Chairman's Letter

Gary J. Wolter, MGE Energy Chairman, President and Chief Executive Officer

MGE Energy has a long-standing tradition of leadership that puts your company at the forefront of the utility industry.

Time and again we have been recognized as a leader—within the financial markets, within the nation, within our state and within the communities we serve.

We have been the first to take bold new steps, whether building the first commercial wind farm in Wisconsin or commissioning the first mercury-free meter system in the country.

We have been ranked at the top, whether maintaining our high bond rating or providing the most reliable electricity. And, we have been among the best, whether building our award-winning green power program or providing a safe investment for our shareholders. In 2009, we were leaders yet again.

ACCOMPLISHMENTS IN 2009. We have a history of sound financial management. This year, Madison Gas and Electric Co. (MGE), our main subsidiary, maintained the highest bond rating (AA-) of all the investor-owned, combination utilities in the nation from Standard & Poor’s (S&P).

Also, in 2009, MGE received the Green Power Program of the Year Award from the Department of Energy (DOE) and the Environmental Protection Agency for expanding our green energy program. Additionally, MGE’s electric service reliability was rated second highest in the nation in a utility industry survey. Our utility consistently ranks among the top 10 U.S. utilities for reliability.

FINANCIAL STRENGTH. MGE Energy works to build long-term value and stability for investors—both with dividend increases and stock price performance. The last two years have tested our nation’s financial markets. Through it all, MGE Energy has remained a sound investment. Our stock has avoided the market volatility experienced by many other stocks. (See chart below.)

In 2009, your company increased the dividend, which we have done annually for 34 years. We paid an annual cash dividend of $1.46 per share in 2009. In contrast, an S&P report showed 804 companies nationwide cut their dividend payments by $58 billion last year.

The number of dividend cuts sets a record, according to S&P data. MGE Energy is built on a strong foundation of utility investments. In the last five years, we have grown assets from $828 million to $1.3 billion for a 57% increase. New generation assets were a major contributor to this growth.

Our prudent financial decisions and careful budget management have allowed us to weather the economic downturn. MGE Energy produced earnings of $2.21 per share in 2009, down from $2.38 in 2008. Earnings benefitted from favorable weather and one-time gains on local economic development investments in 2008.

Construction at the Oak Creek Power Plant, located on Lake Michigan, began in June of 2005 and will wrap up later in 2010.

MOVING FORWARD ON ENERGY. At MGE, we have an established history of leadership in energy supply. In 2009, we distinguished ourselves in reliability, new technologies and green power.

Our most recent generation investment is the newly expanded Oak Creek Power Plant. MGE Energy has an 8.33% ownership interest in this coal-fired plant operated by We Energies. It uses advanced environmental control technologies to dramatically reduce air emissions compared to standard coal-fired plants.

The first unit of the Oak Creek Power Plant is now delivering energy to MGE. The second unit is scheduled to come online later in 2010. MGE owns approximately 100 megawatts (MW) of this 1,230-MW facility.

MGE's most recent wind farm has 18 turbines and can produce enough energy to power about 12,000 homes.

We also are adding new technology demonstration projects. In 2009, MGE began installing an interconnected network of charging stations for electric vehicles—the first network of its kind in the country. We also own plug-in hybrid electric vehicles, one with an automated monitoring device that monitors fuel efficiency, engine function and more. It communicates directly with the federal Idaho National Laboratory as part of a larger, nationwide study. MGE invests in these types of pilot projects to learn firsthand about our energy future and then share that expertise with our customers.

We also have positioned our company for more wind energy. In 2009, MGE Energy took the initial steps required to develop additional wind farms. The company entered into agreements to purchase land development rights for two wind generation sites for up to 175 MW. The agreements give MGE Energy the option for possible future construction at these sites. MGE Energy currently owns two wind farms and purchases wind power from independent projects. Our present wind capacity is 137 MW.

Mirus Bio, a successful biotech company, graduated from the MGE Innovation Center.

At the local level, MGE worked to ensure reliable energy for the future. In 2009, we took the lead in three major utility installations during the City of Madison’s reconstruction of University Avenue. We completed this project on time and on budget to strengthen the gas and electric reliability in Madison’s growing downtown area.

LEADING IN OUR LOCAL ECONOMY. MGE continues to help grow a technology-based economy in Madison through its support of business incubators, venture funds and local collaboration. Madison remains a leader in technology-based businesses.

The Milken Institute listed Madison in the top 20 of 200 cities for high-tech gross domestic product growth. The index pinpoints areas where jobs are being created and maintained.

MGE serves the Madison metro area—the seat of state government centered in a vibrant downtown. The Madison region has been better than any other large metro area in Wisconsin at sustaining jobs in a difficult economy, according to a 2009 Milken Institute study.

This index highlights the importance of technology transfer—university research that moves beyond the campus into commercial applications. A recent study of Madison start-ups shows more than 250 companies with direct ties to University of Wisconsin-Madison faculty and students. A 2009 survey placed UW-Madison among the top universities for the global reach and influence of its scientific research. The university's research was ranked in the top 20 of more than 4,000 universities worldwide.

BOARD OF DIRECTORS. James L. Possin was elected to the MGE Energy Board of Directors in November 2009. He is a certified public accountant. He was a partner at Grant Thornton LLP from 1990 to 2007 and currently is a tax consultant with James L. Possin CPA, LL C. Possin holds degrees in accounting and law from the University of Wisconsin-Madison.

PROVEN LEADERSHIP. The renowned management expert Peter Drucker once said, “Management is doing things right; leadership is doing the right things.” At MGE Energy, we strive to do both. We remain committed to long-term value for our shareholders and to our tradition of leadership in the markets, in the nation, in the state and in our communities.