Edgar Filing: MGE ENERGY INC

Form 10-Q/A

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

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

For the quarterly period ended:

June 30, 2013

[ ] 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 53788

(608) 252-7000

mgeenergy.com

39-2040501

000-1125

Madison Gas and Electric Company

(a Wisconsin Corporation)

133 South Blair Street

Madison, Wisconsin 53788

(608) 252-7000

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, 2013
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 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," "will," 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 include (a) those factors discussed in the Registrants' 2012 Annual Report on Form 10-K: Item 1A. Risk Factors, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, as updated by Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and Item 8. Financial Statements and Supplementary Data – Note 18, as updated by Part I, Item 1. Financial Statements – Note 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 release publicly 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 sec.gov, MGE Energy's website at mgeenergy.com, and MGE's website at 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:*

CWDC	Central Wisconsin Development Corporation
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
North Mendota	North Mendota Energy & Technology Park, LLC

*Other Defined Terms:*

AFUDC	Allowance for Funds Used During Construction
ATC	American Transmission Company LLC
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
DOE	United States Department of Energy
Dth	Dekatherms, a quantity measure used in respect of natural gas
EGUs	Electric Generating Units
Elm Road Units	Elm Road Generating Station
EPA	United States Environmental Protection Agency
FASB	Financial Accounting Standards Board
FTR	Financial Transmission Rights
GHG	Greenhouse Gas
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
MATs	Mercury and Air Toxics Standards
MISO	Midcontinent 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
NGCC	Natural Gas Combined Cycle
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)
PPA	Purchased power agreement
PSCW	Public Service Commission of Wisconsin

PSD	Prevention of Significant Deterioration
SCR	Selective Catalytic Reduction
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
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,
		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
Operating Revenues:
Regulated electric revenues	$	96,846	$	96,339	$	190,340	$	186,275
Regulated gas revenues		30,042		18,629		102,509		75,648
Nonregulated revenues		1,400		2,253		2,676		4,557
Total Operating Revenues		128,288		117,221		295,525		266,480

Operating Expenses:
Fuel for electric generation		9,810		11,481		20,570		20,332
Purchased power		21,051		17,314		39,256		36,860
Cost of gas sold		16,748		7,801		61,440		42,646
Other operations and maintenance		41,887		41,278		83,536		84,227
Depreciation and amortization		9,530		9,712		19,154		19,336
Other general taxes		4,765		4,554		9,444		9,554
Total Operating Expenses		103,791		92,140		233,400		212,955
Operating Income		24,497		25,081		62,125		53,525

Other income, net		2,711		2,549		6,020		5,119
Interest expense, net		(4,657)		(4,764)		(9,332)		(9,868)
Income before income taxes		22,551		22,866		58,813		48,776
Income tax provision		(8,660)		(8,596)		(22,338)		(18,458)
Net Income	$	13,891	$	14,270	$	36,475	$	30,318

Earnings Per Share of Common Stock
(basic and diluted)	$	0.60	$	0.62	$	1.58	$	1.31

Dividends per share of common stock	$	0.395	$	0.383	$	0.790	$	0.766

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,
		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
Net Income	$	13,891	$	14,270	$	36,475	$	30,318
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale
securities, net of tax ($50 and $24, and $93 and
$29)		75		36		140		43
Comprehensive Income	$	13,966	$	14,306	$	36,615	$	30,361

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,
		2013		2012
Operating Activities:
Net income	$	36,475	$	30,318
Items not affecting cash:
Depreciation and amortization		19,154		19,336
Deferred income taxes		20,484		14,657
Provision for doubtful receivables		1,084		1,207
Employee benefit plan expenses		6,558		9,222
Equity earnings in ATC		(4,705)		(4,484)
Other items		547		1,102
Changes in working capital items:
Decrease in current assets		17,350		15,323
Decrease in current liabilities		(5,517)		(10,948)
Dividend income from ATC		3,638		3,494
Cash contributions to pension and other postretirement plans		(31,507)		(21,593)
Other noncurrent items, net		2,567		3,152
Cash Provided by Operating Activities		66,128		60,786

Investing Activities:
Capital expenditures		(63,137)		(39,553)
Capital contributions to investments		(950)		(938)
Other		(458)		(340)
Cash Used for Investing Activities		(64,545)		(40,831)

Financing Activities:
Cash dividends paid on common stock		(18,264)		(17,687)
Repayment of long-term debt		(1,333)		(29,334)
Issuance of long-term debt		-		28,000
Increase in short-term debt		14,000		-
Other		(10)		(815)
Cash Used for Financing Activities		(5,607)		(19,836)

Change in cash and cash equivalents		(4,024)		119
Cash and cash equivalents at beginning of period		46,357		41,169
Cash and Cash Equivalents at End of Period	$	42,333	$	41,288

Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures	$	13,249	$	4,779

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

MGE Energy, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands)

