Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

9.  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 table below presents the fair value and cost of our non-derivative instruments at September 30, 2012 and December 31, 2011.  See also Note 10 of Notes to Condensed Consolidated Financial Statements for the fair values of our derivative instruments.

	Successor
	At September 30,				At December 31,
	2012				2011
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money Market Funds	$	0.2	$	0.2	$	0.2	$	0.2
Equity Securities		3.9		5.2		3.9		4.4
Debt Securities		5.0		5.5		5.0		5.5
Multi-Strategy Fund		0.3		0.3		0.3		0.2
Total Assets	$	9.4	$	11.2	$	9.4	$	10.3
Liabilities
Debt	$	2,614.9	$	2,769.4	$	2,629.3	$	2,710.6

Debt

The carrying value of DPL’s debt was adjusted to fair value at the Merger date.  Unrealized gains or losses are not recognized in the financial statements because debt is presented at 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 2013 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. 

DP&L had $0.8 million ($0.5 million after tax) of unrealized gains and immaterial losses on the Master Trust assets in AOCI at September 30, 2012 and immaterial unrealized gains and losses in AOCI at December 31, 2011.

Due to the liquidation of the DPL Inc. common stock held in the Master Trust, there is sufficient cash to cover the next twelve months of benefits payable to employees covered under the benefit plans.  Therefore, no unrealized gains or losses are expected to be transferred to earnings since we will not need to sell any investments in the next twelve months.

Net Asset Value (NAV) per Unit

The following table discloses the fair value and redemption frequency for those assets whose fair value is estimated using the NAV per unit as of September 30, 2012 and December 31, 2011.  These assets are part of the Master Trust.  Fair values estimated using the NAV per unit are considered Level 2 inputs within the fair value hierarchy, unless they cannot be redeemed at the NAV per unit on the reporting date.  Investments that have restrictions on the redemption of the investments are Level 3 inputs.  As of September 30, 2012, DPL did not have any investments for sale at a price different from the NAV per unit.

Fair Value Estimated Using Net Asset Value per Unit (Successor)
$ in millions	Fair Value at September 30, 2012		Fair Value at December 31, 2011		Unfunded Commitments
Equity Securities (a)	$	5.2	$	4.4	$	-
Debt Securities (b)		5.5		5.5		-
Multi-Strategy Fund (c)		0.3		0.2		-
Total	$	11.0	$	10.1	$	-

(a)This category includes investments in hedge funds representing an S&P 500 Index and the Morgan Stanley Capital International (MSCI) U.S. Small Cap 1750 Index.  Investments in this category can be redeemed immediately at the current net asset value per unit.

(b)This category includes investments in U.S. Treasury obligations and U.S. investment grade bonds.  Investments in this category can be redeemed immediately at the current net asset value per unit.

(c)This category includes a mix of actively managed funds holding investments in stocks, bonds and short-term investments in a mix of actively managed funds.  Investments in this category can be redeemed immediately at the current net asset value per unit.

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.

We transferred a money market account to Level 1 from Level 2 of the fair value hierarchy, as it was determined that this fund is a cash equivalent where quoted prices are generally equal to par value. 

The fair value of assets and liabilities at September 30, 2012 and December 31, 2011 measured on a recurring basis and the respective category within the fair value hierarchy for DPL was determined as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Successor)
			Level 1		Level 2		Level 3
$ in millions	Fair Value at September 30, 2012		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		5.2		-		5.2		-
Debt Securities		5.5		-		5.5		-
Multi-Strategy Fund		0.3		-		0.3		-
Total Master Trust Assets		11.2		0.2		11.0		-
Derivative Assets
FTRs		0.1		-		-		0.1
Heating Oil Futures		0.4		0.4		-		-
Forward Power Contracts		16.8		-		16.8		-
Total Derivative Assets		17.3		0.4		16.8		0.1
Total Assets	$	28.5	$	0.6	$	27.8	$	0.1
Liabilities
Derivative Liabilities
Interest Rate Hedge	$	(35.7)	$	-	$	(35.7)	$	-
FTRs		(0.1)		-		-		(0.1)
Forward NYMEX Coal Contracts		(1.1)		-		(1.1)		-
Forward Power Contracts		(21.0)		-		(21.0)		-
Total Derivative Liabilities		(57.9)		-		(57.8)		(0.1)
Long-term Debt		(2,769.4)		-		(2,750.4)		(19.0)
Total Liabilities	$	(2,827.3)	$	-	$	(2,808.2)	$	(19.1)

Assets and Liabilities Measured at Fair Value on a Recurring Basis (Successor)
			Level 1		Level 2		Level 3
$ in millions	Fair Value as of December 31, 2011		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		4.4		-		4.4		-
Debt Securities		5.5		-		5.5		-
Multi-Strategy Fund		0.2		-		0.2		-
Total Master Trust Assets		10.3		-		10.3		-
Derivative Assets
FTRs		0.1		-		0.1		-
Heating Oil Futures		1.8		1.8		-		-
Forward Power Contracts		17.3		-		17.3		-
Total Derivative Assets		19.2		1.8		17.4		-
Total Assets	$	29.5	$	1.8	$	27.7	$	-
Liabilities
Derivative Liabilities
Interest Rate Hedge	$	(32.5)	$	-	$	(32.5)	$	-
Forward NYMEX Coal Contracts		(14.5)		-		(14.5)		-
Forward Power Contracts		(13.3)		-		(13.3)		-
Total Derivative Liabilities		(60.3)		-		(60.3)		-
Total Liabilities	$	(60.3)	$	-	$	(60.3)	$	-

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).  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; and interest rate hedges, which use observable inputs to populate a pricing model.  Financial transmission rights are considered a Level 3 input, beginning April 1, 2012, 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 WPAFB 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 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.  Additions to AROs were not material during the nine months ended September 30, 2012 and 2011.

