Fair Value

Fair Value Measurements

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:



	December 31, 2014
(Millions)	Level 1		Level 2		Level 3		Total
Risk management assets
Natural gas contracts	$	—	$	0.1	$	—	$	0.1
Financial transmission rights (FTRs)	—		—		2.2		2.2
Total	$	—	$	0.1	$	2.2	$	2.3

Risk management liabilities
Natural gas contracts	$	2.2	$	—	$	—	$	2.2
FTRs	—		—		0.3		0.3
Petroleum product contracts	1.1		—		—		1.1
Coal contracts	—		1.2		2.2		3.4
Total	$	3.3	$	1.2	$	2.5	$	7.0



	December 31, 2013
(Millions)	Level 1		Level 2		Level 3		Total
Risk management assets
Natural gas contracts	$	0.6	$	—	$	—	$	0.6
FTRs	—		—		1.5		1.5
Petroleum product contracts	0.1		—		—		0.1
Coal contracts	—		—		0.2		0.2
Total	$	0.7	$	—	$	1.7	$	2.4

Risk management liabilities
Natural gas contracts	$	0.1	$	—	$	—	$	0.1
FTRs	—		—		0.3		0.3
Coal contracts	—		—		2.7		2.7
Total	$	0.1	$	—	$	3.0	$	3.1

The risk management assets and liabilities listed in the tables above include NYMEX futures and options, financial contracts used to manage transmission congestion costs in the MISO market, and physical commodity contracts. See Note 5, Risk Management Activities, for more information on our derivative instruments.

During 2014, a $1.2 million risk management liability related to certain coal contracts transferred from Level 3 to Level 2 of the fair value hierarchy. There were no transfers between the levels of the fair value hierarchy during 2013.

The significant unobservable inputs used in the valuations that resulted in categorization within Level 3 were as follows at December 31, 2014. The amounts listed in the table below represent the range of unobservable inputs that individually had a significant impact on the fair value determination and caused a derivative to be classified as Level 3.



	Fair Value (Millions)
	Assets		Liabilities		Valuation Technique	Unobservable Input	Average or Range
FTRs	$	2.2	$	0.3	Market-based	Forward market prices ($/megawatt-month) ⁽¹⁾	$188.16
Coal contract	—		2.2		Market-based	Forward market prices ($/ton) ⁽²⁾	$10.89 — $13.60


⁽¹⁾	Represents forward market prices developed using historical cleared pricing data from MISO.


⁽²⁾	Represents third-party forward market pricing.

Significant changes in historical settlement prices and forward coal prices would result in a directionally similar significant change in fair value.

The following tables set forth a reconciliation of changes in the fair value of items categorized as Level 3 measurements:



	2014
(Millions)	FTRs			Coal Contracts			Total
Balance at the beginning of period	$	1.2		$	(2.5	)	$	(1.3	)
Net realized gains included in earnings	0.2			—			0.2
Net unrealized gains recorded as regulatory assets or liabilities	0.4			(1.6		)	(1.2		)
Purchases	4.3			—			4.3
Settlements	(4.2		)	0.7			(3.5		)
Net transfers out of Level 3	—			1.2			1.2
Balance at the end of period	$	1.9		$	(2.2	)	$	(0.3	)



	2013
(Millions)	FTRs			Coal Contracts			Total
Balance at the beginning of period	$	1.1		$	(6.5	)	$	(5.4	)
Net realized gains included in earnings	3.0			—			3.0
Net unrealized (losses) gains recorded as regulatory assets or liabilities	(0.1		)	0.4			0.3
Purchases	3.2			—			3.2
Sales	(0.2		)	—			(0.2		)
Settlements	(5.8		)	3.6			(2.2		)
Balance at the end of period	$	1.2		$	(2.5	)	$	(1.3	)



	2012
(Millions)	FTRs			Coal Contracts			Total
Balance at the beginning of period	$	1.2		$	(6.9	)	$	(5.7	)
Net realized gains included in earnings	1.8			—			1.8
Net unrealized losses (gains) recorded as regulatory assets or liabilities	(0.1		)	5.8			5.7
Purchases	2.8			—			2.8
Sales	(0.1		)	—			(0.1		)
Settlements	(4.5		)	(5.4		)	(9.9		)
Balance at the end of period	$	1.1		$	(6.5	)	$	(5.4	)

Unrealized gains and losses on FTRs and coal contracts are deferred as regulatory assets or liabilities. Therefore, these fair value measurements have no impact on earnings. Realized gains and losses on FTRs, as well as the related transmission congestion costs, are recorded in cost of fuel, natural gas, and purchased power on the statements of income.

Fair Value of Financial Instruments

The following table shows the financial instruments included on our balance sheets that are not recorded at fair value:



	December 31, 2014				December 31, 2013
(Millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	1,174.5	$	1,286.2	$	1,174.5	$	1,176.5
Long-term debt to parent	5.4		5.7		6.3		7.1
Preferred stock	51.2		52.0		51.2		61.4