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 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 financial 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.

We recognize transfers between levels of the fair value hierarchy at their value as of the end of the reporting period.

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:



	March 31, 2019
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	6.0	$	—	$	—	$	6.0
FTRs	—		—		3.1		3.1
Coal contracts	—		1.2		—		1.2
Total derivative assets	$	6.0	$	1.2	$	3.1	$	10.3

Investments held in rabbi trust	$	74.0	$	—	$	—	$	74.0

Derivative liabilities
Natural gas contracts	$	0.9	$	—	$	—	$	0.9
Coal contracts	—		0.1		—		0.1
Interest rate swaps	—		3.7		—		3.7
Total derivative liabilities	$	0.9	$	3.8	$	—	$	4.7



	December 31, 2018
(in millions)	Level 1		Level 2		Level 3		Total
Derivative assets
Natural gas contracts	$	6.3	$	1.8	$	—	$	8.1
FTRs	—		—		7.4		7.4
Coal contracts	—		0.4		—		0.4
Total derivative assets	$	6.3	$	2.2	$	7.4	$	15.9

Investments held in rabbi trust	$	65.0	$	—	$	—	$	65.0

Derivative liabilities
Natural gas contracts	$	4.7	$	0.8	$	—	$	5.5
Coal contracts	—		0.1		—		0.1
Interest rate swaps	—		2.3		—		2.3
Total derivative liabilities	$	4.7	$	3.2	$	—	$	7.9

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 and interest rates. They also include FTRs, which are used to manage electric transmission congestion costs in the MISO Energy and Operating Reserves Markets.

We hold investments in the Integrys rabbi trust. These investments are restricted as they can only be withdrawn from the trust to fund participants' benefits under the Integrys deferred compensation plan and certain Integrys non-qualified pension plans. These investments are included in other long-term assets on our balance sheets. For the three months ended March 31, 2019 and 2018, the net unrealized gains (losses) included in earnings related to the investments held at the end of the period were $8.6 million and $(3.1) million, respectively.

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



	Three Months Ended March 31
(in millions)	2019			2018
Balance at the beginning of the period	$	7.4		$	4.4
Settlements	(4.3		)	(2.9		)
Balance at the end of the period	$	3.1		$	1.5

Fair Value of Financial Instruments

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



	March 31, 2019				December 31, 2018
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Preferred stock of subsidiary	$	30.4	$	28.3	$	30.4	$	28.3
Long-term debt, including current portion *	10,670.6		11,257.5		10,335.7		10,554.9


*	The carrying amount of long-term debt excludes finance and capital lease obligations of $22.1 million and $23.3 million at March 31, 2019 and December 31, 2018, respectively.

The fair values of our long-term debt and preferred stock are categorized within Level 2 of the fair value hierarchy.