Fair Value

9 Months Ended

Sep. 30, 2018

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]

Fair Value

Fair Value

The following table presents the fair value, carrying value and cost of our non-derivative instruments at September 30, 2018 and December 31, 2017. Information about the fair value of our derivative instruments can be found in Note 6 – Derivative Instruments and Hedging Activities.

	September 30, 2018				December 31, 2017
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money market funds	$	0.3	$	0.3	$	0.3	$	0.3
Equity securities	2.4		4.1		2.5		4.2
Debt securities	4.1		4.0		4.3		4.3
Hedge funds	0.2		0.2		0.1		0.2
Tangible assets	0.1		0.1		0.1		0.1
Total Assets	$	7.1	$	8.7	$	7.3	$	9.1
	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Long-term debt	$	1,476.0	$	1,560.1	$	1,704.8	$	1,819.3

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 Long-term debt, which is presented at amortized carrying value.

We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the nine months ended September 30, 2018 or 2017.

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. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income rather than in OCI. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, as of January 1, 2018, AOCI of $1.6 million ($1.0 million net of tax) was reversed to Retained Earnings and all future changes to fair value on the Master Trust Assets will be included in income in the period that the changes occur. These changes to fair value were not material for the nine months ended September 30, 2018. 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 consolidated balance sheets.

DPL had $1.6 million ($1.0 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at December 31, 2017.

Long-term 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 long-term debt is presented at the carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2019 to 2061.

The fair value of assets and liabilities at September 30, 2018 and December 31, 2017 and the respective category within the fair value hierarchy for DPL is as follows:

$ in millions	Fair value at September 30, 2018 (a)								Fair value at December 31, 2017 (a)
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Master Trust assets
Money market funds	$	0.3	$	—	$	—	$	0.3	$	0.3	$	—	$	—	$	0.3
Equity securities	—		4.1		—		4.1		—		4.2		—		4.2
Debt securities	—		4.0		—		4.0		—		4.3		—		4.3
Hedge funds	—		0.2		—		0.2		—		0.2		—		0.2
Tangible assets	—		0.1		—		0.1		—		0.1		—		0.1
Total Master Trust assets	0.3		8.4		—		8.7		0.3		8.8		—		9.1
Derivative assets
Interest rate hedges	—		2.2		—		2.2		—		1.8		—		1.8
Total Derivative assets	—		2.2		—		2.2		—		1.8		—		1.8
Total Assets	$	0.3	$	10.6	$	—	$	10.9	$	0.3	$	10.6	$	—	$	10.9
Liabilities
Long-term debt	$	—	$	1,542.4	$	17.7	$	1,560.1	$	—	$	1,801.5	$	17.8	$	1,819.3
Total Liabilities	$	—	$	1,542.4	$	17.7	$	1,560.1	$	—	$	1,801.5	$	17.8	$	1,819.3

(a) Includes credit valuation adjustment

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

• Level 1 inputs are used 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 interest rate hedge contracts which are valued using a benchmark interest rate. Other Level 2 assets include open-ended mutual funds in the Master Trust, which are valued using the end of day NAV per unit.

• Level 3 inputs such as certain debt balances are considered a Level 3 input because the notes are not publicly traded. Our long-term debt is fair valued for disclosure purposes only.

All of the inputs to the fair value of our derivative instruments are from quoted market prices.

Our long-term 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 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.

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. The balance of AROs was $13.5 million and $15.1 million at September 30, 2018 and December 31, 2017, respectively, which excludes AROs associated with our discontinued operations (see Note 15 – Discontinued Operations of Notes to DPL's Condensed Consolidated Financial Statements).

THE DAYTON POWER AND LIGHT COMPANY [Member]

Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]

Fair Value

Fair Value

The following table presents the fair value, carrying value and cost of our non-derivative instruments at September 30, 2018 and December 31, 2017. Information about the fair value of our derivative instruments can be found in Note 6 – Derivative Instruments and Hedging Activities.

	September 30, 2018				December 31, 2017
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money market funds	$	0.3	$	0.3	$	0.3	$	0.3
Equity securities	2.4		4.1		2.5		4.2
Debt securities	4.1		4.0		4.3		4.3
Hedge funds	0.2		0.2		0.1		0.2
Tangible assets	0.1		0.1		0.1		0.1
Total assets	$	7.1	$	8.7	$	7.3	$	9.1
	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Long-term debt	$	586.7	$	594.9	$	646.6	$	658.4

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 Long-term debt, which is presented at amortized carrying value.

We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the nine months ended September 30, 2018 or 2017.

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. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income rather than in OCI. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, as of January 1, 2018, AOCI of $1.7 million ($1.1 million net of tax) was reversed to Retained Earnings and all future changes to fair value on the Master Trust Assets will be included in income in the period that the changes occur. These changes to fair value were not material for the nine months ended September 30, 2018. 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.

DP&L had $1.7 million ($1.1 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at December 31, 2017.

Long-term 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 long-term debt is presented at the carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2020 to 2061.

The fair value of assets and liabilities at September 30, 2018 and December 31, 2017 and the respective category within the fair value hierarchy for DP&L is as follows:

$ in millions	Fair value at September 30, 2018 (a)								Fair value at December 31, 2017 (a)
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Master Trust assets
Money market funds	$	0.3	$	—	$	—	$	0.3	$	0.3	$	—	$	—	$	0.3
Equity securities	—		4.1		—		4.1		—		4.2		—		4.2
Debt securities	—		4.0		—		4.0		—		4.3		—		4.3
Hedge funds	—		0.2		—		0.2		—		0.2		—		0.2
Tangible assets	—		0.1		—		0.1		—		0.1		—		0.1
Total Master Trust assets	0.3		8.4		—		8.7		0.3		8.8		—		9.1
Derivative assets
Interest rate hedges	—		2.2		—		2.2		—		1.8		—		1.8
Total derivative assets	—		2.2		—		2.2		—		1.8		—		1.8
Total assets	$	0.3	$	10.6	$	—	$	10.9	$	0.3	$	10.6	$	—	$	10.9
Liabilities
Long-term debt	$	—	$	577.2	$	17.7	594.9		$	—	$	640.6	$	17.8	$	658.4
Total liabilities	$	—	$	577.2	$	17.7	$	594.9	$	—	$	640.6	$	17.8	$	658.4

(a) Includes credit valuation adjustment

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

• Level 1 inputs are used 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 interest rate hedge contracts which are valued using a benchmark interest rate. Other Level 2 assets include open-ended mutual funds in the Master Trust, which are valued using the end of day NAV per unit.

• Level 3 inputs such as certain debt balances are considered a Level 3 input because the notes are not publicly traded. Our long-term debt is fair valued for disclosure purposes only.

All of the inputs to the fair value of our derivative instruments are from quoted market prices.

Our long-term 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 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.

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. The balance of AROs was $4.7 million and $8.0 million at September 30, 2018 and December 31, 2017, respectively.