		June 30, 2013		December 31, 2012
ASSETS		June 30, 2013		December 31, 2012
Current Assets:
Cash and cash equivalents	$	42,333	$	46,357
Receivable - margin account		1,164		1,818
Accounts receivable, less reserves of $4,015 and $3,885, respectively		35,994		41,386
Other accounts receivable, less reserves of $846 and $931, respectively		7,619		6,746
Unbilled revenues		21,741		28,262
Materials and supplies, at average cost		17,169		16,997
Fossil fuel		8,311		6,367
Stored natural gas, at average cost		9,701		14,980
Prepaid taxes		17,518		19,520
Regulatory assets - current		8,751		10,327
Deferred income taxes - current		8,058		23,483
Other current assets		7,886		6,694
Total Current Assets		186,245		222,937
Regulatory assets		206,395		218,853
Other deferred assets and other		8,288		7,075
Property, Plant, and Equipment:
Property, plant, and equipment, net		990,554		975,053
Construction work in progress		132,750		98,411
Total Property, Plant, and Equipment		1,123,304		1,073,464
Investments		66,077		64,595
Total Assets	$	1,590,309	$	1,586,924

LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	3,721	$	3,013
Short-term debt		14,000		-
Accounts payable		38,551		43,518
Accrued interest and taxes		4,199		4,296
Accrued payroll related items		8,274		10,063
Derivative liabilities		9,200		9,270
Other current liabilities		12,586		5,637
Total Current Liabilities		90,531		75,797
Other Credits:
Deferred income taxes		275,626		270,410
Investment tax credit - deferred		1,413		1,520
Regulatory liabilities		22,423		24,538
Accrued pension and other postretirement benefits		134,507		162,835
Derivative liabilities		58,530		63,320
Other deferred liabilities and other		53,037		50,584
Total Other Credits		545,536		573,207
Capitalization:
Common shareholders' equity		597,780		579,429
Long-term debt		356,462		358,491
Total Capitalization		954,242		937,920
Commitments and contingencies (see Footnote 8)		-		-
Total Liabilities and Capitalization	$	1,590,309	$	1,586,924

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)

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

2013
Beginning balance - December 31, 2012	23,114	$	23,114	$	316,268	$	239,953	$	94	$	579,429
Net income							36,475				36,475
Other comprehensive income									140		140
Common stock dividends declared
($0.790 per share)							(18,264)				(18,264)
Ending balance - June 30, 2013	23,114	$	23,114	$	316,268	$	258,164	$	234	$	597,780

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,
		2013		2012		2013		2012
Operating Revenues:
Regulated electric revenues	$	96,846	$	96,339	$	190,340	$	186,275
Regulated gas revenues		30,042		18,629		102,509		75,648
Nonregulated revenues		1,400		2,253		2,676		4,557
Total Operating Revenues		128,288		117,221		295,525		266,480

Operating Expenses:
Fuel for electric generation		9,810		11,481		20,570		20,332
Purchased power		21,051		17,314		39,256		36,860
Cost of gas sold		16,748		7,801		61,440		42,646
Other operations and maintenance		41,639		41,026		83,143		83,554
Depreciation and amortization		9,530		9,712		19,154		19,336
Other general taxes		4,765		4,554		9,444		9,554
Income tax provision		7,569		7,635		20,439		16,604
Total Operating Expenses		111,112		99,523		253,446		228,886
Operating Income		17,176		17,698		42,079		37,594

Other Income and Deductions:
AFUDC - equity funds		730		310		1,326		464
Equity in earnings in ATC		2,309		2,242		4,705		4,484
Income tax provision		(1,141)		(975)		(1,922)		(1,968)
Other income, net		(430)		(186)		(289)		(130)
Total Other Income and Deductions		1,468		1,391		3,820		2,850
Income before interest expense		18,644		19,089		45,899		40,444

Interest Expense:
Interest on long-term debt		4,919		5,073		9,847		10,270
Other interest, net		1		(148)		(36)		(141)
AFUDC - borrowed funds		(241)		(126)		(437)		(189)
Net Interest Expense		4,679		4,799		9,374		9,940
Net Income	$	13,965	$	14,290	$	36,525	$	30,504
Less Net Income Attributable to Noncontrolling Interest, net of tax		(6,860)		(6,080)		(13,686)		(12,152)
Net Income Attributable to MGE	$	7,105	$	8,210	$	22,839	$	18,352

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,
		2013		2012		2013		2012
Net Income	$	13,965	$	14,290	$	36,525	$	30,504
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale
securities, net of tax ($1 and $5, and $19 and
$15)		1		(7)		28		(23)
Comprehensive Income	$	13,966	$	14,283	$	36,553	$	30,481
Less: Comprehensive income attributable to
Noncontrolling Interest, net of tax		(6,860)		(6,080)		(13,686)		(12,152)
Comprehensive Income attributable to MGE	$	7,106	$	8,203	$	22,867	$	18,329

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,
		2013		2012
Operating Activities:
Net income	$	36,525	$	30,504
Items not affecting cash:
Depreciation and amortization		19,154		19,336
Deferred income taxes		19,804		14,444
Provision for doubtful receivables		1,084		1,207
Employee benefit plan expenses		6,558		9,222
Equity earnings in ATC		(4,705)		(4,484)
Other items		817		1,367
Changes in working capital items:
Decrease in current assets		17,013		13,822
Decrease in current liabilities		(5,295)		(11,589)
Dividend income from ATC		3,638		3,494
Cash contributions to pension and other postretirement plans		(31,507)		(21,593)
Other noncurrent items, net		2,516		2,961
Cash Provided by Operating Activities		65,602		58,691

