XML 30 R26.htm IDEA: XBRL DOCUMENT v2.4.0.8
FAIR VALUE
 9 Months Ended
Sep. 30, 2013
Fair Value Disclosures [Abstract]  
FAIR VALUE
FAIR VALUE

Fair Value Measurements

A fair value measurement is required to reflect the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We use a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities.

Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methodologies.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

We determine fair value using a market-based approach that uses observable market inputs where available, and internally developed inputs where observable market data is not readily available. For the unobservable inputs, consideration is given to the assumptions that market participants would use in valuing the asset or liability. These factors include not only the credit standing of the counterparties involved, but also the impact of our nonperformance risk on our liabilities.

When possible, we base the valuations of our risk management assets and liabilities on quoted prices for identical assets in active markets. These valuations are classified in Level 1. The valuations of certain contracts include inputs related to market price risk (commodity or interest rate), price volatility (for option contracts), price correlation (for cross commodity contracts), probability of default, and time value. These inputs are available through multiple sources, including brokers and over-the-counter and online exchanges. Transactions valued using these inputs are classified in Level 2.

Certain assets and liabilities are categorized in Level 3 due to the significance of unobservable or internally-developed inputs. The primary reasons for a Level 3 classification are as follows:
 
•
While forward price curves may have been based on observable information, significant assumptions may have been made regarding monthly shaping and locational basis differentials.
•
Certain transactions were valued using price curves that extended beyond an observable period. Assumptions were made to extrapolate prices from the last observable period through the end of the transaction term, primarily through the use of historically settled data or correlations to other locations.

We have established risk oversight committees whose primary responsibility includes directly or indirectly ensuring that all valuation methods are applied in accordance with predefined policies. The development and maintenance of our forward price curves has been assigned to our risk management department, which is part of the corporate treasury function. This group is separate and distinct from any of the trading functions within the organization. To validate the reasonableness of our fair value inputs, our risk management department compares changes in valuation and researches any significant differences in order to determine the underlying cause. Changes to the fair value inputs are made if necessary.

The following tables show assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:
 
 
September 30, 2013
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Risk Management Assets
 
 

 
 

 
 

 
 

Utility Segments
 
 

 
 

 
 

 
 

Natural gas contracts
 
$
0.9

 
$
1.8

 
$
—

 
$
2.7

Financial transmission rights (FTRs)
 
—

 
—

 
3.4

 
3.4

Coal contracts
 
—

 
—

 
1.5

 
1.5

Nonregulated Segments
 
 

 
 

 
 

 
 

Natural gas contracts
 
9.9

 
42.3

 
21.3

 
73.5

Electric contracts
 
70.1

 
49.0

 
12.8

 
131.9

Total Risk Management Assets
 
$
80.9

 
$
93.1

 
$
39.0

 
$
213.0

 
 
 
 
 
 
 
 
 
Investment in exchange-traded funds
 
$
13.4

 
$
—

 
$
—

 
$
13.4

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 

 
 

 
 

 
 

Utility Segments
 
 

 
 

 
 

 
 

Natural gas contracts
 
$
0.8

 
$
5.2

 
$
—

 
$
6.0

Petroleum product contracts
 
0.2

 
—

 
—

 
0.2

FTRs
 
—

 
—

 
0.4

 
0.4

Coal contracts
 
—

 
—

 
2.7

 
2.7

Nonregulated Segments
 
 

 
 

 
 

 
 

Natural gas contracts
 
16.0

 
26.5

 
9.7

 
52.2

Electric contracts
 
75.6

 
69.9

 
10.1

 
155.6

Total Risk Management Liabilities
 
$
92.6

 
$
101.6

 
$
22.9

 
$
217.1

 
 
 
 
 
 
 
 
 
Contingent consideration related to the acquisition of Compass Energy Services (Compass) *
 
$
—

 
$
—

 
$
7.7

 
$
7.7


*
See Note 4, "Acquisitions," for more information.

