Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2018

Derivative Instruments and Hedging Activities Disclosures [Line Items]

Derivative Instruments and Hedging Activities

In the normal course of business, DPL enters into various financial instruments, including derivative financial instruments. We use derivatives principally to manage the risk of changes in market prices for commodities and interest rate risk associated with our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. The objective of the hedging program is to mitigate financial risks while ensuring that we have adequate resources to meet our requirements. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under FASC 815 for accounting purposes.

At March 31, 2018, DPL's derivative instruments were as follows:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)		Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	0.1		—		0.1
Forward power contracts	Not designated	MWh	73.2		—		73.2
Interest rate swaps	Designated	USD	$	140,000.0	$	—	$	140,000.0


(a)	Refers to whether the derivative instruments have been designated as a cash flow hedge.

At December 31, 2017, DPL's derivative instruments were as follows:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)			Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	2.1		—			2.1
Natural gas futures	Not designated	Dths	3,322.5		(390.0		)	2,932.5
Forward power contracts	Designated	MWh	678.5		(1,667.0		)	(988.5		)
Forward power contracts	Not designated	MWh	871.0		(765.6		)	105.4
Interest rate swaps	Designated	USD	$	200,000.0	$	—		$	200,000.0


(a)	Refers to whether the derivative instruments have been designated as a cash flow hedge.

Cash Flow Hedges

As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair values of cash flow hedges determined by current public market prices will continue to fluctuate with changes in market prices up to contract expiration. The effective portion of the hedging transaction is recognized in AOCI and transferred to earnings using specific identification of each contract when the forecasted hedged transaction takes place or when the forecasted hedged transaction is probable of not occurring. The ineffective portion of the cash flow hedge is recognized in earnings in the current period. All risk components were taken into account to determine the hedge effectiveness of the cash flow hedges.

We enter into forward power contracts to manage commodity price risk exposure related to our generation of electricity. We do not hedge all commodity price risk. We reclassify gains and losses on forward power contracts from AOCI into earnings in those periods in which the contracts settle.

As of March 31, 2018, we have two interest rate swaps to hedge the variable interest on our $140.0 million variable interest rate tax-exempt First Mortgage Bonds. The interest rate swaps have a combined notional amount of $140.0 million and will settle monthly based on a one-month LIBOR. We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur. As of December 31, 2017, the interest rate swaps had a combined notional amount of $200.0 million. On March 29, 2018, we settled $60 million of these interest rate swaps due to the partial re-payment of the underlying debt and a gain of $0.8 million was recorded as a reduction to interest expense. Since the swap was partially settled, the remaining swaps were de-designated and then re-designated with a new hypothetical derivative. The AOCI associated with the remaining swaps will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.

We had previously entered into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. These interest rate derivative contracts were settled in the third quarter of 2013 and we continue to amortize amounts out of AOCI into interest expense.

The following tables provide information concerning gains or losses recognized in AOCI for the cash flow hedges for the three months ended March 31, 2018 and 2017:



	Three months ended						Three months ended
	March 31, 2018						March 31, 2017
				Interest						Interest
$ in millions (net of tax)	Power			Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	(2.8	)	$	17.5		$	(4.3	)	$	17.4
Net gains associated with current period hedging transactions	—			0.9			4.9			0.3
Net gains / (losses) reclassified to earnings
Interest expense	—			(0.4		)	—			(0.2		)
Revenues	4.1			—			(0.9		)	—
Purchased power	(1.4		)	—			2.1			—
Ending accumulated derivative gains / (losses) in AOCI	$	(0.1	)	$	18.0		$	1.8		$	17.5

Portion expected to be reclassified to earnings in the next twelve months ^(a)	$	—		$	(0.4	)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	0			29


(a)	The actual amounts that we reclassify from AOCI to earnings related to power can differ from the estimate above due to market price changes.

Net gains or losses associated with the ineffective portion of the hedging transactions were immaterial in the periods presented.

Derivatives not designated as hedges

Certain derivative contracts are entered into on a regular basis as part of our risk management program but do not qualify for hedge accounting or the normal purchase and normal sales scope exceptions under FASC 815. Accordingly, such contracts are recorded at fair value with changes in the fair value charged or credited to the Condensed Consolidated Statements of Operations in the period in which the change occurred. This is commonly referred to as “MTM accounting". Contracts we enter into as part of our risk management program may be settled financially, by physical delivery, or net settled with the counterparty. FTRs, natural gas futures, and certain forward power contracts are currently marked to market.

Certain qualifying derivative instruments have been designated as normal purchase or normal sale contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to MTM accounting and are recognized in the Condensed Consolidated Statements of Operations on an accrual basis.

Financial Statement Effect

The following tables present the amount and classification within the Condensed Consolidated Statements of Operations of the gains and losses on DPL’s derivatives not designated as hedging instruments for the three months ended March 31, 2018 and 2017:



For the three months ended March 31, 2018
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized gain / (loss)	$	0.2	$	(0.1	)	$	(0.1	)	$	—
Realized gain / (loss)	0.2		(0.2		)	0.2			0.2
Total	$	0.4	$	(0.3	)	$	0.1		$	0.2

Recorded in Income Statement: gain / (loss)
Revenues	$	—	$	(1.5	)	$	—		$	(1.5	)
Purchased power	0.4		1.2			0.1			1.7
Total	$	0.4	$	(0.3	)	$	0.1		$	0.2

For the three months ended March 31, 2017
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized gain / (loss)	$	—	$	(0.1	)	$	(0.1	)	$	(0.2	)
Realized gain / (loss)	0.2		(2.6		)	(0.2		)	(2.6		)
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)

Recorded in Income Statement: gain / (loss)
Revenues	$	—	$	(6.7	)	$	—		$	(6.7	)
Purchased power	0.2		4.0			(0.3		)	3.9
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)

DPL has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements.

