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Derivative and Hedging Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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:

	March 31, 2020		December 31, 2019
Commodity derivative contracts	498,960	MWh	417,840	MWh
Commodity derivative contracts	4,650,000	Dth	6,605,000	Dth
FTRs	1,108	MW	2,750	MW
PPA	1,300	MW	1,450	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 March 31, 2020, and December 31, 2019, the cost basis of exchange traded derivatives and FTRs exceeded their fair value by $1.7 million and $1.4 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 as of March 31, 2020, and December 31, 2019, reflected a loss position of $23.6 million and $25.4 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, 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, 2020
Commodity derivative contracts^(a)	$	599	$	2,159	Derivative liability (current)^(b)
Commodity derivative contracts^(a)		74		240	Derivative liability (long-term)
FTRs		9		-	Other current assets
PPA		N/A		10,740	Derivative liability (current)
PPA		N/A		12,870	Derivative liability (long-term)

December 31, 2019
Commodity derivative contracts^(a)	$	157	$	1,521	Derivative liability (current)^(b)
Commodity derivative contracts^(a)		73		217	Derivative liability (long-term)
FTRs		73		-	Other current assets
PPA		N/A		10,100	Derivative liability (current)
PPA		N/A		15,340	Derivative liability (long-term)

(a) As of March 31, 2020, and December 31, 2019, collateral of $1.7 million and $1.5 million, respectively, was posted against and netted with derivative liability positions on the consolidated balance sheets.

(b) As of March 31, 2020, and December 31, 2019, MGE posted $0.3 million and $0.1 million, respectively, as other current assets on the consolidated balance sheets.

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
March 31, 2020
Commodity derivative contracts	$	673	$	(652)	$	-	$	21
FTRs		9		-		-		9

December 31, 2019
Commodity derivative contracts	$	230	$	(192)	$	-	$	38
FTRs		73		-		-		73

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
March 31, 2020
Commodity derivative contracts	$	2,399	$	(652)	$	(1,747)	$	-
PPA		23,610		-		-		23,610

December 31, 2019
Commodity derivative contracts	$	1,738	$	(192)	$	(1,546)	$	-
PPA		25,440		-		-		25,440

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.

		2020				2019
(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 at January 1,	$	26,875	$	1,100	$	31,830	$	377
Unrealized (gain) loss		(689)		-		(922)		-
Realized (loss) gain reclassified to a deferred account		(1,063)		1,063		(260)		260
Realized gain (loss) reclassified to income statement		204		(1,733)		375		(378)
Balance at March 31,	$	25,327	$	430	$	31,023	$	259

		Realized losses (gains)
		2020				2019
(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	$	680	$	1,607	$	270	$	277
FTRs		(65)		-		(135)		-
PPA		(693)		-		(409)		-

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 March 31, 2020, no collateral was required to be, or had been, posted. Certain counterparties extend MGE a credit limit. If MGE exceeds these limits, the counterparties may require collateral to be posted. As of March 31, 2020, and December 31, 2019, 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, 2020, no counterparties had defaulted.