Investing Activities:
Capital expenditures		(63,137)		(39,553)
Capital contributions to investments		(710)		(888)
Other		(422)		(286)
Cash Used for Investing Activities		(64,269)		(40,727)

Financing Activities:
Cash dividends paid to parent by MGE		-		(13,456)
Distributions to parent from noncontrolling interest		(15,750)		(8,500)
Equity contribution received by noncontrolling interest		710		888
Repayment of long-term debt		(1,333)		(29,334)
Issuance of long-term debt		-		28,000
Increase in short-term debt		14,000		-
Other		-		(795)
Cash Used for Financing Activities		(2,373)		(23,197)

Change in cash and cash equivalents		(1,040)		(5,233)
Cash and cash equivalents at beginning of period		6,350		13,898
Cash and Cash Equivalents at End of Period	$	5,310	$	8,665

Supplemental disclosures of cash flow information:
Significant noncash investing activities:
Accrued capital expenditures	$	13,249	$	4,779

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, 2013		December 31, 2012
ASSETS		June 30, 2013		December 31, 2012
Current Assets:
Cash and cash equivalents	$	5,310	$	6,350
Receivable - margin account		1,164		1,818
Accounts receivable, less reserves of $4,015 and $3,885, respectively		35,994		41,386
Affiliate receivables		623		634
Other accounts receivable, less reserves of $846 and $931, respectively		7,579		6,732
Unbilled revenues		21,741		28,262
Materials and supplies, at average cost		17,169		16,997
Fossil fuel		8,311		6,367
Stored natural gas, at average cost		9,701		14,980
Prepaid taxes		21,879		23,561
Regulatory assets - current		8,751		10,327
Deferred income taxes - current		7,652		23,305
Other current assets		7,879		6,670
Total Current Assets		153,753		187,389
Affiliate receivable long-term		6,089		6,354
Regulatory assets		206,395		218,853
Other deferred assets and other		6,660		6,540
Property, Plant, and Equipment:
Property, plant, and equipment, net		990,423		974,549
Construction work in progress		132,750		98,411
Total Property, Plant, and Equipment		1,123,173		1,072,960
Investments		63,371		61,555
Total Assets	$	1,559,441	$	1,553,651

LIABILITIES AND CAPITALIZATION
Current Liabilities:
Long-term debt due within one year	$	3,721	$	3,013
Short-term debt		14,000		-
Accounts payable		38,549		43,517
Affiliate payables		20		767
Accrued interest and taxes		3,896		4,248
Accrued payroll related items		8,274		10,063
Derivative liabilities		9,200		9,270
Other current liabilities		12,392		4,491
Total Current Liabilities		90,052		75,369
Other Credits:
Deferred income taxes		270,738		266,231
Investment tax credit - deferred		1,413		1,520
Regulatory liabilities		22,423		24,538
Accrued pension and other postretirement benefits		134,507		162,835
Derivative liabilities		58,530		63,320
Other deferred liabilities and other		53,037		50,581
Total Other Credits		540,648		569,025
Capitalization:
Common shareholder's equity		456,163		433,296
Noncontrolling interest		116,116		117,470
Total Equity		572,279		550,766
Long-term debt		356,462		358,491
Total Capitalization		928,741		909,257
Commitments and contingencies (see Footnote 8)		-		-
Total Liabilities and Capitalization	$	1,559,441	$	1,553,651

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)

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


	Shares		Value
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

2013
Beginning balance - Dec. 31, 2012	17,348	$	17,348	$	192,417	$	223,527	$	4	$	117,470	$	550,766
Net income							22,839				13,686		36,525
Other comprehensive loss									28				28
Equity contribution received by
noncontrolling interest											710		710
Distributions to parent from
noncontrolling interest											(15,750)		(15,750)
Ending balance - June 30, 2013	17,348	$	17,348	$	192,417	$	246,366	$	32	$	116,116	$	572,279

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

Notes to Consolidated Financial Statements (unaudited)

June 30, 2013

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. See Footnote 2 of Notes to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data, of MGE Energy's and MGE's 2012 Annual Report on Form 10-K.

The accompanying consolidated financial statements as of June 30, 2013, 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 2012 Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These notes should be read in conjunction with the financial statements and the notes on pages 51 through 104 of the 2012 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, 2013 and 2012, 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.

Credit Facilities - MGE Energy and MGE.

On June 19, 2013, each of MGE Energy and MGE entered into an amendment to its existing credit agreement dated as of July 30, 2010, with various financial institutions, as lenders, and JPMorgan Chase Bank, N.A., as administrative agent. In the case of MGE Energy, the principal purposes of the amendment are to increase the revolving credit facility to $50 million from $40 million and to extend the expiration date of the credit agreement to July 31, 2017 from July 31, 2015. In the case of MGE, the principal purposes of the amendment are to increase the revolving credit facility to $100 million from $75 million and to extend the expiration date of the credit agreement to July 31, 2017 from July 31, 2015. In addition, both amendments lowered the adders used in the determination of the interest rates under the existing credit agreements. As a result of the amendments, the existing credit agreements for both of MGE Energy and MGE carry interest at either (i) a "floating rate," plus an adder ranging from zero to 0.125%, depending upon the credit ratings assigned to MGE's senior unsecured long-term debt securities; or (ii) a "Eurodollar Rate," plus an adder ranging from 0.675% to 1.125%, depending upon the credit ratings assigned to MGE's senior unsecured long-term debt securities. The "floating rate" is calculated on a daily basis as the highest of a prime rate, a Federal Funds effective rate plus 0.5% per annum, or a Eurodollar Rate for a one month interest

period plus 1%. The "Eurodollar Rate" is calculated as provided in the credit agreements for the selected interest period. As of June 30, 2013, neither MGE Energy nor MGE had any borrowings outstanding under their respective credit agreements; however, MGE had $14 million in commercial paper outstanding.

