Derivative and Hedging Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Instruments

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, MGE Energy and MGE recognize such derivatives in the consolidated balance sheets at fair value. MGE's 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. 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:

	September 30, 2015	December 31, 2014
Commodity derivative contracts	343,560 MWh	448,000 MWh
Commodity derivative contracts	6,547,500 Dth	4,405,000 Dth
FTRs	3,286 MW	1,854 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 holdsFTRs. 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. At September 30,2015, and December 31,2014, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $0.4 million and $1.6 million, respectively.

MGE is a party to a purchased power agreement that provides MGE with firm capacity and energy during a base term from June 1, 2012, through May 31, 2022. The agreement also allows MGE an option to extend the contract after the base term. The agreement is accounted for as a derivative contract and is recognized at its fair value on the consolidated balance sheets. However, the derivative qualifies for regulatory deferral and is recognized with a corresponding regulatory asset or liability depending on whether the fair value is in a loss or gain position. The fair value of the contract at September 30,2015, and December 31, 2014, reflects a loss position of $57.0 million and $53.4 million, respectively. The actual cost will be 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, MGE Energy and MGE have netted instruments with the same counterparty under a master netting agreement as well as the netting of collateral. At September 30,2015, MGE Energy and MGE had the right to reclaim collateral (a receivable) of $0.8 million.

	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
September 30, 2015
Commodity derivative contracts	Other current assets	$	375	Derivative liability (current)	$	1,196
Commodity derivative contracts	Other deferred charges		65	Derivative liability (long-term)		62
FTRs	Other current assets		370	Derivative liability (current)		-
PPA	N/A		N/A	Derivative liability (current)		8,880
PPA	N/A		N/A	Derivative liability (long-term)		48,070
December 31, 2014
Commodity derivative contracts	Other current assets	$	130	Derivative liability (current)	$	2,262
Commodity derivative contracts	Other deferred charges		93	Derivative liability (long-term)		171
FTRs	Other current assets		642	Derivative liability (current)		-
PPA	N/A		N/A	Derivative liability (current)		6,870
PPA	N/A		N/A	Derivative liability (long-term)		46,560

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 sheet		Collateral posted against derivative positions		Net amount presented in balance sheet
September 30, 2015
Commodity derivative contracts	$	440	$	(431)	$	-	$	9
FTRs		370		-		-		370
December 31, 2014
Commodity derivative contracts	$	223	$	(223)	$	-	$	-
FTRs		642		-		-		642

Offsetting of Derivative Liabilities
(In thousands)		Gross amounts		Gross amounts offset in balance sheet		Collateral posted against derivative positions		Net amount presented in balance sheet
September 30, 2015
Commodity derivative contracts	$	1,258	$	(431)	$	(827)	$	-
PPA		56,950		-		-		56,950
December 31, 2014
Commodity derivative contracts	$	2,433	$	(223)	$	(2,179)	$	31
PPA		53,430		-		-		53,430

The following tables summarize the unrealized and realized gains (losses) related to the derivative instruments on the consolidated balance sheets at September 30,2015 and 2014, and the consolidated income statements for the three and nine months endedSeptember 30,2015 and 2014.

		2015				2014
(In thousands)		Current and long-term regulatory asset		Other current assets		Current and long-term regulatory asset		Other current assets
Three Months Ended September 30:
Balance at July 1,	$	56,048	$	455	$	48,853	$	676
Unrealized loss (gain)		4,036		-		5,329		-
Realized (loss) gain reclassified to a deferred
account		(408)		408		(314)		314
Realized (loss) gain reclassified to income
statement		(2,278)		(91)		(1,184)		(249)
Balance at September 30,	$	57,398	$	772	$	52,684	$	741
Nine Months Ended September 30:
Balance at January 1,	$	54,998	$	1,001	$	63,893	$	411
Unrealized loss (gain)		8,514		-		(18,090)		-
Realized (loss) gain reclassified to a deferred
account		(1,700)		1,700		1,120		(1,120)
Realized (loss) gain reclassified to income
statement		(4,414)		(1,929)		5,761		1,450
Balance at September 30,	$	57,398	$	772	$	52,684	$	741

		Realized losses (gains)
		2015				2014
(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 September 30:
Commodity derivative contracts	$	862	$	(17)	$	480	$	(18)
FTRs		(233)		-		(97)		-
PPA		1,757		-		1,068		-
Nine Months Ended September 30:
Commodity derivative contracts	$	1,860	$	1,742	$	(5,376)	$	(1,367)
FTRs		(607)		-		(929)		-
PPA		3,348		-		461		-

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 above described treatment, there are no unrealized gains or losses that flow through earnings.

The PPA has a provision that may require MGE to post collateral if MGE's debt rating falls below investment grade (i.e., below BBB-). The amount of collateral that it may be required to post varies from $20.0 million to $40.0 million, depending on MGE's nominated capacity amount. As of September 30,2015, no collateral is required to be, or has been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of September 30,2015 and December 31, 2014, certain counterparties were in a net liability of less than $0.1 million.

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 September 30,2015,no counterparties have defaulted.