0000787250 srt:SubsidiariesMember dpl:FirstMortgageBondsMember 2019-01-01 2019-12-31
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(x)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192020
OR
( )☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DPL Inc.
(an Ohio corporation)
Commission File Number 1-9052
1065 Woodman Drive
Dayton, Ohio 45432
937-259-7215
IRS Employer Identification No. 31-1163136
THE DAYTON POWER AND LIGHT COMPANY
(an Ohio corporation)
Commission File Number 1-2385
1065 Woodman Drive
Dayton, Ohio 45432
937-259-7215
IRS Employer Identification No. 31-0258470
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DPL INC.
(an Ohio corporation)
| | THE DAYTON POWER AND LIGHT COMPANY
(an Ohio corporation)
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Commission file number 1-9052 | | Commission file number 1-2385 |
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1065 Woodman Drive
Dayton, Ohio 45432
| | 1065 Woodman Drive
Dayton, Ohio 45432 |
937-259-7215 | | 937-259-7215 |
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I.R.S. Employer Identification No. 31-1163136 | | I.R.S. Employer Identification No. 31-0258470 |
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| N/A | N/A | N/A |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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| DPL Inc. | Yeso | ☐ | No | ☑x |
| The Dayton Power and Light Company | Yeso | ☐ | No | ☑x |
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
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| DPL Inc. | Yesx | ☐ | No | o☑ |
| The Dayton Power and Light Company | Yesx | ☐ | No | o☑ |
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
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| DPL Inc. | Yeso | ☑ | No | ☐x |
| The Dayton Power and Light Company | Yeso | ☑ | No | ☐x |
DPL Inc. and The Dayton Power and Light Company arewere voluntary filers thatuntil their March 6, 2020 Registration Statements on Form S-4/A filed with the Securities and Exchange Commission were declared effective on March 12, 2020. DPL Inc. and The Dayton Power and Light Company have filed all applicable reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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| DPL Inc. | Yesx | ☑ | No | o☐ |
| The Dayton Power and Light Company | Yesx | ☑ | No | o☐ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer
Filer | Accelerated filer
Filer | Non-
accelerated
filer
Non-accelerated Filer | Smaller
reporting
company
| Emerging growth company |
| DPL Inc. | o☐ | o☐ | x☑ | o☐ | o☐ |
| Large accelerated Filer | Accelerated Filer | Non-accelerated Filer | Smaller
reporting
company | Emerging growth company |
| The Dayton Power and Light Company | o☐ | o☐ | x☑ | o☐ | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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| DPL Inc. | o☐ |
| The Dayton Power and Light Company | o☐ |
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| DPL Inc. | The Dayton Power and Light Company |
| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☐ | ☐ |
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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| DPL Inc. | Yeso | ☐ | No | ☑x |
| The Dayton Power and Light Company | Yeso | ☐ | No | ☑x |
All of the outstanding common stock of DPL Inc. is indirectly owned by The AES Corporation. All of the common stock of The Dayton Power and Light Company is owned by DPL Inc.
At December 31, 2019,2020, each registrant had the following shares of common stock outstanding:
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| Registrant | | Description | | Shares Outstanding |
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Registrant | | Description | | Shares Outstanding |
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| DPL Inc. | | Common Stock, no par value | | 1 |
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| The Dayton Power and Light Company | | Common Stock, $0.01 par value | | 41,172,173 |
Documents incorporated by reference: None
This combined Form 10-K is separately filed by DPL Inc. and The Dayton Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself.
THE REGISTRANTS MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
DPL Inc. and The Dayton Power and Light Company - Annual Report on Form 10-K
Year Ended December 31, 2019
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| Table of Contents | Page No. |
| Glossary of Terms | |
| Part I | |
| Item 1 – Business | |
| Item 1A – Risk Factors | |
| Item 1B – Unresolved Staff Comments | |
| Item 2 – Properties | |
| Item 3 – Legal Proceedings | |
| Item 4 – Mine Safety Disclosures | |
| Part II | |
| Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
| Item 6 – Selected Financial Data | |
| Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 7A – Quantitative and Qualitative Disclosures about Market Risk | |
| Item 8 – Financial Statements and Supplementary Data | |
| |
| Consolidated Statements of Operations | |
| Consolidated Statements of Comprehensive Income / (Loss) | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Shareholder's Deficit | |
| Notes to Consolidated Financial Statements | |
| Note 1 – Overview and Summary of Significant Accounting Policies | |
| Note 2 – Supplemental Financial Information | |
| Note 3 – Regulatory Matters | |
| Note 4 – Property, Plant and Equipment | |
| Note 5 – Fair Value | |
| Note 6 – Derivative Instruments and Hedging Activities | |
| Note 7 – Long-term debt | |
| Note 8 – Income Taxes | |
| Note 9 – Benefit Plans | |
Note 10 – EquityShareholder's Deficit | |
| Note 11 – Contractual Obligations, Commercial Commitments and Contingencies | |
| Note 12 – Related Party Transactions | |
| Note 13 – Business Segments | |
| Note 14 – Revenue | |
| Note 15 – Discontinued Operations | |
| Note 16 – Dispositions | |
Note 17 – Fixed-asset ImpairmentsRisks & Uncertainties | |
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| Statements of Operations | |
| Statements of Comprehensive Income | |
| Balance Sheets | |
| Statements of Cash Flows | |
| Statements of Shareholder's Equity | |
| Notes to Financial Statements | |
| Note 1 – Overview and Summary of Significant Accounting Policies | |
| Note 2 – Supplemental Financial Information | |
| Note 3 – Regulatory Matters | |
| Note 4 – Property, Plant and Equipment | |
| Note 5 – Fair Value | |
| Note 6 – Derivative Instruments and Hedging Activities | |
| Note 7 – Long-term debt | |
| Note 8 – Income Taxes | |
| Note 9 – Benefit Plans | |
| Note 10 – Shareholder's Equity | |
| Note 11 – Contractual Obligations, Commercial Commitments and Contingencies | |
| Note 12 – Related Party Transactions | |
| Note 13 – Revenue | |
Note 14 – Generation SeparationDispositions | |
Note 15 – DispositionsRisks & Uncertainties | |
| Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
| Item 9A – Controls and Procedures | |
| Item 9B – Other Information | |
| Part III | |
| Item 10 – Directors, Executive Officers and Corporate Governance | |
| Item 11 – Executive Compensation | |
| Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | |
| Item 13 – Certain Relationships and Related Transactions and Director Independence | |
| Item 14 – Principal Accountant Fees and Services | |
| Part IV | |
| Item 15 – Exhibits and Financial Statement Schedules | |
| Item 16 – Form 10-K Summary | |
| Signatures | |
| Schedule II – Valuation and Qualifying Accounts | |
GLOSSARY OF TERMS
The following select terms, abbreviations or acronyms are used in this Form 10-K:
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| Term | Definition |
2017 ESP | DP&L's ESP - which was approved October 20, 2017 and became effective November 1, 2017. This 2017 ESP was subsequently withdrawn, and DP&L reverted to its ESP 1 rate plan, effective December 18, 2019. |
| AEP Generation | AEP Generation Resources Inc. - a subsidiary of American Electric Power Company, Inc. (“AEP”). Columbus Southern Power Company merged into the Ohio Power Company, another subsidiary of AEP, effective December 31, 2011. The Ohio Power generating assets (including jointly-owned units) were transferred into AEP Generation. |
| AES | The AES Corporation - a global power company, the ultimate parent company of DPL |
| AES Ohio Generation | AES Ohio Generation, LLC - a wholly-owned subsidiary of DPL that ownsowned and operates aoperated generation facilityfacilities from which it makesmade wholesale sales |
| AFUDC | Allowance for Funds Used During Construction |
| AMI | Advanced Metering Infrastructure |
| AOCI | Accumulated Other Comprehensive Income |
AROAOCL | Accumulated Other Comprehensive Loss |
| ARO | Asset Retirement Obligation |
| ASU | Accounting Standards Update |
| CAA | U.S. Clean Air Act - the congressional act that directs the USEPA’s regulation of stationary and mobile sources of air pollution to protect air quality and stratospheric ozone |
| Capacity Market | The purpose of the capacity market is to enable PJM to obtain sufficient resources to reliably meet the needs of electric customers within the PJM footprint. PJM procures capacity, through a multi-auction structure, on behalf of the load serving entities to satisfy the load obligations. There are four auctions held for each Delivery Year (running from June 1 through May 31). The Base Residual Auction is held three years in advance of the Delivery Year and there is one Incremental Auction held in each of the subsequent three years. AES Ohio Generation's capacity is in the “rest of” RTO area of PJM. |
| CCR | Coal Combustion Residuals - which consists of bottom ash, fly ash, boiler slag and air pollutionflue gas desulfurization materials generated from burning coal |
| Conesville | AES Ohio Generation's interest in Unit 4 at the Conesville EGUEGU. Unit 4 was closed in May 2020 and AES Ohio Generation's interest was sold in June 2020. |
| CPP | The Clean Power Plan - the USEPA's final carbon dioxide emission rules for existing power plants under Clean Air Act Section 111(d) |
| CRES | Competitive Retail Electric Service |
| CSAPR | Cross-State Air Pollution Rule - the USEPA's rule to address interstate air pollution transport to decrease emissions to downwind states |
CWADIR | U.S. Clean Water Act - the congressional act that allows the USEPA’s regulation of water discharges and surface water standards
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DIR | Distribution Investment Rider - initially established in the 2017 ESP 3 and authorized in the DRO to recover certain distribution capital investments placed in service beginning October 1, 2015, for the number of years, and subject to increasing annual revenue limits and other terms, as set forth in the DRO. The annual revenue limit for 2019 was $22.0 million. |
Distribution Modernization PlanDMR | In December 2018, DP&L filed a comprehensive grid modernization plan |
DMR | Distribution Modernization Rider - established in the 2017 ESP 3 as a non-bypassable rider to collect $105.0 million in revenue per year for the first three years of the 2017 ESP 3 term |
| DPL | DPL Inc. |
DPLERDP&L | DPL Energy Resources, Inc. - formerly a wholly-owned subsidiary of DPL which sold competitive electric energy and other energy services. DPLER was sold on January 1, 2016 pursuant to an agreement dated December 28, 2015. |
DP&L | The Dayton Power and Light Company - the principal subsidiary of DPL and a public utility which sells, transmits and distributes electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L is wholly-owned by DPL and also does business as AES Ohio. |
| DRO | Distribution Rate Order - the order issued by the PUCO on September 26, 2018 establishing new base distribution rates for DP&L, which became effective October 1, 2018 |
DynegyEBITDA | Dynegy, Inc. - the parent of various subsidiaries that, along with AEP Generation and AES Ohio Generation, formerly co-owned coal-fired EGUs in Ohio |
EBIT | Earnings before interest and taxes |
EBITDA | Earnings before interest, taxes, depreciation and amortization |
| EGU | Electric Generating Unit |
| ELG | Steam Electric Power Effluent Limitations Guidelines - guidelines which cover wastewater discharges from power plants operating as utilities |
| ERISA | The Employee Retirement Income Security Act of 1974 |
| ESP | The Electric Security Plan - a cost-based plan that a utility may file with the PUCO to establish SSO rates pursuant to Ohio law |
| ESP 1 | ESP originally approved by PUCO order dated June 24, 2009. After DP&L withdrew its 2017 ESP 3 Application, the PUCO approved DP&L's request to revert to rates based on its ESP 1 rate plan effective December 19, 2019. DP&L is currently operating under this ESP 1 plan. |
FASBESP 3 | DP&L's ESP - which was approved October 20, 2017 and became effective November 1, 2017. This ESP 3 was subsequently withdrawn, and DP&L reverted to its ESP 1 rate plan, effective December 18, 2019. |
| FASB | Financial Accounting Standards Board |
| FASC | FASB Accounting Standards Codification |
| FERC | Federal Energy Regulatory Commission |
| First and Refunding Mortgage | DP&L’s First and Refunding Mortgage, dated October 1, 1935, as amended, with the Bank of New York Mellon as Trustee |
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| FTR | |
GLOSSARY OF TERMS (cont.) |
Term | Definition |
FTR | Financial Transmission Rights |
| GAAP | Generally Accepted Accounting Principles in the United States of America |
| Generation Separation | The transfer on October 1, 2017, to AES Ohio Generation of the DP&L-owned generating facilities and related liabilities, excluding those of the Beckjord Facility and Hutchings EGU,Coal Stations, pursuant to an asset contribution agreement with a subsidiary that was then merged into AES Ohio Generation |
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GHGGLOSSARY OF TERMS (cont.) |
| Term | Definition |
| GHG | Greenhouse gas - air pollutants largely emitted from combustion |
kVkWh | Kilovolts, 1,000 voltsKilowatt hour |
kWhLIBOR | Kilowatt hour |
LIBOR | London Inter-Bank Offering Rate |
| Master Trust | DP&L established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans |
| MATS | Mercury and Air Toxics Standards - the USEPA’s rules for existing and new power plants under Section 112 of the CAA |
| Merger | The merger of DPL and Dolphin Sub, Inc., a wholly-owned subsidiary of AES. On November 28, 2011, DPL became a wholly-owned subsidiary of AES. |
| Miami Valley Lighting | Miami Valley Lighting, LLC is a wholly-owned subsidiary of DPL established in 1985 to provide street and outdoor lighting services to customers in the Dayton region. Miami Valley Lighting serves businesses, communities and neighborhoods in West Central Ohio with over 70,000 lighting solutions for more than 190 businesses and 180 local governments. |
| MRO | Market Rate Option - a market-based plan that a utility may file with PUCO to establish SSO rates pursuant to Ohio law |
| MTM | Mark to Market |
| MVIC | Miami Valley Insurance Company is a wholly-owned insurance subsidiary of DPL that provides insurance services to DPL and its subsidiaries |
| MW | Megawatt |
| MWh | Megawatt hour |
| NAAQS | National Ambient Air Quality Standards - the USEPA’s health and environmental based standards for six specified pollutants, as found in the ambient air |
| NAV | Net asset value |
| NERC | North American Electric Reliability Corporation - a not-for-profit international regulatory authority whose mission is to assure the effective and efficient reduction of risks to the reliability and security of the electric grid |
| Non-bypassable | Charges that are assessed to all customers regardless of whom the customer selects as their retail electric generation supplier |
| NOV | Notice of Violation - an administrative action by EPA or a state agency to address non-compliance with various federal or state anti-pollution laws or regulations |
NOX | Nitrogen Oxide - an air pollutant regulated by the NAAQS under the CAA |
| NPDES | National Pollutant Discharge Elimination System - a permit program for industrial, municipal and other facilities that discharge to surface water |
NSROCI | New Source Review - a preconstruction permitting program regulating new or significantly modified sources of air pollution |
OCI | Other Comprehensive Income |
| Ohio EPA | Ohio Environmental Protection Agency |
| OVEC | Ohio Valley Electric Corporation, an electric generating company in which DP&L has a 4.9% interest |
| Peaker assets | The generation and related assets for the 586.0 MW Tait combustion turbine and diesel generation facility, the 236.0 MW Montpelier combustion turbine generation facility, the 101.5 MW Yankee combustion turbine generation and solar facility, the 25.0 MW Hutchings combustion turbine generation facility, the 12.0 MW Monument diesel generation facility and the 12.0 MW Sidney diesel generation facility |
| PJM | PJM Interconnection, LLC, an RTO |
| PRP | PRP - A Potentially Responsible Party is considered by the USEPA to be potentially responsible for ground contamination and the USEPA will commonly require PRPs to conduct an investigation to determine the source of contamination and to perform the cleanup before using Superfund money |
| PUCO | Public Utilities Commission of Ohio |
| RSC | Rate Stabilization Charge - approved as part of DP&L's ESP 1. After the 2017 ESP 3 was withdrawn, the PUCO again continued ESP 1, including the RSC, effective December 18, 2019 |
| RTO | Regional Transmission Organization |
SB 221 | Ohio Senate Bill 221 is an Ohio electric energy bill that requires all Ohio distribution utilities to file either an ESP or MRO. The law also contains, among other things, annual targets relating to advanced energy portfolio standards, renewable energy, demand reduction and energy efficiency standards. |
| SEC | Securities and Exchange Commission |
| SEET | Significantly Excessive Earnings Test - a test used by the PUCO to determine whether a utility's ESP or MRO produces significantly excessive earnings for the utility |
| Service Company | AES US Services, LLC - the shared services affiliate providing accounting, finance and other support services to AES’ U.S. SBU businesses |
| SIP | A State Implementation Plan is a plan for complying with the federal CAA, administered by the USEPA. The SIP consists of narrative, rules, technical documentation and agreements that an individual state will use to clean up polluted areas. |
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| Smart Grid Plan | |
GLOSSARY OF TERMS (cont.) |
Term | DefinitionIn December 2018, DP&L filed a comprehensive grid modernization plan |
SO2 | Sulfur Dioxide - an air pollutant regulated by the NAAQS under the CAA |
| SSO | Standard Service Offer - the retail transmission, distribution and generation services offered by a utility through regulated rates, authorized by the PUCO |
| TCJA | The Tax Cuts and Jobs Act of 2017 signed on December 22, 2017 |
| U.S. | United States of America |
| USD | U.S.U. S. dollar |
| USEPA | U. S. Environmental Protection Agency |
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USFGLOSSARY OF TERMS (cont.) |
| Term | Definition |
| USF | The Universal Service Fund (USF) is a statewide program which provides qualified low-income customers in Ohio with income-based bills and energy efficiency education programs |
| U.S. SBU | U. S. Strategic Business Unit, AES’ reporting unit covering the businesses in the United States, including DPL |
| WPAFB | Wright-Patterson Air Force Base |
PART I
This report includes the combined filing of DPL and DP&L. DPL is a wholly-owned subsidiary of AES, a global power company. Throughout this report, the terms “we”, “us”, “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
FORWARD–LOOKING STATEMENTS
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptions and expectations of future economic performance, considering the information currently available to management. These statements are not statements of historical fact and are typically identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will” and similar expressions. Such forward-looking statements are subject to risks and uncertainties and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond our control, including but not limited to:
•impacts of weather on retail sales;
•growth in our service territory and changes in demand and demographic patterns;
•weather-related damage to our electrical system;
•performance of our suppliers;
•transmission and distribution system reliability and capacity;
•regulatory actions and outcomes, including, but not limited to, the review and approval of our rates and charges by the PUCO;
•federal and state legislation and regulations;
•changes in our credit ratings or the credit ratings of AES;
•fluctuations in the value of pension plan assets, fluctuations in pension plan expenses and our ability to fund defined benefit pension plans;
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▪ | changes in financial or regulatory accounting policies; |
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▪ | environmental matters, including costs of compliance with, and liabilities related to, current and future environmental laws and requirements; |
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▪ | interest rates and the use of interest rate hedges, inflation rates and other costs of capital; |
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▪ | the availability of capital; |
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▪ | ▪changes in financial or regulatory accounting policies; ▪environmental matters, including costs of compliance with, and liabilities related to, current and future environmental laws and requirements; ▪interest rates and the use of interest rate hedges, inflation rates and other costs of capital; ▪the availability of capital; ▪the ability of subsidiaries to pay dividends or distributions to DPL; ▪level of creditworthiness of counterparties to contracts and transactions; ▪labor strikes or other workforce factors, including the ability to attract and retain key personnel; ▪facility or equipment maintenance, repairs and capital expenditures; ▪significant delays or unanticipated cost increases associated with construction projects; ▪the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material; ▪local economic conditions; ▪costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation; ▪industry restructuring, deregulation and competition; ▪issues related to our participation in PJM, including the cost associated with membership, allocation of costs, costs associated with transmission expansion, the recovery of costs incurred and the risk of default of other PJM participants; ▪changes in tax laws and the effects of our tax strategies; ▪product development, technology changes and changes in prices of products and technologies; ▪cyberattacks and information security breaches; ▪the use of derivative contracts; ▪catastrophic events such as fires, explosions, terrorist acts, acts of war, pandemic events, including the outbreak of COVID-19, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snowstorms, droughts, or other similar occurrences; and ▪the risks and other factors discussed in this report and other DPL and DP&L filings with the SEC.
