SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ' |
Summary of Significant Accounting Policies |
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(a) Nature of Operations—We are a holding company whose primary wholly owned subsidiaries at December 31, 2013, included MERC, MGU, NSG, PGL, UPPCO, WPS, IBS, Integrys Energy Services, and ITF. Of these subsidiaries, six are regulated natural gas and/or electric utilities (MERC, MGU, NSG, PGL, UPPCO, and WPS). IBS is a centralized service company, Integrys Energy Services is a nonregulated retail energy supply and services company, and ITF is a nonregulated compressed natural gas fueling business. In addition, we have an approximate 34% interest in ATC. |
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As used in these notes, the term "financial statements" refers to the consolidated financial statements. This includes the consolidated statements of income, consolidated statements of comprehensive income, consolidated balance sheets, consolidated statements of equity, and consolidated statements of cash flows, unless otherwise noted. |
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The term "utility" refers to the regulated activities of the electric and natural gas utility companies, while the term "nonutility" refers to the activities of the electric and natural gas utility companies that are not regulated. The term "nonregulated" refers to activities at Integrys Energy Services, ITF, the Integrys Energy Group holding company, and the PELLC holding company. |
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(b) Consolidated Basis of Presentation—The financial statements include our accounts and the accounts of all of our majority owned subsidiaries, after eliminating intercompany transactions and balances. These financial statements also reflect our proportionate interests in certain jointly owned utility facilities. The cost method of accounting is used for investments when we do not have significant influence over the operating and financial policies of the investee. Investments in businesses not controlled by us, but over which we have significant influence regarding the operating and financial policies of the investee, are accounted for using the equity method. See Note 8, Equity Method Investments, for more information. |
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(c) Use of Estimates—We prepare our financial statements in conformity with GAAP. We make estimates and assumptions that affect assets, liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates. |
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(d) Cash and Cash Equivalents—Short-term investments with an original maturity of three months or less are reported as cash equivalents. |
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Significant noncash transactions were: |
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(Millions) | | 2013 | | 2012 | | 2011 |
Construction costs funded through accounts payable | | $ | 108.5 | | | $ | 92.4 | | | $ | 58.6 | |
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Portion of Westwood sale financed with note receivable (1) | | — | | | 4 | | | — | |
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Equity issued for stock-based compensation plans | | 16.3 | | | — | | | 10.6 | |
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Equity issued for employee stock ownership plan | | 14.3 | | | — | | | 5.2 | |
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Equity issued for reinvested dividends | | 12 | | | — | | | 5.4 | |
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Contingent consideration related to the acquisition of Compass Energy Services (2) | | 7.8 | | | — | | | — | |
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(1) | See Note 4, Discontinued Operations, for more information. | | | | | | | | | | | |
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-2 | See Note 3, Acquisitions, for more information on the contingent consideration. | | | | | | | | | | | |
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(e) Revenue and Customer Receivables—Revenues related to the sale of energy are recognized when service is provided or energy is delivered to customers. We accrue estimated amounts of revenues for services provided or energy delivered but not yet billed to customers. Estimated unbilled revenues are calculated using a variety of judgments and assumptions related to customer class, contracted rates, weather, and customer use. At December 31, 2013 and 2012, our unbilled revenues were $438.2 million and $298.2 million, respectively. |
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At December 31, 2013, there were no customers or industries that accounted for more than 10% of our revenues. |
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We present revenues net of pass-through taxes on the income statements. |
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Below is a summary of the significant mechanisms our utility subsidiaries had in place in 2013 that allowed them to recover or refund changes in prudently incurred costs from rate case-approved amounts: |
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• | Fuel and purchased power costs were recovered from customers on a one-for-one basis by UPPCO, WPS's wholesale electric operations, and WPS's Michigan retail electric operations. | | | | | | | | | | | |
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• | WPS's Wisconsin retail electric operations used a "fuel window" mechanism to recover fuel and purchased power costs. Under the fuel window rule, a deferral is required for under or over-collections of actual fuel and purchased power costs that exceed a 2% price variance from the costs included in the rates charged to customers. | | | | | | | | | | | |
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• | The rates for all of our natural gas utilities included one-for-one recovery mechanisms for natural gas commodity costs. | | | | | | | | | | | |
