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Fair Value Measurements
 6 Months Ended
Jun. 30, 2014
Fair Value Measurements

 

8.  Fair Value Measurements 

   

The fair values of our financial instruments are based on published sources for pricing when possible.  We rely on valuation models only when no other methods exist.  The value of our financial instruments represents our best estimates of the fair value, which may not be the value realized in the future. 

   

The following table presents the fair value and cost of our non-derivative instruments at June 30, 2014 and December 31, 2013.  See also Note 9 for the fair values of our derivative instruments. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

December 31, 2013

$ in millions

 

Carrying Value

 

Fair Value

 

 

Carrying Value

 

Fair Value

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.2 

 

$
0.2 

 

 

$
0.3 

 

$
0.3 

Equity securities

 

 
2.8 

 

 
3.9 

 

 

 
3.3 

 

 
4.4 

Debt securities

 

 
4.8 

 

 
4.8 

 

 

 
5.4 

 

 
5.5 

Hedge funds

 

 
0.8 

 

 
0.9 

 

 

 
0.9 

 

 
0.9 

Real estate

 

 
0.4 

 

 
0.4 

 

 

 
0.4 

 

 
0.4 

Total Assets

 

$
9.0 

 

$
10.2 

 

 

$
10.3 

 

$
11.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$
2,294.4 

 

$
2,424.3 

 

 

$
2,294.4 

 

$
2,334.6 

 

These financial instruments are not subject to master netting agreements or collateral requirements and as such are presented in the Condensed Consolidated Balance Sheet at their gross fair value, except for Debt, which is presented at amortized carrying value.

 

Debt 

The carrying value of DPL’s debt in place at the Merger was adjusted to fair value at the Merger date.  Debt issued subsequent to the Merger is carried at issue cost, less amortized premium or discount.  Unrealized gains or losses are not recognized in the financial statements because debt is presented at cost or the value established at the Merger date, less amortized premium or discount.  The debt amounts include the current portion payable in the next twelve months and have maturities that range from 2016 to 2061. 

   

Master Trust Assets 

DP&L established Master Trusts to hold assets that could be used for the benefit of employees participating in employee benefit plans and these assets are not used for general operating purposes.  These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit.  These investments are recorded at fair value within Other deferred assets on the balance sheets and classified as available for sale.  Any unrealized gains or losses are recorded in AOCI until the securities are sold. 

   

DPL  had $0.9 million ($0.6 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at June 30, 2014 and $0.9 million ($0.6 million after tax) of unrealized gains and immaterial unrealized losses in AOCI at December 31, 2013. 

   

During the six months ended June 30, 2014,  an immaterial amount of various investments were sold to facilitate the distribution of benefits and the unrealized gains were reversed into earnings.  An immaterial amount of unrealized gains are expected to be reversed to earnings over the next twelve months to facilitate the distribution of benefits.

   

Fair Value Hierarchy 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  These inputs are then categorized as Level 1 (quoted prices in active markets for identical assets or liabilities); Level 2 (observable inputs such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active); or Level 3 (unobservable inputs). 

   

Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk.  We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency. 

   

 

The fair value of assets and liabilities at June 30, 2014 and December 31, 2013 and the respective category within the fair value hierarchy for DPL was determined as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities at Fair Value

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

$ in millions

 

Fair Value at June 30, 2014

 

Based on Quoted Prices in Active Markets

 

 

Other Observable Inputs

 

Unobservable Inputs

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Trust assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.2 

 

$
0.2 

 

 

$

 -

 

$

 -

Equity securities

 

 
3.9 

 

 
3.9 

 

 

 

 -

 

 

 -

Debt securities

 

 
4.8 

 

 
4.8 

 

 

 

 -

 

 

 -

Hedge funds

 

 
0.9 

 

 

 -

 

 

 
0.9 

 

 

 -

Real estate

 

 
0.4 

 

 
0.4 

 

 

 

 -

 

 

 -

Total Master Trust assets

 

 
10.2 

 

 
9.3 

 

 

 
0.9 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil

 

 
0.1 

 

 
0.1 

 

 

 

 -

 

 

 -

Forward power contracts

 

 
15.9 

 

 

 -

 

 

 
15.9 

 

 

 -

Total Derivative assets

 

 
16.0 

 

 
0.1 

 

 