DPL;
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▪ | level of creditworthiness of counterparties to contracts and transactions; |
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▪ | labor strikes or other workforce factors, including the ability to attract and retain key personnel; |
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▪ | facility or equipment maintenance, repairs and capital expenditures; |
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▪ | significant delays or unanticipated cost increases associated with construction projects; |
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▪ | the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material; |
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▪ | local economic conditions; |
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▪ | costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation; |
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▪ | industry restructuring, deregulation and competition; |
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▪ | issues related to our participation in PJM, including the cost associated with membership, allocation of costs, costs associated with transmission expansion, the recovery of costs incurred and the risk of default of other PJM participants; |
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▪ | changes in tax laws and the effects of our tax strategies; |
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▪ | product development, technology changes and changes in prices of products and technologies; |
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▪ | cyberattacks and information security breaches; |
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▪ | the use of derivative contracts; |
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▪ | catastrophic events such as fires, explosions, terrorist acts, acts of war, pandemic events, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snowstorms, droughts, or other similar occurrences; and |
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▪ | the risks and other factors discussed in this report and other DPL and DP&L filings with the SEC.
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Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and many are beyond our control. See Item 1A - Risk Factors to Part I in this Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this Annual Report for a more detailed discussion of the foregoing and certain other factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook. These risks may also be specifically described in our Quarterly Reports on Form 10-Q in Part II - Item 1A, Current Reports on Form 8-K and other documents that we may file from time to time with the SEC.
OVERVIEW
DPL is a regional energy company incorporated in 1985 under the laws of Ohio. All of DPL’s stock is owned by an AES subsidiary.
DPL has three primary subsidiaries,subsidiaries: DP&L, MVIC and AES Ohio Generation.Miami Valley Lighting. DP&L, which also does business as AES Ohio, is a public utility providing electric transmission and distribution services in West Central Ohio. AES Ohio Generation owns an undivided interest in a coal-fired generating facility and sells all of its energy and capacity into the wholesale market. MVIC is our captive insurance company that provides insurance services to DPL and our other subsidiaries. For additional information, see Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DPL's Consolidated Financial Statements and Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DP&L's Financial Statements. All of DPL's subsidiaries are wholly-owned.DPL manages its business through one reportable operating segment, the Utility segment. See Note 13 – Business Segments of the Notes to DPL's Consolidated Financial Statements for additional information regarding DPL’s reportable segment. DP&L also manages its business through one reportable operating segment, the Utility segment.
As an electric public utility in Ohio, DP&L provides regulated transmission and distribution services to its customers as well as retail SSO electric service. DP&L's sales reflect the general economic conditions, seasonal weather patterns and the growth of energy efficiency initiatives; however, our distribution revenues were decoupled from weather and energy efficiency variations from January 1, 2019 through December 18, 2019. In the first quarter of 2020, DP&L filed a petition to continue to accrue the impacts of decoupling for recovery through a future rate proceeding, but it is unknown at this time how the PUCO will rule on that petition. See Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements for further information.
DPL’s other primary subsidiaries are MVIC and Miami Valley Lighting. MVIC is our captive insurance company that provides insurance services to DP&L and our other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in the Dayton region.
DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
DP&L does not have any subsidiaries.
DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders.
GENERATING CAPACITY
DPL, through AES Ohio Generation, ownsowned an undivided interest in Conesville. AES Ohio Generation's share of this EGU's capacity iswas 129 MW. AES Ohio Generation sellssold all of its energy and capacity into the wholesale market. AEP Generation, the operator of the co-owned Conesville EGU, has announced thatclosed Unit 4 will close by May 2020. During 2019, DPL continued executing on its plan to exit generation by closing on the transfer of its Stuart and Killen EGU's, which were retired in May 2018.2020, and AES Ohio Generation's interest in this EGU was sold in June 2020. For additional information on this event and DPL's other previously owned EGUs, see Note 15 – Discontinued Operations of Notes to DPL's Consolidated Financial Statements.Statements.
DP&L also has a 4.9% interest in OVEC, an electric generating company. OVEC has two electric generating stations located in Cheshire, Ohio and Madison, Indiana with a combined generation capacity of 2,109 MW. DP&L’s share of this generation capacity is 103 MW.
SEGMENTS
DPL
manages its business through one reportable operating segment, the Utility segment. See Note 13 – Business Segments of the Notes to
DPL's Consolidated Financial Statementsemployees are essential to delivering and maintaining reliable service to our customers. for additional information regarding DPL’s reportable segment. DP&L also manages its business through one reportable operating segment, the Utility segment.
EMPLOYEES
DPL and its subsidiaries employed 633631 people (512 full-time) at January 31, 2020,2021 all of which 630 were employed by DP&L. Approximately 59%58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 2020.2023.
Safety
As part of AES, safety is one of our core values. Ensuring safe operations at our facilities, so each person can return home safely, is the cornerstone of our daily activities and decisions. Safety efforts are led globally by the AES Chief Operating Officer and supported by safety committees that operate at the local site level. Hazards in the workplace are actively identified and management tracks incidents so remedial actions can be taken to improve workplace safety.
We work with the Safety Management System (“SMS”), a Global Safety Standard that applies to all AES employees and employees of AES subsidiaries, as well as contractors working in AES facilities and construction projects. The SMS requires continuous safety performance monitoring, risk assessment and performance of periodic integrated environmental, health and safety audits. The SMS provides a consistent framework for all AES operational businesses and construction projects to set expectations for risk identification and reduction, measure performance and drive continuous improvements. The SMS standard is consistent with the OHSAS 18001/ISO 45001 standard. Our safety performance is also measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury near misses. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate. This includes having employees work from home to the extent they were able, while implementing additional safety measures for employees continuing critical on-site work.
Talent
We believe our success depends on our ability to attract, develop and retain key personnel. The skills, experience and industry knowledge of key employees significantly benefit our operations and performance. We have a comprehensive approach to managing our talent and developing our leaders in order to ensure our people have the right skills for today and tomorrow whether that requires us to build new business models or leverage leading technologies.
We emphasize employee development and training. To empower employees, we provide a range of development programs and opportunities, skills, and resources they need to be successful by focusing on experience and exposure as well as formal programs including our AES' ACE Academy for Talent Development, and our Trainee Program.
We believe that our individual differences make us stronger. Our Global Diversity and Inclusion Program is led by the AES Diversity and Inclusion Officer. Governance and standards are guided by the AES Chief Human Resources Officer, with input from members of AES' Executive Leadership Team.
Compensation
Our compensation philosophy emphasizes pay-for-performance. Our incentive plans are designed to reward strong performance, with greater compensation paid when performance exceeds expectations and less compensation paid when performance falls below expectations. We invest significant time and resources to ensure our compensation programs are competitive and reward the performance of our people. Every year, our people who are not part of a collective bargaining agreement are eligible for an annual merit-based salary increase. In addition, individuals are eligible for a salary increase if they receive a significant promotion. For non-collectively bargained employees at certain levels in the organization we offer annual incentives (bonus) and long-term compensation to reinforce the alignment between employees and AES.
SERVICE COMPANY
The Service Company provides services including operations, accounting, legal, human resources, information technology and other corporate services of a similar nature on behalf of companies that are part of the U.S. SBU, including, among other companies, DPL and DP&L. The Service Company allocates the costs for these services based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated businessesutilities served, including DP&L, are not subsidizing costs incurred for the benefit of other businesses. See Note 12 – Related Party Transactions of Notes to DPL's Consolidated Financial Statements and Note 12 – Related Party Transactions of Notes to DP&L's Financial Statements.Statements.
SEASONALITY
The power delivery business is seasonal, and weather patterns have a material effect on energy demand. In the region we serve, demand for electricity is generally greater in the summer months associated with cooling and in the winter months associated with heating compared to other times of the year. DP&L's sales typically reflect the seasonal weather patterns and the growth of energy efficiency initiatives. However, the impacts of weather, energy efficiency programs and economic changes in customer demand were almost entirely eliminated in 2019 by DP&L’s Decoupling Rider, which was in place from January 1, 2019 until December 18, 2019. Subject to PUCO decision, DP&L may, inhas requested authority from the near future, have authorityPUCO to create a regulatory asset for the ongoing revenues that would have been charged in the Decoupling Rider going back to December 18, 2019. See Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.
Storm activity can also have an adverse effect on our operating performance. Severe storms often damage transmission and distribution equipment, thereby causing power outages, which reduce revenues and increase repair costs. Partially mitigating this impact is DP&L’s ability to timely recover certain O&M repair costs related to severe storms.
MARKET STRUCTURE
Retail rate regulation
DP&L's deliverydistribution service to all retail customers as well as the provisions of its SSO service are regulated by the PUCO. In addition, certain costs are considered to be non-bypassable and are therefore assessed to all DP&L retail customers, under the regulatory authority of the PUCO, regardless of the customer’s retail electric supplier. DP&L's transmission rates are subject to regulation by the FERC under the Federal Power Act.
Ohio law establishes the process for determining SSO and non-bypassable rates charged by public utilities. Regulation of retail rates encompasses the timing of applications, the effective date of rate changes, the cost basis upon which the rates are set and other service-related matters. Ohio law also established the Office of the OCC,Ohio Consumers' Counsel, which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings.
Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO's supervisory powers to a holding company system's general condition and capitalization, among other matters, to the extent that such matters relate to the costs associated with the provision of public utility service. Based on existing PUCO and FERC authorization, regulatory assets and liabilities are recorded on the balance sheets of both DPL and DP&L. See Note 3 –
Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.
COMPETITION AND REGULATION
Ohio Retail Rates
DP&L rates for electric service currently remain the lowest among Ohio investor-owned utilities.
ESP 1 establishesestablished DP&L's framework for providing retail service on a going-forward basis including rate structures, non-bypassable charges and other specific rate recovery true-up rider mechanisms. For more information regarding DP&L's ESP, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.Statements.
On September 26, 2018, the PUCO issued the DRO establishing new base distribution rates for DP&L, which became effective October 1, 2018. The DRO approved, without modification, a stipulation and recommendation previously filed by DP&L, along with various intervening parties and the PUCO staff. The DRO established a revenue requirement of $248.0 million for DP&L's electric service base distribution rates which reflects an increase to distribution revenues of approximately $29.8 million per year. In addition to the increase in base distribution rates, among other matters, therates. The DRO also provided for a return on equity of 9.999% and a cost of long-term debt of 4.8%.
On November 30, 2020, DP&L filed a new distribution rate case with the PUCO. This rate case proposes a revenue increase of $120.8 million. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.
In December 2018, DP&L filed a Distribution Modernizationits Smart Grid Plan with the PUCO proposing to invest $576.0 million in capital projects over the next 10 years. There are eight principal components of DP&L’s Distribution ModernizationSmart Grid Plan: 1) Smart Meters, 2) Self-Healing Grid, 3) Customer Engagement, 4) Enhancing Sustainability and Embracing Innovation. 5) Telecommunications, 6) Physical and Cyber Security, 7) Governance and Analytics and 8) Grid Modernization R&D. This filing is pending before the PUCO.
These initiatives will also allowOn October 23, 2020 DP&L to be ready to leverage and integrate Distributed Energy Resources into its grid, including demonstrationsfiled a comprehensive settlement (the “Settlement”) with the PUCO that, among other matters, includes resolution of community solar, energy storage, microgrids, as well as electric vehicle charging infrastructure. this Smart Grid application.If approved, DP&L plans to implement a comprehensive grid modernization projectthe plan that will deliver benefits to customers, society as a whole and to the Company.DP&L. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.
Ohio law and the PUCO rules contain targets relating to renewable energy peak demand reduction and energy efficiency standards. If any targets are not met, compliance penalties will apply unless the PUCO makes certain findings that would excuse performance. DP&L is currently in full compliance with energy efficiency, peak demand reduction and renewable energy targets. DP&L is required to file an energy efficiency portfolio plan to demonstrate how it plans to continue to meet the standards. On June 15, 2017, DP&L filed an energy efficiency portfolio plan for programs in years 2018 through 2020, which was settled and approved by the PUCO on December 20, 2017. DP&L recovers the costs of its compliance with Ohio energy efficiency and renewable energy standards through a separate ridersrider which areis reviewed and audited by the PUCO.
The costs associated with providing high voltage transmission service and wholesale electric sales and ancillary services are subject to FERC jurisdiction. While DPLDP&L has market-basedimplemented a formula-based rate authority for wholesale electric sales,its transmission service, effective May 3, 2020. For more information, see Note 3 – Regulatory Matters of Notes to DPLDPL's would be requiredConsolidated Financial Statements and Note 3 – Regulatory Matters of Notes to file an application at FERC under section 101 of Title 18 of the Code of Federal Regulations to change any of its cost-based transmission or ancillary service rates.DP&L's Financial Statements.
As a member of PJM, DP&L receives revenues from the RTO related to DP&L’s transmission assets and incurs costs associated with its load obligations for retail customers. Ohio law includes a provision that would allow Ohio electric utilities to seek and obtain a reconcilable rider to recover RTO-related costs and credits. DP&L continues to recover non-market-based transmission and ancillary costs through its nonbypassable Transmission Cost Recovery Rider.
In response to filings made by DP&L and AES Ohio Generation, the FERC approved on May 16, 2017 reactive power rates for the generation facilities that were owned at that time. In the same order, FERC referred to the FERC’s Office of Enforcement for investigation, an issue regarding DP&L’s reactive power charges under the previously effective rates in light of changes in DP&L’s generation portfolio between cases. As of the date of this report, DP&L is unable to predict the ultimate outcome of the investigation. Several other utilities within PJM are also being investigated by FERC’s Office of Enforcement with respect to the same issue of changes in the generation portfolio that occurred in between rate proceedings.
DP&L is also subject to aan annual retrospective SEET threshold whereby it must demonstrate its return on equity is below 12%, excluding DMR revenues. The ultimate outcome of thisnot significantly excessive. This review for 2018, 2019 and the ESP v. MRO and prospective SEET are all part of the Settlement. This Settlement is pending review by the PUCO and, depending on the outcome, could have a material adverse effect on our results of operations, financial condition and cash flows. See Note 3 –
Regulatory Matters of
Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.Statements.
Ohio Competition
Since January 2001, DP&L’s electric customers have been permitted to choose their retail electric generation supplier. DP&L continues to have the exclusive right to provide delivery service in its state-certified territory and the obligation to procure and provide electricity to SSO customers that do not choose an alternative supplier. The PUCO maintains jurisdiction over DP&L’s delivery of electricity, SSO and other retail electric services.