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• | The rates of PGL and NSG included riders for cost recovery of both environmental cleanup and energy conservation and management program costs. | | | | | | | | | | | |
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• | MERC's rates included a conservation improvement program rider for cost recovery of energy conservation and management program costs as well as a financial incentive for meeting energy savings goals. | | | | | | | | | | | |
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• | The rates of PGL, NSG, and MGU included riders for cost recovery or refund of bad debts based on the difference between actual bad debt write-offs (as defined in the latest rate order) and the amount recovered in rates. MGU's rider was terminated after December 31, 2013. | | | | | | | | | | | |
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• | The rates of all of our utilities included decoupling mechanisms. These mechanisms differ state by state and allow utilities to recover or refund differences between the applicable actual and authorized margins. See Note 26, Regulatory Environment, for more information on decoupling. | | | | | | | | | | | |
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Revenues are also impacted by other accounting policies related to PGL's natural gas hub and our electric utilities' participation in the MISO market. Amounts collected from PGL's wholesale customers that use the natural gas hub are credited to natural gas costs, resulting in a reduction to retail customers' charges for natural gas and services. WPS and UPPCO both sell and purchase power in the MISO market. If WPS or UPPCO is a net seller in a particular hour, the net amount is reported as revenue. If WPS or UPPCO is a net purchaser in a particular hour, the net amount is recorded as utility cost of fuel, natural gas, and purchased power on the income statements. |
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ITF accounts for revenues from construction management projects using the percentage of completion method. Revenues are recognized based on the percentage of costs incurred to date compared to the total estimated costs of each contract. This method is used because management considers total costs to be the best available measure of progress on these contracts. |
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See Note 1(g), Risk Management Activities, for more information on the classification of certain unrealized gains and losses on derivative instruments in revenues. |
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(f) Inventories—Inventories consist of materials and supplies, natural gas in storage, liquid propane, emission allowances at WPS, and fossil fuels, including coal. Average cost is used to value materials and supplies, fossil fuels, liquid propane, emission allowances at WPS, and natural gas in storage for the regulated utilities, excluding PGL and NSG. PGL and NSG price natural gas storage injections at the calendar year average of the costs of natural gas supply purchased. Withdrawals from storage are priced on the Last-in, First-out (LIFO) cost method. Inventories stated on a LIFO basis represented approximately 26% of total inventories at December 31, 2013, and 30% of total inventories at December 31, 2012. The estimated replacement cost of natural gas in inventory at December 31, 2013, and December 31, 2012, exceeded the LIFO cost by $151.7 million and $95.3 million, respectively. In calculating these replacement amounts, PGL and NSG used a Chicago city-gate natural gas price per dekatherm of $4.77 at December 31, 2013, and $3.58 at December 31, 2012. |
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Inventories at Integrys Energy Services are valued at the lower of cost or market. As a result, Integrys Energy Services recorded net write-downs of $3.6 million, $3.4 million, and $11.6 million in 2013, 2012, and 2011, respectively. |
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(g) Risk Management Activities—As part of our regular operations, we enter into contracts, including options, swaps, futures, forwards, and other contractual commitments, to manage market risks such as changes in commodity prices and interest rates. See Note 2, Risk Management Activities, for more information. Derivative instruments are entered into in accordance with the terms of each subsidiary's risk management policies approved by their respective Boards of Directors and, if applicable, by their respective regulators. |
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All derivatives are recognized on the balance sheets at their fair value unless they qualify for the normal purchases and sales exception, and are so designated. We continually assess our contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Because most energy-related derivatives at the utilities qualify for regulatory deferral, management believes any gains or losses resulting from the eventual settlement of derivative instruments will be refunded to or collected from customers in rates. As such, any changes in the fair value of these derivatives recorded as either risk management assets or liabilities are offset with regulatory liabilities or assets, as appropriate. |
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We classify derivative assets and liabilities as current or long-term on the balance sheets based on the maturities of the underlying contracts. We record unrealized gains and losses on derivative instruments that do not qualify for hedge accounting or regulatory deferral as a component of margins or operating and maintenance expense, depending on the nature of the transactions. Cash flows from derivative activities are presented in the same category as the item being hedged within operating activities on the statements of cash flows unless the derivative contracts contain an other-than-insignificant financing element, in which case the cash flows are classified within financing activities. |
