, and Equipment:
Property, plant, and equipment, net		969,707		961,511
Construction work in progress		53,434		34,055
Total Property, Plant, and Equipment		1,023,141		995,566
Investments		62,323		60,332
Total Assets	$	1,506,550	$	1,458,882

LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	2,667	$	2,667
Accounts payable		28,238		34,532
Accrued interest and taxes		4,131		4,085
Accrued payroll related items		7,789		9,987
Deferred income taxes		2,791		3,020
Derivative liabilities		10,180		4,568
Other current liabilities		6,324		4,215
Total Current Liabilities		62,120		63,074
Other Credits:
Deferred income taxes		215,151		199,850
Investment tax credit - deferred		1,650		1,780
Regulatory liabilities		21,170		20,463
Accrued pension and other postretirement benefits		167,028		183,622
Derivative liabilities		69,570		34,908
Other deferred liabilities and other		46,076		43,330
Total Other Credits		520,645		483,953
Capitalization:
Common shareholders' equity		563,626		550,952
Long-term debt		360,159		360,903
Total Capitalization		923,785		911,855
Commitments and contingencies (see Footnote 8)		-		-
Total Liabilities and Capitalization	$	1,506,550	$	1,458,882

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

MGE Energy, Inc.

Consolidated Statements of Common Equity (unaudited)

(In thousands, except per-share amounts)


					Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total

	Common Stock
	Shares		Value
2011
Beginning balance - December 31, 2010	23,114	$	23,114	$	316,268	$	185,556	$	142	$	525,080
Net income							30,506				30,506
Other comprehensive income									66		66
Common stock dividends declared ($0.750 per share)							(17,340)				(17,340)
Ending balance - June 30, 2011	23,114	$	23,114	$	316,268	$	198,722	$	208	$	538,312

2012
Beginning balance - December 31, 2011	23,114	$	23,114	$	316,268	$	211,458	$	112	$	550,952
Net income							30,318				30,318
Other comprehensive income									43		43
Common stock dividends declared ($0.766 per share)							(17,687)				(17,687)
Ending balance - June 30, 2012	23,114	$	23,114	$	316,268	$	224,089	$	155	$	563,626

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

Madison Gas and Electric Company

Consolidated Statements of Income (unaudited)

(In thousands)


		Three Months Ended June 30,				Six Months Ended June 30,
		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Operating Revenues:
Regulated electric revenues	$	96,339	$	90,834	$	186,275	$	176,841
Regulated gas revenues		18,629		25,062		75,648		102,499
Nonregulated revenues		2,253		1,363		4,557		2,524
Total Operating Revenues		117,221		117,259		266,480		281,864

Operating Expenses:
Fuel for electric generation		11,481		11,599		20,332		22,648
Purchased power		17,314		14,392		36,860		31,973
Cost of gas sold		7,801		13,052		42,646		63,999
Other operations and maintenance		41,026		40,369		83,554		79,604
Depreciation and amortization		9,712		10,357		19,336		20,373
Other general taxes		4,554		4,005		9,554		8,706
Income tax provision		7,635		6,666		16,604		16,557
Total Operating Expenses		99,523		100,440		228,886		243,860
Operating Income		17,698		16,819		37,594		38,004

Other Income and Deductions:
AFUDC - equity funds		310		116		464		203
Equity in earnings in ATC		2,242		2,170		4,484		4,267
Income tax provision		(975)		(950)		(1,968)		(1,756)
Other income, net		(186)		(274)		(130)		(161)
Total Other Income and Deductions		1,391		1,062		2,850		2,553
Income before interest expense		19,089		17,881		40,444		40,557

Interest Expense:
Interest on long-term debt		5,073		5,223		10,270		10,214
Other interest, net		(148)		(105)		(141)		(252)
AFUDC - borrowed funds		(126)		(48)		(189)		(83)
Net Interest Expense		4,799		5,070		9,940		9,879
Net Income	$	14,290	$	12,811	$	30,504	$	30,678
Less Net Income Attributable to Noncontrolling Interest, net of tax		(6,080)		(5,992)		(12,152)		(11,925)
Net Income Attributable to MGE	$	8,210	$	6,819	$	18,352	$	18,753

Madison Gas and Electric Company

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)


		Three Months Ended June 30,				Six Months Ended June 30,
		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Net Income	$	14,290	$	12,811	$	30,504	$	30,678
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale securities, net of tax ($5 and $2, and $15 and $21)		(7)		(3)		(23)		32
Reclassification of realized gain on available-for-sale securities, net of tax ($- and $10, and $- and $10)		-		(15)		-		(15)
Comprehensive Income	$	14,283	$	12,793	$	30,481	$	30,695
Less: Comprehensive income attributable to Noncontrolling Interest, net of tax		(6,080)		(5,992)		(12,152)		(11,925)
Comprehensive Income attributable to MGE	$	8,203	$	6,801	$	18,329	$	18,770

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

Madison Gas and Electric Company

Consolidated Statements of Cash Flows (unaudited)

(In thousands)


		Six Months Ended June 30,
		Six Months Ended June 30,
		2012		2011
Operating Activities:
Net income	$	30,504	$	30,678
Items not affecting cash:
Depreciation and amortization		19,336		20,373
Deferred income taxes		14,444		8,827
Provision for doubtful receivables		1,207		1,013
Employee benefit plan expenses		9,222		6,818
Equity earnings in ATC		(4,484)		(4,267)
Other items		1,367		1,017
Changes in working capital items:
Decrease in current assets		13,822		28,916
Decrease in current liabilities		(11,589)		(9,687)
Dividend income from ATC		3,494		3,327
Cash contributions to pension and other postretirement plans		(21,593)		(19,932)
Other noncurrent items, net		2,961		(989)
Cash Provided by Operating Activities		58,691		66,094

Investing Activities:
Capital expenditures		(39,553)		(28,591)
Capital contributions to investments		(888)		(621)
Other		(286)		406
Cash Used for Investing Activities		(40,727)		(28,806)

Financing Activities:
Cash dividends paid to parent by MGE		(13,456)		(13,192)
Distributions to parent from noncontrolling interest		(8,500)		(37,000)
Equity contribution received by noncontrolling interest		888		622
Repayment of long-term debt		(29,334)		(1,167)
Issuance of long-term debt		28,000		30,000
Decrease in short-term debt		-		(3,500)
Other		(795)		(297)
Cash Used for Financing Activities		(23,197)		(24,534)

Change in Cash and Cash Equivalents:		(5,233)		12,754
Cash and cash equivalents at beginning of period		13,898		4,494
Cash and cash equivalents at end of period	$	8,665	$	17,248

Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures	$	4,779	$	963

The accompanying notes are an integral part of the unaudited consolidated financial statements.

Madison Gas and Electric Company

Consolidated Balance Sheets (unaudited)

(In thousands)


		June 30, 2012		December 31, 2011
ASSETS		June 30, 2012		December 31, 2011
Current Assets:
Cash and cash equivalents	$	8,665	$	13,898
Receivable - margin account		2,695		2,477
Accounts receivable, less reserves of $3,727 and $3,662, respectively		29,873		35,765
Affiliate receivables		670		605
Other accounts receivable, less reserves of $616 and $439, respectively		5,370		5,301
Unbilled revenues		22,311		25,754
Materials and supplies, at average cost		16,875		14,758
Fossil fuel		8,928		5,468
Stored natural gas, at average cost		12,716		19,575
Prepaid taxes		22,082		21,977
Regulatory assets - current		9,643		7,347
Other current assets		7,046		8,245
Total Current Assets		146,874		161,170
Affiliate receivable long-term		6,619		6,884
Regulatory assets		235,570		205,835
Other deferred assets and other		6,208		7,286
Property, Plant, and Equipment:
Property, plant, and equipment, net		969,203		961,007
Construction work in progress		53,434		34,055
Total Property, Plant, and Equipment		1,022,637		995,062
Investments		59,395		57,556
Total Assets	$	1,477,303	$	1,433,793

LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	2,667	$	2,667
Accounts payable		28,238		34,532
Affiliate payables		1,491		2,152
Accrued interest and taxes		4,083		4,037
Accrued payroll related items		7,789		9,987
Deferred income taxes		2,856		3,020
Derivative liabilities		10,180		4,568
Other current liabilities		6,126		3,997
Total Current Liabilities		63,430		64,960
Other Credits:
Deferred income taxes		211,529		196,550
Investment tax credit - deferred		1,650		1,780
Regulatory liabilities		21,170		20,463
Accrued pension and other postretirement benefits		167,028		183,622
Derivative liabilities		69,570		34,908
Other deferred liabilities and other		46,077		43,330
Total Other Credits		517,024		480,653
Capitalization:
Common shareholder's equity		417,799		412,926
Noncontrolling interest		118,891		114,351
Total Equity		536,690		527,277
Long-term debt		360,159		360,903
Total Capitalization		896,849		888,180
Commitments and contingencies (see Footnote 8)		-		-
Total Liabilities and Capitalization	$	1,477,303	$	1,433,793

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

Madison Gas and Electric Company

Consolidated Statements of Common Equity (unaudited)

(In thousands)


					Additional Paid-in Capital		Retained Earnings	Accumulated Other Comprehensive (Loss)/Income			Non- Controlling Interest		Total

	Common Stock
	Shares		Value
2011
Beginning balance - Dec. 31, 2010	17,348	$	17,348	$	192,417	$	192,480	$	71	$	141,993	$	544,309
Net income							18,753				11,925		30,678
Other comprehensive income									17				17
Cash dividends paid to parent by MGE							(13,192)						(13,192)
Equity contribution received by noncontrolling interest											622		622
Distributions to parent from noncontrolling interest											(37,000)		(37,000)
Ending balance - June 30, 2011	17,348	$	17,348	$	192,417	$	198,041	$	88	$	117,540	$	525,434

2012
Beginning balance - Dec. 31, 2011	17,348	$	17,348	$	192,417	$	203,114	$	47	$	114,351	$	527,277
Net income							18,352				12,152		30,504
Other comprehensive loss									(23)				(23)
Cash dividends paid to parent by MGE							(13,456)						(13,456)
Equity contribution received by noncontrolling interest											888		888
Distributions to parent from noncontrolling interest											(8,500)		(8,500)
Ending balance - June 30, 2012	17,348	$	17,348	$	192,417	$	208,010	$	24	$	118,891	$	536,690

The accompanying notes are an integral part of the above unaudited consolidated financial statements.

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

Notes to Consolidated Financial Statements (unaudited)

June 30, 2012

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 Elm Road and MGE Power West Campus own electric generating assets and lease those assets to MGE. 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. As a result, MGE has consolidated MGE Power Elm Road and MGE Power West Campus.

The accompanying consolidated financial statements as of June 30, 2012, and for the three and six 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 2011 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 54 through 107 of the 2011 Annual Report on Form 10-K.

Equity and Financing Arrangements.

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 can issue new shares of its common stock through the Stock Plan. For both the six months ended June 30, 2012 and 2011, MGE Energy did not issue any new shares of common stock under the Stock Plan.

Dilutive Shares Calculation - MGE Energy.

MGE Energy does not hold any dilutive securities.

Long-term Debt - MGE Energy and MGE.

On April 2, 2012, MGE issued $28 million in principal amount of its 4.38% senior notes, due April 1, 2042. The Notes were issued pursuant to a Note Purchase Agreement. The Notes are unsecured and are not issued under, or governed by, MGE's Indenture dated as of September 1, 1998, which governs MGE's Medium-Term Notes. MGE used the net proceeds from the sale of the Notes, together with other available corporate funds, to repay and retire on April 3, 2012, its obligations under a Loan Agreement dated as of April 1, 2002 with the City of Madison, Wisconsin, under which MGE received the net proceeds from the issuance of $28 million aggregate principal amount of 5.875% Series 2002A, Industrial Development Revenue Bonds that were issued by the City of Madison for MGE's benefit. The 5.875% Series 2002A Bonds were redeemed and retired on April 3, 2012, at 100% of their principal amount plus accrued interest with the proceeds of that loan repayment. Any interest savings in 2012 will be deferred.

Remarketing of 4.875% Series 2002B, Industrial Development Revenue Bonds - MGE Energy and MGE.

On April 2, 2012, $19.3 million of 4.875% Series 2002B, Industrial Development Revenue Bonds were remarketed at an interest rate of 3.45%. The net proceeds of the 4.875% Series 2002B Bonds were originally loaned to MGE pursuant to a Loan Agreement dated as of April 1, 2002 with the City of Madison, which issued the Series 2002B Bonds in 2002. MGE is responsible for the payment of principal, premium, if any, and interest on the Bonds. The 4.875% Series 2002B Bonds were originally issued bearing an interest rate of 4.875% per annum for a period that ended April 1, 2012, at which point the Bonds were subject to mandatory tender by their holders and remarketing. The Series 2002B Bonds were remarketed and carry an interest rate of 3.45% per annum, which is payable semi-annually on April 1 and October 1, until their maturity on October 1, 2027. The Series 2002B Bonds are redeemable on or after April 1, 2017, at a redemption price equal to 100% of the principal amount of the Bonds to be redeemed, plus accrued interest to the redemption date.

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 six months ended June 30, 2012 and 2011, MGE Transco recorded equity earnings from the investment in ATC of $4.5 million and $4.3 million, respectively. Dividend income received from ATC was $3.5 million and $3.3 million for the six months ended June 30, 2012 and 2011, respectively. In addition, during the six months ended June 30, 2012 and 2011, MGE Transco made $0.9 million and $0.6 million in capital contributions to ATC, respectively.