As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities were required to join an RTO. DP&L is a member of the PJM RTO. The role of the RTO is to administer a competitive wholesale market for electricity and ensure reliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power system serving more than 65 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region’s transmission grid, administers the world’s largest competitive wholesale electricity market and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
Like other electric utilities and energy marketers, AES Ohio Generation may sell or purchase electric products in the wholesale market. As a co-owner of a generation plant, AES Ohio Generation competes with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity. Selling this electricity will depend not only on the performance of the generating unit, but also on how the electricity's prices, terms and conditions compare to those of other suppliers.
ENVIRONMENTAL MATTERS
DPL’s and DP&L's current and former facilities and operations are and/or were subject to a wide range of federal, state and local environmental laws, rules and regulations. The environmental issues that may affect us include the following. However, as described further below, as a result of DPL’s retirement and sale of various electric generating facilities, including its Stuart and Killen generating stations, the sale of its ownership interest in the Miami Fort and Zimmer generating stations, the planned 2020 retirement of Conesville and our exiting of our generation business, certain of these environmental regulations and laws are now not expected to have a material impact on DPL with respect to these generating stations.discussed below.
•The federal CAA and state laws and regulations (including SIPs) which require compliance, obtaining permits and reporting as to air emissions;
•Litigation with federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating stations require additional permitting or pollution control technology, or whether emissions from coal-fired generating stations cause or contribute to global climate changes;
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• | •Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require substantial reductions in SO2, particulates, mercury, acid gases, NOx and other air emissions; •2, particulates, mercury, acid gases, NOx and other air emissions; |
Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require reporting and reductions of GHGs;
•Rules and future rules issued by the USEPA, the Ohio EPA or other authorities associated with the federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits; and
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain waste.
In addition to imposing continuing compliance obligations, theseenvironmental laws, rules and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at our facilities to comply, or to determine compliance, with such laws, rules and regulations. We record liabilities for loss contingencies related to environmental matters when a loss is probable of occurring and can be reasonably estimated in accordance with the provisions of GAAP. Accordingly, we have immaterial accruals for loss contingencies for environmental matters. We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable, or a loss cannot be reasonably
estimated. We evaluate the potential liability related to environmental matters quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows.
We have several pending environmental matters associated with our previously-owned and operated coal-fired generation units. We do not expect these matters to have a material adverse impact on our results of operations, financial condition or cash flows. See Note 11 – Contractual Obligations, Commercial Commitments and Contingencies – "Environmental Matters” of Notes to DPL's Consolidated Financial Statements and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies – "Environmental Matters" of Notes to DP&L's Financial Statements for more information regarding environmental risks, laws and regulations and legal proceedings to which we are and may be subject to in the future.
Biden Administration Actions Affecting Environmental Regulations
On January 20, 2021, President Biden issued an Executive Order (the "EO") titled “Protecting Public Health and the Environment and Restoring Science to Executive Orders fromTackle the Climate Crisis” directing agencies to, among other tasks, review regulations issued under the previous administration to determine whether they should be suspended, revoked, or revised. As provided for by the EO, the USEPA submitted a letter to the U.S. President, the USEPA is currently evaluating various existing regulationsDepartment of Justice seeking to be considered for repeal, replacement,obtain abeyances or modification. We cannot predict at this time the likely outcomestays of the USEPA’sproceedings in pending litigation that seeks review of theseregulations promulgated during the Trump Administration. The Biden Administration also issued a Memorandum titled “Regulatory Freeze Pending Review” directing agencies to refrain from proposing or other existing regulations or what impact itissuing any rules until the Biden Administration has reviewed and approved those rules. These actions may have an impact on regulations that may affect our business.business, financial condition, or results of operations.
We have several pending environmental matters associated with our current and previously-owned and operated coal-fired generation units. Some ofWe do not expect these matters couldto have a material adverse impactsimpact on our results of operations, financial condition or cash flows.
Environmental Matters Related to Air Quality
As a result of DPL’s retirement and subsequent sale of its Stuart and Killen generating stations,Stations, the sale of its ownership interest in the Miami Fort and Zimmer generating stationsStations and the planned 2020 retirement of Conesville, followed by the sale of our interest in Conesville and our exiting of our generation business, the following environmental matters, regulations and requirements are now not expected to have a material impact on DPL:
•The CAA and the following regulations
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◦ | CSAPR and associated updates; |
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◦ | MATS and any associated regulatory or judicial processes; |
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◦ | CPP or Affordable Clean Energy (ACE) rule. |
•CSAPR and associated updates;
•MATS and any associated regulatory or judicial processes;
•NAAQS; and
•CPP or Affordable Clean Energy (ACE) rule.
Litigation Involving Co-Owned Stations
As a result of a 2008 consent decree entered into with the Sierra Club and approved by the U.S. District Court for the Southern District of Ohio, DPL and the other owners of the Stuart generating stationStation were subject to certain specified emission targets related to NOX, SO2 and particulate matter. The consent decree also includes commitments for energy efficiency and renewable energy activities. An amendment to the consent decree was entered into and approved in 2010 to clarify how emissions would be computed during startups. Given that all of the commitments have been met and with the retirement of the Stuart generating station,Station, DPL and the other owners submitted a request for termination of the consent decree to the U.S. District Court. On July 14, 2020, the U.S. District Court for the Southern District of Ohio granted the request and terminated the Consent Decree.
Notices of Violation Involving Co-Owned Units
In June 2000, the USEPA issued an NOV to the then DP&L-operated Stuart generating station (co-owned by AES Ohio Generation, Dynegy and AEP Generation) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had brought against numerous other coal-fired utilities in the Midwest. The NOV indicated the USEPA may: (1) issue an order requiring compliance with the requirements of the Ohio SIP; or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. Given the retirement and sale of the Stuart generating station and the fact that there has been no action to date, we do not expect any further material developments regarding this NOV.
In January 2015, DP&L received NOVs from the USEPA alleging violations in opacity at the Stuart and Killen generating stations in 2014. On February 15, 2017, the USEPA issued an NOV alleging violations in opacity at the Stuart generation stationStation in 2016. Operations at boththe Stuart and KillenStation have ceased. Given the retirement and sale of the Stuart and Killen generating stationsStation and the fact there has been no recent activity, we do not expect any further material developments regarding these NOVs.
Notices of Violation Involving Wholly-Owned Stations
On November 18, 2009, the USEPA issued an NOV to DP&L for alleged NSR violations of the CAA at the Hutchings EGU, which was closed in 2013, relating to capital projects performed in 2001 involving Unit 3 and Unit 6. We do not believe that the two projects described in the NOV were modifications subject to NSR. Given the fact there has been no recent activity, we do not expect any further material developments regarding this NOV.
Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds
As a result of DPL’s retirement and subsequent sale of its Stuart and Killen generating stations,Stations, the sale of its ownership interest in the Miami Fort and Zimmer generating stationsStations and the planned 2020 retirement of Conesville;Conesville, followed by the sale of our interest in Conesville and our exiting of our generation business; the following environmental matters, regulations and requirements are now not expected to have a material impact on DPL with respect to these generating stations (although certain other requirements related to water quality, waste disposal and ash ponds are discussed further below):
•water intake regulations, including those finalized by the USEPA on May 19, 2014;
the appeal of the NPDES permit governing the discharge of water from the Stuart Station which was dismissed by the Ohio Environmental Review Appeals Commission on August 8, 2019;
•revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the USEPA on November 3, 2015 (and revised on October 13, 2020) and commonly referred to as the ELG rules; and
•Clean Water Act rules for selenium.
Notice of Potential Liability for Third Party Disposal Site
In December 2003, DP&L and other parties received notices that the USEPA considered DP&L and other parties PRPs for the Tremont City Landfill site, located near Dayton, Ohio. On October 16, 2019, DP&L received another
notice from the USEPA claiming that DP&L is a PRP for the portion of the site known as the barrel fill. While a review by DP&L of its records indicates that it did not contribute hazardous materials to the site, DP&L is currently unable to predict the outcome of this matter. If DP&L were required to contribute to the clean-up of the site, it could have an adverse effect on our business, financial condition or results of operations.
Regulation of Waste Disposal
In 2002, DP&L and other parties received a special notice that the USEPA considered DP&L to be a PRP for the clean-up of hazardous substances at a third-party landfill known as the South Dayton Dump (“Landfill”). Several of the parties voluntarily accepted some of the responsibility for contamination at the Landfill and, in May 2010, three of those parties, Hobart Corporation, Kelsey-Hayes Company and NCR Corporation (“PRP Group”), filed a civil complaint in Ohio federal court (the “District Court”) against DP&L and numerous other defendants, alleging that the defendants contributed to the contamination at the landfill and were liable for contribution to the PRP group for costs associated with the investigation and remediation of the site.
While DP&L was able to get the initial case dismissed, the PRP Group subsequently, in 2013, entered into an additional Administrative Settlement Agreement and Order on Consent (“ASAOC”) with the USEPA relating to vapor intrusion and again filed suit against DP&L and other defendants. Plaintiffs also added an additional ASAOC they entered into in 2016 pertaining to the investigation and remediation of all hazardous substances present in the Landfill - potentially including undefined areas outside the original dump footprint - to the vapor intrusion trial proceeding. The 2013 vapor intrusion ASAOC settled in early 2020, but the 2016 ASAOC remains to be adjudicated after completion of the remedial investigation feasibility study. While DP&L is unable to predict the outcome of these matters, if DP&L were required to contribute to the clean-up of the site, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Regulation of CCR
On October 19, 2015, a USEPA rule regulating CCR under the Resource Conservation and Recovery Act as nonhazardous solid waste became effective.effective (CCR Rule). The rule established nationally applicable minimum criteria for the disposal of CCR in new and currently operating landfills and surface impoundments, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. The primary enforcement mechanisms under this regulation would be actions commenced by the states and private lawsuits. On December 16, 2016, President Obama signed into law the Water Infrastructure Improvements for the Nation Act ("WIIN Act"), which includes provisions to implement the CCR ruleRule through a state permitting program, or if the state chooses not to participate, a possible federal permit program. The USEPA has indicated that they will implement a phased approach to amending the CCR Rule. On February 20, 2020, the USEPA published a proposed rule to establish a federal CCR permit program that would operate in states without approved CCR permit programs. On August 28, 2020, the USEPA published final amendments to the CCR Rule titled “A Holistic Approach to Closure Part A: Deadline to Initiate Closure”, which amends certain regulatory provisions that govern CCR. On November 12, 2020, the USEPA published amendments to the CCR Rule titled “A Holistic Approach to Closure Part B” and indicated that it would address this issue of beneficial use of CCR for closure of ash ponds that are subject to forced closure in a separate and future rulemaking. With the sale of our coal-fired generating stations, we expect that the impact of these regulations would be limited to our interest in OVEC.
The CCR Rule, current or proposed amendments to the CCR Rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material adverse effect on our results of operations, financial condition and cash flows.
Clean Water Act - Regulation of Water Discharge
DP&L and other utilities at times have applied the Nationwide Permit 12 (NWP 12) issued by the U.S. Army Corps of Engineers (Corps) in completing transmission and distribution projects that may involve waters of the U.S. NWP 12 is the nationwide permit for Utility Line Activities, specifically those required for construction and maintenance, provided the activity does not result in process.the loss of greater than 1/2-acre of waters of the U.S. for each single and complete project.
On April 15, 2020, in a proceeding involving the construction of the Keystone XL pipeline, the U.S. District Court for the District of Montana (Montana District Court) vacated NWP 12 and enjoined its application. On April 27, 2020, the Corps moved for the Montana District Court to stay, pending appeal, those portions of the April 15, 2020 order that vacate NWP 12 and enjoin its application. In the alternative, the Corps asked the Montana District Court to stay its vacatur and injunction as they relate to anything other than the Keystone XL pipeline. On May 11, 2020, following a request from the Corps, the Montana District Court amended its order to vacate NWP 12 only for oil and gas pipeline construction projects, allowing electric utility T&D projects to continue. On May 13, the Corps appealed the
Montana District Court decision with the Ninth Circuit Court and requested a stay. On May 28, 2020, the Ninth Circuit denied a motion to stay. On June 16, 2020, the U.S. Solicitor General, on behalf of the U.S. Army Corps of Engineers, filed an application with the U.S. Supreme Court asking the Court to stay the district court order that vacated and enjoined the Corps from issuing authorizations under NWP 12 as it relates to the construction of new oil and gas pipelines. On July 6, 2020, the U.S. Supreme Court stayed the district court order, allowing the use of NWP 12 for oil and gas pipeline projects except for Keystone XL. On January 13, 2021, the U.S. Army Corps of Engineers published a final rulemaking for the reissuance and modification of NWPs, including NWP 12, relating exclusively to the construction of oil or natural gas pipelines and the new NWP 57 for construction of electric or telecommunication utility lines. It is too early to determine whether the CCR rulefuture outcomes or any revisionsdecisions related to or reconsideration of the rule maythis matter could have a material impactadverse effect on our business,results of operations, financial condition or results of operations.
Notice of Violation Involving Co-Owned Unitsand cash flows.
On September 9, 2011, DP&L received an NOVApril 23, 2020, the U.S. Supreme Court issued a decision in the Hawaii Wildlife Fund v. County of Maui case related to whether a Clean Water Act permit is required when pollutants originate from a point source but are conveyed to navigable waters through a nonpoint source such as groundwater. The U.S. Supreme Court held that discharges to groundwater require a permit if the addition of the pollutants through groundwater is the functional equivalent of a direct discharge from the USEPA with respect to its previously co-owned Stuart generating station based on a compliance evaluation inspection conducted bypoint source into navigable waters. On December 10, 2020, the USEPA andpublished a Notice of Availability of draft guidance memorandum addressing how the Ohio EPA in
2009. The notice alleged non-compliance by DP&LSupreme Court’s decision applies to NPDES permits. with certain provisions of the RCRA, the CWA NPDES permit program and the station’s storm water pollution prevention plan. The notice requested that DP&L respond with the actions it has subsequently taken or plansIt is too early to take to remedy the USEPA’s findings and ensure that further violations will not occur. Based on its review of the findings, although there can be no assurance, we believe that the notice will not result indetermine whether this decision may have a material adverse effect on our results of operations, financial condition and cash flows.
HOW TO CONTACT DPL AND DP&L AND SOURCES OF OTHER INFORMATION
DPL is a regional energy company incorporated in 1985 under the laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 - telephone 937-259-7215. DP&L’s public internet site is http://www.dpandl.com. The information on this website is not incorporated by reference into this report. The SEC maintains an internet website that contains this report and other information that we file electronically with the SEC at www.sec.gov.
Investors should consider carefully the following risk factors that could cause our business, operating results and financial condition to be materially adversely affected. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance. The categories of risk we have identified in Item 1A. — Risk Factors include risks associated with our operations, governmental regulation and laws and our indebtedness and financial condition. These risk factors should be read in conjunction with the other detailed information concerning DPL set forth in the Notes to DPL's Consolidated Financial Statements and concerning DP&L set forth in the Notes to DP&L's Financial Statements in Part II – Item 8 – Financial Statements and Supplementary Data and additional information in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations herein. The risks and uncertainties described below are not the only ones that we face.
We may not always be able to recover our costs to deliver electricity to our retail customers. RISKS ASSOCIATED WITH OUR OPERATIONS
The costs we can recover and the return on capital we are permitted to earn for certain aspects of our business are regulated and governed by the laws of Ohio and the rules, policies and procedurescurrent outbreak of the PUCO.
In Ohio, retail generation rates are not subject to cost-based regulation, whilenovel coronavirus, or COVID-19, has adversely affected, and it or the future outbreak of any other highly infectious or contagious diseases could materially and adversely affect, our transmission and distribution businesses are still regulated. Even though rate regulation is premisedsystems and other facilities, results of operations, financial condition and cash flows. Further, the spread of the COVID-19 outbreak has caused disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 180 countries, including every state in the United States. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on full recoveryMarch 13, 2020 the United States declared a national emergency with respect to COVID-19.
The outbreak of prudentlyCOVID-19 has impacted global economic activity, caused significant volatility and negative pressure in financial markets and reduced the demand for energy in our service territory. In addition to reduced revenues and lower margins resulting from decreased energy demand within our service territory, we also have incurred costs and a reasonable rateexpect to continue to incur expenses relating to COVID-19, including expenses relating to events
outside of our costs have been prudently incurred or are recoverable. There can be no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs or permitted rates of return. Accordingly, the revenue DP&L receives may or may not match its expenses at any given time.
Changes in or reinterpretations of, or the unexpected applicationcontrol. The global impact of the laws, rules, policiesoutbreak has been rapidly evolving and procedures that setmany countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. In addition to triggering a period of global economic slowdown or govern electric rates, permitted rates of return, rate structures, operation of a competitive bid structure to supply retail generation service to SSO customers, reliability initiatives, capital expenditures and investments and the recovery of these and other costs on a fullglobal recession, COVID-19 or timely basis through rates, power market prices and the frequency and timing of rate increases,another pandemic could have a material and adverse effecteffects on our results of operations, financial condition and cash flows.
Our increased costs due to, renewable energyamong other factors:
•further decline in customer demand as a result of general decline in business activity;
•further destabilization of the markets and energy efficiency requirements may not be fully recoverabledecline in business activity negatively impacting our customer growth or the future.
