Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosures [Line Items]

Derivative Instruments and Hedging Activities

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 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. 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.

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. With the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities effective January 1, 2019, we are no longer required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument is recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item in the period in which it settles.

As of June 30, 2020, 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 settle monthly based on a one-month LIBOR. The AOCL associated with the swaps will be amortized out of AOCL 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 2013 and we continue to amortize amounts out of AOCI into interest expense.

The following tables provide information concerning gains or losses recognized in AOCL for the cash flow hedges for the three and six months ended June 30, 2020 and 2019:

	Three months ended
	June 30, 2020		June 30, 2019
	Interest		Interest
$ in millions (net of tax)	Rate Hedge		Rate Hedge		Power
Beginning accumulated derivative gains in AOCL	$	13.9	$	16.1	$	0.4
Net gains / (losses) associated with current period hedging transactions	0.2		(0.5)		—
Net gains reclassified to earnings
Interest expense	(0.2)		(0.3)		—
Ending accumulated derivative gains in AOCL	$	13.9	$	15.3	$	0.4
	Six months ended
	June 30, 2020		June 30, 2019
	Interest		Interest
$ in millions (net of tax)	Rate Hedge		Rate Hedge		Power
Beginning accumulated derivative gains in AOCL	$	14.5	$	16.6	$	0.4
Net losses associated with current period hedging transactions	(0.1)		(0.8)		—
Net gains reclassified to earnings
Interest expense	(0.5)		(0.5)		—
Ending accumulated derivative gains in AOCL	$	13.9	$	15.3	$	0.4
Portion expected to be reclassified to earnings in the next twelve months	$	(1.1)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	2

Financial Statement Effect

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 fair value derivative position of DPL's interest rate swaps are as follows:

$ in millions (net of tax)	Hedging Designation	Balance sheet classification	June 30, 2020		December 31, 2019
Interest rate swap	Cash Flow Hedge	Prepayments and other current assets	$	—	$	0.1
Interest rate swap	Cash Flow Hedge	Accrued and other current liabilities	$	0.1	$	—

THE DAYTON POWER AND LIGHT COMPANY [Member]

Derivative Instruments and Hedging Activities Disclosures [Line Items]

Derivative Instruments and Hedging Activities

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 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. 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.

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. With the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities effective January 1, 2019, we are no longer required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument is recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item in the period in which it settles.

As of June 30, 2020, 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 settle monthly based on a one-month LIBOR. The AOCL associated with the swaps will be amortized out of AOCL 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 2013 and we continue to amortize amounts out of AOCI into interest expense.

The following tables provide information concerning gains or losses recognized in AOCL for the cash flow hedges for the three and six months ended June 30, 2020 and 2019:

	Three months ended
	June 30, 2020		June 30, 2019
	Interest		Interest
$ in millions (net of tax)	Rate Hedge		Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCL	$	(0.8)	$	0.3
Net gains / (losses) associated with current period hedging transactions	0.2		(0.6)
Net gains reclassified to earnings
Interest expense	(0.1)		—
Ending accumulated derivative losses in AOCL	$	(0.7)	$	(0.3)
	Six months ended
	June 30, 2020		June 30, 2019
	Interest		Interest
$ in millions (net of tax)	Rate Hedge		Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCL	$	(0.4)	$	0.6
Net losses associated with current period hedging transactions	(0.1)		(0.8)
Net gains reclassified to earnings
Interest expense	(0.2)		(0.1)
Ending accumulated derivative losses in AOCL	$	(0.7)	$	(0.3)
Portion expected to be reclassified to earnings in the next twelve months	$	(0.1)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	2

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:

$ in millions (net of tax)	Hedging Designation	Balance sheet classification	June 30, 2020		December 31, 2019
Interest rate swap	Cash Flow Hedge	Prepayments and other current assets	$	—	$	0.1
Interest rate swap	Cash Flow Hedge	Accrued and other current liabilities	$	0.1	$	—