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 December 31, 2017, DPL's outstanding 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	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.

At December 31, 2016, DPL's outstanding 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	2.3		—			2.3
Natural Gas	Not designated	Dths	1,590.0		—			1,590.0
Forward Power Contracts	Designated	MWh	342.9		(9,974.5		)	(9,631.6		)
Forward Power Contracts	Not designated	MWh	2,568.3		(2,020.9		)	547.4
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 considered to determine the hedge effectiveness of the cash flow hedges.

We enter into forward power contracts and forward natural gas 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.

We have two interest rate swaps to hedge the variable interest on our $200.0 million variable interest rate tax-exempt First Mortgage Bonds. The interest rate swaps have a combined notional amount of $200.0 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.

The following tables provide information on gains or losses recognized in AOCI for the cash flow hedges for the periods indicated:



	Years ended December 31,
	2017						2016						2015
$ in millions (net of tax)	Power			Interest Rate Hedges			Power			Interest Rate Hedges			Power			Interest Rate Hedges
Beginning accumulated derivative gain / (loss) in AOCI	$	(4.3	)	$	17.4		$	9.2		$	17.5		$	0.2		$	18.3

Net gains / (losses) associated with current period hedging transactions	8.8			0.8			15.7			0.4			18.2			—
Net gains / (losses) reclassified to earnings:
Interest Expense	—			(0.7		)	—			(0.5		)	—			(0.8		)
Revenues	(9.8		)	—			(35.6		)	—			(12.0		)	—
Purchased Power	2.5			—			6.4			—			2.8			—
Ending accumulated derivative gain / (loss) in AOCI	$	(2.8	)	$	17.5		$	(4.3	)	$	17.4		$	9.2		$	17.5

Portion expected to be reclassified to earnings in the next twelve months ^(a)	$	(2.7	)	$	(0.7	)

Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	3			32


(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 purchases and sales exceptions under FASC 815. Accordingly, such contracts are recorded at fair value with changes in the fair value charged or credited to the 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. We mark to market FTRs, natural gas futures and certain forward power contracts.

Certain qualifying derivative instruments have been designated as normal purchases or normal sales 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 treatment and are recognized in the consolidated statements of operations on an accrual basis.

The following tables show the amount and classification within the Consolidated Statements of Operations or Balance Sheets of the gains and losses on DPL’s derivatives not designated as hedging instruments for the years ended December 31, 2017, 2016 and 2015:



	Year ended December 31, 2017
$ in millions	FTRs			Power			Natural Gas		Total
Change in unrealized gain / (loss)	$	(0.4	)	$	1.9		$	0.1	$	1.6
Realized gain / (loss)	0.8			(0.7		)	1.5		1.6
Total	$	0.4		$	1.2		$	1.6	$	3.2

Recorded on Balance Sheet:
Regulatory asset	$	—		$	—		$	—	$	—
Recorded in Statement of Operations: gain / (loss)
Revenue	—			(1.2		)	—		(1.2		)
Purchased Power	0.4			2.4			1.6		4.4
Total	$	0.4		$	1.2		$	1.6	$	3.2



	Year ended December 31, 2016
$ in millions	FTRs			Power			Natural Gas		Total
Change in unrealized gain / (loss)	$	0.3		$	4.0		$	—	$	4.3
Realized gain / (loss)	(0.6		)	(7.2		)	2.6		(5.2		)
Total	$	(0.3	)	$	(3.2	)	$	2.6	$	(0.9	)

Recorded on Balance Sheet:
Regulatory asset	$	—		$	—		$	—	$	—
Recorded in Statement of Operations: gain / (loss)
Revenue	$	—		$	(17.3	)	$	—	$	(17.3	)
Purchased Power	(0.3		)	14.1			2.6		16.4
Total	$	(0.3	)	$	(3.2	)	$	2.6	$	(0.9	)



	Year ended December 31, 2015
$ in millions	Heating Oil			FTRs			Power			Natural Gas			Total
Change in unrealized gain / (loss)	$	0.4		$	0.3		$	(6.4	)	$	0.1		$	(5.6	)
Realized gain / (loss)	(0.3		)	(0.2		)	(9.8		)	(0.1		)	(10.4		)
Total	$	0.1		$	0.1		$	(16.2	)	$	—		$	(16.0	)

Recorded on Balance Sheet
Regulatory asset	$	0.1		$	—		$	—		$	—		$	0.1
Recorded in Statement of Operations: gain / (loss)
Fuel	—			—			27.4			—			27.4
Purchased Power	—			0.1			(43.6		)	—			(43.5		)
Total	$	0.1		$	0.1		$	(16.2	)	$	—		$	(16.0	)

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
December 31, 2017
				Gross Amounts Not Offset in the 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 Amount
Assets
Short-term derivative positions (presented in Other current assets)
Forward power contracts	Designated	$	4.9	$	(4.9	)	$	—		$	—
Forward power contracts	Not designated	5.3		(3.7		)	—			1.6
Natural gas	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	Designated	—		—			—			—
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
Natural gas	Not designated	0.1		(0.1		)	—			—
FTRs	Not designated	0.3		—			—			0.3
Total liabilities		$	15.3	$	(8.7	)	$	(1.4	)	$	5.2


(a)	Includes credit valuation adjustment.



Fair Values of Derivative Instruments
December 31, 2016
				Gross Amounts Not Offset in the 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 Amount
Assets
Short-term derivative positions (presented in Other current assets)
Forward power contracts	Designated	$	11.0	$	(10.5	)	$	—		$	0.5
Forward power contracts	Not designated	6.0		(4.7		)	—			1.3
FTRs	Not designated	0.1		—			—			0.1

Long-term derivative positions (presented in Other deferred assets)
Interest rate swaps	Designated	1.2		—			—			1.2
Forward power contracts	Designated	0.6		(0.6		)	—			—
Forward power contracts	Not designated	1.9		(1.0		)	—			0.9
Total assets		$	20.8	$	(16.8	)	$	—		$	4.0

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Interest rate swaps	Designated	$	0.7	$	—		$	—		$	0.7
Forward power contracts	Designated	16.4		(10.5		)	(5.5		)	0.4
Forward power contracts	Not designated	7.7		(4.7		)	—			3.0

Long-term derivative positions (presented in Other deferred liabilities)
Forward power contracts	Designated	2.4		(0.6		)	(0.8		)	1.0
Forward power contracts	Not designated	2.0		(1.0		)	—			1.0
Total liabilities		$	29.2	$	(16.8	)	$	(6.3	)	$	6.1


(a)	Includes credit valuation adjustment.

Credit risk-related contingent features

Certain of our OTC commodity derivative contracts are under master netting agreements that contain provisions that require us to post collateral if our credit ratings drop below certain thresholds. We have crossed this threshold and our counterparties could request that we post collateral for our net liability position with them. As of the date of the filing of this report, we have not had to post collateral with any of these counterparties.

The aggregate fair value of DPL’s derivative instruments that were in a MTM loss position at December 31, 2017 is $15.3 million. This amount is offset by $8.7 million of collateral posted directly with third parties and in a broker margin account which offsets our loss positions on the forward contracts. This liability position is further offset by the asset position of counterparties with master netting agreements of $1.4 million. Since our debt is below investment grade, we could have to post collateral for the remaining $4.9 million.