FAIR VALUE | 3 Months Ended |
Mar. 31, 2014 |
Fair Value Disclosures [Abstract] | ' |
FAIR VALUE | ' |
Fair Value |
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Fair Value Measurements |
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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 department 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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We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. |
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The following tables show assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy: |
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| | March 31, 2014 | | | | | | | | |
(Millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Risk Management Assets | | | | | | | | | | | | | | | | | | | | |
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Utility Segments | | | | | | | | | | | | | | | | | | | | |
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Natural gas contracts | | $ | 0.9 | | | $ | 12.4 | | | $ | — | | | $ | 13.3 | | | | | | | | | |
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Financial transmission rights (FTRs) | | — | | | — | | | 0.9 | | | 0.9 | | | | | | | | | |
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Petroleum product contracts | | 0.1 | | | — | | | — | | | 0.1 | | | | | | | | | |
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Coal contracts | | — | | | — | | | 1.8 | | | 1.8 | | | | | | | | | |
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Nonregulated Segments | | | | | | | | | | | | | | | | | | | | |
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Natural gas contracts | | 20.6 | | | 28.8 | | | 27.5 | | | 76.9 | | | | | | | | | |
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Electric contracts | | 88 | | | 127.6 | | | 21.8 | | | 237.4 | | | | | | | | | |
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Total Risk Management Assets | | $ | 109.6 | | | $ | 168.8 | | | $ | 52 | | | $ | 330.4 | | | | | | | | | |
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Investment in exchange-traded funds | | $ | 16.2 | | | $ | — | | | $ | — | | | $ | 16.2 | | | | | | | | | |
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Liabilities | | | | | | | | | | | | | | | | |
Risk Management Liabilities | | | | | | | | | | | | | | | | | | | | |
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Utility Segments | | | | | | | | | | | | | | | | | | | | |
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Natural gas contracts | | $ | 0.2 | | | $ | 0.2 | | | $ | — | | | $ | 0.4 | | | | | | | | | |
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FTRs | | — | | | — | | | 0.2 | | | 0.2 | | | | | | | | | |
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Coal contracts | | — | | | — | | | 1.5 | | | 1.5 | | | | | | | | | |
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Nonregulated Segments | | | | | | | | | | | | | | | | | | | |
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Natural gas contracts | | 10.2 | | | 20.4 | | | 22 | | | 52.6 | | | | | | | | | |
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Electric contracts | | 112.3 | | | 51.9 | | | 3.1 | | | 167.3 | | | | | | | | | |
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Total Risk Management Liabilities | | $ | 122.7 | | | $ | 72.5 | | | $ | 26.8 | | | $ | 222 | | | | | | | | | |
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Contingent consideration related to the acquisition of Compass Energy Services (Compass) | | $ | — | | | $ | — | | | $ | 7.8 | | | $ | 7.8 | | | | | | | | | |
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| | 31-Dec-13 | | | | | | | | |
(Millions) | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | |
Assets | | | | | | | | | | | | | | | | |
Risk Management Assets | | | | | | | | | | | | | | | | |
Utility Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | $ | 2.4 | | | $ | 7.7 | | | $ | — | | | $ | 10.1 | | | | | | | | | |
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FTRs | | — | | | — | | | 2.1 | | | 2.1 | | | | | | | | | |
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Petroleum product contracts | | 0.1 | | | — | | | — | | | 0.1 | | | | | | | | | |
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Coal contracts | | — | | | — | | | 0.2 | | | 0.2 | | | | | | | | | |
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Nonregulated Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | 16.3 | | | 35.2 | | | 35.6 | | | 87.1 | | | | | | | | | |
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Electric contracts | | 65.1 | | | 134.9 | | | 15.9 | | | 215.9 | | | | | | | | | |
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Total Risk Management Assets | | $ | 83.9 | | | $ | 177.8 | | | $ | 53.8 | | | $ | 315.5 | | | | | | | | | |
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Investment in exchange-traded funds | | $ | 15.9 | | | $ | — | | | $ | — | | | $ | 15.9 | | | | | | | | | |
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Liabilities | | | | | | | | | | | | | | | | |
Risk Management Liabilities | | | | | | | | | | | | | | | | |
Utility Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | $ | 0.5 | | | $ | 0.6 | | | $ | — | | | $ | 1.1 | | | | | | | | | |
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FTRs | | — | | | — | | | 0.3 | | | 0.3 | | | | | | | | | |
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Coal contracts | | — | | | — | | | 2.7 | | | 2.7 | | | | | | | | | |
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Nonregulated Segments | | | | | | | | | | | | | | | | |
Natural gas contracts | | 14.3 | | | 22 | | | 25.2 | | | 61.5 | | | | | | | | | |
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Electric contracts | | 98.8 | | | 58.7 | | | 3.5 | | | 161 | | | | | | | | | |
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Total Risk Management Liabilities | | $ | 113.6 | | | $ | 81.3 | | | $ | 31.7 | | | $ | 226.6 | | | | | | | | | |