 
 
December 31, 2012
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Risk Management Assets
 
 
 
 
 
 
 
 
Utility Segments
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
0.3

 
$
3.1

 
$
—

 
$
3.4

FTRs
 
—

 
—

 
2.1

 
2.1

Petroleum product contracts
 
0.2

 
—

 
—

 
0.2

Coal contracts
 
—

 
—

 
2.5

 
2.5

Nonregulated Segments
 
 
 
 
 
 
 
 
Natural gas contracts
 
21.4

 
36.4

 
5.4

 
63.2

Electric contracts
 
48.4

 
61.3

 
9.6

 
119.3

Total Risk Management Assets
 
$
70.3

 
$
100.8

 
$
19.6

 
$
190.7

 
 
 
 
 
 
 
 
 
Investment in exchange-traded funds
 
$
11.8

 
$
—

 
$
—

 
$
11.8

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Risk Management Liabilities
 
 
 
 
 
 
 
 
Utility Segments
 
 
 
 
 
 
 
 
Natural gas contracts
 
$
1.1

 
$
14.1

 
$
—

 
$
15.2

FTRs
 
—

 
—

 
0.1

 
0.1

Coal contracts
 
—

 
—

 
9.0

 
9.0

Nonregulated Segments
 
 
 
 
 
 
 
 
Natural gas contracts
 
17.7

 
36.9

 
1.5

 
56.1

Electric contracts
 
54.9

 
91.1

 
13.9

 
159.9

Total Risk Management Liabilities
 
$
73.7

 
$
142.1

 
$
24.5

 
$
240.3



The risk management assets and liabilities listed in the tables above include options, swaps, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. For more information on derivative instruments, see Note 3, "Risk Management Activities."

The following tables show net risk management assets (liabilities) transferred between the levels of the fair value hierarchy:
 
 
Nonregulated Segments — Natural Gas Contracts
 
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
 
N/A

 
$
—

 
$
—

 
N/A

 
$
—

 
$
—

Transfers into Level 2 from
 
$
—

 
N/A

 
0.3

 
$
—

 
N/A

 
0.3

Transfers into Level 3 from
 
—

 
2.5

 
N/A

 
—

 
0.4

 
N/A

 
 
Nonregulated Segments — Natural Gas Contracts
 
 
Nine Months Ended September 30, 2013

Nine Months Ended September 30, 2012
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
 
N/A

 
$
—

 
$
—

 
N/A

 
$
—

 
$
—

Transfers into Level 2 from
 
$
—

 
N/A

 
0.3

 
$
—

 
N/A

 
1.7

Transfers into Level 3 from
 
—

 
4.0

 
N/A

 
—

 
3.2

 
N/A


 
 
Nonregulated Segments — Electric Contracts
 
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
 
N/A

 
$
—

 
$
—

 
N/A

 
$
—

 
$
—

Transfers into Level 2 from
 
$
—

 
N/A

 
(0.8
)
 
$
—

 
N/A

 
(1.9
)
Transfers into Level 3 from
 
(0.2
)
 
—

 
N/A

 
—

 
1.0

 
N/A

 
 
Nonregulated Segments — Electric Contracts
 
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
(Millions)
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Transfers into Level 1 from
 
N/A

 
$
—

 
—

 
N/A

 
$
—

 
$
—

Transfers into Level 2 from
 
$
—

 
N/A

 
4.6

 
$
—

 
N/A

 
(5.8
)
Transfers into Level 3 from
 
(0.2
)
 
6.2

 
N/A

 
—

 
(7.8
)
 
N/A



Derivatives are transferred between the levels of the fair value hierarchy primarily due to changes in the source of data used to construct price curves as a result of changes in market liquidity. We recognize transfers between the levels at the value as of the end of the reporting period.

The significant unobservable inputs used in the valuation that resulted in categorization within Level 3 were as follows at September 30, 2013. The amounts and percentages listed in the table below represent the range of unobservable inputs that individually had a significant impact on the fair value determination and caused a transaction to be classified as Level 3.
 
 
Fair Value (Millions)
 
 
 
 
 
 
 
 
Assets
 
Liabilities
 
Valuation Technique
 
Unobservable Input
 
Average or Range
Utility Segments
 
 

 
 

 
 
 
 
 
 

FTRs
 
$
3.4

 
$
0.4

 
Market-based
 
Forward market prices ($/megawatt-month) (1)
 
$180.59
Coal contracts
 
1.5

 
2.7

 
Market-based
 
Forward market prices ($/ton) (2)
 
$12.21 — $14.63

Nonregulated Segments
 
 

 
 

 
 
 
 
 
 

Natural gas contracts
 
21.3

 
9.7

 
Market-based
 
Forward market prices ($/dekatherm) (3)
 
($2.36) — $8.17

 
 
 

 
 

 
 
 
Probability of default(4)
 
11.6% — 51.0%

Electric contracts
 
12.8

 
10.1

 
Market-based
 
Forward market prices ($/megawatt-hours) (3)
 
($7.15) — $9.25

 
 
 
 
 
 
 
 
Probability of default(4)
 
26.0
%
 
 
 

 
 

 
 
 
Option volatilities(5)
 
19.3% — 118.0%

 
 
 
 
 
 
 
 
Monthly curve shaping(6)
 
(37.5)% — 25.6%

Contingent consideration related to the acquisition of Compass
 
N/A

 
7.7

 
Monte Carlo analysis
 
Growth rate(7)
 
(32)% — 157%


(1) 
Represents forward market prices developed using historical cleared pricing data from MISO.

