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Derivative and Hedging Instruments
 6 Months Ended
Jun. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative and Hedging Instruments
10.
Derivative and Hedging Instruments - MGE Energy and MGE.
a.
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. 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, the derivatives are recognized in the consolidated balance sheets at fair value. MGE's financial commodity 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 depending on whether the derivative is in a net loss or net gain position, respectively. 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.

b.
Notional Amounts.

The gross notional volume of open derivatives is as follows:

 

 

 

June 30, 2022

 

December 31, 2021

Commodity derivative contracts

 

 

315,520

 

 

MWh

 

 

278,000

 

 

MWh

Commodity derivative contracts

 

 

6,090,000

 

 

Dth

 

 

5,735,000

 

 

Dth

FTRs

 

 

4,204

 

 

MW

 

 

2,127

 

 

MW

PPA

 

 

—

 

 

MW

 

 

250

 

 

MW

 

c.
Financial Statement Presentation.

 

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 electricity transmission paths in the MISO market, MGE holds financial transmission rights (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 offset with a corresponding 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. As of June 30, 2022, and December 31, 2021, the fair value of exchange traded derivatives and FTRs exceeded their cost basis by $8.5 million and $2.8 million, respectively.

 

MGE was a party to a purchased power agreement that provided MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement was accounted for as a derivative contract and was recognized at its fair value on the consolidated balance sheets. However, the derivative qualified for regulatory deferral and was recognized with a corresponding regulatory asset or liability depending on whether the fair value was in a loss or gain position. The actual cost was 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 sheets. 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, instruments are netted with the same counterparty under a master netting agreement as well as the netting of collateral.

 

 

 

Derivative

 

 

Derivative

 

 

 

(In thousands)

 

Assets

 

 

Liabilities

 

 

Balance Sheet Location

June 30, 2022

 

 

 

 

 

 

 

 

Commodity derivative contracts(a)

 

$

11,240

 

 

$

3,512

 

 

Other current assets

Commodity derivative contracts(a)

 

 

826

 

 

 

182

 

 

Other deferred charges

FTRs

 

 

112

 

 

 

—

 

 

Other current assets

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

Commodity derivative contracts(a)

 

$

2,959

 

 

$

811

 

 

Other current assets

Commodity derivative contracts(a)

 

 

420

 

 

 

38

 

 

Other deferred charges

FTRs

 

 

227

 

 

 

—

 

 

Other current assets

PPA

 

N/A

 

 

 

2,140

 

 

Derivative liability (current)

 

(a)
As of June 30, 2022 and December 31, 2021, MGE received collateral of $6.5 million and $1.3 million, respectively, from counterparties under a master netting agreement for outstanding exchange traded derivative positions. The fair value of the derivative asset disclosed in this table has not been reduced for the collateral received.

 

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 consolidated balance sheets.

 

Offsetting of Derivative Assets

(In thousands)

 

Gross Amounts

 

 

Gross Amounts Offset in Balance Sheets

 

 

Collateral Posted Against Derivative Positions

 

 

Net Amount Presented in Balance Sheets

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

12,066

 

 

$

(3,694

)

 

$

(6,512

)

 

$

1,860

 

FTRs

 

 

112

 

 

 

—

 

 

 

—

 

 

 

112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

3,379

 

 

$

(849

)

 

$

(1,254

)

 

$

1,276

 

FTRs

 

 

227

 

 

 

—

 

 

 

—

 

 

 

227

 

 

Offsetting of Derivative Liabilities

(In thousands)

 

Gross Amounts

 

 

Gross Amounts Offset in Balance Sheets

 

 

Collateral Posted Against Derivative Positions

 

 

Net Amount Presented in Balance Sheets

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

3,694

 

 

$

(3,694

)

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

849

 

 

$

(849

)

 

$

—

 

 

$

—

 

PPA

 

 

2,140

 

 

 

—

 

 

 

—

 

 

 

2,140

 

 

The following tables summarize the unrealized and realized gains/losses related to the derivative instruments on the consolidated balance sheets and the consolidated statements of income.

 

 

 

2022

 

 

2021

 

(In thousands)

 

Current and Long-Term Regulatory Asset (Liability)

 

 

Other Current Assets

 

 

Current and Long-Term Regulatory Asset (Liability)

 

 

Other Current Assets

 

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of April 1,

 

$

(9,641

)

 

$

267

 

 

$

11,059

 

 

$

173

 

Unrealized gain

 

 

(5,988

)

 

 

—

 

 

 

(8,049

)

 

 

—

 

Realized gain (loss) reclassified to a deferred account

 

 

1,551

 

 

 

(1,551

)

 

 

(366

)

 

 

366

 

Realized gain (loss) reclassified to income statement

 

 

5,594

 

 

 

1,123

 

 

 

(63

)

 

 

(19

)

Balance as of June 30,

 

$

(8,484

)

 

$

(161

)

 

$

2,581

 

 

$

520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1,

 

$

(617

)

 

$

770

 

 

$

13,989

 

 

$

1,162

 

Unrealized gain

 

 

(17,321

)

 

 

—

 

 

 

(11,637

)

 

 

—

 

Realized gain (loss) reclassified to a deferred account

 

 

2,830

 

 

 

(2,830

)

 

 

(416

)

 

 

416

 

Realized gain (loss) reclassified to income statement

 

 

6,624

 

 

 

1,899

 

 

 

645

 

 

 

(1,058

)

Balance as of June 30,

 

$

(8,484

)

 

$

(161

)

 

$

2,581

 

 

$

520

 

 

 

 

Realized Losses (Gains)

 

 

 

2022

 

 

2021

 

(In thousands)

 

Fuel for Electric Generation/ Purchased Power

 

 

Cost of Gas Sold

 

 

Fuel for Electric Generation/ Purchased Power

 

 

Cost of Gas Sold

 

Three Months Ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

(5,333

)

 

$

45

 

 

$

(326

)

 

$

33

 

FTRs

 

 

597

 

 

 

—

 

 

 

(55

)

 

 

—

 

PPA

 

 

(2,026

)

 

 

—

 

 

 

430

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30:

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

 

$

(5,645

)

 

$

(836

)

 

$

(521

)

 

$

1,055

 

FTRs

 

 

600

 

 

 

—

 

 

 

(311

)

 

 

—

 

PPA

 

 

(2,642

)

 

 

—

 

 

 

190

 

 

 

—

 

 

MGE's commodity derivative contracts, FTRs, and 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 sheets and are recognized in earnings in the delivery month applicable to the instrument. As a result of the treatment described above, there are no unrealized gains or losses that flow through earnings.

 

Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of June 30, 2022, and December 31, 2021, 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, 2022, no counterparties had defaulted.