 
15.9 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$
26.2 

 

$
9.4 

 

 

$
16.8 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

FTRs

 

$
1.3 

 

$

 -

 

 

$

 -

 

$
1.3 

Forward power contracts

 

 
34.2 

 

 

 -

 

 

 
34.2 

 

 

 -

Total Derivative liabilities

 

 
35.5 

 

 

 -

 

 

 
34.2 

 

 
1.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 
2,424.3 

 

 

 -

 

 

 
2,406.0 

 

 
18.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

$
2,459.8 

 

$

 -

 

 

$
2,440.2 

 

$
19.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities at Fair Value

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

$ in millions

 

Fair Value at December 31, 2013

 

Based on Quoted Prices in Active Markets

 

 

Other Observable Inputs

 

Unobservable Inputs

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Trust assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.3 

 

$
0.3 

 

 

$

 -

 

$

 -

Equity securities

 

 
4.4 

 

 
4.4 

 

 

 

 -

 

 

 -

Debt securities

 

 
5.5 

 

 
5.5 

 

 

 

 -

 

 

 -

Hedge funds

 

 
0.9 

 

 

 -

 

 

 
0.9 

 

 

 -

Real estate

 

 
0.4 

 

 
0.4 

 

 

 

 -

 

 

 -

Total Master Trust assets

 

 
11.5 

 

 
10.6 

 

 

 
0.9 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

FTRs

 

 
0.2 

 

 

 -

 

 

 

 -

 

 
0.2 

Heating oil futures

 

 
0.2 

 

 
0.2 

 

 

 

 -

 

 

 -

Forward power contracts

 

 
13.4 

 

 

 -

 

 

 
13.4 

 

 

 -

Total Derivative assets

 

 
13.8 

 

 
0.2 

 

 

 
13.4 

 

 
0.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$
25.3 

 

$
10.8 

 

 

$
14.3 

 

$
0.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward power contracts

 

$
10.6 

 

$

 -

 

 

 
10.6 

 

$

 -

Total Derivative liabilities

 

 
10.6 

 

 

 -

 

 

 
10.6 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 
2,334.6 

 

 

 -

 

 

 
2,316.1 

 

 
18.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

$
2,345.2 

 

$

 -

 

 

$
2,326.7 

 

$
18.5 

 

We use the market approach to value our financial instruments.  Level 1 inputs are used for derivative contracts such as heating oil futures and for money market accounts that are considered cash equivalents.  The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions.  Level 2 inputs are used to value derivatives such as forward power contracts and forward NYMEX-quality coal contracts (which are traded on the OTC market but which are valued using prices on the NYMEX for similar contracts on the OTC market).  FTRs are considered a Level 3 input because the monthly auctions are considered inactive. 

   

Our Level 3 inputs are immaterial to our derivative balances as a whole, and as such no further disclosures are presented. 

   

Our debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets.  These fair value inputs are considered Level 2 in the fair value hierarchy.  Our long-term leases and the Wright-Patterson Air Force Base loan are not publicly traded.  Fair value is assumed to equal carrying value.  These fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs.  Additional Level 3 disclosures are not presented since debt is not recorded at fair value. 

   

Approximately 97% of the inputs to the fair value of our derivative instruments are from quoted market prices. 

   

Non-recurring Fair Value Measurements 

We use the cost approach to determine the fair value of our AROs, which is estimated by discounting expected cash outflows to their present value at the initial recording of the liability.  Cash outflows are based on the approximate future disposal cost as determined by market information, historical information or other management estimates.  These inputs to the fair value of the AROs would be considered Level 3 inputs under the fair value hierarchy.  These inputs to the fair value of the AROs would be considered Level 3 inputs under the fair value hierarchy.  There were no additions to AROs in the three months ended June 30, 2014.  Additions to AROs for the six months ended June 30, 2014 were $1.2 million for asbestos and underground storage tank AROs.    Additions to AROs were not material during the three and six months ended June 30, 2013.