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Derivative accounting rules provide the option to present certain asset and liability derivative positions net on the balance sheets and to net the related cash collateral against these net derivative positions. We elected not to net these items. On the balance sheets, cash collateral provided to others is shown separately as collateral on deposit, and cash collateral received from others is reflected in other current liabilities. |
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(h) Emission Allowances—Integrys Energy Services accounts for emission allowances as intangible assets, with cash inflows and outflows related to purchases and sales of emission allowances recorded as investing activities in the statements of cash flows. WPS accounts for emission allowances as inventory at average cost by vintage year. Charges to income result when allowances are used in operating WPS's generation plants. These charges are included in the costs subject to the fuel window rules. Gains on sales of allowances at WPS are returned to ratepayers. |
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(i) Property, Plant, and Equipment—Utility plant is stated at cost, including any associated AFUDC and asset retirement costs. The costs of renewals and betterments of units of property (as distinguished from minor items of property) are capitalized as additions to the utility plant accounts. Maintenance, repair, replacement, and renewal costs associated with items not qualifying as units of property are considered operating expenses. The utilities record a regulatory liability for cost of removal accruals, which are included in rates. Actual removal costs are charged against the regulatory liability as incurred. Except for land, no gains or losses are recognized in connection with ordinary retirements of utility property units. Ordinary retirements, sales, and other disposals of units of property at the utilities are charged to accumulated depreciation at cost, less salvage value. When it becomes probable that an operating unit will be retired in the near future and substantially in advance of its expected useful life, the cost and corresponding accumulated depreciation of the asset is classified as plant to be retired, net within property, plant, and equipment. |
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We record straight-line depreciation expense over the estimated useful life of utility property using depreciation rates approved by the applicable regulators. Annual utility composite depreciation rates are shown below: |
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Annual Utility Composite Depreciation Rates | | 2013 | | 2012 | | 2011 | | | |
MERC (1) | | 1.88 | % | | 3.07 | % | | 3.1 | % | | | |
MGU (2) | | 1.93 | % | | 2.71 | % | | 2.73 | % | | | |
NSG | | 2.44 | % | | 2.43 | % | | 2.42 | % | | | |
PGL | | 3.19 | % | | 3.16 | % | | 3.18 | % | | | |
UPPCO | | 3.29 | % | | 3.31 | % | | 3.33 | % | | | |
WPS – Electric | | 2.79 | % | | 2.87 | % | | 2.88 | % | | | |
WPS – Natural gas | | 2.19 | % | | 2.21 | % | | 2.22 | % | | | |
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-1 | The 2013 depreciation rate reflects the impact of a new depreciation study approved by the MPUC in July 2013. The rates were effective retroactive to January 2012. An approximate $2 million reduction in depreciation expense was recorded in 2013 related to the 2012 impact. | | | | | | | | | | | |
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(2) | The 2013 depreciation rate includes the impact of a $2.5 million reduction in depreciation expense that was recorded in the first quarter of 2013 as a result of the Michigan Court of Appeals order reversing the MPSC's previously ordered disallowance associated with the early retirement of certain MGU assets in 2010. | | | | | | | | | | | |
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The majority of nonregulated plant is stated at cost, net of impairments recorded, and includes capitalized interest. The costs of renewals, betterments, and major overhauls are capitalized as additions to plant. Nonregulated plant acquired as a result of mergers and acquisitions have been recorded at fair value. The gains or losses associated with ordinary retirements are recorded in the period of retirement. Maintenance, repair, and minor replacement costs are expensed as incurred. Depreciation is computed for the majority of the nonregulated subsidiaries' assets using the straight-line method over the assets' useful lives. |
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We capitalize certain costs related to software developed or obtained for internal use and amortize those costs to operating expense over the estimated useful life of the related software, which ranges from 3 to 15 years. If software is retired prior to being fully amortized, the difference is recorded as a loss on the income statement. |
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We receive grants related to certain renewable generation projects under federal and state grant programs. Our policy is to reduce the depreciable basis of the qualifying project by the grant received. We then reflect the benefit of the grant in income over the life of the related renewable generation project through a reduction in depreciation expense. |
See Note 5, Property, Plant, and Equipment, for more information. |
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(j) AFUDC and Capitalized Interest—Our utilities and IBS capitalize the cost of funds used for construction using a calculation that includes both internal equity and external debt components, as required by regulatory accounting. The internal equity component is accounted for as other income. The external debt component is accounted for as a decrease to interest expense. |