MGE Energy and MGE's investment in ATC as of June 30, 2012, and December 31, 2011, was $58.9 million and $57.0 million, respectively.

At June 30, 2012, 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 and six months ended June 30, 2012 and 2011, is as follows:


		Three Months Ended				Six Months Ended
(In thousands)		June 30,				June 30,
		2012		2011		2012		2011
Operating revenues	$	152,171	$	138,203	$	299,833	$	277,820
Operating expenses		(71,760)		(62,951)		(141,326)		(126,077)
Other expense, net		(327)		(134)		(827)		(492)
Interest expense, net		(20,776)		(19,479)		(40,277)		(41,376)
Earnings before members' income taxes	$	59,308	$	55,639	$	117,403	$	109,875

Columbia Environmental Project Construction - MGE Energy and MGE.

MGE and two other utilities jointly own Columbia, a coal-fired generating facility. WPL is the plant operator and permit holder, and owns 46.2% of Columbia. WPSC owns a 31.8% interest, and MGE owns a 22% interest in Columbia. In early 2011, the PSCW issued a Certificate and Order authorizing the construction of scrubbers and bag houses and associated equipment on Columbia Units 1 and 2 to reduce SO₂ and mercury emissions. The scrubbers and bag houses are expected to support compliance obligations for current and anticipated air quality regulations, including CAIR or CSAPR, the Utility MACT Rule and the Wisconsin Mercury Rule. The operator's current estimate shows that MGE's share of the capital expenditures required for this project will be approximately $140 million. As of June 30, 2012, MGE had accumulated $25.1 million (excluding carrying costs) related to its share of the project, which is reflected in the Construction Work in Progress balance on MGE Energy's and MGE's consolidated balance sheets. MGE expects to incur capital expenditures as follows: $33 million for the remainder of 2012, $68 million in 2013, and $14 million in 2014. These amounts may change as a result of modifications to the project estimate or timing difference.

MGE expects that the costs pertaining to this project will be fully recoverable through rates. Additionally, MGE is entitled to a carrying cost on the related construction costs at 100% of the determined AFUDC rate.

Taxes - MGE Energy and MGE.

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 has adopted a tax method of accounting to accelerate 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. The method change for electric generation and transmission and distribution repairs was included on the 2009 tax return while the change for gas distribution repairs was included on the 2010 return. During 2011, the IRS issued guidance on the treatment of electric transmission and distribution repairs. This guidance prompted the reversal of a portion of the unrecognized tax benefits for these repairs during 2011. MGE Energy and MGE have an unrecognized tax benefit at June 30, 2012, and December 31, 2011, in the amount of $2.5 million and $2.4 million, respectively, for the tax uncertainty primarily related to the change in tax method of accounting for electric generation and gas distribution repairs.

Effective Tax Rate.

MGE Energy's and MGE's effective income tax rate for the three and six months ended June 30, 2012, are 37.6% and 37.8%, respectively, compared to 37.3% and 37.4% for the same period in 2011. The higher effective tax rate is, in part, attributable to a lower estimated domestic manufacturing deduction.

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 defined 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 and six months ended June 30, 2012 and 2011. A portion of the net periodic benefit cost is capitalized within the consolidated balance sheets.


		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Pension Benefits
Components of net periodic benefit cost:
Service cost	$	1,920	$	1,514	$	3,743	$	3,054
Interest cost		3,321		3,030		6,475		6,110
Expected return on assets		(4,021)		(3,473)		(7,839)		(7,004)
Amortization of:
Prior service cost		114		107		222		216
Actuarial loss		2,112		931		4,118		1,877
Net periodic benefit cost	$	3,446	$	2,109	$	6,719	$	4,253
Postretirement Benefits
Components of net periodic benefit cost:
Service cost	$	606	$	514	$	1,253	$	1,001
Interest cost		1,053		1,036		2,178		2,018
Expected return on assets		(407)		(418)		(842)		(814)
Amortization of:
Transition obligation		99		113		206		219
Prior service cost		26		29		54		57
Actuarial loss		581		117		1,201		228
Net periodic benefit cost	$	1,958	$	1,391	$	4,050	$	2,709

The PSCW allowed MGE to defer the 2009 incremental pension and OPRB costs above the amounts recovered in rates. During the three months ended June 30, 2012 and 2011, $0.3 million and $0.7 million, respectively, has been recovered in rates. During the six months ended June 30, 2012 and 2011, $0.6 million and $1.3 million, respectively, has been recovered in rates. These costs are not reflected in the table above.

Share-Based Compensation - MGE Energy and MGE.

Under MGE Energy's 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 2008 through 2011, on February 17, 2012, 16,693 units were granted based on the MGE Energy closing stock price as of that date. These units are subject to a five-year graded vesting schedule. On the grant date, MGE Energy and MGE measure 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 June 30, 2012, as required by applicable accounting standards. Changes in fair value have been recognized as compensation cost. Since this amount is re-measured quarterly 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.

In April 2011, the MGE Energy Board approved an amendment to the outstanding awards under the Performance Unit Plan to provide for the continued vesting of those awards in the event of a bona fide retirement, provided the retired individual does not provide services to a competitor. The amendment did not change the number of performance units covered by any outstanding awards currently held by any of the participants.

As a result of the changes made by the amendment, the Company accelerated the recognition of costs associated with the outstanding awards resulting in a compensation-related charge of $0.5 million in the second quarter of 2011.

During both the six months ended June 30, 2012 and 2011, MGE recorded $0.8 million in compensation expense as a result of the Performance Unit Plan. In January 2012, cash payments of $0.6 million were distributed relating to awards that were granted in 2007 and became payable under the Performance Unit Plan. No forfeitures occurred during the six months ended June 30, 2012 or 2011. At June 30, 2012, $2.8 million of outstanding awards are vested.

Commitments and Contingencies.

Environmental - MGE Energy and MGE.

Water quality

Water quality regulations promulgated by the EPA and WDNR in accordance with the Federal Water Pollution Control Act, or more commonly known as the Clean Water Act (CWA), impose restrictions on emissions of various pollutants into surface waters. The CWA also regulates surface water quality issues that affect aquatic life, such as water temperatures, intake structures, and wetlands filling. The CWA regulates discharges from "point sources" such as power plants by establishing discharge limits in water discharge permits. MGE's power plants operate under Wisconsin Pollution Discharge Elimination System (WPDES) permits to ensure compliance with these discharge limits.

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

In April 2011, the EPA proposed and asked for public comment on standards to reduce entrainment (drawing aquatic life into a plant's cooling system) and impingement (trapping aquatic life on screens) 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 Section 316(b) of the CWA. Both our Blount and Columbia generating plants are subject to the impingement and entrainment aspects of the current proposed rule. Our WCCF plant is subject to the impingement aspect only. Under the current proposed rule, equipment would need to be installed at Blount, WCCF and Columbia to meet these new standards. The EPA has until June 27, 2013 to issue the final rule, pursuant to a recently announced settlement agreement. It is not presently possible to estimate the potential costs associated with the implementation of any of these initiatives because the rule has not been finalized.

WPDES Thermal Discharge Rule

WDNR rules to regulate thermal effluent discharges from point sources in Wisconsin became effective on October 1, 2010. We will need to meet the revised rule requirement as MGE's WPDES permits are issued or renewed. If we, in the cases of Blount and WCCF, or the plant operator, in the cases of Columbia and Elm Road, are unable to demonstrate that any of these permitted plants are able to comply with its associated WPDES permit requirements, then we may face operational controls and/or incur capital costs associated with plant modifications to meet discharge requirements. Those expenditures could be material, but would be anticipated to be recoverable in rates.

WPDES Phosphorus Nutrient Standards

In December 2010, the WDNR established water quality standards for phosphorus and effluent limitations for permitted discharges into specific waterbodies. Phosphorus limitations will be added to water effluent discharge permits as they are issued or renewed. The WDNR will be developing site-specific phosphorus limits. MGE's facilities subject to these standards include Blount, Columbia, Elm Road and WCCF. MGE may incur additional capital or operational expenditures and/or need to install additional pollution controls to meet the new phosphorus limits. MGE has, however, identified potential compliance options and believes compliance can be managed without significant capital investments.

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 recently finalized Cross-State Air Pollution Rule (CSAPR), 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, are expected to result in additional operating and capital expenditure costs for electric generating units.

Maximum Achievable Control Technology (MACT) for Utility Boilers (Also Referred to as the Mercury and Air Toxics Standards or MATS)

In December 2011, the EPA finalized its Mercury and Air Toxics Standards for coal and oil-burning electric generating unit (EGU) boilers. MATS will require emissions standards for mercury, non-mercury HAPs metals, and acid gases. MGE's Columbia and Elm Road Units are subject to MATS. The Elm Road Unit's current pollution controls and Columbia's planned mercury pollution controls are expected to allow both facilities to comply with the MATS rule (see the discussion regarding Columbia below).

Reciprocating Internal Combustion Engine (RICE) MACT

In December 2011, the EPA finalized its RICE MACT standard. RICE MACT applies to combustion turbines that contain a reciprocating internal combustion engine. Under the current RICE MACT, MGE may have to adjust its dispatching of several small generation units used for emergency and backup generation or install pollution controls. In June 2012, the EPA introduced a proposed rule that revised RICE MACT and introduced a New Source Performance Standard for RICE based on a settlement agreement with several power companies. MGE is currently reviewing the proposed rule and evaluating potential impacts associated with complying with the proposed RICE MACT.

Stay of EPA's Cross State Air Pollution Rule (CSAPR) and Reinstatement of the Clean Air Interstate Rule (CAIR)

The CAIR, which became effective in 2009, generally requires NO_x and SO₂ emission reductions from fossil fuel-fired electric generating units (25 MW or greater) (EGUs) in the eastern half of the United States in two phases and includes a regional cap-and-trade system. The first phase (currently in place) requires annual regional emission reductions from 2003 levels of 55% for NO_x and 40% for SO₂. The second phase (beginning in 2015) reduces regional NO_x and SO₂ emissions further from 2003 levels to 65% and 70%, respectively. MGE owns or has partial ownership in several generation units currently subject to the CAIR: Blount, Columbia, Elm Road, and its combustion turbines located in West Marinette and Fitchburg.

In December 2008, the U.S. Court of Appeals for the D.C. Circuit remanded the CAIR to the EPA for further review. In August 2011, the EPA published the Cross-State Air Pollution Rule (CSAPR) to replace the CAIR. Similar to the CAIR, CSAPR requires NO_x and/or SO₂ air emissions reductions by fossil fuel-fired EGUs (25 MW or greater) in 28 states in the eastern half of the U.S. CSAPR established state emission restrictions, referred to as budgets, for SO₂ and NO_x beginning in 2012 (Phase I). Under CSAPR, SO₂emission budgets in certain states, including Wisconsin, will be lowered further in 2014 (Phase II). CSAPR affects the same electric generation units at MGE as CAIR: Blount, Columbia, Elm Road, and the combustion turbines at West Marinette and Fitchburg. Plants in Wisconsin that are subject to CSAPR have been allocated CSAPR emission allowances and will need to hold sufficient allowances to cover emissions on an annual basis. If CSAPR allowances are not adequate for a given plant, emissions will need to be reduced at the plant level by fuel-switching, installation of controls, curtailment of operations or a combination thereof. MGE's Columbia plant, which is operated by WPL (MGE has a 22% ownership interest), has significantly fewer SO₂ allocations under CSAPR in 2012 and 2013 than recent actual emissions.

In December 2011, the U.S. Court of Appeals for the D.C. Circuit stayed the implementation of CSAPR pending judicial review. The ruling leaves the CAIR in place while the court considers the merits and challenges to CSAPR. MGE expects to hold sufficient emissions allowances under the CAIR for 2012.

If CSAPR is reinstated in 2012 or 2013, the Columbia co-owners will need to evaluate and implement interim strategies to address anticipated SO₂ allowance deficiencies under CSAPR. Current analysis shows that, if reinstated in 2013, additional allowances (if available) may need to be purchased, Columbia generation may need to be reduced to comply with CSAPR limits, or a combination of these two strategies may be employed. These interim measures may increase MGE's costs. MGE expects that the costs of meeting CSAPR requirements will be fully recoverable through rates. Planned new SO₂ controls at Columbia are expected to be completed by mid 2014 (see the discussion regarding the Columbia Environmental Project below). Once the new environmental control project is completed at Columbia, it is expected that the plant will emit below anticipated CSAPR allocation levels.

Clean Air Visibility Rule (CAVR)

Air modeling indicates that SO₂ and NO_x emissions (and to a lesser extent particulate matter, or PM) from Columbia may impair visibility at certain Class I Scenic Areas and may therefore be subject to the best available retrofit technology (BART) regulations, a subsection of the EPA's Clean Air Visibility Rule (CAVR), which requires pollution retrofits. The EPA has proposed that compliance with CAIR and with CSAPR emissions limitations could also serve as compliance with BART for SO₂ and NO_x emissions. However, with the uncertainty regarding the future of CAIR and CSAPR, the future of BART regulation and compliance strategies and costs are also uncertain.

Wisconsin State Mercury Rule

Beginning January 1, 2015, phase two of the Wisconsin mercury rule will require large coal-fired electric generating units (larger than 150 MW) to reduce mercury emissions by 90%, or choose a multi-pollutant reduction approach, which allows a stepped approach to mercury reduction while reducing NO_x and SO₂emissions at prescribed rates. Elm Road currently meets this requirement. The Columbia co-owners plan to meet the 90% reduction option by installing pollution controls needed to meet this and other rules (see the discussion regarding the Columbia Environmental Project below).

