Fair Value Measurements

12 Months Ended

Dec. 31, 2015

Note 5 – Fair Value

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 fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future.

The table below presents the fair value and cost of our non-derivative instruments at December 31, 2015 and 2014. See Note 6 – Derivative Instruments and Hedging Activities for the fair values of our derivative instruments.



	December 31, 2015				December 31, 2014
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money market funds	$	0.2	$	0.2	$	0.1	$	0.1
Equity securities	3.0		3.8		2.7		3.7
Debt securities	4.4		4.3		4.7		4.7
Hedge Funds	0.4		0.4		0.8		0.8
Real Estate	0.3		0.3		0.4		0.4
Total assets	$	8.3	$	9.0	$	8.7	$	9.7
Liabilities
Debt	$	2,009.4	$	1,975.3	$	2,159.7	$	2,204.8

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); and


•	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 twelve months ended December 31, 2015 and 2014.

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 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 a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans. 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 $0.7 million ($0.5 million after tax) in unrealized gains and $0.1 million ($0.1 million after tax) in unrealized losses on the Master Trust assets in AOCI at December 31, 2015, and $0.8 million ($0.5 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2014.

Various investments were sold during the past twelve months to facilitate the distribution of benefits. During the past twelve months, an immaterial amount of unrealized gains were reversed into earnings. Over the next twelve months, an immaterial amount of unrealized gains is expected to be reversed to earnings.

The fair value of assets and liabilities at December 31, 2015 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 December 31, 2015 (a)		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	3.8		—		3.8		—
Debt securities	4.3		—		4.3		—
Hedge Funds	0.4		—		0.4		—
Real Estate	0.3		—		0.3		—
Total Master trust assets	9.0		0.2		8.8		—
Derivative assets
Forward power contracts	30.5		—		30.5		—
FTRs	0.2		—		—		0.2
Total Derivative assets	$	30.7	$	—	$	30.5	$	0.2

Total assets	$	39.7	$	0.2	$	39.3	$	0.2
Liabilities
FTRs	0.5		$	—	$	—	$	0.5
Forward power contracts	27.0		—		23.9		3.1
Total derivative liabilities	27.5		—		23.9		3.6

Long-term debt	1,975.3		—		1,957.2		18.1

Total liabilities	$	2,002.8	$	—	$	1,981.1	$	21.7


(a)	Includes credit valuation adjustment.

The fair value of assets and liabilities at 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 December 31, 2014 (a)		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		8.9		0.8		—

Derivative assets
Forward power contracts	14.9		—		13.7		1.2
Total derivative assets	14.9		—		13.7		1.2
Total assets	$	24.6	$	8.9	$	14.5	$	1.2
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


(a)	Includes credit valuation adjustment.

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 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. 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. The WPAFB note 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 were not presented since debt is not recorded at fair value.

Approximately 99% 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 are 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 asbestos, ash ponds, underground storage tanks, and river structures increased by a net amount of $39.0 million ($25.4 million after tax) and $2.5 million ($1.6 million after tax) during the 12 months ended December 31, 2015 and 2014, respectively. The majority of the increase for 2015 is due to a net increase in the ARO for ash ponds of $40.3 million ($26.2 million after tax) as a result of new rules promulgated by the USEPA that were published in the Federal Register in April 2015 and became effective in October 2015. See Note 4 – Property, Plant and Equipment for more information about AROs.

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 major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:



$ in millions	Year ended December 31, 2015
	Carrying		Fair Value						Gross
	Amount		Level 1		Level 2		Level 3		Loss
Goodwill ^(b)
DP&L reporting unit	$	317.0	$	—	$	—	$	—	$	317.0



$ in millions	Year ended December 31, 2014
	Carrying		Fair Value						Gross
	Amount		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



$ in millions	Year ended December 31, 2013
	Carrying		Fair Value						Gross
	Amount		Level 1		Level 2		Level 3		Loss
Assets
Long-lived assets held and used ^(a)
DP&L (Conesville)	$	26.2	$	—	$	—	$	—	$	26.2
Goodwill ^(b)
DP&L Reporting unit	$	623.3	$	—	$	—	$	317.0	$	306.3


(a)	See Note 15 – Fixed-asset Impairment for further information


(b)	See Note 7 – Goodwill and Other Intangible Assets for further information

THE DAYTON POWER AND LIGHT COMPANY [Member]

Entity Information [Line Items]

Fair Value Measurements

Note 5 – Fair Value

The table below presents the fair value and cost of our non-derivative instruments at December 31, 2015 and 2014. See also Note 6 – Derivative Instruments and Hedging Activities for the fair values of our derivative instruments.



