Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value of Financial Instruments Disclosure [Abstract]

Fair Value of Financial Instruments

11.       Fair Value of Financial Instruments - MGE Energy and MGE.

a.       Fair Value of Financial Assets and Liabilities Recorded at the Carrying Amount.

At December 31,2011 and 2010, the carrying amount of cash, cash equivalents, and outstanding commercial paper approximates fair market value due to the short maturity of those investments and obligations. The estimated fair market value of MGE Energy's and MGE long-term debt is based on quoted market prices for similar financial instruments at December 31. The estimated fair market value of MGE Energy's and MGE's financial instruments are as follows:

		2011				2010
		Carrying		Fair		Carrying		Fair
(In thousands)		Amount		Value		Amount		Value
MGE Energy
Assets:
Cash and cash equivalents	$	41,169	$	41,169	$	7,110	$	7,110
Liabilities:
Short-term debt - bank loans		0		0		19,000		19,000
Short-term debt - commercial paper		0		0		3,500		3,500
Long-term debt*		364,473		432,515		336,973		356,395
MGE
Assets:
Cash and cash equivalents		13,898		13,898		4,494		4,494
Liabilities:
Short-term debt - commercial paper		0		0		3,500		3,500
Long-term debt*		364,473		432,515		336,973		356,395
*Includes long-term debt due within one year.

b.       Recurring Fair Value Measurements.

Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The standard clarifies that fair value should be based on the assumptions market participants would use when pricing the asset or liability including assumptions about risk. The standard also establishes a three level fair value hierarchy based upon the observability of the assumptions used and requires the use of observable market data when available. The levels are:

Level 1 - Pricing inputs are quoted prices within active markets for identical assets or liabilities.

Level 2 - Pricing inputs are quoted prices within active markets for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations that are correlated with or otherwise verifiable by observable market data.

Level 3 - Pricing inputs are unobservable and reflect management's best estimate of what market participants would use in pricing the asset or liability.

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

	Fair Value as of December 31, 2011
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	350	$	350	$	0	$	0
Total Assets	$	350	$	350	$	0	$	0
Liabilities:
Derivatives, net(a)	$	42,356	$	1,695	$	0	$	40,661
Deferred compensation(b)		1,725		0		1,725		0
Total Liabilities	$	44,081	$	1,695	$	1,725	$	40,661
MGE
Assets:
Exchange-traded investments	$	188	$	188	$	0	$	0
Total Assets	$	188	$	188	$	0	$	0
Liabilities:
Derivatives, net(a)	$	42,356	$	1,695	$	0	$	40,661
Deferred compensation(b)		1,725		0		1,725		0
Total Liabilities	$	44,081	$	1,695	$	1,725	$	40,661
(a)     These amounts are shown gross and exclude $3.0 million of collateral that was posted
against derivative positions with counterparties.
(b)     The deferred compensation liability at December 31, 2011 was transferred from Level 1 to
Level 2.
	Fair Value as of December 31, 2010
(In thousands)		Total		Level 1		Level 2		Level 3
MGE Energy
Assets:
Exchange-traded investments	$	430	$	430	$	0	$	0
Total Assets	$	430	$	430	$	0	$	0
Liabilities:
Derivatives, net(c)	$	19,230	$	14	$	0	$	19,216
Deferred compensation		1,525		1,525		0		0
Total Liabilities	$	20,755	$	1,539	$	0	$	19,216
MGE
Assets:
Exchange-traded investments	$	260	$	260	$	0	$	0
Total Assets	$	260	$	260	$	0	$	0
Liabilities:
Derivatives, net(c)	$	19,230	$	14	$	0	$	19,216
Deferred compensation		1,525		1,525		0		0
Total Liabilities	$	20,755	$	1,539	$	0	$	19,216
(c)     These amounts are shown gross and exclude $0.5 million of collateral that was posted
against derivative positions with counterparties.

Investments include exchange-traded investment securities valued using quoted prices on active exchanges and are therefore classified as Level 1.

Derivatives include exchange-traded derivative contracts, over-the-counter party transactions, a ten-year purchased power agreement, and FTRs. Most exchange-traded derivative contracts are valued based on unadjusted quoted prices in active markets and are therefore classified as Level 1. A small number of exchange-traded derivative contracts are valued using quoted market pricing in markets with insufficient volumes and are therefore classified as Level 3. Transactions done with an over-the-counter party are on inactive markets and are therefore classified as Level 3. These transactions are valued based on quoted prices with markets with similar exchange traded transactions. The ten-year purchased power agreement (see Footnote 16) was valued using an internally-developed pricing model and therefore classified as Level 3. The model includes both observable and unobservable inputs. Inputs to the model require significant management judgment and estimation. The model uses a forward power pricing curve based on exchange-traded contracts in the electric futures market. As described above, the market prices from this source have insufficient volumes and are classified as Level 3 in the fair value hierarchy. To project future prices beyond the period in which these quoted market prices are available, MGE calculates the price based on forward gas prices and an implied heat rate. MGE considers the assumptions that market participants would use in valuing the asset or liability. This consideration includes assumptions about market risk such as liquidity, volatility and contract duration. The fair value model incorporates discounting, credit, and model risks. FTRs are priced based upon monthly auction results for identical or similar instruments in a closed market with limited data available and are therefore classified as Level 3.

The deferred compensation plan allows participants to defer certain cash compensation into a notional investment account. These amounts are included within other deferred liabilities in the balance sheets of MGE Energy and MGE. The notional investments earn interest based upon the semiannual rate of U.S. Treasury Bills having a 26 Weeks maturity increased by 1% compounded monthly with a minimum annual rate of 7%, compounded monthly. The notional investments are based upon observable market data, however since the deferred compensation obligations themselves are not exchanged in an active market they are classified as Level 2.

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for both MGE Energy and MGE.

(In thousands)
Year Ended December 31,		2011		2010		2009
Balance as of January 1,	$	(19,216)	$	(13,047)	$	(9,219)
Realized and unrealized gains (losses):
Included in regulatory liabilities (assets)		(21,445)		(6,169)		(3,829)
Included in other comprehensive income		0		0		0
Included in earnings		868		(1,482)		(14,489)
Included in current assets		0		0		(24)
Purchases		341		0		0
Sales		144		134		24
Issuances		0		0		0
Settlements		(1,353)		1,348		14,490
Transfers in and/or out of Level 3		0		0		0
Balance as of December 31,	$	(40,661)	$	(19,216)	$	(13,047)
Total gains (losses) included in earnings attributed to the
change in unrealized gains (losses) related to assets and
liabilities held at December 31,(d)	$	0	$	0	$	0

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 for both MGE Energy and MGE(d).

(In thousands)
Year Ended December 31,		2011		2010		2009
Purchased Power Expense	$	868	$	(1,461)	$	(14,642)
Cost of Gas Sold Expense		0		(21)		82
Regulated Gas Revenues		0		0		71
Total	$	868	$	(1,482)	$	(14,489)

(d)MGE's exchange-traded derivative contracts, over-the-counter party transactions, ten-year purchased power agreement, and FTRs are subject to regulatory deferral. These derivatives are therefore marked to fair value and are offset with a corresponding regulatory asset or liability. A portion of MGE's derivative contracts fall under the incentive mechanism within the PGA clause and, prior to 2011, shareholders had the ability to receive a set percentage of the benefit or loss from these deals if certain thresholds were achieved. Under these derivatives, only the gains or losses associated with customers are subject to regulatory deferral. The remaining shareholder portion is reflected in other comprehensive income. As a result of the above described treatment, there are no unrealized gains or losses that flow through earnings.