National Ambient Air Quality Standards (NAAQS)

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 two NAAQS developments: (1) EPA's proposed changes to the PM2.5 NAAQS announced in June 2012, which would lower the primary annual limit and add a secondary PM2.5 standard pertaining to a measure of visibility, and (2) the WDNR attainment/nonattainment designations associated with the EPA's June 2010 final revisions to its SO₂ NAAQS. These two NAAQS developments could have a potential material effect on capital and maintenance costs at our generating facilities. However, the potential impact will not be known until implementation of the rules are finalized.

EPA's Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule

The EPA's Greenhouse Gas "Tailoring Rule" regulates stationary sources for GHG emissions by "phasing in" over time different types of facilities subject to Prevention of Significant Deterioration (PSD) pre-construction program or Title V permitting (i.e. new facilities and existing facilities with certain qualifying modifications). MGE facilities may become subject to this rule if modifications at any facilities trigger PSD or if MGE invests in new facilities that trigger PSD.

GHG New Source Performance Standards for Electric Generating Units (EGU GHG NSPS)

On March 27, 2012, the EPA proposed greenhouse gas (GHG) New Source Performance Standards (NSPS) for coal fired and natural gas combined cycle (NGCC) electric generation units (EGUs). The proposal applies to new EGUs only; the EPA has stated that it does not intend for these rules to apply to modified or existing units at this time. The proposed NSPS may be finalized within 2012 and is not anticipated to significantly affect MGE's existing generation units.

Columbia

MGE and two other utilities jointly own Columbia, a coal-fired generating facility, which accounts for 225 MW (29%) of MGE's net summer generating capability. 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. 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.

Columbia Environmental Project

In early 2011, the PSCW issued a Certificate and Order authorizing the construction of scrubbers and bag houses and associated equipment on Columbia Units 1 and 2 to reduce SO₂ and mercury emissions. The scrubbers and bag houses are expected to support compliance obligations for current and anticipated air quality regulations, including CAIR or CSAPR, the Utility MACT Rule and the Wisconsin Mercury Rule. The operator's current estimate shows that MGE's share of the capital expenditures required for this project will be approximately $140 million.

As of June 30, 2012, Columbia has entered into various contractual commitments with vendors for a portion of the $140 million project. MGE is indirectly a party to these agreements as a result of its joint ownership of Columbia and is also contractually obligated, under the applicable ownership and operating agreements. MGE's share of these commitments is $99.9 million. These costs are expected to be capitalized and included in the consolidated balance sheets of MGE Energy and MGE. See Footnote 4 for further information regarding the Columbia environmental construction project.

Title V Operating Permit Petition

In September 2008, the WDNR issued a Title V renewal operating permit to WPL for 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. The WDNR took various preliminary actions but has not yet fully responded to the EPA's order. 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. In June 2012, the EPA notified the plant operator of its intent to assume responsibility for issuing the renewed operating permit for Columbia, but agreed to provide the plant operator with more time to potentially resolve the issues raised in the EPA's order. MGE believes the permits currently in effect for Columbia remain in place at this time. MGE continues to follow these developments and is unable to predict the outcome of this matter and its impact on its operations or financial condition.

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, as operator, 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. 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. MGE and the other co-owners of Columbia are defending against these allegations while actively pursuing settlement options with the EPA and Sierra Club.

MGE believes that the parties have reached a tentative agreement on the general terms of a settlement with the EPA and Sierra Club regarding various facilities, including Columbia. The Sierra Club has stipulated to dismissal of its lawsuit, without prejudice, while the parties attempt to reach a final settlement. The parties are currently negotiating a consent decree based upon those general terms, which may change during the negotiations. Based on a review of existing EPA consent decrees, the final consent decree could include the installation of emission control technology, changed operating conditions (including use of fuels other than coal and retirement of units), limitations on emissions, beneficial environmental mitigation projects, and a civil penalty.

Once the parties agree to the final terms, the Court must approve the settlement agreement. MGE cannot predict the outcome of these claims, but believes the outcome could be significant if the parties are unable to reach final agreement, or reach final agreement on different terms than currently anticipated, or if the Court does not approve the final settlement agreement and should there ultimately be an adverse outcome.

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 July 31, 2013. At June 30, 2012, MGE has outstanding a $4.5 million interest in these receivables. MGE retains the servicing responsibility for these receivables. As of June 30, 2012, the servicing asset recognized by MGE is $0.2 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 June 30, 2012, 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 2012 and the next four years on the loans are:


(In thousands)		2012		2013		2014		2015		2016
Chattel Paper	$	284	$	679	$	494	$	807	$	732

Purchase Power Agreement Contract Dispute - MGE Energy and MGE.

MGE is seeking resolution to a contract dispute regarding its Purchase Power Agreement with Riverside Energy Center LLC, a Calpine subsidiary, for capacity and energy from the Riverside Energy Center located in Beloit, Wisconsin. MGE declared the PPA terminated. Any savings in capacity costs that ultimately result from the termination of the Riverside PPA will flow through to the Company's customers. MGE is currently deferring amounts equal to the capacity payments MGE would be making under the terms of the Riverside PPA if it were still in effect. This deferral will create a liability to MGE's customers for a future credit, assuming MGE's right to terminate the PPA is ultimately upheld. If MGE does not prevail in the dispute, the capacity payment deferred will be paid to Riverside Energy Center, LLC.

Other Legal Matters - MGE Energy and MGE.

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.

Purchase Contracts - MGE Energy and MGE.

MGE Energy and MGE have entered into various commodity supply, transportation and storage contracts to meet their obligations to deliver electricity and natural gas to customers. As of June 30, 2012, the future commitments related to these purchase contracts were as follows:


(In thousands)		2012		2013		2014		2015		2016
Natural gas supply^(a)	$	10,830	$	12,266	$	-	$	-	$	-
Purchase power^(b)		39,266		51,455		49,372		47,523		48,491
	$	50,096	$	63,721	$	49,372	$	47,523	$	48,491

(a)

These commitments include market-based pricing. Management expects to recover these costs in future customer rates.

(b)

MGE has several purchase power agreements to help meet future electric supply requirements. Management expects to recover these costs in future customer rates.

Smart Grid Investment Grant - MGE Energy and MGE.

MGE was approved in 2010 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 projects to more than $11 million. The projects involve the installation of technologies to boost efficiency, enhance service and improve reliability for customers. The stimulus grant is being used to fund the following projects: advanced metering infrastructure, plug-in hybrid electric vehicles support, and distribution management. As of June 30, 2012, MGE has spent $7.6 million related to these projects and has outstanding agreements to purchase $0.5 million in smart grid related products for the remainder of 2012.

Other Commitments - MGE Energy.

On January 31, 2012, MGE Energy entered a subscription agreement to invest in a nonpublic venture capital fund. From time to time, this entity will require capital infusions from its investors. MGE Energy has committed to contribute $2.0 million in capital for such infusions. The timing of these infusions is dependent on the needs of the investee and is therefore uncertain at this time.

Derivative and Hedging Instruments - MGE Energy and MGE.

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 is 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.

Notional Amounts.

The gross notional volume of open derivatives is as follows:


	June 30, 2012	December 31, 2011
Commodity derivative contracts	460,825 MWh	482,545 MWh
Commodity derivative contracts	3,550,000 Dth	4,030,000 Dth
FTRs	5,587 MW	2,382 MW

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 June 30, 2012, and December 31, 2011, MGE Energy and MGE had $0.7 million and $3.0 million, respectively, in collateral that was netted against the net derivative positions with counterparties.

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 June 30, 2012, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $0.4 million. At December 31, 2011, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $2.8 million.

MGE has also entered into a ten-year purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE 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 June 30, 2012, and December 31, 2011, reflects a loss position of $79.8 million and $39.5 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.


	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
June 30, 2012
Commodity derivative contracts	Other current assets	$	727	Derivative liability (current)	$	1,151
Commodity derivative contracts	Other deferred charges		65	Derivative liability (long-term)		239
FTRs	Other current assets		986	Derivative liability (current)		-
Ten-year PPA	N/A		N/A	Derivative liability (current)		10,180
Ten-year PPA	N/A		N/A	Derivative liability (long-term)		69,570

December 31, 2011
Commodity derivative contracts	Other current assets	$	177	Derivative liability (current)	$	3,060
Commodity derivative contracts	Other deferred charges		92	Derivative liability (long-term)		231
FTRs	Other current assets		186	Derivative liability (current)		-
Ten-year PPA	N/A		N/A	Derivative liability (current)		4,600
Ten-year PPA	N/A		N/A	Derivative liability (long-term)		34,920

The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the balance sheet at June 30, 2012 and 2011, and the income statement for the three and six months ended June 30, 2012 and 2011.


		2012				2011
(In thousands)		Current and long-term regulatory asset		Other current assets		Current and long-term regulatory asset		Other current assets
Three Months Ended June 30:
Balance at April 1,	$	71,514	$	672	$	21,677	$	505
Change in unrealized loss		9,791		-		888		-
Realized loss reclassified to a deferred account		(222)		222		(610)		610
Realized gain (loss) reclassified to income
statement		(1,721)		(176)		649		(114)
Balance at June 30,	$	79,362	$	718	$	22,604	$	1,001

Six Months Ended June 30:
Balance at January 1,	$	42,356	$	1,604	$	19,230	$	1,411
Change in unrealized loss		43,101		-		3,936		-
Realized loss reclassified to a deferred account		(2,880)		2,880		(1,274)		1,274
Realized gain (loss) reclassified to income
statement		(3,215)		(3,766)		712		(1,684)
Balance at June 30,	$	79,362	$	718	$	22,604	$	1,001


		Realized losses (gains)
				Fuel for electric
		Regulated		generation/		Cost of
(In thousands)		gas revenues		purchased power		gas sold
Three Months Ended June 30, 2012:
Commodity derivative contracts	$	-	$	582	$	-
FTRs		-		96		-
Ten-year PPA		-		1,219		-

Three Months Ended June 30, 2011:
Commodity derivative contracts	$	-	$	90	$	-
FTRs		-		(625)		-
Ten-year PPA		-		-		-

Six Months Ended June 30, 2012:
Commodity derivative contracts	$	-	$	2,510	$	3,090
FTRs		-		162		-
Ten-year PPA		-		1,219		-

Six Months Ended June 30, 2011:
Commodity derivative contracts	$	-	$	28	$	1,315
FTRs		-		(371)		-
Ten-year PPA		-		-		-

MGE's commodity derivative contracts, FTRs, and ten-year PPA are subject to regulatory deferral. These derivatives are marked to fair value and are offset with a corresponding regulatory asset or liability. Realized gains and losses are deferred on the balance sheet and are recognized in earnings in the delivery month applicable to the instrument. As a result of the above described treatment, there are no unrealized gains or losses that flow through earnings.

The ten-year PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of June 30, 2012, no collateral has been posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of June 30, 2012, and December 31, 2011, no counterparties were in a net liability position.

Nonperformance of counterparties to the non-exchange traded derivatives could expose MGE to credit loss. However, MGE enters into transactions only with companies that meet or exceed strict credit guidelines, and it monitors these counterparties on an ongoing basis to mitigate nonperformance risk in its portfolio. As of June 30, 2012, no counterparties have defaulted.

10.

Rate Matters - MGE Energy and MGE.

Rate Proceedings.

On March 23, 2012, MGE filed an application with the PSCW requesting a 5.8% increase to electric rates and a 2.6% increase to gas rates. The proposed electric increase will cover costs for new environmental equipment at Columbia, final construction costs for the Elm Road Units (including the prudence of construction costs incurred above a previously approved cap), transmission reliability enhancements, and purchased power costs. MGE has requested that these rates become effective January 1, 2013.

On December 15, 2011, under a limited reopener of MGE's last rate order, the PSCW authorized MGE to increase 2012 rates for retail electric customers by 4.3% or $15.7 million and to increase gas rates by 0.3% or $0.6 million. The change in retail electric rates was driven by MGE's electric fuel and purchased power costs, increased transmission costs, an update to the Elm Road Units' costs, and an increase for energy efficiency programs. The PSCW also approved deferral of CSAPR costs.

On January 12, 2011, the PSCW authorized MGE to increase 2011 rates for retail electric customers by 2.3% or $8.0 million and to increase gas rates by 1.0% or $1.9 million. The increase in retail electric rates is driven by costs for MGE's share of the Elm Road Units. Pursuant to the provisions of this rate order, the fuel rules bandwidth effective January 1, 2011, will be plus or minus 2%. See below for further description of fuel rules. Authorized return on common stock equity was set at 10.3% based on a 58.1% utility common equity.

Fuel Rules.

The PSCW approved new fuel rules that became effective January 1, 2011. The new rules require the PSCW and Wisconsin utilities to automatically defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the deferred costs is determined on an annual basis and will be adjusted in future billings to electric retail customers. Under fuel rules, MGE would defer costs, less any excess revenues, if its actual electric fuel costs exceeded 102% of the electric fuel costs allowed in its latest rate order. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. Conversely, MGE is required to defer the benefit of lower costs if actual electric fuel costs were less than 98% of the electric fuel costs allowed in that order. As of June 30, 2012, MGE has deferred $2.7 million (for credit back to customers) of electric fuel-related savings that are outside the 98% range authorized by the PSCW in the most recent rate order.