Ohio law contains annual targets for energy efficiency which begannumber of customers in 2009 and require increasing energy reductions each year compared to a baseline energy usage, up to 22.3% by 2027. Peak demand reduction targets began in 2009 with increases in required percentages each year, up to 7.75% by 2020. The renewable energy standards have increased our costs and are expected to continue to increase (and could materially increase) these costs. DP&L is currently entitled to recover costs associated with its renewable energy compliance costs,service territory as well as its energy efficiencyour customers’ ability to pay for our services when due (or at all);
•delay or inability in obtaining regulatory actions and demand response programs. If,outcomes that could be material to our business, including for recovery of COVID-19 related expenses and losses such as uncollectible customer amounts and the review and approval of our applications, rates and charges by the PUCO;
•difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the future, weglobal financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;
•negative impacts on the health of our essential personnel, especially if a significant number of them are unableaffected, and on our operations as a result of implementing stay-at-home, quarantine and other social distancing measures;
•a deterioration in our ability to timelyensure business continuity during a disruption, including increased cybersecurity attacks related to the work-from-home environment;
•delays or fully recoverinability to access, transport and deliver materials to our facilities due to restrictions on business operations or other factors affecting us and our third-party suppliers;
•delays or inability to access equipment or the availability of personnel to perform planned and unplanned maintenance, which can, in turn, lead to disruption in operations;
•delays or inability in achieving our financial goals, growth strategy and digital transformation; and
•delays in the implementation of expected rules and regulations.
We will continue to review and modify our plans as conditions change. Despite our efforts to manage and remedy these costs, itimpacts to us, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects.
COVID-19 continues to present material uncertainty which could have a material adverse effect onmaterially and adversely affect our transmission and distribution systems, results of operations, financial condition and cash flows. In addition, if we were found notTo the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section, such as those relating to beour level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in compliance with these standards, monetary penalties could apply. These penalties are not permitted to be recovered from customers and significant penalties could have a material adverse effect onthe agreements that govern our results of operations, financial condition and cash flows. The demand reduction and energy efficiency standards by design result in reduced energy and demand that could have a material adverse effect on our results of operations, financial condition and cash flows.indebtedness.
We may be negatively affected by a lack of growth or a decline in the number of customers.
Customer growth is affected by a number of factors outside our control, such as population changes, job and income growth, housing starts, new business formation and the overall level of economic activity. A lack of growth, or a decline, in the number of customers in our service territory could have a material adverse effect on our results of operations, financial condition and cash flows and may cause us to fail to fully realize anticipated benefits from investments and expenditures.
We are subject to numerous environmental laws, rules and regulations that require capital expenditures, increase our cost of operations and may expose us to environmental liabilities.
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the remediation of retired generation and other facilities, storage, handling, use, storage, disposal and transportation of coal combustion residuals and other materials, some of which may be defined as hazardous materials, the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. Such laws, rules and regulations can become stricter over time, and we could also become subject to additional environmental laws, rules and regulations and other requirements in the future. Environmental laws, rules and regulations also require us to comply with inspections and obtain and comply with a wide variety of environmental licenses, permits, inspections and other governmental authorizations. These laws, rules and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and other governmental authorizations from federal, state and local agencies. If we are not able to timely comply with inspections and obtain, maintain or comply with all environmental laws, rules and regulations and all licenses, permits and other government authorizations required to operate our business, then our operations could be prevented, delayed or subject to additional costs. A violation of environmental laws, rules, regulations, licenses, permits or other requirements can result in substantial fines, penalties, other sanctions, permit revocation, facility shutdowns, the imposition of stricter environmental standards and controls or other injunctive measures affecting operating assets. In addition, any actual or alleged violation of these laws, rules or regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations. DP&L has an ownership interest in OVEC, which operates generating stations, and DPL owns an undivided interest in a separate generating station operated by DPL's co-owner of that facility. We generally are responsible for our respective pro rata share of expenditures for complying with environmental laws, rules, regulations, licenses, permits and other requirements at this generating station, but have limited control over the compliance measures taken by the operator. Under certain environmental laws, we could also be held strictly, jointly and severally responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to such hazardous substances or for other environmental damage.
In particular, we are subject to potentially significant remediation expenses, enforcement initiatives, private-party lawsuits and reputational risk associated with CCR, which consists of bottom ash, fly ash and air pollution control wastes generated at our current coal-fired generation plant sites. CCR currently remains onsite at our Conesville EGU and at OVEC's EGUs, including in CCR ponds. Compliance with the CCR rule, amendments to the federal CCR rule, or other federal, state, or foreign rules or programs addressing CCR may require us to incur substantial costs. In addition, CCR, particularly with respect to its beneficial use and regulation as nonhazardous solid waste, has been the subject of interest from environmental non-governmental organizations and the media. Any of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws, rules and regulations or other environmental requirements. We cannot assure that we will be successful in defending against any claim of noncompliance. Any actual or alleged violation of these laws, rules, regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations and expose us to unexpected costs. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1 - Business - Environmental Matters for a more comprehensive discussion of these and other environmental matters impacting us.
We are reliant upon the performance of a co-owner who operates our remaining co-owned operational EGU.
We co-own an EGU operated by the co-owner. Poor operational performance by our co-owner, misalignment of co-owner's interests with our own or lack of control over costs (such as fuel costs) incurred at this station could have an adverse effect on us. In addition, any sale of this co-owned EGU by the co-owner to a third party could enhance the risk of a misalignment of interests, lack of cost control and other operational failures.
The use of non-derivative and derivative instruments in the normal course of business could result in losses that could negatively impact our results of operations, financial position and cash flows.
From time to time, we use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage financial risks. These trades are affected by a range of factors, including fluctuations in interest rates and optimization opportunities. We have attempted to manage our risk exposure by establishing and enforcing risk limits and risk management policies. Despite our efforts, however, these risk limits and management policies may not work as planned and fluctuating prices and other events could adversely affect our results of operations, financial condition and cash flows. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these instruments can involve management’s judgment or the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of some of these contracts. We could also recognize financial losses as a result of volatility in the market values of these contracts, a counterparty failing to perform or the underlying transactions which the instruments are intended to hedge failing to materialize, which could result in a material adverse effect on our results of operations, financial condition and cash flows.
The Dodd-Frank Act contains significant requirements related to derivatives that, among other things, could reduce the cost effectiveness of entering into derivative transactions.
In July 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law. The Dodd-Frank Act contains significant requirements relating to derivatives, including, among others, a requirement that certain transactions be cleared on exchanges that would necessitate the posting of cash collateral for these transactions. We are considered an end-user under the Dodd-Frank Act and therefore are exempt from most of the collateral and margining requirements. We are required to report our bilateral derivative contracts, unless our counterparty is a major swap participant or has elected to report on our behalf. Even though we qualify for an exception from these requirements, our counterparties that do not qualify for the exception may pass along any increased costs incurred by them through higher prices and reductions in unsecured credit limits or be unable to enter into certain transactions with us. The occurrence of any of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
Our business is sensitive to weather and seasonal variations.
Weather conditions significantly affect the demand for electric power and, accordingly, our business is affected by variations in general weather conditions and unusually severe weather. As a result of these factors, our operating revenues and associated operating expenses are not generated evenly by month during the year. We forecast electric sales based on normal weather, which represents a long-term historical average. In addition, severe or unusual weather, such as floods, tornadoes and ice or snowstorms, may cause outages and property damage that
may require us to incur additional costs that may not be insured or recoverable from customers. While DP&L is permitted to seek recovery of storm damage costs, if DP&L is unable to fully recover such costs in a timely manner, it could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
Our membership in a regional transmission organization presents risks that could have a material adverse effect on our results of operations, financial condition and cash flows.
On October 1, 2004, in compliance with Ohio law, DP&L turned over control of its transmission functions and fully integrated into PJM, a regional transmission organization.
The rules governing the various regional power markets may also change from time to time which could affect our costs and revenues and have a material adverse effect on our results of operations, financial condition and cash flows. We may be required to expand our transmission system according to decisions made by PJM rather than our internal planning process. Various proposals and proceedings before the FERC may cause transmission rates to change from time to time. In addition, PJM developed and continues to refine rules associated with the allocation and methodology of assigning costs associated with improved transmission reliability, reduced transmission congestion and firm transmission rights that may have a financial effect on us. We also incur fees and costs to participate in PJM.
Non-market-based RTO-related charges are being recovered from all retail customers through the Transmission Rider. If in the future, however, we are unable to recover all of these costs in a timely manner this could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
As members of PJM, DP&L and AES Ohio Generation are also subject to certain additional risks including those associated with the allocation of losses caused by unreimbursed defaults of other participants in PJM markets among PJM members and those associated with complaint cases filed against PJM that may seek refunds of
revenues previously earned by PJM members including DP&L and AES Ohio Generation. These amounts could be significant and have a material adverse effect on our results of operations, financial condition and cash flows.flows.
Costs associated with new transmission projects could have a material adverse effect on our results of operations, financial condition and cash flows.
Annually, PJM performs a review of the capital additions required to provide reliable electric transmission services throughout its territory. PJM traditionally allocated the costs of constructing these facilities to those entities that benefited directly from the additions. Over the last several years, however, some of the costs of constructing new large transmission facilities have been “socialized” across PJM without a direct relationship between the costs assigned to and benefits received by particular PJM members. To date, the additional costs charged to DP&L for new large transmission approved projects have not been material. Over time, as more new transmission projects are constructed and if the allocation method is not changed, the annual costs could become material. DP&L is recovering the Ohio retail jurisdictional share of these allocated costs from its retail customers through the Transmission Rider. To the extent that any costs in the future are material and we are unable to recover them from our customers, such costs could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties.
As an owner of a bulk power transmission system, DP&L is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. In addition, DP&L is subject to Ohio reliability standards and targets. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCO will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We rely on access to the financial markets. General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms, or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the ability of corporations to raise capital can be negatively affected. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. Our ability to raise capital on favorable terms, or at all, can be adversely affected by unfavorable market conditions or declines in our creditworthiness, and we may be unable to access adequate funding to refinance our debt as it becomes due or finance capital expenditures. The extent of any impact will depend on several factors, including our operating cash flows, financial condition and prospects, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing, the financial condition, performance and prospects of other companies in our industry or with similar financial circumstances and other general economic and business conditions. It may also depend on the performance of credit counterparties and financial institutions with which we do business. Access to funds under our existing financing arrangements is also dependent on the ability of our counterparties to meet their financing commitments and our satisfying conditions to borrowing. Our inability to obtain financing on reasonable terms, or at all, with creditworthy counterparties could adversely affect our results of operations, financial condition and cash flows. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which would adversely impact our profitability. See Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements for information regarding indebtedness. See also Item 7A - Quantitative and Qualitative Disclosure about Market Riskfor information related to market risks.
Our transmission and distribution system is subject to operational, reliability and capacity risks.
The ongoing reliable performance of our transmission and distribution system is subject to risks due to, among other things, weather damage, intentional or unintentional damage, equipment or process failure, catastrophic events, such as fires and/or explosions, facility outages, labor disputes, accidents or injuries, operator error or inoperability of key infrastructure internal or external to us and events occurring on third party systems that interconnect to and affect our system. The failure of our transmission and distribution system to fully operate and
deliver the energy demanded by customers could have a material adverse effect on our results of operations, financial condition and cash flows, and if such failures occur frequently and/or for extended periods of time, could result in adverse regulatory action. In addition, the advent and quick adoption of new products and services that require increased levels of electrical energy cannot be predicted and could result in insufficient transmission and distribution system capacity. Also, as a result of the above risks and other potential risks and hazards associated with transmission and distribution operations, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that our insurance will be sufficient or effective under all circumstances and against
all hazards or liabilities to which we may be subject. Further, any increased costs or adverse changes in the insurance markets may cause delays or inability in maintaining insurance coverage on terms similar to those presently available to us or at all. A successful claim for which we are not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
Current and future conditions in the economy may adversely affect our customers, suppliers and other counterparties, which may adversely affect our results of operations, financial condition and cash flows.
Our business, results of operations, financial condition and cash flows have been and will continue to be affected by general economic conditions. Slowing economic growth, credit market conditions, fluctuating consumer and business confidence, fluctuating commodity prices and other challenges currently affecting the general economy, have caused and may continue to cause some of our customers to experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing customers may reduce their electricity consumption and may not be able to fulfill their payment obligations to us in a normal, timely fashion. In addition, some existing commercial and industrial customers may discontinue their operations. Sustained downturns, recessions or a sluggish economy generally affect the markets in which we operate and negatively influence our energy operations. A contracting, slow or sluggish economy could reduce the demand for energy in areas in which we are doing business. For example, during economic downturns, our commercial and industrial customers may see a decrease in demand for their products, which in turn may lead to a decrease in the amount of energy they require. Furthermore, projects which may result in potential new customers may be delayed until economic conditions improve. Some of our suppliers, customers, other counterparties and others with whom we transact business experience financial difficulties, which may impact their ability to fulfill their obligations to us or result in their declaring bankruptcy or similar insolvency-type proceedings.us. For example, our counterparties on forward purchase contracts and financial institutions involved in our credit facility may become unable to fulfill their contractual obligations.obligations to us or result in their declaring bankruptcy or similar insolvency-like proceedings. We may not be able to enter into replacement agreements on terms as favorable as our existing agreements. Reduced demand for our electric services, failure by our customers to timely remit full payment owed to us and supply delays or unavailability could have a material adverse effect on our results of operations, financial condition and cash flows.flows. In particular, the projected economic growth and total employment in DP&L’s service territory are important to the realization of our forecasts for annual energy sales.
The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility, and a material change in market interest rates could adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2019, the carrying value of DPL's debt was $1,507.1 million and the carrying value of DP&L's debt was $614.4 million. Of DP&L's indebtedness, there was $565.0 million of First Mortgage Bonds and tax-exempt bonds as of December 31, 2019, which are secured by the pledge of substantially all of the assets of DP&L under the terms of DP&L’s First & Refunding Mortgage. DPL's revolving credit facility is also secured by a pledge of common stock that DPL owns in DP&L. This level of indebtedness and related security could have important consequences, including:
increasing our vulnerability to general adverse economic and industry conditions;
requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
limiting, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.
If DP&L issues additional debt in the future, we will be subject to the terms of such debt agreements and be required to obtain regulatory approvals. To the extent we increase our leverage, the risks described above would also increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flows from operations may not be sufficient to repay all of the outstanding debt as it becomes due and, in that event,
we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt as it becomes due. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default thereunder. For a further discussion of our outstanding debt obligations, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Requirements and Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements.
DP&L has variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted by interest rate fluctuations. As such, any event which impacts market interest rates could have a material effect on our results of operations, financial condition and cash flows. In addition, rating agencies issue ratings on our credit and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Credit ratings also govern the collateral provisions of certain of our contracts. If the rating agencies were to downgrade our credit ratings further, our borrowing costs would likely further increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional collateral under select contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.
Economic conditions relating to the asset performance and interest rates of our pension and postemployment benefit plans could materially and adversely impact our results of operations, financial condition and cash flows.
Pension costs are based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets, level of employer contributions, the expected life span of pension plan beneficiaries and the discount rate used to determine the present value of future pension obligations. Any of these assumptions could prove to be wrong, resulting in a shortfall of our pension and postemployment benefit plan assets compared to obligations under our pension and postemployment benefit plans. Further, the performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under our pension and postemployment benefit plans. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. A decline in the market value of the pension and postemployment benefit plan assets will increase the funding requirements under our pension and postemployment benefit plans if the actual asset returns do not recover these declines in value in the foreseeable future. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. We are responsible for funding any shortfall of our pension and postemployment benefit plans’ assets compared to obligations under the pension and postemployment benefit plans, and a significant increase in our pension liabilities could materially and adversely impact our results of operations, financial condition and cash flows. We are subject to the Pension Protection Act of 2006, which requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, our required contributions to these plans, at times, have increased and may increase in the future. In addition, our pension and postemployment benefit plan liabilities are sensitive to changes in interest rates. When interest rates decrease, the discounted liabilities increase benefit expense and funding requirements. Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements for the obligations related to the pension and other postemployment benefit plans. Declines in market values and increased funding requirements could have a material adverse effect on our results of operations, financial condition and cash flowsflows.
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Counterparties providing materials or services may fail to perform their obligations, which could harm our results of operations, financial condition and cash flows.
We enter into transactions with and rely on many counterparties in connection with our business, including for purchased power, for our capital improvements and additions and to provide professional services, such as actuarial calculations, payroll processing and various consulting services. If any of these counterparties fails to perform its obligations to us or becomes unavailable, our business plans may be materially disrupted, we may be forced to discontinue certain operations if a cost-effective alternative is not readily available or we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause delays. Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than relief provided by these mitigation provisions. Any of the foregoing could result in regulatory actions, cost overruns, delays or other losses, any of which (or a combination of which) could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
Further, from time to time our construction program may call for extensive expenditures for capital improvements and additions, including the installation of upgrades, improvements to transmission and distribution facilities, as well as other initiatives. As a result, we may engage contractors and enter into agreements to acquire necessary materials and/or obtain required construction related services. In addition, some contracts may provide for us to assume the risk of price escalation and availability of certain metals and key components. This could force us to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause construction delays. It could also subject us to enforcement action by regulatory authorities to the extent that such a contractor failure resulted in a failure by DP&L to comply with requirements or expectations, particularly with regard to the cost of the project. If these events were to occur, we might incur losses or delays in completing construction.
