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, 2013
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk Management Assets
Utility Segments
Natural gas contracts	$	2.4	$	7.7	$	—	$	10.1
Financial transmission rights (FTRs)	—		—		2.1		2.1
Petroleum product contracts	0.1		—		—		0.1
Coal contracts	—		—		0.2		0.2
Nonregulated Segments
Natural gas contracts	16.3		35.2		35.6		87.1
Electric contracts	65.1		134.9		15.9		215.9
Total Risk Management Assets	$	83.9	$	177.8	$	53.8	$	315.5

Investment in exchange-traded funds	$	15.9	$	—	$	—	$	15.9

Liabilities
Risk Management Liabilities
Utility Segments
Natural gas contracts	$	0.5	$	0.6	$	—	$	1.1
FTRs	—		—		0.3		0.3
Coal contracts	—		—		2.7		2.7
Nonregulated Segments
Natural gas contracts	14.3		22.0		25.2		61.5
Electric contracts	98.8		58.7		3.5		161.0
Total Risk Management Liabilities	$	113.6	$	81.3	$	31.7	$	226.6

Contingent consideration related to the acquisition of Compass Energy Services (Compass) *	$	—	$	—	$	7.8	$	7.8


*	See Note 3, Acquisitions, for more information.



	December 31, 2012
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk Management Assets
Utility Segments
Natural gas contracts	$	0.3	$	3.1	$	—	$	3.4
FTRs	—		—		2.1		2.1
Petroleum product contracts	0.2		—		—		0.2
Coal contracts	—		—		2.5		2.5
Nonregulated Segments
Natural gas contracts	21.4		36.4		5.4		63.2
Electric contracts	48.4		61.3		9.6		119.3
Total Risk Management Assets	$	70.3	$	100.8	$	19.6	$	190.7

Investment in exchange-traded funds	$	11.8	$	—	$	—	$	11.8

Liabilities
Risk Management Liabilities
Utility Segments
Natural gas contracts	$	1.1	$	14.1	$	—	$	15.2
FTRs	—		—		0.1		0.1
Coal contracts	—		—		9.0		9.0
Nonregulated Segments
Natural gas contracts	17.7		36.9		1.5		56.1
Electric contracts	54.9		91.1		13.9		159.9
Total Risk Management Liabilities	$	73.7	$	142.1	$	24.5	$	240.3

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 2, Risk Management Activities, for more information on derivative instruments.

The following tables show net risk management assets (liabilities) transferred between the levels of the fair value hierarchy:



	Nonregulated Segments — Natural Gas Contracts
	Year Ended December 31, 2013						Year Ended December 31, 2012
(Millions)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Transfers into Level 1 from	N/A		$	—	$	—	N/A		$	—	$	—
Transfers into Level 2 from	$	—	N/A		—		$	—	N/A		2.0
Transfers into Level 3 from	—		7.1		N/A		—		3.7		N/A



	Nonregulated Segments — Electric Contracts
	Year Ended December 31, 2013							Year Ended December 31, 2012
(Millions)	Level 1			Level 2		Level 3		Level 1		Level 2			Level 3
Transfers into Level 1 from	N/A			$	—	(0.3	)	N/A		$	—		$	—
Transfers into Level 2 from	$	—		N/A		7.3		$	—	N/A			(13.0		)
Transfers into Level 3 from	(0.2		)	8.7		N/A		—		(7.9		)	N/A

The significant unobservable inputs used in the valuations that resulted in categorization within Level 3 were as follows at December 31, 2013. The amounts and percentages 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 transaction to be classified as Level 3.



	Fair Value (Millions)
	Assets		Liabilities		Valuation Technique	Unobservable Input	Average or Range
Utility Segments
FTRs	$	2.1	$	0.3	Market-based	Forward market prices ($/megawatt-month)⁽¹⁾	$174.52
Coal contracts	0.2		2.7		Market-based	Forward market prices ($/ton) ⁽²⁾	$11.73 — $14.30
Nonregulated Segments
Natural gas contracts	35.6		25.2		Market-based	Forward market prices ($/dekatherm)⁽³⁾	($1.53) — $17.30
						Probability of default⁽⁴⁾	11.6% — 51.0 %
Electric contracts	15.9		3.5		Market-based	Forward market prices ($/megawatt-hours) ⁽³⁾	($3.30) — $9.25
						Probability of default⁽⁴⁾	26.0	%
						Option volatilities⁽⁵⁾	14.8% — 199.9 %
						Monthly curve shaping⁽⁶⁾	(33.3	)%
Contingent consideration related to the acquisition of Compass	N/A		7.8		Income-based	Growth rate⁽⁷⁾	(13.2)% — 49.3 %


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


⁽²⁾	Represents third-party forward market pricing.