Long-term Debt - MGE Energy and MGE.

On July 18, 2013, MGE issued $20 million in principal amount of 4.42% senior notes, Series A, due July 15, 2043 and $20 million in principal amount of 4.47%, senior notes, Series B, due July 15, 2048. The Notes were issued pursuant to a Note Purchase Agreement with several note purchasers. 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 to redeem on July 18, 2013, $20 million of its 5.26% Medium-Term Notes due September 29, 2017, and to make a $20 million partial redemption of its 5.59% Senior Notes due September 11, 2018. MGE paid a redemption price equal to the principal amount of the notes that were redeemed, plus accrued interest to the redemption date, plus a make-whole premium equal to $3.2 million and $3.6 million, for the 5.26% Medium-Term Notes due September 29, 2017 and 5.59% Senior Notes due September 11, 2018, respectively. The make-whole premiums are treated as a regulatory asset and will be amortized over the life of the Series A and Series B Notes. Any interest savings in 2013 will be deferred. There is $20 million principal amount of the 5.59% Senior Notes remaining outstanding after the redemption.

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, 2013 and 2012, MGE Transco recorded equity earnings from the investment in ATC of $4.7 million and $4.5 million, respectively. Dividends received from ATC were $3.6 million and $3.5 million for the six months ended June 30, 2013 and 2012, respectively. In addition, during the six months ended June 30, 2013 and 2012, MGE Transco made $0.7 million and $0.9 million in capital contributions to ATC, respectively. On July 31, 2013, MGE Transco made a $0.4 million capital contribution to ATC.

MGE Transco's investment in ATC as of June 30, 2013, and December 31, 2012, was $62.8 million and $61.0 million, respectively.

At June 30, 2013, 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, 2013 and 2012, is as follows:

		Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)		2013		2012		2013		2012
Operating revenues	$	152,128	$	152,171	$	303,865	$	299,833
Operating expenses		(69,875)		(71,760)		(139,645)		(141,326)
Other income (expense), net		116		(327)		(332)		(827)
Interest expense, net		(21,052)		(20,776)		(42,096)		(40,277)
Earnings before members' income taxes	$	61,317	$	59,308	$	121,792	$	117,403

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, CAIR's eventual replacement, the Mercury and Air Toxics Standards (MATS), and the Wisconsin Mercury Rule. The operator's current estimate shows that MGE's share of the capital expenditures

required for this project is approximately $140 million. As of June 30, 2013, MGE had accumulated $98.9 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's share of the capital expenditures associated with the Columbia environmental project is expected to be approximately $29 million for the remainder of 2013 and $12 million in 2014. These amounts may change as a result of modifications to the project estimate or timing differences. MGE's share of various contractual commitments entered for the project as of June 30, 2013, is $38.6 million. For the three months ended June 30, 2013 and 2012, MGE has recognized after tax $0.6 million and $0.2 million, respectively, in AFUDC equity related to this project. For the six months ended June 30, 2013 and 2012, MGE has recognized after tax $1.1 million and $0.3 million, respectively, in AFUDC equity related to this project.

MGE expects that the costs pertaining to this project will be fully recoverable through rates. For 2012, the PSCW authorized MGE 100% AFUDC on this project during construction. Beginning in 2013, similar to MGE's other utility construction projects, the PSCW authorized MGE a 50% current return (included in customer rates) and the remaining 50% as AFUDC.

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. MGE Energy and MGE have an unrecognized tax benefit at June 30, 2013, and December 31, 2012, in the amount of $1.9 million and $3.2 million, respectively, for the tax uncertainty related to the change in tax method of accounting for repairs. The reduction in unrecognized tax benefits is due to the Internal Revenue Service completing the examination of tax periods 2007-2009 with no adverse adjustments to these positions.

Effective Tax Rate.

MGE Energy's and MGE's effective income tax rate for the three and six months ended June 30, 2013, are 38.4% and 38.0%, respectively, compared to 37.6% and 37.8% for the same periods in 2012.

