v2.3.0.11
Fair Value Disclosures
 6 Months Ended
Jun. 30, 2011
Fair Value Disclosures  
Fair Value Disclosures
10. Fair Value Disclosures

A. Fair Value Measurements.

Recurring Fair Value Measurements. The following tables present financial assets and liabilities measured and recorded at fair value on NiSource's Condensed Consolidated Balance Sheet (unaudited) on a recurring basis and their level within the fair value hierarchy as of June 30, 2011 and December 31, 2010:

 

Recurring Fair Value Measurements June 30, 2011 (in millions)

    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) 		     Significant
Other
Observable
Inputs
(Level 2) 		     Significant
Unobservable
Inputs
(Level 3) 		     Balance as of
June 30 2011 		 

Assets

            

Commodity Price risk management assets:

            

Physical price risk programs

    $ —         $ 122.3       $ —         $ 122.3   

Financial price risk programs

      121.1         2.5         —           123.6   

Interest rate risk activities

      —           60.7         —           60.7   

Available-for-sale securities

      38.8         42.4         —           81.2   
                                   

Total

    $ 159.9       $ 227.9       $ —         $ 387.8   
                                   

Liabilities

            

Commodity Price risk management liabilities:

            

Physical price risk programs

    $ —         $ 2.8       $ —         $ 2.8   

Financial price risk programs

      257.1         2.1         0.8         260.0   
                                   

Total

    $ 257.1       $ 4.9       $ 0.8       $ 262.8   
                                   

Recurring Fair Value Measurements December 31, 2010 (in millions)

    Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) 		     Significant
Other
Observable
Inputs
(Level 2) 		     Significant
Unobservable
Inputs
(Level 3) 		     Balance as of
December 31,  2010 		 

Assets

            

Commodity Price risk management assets:

            

Physical price risk programs

    $ —         $ 161.4       $ —         $ 161.4   

Financial price risk programs

      173.8         3.2         0.3         177.3   

Interest rate risk activities

      —           61.1         —           61.1   

Available-for-sale securities

      43.5         37.9         —           81.4   
                                   

Total

    $ 217.3       $ 263.6       $ 0.3       $ 481.2   
                                   

Liabilities

            

Commodity Price risk management liabilities:

            

Physical price risk programs

    $ —         $ 3.6       $ —         $ 3.6   

Financial price risk programs

      348.5         3.3         0.1         351.9   
                                   

Total

    $ 348.5       $ 6.9       $ 0.1       $ 355.5   
                                   

Price risk management assets and liabilities include commodity exchange-traded and non-exchange-based derivative contracts. Exchange-traded derivative contracts are generally based on unadjusted quoted prices in active markets and are classified within Level 1. These financial assets and liabilities are secured with cash on deposit with the exchange; therefore nonperformance risk has not been incorporated into these valuations. Certain non-exchange-traded derivatives are valued using broker or over-the-counter, on-line exchanges. In such cases, these non-exchange-traded derivatives are classified within Level 2. Non-exchange-based derivative instruments include swaps, forwards, and options. In certain instances, these instruments may utilize models to measure fair value. NiSource uses a similar model to value similar instruments. Valuation models utilize various inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and market-corroborated inputs, i.e., inputs derived principally from or corroborated by observable market data by correlation or other means. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. Certain derivatives trade in less active markets with a lower availability of pricing information and models may be utilized in the valuation. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Credit risk is considered in the fair value calculation of derivative instruments that are not exchange-traded. Credit exposures are adjusted to reflect collateral agreements which reduce exposures.

To determine the fair value of derivatives associated with NiSource's unregulated natural gas marketing business, certain reserves were calculated. These reserves were primarily determined by evaluating the credit worthiness of certain customers, fair value of future cash flows, and the cost of maintaining restricted cash. Refer to Note 9, "Risk Management Activities" for additional information on price risk assets.

Price risk management assets also include fixed-to-floating interest-rate swaps, which are designated as fair value hedges, as a means to achieve NiSource's targeted level of variable-rate debt as a percent of total debt. NiSource uses a calculation of future cash inflows and estimated future outflows related to the swap agreements, which are discounted and netted to determine the current fair value. Additional inputs to the present value calculation include the contract terms, as well as market parameters such as current and projected interest rates and volatility. As they are based on observable data and valuations of similar instruments, the interest-rate swaps are categorized in Level 2 in the fair value hierarchy. Credit risk is considered in the fair value calculation of the interest rate swap.

