For generations, we have put innovation to work at MGE Energy. It is embedded in our culture. For us, innovation is not just a new product or technology. Instead, innovation is fundamental to how we conduct and build our business. It is an integral part of our process. At MGE Energy, we encourage our employees to generate ideas and take initiative-to imagine how things can be better.

Because of our innovative approach, MGE Energy stands out year after year as an industry leader-in financial performance, in serving customers and in environmental stewardship. We create the solutions that address the challenges we face.

Financial performance
Innovation turns creativity into success. Innovation drives business growth, increases the bottom line and produces results for our shareholders.

MGE Energy reached a milestone when its assets topped $1 billion in 2007. In the last five years, assets have grown from $726 million to $1.1 billion.

This steady growth in assets helped produce record earnings of $2.27 per share in 2007. Sales growth in electric deliveries to the residential and commercial sectors also contributed to these earnings. Your company has produced record earnings for four of the last five years.

In 2007, your Board of Directors raised the regular quarterly dividend to $0.355 per share on the company's common stock. The amount of the dividend increase was double 2006's change and the largest increase in 15 years. Cash dividends paid in 2007 totaled $1.41 per share. MGE Energy is one of only 95 U.S. companies and one of six electric utilities to raise dividends annually for 30 or more consecutive years.

Independent rating agencies have taken note of our performance. Madison Gas and Electric Co. (MGE), our main subsidiary, maintained the highest bond rating (AA-) of all investor-owned, combination utilities in the nation from Standard & Poor's. Likewise, Moody's Investor Service gives MGE the high mark of Aa2 for its sound business strategy and supportive regulatory environment.

MGE Energy's financial performance earned one of Value Line's top ratings for financial strength and its highest ranking for a safe investment.

Energy future
Technology is shaping the future of our industry. We are investing in new projects that provide reliable energy and environmental stewardship.

I am proud that we recently commissioned a new 30-megawatt, MGE Energy wind farm. In the last year, our wind energy capacity increased from 11 to 87 megawatts with the new project and two other wind farms from which we purchase energy.

This increase in renewable energy has allowed us to significantly expand our green pricing program and lower the cost of our green pricing for customers. Our Green Power Tomorrow program provides a clean mix of solar and wind power.

While these renewable energy projects are moving forward, we also are developing new baseload energy. MGE Energy is investing in a cleaner coal power plant expansion on Lake Michigan. This state-of-the-art generation facility will supply affordable, reliable energy with far lower emission rates than standard coal-fired plants.

Commitments to the environment
As we modernize our fleet of electric generation, we recognize our responsibility to protect the environment. MGE developed a 10-year electric supply plan-called Energy 2015-that is anticipated to produce significantly lower emission rates. We expect the combination of more green energy, switching to new coal generation, greater customer conservation and new technologies to drive down emission rates for carbon dioxide, sulfur dioxide, nitrogen oxide, particulates and mercury.

Part of the way we pursue environmental innovation is to invest in demonstration projects. For example, we have more than a dozen solar photovoltaic demonstrations in our service area. We learn which specific solar technologies are most effective in our climate and best serve our customers.

Prospering economy
Innovation goes hand-in-hand with the rapidly growing, knowledge-based economy in our service area. Madison is in the center of the Midwest's I-Q Corridor. In fact, bizjournals.com lists Madison as the fourth "brainiest" medium-sized city in the nation.

For years, our company has been in step with the area's emerging economies-first the high-tech fields and more recently the biotech industry. Life sciences is a $5 billion industry in Wisconsin, and it's centered in Madison. With $125 million earmarked for a new federal bioenergy research center here, we expect the biofuels sector to be the next significant frontier.

Our service territory is not just a high-tech powerhouse. The greater Madison area also is a wonderful place to live. Middleton, a flourishing suburb, was named No. 1 of the 100 "Best Places to Live" nationally by Money magazine. It's no wonder our area is growing. From 2000 to 2030, Dane County's population is estimated to grow 36%-adding more than 150,000 new residents.

Projects to meet growing demand
This vibrant growth requires infrastructure to meet increasing energy demands. In addition to investing in new generation, we also continually improve the systems that deliver energy. Just southwest of Madison, Fitchburg and Verona are rapidly expanding. In 2007, MGE installed new natural gas lines and other facilities to boost gas capacity for this area.

MGE made significant upgrades to the electric system serving parts of downtown Madison and the University of Wisconsin-Madison campus. To power this fast-growing area, the capacity of the East Campus Substation was increased by 50%. Three new building developments-with a total of $380 million in construction-are significantly increasing electric load within blocks of the substation.

Employee innovation
We encourage our employees to make business improvements through innovation. Our employees were resourceful in creating a flexible database to manage compliance with new federal electric reliability standards. These standards are designed to protect the country's electric system. Other utilities have turned to MGE for advice on creating their own databases.

Another group of creative employees faced a daunting task last summer. Raging floodwaters submerged parts of western Wisconsin where MGE provides natural gas service. Worst hit was the village of Gays Mills. Drawing on their ingenuity, our employees used the assistance of a swift-water rescue team to safely turn off submerged gas valves. Later, employees isolated the areas with the worst flooding to keep other customers in service.

Director changes
Londa J. Dewey, president of The QTI Group, was elected to the Board of Directors effective Feb. 1, 2008. Donna K. Sollenberger resigned from the board in 2007 after seven years of dedicated service. We wish her well in her new job in Houston.

Built on innovation
You can count on us to combine innovation and initiative with our sound business principles. We are committed to excellent customer service and outstanding shareholder returns.

Thank you for your confidence in MGE Energy.

Gary J. Wolter
Chairman, President and Chief Executive Officer