SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Nature of operations | (a) Nature of Operations—We are an energy holding company whose primary wholly owned subsidiaries at December 31, 2014, included MERC, MGU, NSG, PGL, WPS, IBS, ITF, and PDI. Of these subsidiaries, five are natural gas and/or electric utilities (MERC, MGU, NSG, PGL, and WPS). IBS is a centralized service company, ITF is a nonregulated compressed natural gas fueling business, and PDI is a nonregulated distributed solar energy company. In addition, we have an approximate 34% interest in ATC. |
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In August 2014, we sold UPPCO, and, in November 2014, we sold IES's retail energy business. See Note 4, Dispositions, for more information on these sales. |
Basis of presentation | (b) Basis of Presentation—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 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 10, Equity Method Investments, for more information. |
Reclassifications | (c) Reclassifications—The assets and liabilities associated with the sale of UPPCO and the sale of eight ITF compressed natural gas fueling stations were reclassified to held for sale on our December 31, 2013, balance sheet. The assets and liabilities related to the sale of IES's retail energy business were reclassified as assets and liabilities of discontinued operations on our December 31, 2013, balance sheet. In addition, the operations of IES's retail energy business were reclassified to discontinued operations on our income statements for the years ended December 31, 2013, and 2012. See Note 4, Dispositions, for more information on these sales. |
Use of estimates | (d) 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. |
Cash and cash equivalents | (e) Cash and Cash Equivalents—Short-term investments with an original maturity of three months or less are reported as cash equivalents. |
Revenue and Customer Receivables | (f) Revenues 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, 2014 and 2013, our unbilled revenues were $269.4 million and $286.4 million, respectively. |
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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 2014 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. WPS monitors the deferral of these costs to ensure that it does not cause them to earn a greater return on common equity than authorized by the PSCW. | | | | | | | | | | | |
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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 and NSG included riders for cost recovery or refund of uncollectible expense based on the difference between actual uncollectible write-offs and the amounts recovered in customer rates. | | | | | | | | | | | |
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• | The rates of PGL, NSG, and MERC included decoupling mechanisms. These mechanisms differ by state and allow utilities to recover or refund differences between actual and authorized margins. See Note 25, Regulatory Environment, for more information. | | | | | | | | | | | |
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• | In 2014, PGL's rates included a cost recovery mechanism for upgrades to the Illinois natural gas utility infrastructure. | | | | | | | | | | | |
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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 sells and purchases power in the MISO market. UPPCO also sold and purchased power in the MISO market until it was sold in August 2014. If WPS or UPPCO was a net seller in a particular hour, the net amount was reported as revenue. If WPS or UPPCO was a net purchaser in a particular hour, the net amount was 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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We provide regulated electric and natural gas service to customers in Illinois, Michigan, Minnesota, and Wisconsin. The geographic concentration of our customers did not contribute significantly to our overall exposure to credit risk. We periodically review customers' credit ratings, financial statements, and historical payment performance and require them to provide collateral or other security as needed. Credit risk exposure at PGL and NSG is mitigated by their rider for cost recovery or refund of uncollectible expense discussed above. As a result, we did not have any significant concentrations of credit risk at December 31, 2014. In addition, there were no customers that accounted for more than 10% of our revenues for the year ended December 31, 2014. |
Inventories | (g) 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 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 37% of total inventories at December 31, 2014, and 30% of total inventories at December 31, 2013. The estimated replacement cost of natural gas in inventory at December 31, 2014, and December 31, 2013, exceeded the LIFO cost by $47.7 million and $151.7 million, respectively. In calculating these replacement amounts, PGL and NSG used a Chicago city-gate natural gas price per dekatherm of $3.04 at December 31, 2014, and $4.77 at December 31, 2013. |
Risk Management Activities | (h) 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 6, 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. |
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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 reflected in other current assets, and cash collateral received from others is reflected in other current liabilities. |
Emission Allowances | (i) Emission Allowances—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. |
Property, plant, and equipment | (j) 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 and repair costs, as well as replacement and renewal costs associated with items not qualifying as units of property, are recorded as 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 | | 2014 | | 2013 | | 2012 | | | |
MERC (1) | | 2.49 | % | | 1.88 | % | | 3.07 | % | | | |
MGU (2) | | 2.65 | % | | 1.93 | % | | 2.71 | % | | | |
NSG | | 2.44 | % | | 2.44 | % | | 2.43 | % | | | |
PGL | | 3.2 | % | | 3.19 | % | | 3.16 | % | | | |
WPS – Electric | | 2.73 | % | | 2.79 | % | | 2.87 | % | | | |
WPS – Natural gas | | 2.17 | % | | 2.19 | % | | 2.21 | % | | | |
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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 and repair costs 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 7, Property, Plant, and Equipment, for more information. |
AFUDC and capitalized interest | (k) 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 2014, WPS's average AFUDC retail rate was 8.08%, and its average AFUDC wholesale rate was 6.99%. 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 2014, 2013, or 2012. |
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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 | | $ | 12.5 | | | $ | 10.8 | | | $ | 2.9 | |
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Allowance for borrowed funds used during construction | | 5.2 | | | 4.1 | | | 1 | |
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Regulatory Assets and Liabilities | (l) 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 9, Regulatory Assets and Liabilities, for more information. |
Investments in Exchange-Traded Funds | (m) Investments in Exchange-Traded Funds—We have investments in exchange-traded funds. These investments are held in a rabbi trust to help fund our obligations under our deferred compensation plan and certain non-qualified pension plans. These investments are classified as trading securities for accounting purposes. As we do not intend to sell them in the near term, they are included in other long-term assets on our balance sheets. The net unrealized gains included in earnings related to the investments held at the end of the period were $1.8 million, $1.9 million, and $1.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. |
Asset impairment | (n) Asset Impairment—Goodwill and other intangible assets with indefinite lives 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 11, 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. |
Retirement of Debt | (o) 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. |
Asset retirement obligations | (p) 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 15, Asset Retirement Obligations, for more information. |
