Fair Value of Financial Assets and Liabilities

12 Months Ended

Dec. 31, 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 discounted cash flow or option pricing 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:

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

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 generally designated as cash flow hedges for accounting purposes.

At Dec. 31, 2011, accumulated other comprehensive losses 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 transactions impact earnings.  Accumulated other comprehensive losses related to interest rate derivatives reclassified into earnings during the years ended Dec. 31, 2011 and Dec. 31, 2010 were $0.1 million.

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 in the consolidated statements of common stockholder's equity and comprehensive income, is detailed in the following table:

(Thousands of Dollars)	2011			2010			2009
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1	$	(590	)	$	(666	)	$	(742	)
After-tax net realized losses on derivative transactions reclassified into earnings		76			76			76
Accumulated other comprehensive loss related to cash flow hedges at Dec. 31	$	(514	)	$	(590	)	$	(666	)

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

At Dec. 31, 2011, NSP-Wisconsin had no commodity derivative contracts designated as cash flow hedges.  However, as of Dec. 31, 2011, NPS-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 commission approved regulatory recovery mechanisms.

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

(Amounts in Thousands) (a)	Dec. 31, 2011		Dec. 31, 2010
MMBtu of natural gas		1,393		2,242

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

During the years ended Dec. 31, 2011 and Dec. 31, 2010, changes in the fair value of natural gas commodity derivatives resulted in net losses of $3.6 million and $3.4 million, respectively, recognized as regulatory assets and liabilities.

Natural gas commodity derivatives settlement losses of $2.9 million and $1.1 million were recognized during the years ended Dec. 31, 2011 and Dec. 31, 2010, respectively, and were subject to purchased natural gas cost recovery mechanisms, which reclassify 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 years ended Dec. 31, 2011 and Dec. 31, 2010.

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 at Dec. 31, 2011 and Dec. 31, 2010 were downgraded below investment grade, no contracts underlying NSP-Wisconsin's derivative liabilities would require the posting of collateral or contract settlement upon the downgrade.

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.  As of Dec. 31, 2011 and Dec. 31, 2010, NSP-Wisconsin had no collateral posted related to adequate assurance clauses in derivative contracts.

Recurring Fair Value Measurements

The following tables present, for each of the hierarchy levels, NSP-Wisconsin's assets and liabilities that are measured at fair value on a recurring basis:

	Dec. 31, 2011
	Fair Value
								Fair Value		Counterparty
(Thousands of Dollars)		Level 1		Level 2		Level 3		Total		Netting (a)		Total
Current derivative liabilities
Natural gas commodity	$	418	$	2,096	$	-	$	2,514	$	-	$	2,514

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

(a) The accounting guidance 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.

Fair Value of Long-Term Debt

As of Dec. 31, 2011 and 2010, other financial instruments for which the carrying amount did not equal fair value were as follows:

	2011				2010
(Thousands of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	369,369	$	474,356	$	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 Dec. 31, 2011 and 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.