INCOME CONTINUATION AGREEMENT

EXHIBIT 10.40

INCOME CONTINUATION AGREEMENT

This Income Continuation Agreement (Agreement) is entered into as of the_____ day of __________ by and between Madison Gas and Electric Company, a Wisconsin corporation (MGE), and __________ (Employee), and shall be effective as of __________. This Agreement supersedes any and all previous Income Continuation Agreements entered into by and between the Employee and MGE, including but not limited to such agreement which was effective __________.

WHEREAS, MGE values the efforts, abilities, and accomplishments of the Employee, and recognizes that the Employee's future services as an Officer are vital to MGE’s continued growth and efficiency, and

WHEREAS, MGE, in order to retain the services of the Employee as an Officer and to compensate for these services, is willing to provide the Employee certain benefits, as set forth below.

NOW THEREFORE, it is mutually agreed that:

1.

Definitions . Whenever capitalized and used in the Agreement, the following terms shall have the respective meanings stated below:

(a)

" Accumulations " means the aggregate of the Employee's contributions, and earnings credited thereto, made under and as described in the Retirement Plan.

(b)

“ Code ” means the Internal Revenue Code of 1986, as amended.

(c)

" Designated Percentage " means the percentage under the table in Section 3(c), based on the age of the Employee in completed whole years and completed whole months on the date of his or her Separation from Service, Disability or death.

(d)

“ Disability ” means the Employee’s inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.

(e)

" Earnings " means "earnings" as defined in the Retirement Plan plus any amount deferred by the Employee under any nonqualified deferred compensation agreement with or plan of MGE and any amount payable pursuant to any severance plan, program or agreement with MGE.

(f)

" Final Average Earnings " means the average of the Employee's monthly Earnings for the 60 consecutive calendar month period for which the Employee has Years of Service Credit immediately before the Employee's date of Separation from Service, Disability or death. However, if as of the date of Separation from Service, Disability or death, the Employee has Earnings for less than 60 consecutive calendar months for which he or she has received Years of Service Credit, his or her Final Average Earnings shall be based on the number of consecutive calendar months during which he or she has such Earnings.

(g)

" Income Continuation Amount " means the monthly amount of the annuity payable to the Employee under this Agreement.

(h)

" Normal Retirement Date " means, where the Employee's 65th birthday occurs within the first 15 days of a calendar month, the first day of that month; otherwise, the first day of the month next following the Employee's 65th birthday.

(i)

" Officer " means an employee who has been named an officer of MGE by the board of directors of MGE.

(j)

" Qualified Plan Benefit Payable " means the monthly amount, if any, of the single life annuity payable to the Employee under the Retirement Plan on the date of commencement of the Income Continuation Amount paid under this Agreement, as modified by Sections 3(d), 4(c) or 6(a), or of this Agreement, as applicable.

(k)

" Retirement Plan " means the Madison Gas and Electric Company Retirement Plan, revised effective March 1, 1999, and as amended thereafter from time to time.

(l)

“ Separation from Service ” means a termination of services provided by the Employee to MGE, as determined by MGE in accordance with Treasury Regulation section 1.409A-1(h), but excluding a termination of services by reason of the Employee’s death or Disability. In determining whether an Employee has experienced a Separation from Service, the following provisions shall apply:

(1)

Subject to part (2) below, an Employee’s Separation from Service shall occur when the Employee has experienced a termination of employment with MGE. The Employee shall be considered to have experienced a termination of employment when the facts and circumstances indicate that the Employee and MGE reasonably anticipate that either:

(i)

no further services will be performed for MGE after a certain date, or

(ii)

that the level of bona fide services the Employee will perform for MGE after such date (whether as an employee or consultant) will permanently decrease to no more than 20% of the average level of bona fide services performed by such Employee (whether as an employee or consultant) over the immediately preceding 36-month period (or the full period of services to MGE if the Employee has been providing services to the MGE less than 36 months).

(2)

If the Employee is on military leave, sick leave, or other bona fide leave of absence, the employment relationship between the Employee and MGE shall be treated as continuing intact, provided that the period of such leave does not exceed six months, or if longer, so long as the Employee retains a right to reemployment with MGE under an applicable statute or by contract. If the period of a military leave, sick leave, or other bona fide leave of absence exceeds six months and the Employee does not retain a right to reemployment under an applicable statute or by contract, the employment relationship shall be considered to be terminated for purposes of this Plan as of the first day immediately following the end of such six-month period. In applying the provisions of this paragraph, a leave of absence shall be considered a bona fide leave of absence only if there is a reasonable expectation that the Employee will return to perform services for MGE.

(m)

" Ten-Year Certain and Life Annuity " means a series of equal monthly payments, payable for the life of the Employee, provided, that if the Employee dies before receiving 120 such payments, such payments shall continue to be paid to the Employee's beneficiary designated pursuant to Section 8 until the total number of such payments made to the Employee and such beneficiary equals 120.

(n)

" Years of Service Credit " means the Employee's "years of service" with MGE as defined in the Retirement Plan.

2.

Employee Services . Except as may be provided in any other agreement or contract between MGE and the Employee, either MGE or the Employee may terminate the Employee's employment or status as an Officer at any time and for any reason.

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3.

Retirement .

(a)

Eligibility . If the Employee's Separation from Service or Disability occurs on or after the date the Employee has attained age 55, the Employee will be deemed to have retired, and MGE will pay or cause to be paid to the Employee, with respect to the earlier to occur of such events, the Income Continuation Amount for a retired Employee in the form of a Ten-Year Certain and Life Annuity.

(b)

Amount . The Income Continuation Amount for a retired Employee is a monthly amount equal to:

(1)

the Designated Percentage of Final Average Earnings, minus

(2)

the Qualified Plan Benefit Payable as described in Section 1(j), [multiplied by

(3)

the vesting percentage set forth in the table below, based on the number of the Employee’s Years of Service Credit as of the date of the Employee’s Separation from Service or Disability.]

(c)

Designated Percentages Table .

If the Employee’s Separation from Service or Disability is on a date other than his or her birth date, the Designated Percentage shall be prorated to reflect his or her age in completed whole years and in completed whole months, as follows: Completed whole months shall be reflected by determining the difference between the percentage attributable to the current age in years of the Employee and the percentage attributable to the age in years of the Employee

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on his or her next birth date, multiplied by a fraction, the numerator of which is the number of completed whole months of age of the Employee (in excess of his or her age in completed hole years) and the denominator of which is 12. The sum of such prorated percentage (reflecting age in completed whole months) and the percentage attributable to age in completed whole years determined using the above table equals the Designated Percentage for the Employee.

(d)

Qualified Plan Benefit Payable . For the purpose of determining the Qualified Plan Benefit Payable for a retired Employee, the Employee's actual Accumulations at Separation from Service or Disability shall be converted to a monthly annuity commencing on the first day of the month coinciding with or next following the date of the Employee's Separation from Service or Disability and continuing for his or her lifetime. Such conversion shall be

(1)

based upon the Employee's age at Separation from Service or Disability, using the mortality table described in the Retirement Plan for this purpose, and

(2)

using an interest rate equal to the greater of 8 percent or the rate that would be used by the Pension Benefit Guaranty Corporation for a trusteed single-employer plan to value immediate annuities during the month immediately before the month of commencement of the Employee's Income Continuation Amount.

(e)

Commencement . The Income Continuation Amount for a retired Employee shall be paid beginning on the first business day of the month coinciding with or next following the Employee's Separation from Service. Notwithstanding the foregoing, if on the date of the Employee’s Sepa