Environmental Remediation Costs | (q) 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 17, 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 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 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, as appropriate, to reflect the new cost estimates. Any material changes in cost estimates are adjusted throughout the year. |
Income taxes | (r) 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 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 16, Income Taxes, for more information regarding accounting for income taxes. |
Guarantees | (s) Guarantees—We follow the guidance of the Guarantees Topic 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 22, Guarantees, for more information. |
Employee Benefits | (t) 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, which is estimated using the following approaches by plan. For plans sponsored by IBS and WPS, we use the calculated value approach. For plans sponsored by PELLC, we use the fair market value approach. 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 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 businesses record changes in the funded status in accumulated other comprehensive income. The 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 18, Employee Benefit Plans, for more information. |
Stock-Based Compensation | (u) Stock-Based Compensation—In May 2014, our shareholders approved the 2014 Omnibus Incentive Compensation Plan (2014 Omnibus Plan). Under the provisions of the 2014 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 forfeited under prior plans. No single employee who is our chief executive officer, chief financial officer, or any 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 or receive a payout in excess of 250,000 shares for performance stock rights during any calendar year. 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, 2014, stock options, performance stock rights, and restricted share units were outstanding under prior 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. |
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Effective October 24, 2014, our Board of Directors accelerated the vesting of all unvested stock options held by active employees in order to help mitigate the tax impacts of Section 280G of the Internal Revenue Code on us and certain of our employees. All stock options awarded to active employees also became exercisable as of this date. For retirees, 25% of their stock options granted will continue to become exercisable each year on the anniversary of the grant date. |
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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. Effective October 24, 2014, our Board of Directors approved the acceleration of the distribution of certain performance stock rights held by active employees. For those performance stock rights with a performance period ending December 31, 2014, a portion of the estimated distribution was made in December 2014. This change was made to help mitigate the tax impacts of Section 280G of the Internal Revenue Code on us and certain of our employees. |
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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 Share Units |
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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. 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. DSUs generally vest over one year. Therefore, the expense for these awards is recognized pro-rata over the year in which the grant occurs. Upon vesting, these awards are deferred into the deferred compensation plan; however, their value cannot be diversified among the various investment options. As DSUs can only be settled in our common stock, they are accounted for as equity awards. |
Earnings Per Share | (v) 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, unvested director DSUs, 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. |
Fair Value | (w) 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. |
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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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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 not classified as Level 1 may be based on observable inputs related to market price risk (commodity or interest rate), price volatility (for option contracts), and price correlation (for cross commodity contracts). 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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• | Financial contracts used to manage transmission congestion costs in the MISO market are valued using historical prices. | | | | | | | | | | | |
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• | The valuation for physical coal contracts is based on significant assumptions made to extrapolate prices from the last observable period through the end of the transaction term. | | | | | | | | | | | |
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• | Certain natural gas contracts are valued using internally-developed inputs due to the absence of available market data for certain 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 supply 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 levels of the fair value hierarchy due to observable pricing becoming available as the remaining contract term becomes shorter. 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 24, Fair Value, for more information. |
New Accounting Pronouncements | (x) New Accounting Pronouncements— |
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Recently Issued Accounting Guidance Not Yet Effective |
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In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis." The guidance focuses on the consolidation evaluation for companies that are required to evaluate whether they should consolidate certain legal entities. This ASU eliminates the specialized guidance for limited partnerships and similar legal entities. It places more emphasis on risk of loss when determining a controlling financial interest and amends the guidance for assessing how relationships of related parties affect the consolidation analysis of variable interest entities. The guidance is effective for us for the reporting period ending March 31, 2016. We are currently evaluating the impact this guidance will have on our financial statements. |
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In January 2015, the FASB issued ASU 2015-01, "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." This guidance no longer requires or allows the disclosure of extraordinary items, net of tax, in the income statement after income from continuing operations. The guidance is effective for us for the reporting period ending March 31, 2016. We do not currently have any extraordinary items presented on the income statements. However, this guidance will eliminate the need for us to further assess whether unusual and infrequently occurring transactions qualify as an extraordinary item in the future. |
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In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." This ASU supersedes the requirements in the Revenue Recognition Topic of the FASB ASC and most industry-specific guidance throughout the ASC. The guidance is based on the principle that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows from customer contracts. The guidance is effective for us for the reporting period ending March 31, 2017. The standard requires either retrospective application by restating each prior period presented in the financial statements, or modified retrospective application by recording the cumulative effect of prior reporting periods to beginning retained earnings in the year that the standard becomes effective. Management is currently evaluating the impact that the adoption of this standard will have on our financial statements. |
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In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. Management early adopted this guidance in the third quarter of 2014. See Note 4, Dispositions, for more information. |
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In January 2014, the FASB issued ASU 2014-01, "Accounting for Investments in Qualified Affordable Housing Projects." 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. Although we have investments in affordable housing projects, adoption of this guidance is not expected to have a significant impact on our financial statements. |