Accidental improprieties and undetected errors in our internal controls and information reporting could result in the disallowance of cost recovery, noncompliant disclosure or incorrect payment processing.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP in the United States of America, laws and regulations, taxation requirements and federal securities laws and regulations in order to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with our reporting requirements under federal securities, tax and other laws and regulations and to properly process payments. We have also implemented corporate governance, internal control and accounting policies and procedures in connection with the Sarbanes-Oxley Act of 2002. Our internal controls and policies have been and continue to be closely monitored by management and our Board of Directors. While we believe these controls, policies, practices and systems are adequate to verify data integrity, unanticipated and unauthorized actions of employees, temporary lapses in internal controls due to shortfalls in oversight or resource constraints could lead to improprieties and undetected errors that could result in the disallowance of cost recovery, noncompliant disclosure and reporting or incorrect payment processing. The consequences of these events could have a material adverse effect on our results of operations, financial condition and cash flowsflows.
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New accounting standards or changesIf we are unable to existing accounting standardsmaintain a qualified and properly motivated workforce, it could materially affect how we reporthave a material adverse effect on our results of operations, financial condition and cash flows.
DPL's
Consolidated Financial Statements
One of the challenges we face is to retain a skilled, efficient and DP&L's Financial Statements are preparedcost-effective workforce while recruiting new talent to replace losses in accordance with accounting principles generally accepted in the United States of America. The SEC, FASBknowledge and skills due to resignations, terminations or other authoritative bodies or governmental entities may issue new pronouncements or new interpretations of existing accounting standards that mayretirements. This undertaking could require us to change our accounting policies. These changesmake additional financial commitments and incur increased costs. If we are beyond our control, can be difficultunable to predictsuccessfully attract and retain an appropriately qualified workforce, it could materially affect how we reporthave a material adverse effect on our results of operations, financial condition and cash flows. In addition, we have employee compensation plans that reward the performance of our employees. We seek to ensure that our compensation plans encourage acceptable levels for risk and high performance through pay mix, performance metrics and timing. We may not be able to successfully train new personnel as current workers with significant knowledge and expertise retire. We also may be unable to staff our business with qualified personnel in the event of significant absenteeism related to a pandemic illness. Excessive risk-taking by our employees to achieve performance targets, through mitigated by policies and procedures, could be requiredresult in events that have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to apply a new or revised standard retroactively, whichcollective bargaining agreements that could adversely affect our business, results of operations, financial condition.condition and cash flows.
We are subject to collective bargaining agreements with employees who are members of a union. Over half of our employees are represented by a collective bargaining agreement. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreement or at the expiration of the collective bargaining agreement before a new agreement is negotiated. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.
The use of non-derivative and derivative instruments in the normal course of business could result in losses that could negatively impact our results of operations, financial position and cash flows.
From time to time, we use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage financial risks. These trades are affected by a range of factors, including fluctuations in interest rates and optimization opportunities. We have attempted to manage our risk exposure by establishing and enforcing risk limits and risk management policies. Despite our efforts, however, these risk limits and management policies may not work as planned and fluctuating prices and other events could adversely affect our results of operations, financial condition and cash flows. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these instruments can involve management’s judgment or the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of some of these contracts. We could also recognize financial losses as a result of volatility in the market values of these contracts, a counterparty failing to perform or the underlying transactions which the instruments are intended to hedge failing to materialize, which could result in a material adverse effect on our results of operations, financial condition and cash flows.
Potential security breaches (including cybersecurity breaches) and terrorism risks could adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our transmission, distribution and other facilities. We also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cybersecurity attacks and other causes. In particular, given the importance of energy and the electric grid, there is the possibility that our systems and facilities could be targets of terrorism or acts of war. We have implemented measures to help prevent unauthorized access to our systems and facilities, including network and system monitoring, identification and deployment of secure technologies and certain other measures to comply with mandatory regulatory reliability standards. Pursuant to NERC requirements, we have a robust cybersecurity plan in place and are subject to regular audits by an independent auditor approved by the NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks and identify areas for improvement. In addition, we provide cybersecurity training for our employees and perform exercises designed to raise employee awareness of cyber risks on a regular basis. To date, cyber-attacks on our business and operations have not had a material impact on our operations or financial results. Despite these efforts, if our systems or facilities were to be breached or disabled, we may be unable to recover them in preparinga timely manner to fulfill critical business functions, including the supply of electric services to our Financial Statements, managementcustomers, and we could experience decreases in revenues and increases in costs that could have a material adverse effect on our results of operations, financial condition and cash flows.
In the course of our business, we also store and use customer, employee and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in negative publicity, remediation costs and potential litigation, damages, consent orders, injunctions, fines and other relief.
To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.
RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS
We may not always be able to recover our costs to deliver electricity to our retail customers. The costs we can recover and the return on capital we are permitted to earn for the most substantial part of our business are regulated and governed by the laws of Ohio and the rules, policies and procedures of the PUCO.
In Ohio, transmission and distribution businesses are regulated. Even though rate regulation is premised on full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCO will agree that all of our costs have been prudently incurred or are recoverable. There can be no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs or permitted rates of return. Accordingly, the revenue DP&L receives may or may not match its expenses at any given time.
Changes in or reinterpretations of, or the unexpected application of the laws, rules, policies and procedures that set or govern electric rates, permitted rates of return, rate structures, operation of a competitive bid structure to supply retail generation service to SSO customers, reliability initiatives, capital expenditures and investments and the recovery of these and other costs on a full or timely basis through rates, power market prices and the frequency and timing of rate increases, could have a material adverse effect on our results of operations, financial condition and cash flows.
Our increased costs due to renewable energy and energy efficiency requirements may not be fully recoverable in the future.
Ohio law contains annual targets for energy efficiency which began in 2009 and require increasing energy reductions each year compared to a baseline energy usage, up to 22.3% by 2027. Peak demand reduction targets began in 2009 with increases in required percentages each year, up to 7.75% by 2020. The renewable energy standards have increased our costs and are expected to continue to increase (and could materially increase) these costs. DP&L is currently entitled to recover costs associated with its renewable energy compliance, as well as its energy efficiency and demand response programs. If, in the future, we are unable to timely or fully recover these costs, it could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, if we were found not to be in compliance with these standards, monetary penalties could apply. These penalties are not permitted to be recovered from customers and significant penalties could have a material adverse effect on our results of operations, financial condition and cash flows. The demand reduction and energy efficiency standards by design result in reduced energy and demand that could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to numerous environmental laws, rules and regulations that require capital expenditures, increase our cost of operations and may expose us to environmental liabilities.
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the remediation of retired generation and other facilities, storage, handling, use, storage, disposal and transportation of coal combustion residuals and other materials, some of which may be defined as hazardous materials, the emission and discharge of hazardous and other materials or items into the environment, such as GHGs; and the health and safety of our employees. Such laws, rules and regulations can become stricter over time, and we could also become subject to additional environmental laws, rules and regulations and other requirements in the future. Environmental laws, rules and regulations also require us to comply with inspections and obtain and comply with a wide variety of environmental licenses, permits, inspections and other governmental authorizations. These laws, rules and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and other governmental authorizations from federal, state and local agencies. If we are not able to timely comply with inspections and obtain, maintain or comply with all environmental laws, rules and regulations and all licenses, permits and other government authorizations required to make estimatesoperate our business, then our operations could be prevented, delayed or subject to additional costs. A violation of environmental laws, rules, regulations, licenses, permits or other requirements can result in substantial fines, penalties, other sanctions, permit revocation, facility shutdowns, the imposition of stricter environmental standards and assumptions. Actualcontrols or other injunctive measures affecting operating assets. In addition, any actual or alleged violation of these laws, rules or regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations. DP&L has an ownership interest in OVEC, which operates generating stations. We generally are responsible for our respective pro rata share of expenditures for complying with environmental laws, rules, regulations, licenses, permits and other requirements at this generating station, but have
limited control over the compliance measures taken by the operator. Under certain environmental laws, we could also be held strictly, jointly and severally responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to such hazardous substances or for other environmental damage.
In particular, we are subject to potentially significant remediation expenses, enforcement initiatives, private-party lawsuits and reputational risk associated with CCR, which consists of bottom ash, fly ash, boiler slag and flue gas desulfurization materials generated from burning coal generated at our formerly owned coal-fired generation plant sites. CCR currently remains onsite at OVEC's EGUs, including in CCR ponds. Compliance with the CCR rule, amendments to the federal CCR rule, or other federal, state, or foreign rules or programs addressing CCR may require us to incur substantial costs. In addition, CCR, particularly with respect to its beneficial use and regulation as nonhazardous solid waste, has been the subject of interest from environmental non-governmental organizations and the media. Any of the foregoing could have a material adverse effect on our results could differ significantly from those estimates.of operations, financial condition and cash flows.
From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws, rules and regulations or other environmental requirements. We cannot assure that we will be successful in defending against any claim of noncompliance. Any actual or alleged violation of these laws, rules, regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations and expose us to unexpected costs. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1 - Business - Environmental Matters for a more comprehensive discussion of these and other environmental matters impacting us.
If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties.
As an owner of a bulk power transmission system, DP&L is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. In addition, DP&L is subject to Ohio reliability standards and targets. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCO will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to extensive laws and local, state and federal regulation, as well as litigation and other proceedings that could affect our operations and costs.
As an electric utility,
DP&L isWe are subject to extensive regulation at both the federal, state, and state level.local levels. For example, at the federal level, DP&L is regulated by the FERC and the NERC and, at the state level, by the PUCO. The regulatory power of the PUCO over DP&L is both comprehensive and typical of the traditional form of regulation generally imposed by state public utility commissions. We face the risk of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Ohio. DP&L is subject to regulation by the PUCO as to our services and facilities, the valuation of property, the construction, purchase, or lease of electric facilities, the classification of accounts, rates of depreciation, the increase or decrease in retail rates and charges, the issuance of securities and incurrence of debt, the acquisition and sale of some public utility properties or securities and certain other matters. As a result of the Energy Policy Act of 2005 and subsequent legislation affecting the electric utility industry, we have been required to comply with rules and regulations in areas including mandatory reliability standards, cybersecurity, transmission expansion and energy efficiency. Complying with the regulatory environment to which we are subject requires us to expend a significant amount of funds and resources. The failure to comply with this regulatory environment could subject us to substantial financial costs and penalties and changes, either forced or voluntary, in the way we operate our business that could have a material adverse effect on our results of operations, financial condition and cash flows.flows.
We are subject to litigation, regulatory proceedings, administrative proceedings, audits, settlements, investigations and claims from time to time that require us to expend significant funds to address. There can be no assurance that the outcome of these matters will not have a material adverse effect on our business, results of operations, financial
condition and cash flows. Asbestos and other regulated substances are, and may continue to be, present at our
facilities, and we have been named as a defendant in asbestos litigation. The continued presence of asbestos and other regulated substances at these facilities could result in additional litigation being brought against us, which could have a material adverse effect on our results of operations, financial condition and cash flows.flows. See Item 1 - Business - Competition and Regulation, Item 1 - Business - Environmental Matters, and Item 3 - Legal Proceedings for a summary of significant regulatory matters and legal proceedings involving us.
Tax legislation initiatives or challenges to our tax positions could adversely affect our operations and financial condition.
We are subject to the tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative measures may be enacted that could adversely affect our overall tax positions regarding income or other taxes. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these legislative measures.
For example, the United States federal government recently enacted tax reform in 2017 that, among other things, reduces U.S. federal corporate income tax rates, imposes limits on tax deductions for interest expense and changes the rules related to capital expenditure cost recovery. There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions of the newly enacted tax reform measure. Given the unpredictability of these possible changes and their potential interdependency, it remains difficult to assess the overall effect such tax changes will have on our earnings and cash flow, and the extent to which such changes could adversely impact our results of operations. As the impacts of the new law are determined, and as yet-to-be-released regulations and other guidance interpreting the new law are issued and finalized, our financial results could be materially impacted.
In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will be sustained if challenged by relevant tax authorities and if not sustained, there could be a material adverse effect on our results of operations, financial condition and cash flowsflows.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION
The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility, and a material change in market interest rates could adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2020, the carrying value of DPL's debt was $1,493.6 million and the carrying value of DP&L's debt was $594.1 million. Of DP&L's indebtedness, there was $565.0 million of First Mortgage Bonds as of December 31, 2020, which are secured by the pledge of substantially all of the assets of DP&L under the terms of DP&L’s First & Refunding Mortgage. DPL's revolving credit facility is also secured by a pledge of common stock that DPL owns in DP&L. This level of indebtedness and related security could have important consequences, including:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•limiting, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.
If DP&L issues additional debt in the future, we are unablewill be subject to the terms of such debt agreements and be required to obtain regulatory approvals. To the extent we increase our leverage, the risks described above would also increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flows from operations may not be sufficient to repay all of the outstanding debt as it becomes due and, in that event, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt as it becomes due. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default thereunder. For a further discussion of our outstanding debt obligations, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Financial Condition, Liquidity and Capital Requirements and Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements.
DPL and DP&L have variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted by interest rate fluctuations. As such, any event which impacts market interest rates could have a qualifiedmaterial effect on our results of operations, financial condition and properly motivated workforce, itcash flows. In addition, rating agencies issue ratings on our credit and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Credit ratings also govern the collateral provisions of certain of our contracts. If the rating agencies were to downgrade our credit ratings further, our borrowing costs would likely further increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional collateral under select contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.
One
We rely on access to the financial markets. General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms, or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the challengesability of corporations to raise capital can be negatively affected. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. Our ability to raise capital on favorable terms, or at all, can be adversely affected by unfavorable market conditions or declines in our creditworthiness, and we facemay be unable to access adequate funding to refinance our debt as it becomes due or finance capital expenditures. The extent of any impact will depend on several factors, including our operating cash flows, financial condition and prospects, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing, the financial condition, performance and prospects of other companies in our industry or with similar financial circumstances and other general economic and business conditions. It may also depend on the performance of credit counterparties and financial institutions with which we do business. Access to funds under our existing financing arrangements is also dependent on the ability of our counterparties to retain a skilled, efficient and cost-effective workforce while recruiting new talent to replace losses in knowledge and skills due to resignations, terminations or retirements. This undertaking could require us to make additional financialmeet their financing commitments and incur increased costs. If we are unableour satisfying conditions to successfully attract and retain an appropriately qualified workforce, itborrowing. Our inability to obtain financing on reasonable terms, or at all, with creditworthy counterparties could have a material adverse effect onadversely affect our results of operations, financial condition and cash flows. In addition,If our available funding is limited or we have employee compensation plans that reward the performance ofare forced to fund our employees. We seekoperations at a higher cost, these conditions may require us to ensure that our compensation plans encourage acceptable levels for risk and high performance through pay mix, performance metrics and timing. We may not be able to successfully train new personnel as current workers with significant knowledge and expertise retire. We also may be unable to staffcurtail our business with qualified personnel in the eventactivities and increase our cost of significant absenteeismfunding, both of which would adversely impact our profitability. See Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements for information regarding indebtedness. See also Item 7A - Quantitative and Qualitative Disclosure about Market Riskfor information related to a pandemic illness. Excessive risk-taking by our employees to achieve performance targets, through mitigated by policies and procedures, could result in events that have a material adverse effect on our results of operations, financial condition and cash flows.market risks.
We are subject to collective bargaining agreements that could adversely affect our business, results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements with employees who are members of a union. Over half of our employees are represented by a collective bargaining agreement. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreement or at the expiration of the collective bargaining agreement before a new agreement is negotiated. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.
Potential security breaches (including cybersecurity breaches) and terrorism risks could adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our generation stations, fuel storage facilities and transmission and distribution facilities. We also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cybersecurity attacks and other causes. In
particular, given the importance of energy and the electric grid, there is the possibility that our systems and facilities could be targets of terrorism or acts of war. We have implemented measures to help prevent unauthorized access to our systems and facilities, including network and system monitoring, identification and deployment of secure technologies and certain other measures to comply with mandatory regulatory reliability standards. Pursuant to NERC requirements, we have a robust cybersecurity plan in place and are subject to regular audits by an independent auditor approved by the NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks and identify areas for improvement. In addition, we provide cybersecurity training for our employees and perform exercises designed to raise employee awareness of cyber risks on a regular basis. To date, cyber-attacks on our business and operations have not had a material impact on our operations or financial results. Despite these efforts, if our systems or facilities were to be breached or disabled, we may be unable to recover them in a timely manner to fulfill critical business functions, including the supply of electric services to our customers, and we could experience decreases in revenues and increases in costs that could have a material adverse effect on our results of operations, financial condition and cash flows.
In the course of our business, we also store and use customer, employee and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in negative publicity, remediation costs and potential litigation, damages, consent orders, injunctions, fines and other relief.
To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.
DPL is a holding company and parent of DP&L and other subsidiaries. DPL’s cash flow is dependent on the cash flows of DP&L and its other subsidiaries and their ability to pay cash to DPL.