⁽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.


⁽⁴⁾	Based on Moody's one-year counterparty default percentages.


⁽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.


⁽⁶⁾	Represents adjustments made to forward market price curves to disaggregate average prices of multiple periods into discrete monthly prices.


⁽⁷⁾	Represents the range of assumed growth rates of earnings before interest, taxes, and amortization.

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.

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



2013	Nonregulated Segments									Utility Segments
(Millions)	Natural Gas			Electric			Contingent Consideration*			FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	3.9		$	(4.3	)	$	—		$	2.0		$	(6.5	)	$	(4.9	)
Net realized and unrealized gains (losses) included in earnings	(1.8		)	14.0			(0.1		)	2.0			—			14.1
Net unrealized gains (losses) recorded as regulatory assets or liabilities	—			—			—			(0.3		)	0.4			0.1
Purchases	7.4			6.0			(7.7		)	4.9			—			10.6
Sales	—			(1.1		)	—			(0.2		)	—			(1.3		)
Settlements	(6.2		)	(3.7		)	—			(6.6		)	3.6			(12.9		)
Net transfers into Level 3	7.1			8.5			—			—			—			15.6
Net transfers out of Level 3	—			(7.0		)	—			—			—			(7.0		)
Balance at the end of the period	$	10.4		$	12.4		$	(7.8	)	$	1.8		$	(2.5	)	$	14.3

Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period	$	(1.8	)	$	14.0		$	—		$	—		$	—		$	12.2


*	Represents the contingent consideration related to the acquisition of Compass. See Note 3, Acquisitions, for more information.



2012	Nonregulated Segments							Utility Segments
(Millions)	Natural Gas			Electric				FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	8.3		$	(11.5	)		$	2.2		$	(6.9	)	$	(7.9	)
Net realized and unrealized gains (losses) included in earnings	3.8			(14.5		)	*	1.8			—			(8.9		)	*
Net unrealized gains recorded as regulatory assets or liabilities	—			—				0.2			5.8			6.0
Purchases	—			7.8				4.9			—			12.7
Sales	—			—				(0.1		)	—			(0.1		)
Settlements	(9.9		)	8.8				(7.0		)	(5.4		)	(13.5		)
Net transfers into Level 3	3.7			(7.9		)		—			—			(4.2		)
Net transfers out of Level 3	(2.0		)	13.0				—			—			11.0
Balance at the end of the period	$	3.9		$	(4.3	)		$	2.0		$	(6.5	)	$	(4.9	)

Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period	$	3.8		$	(14.5	)	*	$	—		$	—		$	(10.7	)	*


*	Includes a $1.2 million net unrealized loss reported as discontinued operations. See Note 4, Discontinued Operations, for more information.



2011	Nonregulated Segments							Utility Segments
(Millions)	Natural Gas			Electric				FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	30.2		$	(14.9	)		$	2.9		$	2.5		$	20.7
Net realized and unrealized gains (losses) included in earnings	32.3			(20.7		)	*	(1.7		)	—			9.9			*
Net unrealized losses recorded as regulatory assets or liabilities	—			—				(1.7		)	(8.0		)	(9.7		)
Net unrealized gains included in other comprehensive loss	—			0.6				—			—			0.6
Purchases	—			2.2				5.9			—			8.1
Sales	—			—				(0.1		)	—			(0.1		)
Settlements	(30.4		)	7.0				(3.1		)	(1.4		)	(27.9		)
Net transfers into Level 3	0.6			(5.9		)		—			—			(5.3		)
Net transfers out of Level 3	(24.4		)	20.2				—			—			(4.2		)
Balance at the end of the period	$	8.3		$	(11.5	)		$	2.2		$	(6.9	)	$	(7.9	)

Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period	$	32.3		$	(20.7	)	*	$	—		$	—		$	11.6		*


*	Includes a $0.5 million net unrealized gain reported as discontinued operations. See Note 4, Discontinued Operations, for more information.

Realized and unrealized gains and losses included in earnings related to Integrys Energy Services’ 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.

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, 2013				December 31, 2012
(Millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	3,056.2	$	3,031.6	$	2,245.2	$	2,425.8
Preferred stock of subsidiary	51.1		61.2		51.1		52.7

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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