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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2021

Estimated Fair Market Value of Financial Instruments

The estimated fair market value of financial instruments are as follows:


	December 31, 2021				December 31, 2020
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
MGE Energy
Assets:
Cash and cash equivalents	$	17,438	$	17,438	$	44,738	$	44,738
Liabilities:
Short-term debt - commercial paper		5,500		5,500		52,500		52,500
Long-term debt(a)		623,449		729,914		528,220		639,271

MGE
Assets:
Cash and cash equivalents	$	6,401	$	6,401	$	4,103	$	4,103
Liabilities:
Short-term debt - commercial paper		5,500		5,500		52,500		52,500
Long-term debt(a)		623,449		729,914		528,220		639,271

(a)

Includes long-term debt due within one year. Excludes debt issuance costs and unamortized discount of $4.3 million and $4.1 million as of December 31, 2021 and 2020, respectively.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis.


	Fair Value as of December 31, 2021
(In thousands)	Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Derivatives, net(b)	$	3,606	$	1,170	$	—	$	2,436
Exchange-traded investments		1,296		1,296		—		—
Total Assets	$	4,902	$	2,466	$	—	$	2,436
Liabilities:
Derivatives, net(b)	$	2,989	$	731	$	—	$	2,258
Deferred compensation		3,653		—		3,653		—
Total Liabilities	$	6,642	$	731	$	3,653	$	2,258

MGE
Assets:
Derivatives, net(b)	$	3,606	$	1,170	$	—	$	2,436
Exchange-traded investments		230		230		—		—
Total Assets	$	3,836	$	1,400	$	—	$	2,436
Liabilities:
Derivatives, net(b)	$	2,989	$	731	$	—	$	2,258
Deferred compensation		3,653		—		3,653		—
Total Liabilities	$	6,642	$	731	$	3,653	$	2,258


	Fair Value as of December 31, 2020
(In thousands)	Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Derivatives, net(b)	$	806	$	436	$	—	$	370
Exchange-traded investments		1,750		1,750		—		—
Total Assets	$	2,556	$	2,186	$	—	$	370
Liabilities:
Derivatives, net(b)	$	14,795	$	370	$	—	$	14,425
Deferred compensation		3,509		—		3,509		—
Total Liabilities	$	18,304	$	370	$	3,509	$	14,425

MGE
Assets:
Derivatives, net(b)	$	806	$	436	$	—	$	370
Exchange-traded investments		603		603		—		—
Total Assets	$	1,409	$	1,039	$	—	$	370
Liabilities:
Derivatives, net(b)	$	14,795	$	370	$	—	$	14,425
Deferred compensation		3,509		—		3,509		—
Total Liabilities	$	18,304	$	370	$	3,509	$	14,425

(b)

As of December 31, 2021, MGE received collateral of $1.3 million 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. No collateral was posted against derivative positions owed to counterparties under a master netting agreement on the consolidated balance sheet as of December 31, 2020.

Significant Unobservable Inputs

The following table presents the significant unobservable inputs used in the pricing model.


	Model Input
Significant Unobservable Inputs	2021	2020
Basis adjustment:
On peak	94.1%	94.2%
Off peak	92.4%	94.5%
Counterparty fuel mix:
Internal generation - range	41%-66%	46%-65%
Internal generation - weighted average	56.6%	56.5%
Purchased power - range	59%-34%	54%-35%
Purchased power - weighted average	43.4%	43.5%

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes the changes in Level 3 commodity derivative assets and liabilities measured at fair value on a recurring basis.


(In thousands)	2021			2020			2019
Balance as of January 1,	$	(14,055	)	$	(26,456	)	$	(32,002	)
Realized and unrealized gains (losses):
Included in regulatory assets		—			12,402			5,545
Included in regulatory liability		14,234			—			—
Included in other comprehensive income		—			—			—
Included in earnings		5,521			(6,439	)		(3,765	)
Included in current assets		237			(87	)		(70	)
Purchases		26,287			22,232			22,974
Sales		—			—			—
Issuances		—			—			—
Settlements		(32,046	)		(15,707	)		(19,138	)
Balance as of December 31,	$	178		$	(14,055	)	$	(26,456	)
Total gains (losses) included in earnings attributed to the change in unrealized gains (losses) related to assets and liabilities held as of December 31,(c)	$	—		$	—		$	—

Gains and Losses Included in Income for Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents total realized and unrealized gains (losses) included in income for Level 3 assets and liabilities measured at fair value on a recurring basis (c).


(In thousands)
Year Ended December 31,	2021			2020			2019
Purchased power expense	$	6,192		$	(5,888	)	$	(3,334	)
Cost of gas sold expense		(671	)		(551	)		(431	)
Total	$	5,521		$	(6,439	)	$	(3,765	)

(c)

MGE's exchange-traded derivative contracts, over-the-counter party transactions, purchased power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair value and are offset in the financial statements with a corresponding regulatory asset or liability.