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, 2013 and 2012. 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)		2013		2012		2013		2012
Pension Benefits
Components of net periodic benefit cost:
Service cost	$	1,911	$	1,920	$	3,840	$	3,743
Interest cost		3,157		3,321		6,343		6,475
Expected return on assets		(4,733)		(4,021)		(9,509)		(7,839)
Amortization of:
Prior service cost		79		114		158		222
Actuarial loss		1,997		2,112		4,012		4,118
Net periodic benefit cost	$	2,411	$	3,446	$	4,844	$	6,719

Postretirement Benefits
Components of net periodic benefit cost:
Service cost	$	591	$	606	$	1,187	$	1,253
Interest cost		962		1,053		1,932		2,178
Expected return on assets		(540)		(407)		(1,084)		(842)
Amortization of:
Transition obligation		1		99		2		206
Prior service cost		27		26		55		54
Actuarial loss		309		581		620		1,201
Net periodic benefit cost	$	1,350	$	1,958	$	2,712	$	4,050

The PSCW allowed MGE to defer the 2009 incremental pension and OPRB costs above the amounts recovered in rates. During both the three months ended June 30, 2013 and 2012, $0.3 million has been recovered in rates. During both the six months ended June 30, 2013 and 2012, $0.6 million 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 2009 through 2012, on February 15, 2013, 15,256 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 a performance unit 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, 2013, 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 the event of a bona fide retirement, not followed by work for a competitor, the executive will receive full vesting credit for each outstanding award.

During the six months ended June 30, 2013 and 2012, MGE recorded $1.0 million and $0.8 million, respectively, in compensation expense as a result of the Performance Unit Plan. In January 2013, cash payments of $1.0 million were distributed relating to awards that were granted in 2008 and became payable under the Performance Unit Plan. No forfeitures occurred during the six months ended June 30, 2013 or 2012. At June 30, 2013, $3.6 million of outstanding awards are vested.

Commitments and Contingencies.

Environmental - MGE Energy and MGE.

MGE Energy and MGE are subject to frequently changing local, state, and federal regulations concerning air quality, water quality, land use, threatened and endangered species, hazardous materials handling, and solid waste disposal. These regulations affect the manner in which they conduct their operations, the costs of those operations, as well as capital and operating expenditures. Regulatory initiatives, proposed rules, and court challenges to adopted rules, have the potential to have a material effect on our capital expenditures and operating costs. These initiatives, proposed rules and court challenges include:

The President's announced plan and directive to the EPA to regulate carbon pollution, or GHG emissions, from new and existing electric power generation, which is discussed below.

Rules to regulate NO_x and SO₂ emissions, including the EPA's Cross States Air Pollution Rule (CSAPR), which is currently vacated as a result of a federal appellate court ruling; and Wisconsin's plan for implementing the EPA's Clean Air Visibility Rule (CAVR). In June 2013, the U.S. Supreme Court indicated that it would review the CSAPR appellate court ruling. The Sierra Club has sought federal appellate court review of the Wisconsin's implementation plan for CAVR. Both the vacation of CSAPR and the appellate court review of Wisconsin's implementation plan for CAVR make the nature of compliance requirements uncertain.

Rules to regulate mercury and similar emissions, including Wisconsin's adopted Mercury Rule and the EPA's adopted Mercury and Air Toxics Standards.

The EPA's proposed cooling water intake rules. The EPA issued a proposed Phase II rule and alternative compliance strategies for existing facilities in April 2011 and has announced that it intends to release the final rule in November 2013.

The matters in the second, third and fourth bullet points are discussed further in Footnote 18.e in MGE Energy's and MGE's 2012 Annual Report on Form 10-K. In addition to the developments noted above, the following discussion is an update to the current status of environmental matters set forth in that Footnote.

Water Quality

EPA's Proposed Effluent Limitations Guidelines and Standards for Steam Electric Power Generating Point Source Category

In June 2013, the EPA published a proposed rule focusing on the reduction of metals and other pollutants in wastewater from new and existing coal-burning electric generation plants. The proposed rule is technology-driven in that specific technologies may need to be installed and sites that already have these technologies will be deemed to meet the requirements of the rule. The proposed rule as written will likely affect Columbia and the Elm Road Units. The EPA has announced that it plans to finalize the rule by May 22, 2014, and that it expects the rule to affect power plants as they renew their water discharge permits beginning in July 2017. We are currently evaluating the rule's specific impacts at these sites and will not know the full extent of those impacts until the rule is finalized.

Air Quality

Greenhouse Gas Regulation

President Obama's Executive Order Regarding Climate Change and his Directive to the EPA Regarding Power Sector Pollution Standards

In June 2013, President Obama introduced his "National Climate Action Plan." The plan consists of planned federal actions and directives to several federal agencies, including the EPA, on a range of activities and policies designed to reduce greenhouse gas emissions in the United States. The directive to the EPA, which President Obama provided to the EPA in a memo, to develop carbon pollution standards for the electric power sector, has the greatest potential effect on MGE's operations. See the GHG New Performance Standards discussion below for additional details.

GHG New Source Performance Standards (NSPS)

On March 27, 2012, the EPA proposed GHG New Source Performance Standards (NSPS) for coal fired and natural gas combined cycle (NGCC) EGUs. The proposal applies to new EGUs only. The EPA had planned to propose NSPS for existing units some time in 2013 as part of a settlement agreement. There was a fair amount of uncertainty regarding the EPA's plans for existing units. In June 2013, however, President Obama provided a directive to the EPA regarding NSPS for new, modified, reconstructed and existing electric power plants.