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The majority of AFUDC is recorded at WPS. Approximately 50% of WPS's retail jurisdictional construction work in progress expenditures are subject to the AFUDC calculation. For 2013, WPS's average AFUDC retail rate was 8.61%, and its average AFUDC wholesale rate was 2.64%. The AFUDC calculation for the other utilities and IBS is determined by their respective state commissions, each with specific requirements. Based on these requirements, the other utilities and IBS did not record significant AFUDC for 2013, 2012, or 2011. |
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Total AFUDC was as follows for the years ended December 31: |
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Allowance for equity funds used during construction | | $ | 10.8 | | | $ | 2.9 | | | $ | 0.7 | |
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Allowance for borrowed funds used during construction | | 4.1 | | | 1 | | | 0.3 | |
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Our nonregulated subsidiaries capitalize interest for construction projects. However, the nonregulated subsidiaries did not capitalize significant interest during 2013, 2012, and 2011. |
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(k) Regulatory Assets and Liabilities—Regulatory assets represent probable future revenue associated with certain costs or liabilities that have been deferred and are expected to be recovered through rates charged to customers. Regulatory liabilities represent amounts that are expected to be refunded to customers in future rates or amounts collected in rates for future costs. Recovery or refund of regulatory assets and liabilities is based on specific periods determined by the regulators or occurs over the normal operating period of the assets and liabilities to which they relate. If at any reporting date a previously recorded regulatory asset is no longer probable of recovery, the regulatory asset is reduced to the amount considered probable of recovery with the reduction charged to expense in the year the determination is made. See Note 7, Regulatory Assets and Liabilities, for more information. |
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(l) Investments in Exchange-Traded Funds—We have investments in exchange-traded funds which are classified as trading securities for accounting purposes. These investments are used to offset gains and losses related to our deferred compensation obligations. As we do not intend to sell these investments in the near term, they are included in other long-term assets on our balance sheets. The net unrealized gains (losses) included in earnings related to the investments still held at the end of the period were $1.9 million, $1.0 million, and $(0.1) million for the years ended December 31, 2013, 2012, and 2011, respectively. |
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(m) Asset Impairment—Goodwill and other intangible assets with indefinite lives are not amortized, but are subject to an annual impairment test. Interim impairment tests are performed when impairment indicators are present. Intangible assets with definite lives are reviewed for impairment on a quarterly basis. Other long-lived assets require an impairment review when events or circumstances indicate that the carrying amount may not be recoverable. We base our evaluation of other long-lived assets on the presence of impairment indicators such as the future economic benefit of the assets, any historical or future profitability measurements, and other external market conditions or factors. |
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Our reporting units containing goodwill perform annual goodwill impairment tests during the second quarter of each year. The carrying amount of the reporting unit's goodwill is considered not recoverable if the carrying amount of the reporting unit exceeds the reporting unit's fair value. An impairment loss is recorded for the excess of the carrying amount of the goodwill over its implied fair value. See Note 9, Goodwill and Other Intangible Assets, for more information on our goodwill and other intangible assets. |
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The carrying amount of tangible long-lived assets held and used is considered not recoverable if the carrying amount exceeds the undiscounted sum of cash flows expected to result from the use and eventual disposition of the asset. If the carrying amount is not recoverable, the impairment loss is measured as the excess of the asset's carrying amount over its fair value. |
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The carrying amount of assets held for sale is not recoverable if the carrying amount exceeds the fair value less estimated costs to sell the asset. An impairment loss is recorded for the excess of the asset’s carrying amount over the fair value, less estimated costs to sell. |
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The carrying amounts of cost and equity method investments are assessed for impairment by comparing the fair values of these investments to their carrying amounts, if a fair value assessment was completed, or by reviewing for the presence of impairment indicators. If an impairment exists and it is determined to be other-than-temporary, a loss is recognized equal to the amount by which the carrying amount exceeds the investment's fair value. |
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Integrys Energy Services evaluates emission allowances for impairment by comparing the expected undiscounted future cash flows to the carrying amount. When allowances are expected to be used for generation, the allowances are grouped with the related power plant in the impairment evaluation. |
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(n) Retirement of Debt—Any call premiums or unamortized expenses associated with refinancing utility debt obligations are amortized consistent with regulatory treatment of those items. Any gains or losses resulting from the retirement of utility debt that is not refinanced are amortized over the remaining life of the original debt. Any gains or losses resulting from the retirement of nonutility debt are recorded through current earnings. |
