Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2019

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 interest rate hedges to manage the interest rate risk of our variable rate debt. 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. In prior periods, we have used commodity derivatives principally to manage the risk of changes in market prices for commodities.

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 will no longer be required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument will be 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 September 30, 2019, 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. On March 29, 2018, we settled $60.0 million of these interest rate swaps due to the partial repayment 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 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 and nine months ended September 30, 2019 and 2018:

	Three months ended						Three months ended
	September 30, 2019						September 30, 2018
				Interest						Interest
$ in millions (net of tax)	Power			Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains in AOCI	$	0.4		$	15.3		$	—		$	17.4
Net gains / (losses) associated with current period hedging transactions	—			(0.2		)	—			0.1
Net gains reclassified to earnings
Interest expense	—			(0.4		)	—			(0.2		)
(Income) / loss from discontinued operations	(0.4		)	—			—			—
Ending accumulated derivative gains in AOCI	$	—		$	14.7		$	—		$	17.3
	Nine months ended						Nine months ended
	September 30, 2019						September 30, 2018
				Interest						Interest
$ in millions (net of tax)	Power			Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	0.4		$	16.6		$	(2.8	)	$	17.5
Net gains / (losses) associated with current period hedging transactions	—			(1.0		)	—			0.4
Net (gains) / losses reclassified to earnings
Interest expense	—			(0.9		)	—			(0.6		)
(Income) / loss from discontinued operations	(0.4		)	—			2.8			—
Ending accumulated derivative gains in AOCI	$	—		$	14.7		$	—		$	17.3
Portion expected to be reclassified to earnings in the next twelve months				$	(1.2	)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)				11

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

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:

Fair Values of Derivative Instruments
at September 30, 2019
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Consolidated Balance Sheets (a)		Financial Instruments with Same Counterparty in Offsetting Position		Cash Collateral		Net Fair Value
Assets
Short-term derivative positions (presented in Prepayments and other current assets)
Interest rate swap	Designated	$	0.2	$	—	$	—	$	0.2
Total assets		$	0.2	$	—	$	—	$	0.2

(a)    Includes credit valuation adjustment.

Fair Values of Derivative Instruments
at December 31, 2018
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Consolidated Balance Sheets (a)		Financial Instruments with Same Counterparty in Offsetting Position		Cash Collateral		Net Fair Value
Assets
Short-term derivative positions (presented in Prepayments and other current assets)
Interest rate swaps	Designated	$	0.9	$	—	$	—	$	0.9
Long-term derivative positions (presented in Other non-current assets)
Interest rate swaps	Designated	0.6		—		—		0.6
Total assets		$	1.5	$	—	$	—	$	1.5

(a)    Includes credit valuation adjustment.

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

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 interest rate hedges to manage the interest rate risk of our variable rate debt. 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. In prior periods, we have used commodity derivatives principally to manage the risk of changes in market prices for commodities.

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 will no longer be required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument will be 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 September 30, 2019, 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. On March 29, 2018, we settled $60.0 million of these interest rate swaps due to the partial repayment 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 and nine months ended September 30, 2019 and 2018:

	Three months ended
	September 30, 2019			September 30, 2018
	Interest			Interest
$ in millions (net of tax)	Rate Hedge			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	(0.3	)	$	1.6
Net losses associated with current period hedging transactions	(0.1		)	—
Net gains reclassified to earnings
Interest expense	—			(0.2		)
Ending accumulated derivative gains / (losses) in AOCI	$	(0.4	)	$	1.4
	Nine months ended
	September 30, 2019			September 30, 2018
	Interest			Interest
$ in millions (net of tax)	Rate Hedge			Rate Hedge
Beginning accumulated derivative gains in AOCI	$	0.6		$	1.4
Net gains / (losses) associated with current period hedging transactions	(0.9		)	0.5
Net gains reclassified to earnings
Interest expense	(0.1		)	(0.5		)
Ending accumulated derivative gains / (losses) in AOCI	$	(0.4	)	$	1.4
Portion expected to be reclassified to earnings in the next twelve months	$	(0.2	)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	11

Net gains or losses associated with the ineffective portion of the hedging transactions were immaterial in the prior year period 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:

Fair Values of Derivative Instruments
at September 30, 2019
				Gross Amounts Not Offset in the Condensed Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Balance Sheets (a)		Financial Instruments with Same Counterparty in Offsetting Position		Cash Collateral		Net Fair Value
Assets
Short-term derivative positions (presented in Prepayments and other current assets)
Interest rate swap	Designated	$	0.2	$	—	$	—	$	0.2
Total assets		$	0.2	$	—	$	—	$	0.2

(a)    Includes credit valuation adjustment.

Fair Values of Derivative Instruments
at December 31, 2018
				Gross Amounts Not Offset in the Condensed Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Balance Sheets (a)		Financial Instruments with Same Counterparty in Offsetting Position		Cash Collateral		Net Fair Value
Assets
Short-term derivative positions (presented in Prepayments and other current assets)
Interest rate swaps	Designated	$	0.9	$	—	$	—	$	0.9
Long-term derivative positions (presented in Other non-current assets)
Interest rate swaps	Designated	0.6		—		—		0.6
Total assets		$	1.5	$	—	$	—	$	1.5

(a)    Includes credit valuation adjustment.

Any prior year 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.