The June 2013 directive instructed the EPA to re-propose greenhouse gas standards for new power plants by September 2013, based on comments received on their original rule proposal, and to finalize those standards in a timely manner. The directive also instructed the EPA to propose standards, regulations or guidelines for modified, reconstructed and existing power plants under Sections 111(b) and 111(d) of the Clean Air Act no later than June 2014 and to finalize those standards by June 2015. The directive further instructs the EPA to require states to submit implementation plans for this rule by June 30, 2016. The Directive asks the EPA to aim to develop a market-based approach towards carbon reduction, promote cleaner technologies while keeping energy options diverse, work with other government agencies to keep energy affordable and improve energy efficiencies, and engage States, the power industry, and the other key stakeholders in establishing and implementing strategies for greenhouse gas reductions.

While it is too early to predict with any certainty the specific costs that MGE will incur with implementation of a greenhouse gas reduction rule introduced under Section 111 of the Clean Air Act, it is reasonable to assume that costs of implementation of this rule could be significant.

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

See Footnote 4 for information regarding the Columbia environmental construction project.

Title V Operating Permit Petition

As discussed in Footnote 18.e in MGE Energy's and MGE's 2012 Annual Report on From 10-K, the renewal of WPL's Title V operating permit for Columbia has been the subject of litigation initiated by a citizen group. On February 4, 2013, the parties involved dismissed the litigation without prejudice. The consideration of the permit renewal is still pending at the EPA but is expected to be closed out due to the resolution of the Clean Air Act litigation discussed below. 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 co-owners (WPL, WPS, and MGE) failed to comply with appropriate pre-construction review and permitting requirements and, as a result, violated the PSD program requirements, the Title V operating permit requirements of the CAA and the Wisconsin State Implementation Plan (SIP). In April 2013, the EPA filed a lawsuit against the co-owners of Columbia asserting similar allegations. In September 2010 and April 2013, Sierra Club filed lawsuits against WPL alleging violations of the CAA at Columbia and other WPL-operated Wisconsin facilities.

In April 2013, WPL, as operator, along with the other owners of Columbia (MGE and WPS), entered into a consent decree with the EPA and the Sierra Club to resolve these claims, while admitting no liability. In June 2013, the consent decree was approved and entered by the Court. The consent decree requires installation of the following emission controls at Columbia: scrubbers and baghouses at Columbia Units 1 and 2 by December 31, 2014 and an SCR system at Columbia Unit 2 by December 31, 2018. In addition, the consent decree establishes emission rate limits for SO2, nitrogen oxide (NOx), and particulate matter for Columbia Units 1 and 2. The consent decree also includes annual plant-wide emission caps for SO2 and

NOx for Columbia. MGE also paid approximately $0.2 million as its share of a civil penalty and will complete approximately $0.6 million in environmental mitigation projects. MGE currently expects to recover any material costs that could be incurred by MGE related to the terms of the final consent decree from MGE's electric customers, except for costs related to the civil penalty.

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, 2014. At June 30, 2013, MGE has outstanding a $4.4 million interest in these receivables. MGE retains the servicing responsibility for these receivables. As of June 30, 2013, 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, 2013, 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 2013 and the next four years on the loans are:

(In thousands)		2013		2014		2015		2016		2017
Chattel Paper	$	372	$	577	$	891	$	815	$	405

Legal Matters - MGE Energy and MGE.

MGE is involved in various legal matters that are being defended and handled in the normal course of business, including the Columbia matters discussed above. MGE maintains accruals for such costs that are probable of being incurred and subject to reasonable estimation. The accrued amount for these matters is not material to the financial statements.

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, 2013, the future commitments related to these purchase contracts were as follows:

(In thousands)		2013		2014		2015		2016		2017
Coal^(a)	$	14,686	$	16,287	$	9,921	$	3,770	$	1,040
Natural gas supply^(b)		14,178		13,836		-		-		-
Purchase power^(c)		49,513		48,593		47,667		48,697		49,717
Other		1,798		-		-		-		-
	$	80,175	$	78,716	$	57,588	$	52,467	$	50,757

(a)

Total coal commitments for the Columbia and Elm Road Units, including transportation. Fuel procurement for MGE's jointly owned Columbia and Elm Road Units are handled by WPL and WEPCO, respectively, who are the operators of those facilities. If any minimum purchase obligations must be paid under these contracts, management believes these obligations would be considered costs of service and recoverable in rates.

(b)

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

(c)

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, 2013, MGE has spent $10.3 million related to these projects and has outstanding agreements to purchase $1.4 million in smart grid related products for the remainder of 2013.

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, 2013	December 31, 2012
Commodity derivative contracts	277,295 MWh	444,650 MWh
Commodity derivative contracts	2,940,000 Dth	1,980,000 Dth
FTRs	4,598 MW	2,670 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.

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 market, 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, 2013, and December 31, 2012, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $1.1 million and $0.3 million, respectively.

MGE is a party to 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 consolidated 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, 2013, and December 31, 2012, reflects a loss position of $67.7 million and $72.6 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 consolidated 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, 2013
Commodity derivative contracts	Other current assets	$	521	Derivative liability (current)	$	241
Commodity derivative contracts	Other deferred charges		32	Derivative liability (long-term)		17
FTRs	Other current assets		786	Derivative liability (current)		-
Ten-year PPA	N/A		N/A	Derivative liability (current)		9,200
Ten-year PPA	N/A		N/A	Derivative liability (long-term)		58,530

December 31, 2012
Commodity derivative contracts	Other current assets	$	365	Derivative liability (current)	$	394
Commodity derivative contracts	Other deferred charges		95	Derivative liability (long-term)		11
FTRs	Other current assets		206	Derivative liability (current)		-
Ten-year PPA	N/A		N/A	Derivative liability (current)		9,270
Ten-year PPA	N/A		N/A	Derivative liability (long-term)		63,320

The following tables show the effect of netting arrangements for recognized derivative assets and liabilities that are subject to a master netting arrangement or similar arrangement on the balance sheet.