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(o) Asset Retirement Obligations—We recognize at fair value legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development, and/or normal operation of the assets. A liability is recorded for these obligations as long as the fair value can be reasonably estimated, even if the timing or method of settling the obligation is unknown. The asset retirement obligations are accreted using a credit-adjusted risk-free interest rate commensurate with the expected settlement dates of the asset retirement obligations; this rate is determined at the date the obligation is incurred. The associated retirement costs are capitalized as part of the related long-lived assets and are depreciated over the useful lives of the assets. Subsequent changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease in the carrying amount of the liability and the associated retirement cost. See Note 13, Asset Retirement Obligations, for more information. |
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(p) Environmental Remediation Costs— We are subject to federal and state environmental laws and regulations that in the future may require us to pay for environmental remediation at sites where we have been, or may be, identified as a potentially responsible party (PRP). Loss contingencies may exist for the remediation of hazardous substances at various potential sites, including former manufactured gas plant sites. See Note 15, Commitments and Contingencies, for more information on our manufactured gas plant sites. |
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We record environmental remediation liabilities when site assessments indicate remediation is probable and we can reasonably estimate the loss or a range of possible losses. The estimate includes both our share of the liability and any additional amounts that will not be paid by other PRPs or the government. When possible, we estimate costs using site-specific information but also consider historical experience for costs incurred at similar sites. Remediation efforts for a particular site generally extend over a period of several years. During this period, the laws governing the remediation process may change, as well as site conditions, potentially affecting the cost of remediation. |
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Our regulated utilities have received approval to defer certain environmental remediation costs, as well as estimated future costs, through a regulatory asset. The recovery of deferred costs is subject to the respective Commission's approval. |
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We review our estimated costs of remediation annually for our manufactured gas plant sites and adjust the liabilities and related regulatory assets to reflect the new cost estimates. Any material changes in cost estimates are adjusted throughout the year. |
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(q) Income Taxes—We file a consolidated United States income tax return that includes domestic subsidiaries of which our ownership is 80% or more. We and our consolidated subsidiaries are parties to a federal and state tax allocation arrangement under which each entity determines its provision for income taxes on a stand-alone basis. In several states, combined or consolidated filings are required for certain subsidiaries doing business in that state. |
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Deferred income taxes have been recorded to recognize the expected future tax consequences of events that have been included in the financial statements by using currently enacted tax rates for the differences between the income tax basis of assets and liabilities and the basis reported in the financial statements. We record valuation allowances for deferred income tax assets unless it is more likely than not that the benefit will be realized in the future. Our regulated utilities defer certain adjustments made to income taxes that will impact future rates and record regulatory assets or liabilities related to these adjustments. |
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We use the deferral method of accounting for investment tax credits (ITCs). Under this method, we record the ITCs as deferred credits and amortize such credits as a reduction to the provision for income taxes over the life of the asset that generated the ITCs. ITCs that do not reduce income taxes payable for the current year are eligible for carryover and recognized as a deferred income tax asset. |
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We report interest and penalties accrued related to income taxes as a component of provision for income taxes in the income statements, as well as regulatory assets or regulatory liabilities on the balance sheets. |
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We record excess tax benefits from stock-based compensation awards when the actual tax benefit is realized. We follow the tax law ordering approach to determine when the tax benefit has been realized. Under this approach, the tax benefit is realized in the year it reduces taxable income. Current year stock-based compensation deductions are assumed to be used before any net operating loss carryforwards. |
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See Note 14, Income Taxes, for more information regarding accounting for income taxes. |
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(r) Guarantees—Integrys Energy Group follows the guidance of the of the FASB ASC, which requires that the guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. See Note 16, Guarantees, for more information. |
