Fair Value

3 Months Ended

Mar. 31, 2018

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

Fair Value

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 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, carrying value and cost of our non-derivative instruments at March 31, 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.

	March 31, 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		3.8		2.5		4.2
Debt securities	4.3		4.2		4.3		4.3
Hedge funds	0.1		0.2		0.1		0.2
Tangible assets	0.1		0.1		0.1		0.1
Total Assets	$	7.2	$	8.6	$	7.3	$	9.1
	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Long-term debt (a)	$	1,576.6	$	1,661.4	$	1,704.8	$	1,819.3

(a) Amounts exclude immaterial capital lease obligations at December 31, 2017

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.

Fair Value Hierarchy

Fair value is defined as the 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) reflecting management’s own assumptions about the inputs used in pricing the asset or liability).

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, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 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 three months ended March 31, 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 cost, 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 March 31, 2018 and December 31, 2017 and the respective category within the fair value hierarchy for DPL is as follows:

Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at March 31, 2018 (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	3.8		—		3.8		—
Debt securities	4.2		—		4.2		—
Hedge funds	0.2		—		0.2		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	8.6		0.3		8.3		—
Derivative assets
Interest rate hedges	1.9		—		1.9		—
Total Derivative assets	1.9		—		1.9		—
Total Assets	$	10.5	$	0.3	$	10.2	$	—
Liabilities
Derivative Liabilities
FTRs	$	0.1	$	—	$	—	$	0.1
Forward power contracts	0.1		—		0.1		—
Total Derivative liabilities	0.2		—		0.1		0.1
Long-term debt	1,661.4		—		1,643.6		17.8
Total Liabilities	$	1,661.6	$	—	$	1,643.7	$	17.9

(a) Includes credit valuation adjustment

Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at December 31, 2017 (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	4.2		—		4.2		—
Debt securities	4.3		—		4.3		—
Hedge funds	0.2		—		0.2		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	9.1		0.3		8.8		—
Derivative assets
Forward power contracts	10.8		—		10.8		—
Interest rate hedges	1.8		—		1.8		—
Natural gas	0.2		0.2		—		—
Total Derivative assets	12.8		0.2		12.6		—
Total Assets	$	21.9	$	0.5	$	21.4	$	—
Liabilities
Derivative liabilities
FTRs	$	0.3	$	—	$	—	$	0.3
Natural gas	0.1		0.1		—		—
Forward power contracts	14.9		—		14.9		—
Total Derivative liabilities	15.3		0.1		14.9		0.3
Long-term debt (b)	1,819.3		—		1,801.5		17.8
Total Liabilities	$	1,834.6	$	0.1	$	1,816.4	$	18.1

(a) Includes credit valuation adjustment

(b) Amounts exclude immaterial capital lease obligations

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

• Level 1 inputs are used for derivative contracts such as natural gas 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 in the Master Trust, which are valued using the end of day NAV per unit.

• Level 3 inputs such as FTRs are considered a Level 3 input because the monthly auctions are considered inactive. Other Level 3 inputs include the credit valuation adjustment on some of the forward power contracts and forward power contracts in less active markets. Our Level 3 inputs are immaterial to our derivative balances as a whole and as such no further disclosures are presented.

Approximately 94% 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. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair value.

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 $128.3 million and $131.2 million at March 31, 2018 and December 31, 2017, respectively.

On March 17, 2017, the Board of Directors of DP&L approved the retirement of the DP&L operated and co-owned Stuart station coal-fired and diesel-fired generating units and the Killen station coal-fired generating unit and combustion turbine (collectively, the “Facilities”) on or before June 1, 2018, and the co-owners of the Facilities agreed with DP&L to proceed with this plan of retirement. As a result, we performed a long-lived asset impairment analysis during the first quarter of 2017 and determined that the carrying amounts of the Facilities were not recoverable. See Note 15 – Fixed-asset Impairments.

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 Long-lived assets measured at fair value on a non-recurring basis during the periods and their level within the fair value hierarchy:

	Carrying		Fair Value						Gross
	Amount (a)		Level 1		Level 2		Level 3		Loss
$ in millions	Three months ended March 31, 2017
Assets
Long-lived assets (b)
Stuart	$	42.4	$	—	$	—	$	3.3	$	39.1
Killen	$	35.2	$	—	$	—	$	7.9	$	27.3
Total									$	66.4

(a) Carrying amount at date of valuation

(b) See Note 15 – Fixed-asset Impairments for further information

The following summarizes the significant unobservable inputs used in the Level 3 measurement on a non-recurring basis during the three months ended March 31, 2017:

$ in millions	Fair value		Valuation technique	Unobservable input	Weighted average
Long-lived assets held and used:
Stuart	$	3.3	Discounted cash flow	Pre-tax operating margin (through remaining life)	10.0	%
				Weighted-average cost of capital	7.0	%
Killen	$	7.9	Discounted cash flow	Pre-tax operating margin (through remaining life)	22.0	%
				Weighted-average cost of capital	7.0	%

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 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, carrying value and cost of our non-derivative instruments at March 31, 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.

	March 31, 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		3.8		2.5		4.2
Debt securities	4.3		4.2		4.3		4.3
Hedge funds	0.1		0.2		0.1		0.2
Real estate	—		—		—		—
Tangible assets	0.1		0.1		0.1		0.1
Total assets	$	7.2	$	8.6	$	7.3	$	9.1
	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Long-term debt	$	587.7	$	597.2	$	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.

Fair Value Hierarchy

Fair value is defined as the 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) reflecting management’s own assumptions about the inputs used in pricing the asset or liability).

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, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 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 three months ended March 31, 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 cost, 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 March 31, 2018 and December 31, 2017 and the respective category within the fair value hierarchy for DP&L is as follows:

Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at March 31, 2018 (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	3.8		—		3.8		—
Debt securities	4.2		—		4.2		—
Hedge funds	0.2		—		0.2		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	8.6		0.3		8.3		—
Derivative assets
Interest rate hedges	1.9		—		1.9		—
Total derivative assets	1.9		—		1.9		—
Total assets	$	10.5	$	0.3	$	10.2	$	—
Liabilities
Long-term debt	$	597.2	$	—	$	579.4	$	17.8
Total liabilities	$	597.2	$	—	$	579.4	$	17.8

(a) Includes credit valuation adjustment

Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at December 31, 2017 (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	4.2		—		4.2		—
Debt securities	4.3		—		4.3		—
Hedge funds	0.2		—		0.2		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	9.1		0.3		8.8		—
Derivative assets
Interest rate hedges	1.8		—		1.8		—
Total Derivative assets	1.8		—		1.8		—
Total assets	$	10.9	$	0.3	$	10.6	$	—
Liabilities
Long-term debt	$	658.4	$	—	$	640.6	$	17.8
Total liabilities	$	658.4	$	—	$	640.6	$	17.8

(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 natural gas 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 in the Master Trust, which are valued using the end of day NAV per unit.

• Level 3 inputs such as FTRs are considered a Level 3 input because the monthly auctions are considered inactive. Other Level 3 inputs include the credit valuation adjustment on some of the forward power contracts and forward power contracts in less active markets. Our Level 3 inputs are immaterial to our derivative balances as a whole and as such no further disclosures are presented.

Approximately 100% 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. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair value.

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 March 31, 2018 and December 31, 2017, respectively.