DPL is a holding company with no material assets other than the ownership of its subsidiaries, and accordingly all cash is generated by the activities of its subsidiaries, principally DP&L. As such, DPL’s cash flow is largely dependent on the cash flows of DP&L and its ability to pay cash to DPL. The impact of the recentDecember 2019 ESP and otherrelated regulatory proceedings on DP&L's revenues adversely affects DPL'sDPL ability to satisfy the financial covenants in its secured revolving credit facility.. In addition, there are a number of other rate proceedings pending or anticipated that we cannot predict the outcome of, which could adversely affect DPL'sDPL ability to satisfy these covenants.. See Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements for descriptions of DP&L's ESP and other regulatory proceedings and Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements for information regarding indebtedness and our financial covenants related to indebtedness.proceedings. In addition, DP&L is regulated by the PUCO, which possesses broad oversight powers to ensure that the needs of utility customers are being met. The PUCO could impose additional restrictions on the ability of DP&L to distribute, loan or advance cash to DPL pursuant to these broad powers. A significant limitation on DP&L’s ability to pay dividends or loan or advance funds to DPL could have a material adverse effect on DPL’s results of operations, financial condition and cash flows.flows.
Our ownership by AES subjects us to potential risks that are beyond our control.
All of DP&L’s common stock is owned by DPL, and DPL is an indirectly wholly owned subsidiary of AES. Due to our relationship with AES, any adverse developments and announcements concerning AES may impair our ability to access the capital markets and to otherwise conduct business. In particular, downgrades in AES’s credit ratings could result in DPL’s or DP&L’s credit ratings being downgraded.
Impairment of long-lived assets would negatively affect our consolidated results of operations and net worth.
Long-lived assets are amortized or depreciated over their estimated useful lives. Long-lived assets are evaluated for impairment only when impairment indicators are present. The recoverability assessment of long-lived assets requires making estimates and assumptions to determine fair value, as described above.
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| Item 1B – Unresolved Staff Comments |
None.
Information relating to our properties is contained in Note 4 – Property, Plant and Equipment of Notes to DPL's Consolidated Financial Statements and Note 4 – Property, Plant and Equipment of Notes to DP&L's Financial Statements.Statements.
Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio. This facility and the remainder of our material properties are owned directly by DP&L or AES Ohio Generation.. These properties include our distribution service center in Dayton, Ohio, various substations and other transmission and distribution equipment and property.
Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage. All generation assets were released from the lien of DP&L's first and refunding mortgage in connection with the completion of Generation Separation on October 1, 2017.See Note 14 – Generation SeparationDispositions of Notes to DP&L's Financial Statements.Statements.
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| Item 3 – Legal Proceedings |
DPL and DP&L are involved in certain claims, suits and legal proceedings inIn the normal course of business. DPLbusiness, we are subject to various lawsuits, actions, claims, and DP&L other proceedings. We are also from time to time involved in other reviews, investigations and proceedings by governmental and regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. We have accrued in our Financial Statements for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. DPLWe believe the amounts provided in our Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and DP&L believe, based upon information they currently possess and considering established reserves for estimated liabilities and insurance coverage,estimable contingencies. However, there can be no assurances that the ultimate outcomeactual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters (including those matters noted below), and to comply with applicable laws and regulations will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of these proceedings and actions is unlikely to have a material adverse effect on their financial statements. It isthose amounts provided for in our Financial Statements, cannot be reasonably possible, however, that some mattersdetermined, but could be decided unfavorablymaterial. For more information, see Note 3 – Regulatory Matters and could requireNote 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPLDPL's orConsolidated Financial Statements and Note 3 – Regulatory Matters and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DP&L &L'sto pay damages or make expenditures in amounts that could be material but cannot be estimated as of December 31, 2019. Financial Statements.
The following additional information is incorporated by reference into this Item: information about the legal proceedings contained in Item 1 - Business - Competition and Regulation and Item 1 - Business - Environmental Matters.
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| Item 4 – Mine Safety Disclosures |
Not applicable.
PART II
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| Item 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
All of the outstanding common stock of DPL is owned indirectly by AES and directly by a wholly-owned subsidiary of AES. As a result, DPL’s stock is not listed for trading on any stock exchange. DP&L’s common stock is held solely by DPL and, as a result, is not listed for trading on any stock exchange.
Dividends and return of capital
During the years ended December 31, 2020, 2019 2018 and 2017,2018, DPL paid no dividends to AES. DP&L declares and pays dividends on its common shares to its parent DPL from time to time as declared by the DP&L board. Return of capital payments and dividends on common shares were declared in the amountsamount of $52.7 million and paid in the amount of $42.7 million in the year ended December 31, 2020, and $95.0 million $43.8 million and $39.0$43.8 million were declared and paid in the years ended December 31, 2019 2018 and 2017,2018, respectively.
DPL’s Amended Articles of Incorporation contain restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency is below investment grade. As of December 31, 20192020, , DPL’sDPL leverage ratio was at 1.32 to 1.00 and DPL’s senior long-term debt rating from a major credit rating agency was below investment grade.did not meet these requirements. As a result, as of December 31, 2019,2020, DPL was prohibited under its Articles of Incorporation from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
DP&L's 2017 ESP contained restrictions on dividend or tax sharing payments from DPL to AES. See Note 10 – Equity for more information and Note 8 – Income Taxes for more information about the tax sharing payment restrictions.
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| Item 6 – Selected Financial Data |
The following table presents our selected financial data, which should be read in conjunction with DPL's audited Consolidated Financial Statements and the related Notes thereto, DP&L's audited Financial Statements and the related Notes thereto and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. The “Results of Operations” discussion in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses significant fluctuations in operating data. DPL’s common stock is wholly-owned by an indirect subsidiary of AES andAES; therefore, DPL does not report earnings or dividends on a per-share basis. Other information that management believes is important in understanding trends in our business is also included in this table. The total electric sales and Statements of Operations Data for DPL for 2015 and the Balance Sheet Data for DPL for 2015 - 2016Prior period amounts have been restated to reflect discontinued operations in all periods presented. Our historical results are not comparablenecessarily indicative of our future results.
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| DPL |
| | Years ended December 31, |
| $ in millions except per share amounts or as indicated | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Total electric sales (millions of kWh) | | 13,918 | | | 14,628 | | | 15,728 | | | 14,679 | | | 15,406 | |
| Statements of Operations Data | | | | | | | | | | |
| Revenues | | $ | 660.5 | | | $ | 743.7 | | | $ | 747.3 | | | $ | 729.0 | | | $ | 815.7 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Operating income | | $ | 89.1 | | | $ | 154.9 | | | $ | 142.6 | | | $ | 126.5 | | | $ | 175.1 | |
| Income / (loss) from continuing operations | | $ | (6.4) | | | $ | 51.8 | | | $ | 36.7 | | | $ | 12.3 | | | $ | 51.3 | |
Income / (loss) from discontinued operations, net of tax (a) | | $ | 5.4 | | | $ | 53.6 | | | $ | 33.4 | | | $ | (106.9) | | | $ | (536.5) | |
| Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | $ | 70.1 | | | $ | (94.6) | | | $ | (485.2) | |
| Capital expenditures | | $ | 157.3 | | | $ | 156.5 | | | $ | 96.1 | | | $ | 110.5 | | | $ | 147.2 | |
| | | | | | | | | | |
| Balance Sheet Data (end of period): | | | | | | | | | | |
| Total assets | | $ | 2,036.0 | | | $ | 1,935.8 | | | $ | 1,883.1 | | | $ | 2,049.2 | | | $ | 2,419.2 | |
Long-term debt (b) | | $ | 1,393.4 | | | $ | 1,223.3 | | | $ | 1,372.3 | | | $ | 1,700.2 | | | $ | 1,828.7 | |
| Total common shareholder's deficit | | $ | (283.5) | | | $ | (371.9) | | | $ | (471.7) | | | $ | (584.3) | | | $ | (587.6) | |
(a)Fixed-asset impairments of $3.5 million, $2.8 million, $175.8 million and $859.0 million in 2019, 2018, 2017 and 2016, respectively, have been reclassified to the total electric sales and Statements of Operations Data for 2016 - 2019 and the Balance Sheet Data for 2017 - 2019, respectively, as these periods have not been adjusted to reflect the reclassification of the generation business, excluding Conesville, as a discontinued operation. The total electric sales and Balance Sheet Data for DP&L for 2015 are not comparable to the total electric sales and Balance Sheet Data for 2016 - 2019, respectively, as these periods have not been adjusted to reflect the Generation Separation and its reclassification as a discontinued operation.operations.
(b)Excluded from this line are the current maturities of long-term debt.
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| DP&L |
| | Years ended December 31, |
| $ in millions except per share amounts or as indicated | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Total electric sales (millions of kWh) | | 13,918 | | | 14,628 | | | 15,194 | | | 14,401 | | | 15,008 | |
| Statements of Operations Data | | | | | | | | | | |
| Revenues | | $ | 652.1 | | | $ | 735.4 | | | $ | 738.7 | | | $ | 720.0 | | | $ | 808.0 | |
| Operating income | | $ | 83.5 | | | $ | 150.7 | | | $ | 135.1 | | | $ | 122.1 | | | $ | 169.0 | |
| Income from continuing operations | | $ | 51.1 | | | $ | 124.9 | | | $ | 86.7 | | | $ | 57.4 | | | $ | 97.6 | |
Loss from discontinued operations, net of tax (a) | | $ | — | | | $ | — | | | $ | — | | | $ | (40.4) | | | $ | (870.3) | |
| Net income / (loss) | | $ | 51.1 | | | $ | 124.9 | | | $ | 86.7 | | | $ | 17.0 | | | $ | (773.4) | |
| Capital expenditures | | $ | 153.3 | | | $ | 155.5 | | | $ | 85.6 | | | $ | 90.7 | | | $ | 127.0 | |
| | | | | | | | | | |
| Balance Sheet Data (end of period): | | | | | | | | | | |
| Total assets | | $ | 2,014.7 | | | $ | 1,883.2 | | | $ | 1,819.6 | | | $ | 1,695.9 | | | $ | 2,035.1 | |
Long-term debt (b) | | $ | 573.9 | | | $ | 434.6 | | | $ | 581.5 | | | $ | 642.0 | | | $ | 731.5 | |
| Total common shareholder's equity | | $ | 616.7 | | | $ | 473.4 | | | $ | 445.3 | | | $ | 330.7 | | | $ | 362.3 | |
(a) Fixed-asset impairments of $66.3 million and $1,353.5 million in 2017 and 2016, respectively, have been reclassified to discontinued operations.
(b) Excluded from this line are the current maturities of long-term debt.
|
| | | | | | | | | | | | | | | | | | | | |
| DPL |
| | | Years ended December 31, |
| $ in millions except per share amounts or as indicated | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total electric sales (millions of kWh) | | 15,108 |
| | 15,728 |
| | 14,679 |
| | 15,406 |
| | 20,756 |
|
| Statements of Operations Data | | | | | | | | | | |
| Revenues | | $ | 763.3 |
| | $ | 775.9 |
| | $ | 743.9 |
| | $ | 834.2 |
| | $ | 1,612.8 |
|
| Goodwill impairment | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 317.0 |
|
Fixed-asset impairment (a) | | $ | 3.5 |
| | $ | 2.8 |
| | $ | — |
| | $ | 23.9 |
| | $ | — |
|
| Operating income / (loss) | | $ | 147.5 |
| | $ | 135.5 |
| | $ | 105.2 |
| | $ | 119.0 |
| | $ | (109.9 | ) |
| Income / (loss) from continuing operations | | $ | 45.9 |
| | $ | 31.2 |
| | $ | (1.5 | ) | | $ | 14.8 |
| | $ | (251.4 | ) |
| Income / (loss) from discontinued operations, net of tax | | $ | 59.5 |
| | $ | 38.9 |
| | $ | (93.1 | ) | | $ | (500.0 | ) | | $ | 12.4 |
|
| Net income / (loss) | | $ | 105.4 |
| | $ | 70.1 |
| | $ | (94.6 | ) | | $ | (485.2 | ) | | $ | (239.0 | ) |
| Capital expenditures | | $ | 168.1 |
| | $ | 103.6 |
| | $ | 121.5 |
| | $ | 148.5 |
| | $ | 137.2 |
|
| | | | | | | | | | | |
| Balance Sheet Data (end of period): | | | | | | | | | | |
| Total assets | | $ | 1,935.8 |
| | $ | 1,883.1 |
| | $ | 2,049.2 |
| | $ | 2,419.2 |
| | $ | 3,324.7 |
|
Long-term debt (b) | | $ | 1,223.3 |
| | $ | 1,372.3 |
| | $ | 1,700.2 |
| | $ | 1,828.7 |
| | $ | 1,420.5 |
|
| Redeemable preferred stock of subsidiary | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 18.4 |
|
| Total common shareholder's deficit | | $ | (371.9 | ) | | $ | (471.7 | ) | | $ | (584.3 | ) | | $ | (587.6 | ) | | $ | (80.6 | ) |
| |
(a) | Fixed-asset impairments of $175.8 million and $835.2 million in 2017 and 2016, respectively, have been reclassified to discontinued operations. |
| |
(b) | Excluded from this line are the current maturities of long-term debt. |
|
| | | | | | | | | | | | | | | | | | | | |
| DP&L |
| | | Years ended December 31, |
| $ in millions except per share amounts or as indicated | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Total electric sales (millions of kWh) | | 14,628 |
| | 15,194 |
| | 14,401 |
| | 15,008 |
| | 26,394 |
|
| Statements of Operations Data | | | | | | | | | | |
| Revenues | | $ | 735.4 |
| | $ | 738.7 |
| | $ | 720.0 |
| | $ | 808.0 |
| | $ | 857.0 |
|
| Operating income | | $ | 150.7 |
| | $ | 135.1 |
| | $ | 122.1 |
| | $ | 169.0 |
| | $ | 222.2 |
|
| Income from continuing operations | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 57.4 |
| | $ | 97.6 |
| | $ | 130.0 |
|
Loss from discontinued operations, net of tax (a) | | $ | — |
| | $ | — |
| | $ | (40.4 | ) | | $ | (870.3 | ) | | $ | (23.6 | ) |
| Net income / (loss) attributable to common stock | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 17.0 |
| | $ | (773.4 | ) | | $ | 105.5 |
|
| Capital expenditures | | $ | 167.1 |
| | $ | 93.1 |
| | $ | 101.7 |
| | $ | 128.3 |
| | $ | 127.0 |
|
| | | | | | | | | | | |
| Balance Sheet Data (end of period): | | | | | | | | | | |
| Total assets | | $ | 1,883.2 |
| | $ | 1,819.6 |
| | $ | 1,695.9 |
| | $ | 2,035.1 |
| | $ | 3,359.6 |
|
Long-term debt (b) | | $ | 434.6 |
| | $ | 581.5 |
| | $ | 642.0 |
| | $ | 731.5 |
| | $ | 313.6 |
|
| Redeemable preferred stock | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22.9 |
|
| Total common shareholder's equity | | $ | 473.4 |
| | $ | 445.3 |
| | $ | 330.7 |
| | $ | 362.3 |
| | $ | 1,212.7 |
|
| | | | | | | | | | | |
| Number of shareholders - preferred stock | | — |
| | — |
| | — |
| | — |
| | 180 |
|
| |
(a) | Fixed-asset impairments of $66.3 million and $1,353.5 million in 2017 and 2016, respectively, have been reclassified to discontinued operations. |
| |
(b) | Excluded from this line are the current maturities of long-term debt. |
| | |
|
| Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in conjunction with DPL’s audited Consolidated Financial Statements and the related Notes thereto and DP&L’s audited Financial Statements and the related Notes thereto included in Item 8 – Financial Statements and Supplementary Data of this Form 10-K. The following discussion
contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. See “Forward-Looking Statements” at the beginning of this Form 10-K and Item 1A – Risk Factors. For a list of certain abbreviations or acronyms in this discussion, see Glossary of Terms at the beginning of this Form 10-K.
OVERVIEW OF 20192020 RESULTS AND STRATEGIC PERFORMANCE
The most important matters on which we focus in evaluating our financial condition and operating performance and allocating our resources include: (i) recurring factors which have significant impacts on operating performance such as: regulatory action, environmental matters, weather and weather-related damage in our service area, customer growth, and the local economy; (ii) our progress on performance improvement and growth strategies designed to maintain high standards in several operating areas (including safety, customer satisfaction, operations, financial and enterprise-wide performance, talent management/people, capital allocation/sustainability and corporate social responsibility) simultaneously; and (iii) our short-term and long-term financial and operating strategies. For a discussion of how we are impacted by regulation and environmental matters, please see Note 2, “Regulatory Matters”3 – Regulatory Matters of the Notes to theDPL's Consolidated Financial Statements and “Environmental Matters” in “Item 1.1 - Business.”
Operational Excellence
Our objective is to optimize DP&L’s performance in the U.S. utility industry by focusing on the following areas: safety, operations (reliability and customer satisfaction), financial and enterprise-wide performance (efficiency and cost savings, talent management/people, capital allocation/sustainability and corporate social responsibility). We set and measure these objectives carefully, balancing them in a way and to a degree necessary to ensure a sustainable high level of performance in these areas simultaneously as compared to our peers. We monitor our performance in these areas, and where practical and meaningful, compare performance in some areas to peer utilities. Because some of our financial and enterprise-wide performance measures are company-specific performance goals, they are not benchmarked.