Purchased Gas Adjustment Clause.

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 rates. 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. At June 30, 2012, and December 31, 2011, MGE had over collected $1.9 million and $0.9 million, respectively. These amounts were recorded in other current liabilities on the consolidated balance sheet.

11.

Fair Value of Financial Instruments - MGE Energy and MGE.

Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.

At June 30, 2012, and December 31, 2011, the carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of MGE Energy's and MGE's long-term debt is based on quoted market prices for similar financial instruments at June 30, 2012, and December 31, 2011. Since the long-term debt is not traded in an active market, it is classified as Level 2 (see discussion regarding the fair value level hierarchy below in section b).

The estimated fair market value of MGE Energy's and MGE's financial instruments are as follows:


		June 30, 2012				December 31, 2011
		Carrying		Fair		Carrying		Fair
(In thousands)		Amount		Value		Amount		Value
MGE Energy
Assets:
Cash and cash equivalents	$	41,288	$	41,288	$	41,169	$	41,169
Liabilities:
Long-term debt*		363,139		429,115		364,473		432,515

MGE
Assets:
Cash and cash equivalents		8,665		8,665		13,898		13,898
Liabilities:
Long-term debt*		363,139		429,115		364,473		432,515

*Includes long-term debt due within one year.

Recurring Fair Value Measurements.

Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:

Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.

Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.

Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis for MGE Energy and MGE.


	Fair Value as of June 30, 2012
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	422	$	422	$	-	$	-
Total Assets	$	422	$	422	$	-	$	-
Liabilities:
Derivatives, net^(a)	$	79,362	$	(218)	$	-	$	79,580
Deferred compensation		1,856		-		1,856		-
Total Liabilities	$	81,218	$	(218)	$	1,856	$	79,580

MGE
Assets:
Exchange-traded investments	$	150	$	150	$	-	$	-
Total Assets	$	150	$	150	$	-	$	-
Liabilities:
Derivatives, net^(a)	$	79,362	$	(218)	$	-	$	79,580
Deferred compensation		1,856		-		1,856		-
Total Liabilities	$	81,218	$	(218)	$	1,856	$	79,580

(a) These amounts are shown gross and exclude $0.7 million of collateral that was posted against derivative positions with counterparties.


No transfers were made in or out of Level 1 or Level 2 for the six months ended June 30, 2012.

	Fair Value as of December 31, 2011
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	350	$	350	$	-	$	-
Total Assets	$	350	$	350	$	-	$	-
Liabilities:
Derivatives, net^(b)	$	42,356	$	1,695	$	-	$	40,661
Deferred compensation^(c)		1,725		-		1,725		-
Total Liabilities	$	44,081	$	1,695	$	1,725	$	40,661

MGE
Assets:
Exchange-traded investments	$	188	$	188	$	-	$	-
Total Assets	$	188	$	188	$	-	$	-
Liabilities:
Derivatives, net^(b)	$	42,356	$	1,695	$	-	$	40,661
Deferred compensation^(c)		1,725		-		1,725		-
Total Liabilities	$	44,081	$	1,695	$	1,725	$	40,661

(b) These amounts are shown gross and exclude $3.0 million of collateral that was posted against derivative positions with counterparties.

(c) The deferred compensation liability at December 31, 2011, was transferred from Level 1 to Level 2.

Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as Level 1.

Derivatives include exchange-traded derivative contracts, over-the-counter party transactions, a ten-year purchased power agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as Level 1. A small number of exchange-traded derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore classified as Level 3. Transactions done with an over-the-counter party are on inactive markets and are therefore classified as Level 3. These transactions are valued based on quoted prices with markets with similar exchange traded transactions. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as Level 3.

The ten-year purchased power agreement (see Footnote 9) was valued using an internally-developed pricing model and therefore is classified as Level 3. The model projects future market energy prices and compares those prices to the projected power costs to be incurred under the contract. Inputs to the model require significant management judgment and estimation. Future energy prices are based on a forward power pricing curve using exchange-traded contracts in the electric futures market, where such exchange-traded contracts exist, and upon calculations based on forward gas prices, where such exchange-traded contracts do not exist. A basis adjustment is applied to the market energy price to reflect the price differential between the market price delivery point and the counterparty delivery point. The historical relationship between the delivery points is reviewed and a discount (below 100%) or premium (above 100%) is derived. This comparison is done for both peak times when demand is high and off peak times when demand is low. If the basis adjustment is lowered, the fair value measurement will decrease and if the basis adjustment is increased, the fair value measurement will increase.

The projected power costs anticipated to be incurred under the purchased power agreement are determined using many factors, including historical generating costs, future prices, and expected fuel mix of the counterparty. An increase in the projected fuel costs would result in a decrease in the fair value measurement of the purchased power agreement. A significant input that MGE estimates is the counterparty's fuel mix in determining the projected power cost. MGE also considers the assumptions that market participants would use in valuing the asset or liability. This consideration includes assumptions about market risk such as liquidity, volatility and contract duration. The fair value model uses a discount rate that incorporates discounting, credit, and model risks.

This model is prepared by members of the Energy Supply group. It is reviewed on a quarterly basis by management in Energy Supply and Finance to review the assumptions, inputs and fair value measurements.

The following table presents the significant unobservable inputs used in the pricing model.


Significant Unobservable Inputs		Model Input
Basis adjustment
On peak		95.5 %
Off peak		94.1 %
Counterparty fuel mix:
Internal generation		49 % - 65 %
Purchased power		51 % - 35 %

The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26 week maturity increased by 1% compounded monthly with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon observable market data, however, since the deferred compensation obligations themselves are not exchanged in an active market, they are classified as Level 2.

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE.


		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Beginning balance,	$	(71,188)	$	(22,148)	$	(40,661)	$	(19,216)
Realized and unrealized gains (losses):
Included in regulatory liabilities (assets)		(8,392)		(835)		(38,919)		(3,767)
Included in other comprehensive income		-		-		-		-
Included in earnings		(1,726)		579		(3,228)		564
Included in current assets		(94)		(229)		(145)		(229)
Purchases		1,917		334		1,967		334
Sales		32		-		64		71
Issuances		-		-		-		-
Settlements		(129)		(684)		1,342		(740)
Transfers in and/or out of Level 3		-		-		-		-
Balance as of June 30,	$	(79,580)	$	(22,983)	$	(79,580)	$	(22,983)
Total gains (losses) included in earnings attributed to
the change in unrealized gains (losses) related to
assets and liabilities held at June 30,^(d)	$	-	$	-	$	-	$	-

The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE (d).


		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)		Three Months Ended June 30,				Six Months Ended June 30,
		2012		2011		2012		2011
Purchased Power Expense	$	(1,726)	$	579	$	(3,228)	$	564
Cost of Gas Sold Expense		-		-		-		-
Regulated Gas Revenues		-		-		-		-
Total	$	(1,726)	$	579	$	(3,228)	$	564

(d)

MGE's exchange-traded derivative contracts, over-the-counter party transactions, ten-year purchased power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair value and are offset with a corresponding regulatory asset or liability.

12.

New Accounting Pronouncements - MGE Energy and MGE.

Fair Value Measurements and Disclosures.

In May 2011, the FASB issued authoritative guidance within the Codification's Fair Value Measurements and Disclosures topic that provides guidance on additional disclosures about fair value measurements, specifically related to Level 3 assets and liabilities. This authoritative guidance became effective January 1, 2012. The authoritative guidance did not have any financial impact, but required additional disclosures. See Footnote 11 for additional information.

Presentation of Comprehensive Income.

In June 2011, the FASB issued authoritative guidance within the Codification's Comprehensive Income topic that provides guidance on presentation of comprehensive income. Comprehensive income will be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This authoritative guidance became effective January 1, 2012. The authoritative guidance had an effect on our financial statement presentation of comprehensive income. See the Statement of Comprehensive Income for additional information.

Disclosures about Offsetting Assets and Liabilities.

In December 2011, the FASB issued authoritative guidance within the Codification's Balance Sheet topic that provides guidance on disclosures about offsetting assets and liabilities. The new disclosure requirements mandate that entities disclose both gross and net information for instruments and transactions eligible for offset in the balance sheet as well as instruments and transactions subject to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connections with a master netting arrangement. This authoritative guidance will become effective January 1, 2013. The authoritative guidance will not have a financial impact, but will require additional disclosures.

13.

Segment Information - MGE Energy and MGE.

MGE Energy operates in the following business segments: electric utility, gas utility, nonregulated energy, transmission investment, and all other. See MGE Energy's and MGE's 2011 Annual Report on Form 10-K for additional discussion of each of these segments.

The following tables show segment information for MGE Energy's operations for the indicated periods:


(In thousands)		Electric		Gas		Non- Regulated Energy		Transmission Investment		All Others		Consolidation/ Elimination Entries		Consolidated Total
MGE Energy

*Three Months Ended June 30, 2012*
Operating revenues	$	96,339	$	18,629	$	2,253	$	-	$	-	$	-	$	117,221
Interdepartmental revenues		119		3,077		8,677		-		-		(11,873)		-
Total operating revenues		96,458		21,706		10,930		-		-		(11,873)		117,221
Depreciation and amortization		(6,546)		(1,389)		(1,777)		-		-		-		(9,712)
Other operating expenses		(72,265)		(21,746)		(37)		-		(253)		11,873		(82,428)
Operating income (loss)		17,647		(1,429)		9,116		-		(253)		-		25,081
Other income, net		96		27		-		2,242		184		-		2,549
Interest (expense) income, net		(2,465)		(695)		(1,639)		-		35		-		(4,764)
Income (loss) before taxes		15,278		(2,097)		7,477		2,242		(34)		-		22,866
Income tax (provision) benefit		(5,642)		933		(3,001)		(900)		14		-		(8,596)
Net income (loss)	$	9,636	$	(1,164)	$	4,476	$	1,342	$	(20)	$	-	$	14,270

*Three Months Ended June 30, 2011*
Operating revenues	$	90,834	$	25,062	$	1,363	$	-	$	-	$	-	$	117,259
Interdepartmental revenues		121		2,173		9,581		-		-		(11,875)		-
Total operating revenues		90,955		27,235		10,944		-		-		(11,875)		117,259
Depreciation and amortization		(7,052)		(1,532)		(1,773)		-		-		-		(10,357)
Other operating expenses		(69,522)		(25,717)		(55)		-		(286)		11,875		(83,705)
Operating income (loss)		14,381		(14)		9,116		-		(286)		-		23,197
Other (deductions) income, net		(124)		(35)		-		2,170		142		-		2,153
Interest (expense) income, net		(2,653)		(748)		(1,669)		-		15		-		(5,055)
Income (loss) before taxes		11,604		(797)		7,447		2,170		(129)		-		20,295
Income tax (provision) benefit		(4,121)		366		(2,990)		(870)		43		-		(7,572)
Net income (loss)	$	7,483	$	(431)	$	4,457	$	1,300	$	(86)	$	-	$	12,723

*Six Months Ended June 30, 2012*
Operating revenues	$	186,275	$	75,648	$	4,557	$	-	$	-	$	-	$	266,480
Interdepartmental revenues		228		6,063		17,353		-		-		(23,644)		-
Total operating revenues		186,503		81,711		21,910		-		-		(23,644)		266,480
Depreciation and amortization		(13,024)		(2,759)		(3,553)		-		-		-		(19,336)
Other operating expenses		(145,053)		(71,487)		(49)		-		(674)		23,644		(193,619)
Operating income (loss)		28,426		7,465		18,308		-		(674)		-		53,525
Other income, net		260		73		-		4,484		302		-		5,119
Interest (expense) income, net		(5,192)		(1,464)		(3,284)		-		72		-		(9,868)
Income (loss) before taxes		23,494		6,074		15,024		4,484		(300)		-		48,776
Income tax (provision) benefit		(8,427)		(2,305)		(6,030)		(1,810)		114		-		(18,458)
Net income (loss)	$	15,067	$	3,769	$	8,994	$	2,674	$	(186)	$	-	$	30,318

*Six Months Ended June 30, 2011*
Operating revenues	$	176,841	$	102,499	$	2,524	$	-	$	-	$	-	$	281,864
Interdepartmental revenues		228		3,164		18,977		-		-		(22,369)		-
Total operating revenues		177,069		105,663		21,501		-		-		(22,369)		281,864
Depreciation and amortization		(14,029)		(2,869)		(3,475)		-		-		-		(20,373)
Other operating expenses		(140,438)		(88,770)		(94)		-		(463)		22,369		(207,396)
Operating income (loss)		22,602		14,024		17,932		-		(463)		-		54,095
Other income, net		33		9		-		4,267		230		-		4,539
Interest expense, net		(5,353)		(1,509)		(3,017)		-		(26)		-		(9,905)
Income (loss) before taxes		17,282		12,524		14,915		4,267		(259)		-		48,729
Income tax (provision) benefit		(5,722)		(4,882)		(5,987)		(1,722)		90		-		(18,223)
Net income (loss)	$	11,560	$	7,642	$	8,928	$	2,545	$	(169)	$	-	$	30,506

The following tables show segment information for MGE's operations for the indicated periods:


(In thousands)		Electric		Gas		Non- Regulated Energy		Transmission Investment		Consolidation/ Elimination Entries		Consolidated Total
MGE

