Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

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).

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:

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.

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.

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.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. 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. We primarily use a market approach for recurring fair value measurements and attempt to use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

When possible, we base the valuations of our risk management assets and liabilities on quoted prices for identical assets and liabilities in active markets. These valuations are classified in Level 1. The valuations of certain contracts not classified as Level 1 may be based on quoted market prices received from counterparties and/or observable inputs for similar instruments. Transactions valued using these inputs are classified in Level 2. Certain derivatives are categorized in Level 3 due to the significance of unobservable or internally-developed inputs.

The following tables summarize our financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy:

	As of September 30, 2015
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Derivative Assets
Natural gas contracts	$	2.6	$	3.9	$	—	$	6.5
Financial transmission rights (FTRs)	—		—		5.8		5.8
Petroleum product contracts	0.4		—		—		0.4
Coal contracts	—		0.8		—		0.8
Total Derivative Assets	$	3.0	$	4.7	$	5.8	$	13.5
Investment in exchange-traded funds *	$	49.6	$	—	$	—	$	49.6
Liabilities
Derivative Liabilities
Natural gas contracts	$	15.0	$	21.5	$	—	$	36.5
Petroleum product contracts	2.1		—		—		2.1
Coal contracts	—		2.5		5.4		7.9
Total Derivative Liabilities	$	17.1	$	24.0	$	5.4	$	46.5

* Exchange-traded funds are held in the Integrys rabbi trust. The Integrys rabbi trust is an irrevocable trust used to fund participants' benefits under the Integrys deferred compensation program and certain Integrys nonqualified pension plans.

	As of December 31, 2014
(in millions)	Level 1		Level 2		Level 3		Total
Assets
Derivative Assets
Natural gas contracts	$	1.1	$	3.9	$	—	$	5.0
FTRs	—		—		7.0		7.0
Coal contracts	—		3.3		—		3.3
Total Derivative Assets	$	1.1	$	7.2	$	7.0	$	15.3
Liabilities
Derivative Liabilities
Natural gas contracts	$	11.5	$	0.8	$	—	$	12.3
Coal contracts	—		0.2		—		0.2
Total Derivative Liabilities	$	11.5	$	1.0	$	—	$	12.5

The derivative 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 Midcontinent Independent System Operator, Inc. (MISO) market.

The following table summarizes the changes to derivatives classified as Level 3 in the fair value hierarchy:

	Three Months Ended September 30						Nine Months Ended September 30
(in millions)	2015			2014			2015			2014
Balance at the beginning of the period	$	2.3		$	14.1		$	7.0		$	3.5
Realized and unrealized gains	0.2			—			0.2			—
Purchases	—			—			3.9			15.6
Settlements	(2.1		)	(4.0		)	(9.4		)	(9.0		)
Acquisition of Integrys	—			—			(1.3		)	—
Balance at the end of the period	$	0.4		$	10.1		$	0.4		$	10.1

Unrealized gains and losses on Level 3 derivatives 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 cost of sales on the condensed consolidated income statements.

Fair Value of Financial Instruments

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

	September 30, 2015				December 31, 2014
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Preferred stock	$	81.5	$	78.8	$	30.4	$	27.1
Long-term debt, including current portion	$	9,300.7	$	9,386.4	$	4,552.4	$	5,126.0

Due to the short-term nature of cash and cash equivalents, net accounts receivable, accounts payable, and short-term borrowings, the carrying amount of each such item approximates fair value. The fair value of our preferred stock is estimated based on the quoted market value for the same issue, similar issues, or by using a perpetual dividend discount model. The fair value of our long-term debt, including the current portion of long-term debt, but excluding capitalized leases and unamortized discount on debt, is estimated based upon the quoted market value for the same issue, similar issues, or upon the quoted market prices of U.S. Treasury issues having a similar term to maturity, adjusted for the issuing company's bond rating and the present value of future cash flows.