Our safety performance is measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury near misses. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
DP&L measures delivery reliability by Customer Average Interruption Duration Index ("CAIDI"), System Average Interruption Duration Index ("SAIDI") and System Average Interruption Frequency Index ("SAIFI") and benchmarks the reliability metrics against other utilities at both the state and national levels. DP&L also measures customer centricity on more of an individual basis by the industry metric of Customers that Experience Multiple Interruption of five or more times (“CEMI-5”). We measure customer satisfaction using Research America Utilities Market Research - Consumer Insight. Monitoring performance in the areas such as competitive rates, operational reliability and customer service supports our ongoing work to deliver reliable service to our customers.
EXECUTIVE SUMMARY
The following review of results of operations compares the results for the year ended December 31, 20192020 to the results for the year ended December 31, 2018.2019. For a discussion ofcomparing the results of operations for the year ended December 31, 2017,2019 to the year ended December 31, 2018, see Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 20182019 Annual Report on Form 10-K, filed with the SEC on February 26, 2019.27, 2020.
DPL
Compared with the prior year, DPL's results for the year ended December 31, 2019 reflects2020 reflect a decrease in income / (loss) from continuing operations before income tax of $7.8$43.4 million, or 24%138%, primarily due to factors including, but not limited to:
| | | | | | | | |
| $ in millions | | 2020 vs. 2019 |
Impact of changes to DP&L's ESP in December 2019, primarily removal of the DMR, DIR, and Decoupling Rider and reinstatement of the RSC Rider | | $ | (57.8) | |
| Net decrease in the volume of retail kWh sold primarily driven by unfavorable weather, partially offset by the purchased power volume variance | | (15.1) | |
| Increase due to lower losses on early extinguishment of debt recorded in 2020 compared to 2019 | | 13.2 | |
| Increase due to lower interest expense from debt refinancings in 2020 and 2019 | | 10.9 | |
Increase due to the deferral of revenue to adjust for the impacts of the TCJA in the prior year
| | 5.4 | |
| | |
| Net change in income / (loss) from continuing operations before income tax | | $ | (43.4) | |
| | |
| | |
| | |
| | |
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
| Decrease due to a higher loss on early extinguishment of debt in 2019, primarily due to the make-whole premium on the partial prepayment of the 7.25% Senior Notes due 2021 | | $ | (38.4 | ) |
| Decrease due to the deferral of revenue to adjust for the impacts of the TCJA | | (14.0 | ) |
| Decrease due to higher taxes other than income | | (4.7 | ) |
Impact of the distribution rate order, including higher distribution rates, the DIR, and the Decoupling Rider, partially offset by changes to DP&L's ESP | | 22.4 |
|
| Increase due to the loss on transfer of the Beckjord facility in the first quarter of 2018 | | 11.7 |
|
| Lower interest expense due to debt payments made in 2017 and 2018 | | 15.8 |
|
| Other | | (0.6 | ) |
| Net change in income from continuing operations before income tax | | $ | (7.8 | ) |
DP&L
Compared with the prior year, DP&L's results for the year ended December 31, 2019 reflects an increase2020 reflect a decrease in income from continuing operations before income tax of $19.9$66.2 million, or 19%53%, primarily due to factors including, but not limited to:
| | | | | | | | |
| $ in millions | | 2020 vs. 2019 |
Impact of changes to DP&L's ESP in December 2019, primarily removal of the DMR, DIR, and Decoupling Rider and reinstatement of the RSC Rider | | $ | (57.8) | |
| Net decrease in the volume of retail kWh sold primarily driven by unfavorable weather, partially offset by the purchased power volume variance | | (15.1) | |
| Increase due to the deferral of revenue to adjust for the impacts of the TCJA in the prior year | | 5.4 | |
| Other | | 1.3 | |
| Net change in income from continuing operations before income tax | | $ | (66.2) | |
| | |
| | |
| | |
| | |
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
Impact of the distribution rate order, including higher distribution rates, the DIR, and the Decoupling Rider, partially offset by changes to DP&L's ESP | | $ | 22.4 |
|
| Increase due to the loss on transfer of the Beckjord facility in the first quarter of 2018 | | 12.4 |
|
| Decrease due to the deferral of revenue to adjust for the impacts of the TCJA | | (14.0 | ) |
| Decrease due to higher taxes other than income | | (4.6 | ) |
| Other | | 3.7 |
|
| Net change in income from continuing operations before income tax | | $ | 19.9 |
|
RESULTS OF OPERATIONS – DPL
DPL’s results of operations include the results of its subsidiaries, including the consolidated results of its principal subsidiary DP&L. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for DP&L is presented elsewhere in this report.
Statement of Operations Highlights – DPL
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | Change 2020 vs. 2019 | | Change 2019 vs. 2018 |
| $ in millions | | 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
| Revenues: | | | | | | | | | | | | | | |
| Retail | | $ | 586.4 | | | $ | 667.3 | | | $ | 656.9 | | | $ | (80.9) | | | (12)% | | $ | 10.4 | | | 2% |
| Wholesale | | 10.1 | | | 16.2 | | | 29.9 | | | (6.1) | | | (38)% | | (13.7) | | | (46)% |
| RTO ancillary | | 44.0 | | | 43.5 | | | 43.1 | | | 0.5 | | | 1% | | 0.4 | | | 1% |
| Capacity revenues | | 4.2 | | | 6.2 | | | 7.9 | | | (2.0) | | | (32)% | | (1.7) | | | (22)% |
| Miscellaneous revenues | | 15.8 | | | 10.5 | | | 9.5 | | | 5.3 | | | 50% | | 1.0 | | | 11% |
| | | | | | | | | | | | | | |
| Total revenues | | 660.5 | | | 743.7 | | | 747.3 | | | (83.2) | | | (11)% | | (3.6) | | | —% |
| | | | | | | | | | | | | | |
| Operating costs and expenses: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net fuel cost | | 1.7 | | | 2.5 | | | 2.5 | | | (0.8) | | | (32)% | | — | | | —% |
| Purchased power: | | | | | | | | | | | | | | |
| Purchased power | | 200.7 | | | 227.9 | | | 244.9 | | | (27.2) | | | (12)% | | (17.0) | | | (7)% |
| RTO charges | | 29.9 | | | 24.0 | | | 55.6 | | | 5.9 | | | 25% | | (31.6) | | | (57)% |
| RTO capacity charges | | — | | | — | | | 2.2 | | | — | | | —% | | (2.2) | | | (100)% |
| | | | | | | | | | | | | | |
| Net purchased power cost | | 230.6 | | | 251.9 | | | 302.7 | | | (21.3) | | | (8)% | | (50.8) | | | (17)% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Operation and maintenance | | 181.6 | | | 184.2 | | | 138.3 | | | (2.6) | | | (1)% | | 45.9 | | | 33% |
| Depreciation and amortization | | 73.3 | | | 72.3 | | | 76.2 | | | 1.0 | | | 1% | | (3.9) | | | (5)% |
| Taxes other than income taxes | | 79.4 | | | 77.9 | | | 73.3 | | | 1.5 | | | 2% | | 4.6 | | | 6% |
| | | | | | | | | | | | | | |
| Loss on asset disposal | | 0.1 | | | — | | | — | | | 0.1 | | | —% | | — | | | —% |
| Loss on disposal of business | | 4.7 | | | — | | | 11.7 | | | 4.7 | | | —% | | (11.7) | | | (100)% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total operating costs and expenses | | 571.4 | | | 588.8 | | | 604.7 | | | (17.4) | | | (3)% | | (15.9) | | | (3)% |
| | | | | | | | | | | | | | |
| Operating income | | 89.1 | | | 154.9 | | | 142.6 | | | (65.8) | | | (42)% | | 12.3 | | | 9% |
| | | | | | | | | | | | | | |
| Other expense, net: | | | | | | | | | | | | | | |
| Interest expense | | (71.3) | | | (82.2) | | | (98.0) | | | 10.9 | | | (13)% | | 15.8 | | | (16)% |
| Loss on early extinguishment of debt | | (31.7) | | | (44.9) | | | (6.5) | | | 13.2 | | | (29)% | | (38.4) | | | 591% |
| Other income | | 2.0 | | | 3.7 | | | 0.8 | | | (1.7) | | | (46)% | | 2.9 | | | 363% |
| Other expense, net | | (101.0) | | | (123.4) | | | (103.7) | | | 22.4 | | | (18)% | | (19.7) | | | 19% |
| | | | | | | | | | | | | | |
| Income / (loss) from continuing operations before income tax (a) | | $ | (11.9) | | | $ | 31.5 | | | $ | 38.9 | | | $ | (43.4) | | | (138)% | | $ | (7.4) | | | (19)% |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Revenues: | | | | | | |
| Retail | | $ | 667.3 |
| | $ | 656.9 |
| | $ | 641.5 |
|
| Wholesale | | 30.3 |
| | 52.0 |
| | 31.9 |
|
| RTO ancillary | | 43.7 |
| | 43.2 |
| | 47.4 |
|
| Capacity revenues | | 11.5 |
| | 14.4 |
| | 12.1 |
|
| Miscellaneous revenues | | 10.5 |
| | 9.4 |
| | 11.0 |
|
| Total revenues | | 763.3 |
| | 775.9 |
| | 743.9 |
|
| | | | | | | |
| Operating costs and expenses: | | | | | | |
| Net fuel cost | | 16.0 |
| | 17.5 |
| | 9.0 |
|
| Purchased power: | | | | | | |
| Purchased power | | 227.9 |
| | 244.9 |
| | 231.4 |
|
| RTO charges | | 24.0 |
| | 57.8 |
| | 57.5 |
|
| RTO capacity charges | | 1.1 |
| | 2.3 |
| | 2.1 |
|
| Net purchased power cost | | 253.0 |
| | 305.0 |
| | 291.0 |
|
| Operation and maintenance | | 191.4 |
| | 156.8 |
| | 186.1 |
|
| Depreciation and amortization | | 72.7 |
| | 73.1 |
| | 76.1 |
|
| Taxes other than income taxes | | 78.2 |
| | 73.5 |
| | 77.1 |
|
| Fixed-asset impairment | | 3.5 |
| | 2.8 |
| | — |
|
| Loss / (gain) on asset disposal | | 1.0 |
| | — |
| | (0.6 | ) |
| Loss on disposal of business | | — |
| | 11.7 |
| | — |
|
| Total operating costs and expenses | | 615.8 |
| | 640.4 |
| | 638.7 |
|
| | | | | | | |
| Operating income | | 147.5 |
| | 135.5 |
| | 105.2 |
|
| | | | | | | |
| Other expense, net: | | | | | | |
| Interest expense | | (82.2 | ) | | (98.0 | ) | | (110.0 | ) |
| Loss on early extinguishment of debt | | (44.9 | ) | | (6.5 | ) | | (3.3 | ) |
| Other income | | 3.7 |
| | 0.9 |
| | 1.6 |
|
| Other expense, net | | (123.4 | ) | | (103.6 | ) | | (111.7 | ) |
| | | | | | | |
| Income / (loss) from continuing operations before income tax (a) | | $ | 24.1 |
| | $ | 31.9 |
| | $ | (6.5 | ) |
| |
(a) | For purposes of discussing operating results, we present and discuss Income / (loss) from continuing operations before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance. |
The following review of consolidated results of operations compares the results for the year ended December 31, 2020 to the results for the year ended December 31, 2019. For discussion comparing the results for the year ended December 31, 2019 to the results for the year ended December 31, 2018. For discussion around results of operations for the year ended December 31, 2017,2018, see Item 7.-Management's7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 20182019 Annual Report on Form 10-K, filed with the SEC on February 26, 2019.27, 2020. As a result of presenting Conesville in Discontinued Operations in the current year, certain DPL variances and discussion included in our 2019 Annual Report on Form 10-K for the year ended December 31, 2019 compared to the year ended December 31, 2018 have changed. For these variances, see the discussion in DPL's Utility segment, DP&L's, Results of Operations in our 2019 Annual Report on Form 10-K, as DPL's continuing operations now primarily consist of DP&L.
DPL – Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring
during a year. Cooling degree-days typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Because of the impact of the Decoupling Rider (effective January 1, 2019 through December 18, 2019), weather had a minimal impact on our 2019 net operating results. SeeAdditionally, our retail revenues are affected by regulated rates and riders, including the changes to our ESP, described in Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements for additional information.Statements.
Additionally, factors affectingHeating and Cooling Degree-days (a)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | change | | % change | | |
| Actual | | | | | | | | | | |
Heating degree-days (a) | | 4,867 | | | 4,987 | | | (120) | | | (2) | % | | |
Cooling degree-days (a) | | 1,176 | | | 1,318 | | | (142) | | | (11) | % | | |
| | | | | | | | | | |
30-year average (b) | | | | | | | | | | |
| Heating-degree days | | 5,444 | | | 5,442 | | | | | | | |
| Cooling-degree days | | 995 | | | 984 | | | | | | | |
(a)Heating and cooling degree-days are a measure of the relative heating or cooling required for a home or business. The heating degrees in a day are calculated as the degrees that the average actual daily temperature is below 65 degrees Fahrenheit. For example, if the average temperature on March 20th was 40 degrees Fahrenheit, the heating degrees for that day would be the 25-degree difference between 65 degrees and 40 degrees. Similarly, cooling degrees in a day are calculated as the degrees that the average actual daily temperature is above 65 degrees Fahrenheit.
(b)30-year average is computed from observed degree-days in the Dayton area on a trailing 30-year basis.
DPL's wholesale sales volume include wholesale market prices; retail demand throughout the entire wholesale market area; unit availability to sell into the wholesale market; and weather conditions.
Degree-days
|
| | | | | | |
| | | Years ended December 31, |
| | 2019 | | 2018 |
Heating degree-days (a) | | 5,057 |
| | 5,547 |
|
Cooling degree-days (a) | | 1,409 |
| | 1,341 |
|
| |
(a) | Heating and cooling degree-days are a measure of the relative heating or cooling required for a home or business. The heating degrees in a day are calculated as the degrees that the average actual daily temperature is below 65 degrees Fahrenheit. For example, if the average temperature on March 20th was 40 degrees Fahrenheit, the heating degrees for that day would be the 25-degree difference between 65 degrees and 40 degrees. Similarly, cooling degrees in a day are calculated as the degrees that the average actual daily temperature is above 65 degrees Fahrenheit. |
DPL'sDP&L's electric sales and billed customers were as follows:
| | | | | | | | | | | | | | | | |
ELECTRIC SALES AND CUSTOMERS (a) | | |
| | DPL and DP&L | | |
| | Years ended December 31, | | |
| | 2020 | | 2019 | | |
Retail electric sales (b) | | | | | | |
| Residential | | 5,330 | | | 5,354 | | | |
| Commercial | | 3,438 | | | 3,688 | | | |
| Industrial | | 3,533 | | | 3,735 | | | |
| Governmental | | 1,148 | | | 1,255 | | | |
| Other | | 19 | | | 17 | | | |
| Total retail electric sales | | 13,468 | | | 14,049 | | | |
Wholesale electric sales (c) | | 450 | | | 579 | | | |
| Total electric sales | | 13,918 | | | 14,628 | | | |
| | | | | | |
| Billed electric customers (end of period) | | 530,670 | | | 525,801 | | | |
(a)Electric sales are presented in millions of kWh.
(b)DPL and DP&L retail electric sales represent the total transmission and distribution retail sales for the periods presented. SSO sales were 3,850 million kWh and 3,913 million kWh for the years ended December 31, 2020 and 2019, respectively.
