Note 10 – 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 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, 2013 and 2012. See Note 11 for the fair values of our derivative instruments.



	December 31, 2013				December 31, 2012
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money market funds	$	0.3	$	0.3	$	0.2	$	0.2
Equity securities		3.3		4.4		4.0		5.1
Debt securities		5.4		5.5		4.6		5.0
Hedge Funds		0.9		0.9		-		-
Real Estate		0.4		0.4		0.3		0.3
Total assets	$	10.3	$	11.5	$	9.1	$	10.6

Liabilities
Debt	$	2,294.4	$	2,334.6	$	2,609.9	$	2,707.1

Debt

The carrying value of DPL’s debt was adjusted to fair value at the Merger date. The fair value of the debt at December 31, 2013 did not change substantially from the value at the Merger date. Unrealized gains or losses are not recognized in the financial statements as debt is presented at the carrying value established at the Merger date, 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 $0.9 million ($0.6 million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at December 31, 2013 and $0.7 million ($0.5 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2012.

Various investments were sold during the past twelve months to facilitate the distribution of benefits. During the past twelve months, $2.1 million ($1.4 million after tax) of unrealized gains were reversed into earnings. Over the next twelve months, $0.1 million ($0.1 million after tax) of unrealized gains are expected to be reversed to earnings.

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 December 31, 2013 and 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. As of December 31, 2013, 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
$ in millions	Fair Value at December 31, 2013		Unfunded Commitments		Redemption Frequency
Money market fund (a)	$	0.3	$	-	Immediate
Equity securities (b)		4.4		-	Immediate
Debt Securities (c)		5.5		-	Immediate
Hedge Funds (d)		0.9		-	Quarterly
Real Estate (e)		0.4		-	Quarterly
Total	$	11.5	$	-

(a) This category includes investments in high-quality, short-term securities. Investments in this category can be redeemed immediately at the current NAV.

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

(c) 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 NAV per unit.

(d)This category includes hedge funds investing in fixed income securities and currencies, short and long-term equity investments, and a diversified fund with investments in bonds, stocks, real estate and commodities.

(e)This category includes EFT real estate funds that invest in U.S. and International properties.



Fair Value Estimated Using Net Asset Value per Unit
$ in millions	Fair Value at December 31, 2012		Unfunded Commitments		Redemption Frequency
Money market fund (a)	$	0.2	$	-	Immediate
Equity securities (b)		5.1		-	Immediate
Debt Securities (c)		5.0		-	Immediate
Multi-strategy fund (d)		0.3		-	Immediate
Total	$	10.6	$	-

(a)This category includes investments in high-quality, short-term securities. Investments in this category can be redeemed immediately at the current net asset value per unit.

(b)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.

(c)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.

(d)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);

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, 2013 and 2012.

The fair value of assets and liabilities at December 31, 2013 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
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2013 (a)		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		0.3		11.2		-

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	$	0.5	$	24.6	$	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

(a)

Includes credit valuation adjustment.

The fair value of assets and liabilities at December 31, 2012 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
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2012 (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		5.1		-		5.1		-
Debt securities		5.0		-		5.0		-
Multi-strategy fund		0.3		-		0.3		-
Total Master trust assets		10.6		0.2		10.4		-

Derivative assets
Heating oil futures		0.2		0.2		-		-
Forward power contracts		6.3		-		6.3		-
Total derivative assets		6.5		0.2		6.3		-

Total assets	$	17.1	$	0.4	$	16.7	$	-

Liabilities
Derivative liabilities
FTRs	$	0.1	$	-	$	-	$	0.1
Interest rate hedges		29.5		-		29.5		-
Forward power contracts		13.1		-		13.1		-
Total derivative liabilities		42.7		-		42.6		0.1

Long Term Debt		2,707.1		-		2,688.2		18.9

Total liabilities	$	2,749.8	$	-	$	2,730.8	$	19.0

(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 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.

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. Our long-term leases and the WPAFB note 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 95% 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. An ARO liability in the amount of $0.1 million was established in 2012 associated with a gypsum landfill disposal site that is presently under construction. This increase in 2012 was offset by a $0.1 million reduction in ARO for asbestos as a result of an acceleration of removal and remediation activities. There were no additions to our AROs during the year ended December 31, 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 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)
DP&L (Conesville)	$	26.2	$	-	$	-	$	-	$	26.2
Goodwill (b)
DP&L Reporting unit	$	623.3	$	-	$	-	$	317.0	$	306.3



$ in millions	Year ended December 31, 2012
		Carrying	Fair Value							Gross
		Amount		Level 1		Level 2		Level 3		Loss
Assets
Goodwill (b)
DP&L Reporting unit	$	2,440.5	$	-	$	-	$	623.3	$	1,817.2

(a)See Note 19 for further information

(b)See Note 18 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%)

Cash Equivalents

DPL had $0.0 million and $130.0 million in money market funds classified as cash and cash equivalents in its Consolidated Balance Sheets at December 31, 2013 and 2012, respectively. The money market funds have quoted prices that are generally equivalent to par.