Offsetting of Derivative Assets
(In thousands)		Gross amounts		Gross amounts offset in balance sheet		Collateral posted against derivative positions		Net amount presented in balance sheet
June 30, 2013
Commodity derivative contracts	$	553	$	(258)	$	-	$	295
FTRs		786		-		-		786

December 31, 2012
Commodity derivative contracts	$	460	$	(405)	$	-	$	55
FTRs		206		-		-		206

Offsetting of Derivative Liabilities
(In thousands)		Gross amounts		Gross amounts offset in balance sheet		Collateral posted against derivative positions		Net amount presented in balance sheet
June 30, 2013
Commodity derivative contracts	$	258	$	(258)	$	-	$	-
Ten-year PPA		67,730		-		-		67,730

December 31, 2012
Commodity derivative contracts	$	405	$	(405)	$	-	$	-
Ten-year PPA		72,590		-		-		72,590

The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheet at June 30, 2013 and 2012, and the consolidated income statement for the three and six months ended June 30, 2013 and 2012.

		2013				2012
(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,	$	69,197	$	259	$	71,514	$	672
Change in unrealized (gain) loss		(1,963)		-		9,791		-
Realized loss reclassified to a deferred account		(388)		388		(222)		222
Realized gain (loss) reclassified to income
statement		(197)		11		(1,721)		(176)
Balance at June 30,	$	66,649	$	658	$	79,362	$	718

Six Months Ended June 30:
Balance at January 1,	$	72,329	$	574	$	42,356	$	1,604
Change in unrealized (gain) loss		(3,660)		-		43,101		-
Realized loss reclassified to a deferred account		(678)		678		(2,880)		2,880
Realized loss reclassified to income
statement		(1,342)		(594)		(3,215)		(3,766)
Balance at June 30,	$	66,649	$	658	$	79,362	$	718

		Realized losses (gains)
(In thousands)		Regulated gas revenues		Fuel for electric generation/ purchased power		Cost of gas sold
Three Months Ended June 30, 2013:
Commodity derivative contracts	$	-	$	(538)	$	-
FTRs		-		(351)		-
Ten-year PPA		-		1,075		-

Three Months Ended June 30, 2012:
Commodity derivative contracts	$	-	$	582	$	-
FTRs		-		96		-
Ten-year PPA		-		1,219		-

Six Months Ended June 30, 2013:
Commodity derivative contracts	$	-	$	(516)	$	608
FTRs		-		(509)		-
Ten-year PPA		-		2,353		-

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

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 consolidated 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, 2013, 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, 2013, and December 31, 2012, 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, 2013, no counterparties have defaulted.

10.

Rate Matters - MGE Energy and MGE.

Rate Proceedings.

On July 26, 2013, the PSCW authorized MGE to freeze electric and natural gas rates at 2013 levels for 2014. The order includes authorizing 100% AFUDC on the Columbia scrubber construction project and deferral of increased costs related to ATC and MISO Schedule 26 fees. As a result of the authorization, approximately $6.2 million associated with a 2012 fuel rule surplus credit will not be required to be refunded to customers and will be amortized in 2014. The fuel credit will accrue interest at MGE's weighted cost of capital. The authorized return on equity will remain unchanged at 10.3%.

On December 14, 2012, the PSCW authorized MGE to increase 2013 rates for retail electric customers by 3.8% or $14.9 million and to increase gas rates by 1.0% or $1.6 million. The change in retail electric rates was driven by costs for new environmental equipment at Columbia, final construction costs for the Elm Road Units, transmission reliability enhancements, and purchased power costs. The authorized return on common stock equity remains unchanged at 10.3%.

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.

Fuel Rules.

Fuel rules require the PSCW and Wisconsin utilities to defer electric fuel-related costs that fall outside a symmetrical cost tolerance band around the amount approved for a utility in its most recent base rate proceedings. Any over/under recovery of the actual costs is determined on an annual basis and will be adjusted in future billings to electric retail customers. The fuel rules bandwidth is currently set at plus or minus 2%. 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, 2013, MGE has deferred $0.4 million (to be returned to customers in a future period) of 2013 electric fuel-related savings that are outside the range authorized by the PSCW.

11.

Fair Value of Financial Instruments - MGE Energy and MGE.

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.

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

At June 30, 2013, and December 31, 2012, the carrying amount of cash and cash equivalents 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, 2013, and December 31, 2012. Since the long-term debt is not traded in an active market, it is classified as Level 2. The estimated fair market value of MGE Energy's and MGE's financial instruments are as follows:

(In thousands)		June 30, 2013				December 31, 2012
(In thousands)		Carrying Amount		Fair Value		Carrying Amount		Fair Value
MGE Energy
Assets:
Cash and cash equivalents	$	42,333	$	42,333	$	46,357	$	46,357
Liabilities:
Short-term debt - commercial paper		14,000		14,000		-		-
Long-term debt*		360,472		401,854		361,805		427,456

MGE
Assets:
Cash and cash equivalents	$	5,310	$	5,310	$	6,350	$	6,350
Liabilities:
Short-term debt - commercial paper		14,000		14,000		-		-
Long-term debt*		360,472		401,854		361,805		427,456

*Includes long-term debt due within one year.