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Contingent consideration related to the acquisition of Compass | | $ | — | | | $ | — | | | $ | 7.8 | | | $ | 7.8 | | | | | | | | | |
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The risk management assets and liabilities listed in the tables above include options, swaps, futures, physical commodity contracts, and other instruments used to manage market risks related to changes in commodity prices. They also include FTRs, which are used to manage electric transmission congestion costs in the MISO market. See Note 3, Risk Management Activities, for more information. |
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The following tables show net risk management assets transferred between the levels of the fair value hierarchy: |
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| | Nonregulated Segments — Natural Gas Contracts |
| | Three Months Ended March 31, 2014 | | Three Months Ended March 31, 2013 |
(Millions) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Transfers into Level 1 from | | N/A | | | $ | — | | | $ | — | | | N/A | | | $ | — | | | $ | — | |
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Transfers into Level 2 from | | $ | — | | | N/A | | | 0.1 | | | $ | — | | | N/A | | | — | |
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Transfers into Level 3 from | | — | | | 0.9 | | | N/A | | | — | | | 0.2 | | | N/A | |
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| | Nonregulated Segments — Electric Contracts |
| | Three Months Ended March 31, 2014 | | Three Months Ended March 31, 2013 |
(Millions) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Transfers into Level 1 from | | N/A | | | $ | — | | | $ | — | | | N/A | | | $ | — | | | $ | — | |
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Transfers into Level 2 from | | $ | — | | | N/A | | | 4.4 | | | $ | — | | | N/A | | | 5.5 | |
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Transfers into Level 3 from | | — | | | 2.6 | | | N/A | | | — | | | — | | | N/A | |
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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 between the levels at the value as of the end of the reporting period. |
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The amounts and percentages listed in the table below represent the range of unobservable inputs used in the valuations that individually had a significant impact on the fair value determination and caused a derivative to be classified as Level 3 at March 31, 2014: |
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| | Fair Value (Millions) | | | | | | | | | | | | | | | | |
| | Assets | | Liabilities | | Valuation Technique | | Unobservable Input | | Average or Range | | | | | | | | | | |
Utility Segments | | | | | | | | | | | | | | | | | | | | | | |
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FTRs | | $ | 0.9 | | | $ | 0.2 | | | Market-based | | Forward market prices ($/megawatt-month) (1) | | $172.92 | | | | | | | | | | |
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Coal contracts | | 1.8 | | | 1.5 | | | Market-based | | Forward market prices ($/ton) (2) | | $12.11 — $15.25 | | | | | | | | | | |
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Nonregulated Segments | | | | | | | | | | | | | | | | | | | | | | |
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Natural gas contracts | | 27.5 | | | 22 | | | Market-based | | Forward market prices ($/dekatherm) (3) | | ($2.59) — $3.85 | | | | | | | | | | |
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| | | | | | | | | | Probability of default (4) | | 11.6% — 51.0% | | | | | | | | | | |
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Electric contracts | | 21.8 | | | 3.1 | | | Market-based | | Forward market prices ($/megawatt-hours) (3) | | ($5.02) — $10.06 | | | | | | | | | | |
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| | | | | | | | Probability of default (4) | | 26.00% | | | | | | | | | | |
| | | | | | | | | | Option volatilities (5) | | 19.8% — 155.6% | | | | | | | | | | |
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| | | | | | | | Monthly curve shaping (6) | | -27.00% | | | | | | | | | | |
Contingent consideration related to the acquisition of Compass | | N/A | | | 7.8 | | | Income-based | | Growth rate (7) | | (13.2)% - 49.3% | | | | | | | | | | |
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(1) | Represents forward market prices developed using historical cleared pricing data from MISO. | | | | | | | | | | | | | | | | | | | | | | | |
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(2) | Represents third-party forward market pricing. | | | | | | | | | | | | | | | | | | | | | | | |
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(3) | Represents unobservable basis spreads developed using historical settled prices that are applied to observable market prices at various natural gas and electric locations, as well as unobservable adjustments made to extend observable market prices beyond the quoted period through the end of the transaction term. | | | | | | | | | | | | | | | | | | | | | | | |
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(4) | Based on Moody's one-year counterparty default percentages. | | | | | | | | | | | | | | | | | | | | | | | |
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(5) | Represents the range of volatilities used in the valuation of options. Volatilities are derived from an internal model using volatility curves from third parties. | | | | | | | | | | | | | | | | | | | | | | | |
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(6) | Represents adjustments made to forward market price curves to disaggregate average prices of multiple periods into discrete monthly prices. | | | | | | | | | | | | | | | | | | | | | | | |
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(7) | Represents the range of assumed growth rates of earnings before interest, taxes, and amortization input into the valuation model. | | | | | | | | | | | | | | | | | | | | | | | |