Available-for-sale securities are investments pledged as collateral for trust accounts related to NiSource's wholly-owned insurance company. Available-for-sale securities are included within "Other investments" in the Condensed Consolidated Balance Sheets (unaudited). Securities classified within Level 1 include U.S. Treasury debt securities which are highly liquid and are actively traded in over-the-counter markets. NiSource values corporate and mortgage-backed debt securities using a matrix pricing model that incorporates market-based information. These securities trade less frequently and are classified within Level 2. Total gains and losses from available-for-sale securities are included in other comprehensive income (loss). The amortized cost, gross unrealized gains and losses, and fair value of available-for-sale debt securities at June 30, 2011 and December 31, 2010 were:

 

(in millions)

    Amortized
Cost 		     Total
Gains 		     Total
Losses 		    Fair
Value 		 

Available-for-sale debt securities, June 30 2011

           

U.S. Treasury

    $ 38.4       $ 0.6       $ (0.2 )    $ 38.8   

Corporate/Other

      41.2         1.3         (0.1 )      42.4   
                                  

Total Available-for-sale debt securities

    $ 79.6       $ 1.9       $ (0.3 )    $ 81.2   
                                  

(in millions)

    Amortized
Cost 		     Total
Gains 		     Total
Losses 		    Fair
Value 		 

Available-for-sale debt securities, Dec. 31, 2010

           

U.S. Treasury

    $ 43.4       $ 0.6       $ (0.5 )    $ 43.5   

Corporate/Other

      36.1         2.0         (0.2 )      37.9   
                                  

Total Available-for-sale debt securities

    $ 79.5       $ 2.6       $ (0.7 )    $ 81.4   
                                  

For the three months ended June 30, 2011 and 2010, the net realized gain on the sale of available-for-sale U.S. Treasury debt securities was $0.2 million and $0.1 million, respectively. For the three months ended June 30, 2011 and 2010, the realized gain on sale of available-for-sale Corporate/Other bond debt securities was $0.5 million and $0.3 million, respectively.

 

For the six months ended June 30, 2011 and 2010, the net realized gain on the sale of available-for-sale U.S. Treasury debt securities was $0.3 million and $0.1 million, respectively. For the six months ended June 30, 2011 and 2010, the realized gain on sale of available-for-sale Corporate/Other bond debt securities was $1.0 million and $0.7 million, respectively.

The cost of maturities sold is based upon specific identification. At June 30, 2011, approximately $0.7 million of U.S. Treasury debt securities have maturities of less than a year while the remaining securities have maturities of greater than one year. At June 30, 2011, approximately $1.0 million of Corporate/Other bonds have maturities of less than a year while the remaining securities have maturities of greater than one year.

NiSource adopted the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which is effective for fiscal years beginning after December 15, 2010 during the first quarter of 2011. The following tables present the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011 and 2010:

 

Three Months Ended June 30, 2011 (in millions)

    Financial
Transmission
Rights 		    Other
Derivatives 		    Total  

Balance as of April 1, 2011

    $ —        $ (0.1 )    $ (0.1 ) 
                        

Total gains or (losses) (unrealized/realized)

       

Included in regulatory assets/liabilities

      —          (0.6 )      (0.6 ) 

Purchases

      —          (0.5 )      (0.5 ) 

Settlements

      —          0.4        0.4   
                        

Balance as of June 30, 2011

    $ —        $ (0.8 )    $ (0.8 ) 

Change in unrealized gains/(losses) relating to instruments still held as of June 30, 2011

    $ —        $ (1.5 )    $ (1.5 ) 
                        

Three Months Ended June 30, 2010 (in millions)

    Financial
Transmission
Rights 		    Other
Derivatives 		    Total  

Balance as of April 1, 2010

    $ 0.9      $ (0.1 )    $ 0.8   
                        

Total gains or losses (unrealized/realized)

       

Included in regulatory assets/liabilities

      (3.2 )      —          (3.2 ) 