*Three Months Ended June 30, 2012*
Operating revenues	$	96,339	$	18,629	$	2,253	$	-	$	-	$	117,221
Interdepartmental revenues		119		3,077		8,677		-		(11,873)		-
Total operating revenues		96,458		21,706		10,930		-		(11,873)		117,221
Depreciation and amortization		(6,546)		(1,389)		(1,777)		-		-		(9,712)
Other operating expenses*		(77,849)		(20,797)		(3,038)		-		11,873		(89,811)
Operating income (loss)*		12,063		(480)		6,115		-		-		17,698
Other income, net*		38		11		-		1,342		-		1,391
Interest expense, net		(2,465)		(695)		(1,639)		-		-		(4,799)
Net income (loss)		9,636		(1,164)		4,476		1,342		-		14,290
Less: Net income attributable to
noncontrolling interest, net of tax		-		-		-		-		(6,080)		(6,080)
Net income (loss) attributable to MGE	$	9,636	$	(1,164)	$	4,476	$	1,342	$	(6,080)	$	8,210

*Three Months Ended June 30, 2011*
Operating revenues	$	90,834	$	25,062	$	1,363	$	-	$	-	$	117,259
Interdepartmental revenues		121		2,173		9,581		-		(11,875)		-
Total operating revenues		90,955		27,235		10,944		-		(11,875)		117,259
Depreciation and amortization		(7,052)		(1,532)		(1,773)		-		-		(10,357)
Other operating expenses*		(73,581)		(25,333)		(3,044)		-		11,875		(90,083)
Operating income*		10,322		370		6,127		-		-		16,819
Other (deductions) income, net*		(185)		(52)		-		1,299		-		1,062
Interest expense, net		(2,653)		(748)		(1,669)		-		-		(5,070)
Net income (loss)		7,484		(430)		4,458		1,299		-		12,811
Less: net income attributable to
noncontrolling interest, net of tax		-		-		-		-		(5,992)		(5,992)
Net income (loss) attributable to MGE	$	7,484	$	(430)	$	4,458	$	1,299	$	(5,992)	$	6,819

*Six Months Ended June 30, 2012*
Operating revenues	$	186,275	$	75,648	$	4,557	$	-	$	-	$	266,480
Interdepartmental revenues		228		6,063		17,353		-		(23,644)		-
Total operating revenues		186,503		81,711		21,910		-		(23,644)		266,480
Depreciation and amortization		(13,024)		(2,759)		(3,553)		-		-		(19,336)
Other operating expenses*		(153,357)		(73,758)		(6,079)		-		23,644		(209,550)
Operating income*		20,122		5,194		12,278		-		-		37,594
Other income, net*		137		39		-		2,674		-		2,850
Interest expense, net		(5,192)		(1,464)		(3,284)		-		-		(9,940)
Net income		15,067		3,769		8,994		2,674		-		30,504
Less: Net income attributable to
noncontrolling interest, net of tax		-		-		-		-		(12,152)		(12,152)
Net income attributable to MGE	$	15,067	$	3,769	$	8,994	$	2,674	$	(12,152)	$	18,352

*Six Months Ended June 30, 2011*
Operating revenues	$	176,841	$	102,499	$	2,524	$	-	$	-	$	281,864
Interdepartmental revenues		228		3,164		18,977		-		(22,369)		-
Total operating revenues		177,069		105,663		21,501		-		(22,369)		281,864
Depreciation and amortization		(14,029)		(2,869)		(3,475)		-		-		(20,373)
Other operating expenses*		(146,132)		(93,644)		(6,080)		-		22,369		(223,487)
Operating income*		16,908		9,150		11,946		-		-		38,004
Other income, net*		6		2		-		2,545		-		2,553
Interest expense, net		(5,353)		(1,509)		(3,017)		-		-		(9,879)
Net income		11,561		7,643		8,929		2,545		-		30,678
Less: net income attributable to
noncontrolling interest, net of tax		-		-		-		-		(11,925)		(11,925)
Net income attributable to MGE	$	11,561	$	7,643	$	8,929	$	2,545	$	(11,925)	$	18,753

*Amounts are shown net of the related tax expense, consistent with the presentation on the consolidated MGE Income Statement.

The following table shows segment information for MGE Energy's and MGE's assets and capital expenditures:


		Utility						Consolidated
(In thousands)		Electric		Gas		Assets not Allocated	Nonregulated Energy			Transmission Investment		All Others	Consolidation/ Elimination Entries			Total
MGE Energy

Assets:
June 30, 2012	$	868,718	$	258,569	$	24,595	$	293,194	$	58,875	$	405,929	$	(403,330)	$	1,506,550
December 31, 2011		794,738		285,702		32,882		299,421		57,006		401,862		(412,729)		1,458,882
Capital Expenditures:
Six Months Ended June 30, 2012	$	33,479	$	5,601	$	-	$	473	$	-	$	-	$	-	$	39,553
Year ended Dec. 31, 2011		47,206		15,830		-		2,140		-		-		-		65,176


		Utility						Consolidated
(In thousands)	Electric			Gas		Assets not Allocated	Nonregulated Energy			Transmission Investment				Total
MGE												Elimination Entries
												Elimination Entries
Assets:
June 30, 2012	$	868,718	$	258,569	$	24,595	$	292,944	$	58,875	$	(26,398)	$	1,477,303
December 31, 2011		794,738		285,702		32,882		299,171		57,006		(35,706)		1,433,793
Capital Expenditures:
Six Months Ended June 30, 2012	$	33,479	$	5,601	$	-	$	473	$	-	$	-	$	39,553
Year ended Dec. 31, 2011		47,206		15,830		-		2,140		-		-		65,176

14.

Subsequent Events - MGE Energy and MGE.

ATC Capital Contribution.

On July 31, 2012, MGE Transco made a voluntary $0.9 million capital contribution to ATC.

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

General

MGE Energy is an investor-owned public utility holding company operating through subsidiaries in five business segments:

Regulated electric utility operations, conducted through MGE,

Regulated gas utility operations, conducted through MGE,

Nonregulated energy operations, conducted through MGE Power and its subsidiaries,

Transmission investments, representing our equity investment in ATC, and

All other, which includes corporate operations and services.

Our principal subsidiary is MGE, which generates and distributes electric energy, distributes natural gas, and represents a majority portion of our assets, liabilities, revenues, and expenses. MGE generates and distributes electricity to approximately 139,000 customers in Dane County, Wisconsin, including the city of Madison, and purchases and distributes natural gas to approximately 144,000 customers in the Wisconsin counties of Columbia, Crawford, Dane, Iowa, Juneau, Monroe, and Vernon.

Our nonregulated energy operations own interests in electric generating capacity that is leased to MGE. The ownership/leasing structure was adopted under applicable state regulatory guidelines for MGE's participation in these generation facilities, consisting principally of a stable return on the equity investment in the new generation facilities over the term of the related leases. The nonregulated energy operations include an undivided 8.33% ownership interest in two 615 MW coal-fired generating units in Oak Creek, Wisconsin and a partial ownership of a cogeneration project on the UW-Madison campus. A third party operates the units in Oak Creek, and MGE operates the cogeneration project. Due to the nature of MGE's participation in these facilities, the results of our nonregulated operations are also consolidated into MGE's consolidated financial position and results of operations under applicable accounting standards.

Overview

Our primary focus today and for the foreseeable future is our core utility customers at MGE as well as creating long-term value for shareholders. MGE continues to face the challenge of providing its customers with reliable power at competitive prices. MGE meets this challenge by investing in more efficient generation projects, including renewable energy sources. In the future, MGE will continue to focus on growing earnings while controlling operating and fuel costs. MGE will continue to maintain safe and efficient operations in addition to providing customer value. We believe it is critical to maintain a strong credit standing consistent with financial strength in MGE as well as the parent company in order to accomplish these goals.

We earn our revenue and generate cash from operations by providing electric and natural gas utility services, including electric power generation and electric power and gas distribution. The earnings and cash flows from the utility business are sensitive to various external factors, including:

Weather, and its impact on customer sales of electricity and gas,

Economic conditions, including current business activity and employment and their impact on customer demand,

Regulation and regulatory issues, and their impact on the timing and recovery of costs,

Energy commodity prices,

Equity price risk pertaining to pension related assets,

Credit market conditions, including interest rates and our debt credit rating,

Environmental laws and regulations, including adopted and pending environmental rule changes,

Construction risk in connection with the Columbia environmental project,

and other factors listed in "Item 1A. Risk Factors" in our 2011 Annual Report on Form 10-K and in this Report.

For the three months ended June 30, 2012, MGE Energy's earnings were $14.3 million or $0.62 per share compared to $12.7 million or $0.55 per share for the same period in the prior year. MGE's earnings for the three months ended June 30, 2012, were $8.2 million compared to $6.8 million for the same period in the prior year.

For the six months ended June 30, 2012, MGE Energy's earnings were $30.3 million or $1.31 per share compared to $30.5 million or $1.32 per share for the same period in the prior year. MGE's earnings for the six months ended June 30, 2012, were $18.4 million compared to $18.8 million for the same period in the prior year.

MGE Energy's income was derived from our business segments as follows:


		Three Months Ended				Six Months Ended
(In thousands)		June 30,				June 30,
Business Segment:		2012		2011		2012		2011
Electric Utility	$	9,636	$	7,483	$	15,067	$	11,560
Gas Utility		(1,164)		(431)		3,769		7,642
Nonregulated Energy		4,476		4,457		8,994		8,928
Transmission Investments		1,342		1,300		2,674		2,545
All Other		(20)		(86)		(186)		(169)
Net Income	$	14,270	$	12,723	$	30,318	$	30,506

Our net income during the three months ended June 30, 2012, primarily reflects the effects of the following factors:

A 6.5% increase in electric revenues reflecting increased customer demand primarily as a result of warmer-than normal weather. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 61.5% compared to the prior period.

Our net income during the six months ended June 30, 2012, primarily reflects the effects of the following factors:

A 5.5% increase in electric revenues reflecting increased customer demand primarily as a result of warmer-than normal weather. Cooling degree days (a measure for determining the impact of weather during the cooling season) increased by 75% compared to the prior period.

A 16.7% decrease in gas sales reflecting lower customer demand due to a milder winter. Heating degree days (a measure for determining the impact of weather during the heating season) decreased by 26.6% compared to the prior period.

During the first six months of 2012, the following events occurred:

Columbia Environmental Project: In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. MGE's estimated share of the capital expenditures required to complete this project will be approximately $140 million. MGE expects to incur capital expenditures as follows: $33 million for the remainder of 2012, $68 million in 2013, and $14 in 2014 million. As of June 30, 2012, MGE has accumulated $25.1 million (excluding carrying costs) related to its share of the project, which is reflected in the Construction Work in Progress balance on MGE Energy's and MGE's consolidated balance sheets. Of this amount, MGE has accumulated $20.8 million in 2012.

Rate Filing: On March 23, 2012, MGE filed an application with the PSCW requesting a 5.8% increase to electric rates and a 2.6% increase to gas rates. The proposed electric increase will cover costs for new environmental equipment at Columbia, final construction costs for the Elm Road Units (including the prudence of construction costs incurred above a previously approved cap), transmission reliability enhancements, and purchased power costs. MGE has requested that these rates become effective January 1, 2013. See Footnote 21 in the 2011 Annual Report Form 10-K for additional information on the construction costs for the Elm Road Units.

ATC: MGE Transco contributed $0.9 million for voluntary capital contributions to ATC for the six months ended June 30, 2012.

Smart Grid Investment Grant: MGE was approved in 2010 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 projects to more than $11 million. The projects involve the installation of technologies to boost efficiency, enhance service and improve reliability for customers. The stimulus grant is being used to fund the following projects: advanced metering infrastructure, plug-in hybrid electric vehicles support, and distribution management. As of June 30, 2012, MGE has spent $7.6 million related to these projects, of this amount $1.6 million was incurred during six months ended June 30, 2012. MGE also has outstanding agreements to purchase $0.5 million in smart grid related products for the remainder of 2012.

In the near term, several items may affect us, including:

Environmental Initiatives: There are proposed legislation, rules and initiatives involving matters related to air emissions, water effluent, hazardous materials and greenhouse gases, all of which affect generation plant capital expenditures and operating costs as well as future operational planning. Such legislation and rulemaking could significantly affect the costs of owning and operating fossil-fueled generating plants, such as Columbia and Elm Road, from which we derive approximately 43% of our electric generating capacity. We would expect to seek and receive recovery of any such costs in rates; however, it is difficult to estimate the amount of such costs due to the uncertainty as to the timing and form of the legislation and rules, and the scope and time of the recovery of costs in rates. In addition, MGE is involved in claims surrounding the alleged failure, among other things, to obtain necessary air permits and implement necessary emission controls associated with past activities at Columbia. MGE and the other co-owners are defending against these claims. MGE is currently unable to predict the impact of these claims on its financial condition or results of operations at this time. However, should there ultimately be an adverse outcome, MGE believes it could have a significant effect.

General economic conditions: Economic conditions both inside and outside our service area are expected to continue to affect the level of demand for our utility services and may affect the collection of our accounts receivable and the creditworthiness of counterparties with whom we do business. We have in place lines of credit aggregating $115 million for MGE Energy (including MGE) and $75 million for MGE to address our liquidity needs.

The following discussion is based on the business segments as discussed in Footnote 13.

