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
Assets
Risk Management Assets
Natural gas contracts	$	—	$	2.3	$	—	$	2.3
Financial transmission rights (FTRs)	—		—		2.2		2.2
Coal contracts	—		—		—		—
Total Risk Management Assets	$	—	$	2.3	$	2.2	$	4.5

Investment in Exchange-Traded Funds	$	102.4	$	—	$	—	$	102.4

Liabilities
Risk Management Liabilities
Natural gas contracts	$	4.8	$	31.2	$	6.6	$	42.6
FTRs	—		—		0.3		0.3
Petroleum product contracts	2.8		—		—		2.8
Coal contracts	—		1.2		2.2		3.4
Total Risk Management Liabilities	$	7.6	$	32.4	$	9.1	$	49.1



	December 31, 2013
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk Management Assets
Natural gas contracts	$	2.4	$	7.7	$	—	$	10.1
FTRs	—		—		1.5		1.5
Petroleum product contracts	0.1		—		—		0.1
Coal contracts	—		—		0.2		0.2
Total Risk Management Assets	$	2.5	$	7.7	$	1.7	$	11.9

Investment in Exchange-Traded Funds	$	15.9	$	—	$	—	$	15.9

Liabilities
Risk Management Liabilities
Natural gas contracts	$	0.5	$	0.6	$	—	$	1.1
FTRs	—		—		0.3		0.3
Coal contracts	—		—		2.7		2.7
Total Risk Management Liabilities	$	0.5	$	0.6	$	3.0	$	4.1

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

Transfers between levels of the fair value hierarchy were not significant during 2014. 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 transaction to be classified as Level 3.

Fair Value (Millions)

Assets

Liabilities

Valuation Technique

Unobservable Input

Average or Range

Natural gas contracts

—

6.6

Income-based

Option volatilities ⁽¹⁾

50.5% – 67.2%

FTRs

2.2

0.3

Market-based

Forward market prices ($/megawatt-month)⁽²⁾

$188.16

Coal contracts

—

2.2

Market-based

Forward market prices ($/ton) ⁽³⁾

$10.89 – $13.60


⁽¹⁾	Represents the range of volatilities used in the valuation of options. Volatilities are derived from an internal model based on volatility curves from third parties.


⁽²⁾	Represents forward market prices developed using historical cleared pricing data from MISO.


⁽³⁾	Represents third-party forward market pricing.

Significant changes in option volatilities, 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)	Natural Gas Contracts			FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	—		$	1.2		$	(2.5	)	$	(1.3	)
Net realized and unrealized gains included in earnings	—			0.2			—			0.2
Net unrealized (losses) gains recorded as regulatory assets or liabilities	(6.6		)	0.4			(1.6		)	(7.8		)
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 the period	$	(6.6	)	$	1.9		$	(2.2	)	$	(6.9	)



	2013
(Millions)	FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	1.1		$	(6.5	)	$	(5.4	)
Net realized and unrealized 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 the period	$	1.2		$	(2.5	)	$	(1.3	)



	2012
(Millions)	FTRs			Coal Contracts			Total
Balance at the beginning of the period	$	1.2		$	(6.9	)	$	(5.7	)
Net realized and unrealized 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 the period	$	1.1		$	(6.5	)	$	(5.4	)

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 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	$	3,081.3	$	3,271.4	$	3,056.2	$	3,031.6
Preferred stock of subsidiary	51.1		51.8		51.1		61.2