Fair Value Measurements

3 Months Ended

Mar. 31, 2015

7. 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 March 31, 2015 and December 31, 2014. Information about the fair value of our derivative instruments can be found in Note 8.



	March 31, 2015				December 31, 2014
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money market funds	$	0.1	$	0.1	$	0.1	$	0.1
Equity securities		2.7		3.8		2.7		3.7
Debt securities		4.6		4.6		4.7		4.7
Hedge funds		0.7		0.7		0.8		0.8
Real estate		0.3		0.4		0.4		0.4
Total Assets	$	8.4	$	9.6	$	8.7	$	9.7

Liabilities
Debt	$	2,159.7	$	2,238.5	$	2,159.7	$	2,204.8

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

Unrealized gains or losses are not recognized in the financial statements as debt is presented at the carrying value, net of unamortized premium or discount 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, 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 $1.0 million ($0.7 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2015 and $0.8 million ($0.5 million after tax) of unrealized gains and immaterial unrealized losses in AOCI at December 31, 2014.

During the three months ended March 31, 2015, $0.6 million ($0.4 million after tax) 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);

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.

We did not have any transfers of the fair values of our financial instruments between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 30, 2015 and 2014.

The fair value of assets and liabilities at March 31, 2015 and December 31, 2014 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 March 31, 2015		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.1	$	0.1	$	-	$	-
Equity securities		3.8		-		3.8		-
Debt securities		4.6		-		4.6		-
Hedge funds		0.7		-		0.7		-
Real estate		0.4		-		0.4		-
Total Master Trust assets		9.6		0.1		9.5		-

Derivative Assets
FTRs		0.3		-		-		0.3
Forward power contracts		20.3		-		18.8		1.5
Total Derivative assets		20.6		-		18.8		1.8

Total Assets	$	30.2	$	0.1	$	28.3	$	1.8

Liabilities
Derivative Liabilities
Heating oil		0.3		0.3		-		-
Forward power contracts		20.4		-		19.0		1.4
Total Derivative liabilities		20.7		0.3		19.0		1.4

Long-term debt		2,238.5		-		2,220.3		18.2

Total Liabilities	$	2,259.2	$	0.3	$	2,239.3	$	19.6



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2014		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.1	$	0.1	$	-	$	-
Equity securities		3.7		-		3.7		-
Debt securities		4.7		-		4.7		-
Hedge funds		0.8		-		0.8		-
Real estate		0.4		-		0.4		-
Total Master Trust assets		9.7		0.1		9.6		-

Derivative assets
Forward power contracts		14.9		-		13.7		1.2
Total Derivative assets		14.9		-		13.7		1.2

Total Assets	$	24.6	$	0.1	$	23.3	$	1.2

Liabilities
Derivative liabilities
FTRs	$	0.6	$	-	$	-	$	0.6
Heating oil futures		0.4		0.4		-		-
Natural gas futures		0.1		0.1		-		-
Forward power contracts		11.1		-		11.1		-
Total Derivative liabilities		12.2		0.5		11.1		0.6

Long-term debt		2,204.8		-		2,186.6		18.2

Total Liabilities	$	2,217.0	$	0.5	$	2,197.7	$	18.8

Our financial instruments are valued using the market approach in the following categories:

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 (which are traded on the OTC market but which are valued using prices on the NYMEX for similar contracts on the OTC market). Other Level 2 assets include open-ended mutual funds that are in the Master Trust, which are valued using observable prices based on the end of day NAV per unit.

Level 3 inputs such as financial transmission rights are considered a Level 3 input because the monthly auctions are considered inactive. Other Level 3 inputs include the credit valuation adjustment on some of the forward power contracts and forward power contracts in less active markets. Our Level 3 inputs are immaterial to our derivative balances as a whole and as such no further disclosures are presented.

Approximately 98% of the inputs to the fair value of our derivative instruments are from quoted market prices.

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. As the Wright-Patterson Air Force Base loan is 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.

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. AROs for ash ponds, asbestos and underground storage tanks increased by $0.6 million and $1.2 million during the three months ended March 31, 2015 and 2014, respectively.

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 (there were no impairments during the quarter ended March 31, 2015):



$ in millions	Three months ended March 31, 2014
		Carrying	Fair Value							Gross
		Amount (c)		Level 1		Level 2		Level 3		Loss
Assets
Long-lived assets (a)
DP&L (East Bend)	$	14.2	$	-	$	-	$	2.7	$	11.5
Goodwill (b)
DPLER Reporting unit	$	135.8	$	-	$	-	$	-	$	135.8

(a)See Note 12 for further information

(b)See Note 11 for further information

(c)Carrying amount at date of valuation

DP&L [Member]

Fair Value Measurements

7. 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.



	March 31, 2015				December 31, 2014
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money market funds	$	0.1	$	0.1	$	0.1	$	0.1
Equity securities		2.7		3.8		2.7		3.7
Debt securities		4.6		4.6		4.7		4.7
Hedge funds		0.7		0.7		0.8		0.8
Real estate		0.3		0.4		0.4		0.4
Total assets	$	8.4	$	9.6	$	8.7	$	9.7

Liabilities
Debt	$	877.2	$	885.2	$	877.1	$	882.5

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

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 $1.1 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2015 and $1.1 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2014.

Fair Value Hierarchy

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);

Level 3 (unobservable inputs).

We did not have any transfers of the fair values of our financial instruments between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 30, 2015 and 2014.

The fair value of assets and liabilities at March 31, 2015 and December 31, 2014 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 March 31, 2015		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.1	$	0.1	$	-	$	-
Equity securities		3.8		-		3.8		-
Debt securities		4.6		-		4.6		-
Hedge funds		0.7		-		0.7		-
Real estate		0.4		-		0.4		-
Total Master Trust assets		9.6		0.1		9.5		-

Derivative assets
FTRs		0.3		-		-		0.3
Forward power contracts		20.5		-		19.0		1.5
Total derivative assets		20.8		-		19.0		1.8

Total assets	$	30.4	$	0.1	$	28.5	$	1.8

Liabilities
Derivative liabilities
Heating oil	$	0.3	$	0.3	$	-	$	-
Forward power contracts		20.6		-		19.2		1.4
Total derivative liabilities		20.9		0.3		19.2		1.4

Long-term debt		885.2		-		867.0		18.2

Total liabilities	$	906.1	$	0.3	$	886.2	$	19.6



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2014		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.1	$	0.1	$	-	$	-
Equity securities		3.7		-		3.7		-
Debt securities		4.7		-		4.7		-
Hedge funds		0.8		-		0.8		-
Real estate		0.4		-		0.4		-
Total Master Trust assets		9.7		0.1		9.6		-

Derivative assets
Forward power contracts		15.1		-		13.9		1.2
Total Derivative assets		15.1		-		13.9		1.2

Total assets	$	24.8	$	0.1	$	23.5	$	1.2

Liabilities
Derivative liabilities
FTRs	$	0.6	$	-	$	-	$	0.6
Heating oil futures		0.4		0.4		-		-
Natural gas futures		0.1		0.1		-		-
Forward power contracts		11.2		-		11.2		-
Total Derivative liabilities		12.3		0.5		11.2		0.6

Long-term debt		882.5		-		864.3		18.2

Total liabilities	$	894.8	$	0.5	$	875.5	$	18.8

Our financial instruments are valued using the market approach in the following categories:

Level 3 inputs such as financial transmission rights 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. Since the Wright-Patterson Air Force Base loan is 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 98% 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. AROs for ash ponds, asbestos and underground storage tanks increased by $0.6 million and $1.2 million during the three months ended March 31, 2015 and 2014, respectively

- 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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