   

When evaluating impairment of goodwill and long-lived assets, we measure fair value using the applicable fair value measurement guidance.  Impairment expense is measured by comparing the fair value at the evaluation date to the carrying amount. The following table summarizes Goodwill and Long-lived assets measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$ in millions

 

Six months ended June 30, 2014

 

 

 

 

Carrying

 

Fair Value

 

 

 

Gross

 

 

 

Amount (c)

 

 

Level 1

 

 

 

Level 2

 

 

Level 3

 

 

Loss

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held and used (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L (East Bend)

 

$
14.2 

 

$

 -

 

 

$

 -

 

$
2.7 

 

$
11.5 

Goodwill (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DPLER Reporting unit

 

$
135.8 

 

$

 -

 

 

$

 -

 

$

 -

 

$
135.8 

   

(a)See Note 13 for further information

(b)See Note 12 for further information

(c)Carrying amount at date of valuation

   

DP&L [Member]
  
Fair Value Measurements

   

8.  Fair Value Measurements 

   

The fair values of our financial instruments are based on published sources for pricing when possible.  We rely on valuation models only when no other method is available to us.  The value of our financial instruments represents our best estimates of fair value, which may not be the value realized in the future. 

   

 

The following table presents the fair value and cost of our non-derivative instruments at June 30, 2014 and December 31, 2013.  See also Note 9 for the fair values of our derivative instruments. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

December 31, 2013

$ in millions

 

Carrying Value

 

Fair Value

 

 

Carrying Value

 

Fair Value

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.2 

 

$
0.2 

 

 

$
0.3 

 

$
0.3 

Equity securities

 

 
2.8 

 

 
3.9 

 

 

 
3.3 

 

 
4.4 

Debt securities

 

 
4.8 

 

 
4.8 

 

 

 
5.4 

 

 
5.5 

Hedge funds

 

 
0.8 

 

 
0.9 

 

 

 
0.9 

 

 
0.9 

Real estate

 

 
0.4 

 

 
0.4 

 

 

 
0.4 

 

 
0.4 

Total assets

 

$
9.0 

 

$
10.2 

 

 

$
10.3 

 

$
11.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt

 

$
877.1 

 

$
887.5 

 

 

$
877.1 

 

$
859.6 

 

These financial instruments are not subject to master netting agreements or collateral requirements and as such are presented in the Condensed Balance Sheet at their gross fair value, except for Debt, which is presented at amortized cost.

 

Debt 

The fair value of debt is based on current public market prices for disclosure purposes only.  Unrealized gains or losses are not recognized in the financial statements because debt is presented at amortized cost in the financial statements.  The debt amounts include the current portion payable in the next twelve months and have maturities that range from 2016 to 2061. 

   

Master Trust Assets 

DP&L established Master Trusts to hold assets that could be used for the benefit of employees participating in employee benefit plans and these assets are not used for general operating purposes.  These assets are primarily comprised of open-ended mutual funds that are valued using the net asset value per unit.  These investments are recorded at fair value within Other deferred assets on the balance sheets and classified as available for sale.  Any unrealized gains or losses are recorded in AOCI until the securities are sold. 

   

DP&L had $1.2 million ($0.7  million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at June 30, 2014 and $1.2 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2013. 

   

During the six months ended June 30, 2014,  an immaterial amount of various investments were sold to facilitate the distribution of benefits and the unrealized gains were reversed into earnings.  An immaterial amount of unrealized gains are expected to be reversed to earnings over the next twelve months to facilitate the disbursement of benefits.

   

Fair Value Hierarchy 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  These inputs are then categorized as Level 1 (quoted prices in active markets for identical assets or liabilities); Level 2 (observable inputs such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active); or Level 3 (unobservable inputs). 

   

Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk.  We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency. 

   

 

The fair value of assets and liabilities at June 30, 2014 and December 31, 2013 and the respective category within the fair value hierarchy for DP&L was determined as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities at Fair Value

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

$ in millions

 

Fair Value at June 30, 2014

 

Based on Quoted Prices in Active Markets

 

 

Other Observable Inputs

 

Unobservable Inputs

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Trust assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.2 

 

$
0.2 

 

 

$

 -

 

$

 -

Equity securities

 

 
3.9 

 

 
3.9 

 

 

 

 -

 

 

 -

Debt securities

 

 
4.8 

 

 
4.8 

 

 

 

 -

 

 

 -

Hedge funds

 

 
0.9 

 

 

 -

 

 

 
0.9 

 

 

 -

Real estate

 

 
0.4 

 

 
0.4 

 

 

 

 -

 

 

 -

Total Master Trust assets

 