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Significant changes in historical settlement prices, forward commodity prices, and option volatilities would result in a directionally similar significant change in fair value. Significant changes in probability of default would result in a significant directionally opposite change in fair value. Changes in the adjustments to prices related to monthly curve shaping would affect fair value differently depending on their direction. A significant decrease in the growth rate used to value the contingent consideration would result in a directionally similar significant change in fair value. A significant increase in the growth rate would not have a significant impact on the fair value as the contingent consideration is limited to $8.0 million. |
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The following tables set forth a reconciliation of changes in the fair value of items categorized as Level 3 measurements: |
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Three Months Ended March 31, 2014 | | Nonregulated Segments | | Utility Segments | | |
(Millions) | | Natural Gas | | Electric | | Contingent Consideration | | FTRs | | Coal Contracts | | Total |
Balance at the beginning of the period | | $ | 10.4 | | | $ | 12.4 | | | $ | (7.8 | ) | | $ | 1.8 | | | $ | (2.5 | ) | | $ | 14.3 | |
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Net realized and unrealized (losses) gains included in earnings | | (6.2 | ) | | 12.6 | | | — | | | 0.4 | | | — | | | 6.8 | |
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Net unrealized gains recorded as regulatory assets or liabilities | | — | | | — | | | — | | | — | | | 2.2 | | | 2.2 | |
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Purchases | | — | | | 0.7 | | | — | | | (0.1 | ) | | — | | | 0.6 | |
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Sales | | — | | | (0.7 | ) | | — | | | — | | | — | | | (0.7 | ) |
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Settlements | | 0.5 | | | (4.5 | ) | | — | | | (1.4 | ) | | 0.6 | | | (4.8 | ) |
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Net transfers into Level 3 | | 0.9 | | | 2.6 | | | — | | | — | | | — | | | 3.5 | |
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Net transfers out of Level 3 | | (0.1 | ) | | (4.4 | ) | | — | | | — | | | — | | | (4.5 | ) |
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Balance at the end of the period | | $ | 5.5 | | | $ | 18.7 | | | $ | (7.8 | ) | | $ | 0.7 | | | $ | 0.3 | | | $ | 17.4 | |
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Net unrealized (losses) gains included in earnings related to instruments still held at the end of the period | | $ | (6.2 | ) | | $ | 12.6 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6.4 | |
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Three Months Ended March 31, 2013 | | Nonregulated Segments | | Utility Segments | | | | | | |
(Millions) | | Natural Gas | | Electric | | FTRs | | Coal Contracts | | Total | | | | |
Balance at the beginning of the period | | $ | 3.9 | | | $ | (4.3 | ) | | $ | 2 | | | $ | (6.5 | ) | | $ | (4.9 | ) | | | | |
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Net realized and unrealized (losses) gains included in earnings | | (1.5 | ) | | 15.1 | | | 0.3 | | | — | | | 13.9 | | | | | |
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Net unrealized (losses) gains recorded as regulatory assets or liabilities | | — | | | — | | | (0.2 | ) | | 3.1 | | | 2.9 | | | | | |
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Purchases | | — | | | 0.7 | | | — | | | — | | | 0.7 | | | | | |
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Settlements | | (0.9 | ) | | 0.1 | | | (1.2 | ) | | (1.2 | ) | | (3.2 | ) | | | | |
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Net transfers into Level 3 | | 0.2 | | | — | | | — | | | — | | | 0.2 | | | | | |
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Net transfers out of Level 3 | | — | | | (5.5 | ) | | — | | | — | | | (5.5 | ) | | | | |
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Balance at the end of the period | | $ | 1.7 | | | $ | 6.1 | | | $ | 0.9 | | | $ | (4.6 | ) | | $ | 4.1 | | | | | |
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Net unrealized (losses) gains included in earnings related to instruments still held at the end of the period | | $ | (1.5 | ) | | $ | 15.1 | | | $ | — | | | $ | — | | | $ | 13.6 | | | | | |
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Realized and unrealized gains and losses included in earnings related to IES’s risk management assets and liabilities are recorded through nonregulated revenue or nonregulated cost of sales on the statements of income, depending on the nature of the instrument. Unrealized gains and losses on Level 3 derivatives at the utilities are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on these instruments flow through utility cost of fuel, natural gas, and purchased power on the statements of income. |
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Fair Value of Financial Instruments |
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The following table shows the financial instruments included on our balance sheets that are not recorded at fair value: |
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| | March 31, 2014 | | December 31, 2013 | | | | | | | | |
(Millions) | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | | | | | | | | |
Long-term debt | | $ | 3,056.20 | | | $ | 3,076.40 | | | $ | 3,056.20 | | | $ | 3,031.60 | | | | | | | | | |
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Preferred stock of subsidiary | | 51.1 | | | 57.3 | | | 51.1 | | | 61.2 | | | | | | | | | |
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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. |
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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. |