Recurring Fair Value Measurements.

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, 2013
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	553	$	553	$	-	$	-
Total Assets	$	553	$	553	$	-	$	-
Liabilities:
Derivatives, net	$	66,649	$	(207)	$	-	$	66,856
Deferred compensation		2,174		-		2,174		-
Total Liabilities	$	68,823	$	(207)	$	2,174	$	66,856

MGE
Assets:
Exchange-traded investments	$	164	$	164	$	-	$	-
Total Assets	$	164	$	164	$	-	$	-
Liabilities:
Derivatives, net	$	66,649	$	(207)	$	-	$	66,856
Deferred compensation		2,174		-		2,174		-
Total Liabilities	$	68,823	$	(207)	$	2,174	$	66,856

		Fair Value as of December 31, 2012
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	320	$	320	$	-	$	-
Total Assets	$	320	$	320	$	-	$	-
Liabilities:
Derivatives, net	$	72,329	$	(17)	$	-	$	72,346
Deferred compensation		2,010		-		2,010		-
Total Liabilities	$	74,339	$	(17)	$	2,010	$	72,346

MGE
Assets:
Exchange-traded investments	$	117	$	117	$	-	$	-
Total Assets	$	117	$	117	$	-	$	-
Liabilities:
Derivatives, net	$	72,329	$	(17)	$	-	$	72,346
Deferred compensation		2,010		-		2,010		-
Total Liabilities	$	74,339	$	(17)	$	2,010	$	72,346

No transfers were made in or out of Level 1 or Level 2 for the six months ended June 30, 2013.

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 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 from 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 MGE's 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		96.3%
Off peak		95.7%
Counterparty fuel mix:
Internal generation		50 % - 70 %
Purchased power		50 % - 30 %

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 consolidated 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)		2013		2012		2013		2012
Beginning balance,	$	(69,598)	$	(71,188)	$	(72,346)	$	(40,661)
Realized and unrealized gains (losses):
Included in regulatory liabilities (assets)		2,743		(8,392)		5,490		(38,919)
Included in other comprehensive income		-		-		-		-
Included in earnings		(44)		(1,726)		(1,351)		(3,228)
Included in current assets		(123)		(94)		(123)		(145)
Purchases		6,162		1,917		11,724		1,967
Sales		-		32		(2)		64
Issuances		-		-		-		-
Settlements		(5,996)		(129)		(10,248)		1,342
Transfers in and/or out of Level 3		-		-		-		-
Balance as of June 30,	$	(66,856)	$	(79,580)	$	(66,856)	$	(79,580)
Total gains (losses) included in earnings attributed to the change in unrealized gains (losses) related to assets and liabilities held at June 30,^(a)

	$	-	$	-	$	-	$	-

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 (a).

		Three Months Ended				Six Months Ended
		June 30,				June 30,
(In thousands)		2013		2012		2013		2012
Purchased Power Expense	$	(44)	$	(1,726)	$	(1,351)	$	(3,228)
Cost of Gas Sold Expense		-		-		-		-
Regulated Gas Revenues		-		-		-		-
Total	$	(44)	$	(1,726)	$	(1,351)	$	(3,228)

(a)

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.

Presentation of Comprehensive Income.

In February 2013, the FASB issued authoritative guidance within the Codification's Comprehensive Income topic that provides guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. Reclassification adjustments will be presented either on the financial statement where income is presented or as a separate disclosure in the notes to the financial statements. This authoritative guidance became effective January 1, 2013. The authoritative guidance had no effect on our financial statement presentation or notes to the financial statements.

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. On January 31, 2013, the FASB issued additional authoritative guidance which clarified the scope of disclosures about offsetting assets and liabilities. The revised guidance limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. This authoritative guidance became effective January 1, 2013. The authoritative guidance did not have a financial impact, but required additional disclosures. See Footnote 9 for additional information.

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.

In February 2013, the FASB issued authoritative guidance within the Codification's Balance Sheet topic that provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This authoritative guidance will become effective January 1, 2014. The authoritative guidance will not have a financial or disclosure impact.

Presentation of an Unrecognized Tax Benefit.

In July 2013, the FASB issued authoritative guidance within the Codification's Income Statement topic that provides guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exist. The authoritative guidance was issued to eliminate diversity in practice by providing guidance on the presentation of unrecognized tax benefits. This authoritative guidance will become effective January 1, 2014. The authoritative guidance will not have a financial statement or disclosure impact, unless MGE Energy or its subsidiaries are in a net operating loss position.

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 2012 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)

MGE Energy

Electric

Gas

Non-

Regulated

Energy

Transmission

Investment

All

Others

Consolidation/

Elimination

Entries

Consolidated

Total

Three Months Ended June 30, 2013

Operating revenues

96,846

30,042

1,400