Fair Value Measurements

3 Months Ended

Mar. 31, 2014

8. 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, 2014 and December 31, 2013. See also Note 9 for the fair values of our derivative instruments.



	March 31, 2014				December 31, 2013
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money Market Funds	$	0.1	$	0.1	$	0.3	$	0.3
Equity Securities		2.8		3.7		3.3		4.4
Debt Securities		4.8		4.9		5.4		5.5
Hedge Funds		0.8		0.9		0.9		0.9
Real Estate		0.4		0.4		0.4		0.4
Total Assets	$	8.9	$	10.0	$	10.3	$	11.5

Liabilities
Debt	$	2,294.4	$	2,364.2	$	2,294.4	$	2,334.6

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 cost.

Debt

The carrying value of DPL’s debt in place at the Merger was adjusted to fair value at the Merger date. Debt issued subsequent to the Merger is carried at issue cost, less amortized premium or discount. Unrealized gains or losses are not recognized in the financial statements because debt is presented at cost or 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 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 $0.7 million ($0.5 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2014 and $0.9 million ($0.6 million after tax) of unrealized gains and immaterial unrealized losses in AOCI at December 31, 2013.

During the three months ended March 31, 2014, $0.3 million ($0.2 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.

Net Asset Value (NAV) per Unit

The following table presents the fair value and redemption frequency for those assets whose fair value is estimated using the NAV per unit as of March 31, 2014 and December 31, 2013. These assets are part of the Master Trusts. Fair values estimated using the NAV per unit are primarily 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 March 31, 2014, 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 March 31, 2014		Fair Value at December 31, 2013		Unfunded Commitments		Redemption Frequency

Money Market Fund (a)	$	0.1	$	0.3	$	-	Immediate
Equity Securities (b)		3.7		4.4		-	Immediate
Debt Securities (c)		4.9		5.5		-	Immediate
Hedge Funds (d)		0.9		0.9		-	Quarterly
Real Estate (e)		0.4		0.4		-	Quarterly
Total	$	10.0	$	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 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.

The fair value of assets and liabilities at March 31, 2014 and December 31, 2013 on a recurring basis and the respective category within the fair value hierarchy for DPL was determined as follows:



Assets and Liabilities at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value at March 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		4.9		-		4.9		-
Hedge Funds		0.9		-		0.9		-
Real Estate		0.4		-		0.4		-
Total Master Trust Assets		10.0		0.1		9.9		-

Derivative Assets
Heating Oil		0.1		0.1		-		-
Forward Power Contracts		19.7		-		19.7		-
Total Derivative Assets		19.8		0.1		19.7		-

Total Assets	$	29.8	$	0.2	$	29.6	$	-

Liabilities
Derivative Liabilities
FTRs	$	0.1	$	-	$	-	$	0.1
Forward Power Contracts		33.2		-		33.2		-
Total Derivative Liabilities		33.3		-		33.2		0.1

Long-term Debt		2,364.2		-		2,345.8		18.4

Total Liabilities	$	2,397.5	$	-	$	2,379.0	$	18.5



Assets and Liabilities at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2013		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

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. FTRs 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 Wright-Patterson Air Force Base 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 are 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 for the three months ended March 31, 2014 were $1.2 million for asbestos and underground storage tank AROs. Additions to AROs were not material during the three months ended March 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 Goodwill and Long-lived assets measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:



$ in millions	Three months ended March 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

(a)See Note 13 for further information

(b)See Note 12 for further information

DP&L [Member]

Fair Value Measurements

8. 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 following table presents the fair value and cost of our non-derivative instruments at March 31, 2014 and December 31, 2013. See also Note 9 for the fair values of our derivative instruments.



	March 31, 2014				December 31, 2013
$ in millions	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Money market funds	$	0.1	$	0.1	$	0.3	$	0.3
Equity securities		2.8		3.7		3.3		4.4
Debt securities		4.8		4.9		5.4		5.5
Hedge funds		0.8		0.9		0.9		0.9
Real estate		0.4		0.4		0.4		0.4
Total assets	$	8.9	$	10.0	$	10.3	$	11.5

Liabilities
Debt	$	877.1	$	878.6	$	877.1	$	859.6

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 2028 to 2061.

Master Trust Assets

DP&L had $1.0 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2014 and $1.2 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses in AOCI at December 31, 2013.

Net Asset Value (NAV) per Unit

The following table presents the fair value and redemption frequency for those assets whose fair value is estimated using the NAV per unit as of March 31, 2014 and December 31, 2013. These assets are part of the Master Trusts. Fair values estimated using the NAV per unit are primarily 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 March 31, 2014, 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 March 31, 2014		Fair Value at December 31, 2013		Unfunded Commitments		Redemption Frequency

Money market fund (a)	$	0.1	$	0.3	$	-	Immediate
Equity securities (b)		3.7		4.4		-	Immediate
Debt securities (c)		4.9		5.5		-	Immediate
Hedge funds (d)		0.9		0.9		-	Quarterly
Real estate (e)		0.4		0.4		-	Quarterly
Total	$	10.0	$	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 Hierarchy

The fair value of assets and liabilities at March 31, 2014 and December 31, 2013 measured on a recurring basis and the respective category within the fair value hierarchy for DP&L was determined as follows:



Assets and Liabilities at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value at March 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		4.9		-		4.9		-
Hedge funds		0.9		-		0.9		-
Real estate		0.4		-		0.4		-
Total Master trust assets		10.0		0.1		9.9		-

Derivative assets
FTRs		-		-		-		-
Heating Oil		0.1		0.1		-		-
Forward power contracts		20.0		-		20.0		-
Total derivative assets		20.1		0.1		20.0		-

Total assets	$	30.1	$	0.2	$	29.9	$	-

Liabilities
Derivative liabilities
FTRs	$	0.1	$	-	$	-	$	0.1
Forward power contracts		33.5		-		33.5		-
Total derivative liabilities		33.6		-		33.5		0.1

Long-term debt		878.6		-		860.2		18.4

Total liabilities	$	912.2	$	-	$	893.7	$	18.5



Assets and Liabilities at Fair Value on a Recurring Basis
			Level 1		Level 2		Level 3
$ in millions	Fair Value at December 31, 2013		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
Heating oil futures		0.2		0.2		-		-
FTRs		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		859.6		-		841.1		18.5

Total liabilities	$	870.2	$	-	$	851.7	$	18.5

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 for DP&L.

Non-recurring Fair Value Measurements

- 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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