 
10.2 

 

 
9.3 

 

 

 
0.9 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

FTRs

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Heating oil

 

 
0.1 

 

 
0.1 

 

 

 

 -

 

 

 -

Forward power contracts

 

 
16.5 

 

 

 -

 

 

 
16.5 

 

 

 -

Total derivative assets

 

 
16.6 

 

 
0.1 

 

 

 
16.5 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$
26.8 

 

$
9.4 

 

 

$
17.4 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

FTRs

 

$
1.3 

 

$

 -

 

 

$

 -

 

$
1.3 

Forward power contracts

 

 
34.3 

 

 

 -

 

 

 
34.3 

 

 

 -

Total derivative liabilities

 

 
35.6 

 

 

 -

 

 

 
34.3 

 

 
1.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 
887.5 

 

 

 -

 

 

 
869.2 

 

 
18.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$
923.1 

 

$

 -

 

 

$
903.5 

 

$
19.6 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and Liabilities at Fair Value

 

 

 

 

Level 1

 

 

Level 2

 

Level 3

$ in millions

 

Fair Value at December 31, 2013

 

Based on Quoted Prices in Active Markets

 

 

Other Observable Inputs

 

Unobservable Inputs

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Master Trust assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$
0.3 

 

$
0.3 

 

 

$

 -

 

$

 -

Equity securities

 

 
4.4 

 

 
4.4 

 

 

 

 -

 

 

 -

Debt securities

 

 
5.5 

 

 
5.5 

 

 

 

 -

 

 

 -

Hedge funds

 

 
0.9 

 

 

 -

 

 

 
0.9 

 

 

 -

Real estate

 

 
0.4 

 

 
0.4 

 

 

 

 -

 

 

 -

Total Master Trust assets

 

 
11.5 

 

 
10.6 

 

 

 
0.9 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Heating oil futures

 

 
0.2 

 

 
0.2 

 

 

 

 -

 

 

 -

FTRs

 

 
0.2 

 

 

 -

 

 

 

 -

 

 
0.2 

Forward power contracts

 

 
13.4 

 

 

 -

 

 

 
13.4 

 

 

 -

Total Derivative assets

 

 
13.8 

 

 
0.2 

 

 

 
13.4 

 

 
0.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$
25.3 

 

$
10.8 

 

 

$
14.3 

 

$
0.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward power contracts

 

 
10.6 

 

 

 -

 

 

 
10.6 

 

 

 -

Total Derivative liabilities

 

 
10.6 

 

 

 -

 

 

 
10.6 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 
859.6 

 

 

 -

 

 

 
841.1 

 

 
18.5 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$
870.2 

 

$

 -

 

 

$
851.7 

 

$
18.5 

 

 

We use the market approach to value our financial instruments.  Level 1 inputs are used for derivative contracts such as heating oil futures and for money market accounts that are considered cash equivalents.  The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions.  Level 2 inputs are used to value derivatives such as forward power contracts and forward NYMEX-quality coal contracts (which are traded on the OTC market but which are valued using prices on the NYMEX for similar contracts on the OTC market).  FTRs are considered a Level 3 input because the monthly auctions are considered inactive. 

   

Our Level 3 inputs are immaterial to our derivative balances as a whole, and as such no further disclosures are presented. 

   

Our debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets.  These fair value inputs are considered Level 2 in the fair value hierarchy.  Our long-term leases and the Wright-Patterson Air Force Base loan are not publicly traded.  Fair value is assumed to equal carrying value.  These fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs.  Additional Level 3 disclosures are not presented since debt is not recorded at fair value. 

   

Approximately 97% of the inputs to the fair value of our derivative instruments are from quoted market prices for DP&L. 

   

Non-recurring Fair Value Measurements 

We use the cost approach to determine the fair value of our AROs, which is estimated by discounting expected cash outflows to their present value at the initial recording of the liability.  Cash outflows are based on the approximate future disposal cost as determined by market information, historical information or other management estimates.  These inputs to the fair value of the AROs would be considered Level 3 inputs under the fair value hierarchy.  There were no additions to AROS in the three months ended June 30, 2014.  Additions to AROs for the three and six months ended June 30, 2014 were $1.2 million for asbestos and underground storage tank AROs.  Additions to AROs were not material during the three and six months ended June 30, 2013.