Fair Value of Financial Assets and Liabilities

6 Months Ended

Jun. 30, 2011

Fair Value of Financial Assets and Liabilities [Abstract]

Fair Value of Financial Assets and Liabilities

8. 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 and requires certain disclosures about assets and liabilities measured at fair value.  A hierarchal framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance. The three Levels in the hierarchy are as follows:

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 the following:

Commodity derivatives- The methods utilized to measure the fair value of commodity derivatives include the use of forward prices and volatilities to value commodity forwards and options.  Levels are assigned to these fair value measurements based on the significance of the use of subjective forward price and volatility forecasts for commodities and locations with limited observability, or the significance of contractual settlements that extend to periods beyond those readily observable on active exchanges or quoted by brokers.

NSP-Wisconsin continuously monitors the creditworthiness of the counterparties to its commodity derivative contracts and assesses each counterparty's ability to perform on the transactions set forth in the contracts.  Given this assessment, as well as an assessment of the impact of NSP-Wisconsin's own credit risk when determining the fair value of commodity derivative liabilities, the impact of considering credit risk was immaterial to the fair value of commodity derivative assets and liabilities presented in the consolidated balance sheets.

Derivative Instruments Fair Value Measurements

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

Interest Rate Derivatives - NSP-Wisconsin enters into various instruments that effectively fix the interest payments on certain floating rate debt obligations or 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 designated as cash flow hedges for accounting purposes.

At June 30, 2011, accumulated other comprehensive income (OCI) related to interest rate derivatives included $0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.  There were immaterial losses related to interest rate derivatives reclassified from accumulated OCI into earnings during the three months ended June 30, 2011 and June 30, 2010 and $0.1 million of net losses reclassified from accumulated OCI into earnings during the six months ended June 30, 2011 and June 30, 2010.

Financial Impact of Qualifying Cash Flow Hedges - The impact of qualifying interest rate cash flow hedges on NSP-Wisconsin's accumulated other comprehensive losses, included as a component of common stockholder's equity, is detailed in the following table:

	Three Months Ended June 30,
(Thousands of Dollars)	2011			2010
Accumulated other comprehensive loss related to cash flow hedges at April 1	$	(571	)	$	(647	)
After-tax net realized losses on derivative transactions reclassified into earnings		19			19
Accumulated other comprehensive loss related to cash flow hedges at June 30	$	(552	)	$	(628	)

	Six Months Ended June 30,
(Thousands of Dollars)	2011			2010
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1	$	(590	)	$	(666	)
After-tax net realized losses on derivative transactions reclassified into earnings		38			38
Accumulated other comprehensive loss related to cash flow hedges at June 30	$	(552	)	$	(628	)

Commodity Derivatives - NSP-Wisconsin enters into derivative instruments to manage variability of future cash flows from changes in commodity prices in its natural gas operations, including the sale of natural gas or the purchase of natural gas for resale.

At June 30, 2011, NSP-Wisconsin had no commodity derivative contracts designated as cash flow hedges.  However, as of June 30, 2011, NSP-Wisconsin has entered into derivative instruments that mitigate commodity price risk on behalf of natural gas customers but are not designated as qualifying hedging instruments.  Changes in the fair value of these commodity derivative instruments are deferred as a regulatory asset or liability based on the commission approved regulatory recovery mechanisms.

The following table details the gross notional amounts of commodity forwards at June 30, 2011 and Dec. 31, 2010:

(Amounts in Thousands) (a)	June 30, 2011		Dec. 31, 2010
MMBtu of natural gas		1,459		2,242

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

During the three and six months ended June 30, 2011, changes in the fair value of natural gas commodity derivatives resulted in net losses of $0.2 million and $0.5 million, respectively, recognized as regulatory assets and liabilities.  During the three and six months ended June 30, 2010, changes in the fair value of natural gas commodity derivatives resulted in net losses of $0.1 million and $1.6 million, respectively, recognized as regulatory assets and liabilities.

Natural gas commodity derivatives settlement gains of $2.0 million and $0.3 million were recognized during the six months ended June 30, 2011 and June 30, 2010, respectively, and were 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.  There were no material settlement gains or losses on commodity derivatives for the three months ended June 30, 2011 and June 30, 2010.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2011 and June 31, 2010.  Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Recurring Fair Value Measurements- The following tables present, for each of these hierarchy Levels, NSP-Wisconsin's derivative liabilities that are measured at fair value on a recurring basis:

	June 30, 2011
	Fair Value
(Thousands of Dollars)	Level 1			Level 2			Level 3			Fair Value Total			Counterparty Netting (a)			Total
Current derivative liabilities
Natural gas commodity		$	27		$	266		$	-		$	293		$	-		$	293

	Dec. 31, 2010
	Fair Value
(Thousands of Dollars)	Level 1			Level 2			Level 3			Fair Value Total			Counterparty Netting (a)				Total
Current derivative liabilities
Natural gas commodity		$	-		$	1,800		$	-		$	1,800		$	(13	)		$	1,787

(a) The accounting for derivatives and hedging permits the netting of receivables and payables for derivatives and related collateral amounts when a legally enforceable master netting agreement exists between NSP-Wisconsin and a counterparty.  A master netting agreement is an agreement between two parties who have multiple contracts with each other that provides for the net settlement of all contracts in the event of default on or termination of any one contract.

Credit Related Contingent Features- Contract provisions of the derivative instruments that NSP-Wisconsin enters into may require the posting of collateral or settlement of the contracts for various reasons, including if NSP-Wisconsin is unable to maintain its credit ratings.  If the credit ratings of NSP-Wisconsin were downgraded below investment grade, no contracts underlying NSP-Wisconsin's derivative liabilities at June 30, 2011 and Dec. 31, 2010 would require the posting of collateral or contract settlement.

Certain of NSP-Wisconsin's derivative instruments are subject to contract provisions that contain adequate assurance clauses.  These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that NSP-Wisconsin's ability to fulfill its contractual obligations is reasonably expected to be impaired.  NSP-Wisconsin had no collateral posted related to adequate assurance clauses in derivative contracts as of June 30, 2011 and Dec. 31, 2010.

Fair Value of Long-Term Debt

The historical cost and fair value of NSP-Wisconsin's long-term debt are as follows:

	June 30, 2011				Dec. 31, 2010
	Historical				Historical
(Thousands of Dollars)	Cost		Fair Value		Cost		Fair Value
Long-term debt, including current portion	$	369,380	$	420,126	$	369,356	$	416,587

The fair value of NSP-Wisconsin's long-term debt is estimated based on the quoted market prices for the same or similar issues or the current rates for debt of the same remaining maturities and credit quality.  The fair value estimates presented are based on information available to management as of June 30, 2011 and Dec. 31, 2010.  These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair values may differ significantly.

As of June 30, 2011 and Dec. 31, 2010, the historical cost of cash and cash equivalents, notes and accounts receivable, notes and accounts payable and accrued liabilities are representative of fair value because of the short-term nature of these instruments.