The following tables summarize the derivative positions presented in the balance sheet where a right of offset exists under these arrangements and related cash collateral received or pledged, as well as the fair value, balance sheet classification and hedging designation of DPL’s derivative instruments:



Fair Values of Derivative Instruments
at March 31, 2018
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Consolidated Balance Sheets ^(a)		Financial Instruments with Same Counterparty in Offsetting Position		Cash Collateral			Net Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Interest rate swap	Designated	$	0.5	$	—	$	—		$	0.5

Long-term derivative positions (presented in Other deferred assets)
Interest rate swap	Designated	1.4		—		—			1.4
Total assets		$	1.9	$	—	$	—		$	1.9

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Forward power contracts	Not designated	0.1		—		(0.1		)	—
FTRs	Not designated	0.1		—		—			0.1
Total liabilities		$	0.2	$	—	$	(0.1	)	$	0.1


(a)	includes credit valuation adjustment



Fair Values of Derivative Instruments
at December 31, 2017
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Consolidated Balance Sheets ^(a)		Financial Instruments with Same Counterparty in Offsetting Position			Cash Collateral			Net Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Forward power contracts	Designated	$	4.9	$	(4.9	)	$	—		$	—
Forward power contracts	Not designated	5.3		(3.7		)	—			1.6
FTRs	Not designated	0.2		(0.1		)	—			0.1

Long-term derivative positions (presented in Other deferred assets)
Interest rate swaps	Designated	1.8		—			—			1.8
Forward power contracts	Not designated	0.6		—			—			0.6
Total assets		$	12.8	$	(8.7	)	$	—		$	4.1

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Forward power contracts	Designated	$	9.0	$	(4.9	)	$	(1.4	)	$	2.7
Forward power contracts	Not designated	5.9		(3.7		)	—			2.2
FTRs	Not designated	0.3		—			—			0.3
Natural gas	Not designated	0.1		(0.1		)	—			—
Total liabilities		$	15.3	$	(8.7	)	$	(1.4	)	$	5.2


(a)	includes credit valuation adjustment

Credit risk-related contingent features

Most of DPL’s commodity derivatives (except FTRs) are transacted through a broker account which is fully-collateralized, while FTRs are collateralized through the PJM Market. Therefore, no further collateral would need to be posted due to any changes in DPL’s credit ratings.

THE DAYTON POWER AND LIGHT COMPANY [Member]

Derivative Instruments and Hedging Activities Disclosures [Line Items]

Derivative Instruments and Hedging Activities

In the normal course of business, DP&L enters into various financial instruments, including derivative financial instruments. We use derivatives principally to manage the risk of changes in market prices for commodities and interest rate risk associated with our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. The objective of the hedging program is to mitigate financial risks while ensuring that we have adequate resources to meet our requirements. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under FASC 815 for accounting purposes. DP&L's interest rate swaps are designated as a cash flow hedge.

Cash Flow Hedges

As of March 31, 2018, we have two interest rate swaps to hedge the variable interest on our $140.0 million variable interest rate tax-exempt First Mortgage Bonds. The interest rate swaps have a combined notional amount of $140.0 million and will settle monthly based on a one-month LIBOR. We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur. As of December 31, 2017, the interest rate swaps had a combined notional amount of $200.0 million. On March 29, 2018, we settled $60.0 million of these interest rate swaps due to the partial re-payment of the underlying debt and a gain of $0.8 million was recorded as a reduction to interest expense. Since the swap was partially settled, the remaining swaps were de-designated and then re-designated with a new hypothetical derivative. The AOCI associated with the remaining swaps will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.

The following tables provide information concerning gains or losses recognized in AOCI for the cash flow hedges for the three months ended March 31, 2018 and 2017:



	Three months ended					Three months ended
	March 31, 2018					March 31, 2017
			Interest						Interest
$ in millions (net of tax)	Power		Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	—	$	1.4		$	(4.3	)	$	1.6
Net gains associated with current period hedging transactions	—		0.5			—			0.3
Net gains / (losses) reclassified to earnings
Interest expense	—		(0.3		)	—			(0.2		)
Loss from discontinued operations	—		—			6.1			—
Ending accumulated derivative gains in AOCI	$	—	$	1.6		$	1.8		$	1.7

Portion expected to be reclassified to earnings in the next twelve months ^(a)	$	—	$	(0.3	)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	0		29


(a)	The actual amounts that we reclassify from AOCI to earnings related to power can differ from the estimate above due to market price changes.

Net gains or losses associated with the ineffective portion of the hedging transactions were immaterial in the periods presented.

Financial Statement Effect

DP&L has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. The fair value derivative position of DP&L's interest rate swaps are as follows:



	Hedging Designation	Balance sheet classification	March 31, 2018		December 31, 2017
Interest Rate Hedges in an Asset Position	Cash Flow Hedge	Other Deferred Assets
Gross Fair Value as presented in the Balance Sheets			$	1.9	$	1.8

Any ineffectiveness on the interest rate hedges and the monthly settlement of the interest rate hedges is recorded in interest expense within the Condensed Statements of Operations.