Mitochondrial morphology and inheritance of mitochondrial DNA in yeast depend on the dynamin-like GTPase Mgm1. It is present in two isoforms in the intermembrane space of mitochondria both of which are required for Mgm1 function. Limited proteolysis of the large isoform by the mitochondrial rhomboid protease Pcp1/Rbd1 generates the short isoform of Mgm1 but how this is regulated is unclear. We show that near its NH2 terminus Mgm1 contains two conserved hydrophobic segments of which the more COOH-terminal one is cleaved by Pcp1. Changing the hydrophobicity of the NH2-terminal segment modulated the ratio of the isoforms and led to fragmentation of mitochondria. Formation of the short isoform of Mgm1 and mitochondrial morphology further depend on a functional protein import motor and on the ATP level in the matrix. Our data show that a novel pathway, to which we refer as alternative topogenesis, represents a key regulatory mechanism ensuring the balanced formation of both Mgm1 isoforms. Through this process the mitochondrial ATP level might control mitochondrial morphology.