Three Months Ended June 30, 2012 and 2011

Electric Utility Operations - MGE Energy and MGE

Electric sales and revenues

The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the periods indicated:


		Revenues				Sales (kWh)
(in thousands, except cooling degree days)		Three Months Ended June 30,				Three Months Ended June 30,
(in thousands, except cooling degree days)		2012		2011	% Change	2012	2011	% Change
Residential	$	29,690	$	27,750	7.0 %	185,858	180,638	2.9 %
Commercial		52,796		48,929	7.9 %	460,939	446,628	3.2 %
Industrial		5,136		5,072	1.3 %	65,521	68,343	(4.1)%
Other-retail/municipal		9,556		9,487	0.7 %	107,869	114,238	(5.6)%
Total retail		97,178		91,238	6.5 %	820,187	809,847	1.3 %
Sales to the market		474		693	(31.6)%	17,170	13,654	25.8 %
Adjustments to revenues		(1,313)		(1,097)	(19.7)%	-	-	- %
Total	$	96,339	$	90,834	6.1 %	837,357	823,501	1.7 %

Cooling degree days (normal 170)						310	192	61.5 %

Electric operating revenues increased $5.5 million or 6.1% for the three months ended June 30, 2012, due to the following:


(In millions)
Rate changes	$	4.7
Volume		1.2
Sales to the market		(0.2)
Adjustments to revenues		(0.2)
Total	$	5.5

Rate changes. Rates charged to retail customers for the three months ended June 30, 2012, were 5.2% or $4.7 million higher than those charged during the same period in the prior year.

In December 2011, the PSCW authorized MGE to increase 2012 rates for retail electric customers by 4.3% or $15.7 million. The increase in retail electric rates is driven by MGE's electric fuel and purchased power costs, increased transmission costs, an update to the Elm Road Units' costs, and an increase for energy efficiency programs.

Volume. During the three months ended June 30, 2012, there was a 1.3% increase in total retail sales volumes compared to the same period in the prior year, reflecting increased customer demand as a result of warmer-than-normal weather in June 2012.

Sales to the market. Sales to the market represent wholesale sales made to third parties who are not ultimate users of the electricity. These sales may include spot market transactions on the markets operated by MISO and PJM. These sales may also include bilateral sales to other utilities or power marketers. Generating units are dispatched by MISO based on cost considerations as well as reliability of the system. Sales to the market typically occur when MGE has more generation and purchases online than is needed for its own system demand. The excess electricity is then sold to others in the market. For the three months ended June 30, 2012, market volumes increased compared to the same period in the prior year, reflecting increased opportunities for sales; however, market settlement resulted in a decrease in revenue per kWh for the three months ended June 30, 2012, reflecting lower market prices.

Adjustments to revenues. The adjustments to revenues amount includes the elimination of carrying costs for the Elm Road Units and WCCF that were collected in electric rates, which are recognized as nonregulated energy operating revenues in our Nonregulated Energy Operations segment.

Electric fuel and purchased power

The expense for fuel for electric generation decreased $0.1 million or 1.0% during the three months ended June 30, 2012, compared to the same period in the prior year. Internal electric generation costs decreased $1.7 million as a result of a 12.7% decrease in the per-unit cost (largely due to lower natural gas prices), which was offset by an increase of $1.6 million due to a 13.4% increase in volume.

Excluding the fuel rules adjustments discussed below, purchased power expense decreased $2.5 million during the three months ended June 30, 2012, compared to the same period in the prior year. A 15.1% decrease in the volume of purchased power from third parties lowered expense by $2.6 million, the decrease was slightly offset by a $0.1 million or 0.5% increase in the per-unit cost of purchased power.

The PSCW has adopted new fuel rules effective January 1, 2011 which require MGE to automatically defer electric fuel-related costs that fall outside a 2% cost tolerance band. Any fuel rules adjustments are reflected in purchased power expense. During the second quarter of 2012, MGE had overcollected its fuel costs and fell outside the lower end of this tolerance band. As a result, MGE deferred $2.7 million in fuel-related cost savings to be returned to customers and increased purchased power costs. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. In contrast, during the second quarter of 2011, MGE had undercollected its fuel costs and fell outside the upper end of this tolerance band. As a result, in the second quarter of 2011, MGE deferred $2.7 million of incremental fuel-related costs and decreased purchased power costs (it was later determined no fuel cost recovery was needed from customers). For the second quarter of 2012 compared to the prior year, the impact of these fuel rules adjustments was to create a difference in purchased power expense by $5.4 million. After combining the fuel rules adjustments with the actual savings discussed above, purchased power expense increased $2.9 million ($5.4 million fuel rules difference less the $2.5 million decrease discussed above) during the three months ended June 30, 2012, compared to the prior year.

Electric operating and maintenance expenses

Electric operating and maintenance expenses increased $0.1 million during the three months ended June 30, 2012, compared to the same period in 2011. The following changes contributed to the net change:


(In millions)
Increased administrative and general costs	$	0.9
Increased customer service costs		0.4
Increased customer accounts		0.2
Increased distribution costs		0.1
Increased transmission costs		0.1
Decreased production costs		(1.6)
Total	$	0.1

For the three months ended June 30, 2012, increased administrative and general costs are primarily due to increased pension costs and increased customer service costs are due to increased conservation costs. Production costs decreased primarily due to decreased costs at Columbia and the Elm Road Units.

Electric depreciation expense

Electric depreciation expense decreased $0.5 million for the three months ended June 30, 2012, compared to the same period in the prior year. This decrease is related to retirement of Blount assets at the end of 2011 due to the switch from operating coal to natural gas.

Gas Utility Operations - MGE Energy and MGE

Gas deliveries and revenues

The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the periods indicated:


		Revenues				Therms Delivered
(In thousands, except HDD and average rate per therm of retail customer)		Three Months Ended June 30,				Three Months Ended June 30,
		2012		2011	% Change	2012	2011	% Change
Residential	$	10,235	$	14,251	(28.2)%	9,988	13,227	(24.5)%
Commercial/Industrial		7,791		10,087	(22.8)%	18,621	15,834	17.6 %
Total retail		18,026		24,338	(25.9)%	28,609	29,061	(1.6)%
Gas Transportation		500		562	(11.0)%	6,300	7,605	(17.2)%
Other revenues		103		162	(36.4)%	-	-	- %
Total	$	18,629	$	25,062	(25.7)%	34,909	36,666	(4.8)%
Heating degree days (normal 846)						652	912	(28.5)%
Average Rate Per Therm of
Retail Customer	$	0.630	$	0.837	(24.7)%

Gas revenues decreased $6.4 million or 25.7% for the three months ended June 30, 2012. These changes are related to the following factors:


(In millions)
Gas costs/rates	$	(5.9)
Gas deliveries		(0.4)
Transportation and other effects		(0.1)
Total	$	(6.4)

Gas costs/rates. The average retail rate per therm for the three months ended June 30, 2012, decreased 24.8% compared to the same period in 2011, reflecting lower natural gas commodity costs.

Retail gas deliveries. For the three months ended June 30, 2012, retail gas deliveries decreased 1.6% compared to the same period in 2011.

Cost of gas sold

For the three months ended June 30, 2012, cost of gas sold decreased by $5.3 million, compared to the same period in the prior year. The volume of gas purchased decreased 3.6%, which resulted in $0.5 million of decreased expense. In addition, the cost per therm of natural gas decreased 40.0%, which resulted in $4.8 million of decreased expense.

Gas operating and maintenance expenses

Gas operating and maintenance expenses increased by $0.6 million for the three months ended June 30, 2012, compared to the same period in 2011. The following changes contributed to the net change:


(In millions)
Increased customer service costs	$	0.2
Increased customer accounts costs		0.2
Increased administrative and general costs		0.1
Increased distribution costs		0.1
Total	$	0.6

Nonregulated Energy Operations - MGE Energy and MGE

For both the three months ended June 30, 2012 and 2011, net income at the nonregulated energy operations segment was $4.5 million. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power, MGE Power Elm Road and MGE Power West Campus. These subsidiaries have been formed to construct, own and lease electric generating capacity to assist MGE.

Transmission Investment Operations - MGE Energy and MGE

Transmission investment other income

For both the three months ended June 30, 2012 and 2011, other income at the transmission investment segment was $2.2 million. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 3 for additional information concerning ATC and summarized financial information regarding ATC.

Consolidated Income Taxes - MGE Energy and MGE

MGE Energy's and MGE's effective income tax rate for the three months ended June 30, 2012, are 37.6% compared to 37.3% for the same period in 2011. The higher effective tax rate is, in part, attributable to a lower estimated domestic manufacturing deduction.

Noncontrolling Interest, Net of Tax - MGE

The noncontrolling interest, net of tax, reflects the accounting required for MGE Energy's interest in the Elm Road Units and WCCF. MGE Energy owns 100% of MGE Power Elm Road and MGE Power West Campus; however, due to the contractual agreements for these projects with MGE, the entities are considered VIEs and their results are consolidated with those of MGE, the primary beneficiary of the VIEs. Also included in noncontrolling interest, net of tax, is MGE Energy's interest in MGE Transco. The following table shows MGE Energy's noncontrolling interest, net of tax, reflected on MGE's consolidated statement of income:


		Three Months Ended
		June 30,
(in millions)		2012		2011
MGE Power Elm Road	$	3.7	$	3.6
MGE Power West Campus	$	1.9	$	1.9
MGE Transco	$	0.5	$	0.5

Six Months Ended June 30, 2012 and 2011

Electric Utility Operations - MGE Energy and MGE

Electric sales and revenues

The following table compares MGE's electric revenues and electric kWh sales by customer class for each of the periods indicated:


		Revenues				Sales (kWh)
(in thousands, except cooling degree days)		Six Months Ended June 30,				Six Months Ended June 30,
(in thousands, except cooling degree days)		2012		2011	% Change	2012	2011	% Change
Residential	$	59,829	$	58,049	3.1 %	382,021	387,499	(1.4)%
Commercial		99,992		93,620	6.8 %	892,694	881,417	1.3 %
Industrial		9,662		9,405	2.7 %	125,369	130,224	(3.7)%
Other-retail/municipal		18,530		17,086	8.5 %	215,549	204,067	5.6 %
Total retail		188,013		178,160	5.5 %	1,615,633	1,603,207	0.8 %
Sales to the market		754		883	(14.6)%	22,958	28,258	(18.8)%
Adjustments to revenues		(2,492)		(2,202)	(13.2)%	-	-	- %
Total	$	186,275	$	176,841	5.3 %	1,638,591	1,631,465	0.4 %

Cooling degree days (normal 170)						336	192	75.0 %

Electric operating revenues increased $9.4 million or 5.3% for the six months ended June 30, 2012, due to the following:


(In millions)
Rate changes	$	8.5
Volume		1.4
Sales to the market		(0.1)
Adjustments to revenues		(0.4)
Total	$	9.4

Rate changes. Rates charged to retail customers for the six months ended June 30, 2012, were 4.7% or $8.5 million higher than those charged during the same period in the prior year.

Volume. During the six months ended June 30, 2012, there was a 0.8% increase in total retail sales volumes compared to the same period in the prior year, reflecting increased customer demand as a result of warmer-than-normal weather in June 2012.

Adjustments to revenues. The adjustments to revenues amount includes the elimination of carrying costs for Elm Road Units and the WCCF that were collected in electric rates, which are recognized as nonregulated energy operating revenues in our Nonregulated Energy Operations segment.

Electric fuel and purchased power

The expense for fuel for electric generation decreased $2.3 million or 10.2% during the six months ended June 30, 2012, compared to the same period in the prior year. Internal electric generation costs decreased $1.7 million as a result of a 7.3% decrease in the per-unit cost (largely due to lower natural gas prices), and lower generation volumes of 3.2% or $0.6 million.

Excluding the fuel rules adjustments discussed below, purchased power expense decreased $0.5 million during the six months ended June 30, 2012, compared to the same period in the prior year. Of this amount, $2.6 million was due to a 7.2% decrease in the per-unit cost of purchased power, partially offset by an increase of $2.1 million due to a 6.1% increase in the volume of power purchased from third parties.

The PSCW has adopted new fuel rules effective January 1, 2011 which require MGE to automatically defer electric fuel-related costs that fall outside a 2% cost tolerance band. Any fuel rules adjustments are reflected in purchased power expense. During the second quarter of 2012, MGE had overcollected its fuel costs and fell outside the lower end of this tolerance band. As a result, MGE deferred $2.7 million in fuel-related cost savings to be returned to customers and increased purchased power costs. Any over/under recovery of the deferred costs is determined on an annual basis and adjusted in future billings to customers. In contrast, during the second quarter of 2011, MGE had undercollected its fuel costs and fell outside the upper end of this tolerance band. As a result, in the second quarter of 2011, MGE deferred $2.7 million of incremental fuel-related costs and decreased purchased power costs (it was later determined no fuel cost recovery was needed from customers). For the second quarter of 2012 compared to the prior year, the impact of these fuel rules adjustments was to create a difference in purchased power expense by $5.4 million. After combining the fuel rules adjustments with the actual savings discussed above, purchased power expense increased $4.9 million ($5.4 million fuel rules difference less the $0.5 million decrease discussed above) during the six months ended June 30, 2012, compared to the prior year.

Electric operating and maintenance expenses

Electric operating and maintenance expenses increased $2.5 million during the six months ended June 30, 2012, compared to the same period in 2011. The following changes contributed to the net change:


(In millions)
Increased administrative and general costs	$	2.7
Increased distribution costs		0.8
Increased customer services costs		0.6
Increased transmission costs		0.3
Increased customer accounts costs		0.3
Decreased production costs		(2.2)
Total	$	2.5

For the six months ended June 30, 2012, increased administrative and general costs are primarily due to increased pension costs. Also, increased distribution costs are due to increased overhead line expenses and increased customer service costs are due to increased conservation costs. Production costs decreased primarily due to decreased costs at Columbia and the Elm Road Units.