(2) 
Represents third-party forward market pricing.

(3) 
Represents unobservable basis spreads developed using historical settled prices that are applied to observable market prices at various natural gas and electric locations, as well as unobservable adjustments made to extend observable market prices beyond the quoted period through the end of the transaction term.

(4) 
Based on Moody's one-year counterparty default percentages.

(5) 
Represents the range of volatilities used in the valuation of options. Volatilities are derived from an internal model using volatility curves from third parties.

(6) 
Represents adjustments made to forward market price curves to disaggregate average prices of multiple periods into discrete monthly prices.

(7) 
Represents the range of assumed growth rates of earnings before interest, taxes, and amortization input into the valuation model.

Significant changes in historical settlement prices, forward commodity prices, and option volatilities would result in a directionally similar significant change in fair value. Significant changes in probability of default would result in a significant directionally opposite change in fair value. Changes in the adjustments to prices related to monthly curve shaping would affect fair value differently depending on their direction. A significant decrease in the growth rate used to value the contingent consideration would result in a directionally similar significant change in fair value. A significant increase in the growth rate would not have a significant impact on the fair value as the contingent consideration is limited to $8.0 million.

The following tables set forth a reconciliation of changes in the fair value of items categorized as Level 3 measurements:
Three Months Ended September 30, 2013
 
Nonregulated Segments
 
Utility Segments
 
 
(Millions)
 
Natural Gas
 
Electric
 
Contingent Consideration*
 
FTRs
 
Coal Contracts
 
Total
Balance at the beginning of the period
 
$
7.7

 
$
4.1

 
$
(7.7
)
 
$
3.9

 
$
(2.3
)
 
$
5.7

Net realized and unrealized gains included in earnings
 
4.2

 
1.9

 
—

 
1.3

 
—

 
7.4

Net unrealized gains (losses) recorded as regulatory assets or liabilities
 
—

 
—

 
—

 
0.6

 
(4.5
)
 
(3.9
)
Purchases
 
—

 
0.7

 
—

 
—

 
—

 
0.7

Settlements
 
(2.5
)
 
(4.6
)
 
—

 
(2.8
)
 
5.6

 
(4.3
)
Net transfers into Level 3
 
2.5

 
(0.2
)
 
—

 
—

 
—

 
2.3

Net transfers out of Level 3
 
(0.3
)
 
0.8

 
—

 
—

 
—

 
0.5

Balance at the end of the period
 
$
11.6

 
$
2.7

 
$
(7.7
)
 
$
3.0

 
$
(1.2
)
 
$
8.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains included in earnings related to instruments still held at the end of the period
 
$
4.2

 
$
1.9

 
$
—

 
$
—

 
$
—

 
$
6.1


*
Represents the contingent consideration related to the acquisition of Compass. See Note 4 "Acquisitions," for more information.

Nine Months Ended September 30, 2013
 
Nonregulated Segments
 
Utility Segments
 
 
(Millions)
 
Natural Gas
 
Electric
 
Contingent Consideration*
 
FTRs
 
Coal Contracts
 
Total
Balance at the beginning of the period
 
$
3.9

 
$
(4.3
)
 
$
—

 
$
2.0

 
$
(6.5
)
 
$
(4.9
)
Net realized and unrealized gains included in earnings
 
1.3

 
7.6

 
—

 
1.7

 
—

 
10.6

Net unrealized (losses) gains recorded as regulatory assets or liabilities
 
—

 
—

 
—

 
(0.3
)
 
2.2

 
1.9

Purchases
 
7.0

 
2.3

 
(7.7
)
 
4.9

 
—

 
6.5

Sales
 
—

 
—

 
—

 
(0.1
)
 
—

 
(0.1
)
Settlements
 
(4.3
)
 
(4.3
)
 
—

 
(5.2
)
 
3.1

 
(10.7
)
Net transfers into Level 3
 
4.0

 
6.0

 
—

 
—

 
—

 
10.0

Net transfers out of Level 3
 
(0.3
)
 
(4.6
)
 
—

 
—

 
—

 
(4.9
)
Balance at the end of the period
 
$
11.6

 
$
2.7

 
$
(7.7
)
 
$
3.0

 
$
(1.2
)
 
$
8.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains included in earnings related to instruments still held at the end of the period
 
$
1.3

 
$
7.6

 
$
—

 
$
—

 
$
—

 
$
8.9


*
Represents the contingent consideration related to the acquisition of Compass. See Note 4 "Acquisitions," for more information.

