Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2012

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 hierarchical 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.

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 utilize forward prices and volatilities, as well as pricing adjustments for specific delivery locations, and are generally assigned a Level 2. When contractual settlements extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of long-term forward prices and volatilities on a valuation is evaluated, and may result in Level 3 classification.

NSP-Wisconsin continuously monitors the creditworthiness of the counterparties to its interest rate and commodity derivative contracts prior to settlement, 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 derivative liabilities, the impact of considering credit risk was immaterial to the fair value of commodity derivatives 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 Sept. 30, 2012, accumulated other comprehensive loss 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 pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings during the three months ended Sept. 30, 2012 and 2011 and $0.1 million of net pre-tax losses reclassified from accumulated other comprehensive loss into earnings during the nine months ended Sept. 30, 2012 and 2011.

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

	Three Months Ended Sept. 30
(Thousands of Dollars)	2012			2011
Accumulated other comprehensive loss related to cash flow hedges at July 1	$	(476	)	$	(552	)
After-tax net realized losses on derivative transactions reclassified into earnings		20			19
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30	$	(456	)	$	(533	)

	Nine Months Ended Sept. 30
(Thousands of Dollars)	2012			2011
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1	$	(514	)		$	(590	)
After-tax net realized losses on derivative transactions reclassified into earnings		58				57
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30	$	(456	)		$	(533	)

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, including the sale of natural gas or the purchase of natural gas for resale. At Sept. 30, 2012, NSP-Wisconsin held an immaterial amount of commodity derivatives.

The following table details the gross notional amounts of commodity forwards and options at Sept. 30, 2012 and Dec. 31, 2011:

(Amounts in Thousands) (a)(b)	Sept. 30, 2012		Dec. 31, 2011
MMBtu of natural gas		328		1,393

(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.

During the three months ended Sept. 30, 2012, changes in the fair value of natural gas commodity derivatives resulted in an immaterial amount of net gains recognized as regulatory assets and liabilities. During the nine months ended Sept. 30, 2012, changes in the fair value of natural gas commodity derivatives resulted in net losses of $0.4 million recognized as regulatory assets and liabilities. During the three and nine months ended Sept. 30, 2011, changes in the fair value of natural gas commodity derivatives resulted in net losses of $1.2 million and $1.7 million, respectively, recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.

Natural gas commodity derivatives settlement losses of $2.9 million and $2.0 million were recognized during the nine months ended Sept. 30, 2012 and 2011, 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 Sept. 30, 2012 and 2011.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 2012 and 2011.

Recurring Fair Value Measurements

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

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

Fair Value of Long-Term Debt

As of Sept. 30, 2012 and Dec. 31, 2011, other financial instruments for which the carrying amount did not equal fair value were as follows:

	Sept. 30, 2012				Dec. 31, 2011
	Carrying				Carrying
(Thousands of Dollars)	Amount		Fair Value		Amount		Fair Value
Long-term debt, including current portion	$	369,403	$	483,430	$	369,369	$	474,356

The 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. The fair value estimates are based on information available to management as of Sept. 30, 2012 and Dec. 31, 2011, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2. These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since those dates and current estimates of fair values may differ significantly.