Electric depreciation expense

Electric depreciation expense decreased $1.0 million for the six months ended June 30, 2012, compared to the same period in the prior year. This decrease is related to retirement of Blount assets at the end of 2011 due to the switch from operating coal to natural gas.

Gas Utility Operations - MGE Energy and MGE

Gas deliveries and revenues

The following table compares MGE's gas revenues and gas therms delivered by customer class during each of the periods indicated:


		Revenues				Therms Delivered
(In thousands, except HDD and average rate per therm of retail customer)		Six Months Ended June 30,				Six Months Ended June 30,
		2012		2011	% Change	2012	2011	% Change
Residential	$	43,616	$	58,566	(25.5)%	45,588	58,888	(22.6)%
Commercial/Industrial		30,562		42,182	(27.5)%	55,568	62,256	(10.7)%
Total retail		74,178		100,748	(26.4)%	101,156	121,144	(16.5)%
Gas Transportation		1,229		1,403	(12.4)%	16,417	19,920	(17.6)%
Other revenues		241		348	(30.7)%	-	-	- %
Total	$	75,648	$	102,499	(26.2)%	117,573	141,064	(16.7)%
Heating degree days (normal 4,400)						3,369	4,589	(26.6)%
Average Rate Per Therm of
Retail Customer	$	0.733	$	0.832	(11.9)%

Gas revenues decreased $26.9 million or 26.2% for the six months ended June 30, 2012. These changes are related to the following factors:


(In millions)
Gas deliveries	$	(16.6)
Gas costs/rates		(9.9)
Transportation and other effects		(0.4)
Total	$	(26.9)

Retail gas deliveries. For the six months ended June 30, 2012, retail gas deliveries decreased 16.5% compared to the same period in 2011, as a result of milder weather during the winter months.

Gas costs/rates. The average retail rate per therm for the six months ended June 30, 2012, decreased 11.8% compared to the same period in 2011, reflecting lower natural gas commodity costs.

Cost of gas sold

For the six months ended June 30, 2012, cost of gas sold decreased by $21.4 million, compared to the same period in the prior year. The volume of purchased gas decreased 17.2%, which resulted in $11.0 million of decreased expense. In addition, the cost per therm of natural gas decreased 19.5%, which resulted in $10.4 million of decreased expense.

Gas operating and maintenance expenses

Gas operating and maintenance expenses increased by $1.5 million for the six months ended June 30, 2012, compared to the same period a year ago. The following changes contributed to the net change:


(In millions)
Increased administrative and general costs	$	0.7
Increased distribution costs		0.3
Increased customer service costs		0.3
Increased customer accounts costs		0.2
Total	$	1.5

For the six months ended June 30, 2012, increased administrative general costs are primarily due to increased pension costs.

Nonregulated Energy Operations - MGE Energy and MGE

For the six months ended June 30, 2012 and 2011, net income at the nonregulated energy operations segment was $9.0 million and $8.9 million, respectively. The nonregulated energy operations are conducted through MGE Energy's subsidiaries: MGE Power, MGE Power Elm Road and MGE Power West Campus. These subsidiaries have been formed to construct, own and lease electric generating capacity to assist MGE.

Transmission Investment Operations - MGE Energy and MGE

Transmission investment other income

For the six months ended June 30, 2012 and 2011, other income at the transmission investment segment was $4.5 million and $4.3 million, respectively. The transmission investment segment holds our interest in ATC, and its income reflects our equity in the earnings of ATC. See Footnote 3 for additional information concerning ATC and summarized financial information regarding ATC.

Consolidated Income Taxes - MGE Energy and MGE

MGE Energy's and MGE's effective income tax rate for the six months ended June 30, 2012, are 37.8% compared to 37.4% for the same period in 2011. The higher effective tax rate is, in part, attributable to a lower estimated domestic manufacturing deduction.

Noncontrolling Interest, Net of Tax - MGE


		Six Months Ended June 30,
(in millions)		2012		2011
MGE Power Elm Road	$	7.4	$	7.3
MGE Power West Campus	$	3.8	$	3.7
MGE Transco	$	1.0	$	0.9

Contractual Obligations and Commercial Commitments - MGE Energy and MGE

There were no material changes, other than from the normal course of business, to MGE Energy's and MGE's contractual obligations (representing cash obligations that are considered to be firm commitments) and commercial commitments (representing commitments triggered by future events) during the six months ended June 30, 2012, except as noted below. Further discussion of the contractual obligations and commercial commitments is included in Footnote 8 of this Report and Footnote 18 and "Contractual Obligations and Commercial Commitments for MGE Energy and MGE" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in MGE Energy's and MGE's 2011 Annual Report on Form 10-K.

Purchase Power Agreement Contract Dispute - MGE Energy and MGE

Purchase Contracts - MGE Energy and MGE


(In thousands)		2012		2013		2014		2015		2016
Natural gas supply^(a)		10,830		12,266		-		-		-
Purchase power^(b)		39,266		51,455		49,372		47,523		48,491
	$	50,096	$	63,721	$	49,372	$	47,523	$	48,491

(a)

These commitments include market-based pricing. Management expects to recover these costs in future customer rates.

(b)

MGE has several purchase power agreements to help meet future electric supply requirements. Management expects to recover these costs in future customer rates.

Smart Grid Investment Grant - MGE Energy and MGE

Other Commitments - MGE Energy

Long-term Debt - MGE Energy and MGE

On April 2, 2012, MGE issued $28 million in principal amount of its 4.38% senior notes, due April 1, 2042. The Notes were issued pursuant to a Note Purchase Agreement. The Notes are unsecured and are not issued under, or governed by, MGE's Indenture dated as of September 1, 1998, which governs MGE's Medium-Term Notes. MGE used the net proceeds from the sale of the Notes, together with other available corporate funds, to repay and retire on April 3, 2012, its obligations under a Loan Agreement dated as of April 1, 2002 with the City of Madison, Wisconsin, under which MGE received the net proceeds from the issuance of $28 million aggregate principal amount of 5.875% Series 2002A, Industrial Development Revenue Bonds that were issued by the City of Madison for MGE's benefit. The 5.875% Series 2002A Bonds were redeemed and retired on April 3, 2012 at 100% of their principal amount plus accrued interest with the proceeds of that loan repayment. Any interest savings in 2012 will be deferred.

Remarketing of 4.875% Series 2002B, Industrial Development Revenue Bonds - MGE Energy and MGE

Liquidity and Capital Resources

Cash Flows

The following summarizes cash flows for MGE Energy and MGE during the six months ended June 30, 2012 and 2011:


		MGE Energy				MGE
(In thousands)		2012		2011		2012		2011
Cash provided by/(used for):
Operating activities	$	60,786	$	67,423	$	58,691	$	66,094
Investing activities		(40,831)		(31,173)		(40,727)		(28,806)
Financing activities		(19,836)		(11,306)		(23,197)		(24,534)

Cash Provided by Operating Activities

MGE Energy

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

Cash provided by operating activities for the six months ended June 30, 2012, was $60.8 million, a decrease of $6.6 million when compared to the same period in the prior year, primarily due to working capital changes.

MGE Energy's net income decreased $0.2 million for the six months ended June 30, 2012, when compared to the same period in the prior year.

The cash flows for the six months ended June 30, 2012, reflect a $5.4 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.

Working capital accounts resulted in $4.4 million in cash provided by operating activities for the six months ended June 30, 2012, primarily due to decreased accounts receivable, decreased receivable – margin account and decreased unbilled receivables, partially offset by decreased accounts payable. Working capital accounts resulted in $20.5 million in cash provided by operating activities for the six months ended June 30, 2011, primarily due to decreased inventories, decreased prepaid taxes, decreased accounts receivable and decreased unbilled revenues, partially offset by decreased accounts payable.

An increase in pension contribution resulted in an additional $1.7 million in cash used by operating activities for the six months ended June 30, 2012, when compared to the same period in the prior year. These contributions were made to comply with the Employee Retirement Income Security Act (ERISA) and the Pension Protection Act of 2006, and additional contributions were at management's discretion.

MGE

Cash provided by operating activities for the six months ended June 30, 2012, was $58.7 million, a decrease of $7.4 million when compared to the same period in the prior year, primarily due to working capital changes.

Net income decreased $0.2 million for the six months ended June 30, 2012, when compared to the same period in the prior year.

The cash flows for the six months ended June 30, 2012, reflect a $5.6 million benefit of lower taxes payable, compared to the same period in the prior year, primarily due to the additional benefit from the income tax method change in accounting for repairs and bonus depreciation.

Working capital accounts resulted in $2.2 million in cash provided by operating activities for the six months ended June 30, 2012, primarily due to decreased accounts receivable and decreased unbilled receivables, partially offset by decreased accounts payable. Working capital accounts resulted in $19.2 million in cash provided by operating activities for the six months ended June 30, 2011, primarily due to decreased inventories, decreased prepaid taxes, decreased accounts receivable and decreased unbilled receivables, partially offset by decreased accounts payable and accrued tax and interest.

An increase in pension contribution resulted in an additional $1.7 million in cash used by operating activities for the six months ended June 30, 2012, when compared to the same period in the prior year. These contributions were made to comply with the ERISA and the Pension Protection Act of 2006, and additional contributions were at management's discretion.

Cash Used for Investing Activities

MGE Energy

MGE Energy's cash used for investing activities increased $9.7 million for the six months ended June 30, 2012, when compared to the same period in the prior year.

Capital expenditures for the six months ended June 30, 2012, were $39.6 million. This amount represents an increase of $11.0 million from the expenditures made in the same period in the prior year. This increase is due to increased expenditures on the Columbia environmental project of $16.5 million.

Cash used for investing activities for the six months ended June 30, 2011, also included land purchased for investing purposes of $1.8 million.

MGE

MGE's cash used for investing activities increased $11.9 million for the six months ended June 30, 2012, when compared to the same period in the prior year.

Cash Used for Financing Activities

MGE Energy

Cash used for MGE Energy's financing activities was $19.8 million for the six months ended June 30, 2012, compared to $11.3 million of cash used for the six months ended June 30, 2011.

For the six months ended June 30, 2012, dividends paid were $17.7 million compared to $17.3 million in the prior year. This increase was a result of a higher dividend per share ($0.766 vs. $0.750).

During the six months ended June 30, 2012, MGE issued and retired $28.0 million of long-term debt. During the six months ended June 30, 2011, MGE Power Elm Road issued $30.0 million of long-term debt.

For the six months ended June 30, 2011, net short-term debt repayments were $22.5 million reflecting the use of proceeds from the MGE Power Elm Road long-term debt issue.

MGE

During the six months ended June 30, 2012, cash used for MGE's financing activities was $23.2 million compared to $24.5 million of cash used by MGE's financing activities in the prior year.

Dividends paid from MGE to MGE Energy were $13.5 million for the six months ended June 30, 2012 compared to $13.2 million in the prior year.

As a result of the long-term debt financing by MGE Power Elm Road, distributions to parent from noncontrolling interest were $37.0 million for the six months ended June 30, 2011. The proceeds from the financing were used to repay MGE Energy, which had been using its short-term credit facilities to help finance the Elm Road Units. Distributions to parent from noncontrolling interest were $8.5 million for the six months ended June 30, 2012.

In addition, for the six months ended June 30, 2011, net short-term debt repayments were $3.5 million.

Capitalization Ratios

MGE Energy's capitalization ratios were as follows:


	MGE Energy
	June 30, 2012	December 31, 2011
Common shareholders' equity	60.8 %	60.2 %
Long-term debt*	39.2 %	39.8 %
*Includes the current portion of long-term debt.

MGE Energy's and MGE's Capital Requirements

MGE Energy's and MGE's liquidity are primarily affected by their capital requirements. During the six months ended June 30, 2012, capital expenditures for MGE Energy and MGE totaled $39.6 million, which included $39.1 million of capital expenditures for utility operations.

In early 2011, the PSCW authorized the construction of air emission reduction systems and associated equipment on Columbia Units 1 and 2. MGE's estimated share of the capital expenditures required to complete this project will be approximately $140 million. MGE expects to incur capital expenditures as follows: $33 million for the remainder of 2012, $68 million in 2013, and $14 million in 2014. As of June 30, 2012, MGE had incurred $20.7 million (excluding carrying costs) in construction expenditures at Columbia related to the project and had accrued $4.4 million in incurred, but unpaid capital expenditures.

Credit Ratings

MGE Energy's and MGE's access to the capital markets, including, in the case of MGE, the commercial paper market, and their respective financing costs in those markets, may depend on the credit ratings of the entity that is accessing the capital markets.

None of MGE Energy's or MGE's borrowing is subject to default or prepayment as a result of a downgrading of credit ratings, although a downgrading of MGE's credit ratings could increase fees and interest charges under both MGE Energy's and MGE's credit agreements.

Pension Plan Funding Stabilization

On July 6, 2012, the Moving Ahead for Progress in the 21^st Century Act (MAP-21) was signed and became law. The provisions in MAP-21 provide pension plan funding relief through interest rate stabilization and will increase Pension Benefit Guaranty Corporation premiums payable with respect to plans. MGE does not believe the law will have a significant impact on its pension funding policy.

