FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques.  The levels of the hierarchy are described below:

• Level 1:  Observable inputs such as quoted prices in active markets for identical assets or liabilities.

• Level 2:  Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

• Level 3:  Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):

As of June 30, 2013	Total		Level 1		Level 2		Level 3
Assets
Available-for-Sale Securities (A)	$	7,859	$	7,859	$	—	$	—
Derivatives – Energy Related Assets (B)	48,468		6,444		17,811		24,213
	$	56,327	$	14,303	$	17,811	$	24,213
Liabilities
Derivatives – Energy Related Liabilities (B)	$	63,542	$	4,065	$	26,749	$	32,728
Derivatives – Other (C)	9,091		—		9,091		—
	$	72,633	$	4,065	$	35,840	$	32,728

As of December 31, 2012	Total		Level 1		Level 2		Level 3
Assets
Available-for-Sale Securities (A)	$	7,538	$	787	$	6,751	$	—
Derivatives – Energy Related Assets (B)	36,539		9,404		16,205		10,930
	$	44,077	$	10,191	$	22,956	$	10,930
Liabilities
Derivatives – Energy Related Liabilities (B)	$	29,231	$	5,399	$	15,664	$	8,168
Derivatives – Other (C)	13,462		—		13,462		—
	$	42,693	$	5,399	$	29,126	$	8,168

(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly.  The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.  The remaining securities consist of funds that are not publicly traded.  These funds, which consist of stocks and bonds that are traded individually in active markets, are valued using quoted prices for similar assets and are categorized in Level 2 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy. Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 as the model inputs generally are not observable.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forwards, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in mark-to-market valuations from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

Level 3 valuation methods for natural gas derivative contracts include utilizing another location in close proximity adjusted for certain pipeline charges to derive a basis value. The significant unobservable inputs used in the fair value measurement of certain natural gas contracts are forward prices developed based on industry standard methodologies. Significant increases (decreases) in these forward prices for purchases of natural gas would result in a directionally similar impact to the fair value measurement and for sales of natural gas would result in a directionally opposite impact to the fair value measurement. Level 3 valuation methods for electric represent the value of the contract marked to the forward wholesale curve, as provided by daily exchange quotes for delivered electricity. The significant unobservable inputs used in the fair value measurement of electric contracts are fixed contracted electric load profiles; therefore no change in unobservable inputs would occur. Unobservable inputs are updated daily using industry standard techniques. Management reviews and corroborates the price quotations to ensure the prices are observable which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration.

(C) Derivatives – Other are valued using quoted prices on commonly-quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands):

Type	Fair Value at June 30, 2013		Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets	Liabilities
Forward Contract - Natural Gas	$17,019	$28,069	Discounted Cash Flow	Forward price (per dt)	$(1.20) - $3.58 [$(0.49)]
Forward Contract - Electric	$7,194	$4,659	Discounted Cash Flow	Fixed electric load profile (on-peak)	19.72% - 100.00% [60.44%]
				Fixed electric load profile (off-peak)	0.00% - 80.28% [39.56%]

Type	Fair Value at December 31, 2012				Valuation Technique	Significant Unobservable Input	Range [Weighted Average]
	Assets		Liabilities
Forward Contract - Natural Gas	$	4,340	$	4,986	Discounted Cash Flow	Forward price (per dt)	$(0.35) - $2.92 [$(0.12)]
Forward Contract - Electric	$	6,590	$	3,182	Discounted Cash Flow	Fixed electric load profile (on-peak)	21.62% - 100.00% [53.64%]
						Fixed electric load profile (off-peak)	0.00% - 78.38% [46.36%]

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities for the three and six months ended June 30, 2013 and 2012, using significant unobservable inputs (Level 3), are as follows (in thousands):

	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
Balance at beginning of period	$	1,627		$	2,762
Total losses realized/unrealized included in earnings	(12,022		)	(12,723		)
Transfers in/(out) of Level 3 (A)	928			928
Settlements	952			518
Balance at June 30	$	(8,515	)	$	(8,515	)

(A) Transfers between different levels of the fair value hierarchy may occur based on the level of observable inputs used to value the instruments from period to period. During the three and six months ended June 30, 2013, $0.9 million of net derivatives assets were transferred from Level 2 to Level 3, due to decreased observability of market data. The transfer was recognized as of the end of the second quarter.

	Three Months Ended June 30, 2012			Six Months Ended June 30, 2012
Balance at beginning of period	(1,958		)	(5,958		)
Total losses realized/unrealized included in earnings	3,306			3,475
Settlements	1,730			5,561
Balance at June 30	$	3,078		$	3,078

Total losses for 2013 included in earnings that are attributable to the change in unrealized losses relating to those assets and liabilities included in Level 3 still held as of June 30, 2013, is $(12.0) million.  These losses are included in Operating Revenues-Nonutility on the condensed consolidated statements of income.