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Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2019

Fair Value of Financial Assets and Liabilities

Fair Value Measurements

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value, hierarchical framework for measuring assets and liabilities and requires disclosure about assets and liabilities measured at fair value.

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices.

Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, or priced with models using highly observable inputs.

Level 3 — Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those valued with models requiring significant management judgment or estimation.

Specific valuation methods include:

Cash equivalents — The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are measured using quoted NAVs.

Interest rate derivatives — The fair values of interest rate derivatives are based on broker quotes that utilize current market interest rate forecasts.

Commodity derivatives — The methods used to measure the fair value of commodity derivative forwards and options generally utilize observable forward prices and volatilities, as well as observable pricing adjustments for specific delivery locations, and are generally assigned a Level 2 classification.

When contractual settlements relate to delivery locations for which pricing is relatively unobservable, or extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable inputs on a valuation is evaluated, and may result in Level 3 classification.

Derivative Instruments Fair Value Measurements

NSP-Wisconsin enters into derivative instruments, including forward contracts, futures, swaps and options, for trading purposes and to manage risk in connection with changes in interest rates and utility commodity prices.

Interest Rate Derivatives — NSP-Wisconsin may enter into various instruments that effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period. These derivative instruments are generally designated as cash flow hedges for accounting purposes.

At Sept. 30, 2019, accumulated other comprehensive loss related to interest rate derivatives included no net gains or losses expected to be reclassified into earnings during the next 12 months.

Commodity Derivatives — NSP-Wisconsin may enter into derivative instruments to manage variability of future cash flows from changes in commodity prices in its electric and natural gas operations, as well as for trading purposes. This could include the purchase or sale of natural gas to generate electric energy and natural gas for resale.

Gross notional amounts of commodity options:


^(a)	Amounts are not reflective of net positions in the underlying commodities.


^(b)	Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.

Consideration of Credit Risk and Concentrations — NSP-Wisconsin continuously monitors the creditworthiness of counterparties to its interest rate derivatives and commodity derivative contracts prior to settlement, and assesses each counterparty’s ability to perform on the transactions set forth in the contracts. Impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets.

Impact of Derivative Activities on Income and Accumulated Other Comprehensive Loss — There were no pre-tax gains or losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings for the three and nine months ended Sept. 30, 2019. There were immaterial pre-tax losses and $0.1 million of net losses reclassified from accumulated other comprehensive loss into earnings during the three and nine months ended Sept. 30, 2018, respectively.

Changes in the fair value of natural gas commodity derivatives resulted in $0.2 million of net losses and immaterial net losses for the three months ended Sept. 30, 2019 and 2018, respectively, which were recognized as regulatory assets and liabilities. There were $0.2 million of net losses and immaterial net losses for the nine months ended Sept. 30, 2019, and 2018, respectively, which were recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on approved regulatory recovery mechanisms.

During both the three months ended Sept. 30, 2019 and 2018, there were no settlement gains or losses on natural gas commodity derivatives. For the nine months ended Sept. 30, 2019 and 2018, there were $0.1 million of losses and no gains or losses, respectively, recognized subject to purchased natural gas cost recovery mechanisms, which result in reclassifications of derivative settlement gains and losses out of income to a regulatory asset or liability, as appropriate.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 2019 and 2018.

Recurring Fair Value Measurements — The following tables presents for each of the fair value hierarchy levels, NSP-Wisconsin's derivative assets and liabilities measured at fair value on a recurring basis:



	Sept. 30, 2019
	Fair Value						Fair Value Total		Netting ^(a)		Total ^(b)
(Millions of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Netting ^(a)		Total ^(b)
Current derivative assets
Natural gas commodity	$	—	$	0.8	$	—	$	0.8	$	—	$	0.8
Current derivative liabilities
Natural gas commodity	$	—	$	0.4	$	—	$	0.4	$	—	$	0.4



	Dec. 31, 2018
	Fair Value						Fair Value Total		Netting ^(a)		Total ^(c)
(Millions of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Netting ^(a)		Total ^(c)
Current derivative assets
Natural gas commodity	$	—	$	0.2	$	—	$	0.2	$	—	$	0.2

^(a)

NSP-Wisconsin nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Sept. 30, 2019 and Dec. 31, 2018. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.


^(b)	Included in prepayments and other current assets balance of $4.6 million and other current liabilities balance of $15.0 million at Sept. 30, 2019, in the consolidated balance sheets.


^(c)	Included in prepayments and other current assets balance of $3.3 million at Dec. 31, 2018, in the consolidated balance sheets.

Fair Value of Long-Term Debt

Other financial instruments for which the carrying amount did not equal fair value:



	Sept. 30, 2019				Dec. 31, 2018
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	807.9	$	954.0	$	807.5	$	850.4

Fair value of NSP-Wisconsin’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. Fair value estimates are based on information available to management as of Sept. 30, 2019 and Dec. 31, 2018, and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

(Amounts in Millions) ^(a)(b)

Sept. 30, 2019

Dec. 31, 2018

Million British thermal Units (MMBtu) of natural gas