Cash Equivalents

DPL had $125.0 million and $125.0 million in money market funds classified as cash and cash equivalents in its Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, respectively.  The money market funds have quoted prices that are generally equivalent to par and are considered Level 1.

DP&L [Member]

Fair Value Measurements

9.  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 table below presents the fair value and cost of our non-derivative instruments at September 30, 2012 and December 31, 2011.  See also Note 10 for the fair values of our derivative instruments.

	At September 30,				At December 31,
	2012				2011
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money Market Funds	$	0.2	$	0.2	$	0.2	$	0.2
Equity Securities		3.9		5.2		3.9		4.4
Debt Securities		5.0		5.5		5.0		5.5
Multi-Strategy Fund		0.3		0.3		0.3		0.2
Total Assets	$	9.4	$	11.2	$	9.4	$	10.3
Liabilities
Debt	$	903.2	$	934.5	$	903.4	$	934.5

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 2013 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 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 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 $1.7 million ($1.1 million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at September 30, 2012 and $1.0 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2011. 

Due to the liquidation of the DPL common stock held in the Master Trust, there is sufficient cash to cover the next twelve months of benefits payable to employees covered under the benefit plans.  Therefore, no unrealized gains or losses are expected to be transferred to earnings since we will not need to sell any investments in the next twelve months.

Net Asset Value (NAV) per Unit

The following table discloses the fair value and redemption frequency for those assets whose fair value is estimated using the NAV per unit as of September 30, 2012.  These assets are part of the Master Trust.  Fair values estimated using the NAV per unit are considered Level 2 inputs within the fair value hierarchy, unless they cannot be redeemed at the NAV per unit on the reporting date.  Investments that have restrictions on the redemption of the investments are Level 3 inputs.  At September 30, 2012, DP&L did not have any investments for sale at a price different from the NAV per unit.

Fair Value Estimated Using Net Asset Value per Unit
$ in millions	Fair Value at September 30, 2012		Fair Value at December 31, 2011		Unfunded Commitments
Equity Securities (a)	$	5.2	$	4.4	$	-
Debt Securities (b)		5.5		5.5		-
Multi-Strategy Fund (c)		0.3		0.2		-
Total	$	11.0	$	10.1	$	-

(a)This category includes investments in hedge funds representing an S&P 500 index and the Morgan Stanley Capital International (MSCI) U.S. Small Cap 1750 Index.  Investments in this category can be redeemed immediately at the current net asset value per unit.

(b)This category includes investments in U.S. Treasury obligations and U.S. investment grade bonds.  Investments in this category can be redeemed immediately at the current net asset value per unit.

(c)This category includes a mix of actively managed funds holding investments in stocks, bonds and short-term investments in a mix of actively managed funds.  Investments in this category can be redeemed immediately at the current net asset value per unit.

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.

We transferred a money market account to Level 1 from Level 2 of the fair value hierarchy, as it was determined that this fund is a cash equivalent where quoted prices are generally equal to par value.

The fair value of assets and liabilities at September 30, 2012 and December 31, 2011 measured on a recurring basis and the respective category within the fair value hierarchy for DP&L was determined as follows:

Assets and Liabilities Measured at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value at September 30, 2012		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		5.2		-		5.2		-
Debt Securities		5.5		-		5.5		-
Multi-Strategy Fund		0.3		-		0.3		-
Total Master Trust Assets		11.2		0.2		11.0		-
Derivative Assets
FTRs		0.1		-		-		0.1
Heating Oil Futures		0.4		0.4		-		-
Forward Power Contracts		5.0		-		5.0		-
Total Derivative Assets		5.5		0.4		5.0		0.1
Total Assets	$	16.7	$	0.6	$	16.0	$	0.1
Liabilities
Derivative Liabilities
FTRs	$	(0.1)	$	-	$	-	$	(0.1)
Forward NYMEX Coal Contracts		(1.1)		-		(1.1)		-
Forward Power Contracts		(18.6)		-		(18.6)		-
Total Derivative Liabilities		(19.8)		-		(19.7)		(0.1)
Long-term Debt		(934.5)		-		(915.5)		(19.0)
Total Liabilities	$	(954.3)	$	-	$	(935.2)	$	(19.1)

Assets and Liabilities Measured at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value as of December 31, 2011		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		4.4		-		4.4		-
Debt Securities		5.5		-		5.5		-
Multi-Strategy Fund		0.2		-		0.2		-
Total Master Trust Assets		10.3		-		10.3		-
Derivative Assets
FTRs		0.1		-		0.1		-
Heating Oil Futures		1.8		1.8		-		-
Forward Power Contracts		4.1		-		17.3		-
Total Derivative Assets		6.0		1.8		17.4		-
Total Assets	$	16.3	$	1.8	$	27.7	$	-
Liabilities
Derivative Liabilities
Forward NYMEX Coal Contracts	$	(14.5)	$	-	$	(14.5)	$	-
Forward Power Contracts		(5.0)		-		(13.3)		-
Total Derivative Liabilities		(19.5)		-		(27.8)		-
Total Liabilities	$	(19.5)	$	-	$	(27.8)	$	-

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).  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; and interest rate hedges, which use observable inputs to populate a pricing model.  Financial transmission rights are considered a Level 3 input beginning April 1, 2012 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 WPAFB 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 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 for DP&L.

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.  Additions to AROs were not material during the nine months ended September 30, 2012 and 2011.