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 refundable or recoverable in gas rates through the PGA or in electric rates as a component of the fuel rules mechanism.

The gross notional volume of open derivatives is as follows:

         
        March 31, 2024

        December 31, 2023

Commodity derivative contracts

340,680

MWh

392,000

MWh

Commodity derivative contracts

5,240,000

Dth

7,180,000

Dth

FTRs

701

MW

1,824

MW

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 March 31, 2024, and December 31, 2023, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $3.0 million and $5.2 million, respectively.

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
March 31, 2024
Commodity derivative contracts(a)	$	449	$	3,264	Other current liabilities
Commodity derivative contracts(a)		42		247	Other deferred liabilities and other
FTRs		11		—	Other current assets

December 31, 2023
Commodity derivative contracts(a)	$	263	$	4,942	Other current liabilities
Commodity derivative contracts(a)		156		882	Other deferred liabilities and other
FTRs		179		—	Other current assets

(a)

As of March 31, 2024, and December 31, 2023, collateral of $3.0 million and $5.4 million, respectively, was posted against and netted with derivative liability positions on the consolidated balance sheets. The fair value of the derivative liability disclosed in this table has not been reduced for the collateral posted.

The following table shows 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 and Liabilities


(In thousands)	Gross Amounts		Gross Amounts Offset in Balance Sheets			Collateral Posted Against Derivative Positions			Net Amount Presented in Balance Sheets
March 31, 2024
Assets
Commodity derivative contracts	$	491	$	(491	)	$	—		$	—
FTRs		11		—			—			11
Liabilities
Commodity derivative contracts		3,511		(491	)		(3,020	)		—

December 31, 2023
Assets
Commodity derivative contracts	$	419	$	(419	)	$	—		$	—
FTRs		179		—			—			179
Liabilities
Commodity derivative contracts		5,824		(419	)		(5,405	)		—

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.


	2024						2023
(In thousands)	Current and Long-Term Regulatory Asset			Other Current Assets			Current and Long-Term Regulatory Asset			Other Current Assets
Three Months Ended March 31:
Balance as of January 1,	$	5,226		$	1,569		$	5,094		$	2,747
Unrealized loss		2,140			—			14,303			—
Realized (loss) gain reclassified to a deferred account		(2,157	)		2,157			(6,917	)		6,917
Realized loss reclassified to income statement		(2,200	)		(3,451	)		(4,667	)		(9,209	)
Balance as of March 31,	$	3,009		$	275		$	7,813		$	455


	Realized Losses (Gains)
	2024					2023
(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 March 31:
Commodity derivative contracts	$	2,426		$	3,265	$	7,445		$	6,451
FTRs		(40	)		—		(20	)		—

MGE's commodity derivative contracts and FTRs 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 March 31, 2024, and December 31, 2023, 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 March 31, 2024, no counterparties had defaulted.