Settlements

      2.3        0.3        2.6   
                        

Balance as of June 30, 2010

    $ —        $ 0.2      $ 0.2   

Change in unrealized gains/(losses) relating to instruments still held as of June 30, 2010

    $ —        $ —        $ —     
                        

 

Six Months Ended, June 30, 2011 (in millions)

    Financial
Transmission
Rights 		    Other
Derivatives 		    Total  

Balance as of January 1, 2011

    $ —        $ 0.2      $ 0.2   
                        

Total gains or (losses) (unrealized/realized)

       

Included in regulatory assets/liabilities

      —          (1.0 )      (1.0 ) 

Purchases

      —          (1.0 )      (1.0 ) 

Settlements

      —          1.0        1.0   
                        

Balance as of June 30, 2011

    $ —        $ (0.8 )    $ (0.8 ) 

Change in unrealized gains/(losses) relating to instruments still held as of June 30, 2011

    $ —        $ (1.5 )    $ (1.5 ) 
                        

Six Months Ended, June 30, 2010 (in millions)

    Financial
Transmission
Rights 		    Other
Derivatives 		    Total  

Balance as of January 1, 2010

    $ 1.9      $ 0.2      $ 2.1   
                        

Total gains or losses (unrealized/realized)

       

Included in regulatory assets/liabilities

      (4.2 )      —          (4.2 ) 

Settlements

      2.3        —          2.3   
                        

Balance as of June 30, 2010

    $ —        $ 0.2      $ 0.2   

Change in unrealized gains/(losses) relating to instruments still held as of June 30, 2010

    $ —        $ —        $ —     
                        

As discussed in Note 9, as part of the MISO Day 2 initiative, Northern Indiana obtains FTRs, which help to offset congestion costs due to the MISO Day 2 activity. These instruments are considered derivatives and are classified as Level 3 and reflected in the table above. FTRs are valued using a valuation model based on the value of allocated ARRs and forecasted congestion costs. Since congestion costs are recoverable through the fuel cost recovery mechanism, the related gains and losses associated with marking these derivatives to market are recorded as a regulatory asset or liability. Northern Indiana also writes options for regulatory incentive purposes which are also considered Level 3 valuations. Realized gains and losses for these Level 3 recurring items are included in income within Cost of Sales on the Condensed Statements of Consolidated Income (unaudited). Unrealized gains and losses from Level 3 recurring items are included within Regulatory assets or Regulatory liabilities on the Condensed Consolidated Balance Sheets (unaudited).

Non-recurring Fair Value Measurements. During the second quarter of 2011, NiSource acquired $19.3 million of assets at fair value as a result of the Lake Erie Land transaction described within Note 6, "Discontinued Operations and Assets and Liabilities Held for Sale". The fair value was determined based on third party appraisals based on unobservable inputs and is deemed to be a Level 3 fair value measurement under the fair value hierarchy. See Note 6 for further discussion.

B. Other Fair Value Disclosures for Financial Instruments. NiSource has certain financial instruments that are not measured at fair value on a recurring basis but nevertheless are recorded at amounts that approximate fair value due to their liquid or short-term nature, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, customer deposits and short-term borrowings. NiSource's long-term borrowings are recorded at historical amounts unless designated as a hedged item in a fair value hedge.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value.

Investments. NiSource has corporate owned life insurance which is measured and recorded at cash surrender value. NiSource's investments in corporate owned life insurance at June 30, 2011 and December 31, 2010 were $27.0 million and $26.0 million, respectively.

 

Long-term Debt. The fair values of these securities are estimated based on the quoted market prices for the same or similar issues or on the rates offered for securities of the same remaining maturities. Certain premium costs associated with the early settlement of long-term debt are not taken into consideration in determining fair value.

The carrying amount and estimated fair values of financial instruments were as follows:

(in millions)    Carrying
Amount as of
June 30 2011 		     Estimated Fair
Value as of
June 30 2011 		     Carrying
Amount as of
Dec. 31, 2010 		     Estimated Fair
Value as of
Dec. 31, 2010 		 

Long-term investments

    $ 27.6       $ 26.4       $ 26.7       $ 25.4   

Long-term debt (including current portion)

      6,370.0         6,972.5         5,970.3         6,482.4