FAIR VALUE

3 Months Ended

Mar. 31, 2013

FAIR VALUE

FAIR VALUE

NOTE 19 — 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:

	March 31, 2013
(Millions)	Level 1		Level 2		Level 3		Total
Assets
Risk Management Assets
Utility Segments
Natural gas contracts	$	1.2	$	10.5	$	—	$	11.7
Financial transmission rights (FTRs)	—		—		1.0		1.0
Petroleum product contracts	0.1		—		—		0.1
Coal contracts	—		—		0.1		0.1
Nonregulated Segments
Natural gas contracts	10.2		21.2		2.9		34.3
Electric contracts	64.0		107.9		13.7		185.6
Total Risk Management Assets	$	75.5	$	139.6	$	17.7	$	232.8
Investment in exchange-traded funds	$	12.4	$	—	$	—	$	12.4
Liabilities
Risk Management Liabilities
Utility Segments
Natural gas contracts	$	—	$	3.8	$	—	$	3.8
FTRs	—		—		0.1		0.1
Coal contracts	—		0.1		4.7		4.8
Nonregulated Segments
Natural gas contracts	9.0		14.8		1.2		25.0
Electric contracts	78.6		70.3		7.6		156.5
Total Risk Management Liabilities	$	87.6	$	89.0	$	13.6	$	190.2

	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 and interest rates. For more information on derivative instruments, see Note 3, “Risk Management Activities.”

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

	Nonregulated Segments — Natural Gas Contracts
	Three Months Ended March 31, 2013						Three Months Ended March 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		1.3
Transfers into Level 3 from	—		0.2		N/A		—		2.4		N/A

	Nonregulated Segments — Electric Contracts
	Three Months Ended March 31, 2013						Three Months Ended March 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		5.5		$	—	N/A			(0.1		)
Transfers into Level 3 from	—		—		N/A		—		(5.0		)	N/A

Derivatives are transferred between the levels of the fair value hierarchy primarily due to changes in the source of data used to construct price curves as a result of changes in market liquidity.

The significant unobservable inputs used in the valuation that resulted in categorization within Level 3 were as follows at March 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 derivative transaction to be classified as Level 3.

	Fair Value (Millions)
	Assets		Liabilities		Valuation Technique	Unobservable Input	Average or Range
Utility Segments
FTRs	$	1.0	$	0.1	Market-based	Forward market prices ($/megawatt-month) (1)	203.72
Coal contracts	0.1		4.7		Market-based	Forward market prices ($/ton) (2)	11.64 — 13.90
Nonregulated Segments
Natural gas contracts	2.9		1.2		Market-based	Forward market prices ($/dekatherm) (3)	(0.08) — 1.99
						Probability of default	11.6% — 51.0%
Electric contracts	13.7		7.6		Market-based	Forward market prices ($/megawatt-hours) (3)	(9.55) — 44.03
						Option volatilities (4)	19.0% — 80.0%

⁽¹⁾  Represents forward market prices developed using historical cleared pricing data from MISO used in the valuation of FTRs.

⁽²⁾  Represents third-party forward market pricing used in the valuation of our coal contracts.

⁽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⁾  Represents the range of volatilities used in the valuation of options.

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.

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

Three Months Ended March 31, 2013	Nonregulated Segments						Utility Segments
(Millions)	Natural Gas			Electric			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 (losses) gains included in earnings	(1.5		)	15.1			0.3			—			13.9
Net unrealized (losses) gains recorded as regulatory assets or liabilities	—			—			(0.2		)	3.1			2.9
Purchases	—			0.7			—			—			0.7
Settlements	(0.9		)	0.1			(1.2		)	(1.2		)	(3.2		)
Net transfers into Level 3	0.2			—			—			—			0.2
Net transfers out of Level 3	—			(5.5		)	—			—			(5.5		)
Balance at the end of the period	$	1.7		$	6.1		$	0.9		$	(4.6	)	$	4.1
Net unrealized (losses) gains included in earnings related to instruments still held at the end of the period	$	(1.5	)	$	15.1		$	—		$	—		$	13.6

Three Months Ended March 31, 2012	Nonregulated Segments						Utility Segments
(Millions)	Natural Gas			Electric			FTRs			Coal Contract			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	4.1			(7.7		)	0.5			—			(3.1		)
Net unrealized gains (losses) recorded as regulatory assets or liabilities	—			—			0.1			(5.8		)	(5.7		)
Purchases	—			1.1			—			—			1.1
Sales	—			—			(0.1		)	—			(0.1		)
Settlements	(2.6		)	1.1			(1.8		)	(0.7		)	(4.0		)
Net transfers into Level 3	2.4			(5.0		)	—			—			(2.6		)
Net transfers out of Level 3	(1.3		)	0.1			—			—			(1.2		)
Balance at the end of the period	$	10.9		$	(21.9	)	$	0.9		$	(13.4	)	$	(23.5	)
Net unrealized gains (losses) included in earnings related to instruments still held at the end of the period	$	4.1		$	(7.7	)	$	—		$	—		$	(3.6	)

Unrealized gains and losses included in earnings related to Integrys Energy Services’ risk management assets and liabilities are recorded through nonregulated revenue on the statements of income. Realized gains and losses on these same instruments are recorded in nonregulated revenue or nonregulated cost of sales, 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:

	March 31, 2013				December 31, 2012
(Millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	2,223.2	$	2,376.2	$	2,245.2	$	2,425.8
Preferred stock of subsidiary	51.1		61.7		51.1		52.7

The fair values of long-term debt instruments are estimated based on the quoted market price for the same or similar issues, or on the current rates offered to us for debt of the same remaining maturity. The fair values of preferred stock are estimated based on quoted market prices when available, or by using a perpetual dividend discount model. The fair values of long-term debt instruments and preferred stock are categorized within Level 2 of the fair value hierarchy.

Due to the short-term nature of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and outstanding commercial paper, the carrying amount for each such item approximates fair value.