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(s) Employee Benefits—The costs of pension and other postretirement benefits are expensed over the periods during which employees render service. Our transition obligation related to other postretirement benefit plans was recognized over a 20-year period that began in 1993, and ended in 2012. In computing the expected return on plan assets, we use a market-related value of plan assets. Changes in realized and unrealized investment gains and losses are recognized over the subsequent five years for plans sponsored by WPS, while differences between actual investment returns and the expected return on plan assets are recognized over a five-year period for plans sponsored by IBS and PELLC. The benefit costs associated with employee benefit plans are allocated among our subsidiaries based on current employment status and actuarial calculations, as applicable. Our regulators allow recovery in rates for the regulated utilities' net periodic benefit cost calculated under GAAP. |
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We recognize the funded status of defined benefit postretirement plans on the balance sheet, and recognize changes in the plans' funded status in the year in which the changes occur. Our nonregulated segments record changes in the funded status in accumulated other comprehensive income. The regulated utilities record changes in the funded status to regulatory asset or liability accounts, pursuant to the Regulated Operations Topic of the FASB ASC. |
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See Note 17, Employee Benefit Plans, for more information. |
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(t) Stock-Based Compensation—In May 2010, our shareholders approved the 2010 Omnibus Incentive Compensation Plan (2010 Omnibus Plan). Under the provisions of the 2010 Omnibus Plan, the number of shares of stock that may be issued in satisfaction of plan awards may not exceed 3,000,000 shares, plus any shares remaining or forfeited under prior plans. No more than 900,000 shares of stock, plus shares remaining or forfeited under prior plans, can be granted as full value shares in the form of performance shares, restricted stock, or restricted stock units. Additional awards will not be issued under prior plans, although the plans continue to exist for purposes of the existing outstanding stock-based compensation awards. At December 31, 2013, stock options, performance stock rights, and restricted share units were outstanding under the various plans. |
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Stock Options |
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Our stock options have a term not longer than 10 years. The exercise price of each stock option is equal to the fair market value of our stock on the date the stock option is granted. Generally, 25% of the stock options granted vest and become exercisable each year on the anniversary of the grant date. For accounting purposes, stock options granted to retirement-eligible employees vest over a shorter period; however, there is no acceleration of when the options become exercisable. Under the provisions of the 2010 Omnibus Plan, no single employee who is our chief executive officer or one of our other three highest compensated officers (including officers of our subsidiaries) can be granted stock options for more than 1,000,000 shares during any calendar year. |
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The fair value of stock option awards granted is estimated using a binomial lattice model. The expected term of option awards is derived from the output of the binomial lattice model and represents the period of time that options are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. Our expected stock price volatility is estimated using the 10-year historical volatility of our stock price. |
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Performance Stock Rights |
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Performance stock rights generally vest over a three-year performance period. For accounting purposes, awards granted to retirement-eligible employees vest over a shorter period; however, the distribution of these awards is not accelerated. No single employee who is our chief executive officer or one of our other three highest compensated officers (including officers of our subsidiaries) can receive a payout in excess of 250,000 performance shares during any calendar year. Performance stock rights are paid out in shares of our common stock, or eligible employees can elect to defer the value of their awards into the deferred compensation plan and choose among various investment options, some of which are ultimately paid out in our common stock and some of which are ultimately paid out in cash. Eligible employees can only elect to defer up to 80% of the value of their awards. The number of shares paid out is calculated by multiplying a performance percentage by the number of outstanding stock rights at the completion of the performance period. The performance percentage is based on the total shareholder return of our common stock relative to the total shareholder return of a peer group of companies. The payout may range from 0% to 200% of target. |
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Performance stock rights are accounted for as either an equity award or a liability award, depending on their settlement features. Awards that can only be settled in our common stock are accounted for as equity awards. Awards that an employee has elected to defer, or is still able to defer, into the deferred compensation plan are accounted for as liability awards and are recorded at fair value each reporting period. |
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Six months prior to the end of the performance period, employees can no longer change their election to defer the value of their performance stock rights into the deferred compensation plan. As a result, any awards not elected for deferral at this point in the performance period will be settled in our common stock. This changes the classification of these awards from a liability award to an equity award. The change in classification is accounted for as an award modification. The fair value on the modification date is used to measure these awards for the remaining six months of the performance period. No incremental compensation expense is recorded as a result of this award modification. |