Three Months Ended September 30, 2012
 
Nonregulated Segments
 
Utility Segments
 
 
(Millions)
 
Natural Gas
 
Electric
 
FTRs
 
Coal Contracts
 
Total
Balance at the beginning of the period
 
$
6.3

 
$
(14.7
)
 
$
4.8

 
$
(9.8
)
 
$
(13.4
)
Net realized and unrealized gains (losses) included in earnings
 
2.7

 
2.6

*
(1.0
)
 
—

 
4.3

Net unrealized (losses) gains recorded as regulatory assets or liabilities
 
—

 
—

 
(0.2
)
 
2.1

 
1.9

Settlements
 
(6.7
)
 
(0.1
)
 
(0.4
)
 
(1.6
)
 
(8.8
)
Net transfers into Level 3
 
0.4

 
1.0

 
—

 
—

 
1.4

Net transfers out of Level 3
 
(0.3
)
 
1.9

 
—

 
—

 
1.6

Balance at the end of the period
 
$
2.4

 
$
(9.3
)
 
$
3.2

 
$
(9.3
)
 
$
(13.0
)
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains included in earnings related to instruments still held at the end of the period
 
$
2.7

 
$
2.6

* 
$
—

 
$
—

 
$
5.3


*
Includes a $0.2 million net unrealized loss reported as discontinued operations. See Note 5, "Discontinued Operations," for more information.

Nine Months Ended September 30, 2012
 
Nonregulated Segments
 
Utility Segments
 
 
(Millions)
 
Natural Gas
 
Electric
 
FTRs
 
Coal Contracts
 
Total
Balance at the beginning of the period
 
$
8.3

 
$
(11.5
)
 
$
2.2

 
$
(6.9
)
 
$
(7.9
)
Net realized and unrealized gains (losses) included in earnings
 
1.9

 
(5.3
)
*
1.5

 
—

 
(1.9
)
Net unrealized gains recorded as regulatory assets or liabilities
 
—

 
—

 
0.1

 
1.5

 
1.6

Purchases
 
—

 
2.1

 
4.9

 
—

 
7.0

Sales
 
—

 
—

 
(0.1
)
 
—

 
(0.1
)
Settlements
 
(9.3
)
 
7.4

 
(5.4
)
 
(3.9
)
 
(11.2
)
Net transfers into Level 3
 
3.2

 
(7.8
)
 
—

 
—

 
(4.6
)
Net transfers out of Level 3
 
(1.7
)
 
5.8

 
—

 
—

 
4.1

Balance at the end of the period
 
$
2.4

 
$
(9.3
)
 
$
3.2

 
$
(9.3
)
 
$
(13.0
)
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period
 
$
1.9

 
$
(5.3
)
* 
$
—

 
$
—

 
$
(3.4
)

*
Includes a $0.6 million net unrealized loss reported as discontinued operations. See Note 5, "Discontinued Operations," for more information.

Realized and unrealized gains and losses included in earnings related to Integrys Energy Services’ risk management assets and liabilities are recorded through nonregulated revenue or nonregulated cost of sales on the statements of income, depending on the nature of the instrument. Unrealized gains and losses on Level 3 derivatives at the utilities are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on these instruments flow through utility cost of fuel, natural gas, and purchased power on the statements of income.

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that are not recorded at fair value:
 
 
September 30, 2013
 
December 31, 2012
(Millions)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt
 
$
2,782.7

 
$
2,768.5

 
$
2,245.2

 
$
2,425.8

Preferred stock of subsidiary
 
51.1

 
61.6

 
51.1

 
52.7



The fair values of long-term debt instruments are estimated based on the quoted market price for the same or similar issues, or on the current rates offered to us for debt of the same remaining maturity. The fair values of preferred stock are estimated based on quoted market prices when available, or by using a perpetual dividend discount model. The fair values of long-term debt instruments and preferred stock are categorized within Level 2 of the fair value hierarchy.

Due to the short-term nature of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and outstanding commercial paper, the carrying amount for each of these items approximates fair value.