Environmental Matters

The following discussion is limited to updates or developments in environmental matters that occurred during the six months ended June 30, 2012. Further discussion of environmental matters is included in MGE Energy's and MGE's 2011 Annual Report on Form 10-K and Footnote 8.a. of Notes to Consolidated Financial Statements in this Report.

Global climate change

MGE is a producer of GHG emissions, primarily from the fossil fuel generating facilities it utilizes to meet customers' energy needs, as well as from its natural gas pipeline system and fleet vehicles. Climate change and the regulatory response to it could significantly affect our operations in a number of ways, including increased operating costs and capital expenditures, restrictions on energy supply options, permitting difficulties and more stringent emission limits. MGE management would expect to seek and receive rate recovery of such compliance costs, if and when required. MGE will continue to monitor proposed climate change legislation and regulation. MGE is currently complying with applicable greenhouse gas regulations and is actively monitoring current proposed and other potential greenhouse gas regulations from the EPA.

GHG New Source Performance Standards for Electric Generating Units (EGU GHG NSPS)

Other Matters

PJM Resettlement

MGE is a member of PJM. PJM, an RTO, is a neutral and independent party that coordinates and directs the operation of the transmission grid within its area of coverage, administers a competitive wholesale electricity market and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion. In 2009, PJM determined certain market participants, including MGE, were not eligible to receive transmission loss credits. In September 2009, MGE paid PJM $1.2 million at that time as part of this resettlement.

In July 2011, FERC reversed the 2009 decision and determined PJM should refund certain amounts back to market participants, including MGE. In May 2012, FERC denied rehearing requests by financial marketers and ordered the resettlement. In July 2012, MGE received a $1.2 million refund from PJM related to the resettlement, which was credited to purchased power. This refund will increase the current fuel deferral of $2.7 million (for credit to customers) as of June 30, 2012 to a total of $3.9 million.

There continues to be an open rehearing request at FERC and a petition at the US Court of Appeals to resettle again. There is potential that MGE would have to pay back the refund received from PJM.

Ratification of Union Agreements

MGE has employees who are covered by a collective bargaining agreement with Local Union 2304 of the International Brotherhood of Electric Workers and also has 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 expired on April 30, 2012. On May 31, 2012, both unions ratified their respective labor agreements which will be in effect from May 1, 2012, until April 30, 2015.

New Accounting Principles

See Footnote 12 for discussion of new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

MGE Energy and MGE are potentially exposed to market risk associated with interest rates, commodity prices, and equity returns. MGE currently has no exposure to foreign currency risk. MGE manages some risk exposure through risk management policies and the use of derivative instruments. MGE's risk management policy prohibits speculative trading transactions.

Commodity Price Risk

MGE has commodity price risk exposure with respect to the price of natural gas, electricity, coal, emission credits, and oil. MGE employs established policies and procedures to reduce the market risks associated with changing commodity prices. MGE's commodity risks are somewhat mitigated by the current ratemaking process in place for recovering electric fuel cost, purchased energy costs, and the cost of natural gas. MGE's electric fuel costs are subject to fuel rules established by the PSCW.

MGE's electric operations burn natural gas in several of its peaking power plants and, in many cases, the cost of purchased power is tied to the cost of natural gas. MGE bears regulatory risk for the recovery of such fuel and purchased power costs when they are higher than the base rate established in its current rate structure.

The PSCW approved new fuel rules that became effective January 1, 2011. The new rules require the PSCW and Wisconsin utilities to automatically defer electric fuel-related costs that fall outside a symmetrical cost tolerance band. Any over/under recovery of the deferred costs is determined on an annual basis and will be adjusted in future billings to electric retail customers. Under the electric fuel rules, MGE is required to defer the benefit of lower costs if the actual fuel rules costs fall outside the lower end of the range and would defer costs, less any excess revenues, if the actual fuel rules costs exceeded the upper end of the range. Excess revenues are defined as revenues in the year in question that provide MGE with a greater return on common equity than authorized by the PSCW in MGE's latest rate order. The range is defined by the PSCW and has been modified throughout the years based on market conditions and other relevant factors. Currently, MGE is subject to a plus or minus 2% range. MGE assumes the risks and benefits of variances that are within the cost tolerance band. For 2012, fuel and purchased power costs included in MGE's base fuel rates are $100.7 million. See Footnote 10.b. for additional information.

MGE's gas segment is governed by the purchased gas adjustment clause (PGA). Under the PGA, MGE is able to pass through to customers the cost of gas.

MGE also reduces price risk caused by market fluctuations via physical contracts and financial derivative contracts, including futures, swaps, options, forwards, and other contractual commitments. The maximum length of time over which cash flows related to energy commodities can be hedged under applicable PSCW approvals is four years.

MGE has financial gas and electric commodity contracts to hedge commodity price risk in the gas and electric segments. These contracts are primarily comprised of exchange-traded option and future contracts. MGE also holds FTRs, which are used to hedge the risk of increased transmission congestion charges. At June 30, 2012, the fair value of these instruments exceeded their cost basis by $0.4 million. Under the PGA clause and electric fuel rules, MGE may include in the costs of fuel (natural gas or power) the costs and benefits of the aforementioned fuel price risk management tools. Because these costs/benefits are recoverable, the related unrealized loss/gain has been deferred on the balance sheet as a regulatory asset/liability.

MGE has also entered into a ten-year purchased power agreement that provides MGE with firm capacity and energy that began on June 1, 2012, and ends on May 31, 2022 (the "base term"). The agreement also allows MGE the option to extend the contract after the base term. The agreement is a derivative contract and is recognized at its fair value on the balance sheet. The fair value of the contract at June 30, 2012, reflects a loss position of $79.8 million.

Interest Rate Risk

Both MGE Energy and MGE may have short term borrowings at varying interest rates. MGE issues commercial paper for its short-term borrowings, while MGE Energy draws from its current credit facility to meet its short-term borrowing needs. Borrowing levels vary from period to period depending upon capital investments and other factors. Future short-term interest expense and payments will reflect both future short-term interest rates and borrowing levels. MGE Energy and MGE manage interest rate risk by limiting their variable rate exposure and continually monitoring the effects of market changes on interest rates. MGE is not exposed to changes in interest rates on a substantial portion of its long-term debt until that debt matures and is refinanced at market rates.

Equity Price Risk - Pension-Related Assets

MGE currently funds its liabilities related to employee benefits through trust funds. These funds, which include investments in debt and equity securities, are managed by various investment managers. Changes in market value of these investments can have an impact on the future expenses related to these liabilities.

Credit Risk - Counterparty

Credit risk is the loss that may result from counterparty nonperformance. MGE is exposed to credit risk primarily through its merchant energy business. MGE uses credit policies to manage its credit risk, which include utilizing an established credit approval process, monitoring counterparty limits, employing credit mitigation measures such as collateral or prepayment arrangements, and using netting agreements.

Due to the possibility of extreme volatility in the prices of energy commodities and derivatives, the market value of contractual positions with individual counterparties could exceed established credit limits or collateral provided by those counterparties. If such a counterparty were then to fail to perform its obligations under its contract (for example, fail to deliver the electricity MGE originally contracted for), MGE could sustain a loss that could have a material impact on its financial results.

Additionally, if a counterparty were to default and MGE were to liquidate all contracts with that entity, MGE's credit loss would include the loss in value of mark-to-market contracts; the amount owed for settled transactions; and additional payments, if any, to settle unrealized losses on accrual contracts. As of June 30, 2012, no counterparties have defaulted.

MGE is obligated to provide service to all electric and gas customers within its respective franchised territories. MGE's franchised electric territory includes a 316 square-mile area in Dane County, Wisconsin, and MGE's franchised gas territory includes a service area covering 1,631 square miles in Wisconsin. Based on results for the year ended December 31, 2011, no one customer constituted more than 9% of total operating revenues for MGE Energy and MGE. Credit risk for electric and gas is managed by MGE's credit and collection policies, which are consistent with state regulatory requirements.

Cash, cash equivalents, and customer accounts receivable are the financial instruments that potentially subject MGE Energy and MGE to concentrations of credit risk. MGE Energy and MGE place their cash and cash equivalents with high credit-quality financial institutions. MGE has limited concentrations of credit risk from customer accounts receivable because of the large number of customers and relatively strong economy in its service territory.

Item 4. Controls and Procedures.

During the second quarter of 2012, each registrant's management, including the principal executive officer and principal financial officer, evaluated its disclosure controls and procedures related to the recording, processing, summarization, and reporting of information in its periodic reports that it files with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to that registrant, including its subsidiaries, is accumulated and made known to that registrant's management, including these officers, by other employees of that registrant and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and that this information is recorded, processed, summarized, evaluated, and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision making can be faulty and breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, the registrants do not control or manage certain of their unconsolidated entities and thus, their access and ability to apply their procedures to those entities is more limited than is the case for their consolidated subsidiaries.

As of June 30, 2012, each registrant's principal executive officer and principal financial officer concluded that its disclosure controls and procedures were effective. Each registrant intends to strive continually to improve its disclosure controls and procedures to enhance the quality of its financial reporting.

During the quarter ended June 30, 2012, there were no changes in either registrant's internal controls over financial reporting that materially affected, or are reasonably likely to affect materially, that registrant's internal control over financial reporting.

PART II. OTHER INFORMATION.

Item 1. 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.

See Footnote 8.a. and 8.d. for a description of several proceedings involving MGE.

Item 1A. Risk Factors.

There were no material changes in the risk factors previously disclosed in Part I, Item 1A. of the 2011 Form 10-K, except as described below.

We face construction risk in connection with the completion of the Columbia environmental project.

The large-scale environmental project at the Columbia generating facility is subject to various risks that could cause costs to increase or delays in completion. These risks include shortages of, the inability to obtain, the cost of, and the consistency of, labor, materials and equipment; the inability of the general contractor or subcontractors to perform under their contracts; the inability to agree to terms of contracts or disputes in contract terms; work stoppages; adverse weather conditions; the inability to obtain necessary permits in a timely manner; changes in applicable laws or regulations; adverse interpretation or enforcement of permit conditions; governmental actions; legal action; and unforeseen engineering or technology issues. If the construction project is over budget, we may not be able to recover those excess costs. Inability to recover excess costs, or inability to complete the project in a timely manner, could adversely impact our financial condition and results of operations.

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

Issuer Purchases of Equity Securities


	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs^*	Maximum number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under the Plans or Programs^*





Period
April 1-30, 2012	38,671	$	44.40	-	-
May 1-31, 2012	29,655		45.98	-	-
June 1-30, 2012	78,790		46.65	-	-
Total	147,116	$	45.92	-	-

* Under the Stock Plan, common stock shares deliverable to plan participants may be either newly issued shares or shares purchased on the open market, as determined from time to time by MGE Energy. In June 2009, MGE Energy switched to using open market purchases to provide shares to meet obligations to participants in the Stock Plan. The shares are purchased on the open market through a securities broker-dealer and then are reissued under the Stock Plan as needed to meet share delivery requirements. The volume and timing of share repurchases in the open market depends upon the level of dividend reinvestment and optional share purchases being made from time to time by plan participants. As a result, there is no specified maximum number of shares to be repurchased and no specified termination date for the repurchases. All shares issued through the Stock Plan, whether newly issued or reissued following open market purchases, are issued and sold pursuant to a registration statement that was filed with the SEC and is currently effective.

Item 4. Mine Safety Disclosures.

Not applicable to MGE Energy and MGE.

Item 6. Exhibits.

Statement regarding computation of ratio of earnings to fixed charges for Madison Gas and Electric Company.

Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed by the following officers for the following companies:

31.1

Filed by Gary J. Wolter for MGE Energy, Inc.

31.2

Filed by Jeffrey C. Newman for MGE Energy, Inc.

31.3

Filed by Gary J. Wolter for Madison Gas and Electric Company

31.4

Filed by Jeffrey C. Newman for Madison Gas and Electric Company

Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code (Sarbanes-Oxley Act of 2002) as to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed by the following officers for the following companies:

32.1

Filed by Gary J. Wolter for MGE Energy, Inc.

32.2

Filed by Jeffrey C. Newman for MGE Energy, Inc.

32.3

Filed by Gary J. Wolter for Madison Gas and Electric Company

32.4

Filed by Jeffrey C. Newman for Madison Gas and Electric Company

101

Interactive Data Files:

101.INS

XBRL Instance

101.SCH

XBRL Taxonomy Extension Schema

101.CAL

XBRL Taxonomy Extension Calculation

101.DEF

XBRL Taxonomy Extension Definition

101.LAB

XBRL Taxonomy Extension Labels

101.PRE

XBRL Taxonomy Extension Presentation

Signatures - MGE Energy, Inc.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	MGE ENERGY, INC.



Date: August 7, 2012	/s/ Gary J. Wolter
	Gary J. Wolter Chairman, President and Chief Executive Officer (Duly Authorized Officer)



Date: August 7, 2012	/s/ Jeffrey C. Newman
	Jeffrey C. Newman Vice President, Chief Financial Officer, Secretary and Treasurer (Chief Financial and Accounting Officer)

Signatures - Madison Gas and Electric Company

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	MADISON GAS AND ELECTRIC COMPANY



Date: August 7, 2012	/s/ Gary J. Wolter
	Gary J. Wolter Chairman, President and Chief Executive Officer (Duly Authorized Officer)



Date: August 7, 2012	/s/ Jeffrey C. Newman
	Jeffrey C. Newman Vice President, Chief Financial Officer, Secretary and Treasurer (Chief Financial and Accounting Officer)