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The fair values of performance stock rights are estimated using a Monte Carlo valuation model. The risk-free interest rate is based on the United States Treasury yield curve. The expected dividend yield incorporates the current and historical dividend rate. Our expected stock price volatility is estimated using one to three years of historical data. |
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Restricted Shares and Restricted Share Units |
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Restricted shares and restricted share units generally have a four-year vesting period, with 25% of each award vesting on each anniversary of the grant date. For accounting purposes, awards granted to retirement-eligible employees vest over a shorter period; however, the release of shares to these employees is not accelerated. During 2011, the last of the outstanding restricted shares vested. Only restricted share units remain outstanding at December 31, 2013. Restricted share unit recipients do not have voting rights, but they receive forfeitable dividend equivalents in the form of additional restricted share units. |
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Restricted share units are accounted for as either an equity award or a liability award, depending on their settlement features. Awards that can only be settled in our common stock and cannot be deferred into the deferred compensation plan are accounted for as equity awards. Eligible employees can only elect to defer up to 80% of their awards into the deferred compensation plan. Equity awards are measured based on the fair value on the grant date. Awards that an employee has elected to defer into the deferred compensation plan are accounted for as liability awards and are recorded at fair value each reporting period. |
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Nonemployee Directors Deferred Stock Units |
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Each nonemployee director is granted deferred stock units (DSUs), typically in January of each year. The number of DSUs granted is calculated by dividing a set dollar amount by our closing common stock price on December 31 of the prior year. Prior to January 1, 2013, under the terms of the agreement, these awards vested immediately, and therefore were expensed on the grant date. Beginning in 2013, these awards generally vest over one year. Therefore, the expense for these awards is recognized pro-rata over the year in which the grant occurs. |
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(u) Earnings Per Share—Basic earnings per share is computed by dividing net income attributed to common shareholders by the weighted average number of common shares outstanding during the period, adjusted for shares we are obligated to issue under the deferred compensation and restricted share unit plans. Diluted earnings per share is computed in a similar manner, but includes the exercise and/or conversion of all potentially dilutive securities. Such dilutive items include in-the-money stock options, performance stock rights, restricted share units, and certain shares issuable under the deferred compensation plan. As the obligation for the shares issuable under the deferred compensation plan is accounted for as a liability, the numerator is adjusted for any changes in income or loss that would have resulted had it been accounted for as an equity instrument during the period. |
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(v) Fair Value—A fair value measurement is required to reflect the assumptions market participants would use in pricing an asset or liability based on the best available information. These assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. |
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Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We use a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical measure for valuing certain derivative assets and liabilities. |
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Fair value accounting rules provide a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are defined as follows: |
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Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
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Level 2 – Pricing inputs are observable, either directly or indirectly, but are not quoted prices included within Level 1. Level 2 includes those financial instruments that are valued using external inputs within models or other valuation methods. |
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Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methods that result in management's best estimate of fair value. Level 3 instruments include those that may be more structured or otherwise tailored to customers' needs. |
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Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. |
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We primarily determine fair value using a market-based approach that uses observable market inputs where available, and internally developed inputs only when observable market data is not readily available. For the unobservable inputs, consideration is given to the assumptions that market participants would use in valuing the asset or liability. These factors include not only the credit standing of the counterparties involved, but also the impact of our nonperformance risk on our liabilities. |
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When possible, we base the valuations of our risk management assets and liabilities on quoted prices for identical assets in active markets. These valuations are classified in Level 1. The valuations of certain contracts include inputs related to market price risk (commodity or interest rate), price volatility (for option contracts), and price correlation (for cross commodity contracts). These inputs are available through multiple sources, including exchanges and brokers. Transactions valued using these inputs are classified in Level 2. |