	December 31, 2015				December 31, 2014
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money market funds	$	0.2	$	0.2	$	0.1	$	0.1
Equity securities	3.0		3.8		2.7		3.7
Debt securities	4.4		4.3		4.7		4.7
Hedge Funds	0.4		0.4		0.8		0.8
Real Estate	0.3		0.3		0.4		0.4
Total assets	$	8.3	$	9.0	$	8.7	$	9.7

Liabilities
Debt	$	762.9	$	764.2	$	877.1	$	882.5

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); and


•	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 twelve months ended December 31, 2015 and 2014.

Debt

Master trust assets

DP&L had $0.8 million ($0.5 million after tax) in unrealized gains and $0.1 million ($0.1 million after tax) in unrealized losses on the Master Trust assets in AOCI at December 31, 2015 and $1.1 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2014.

The fair value of assets and liabilities at December 31, 2015 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 December 31, 2015 (a)		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	3.8		—		3.8		—
Debt securities	4.3		—		4.3		—
Hedge Funds	0.4		—		0.4		—
Real Estate	0.3		—		0.3		—
Total Master trust assets	9.0		0.2		8.8		—

Derivative assets
FTRs	0.2		—		—		0.2
Forward power contracts	30.6		—		30.6		—
Total derivative assets	30.8		—		30.6		0.2

Total assets	$	39.8	$	0.2	$	39.4	$	0.2
Liabilities
FTRs	$	0.5	$	—	$	—	$	0.5
Forward power contracts	27.0		—		23.9		3.1
Total derivative liabilities	27.5		—		23.9		3.6

Long-term debt	764.2		—		746.1		18.1

Total liabilities	$	791.7	$	—	$	770.0	$	21.7


(a)	Includes credit valuation adjustment.

The fair value of assets and liabilities at 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 December 31, 2014 (a)		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		8.9		0.8		—

Derivative assets
Forward power contracts	15.1		—		13.9		1.2
Total derivative assets	15.1		—		13.9		1.2

Total assets	$	24.8	$	8.9	$	14.7	$	1.2
Liabilities
Forward power contracts	$	11.2	$	—	$	11.2	$	—
FTRS	0.6		—		—		0.6
Heating Oil Futures	0.4		0.4		—		—
Natural Gas Futures	0.1		0.1		—		—
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


(a)	Includes credit valuation adjustment.

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

Approximately 99% 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 are 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 asbestos, ash ponds, underground storage tanks, and river structures increased by a net amount of $39.2 million ($25.5 million after tax) and $3.0 million ($2.0 million after tax) during the 12 months ended December 31, 2015 and 2014, respectively. The majority of the increase for 2015 is due to a net increase in the ARO for ash ponds of $40.3 million ($26.2 million after tax) as a result of new rules promulgated by the USEPA that were published in the Federal Register in April 2015 and became effective in October 2015. See Note 4 – Property, Plant and Equipment for more information about AROs.

When evaluating impairment of 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 major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:



$ in millions	Year ended December 31, 2013
	Carrying		Fair Value						Gross
	Amount		Level 1		Level 2		Level 3		Loss
Assets
Long-lived assets held and used ^(a)
Conesville	$	30.0	$	—	$	—	$	20.0	$	10.0
East Bend	$	76.0	$	—	$	—	$	—	$	76.0


(a)	See Note 13 – Fixed-asset Impairment for further information.

The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the year ended December 31, 2013:



$ in millions	Fair Value		Valuation Technique	Unobservable input	Range (Weighted Average)
Long-lived assets held and used:
DP&L (Conesville)	$	—	Discounted cash flows	Annual revenue growth	-31% to 18% (0)

- 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.

+ References + Details