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Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs. The primary reasons for a Level 3 classification are as follows: |
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• | While forward price curves may have been based on observable information, significant assumptions may have been made regarding monthly shaping and locational basis differentials. | | | | | | | | | | | |
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• | Certain transactions were valued using price curves that extended beyond an observable period. Assumptions were made to extrapolate prices from the last observable period through the end of the transaction term, primarily through the use of historically settled data or correlations to other locations. | | | | | | | | | | | |
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We have established risk oversight committees whose primary responsibility includes directly or indirectly ensuring that all valuation methods are applied in accordance with predefined policies. The development and maintenance of our forward price curves has been assigned to our risk management department, which is part of the corporate treasury function. This group is separate and distinct from any of the trading functions within the organization. To validate the reasonableness of our fair value inputs, our risk management department compares changes in valuation and researches any significant differences in order to determine the underlying cause. Changes to the fair value inputs are made if necessary. |
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Derivatives are transferred between the levels of the fair value hierarchy primarily due to changes in the source of data used to construct price curves as a result of changes in market liquidity. We recognize transfers at the value as of the end of the reporting period. |
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The fair values of long-term debt instruments are estimated based on the quoted market price for the same or similar issues, or on the current rates offered to us for debt of the same remaining maturity. The fair values of preferred stock are estimated based on quoted market prices when available, or by using a perpetual dividend discount model. The fair values of long-term debt instruments and preferred stock are categorized within Level 2 of the fair value hierarchy. Due to the short-term nature of cash and cash equivalents, accounts receivable, accounts payable, and outstanding commercial paper, the carrying amount for each of these items approximates fair value. |
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We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. |
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See Note 23, Fair Value, for more information. |
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(w) Advertising Costs—We expense all advertising costs as incurred, except for those capitalized as direct-response advertising. Costs associated with certain natural gas and electric direct-response advertising campaigns at Integrys Energy Services were capitalized and reported as other long-term assets on the balance sheets. The capitalized costs result in probable future benefits and were incurred to solicit sales to customers who could be shown to have responded specifically to the advertising. The asset balances for each of the direct-response advertising cost pools are reviewed quarterly for impairment. Direct-response advertising costs are amortized to operating and maintenance expense over the estimated period of benefit, which is approximately two years. |
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(x) New Accounting Pronouncements— |
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Recently Issued Accounting Guidance Not Yet Effective |
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Accounting Standards Update (ASU) 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date," was issued in February 2013. The guidance requires an entity to measure obligations under these arrangements, for which the total amount of the obligation is fixed at the reporting date, as the sum of the reporting entity's portion and any additional amount it expects to pay on behalf of its co-obligors. The guidance also requires additional disclosures about the nature and amount of the obligations. The guidance is effective for us for the reporting period ending March 31, 2014. Adoption of this guidance is not expected to have a significant impact on our financial statements. |
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ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," was issued in July 2013. The guidance states that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, there are certain exceptions under which the unrecognized tax benefit would be presented in the balance sheet as a liability. The guidance is effective for us for the reporting period ending March 31, 2014. Adoption of this guidance is not expected to have a significant impact on our financial statements. |
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ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects," was issued in January 2014. The guidance allows investors to use the proportional amortization method to account for investments in qualified affordable housing projects if certain conditions are met. Under that method, which replaces the effective yield method, an investor amortizes the cost of its investment, in proportion to the tax credits and other tax benefits it receives, to income tax expense. The guidance also requires new disclosures for all investments in these types of projects. The guidance is effective for us for the reporting period ending March 31, 2015. Adoption of this guidance is not expected to have a significant impact on our financial statements. |