(c)Wholesale electric sales are DP&L's 4.9% share of the generation output of OVEC.
|
| | | | | | |
ELECTRIC SALES AND CUSTOMERS (a) |
| | | DPL |
| | | Years ended December 31, |
| | | 2019 | | 2018 |
Retail electric sales (b) | | 14,049 |
| | 14,439 |
|
Wholesale electric sales (c) | | 1,059 |
| | 1,289 |
|
| Total electric sales | | 15,108 |
| | 15,728 |
|
| | | | | |
| Billed electric customers (end of period) | | 525,801 |
| | 525,166 |
|
| |
(a) | Electric sales are presented in millions of kWh. |
| |
(b) | DPL retail electric sales represent the total transmission and distribution retail sales for the periods presented. SSO sales were 3,913 million kWh and 3,977 million kWh for the years ended December 31, 2019 and 2018, respectively.Table of Contents |
| |
(c) | Included within DPL wholesale electric sales are DP&L's 4.9% share of the generation output of OVEC and the generation output of Conesville.
|
During the year ended December 31, 2019,2020, Revenues decreased $12.6$83.2 million to $763.3$660.5 million from $775.9$743.7 million in the same period of the prior year. This decrease was a result of:
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
| Retail | | |
| Rate | | |
| Increase in Energy Efficiency and USF Revenue Rate Riders | | $ | 39.9 |
|
| Increase in base distribution rates due to the DRO | | 18.8 |
|
Increase due to the DIR, which was effective with the DRO (a) | | 16.5 |
|
Increase due to the Decoupling Rider, which was effective with the DRO and designed to eliminate the impacts of weather and demand from certain customer classes (a) | | 9.4 |
|
Decrease in the TCRR due to lower transmission costs and the impact of DP&L passing back the benefits of the PJM Transmission Enhancement Settlement to customers | | (32.8 | ) |
| Decrease due to the deferral of revenue to adjust for the impacts of the TCJA | | (14.0 | ) |
| Decrease due to energy efficiency lost revenues recorded in the prior year | | (13.6 | ) |
| Other | | (1.3 | ) |
| Net change in retail rate | | 22.9 |
|
| | | |
| Volume | | |
Decrease in volume primarily due to demand in the current year driven by a decrease in heating degree-days of 490, partially offset by an increase in cooling degree-days of 68 (excludes the decoupling impact in 2019, which is included in rates above) (a) | | (15.2 | ) |
| | | |
| Other miscellaneous | | 2.7 |
|
| Total retail change | | 10.4 |
|
| | | |
| Wholesale | | |
| Decrease due to lower wholesale prices and lower volumes, primarily due to a 9% decrease in internal generation at Conesville and no longer serving the load of other parties through their competitive bid process |
| (21.7 | ) |
| | | |
| RTO ancillary and capacity revenues | | |
| Decrease primarily due to lower capacity prices | | (2.4 | ) |
| | | |
| Other | | |
| Miscellaneous revenues | | 1.1 |
|
| | | |
| Net change in Revenues | | $ | (12.6 | ) |
| | | | | | | | |
(a)$ in millions | | The PUCO order approving the ESP 1 rate plan on December 18,2020 vs. 2019 included the |
| Retail | | |
| Rate | | |
| Decrease due to removal of DMR | | $ | (95.9) | |
| Decrease in competitive bid revenue rate rider | | (20.7) | |
| Decrease due to removal of DIR | | (20.4) | |
| Decrease due to removal of decoupling rider | | (11.9) | |
| | |
| Increase due to reinstatement of RSC rider | | 70.4 | |
| Increase in base distribution average rate per retail kWh sold, which goes up as usage declines due to fixed components in distribution rates | | 9.0 | |
Increase due to the DIR and Decoupling Rider. For more information, see Part II, Item 8, Note 3 – Regulatory Mattersdeferral of revenue to adjust for the impacts of the TCJA in the Notesprior year | | 5.4 | |
| | |
| Other | | 2.9 | |
| Net change in retail rate | | (61.2) | |
| | |
| Volume | | |
| Net decrease in the volume of kWh sold primarily due to unfavorable weather as compared to the prior year and lower demand from commercial and industrial customers due to the impacts of COVID-19, partially offset by higher demand from residential customers due to the impacts of COVID-19 | | DPL's(18.7) | |
| | |
| Other miscellaneous | | (1.0) | |
| Total retail change | | (80.9) | |
| | |
| Wholesale | | |
| | |
| | |
| | |
| Decrease due to lower wholesale prices and lower volumes at OVEC | | (6.1) | |
| | |
| RTO ancillary and capacity revenues | | |
| RTO ancillary and capacity revenues | | (1.5) | |
| | |
| Miscellaneous revenues | | |
| Increase due to collections on legacy generation deferral rider | | 5.3 Consolidated Financial Statements. | |
| | |
| | |
| Net change in Revenues | | $ | (83.2) | |
| | |
| | |
| | |
DPL – Net Purchased Power
During the year ended December 31, 2019,2020, Net Purchased Power decreased $52.0$21.3 million compared to the prior year. This decrease was a result of:
| | | | | | | | |
| $ in millions | | 2020 vs. 2019 |
| Net purchased power | | |
| Purchased power | | |
| Rate | | |
| Decrease due to pricing in the competitive bid process | | $ | (23.6) | |
| Volume | | |
| Decrease due to lower retail load served primarily driven by weather | | (3.6) | |
| Total purchased power change | | (27.2) | |
| RTO charges | | |
| Increase primarily due to higher TCRR rates in the current year | | 5.9 | |
| | |
| | |
| | |
| | |
| | |
| Net change in purchased power | | $ | (21.3) | |
| | |
| | |
| | |
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
| Net purchased power | | |
| Purchased power | | |
| Rate | | |
| Increase due to pricing in the competitive bid process | | $ | 1.4 |
|
| Volume | | |
Decrease primarily due to lower retail load served due to milder weather and lower purchases as DP&L stopped purchasing power to serve the load of other parties through their competitive bid process after May of 2018 | | (18.4 | ) |
| Total purchased power change | | (17.0 | ) |
| RTO charges | | |
Decrease due to lower transmission and congestion charges, including a decrease due to benefits of the PJM Transmission Enhancement Settlement. RTO charges are incurred by DP&L as a member of PJM and primarily include transmission charges within our network, which are incurred and charged to customers in the Transmission Rider | | (33.8 | ) |
| | | |
| RTO capacity charges | | (1.2 | ) |
| | | |
| Net change in purchased power | | $ | (52.0 | ) |
DPL - Operation and Maintenance
During the year ended December 31, 2019,2020, Operation and Maintenance expense increased $34.6decreased $2.6 million compared to the prior year. This increasedecrease was a result of:
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
Increase in alternative energy and energy efficiency programs (a) | | $ | 26.7 |
|
Increase in uncollectible expenses for the low-income payment program, which is funded by the USF Revenue Rate
Rider (a) | | 12.7 |
|
| Decrease due to prior year write-off of previously deferred rate case costs no longer deemed probable for recovery | | (5.3 | ) |
| Other, net | | 0.5 |
|
| Net change in Operations and Maintenance expense | | $ | 34.6 |
|
| | | | | | | | |
(a)$ in millions | There | 2020 vs. 2019 |
Decrease in alternative energy and energy efficiency programs (a) | | $ | (12.2) | |
Increase in uncollectible expenses for the low-income payment program, which is correspondingfunded by the USF revenue associated with these programrate rider (a) | | 6.6 | |
Increase in deferred storm costs resulting(a) | | 3.9 | |
| | |
| | |
| | |
| | |
| Other, net | | (0.9) | |
Net change in minimal impact to Net income.Operations and Maintenance expense | | $ | (2.6) | |
| | |
| | |
| | |
(a) There is corresponding revenue associated with these program costs resulting in minimal impact to Net income.
DPL – Taxes Other Than Income Taxes
During the year ended December 31, 2019,2020, Taxes other than income taxes increased $4.7$1.5 million compared to the prior year. The increase was primarily the result of a favorable adjustment recorded in the second quarter of 2018 related to 2017 Ohiofrom higher property taxes due to reflect actual payments madean increase in 2018.
DPL – Fixed-asset Impairment
During the years ended December 31, 2019 and 2018, DPL recorded impairments of fixed assets of $3.5 million and $2.8 million, respectively, for Conesville, as it was determined that additional amounts capitalized for AROs in 2019 and 2018, respectively, were not recoverable.
DPL – Loss on Disposal of Business
During the year ended December 31, 2018,2020, DPL recorded a lossLoss on disposal of business of $11.7$4.7 million due to the loss on the transfer of business interests in the Beckjord facility.Hutchings Coal Station.
DPL – Interest Expense
During the year ended December 31, 2019,2020, Interest expense decreased $15.8$10.9 million compared to the prior year. The decrease was primarily the result of the reduction and refinancing of debt which resulted in lower interest rates at DPL and DP&L in 20182020 and 2019.
DPL – Loss on Early Extinguishment of Debt
During the year ended December 31, 2020, DPL recorded a Loss on early extinguishment of debt of $31.7 million primarily due to the make-whole premium payment of $30.8 million related to the redemption of the $380.0 million 7.25% Notes due 2021 in the third quarter of 2020.
During the year ended December 31, 2019, DPL recorded a Loss on early extinguishment of debt increased $38.4of $44.9 million compared to the prior year. The increase was primarily due to the make-whole premium payment of $41.4 million related to the $400.0 million partial redemption of the $780.0 million 7.25% Notes due 2021 in the second quarter of 2019, partially offset by the make-whole premium payment of $5.1 million related to the $101.0 million partial redemption of the 6.75% Senior Notes due 2019 in the second quarter of 2018.
DPL – Income Tax Expense From Continuing Operations
Income tax expense of $0.7benefit decreased $14.8 million from $(20.3) million in 2018 changed2019 to Income tax benefit of $21.8$(5.5) million in 2019.2020. The change of $22.5$14.8 million was primarily due to a benefit recorded in the impact ofprior year for the September 26, 2019 PUCO order, which finalized the amount of excess deferred tax balances allocable to DP&L’s utility customers. This change was partially offset by a pre-tax loss in the current year compared to pre-tax income in the prior year.
DPL – Discontinued Operations
During the years ended December 31, 20192020 and 2018,2019, DPL recorded income from discontinued operations (net of tax) of $59.5$5.4 million and $38.9$53.6 million, respectively. This income relates to the generation components of Miami Fort, Zimmer, Stuart Killen and the Peaker assets,Killen, which were disposed of by saleretired in recent years.2018 and sold in 2019, and Conesville, which was retired in May 2020 and sold in June 2020. See Part II, Item 8, Note 15 – Discontinued Operations in the Notes to DPL's Consolidated Financial Statements for further discussion.
RESULTS OF OPERATIONS BY SEGMENT – DPL
– DPL
DPL has presented the results of operations of Miami Fort Station, Zimmer Station, the Peaker Assets, Stuart Station and Killen Station as discontinued operations as a group of components for all periods presented. For more information, see Note 15 – Discontinued Operations of Notes to DPL's Consolidated Financial Statements. As such, AES Ohio Generation only has operating activity coming from its undivided ownership interest in Conesville, which does not meet the threshold to be a separate reportable operating segment. Because of this, DPL manages its business through only one reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this
measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segments. The Utility segment is discussed further below:
Utility Segment
The Utility segment is comprised primarily of DP&L’s electric transmission and distribution businesses, which distribute electricity to residential, commercial, industrial and governmental customers. DP&L distributes electricity to more than 526,000531,000 retail customers who are located in a 6,000 square mile area of West Central Ohio. DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs. The Utility segment includes revenues and costs associated with our investment in OVEC and the historical results of DP&L’s Beckjord Facility,Station, which was closed in 2014 and transferred to a third party in the first quarter of 2018, and the Hutchings Coal generating facility,Station, which was closed in 2013. These assets did not transfer2013 and transferred to AES Ohio Generation as part of DP&L's Generation Separation on October 1, 2017. Thus, they are grouped within the Utility segment for segment reporting purposes. In addition, regulatory deferrals and collections, which include fuel deferrals in historical periods, are includeda third party in the Utility segment.fourth quarter of 2020.
Included within the “Other” column are other businesses that do not meet the GAAP requirements for disclosure as reportable segments as well as certain corporate costs, which include interest expense and loss on early extinguishment of debt on DPL’s long-term debt as well as adjustments related to purchase accounting from the Merger. DPL's undivided interest in Conesville is included within the "Other" column as it no longer meets the requirement for disclosure as a reportable operating segment, since the results of operations of the other EGUs are presented as discontinued operations. The accounting policies of the reportable segments are the same as those described in Note 1 – Overview and Summary of Significant Accounting Policies. Intersegment sales, costs of sales and expenses are eliminated in consolidation. Certain shared and corporate costs are allocated between "Other" and the Utility reporting segment.
See Note 13 – Business Segments of Notes to DPL's Consolidated Financial Statements for additional information regarding DPL’s reportable segment.
The following table presents DPL’s Income / (loss) from continuing operations before income tax by business segment:
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Utility | | $ | 124.3 |
| | $ | 104.4 |
| | $ | 88.5 |
|
| Other | | (100.2 | ) | | (72.5 | ) | | (95.0 | ) |
| Income / (loss) from continuing operations before income tax | | $ | 24.1 |
| | $ | 31.9 |
| | $ | (6.5 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Utility | | $ | 58.1 | | | $ | 124.3 | | | $ | 104.4 | |
| Other | | (70.0) | | | (92.8) | | | (65.5) | |
| Income / (loss) from continuing operations before income tax | | $ | (11.9) | | | $ | 31.5 | | | $ | 38.9 | |
Statement of Operations Highlights - DPL – Utility Segment
The results of operations of the Utility segment for DPL are identical in all material respects and for all periods presented to those of DP&L, which are included in Part II - Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations (Statement of Operations Highlights - DP&L) of this Form 10-K.
RESULTS OF OPERATIONS – DP&L
Statement of Operations Highlights – DP&L
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | Change 2020 vs. 2019 | | Change 2019 vs. 2018 |
| $ in millions | | 2020 | | 2019 | | 2018 | | $ | | % | | $ | | % |
| Revenues: | | | | | | | | | | | | | | |
| Retail | | $ | 586.4 | | | $ | 667.3 | | | $ | 657.9 | | | $ | (80.9) | | | (12)% | | $ | 9.4 | | | 1% |
| Wholesale | | 11.0 | | | 17.2 | | | 29.9 | | | (6.2) | | | (36)% | | (12.7) | | | (42)% |
| RTO ancillary | | 44.0 | | | 43.5 | | | 43.1 | | | 0.5 | | | 1% | | 0.4 | | | 1% |
| Capacity revenues | | 4.2 | | | 6.2 | | | 7.8 | | | (2.0) | | | (32)% | | (1.6) | | | (21)% |
| Miscellaneous revenues | | 6.5 | | | 1.2 | | | — | | | 5.3 | | | 442% | | 1.2 | | | —% |
| Total revenues | | 652.1 | | | 735.4 | | | 738.7 | | | (83.3) | | | (11)% | | (3.3) | | | —% |
| | | | | | | | | | | | | | |
| Operating costs and expenses: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Net fuel cost | | 1.6 | | | 2.5 | | | 2.4 | | | (0.9) | | | (36)% | | 0.1 | | | 4% |
| | | | | | | | | | | | | | |
| Purchased power: | | | | | | | | | | | | | | |
| Purchased power | | 200.7 | | | 227.6 | | | 243.5 | | | (26.9) | | | (12)% | | (15.9) | | | (7)% |
| RTO charges | | 28.7 | | | 23.0 | | | 55.6 | | | 5.7 | | | 25% | | (32.6) | | | (59)% |
| RTO capacity charges | | — | | | — | | | 2.2 | | | — | | | —% | | (2.2) | | | (100)% |
| | | | | | | | | | | | | | |
| Net purchased power cost | | 229.4 | | | 250.6 | | | 301.3 | | | (21.2) | | | (8)% | | (50.7) | | | (17)% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Operation and maintenance | | 181.9 | | | 183.0 | | | 139.7 | | | (1.1) | | | (1)% | | 43.3 | | | 31% |
| Depreciation and amortization | | 71.8 | | | 70.8 | | | 74.5 | | | 1.0 | | | 1% | | (3.7) | | | (5)% |
| Taxes other than income taxes | | 79.1 | | | 77.7 | | | 73.1 | | | 1.4 | | | 2% | | 4.6 | | | 6% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Loss on asset disposal | | 0.1 | | | 0.1 | | | 0.2 | | | — | | | —% | | (0.1) | | | (50)% |
| Loss on disposal of business | | 4.7 | | | — | | | 12.4 | | | 4.7 | | | —% | | (12.4) | | | (100)% |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Total operating costs and expenses | | 568.6 | | | 584.7 | | | 603.6 | | | (16.1) | | | (3)% | | (18.9) | | | (3)% |
| | | | | | | | | | | | | | |
| Operating income | | 83.5 | | | 150.7 | | | 135.1 | | | (67.2) | | | (45)% | | 15.6 | | | 12% |
| | | | | | | | | | | | | | |
| Other expense, net: | | | | | | | | | | | | | | |
| Interest expense | | (24.3) | | | (26.0) | | | (27.3) | | | 1.7 | | | (7)% | | 1.3 | | | (5)% |
| Loss on early extinguishment of debt | | — | | | — | | | (0.6) | | | — | | | —% | | 0.6 | | | (100)% |
| Other expense | | (1.1) | | | (0.4) | | | (2.8) | | | (0.7) | | | 175% | | 2.4 | | | (86)% |
| Other expense, net | | (25.4) | | | (26.4) | | | (30.7) | | | 1.0 | | | (4)% | | 4.3 | | | (14)% |
| | | | | | | | | | | | | | |
| Income before income tax (a) | | $ | 58.1 | | | $ | 124.3 | | | $ | 104.4 | | | $ | (66.2) | | | (53)% | | $ | 19.9 | | | 19% |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Revenues: | | | | | | |
| Retail | | $ | 667.3 |
| | $ | 657.9 |
| | $ | 642.6 |
|
| Wholesale | | 17.2 |
| | 29.9 |
| | 23.6 |
|
| RTO ancillary | | 43.5 |
| | 43.1 |
| | 47.2 |
|
| Capacity revenues | | 6.2 |
| | 7.8 |
| | 6.6 |
|
| Miscellaneous revenues | | 1.2 |
| | — |
| | — |
|
| Total revenues | | 735.4 |
| | 738.7 |
| | 720.0 |
|
| | | | | | | |
| Operating costs and expenses: | | | | | | |
| Net fuel cost | | 2.5 |
| | 2.4 |
| | 0.5 |
|
| Purchased power: | | | | | | |
| Purchased power | | 227.6 |
| | 243.5 |
| | 230.6 |
|
| RTO charges | | 23.0 |
| | 55.6 |
| | 57.2 |
|
| RTO capacity charges | | — |
| | 2.2 |
| | 2.0 |
|
| Net purchased power cost | | 250.6 |
| | 301.3 |
| | 289.8 |
|
| Operation and maintenance | | 183.0 |
| | 139.7 |
| | 156.5 |
|
| Depreciation and amortization | | 70.8 |
| | 74.5 |
| | 75.3 |
|
| Taxes other than income taxes | | 77.7 |
| | 73.1 |
| | 76.3 |
|
| Loss / (gain) on asset disposal | | 0.1 |
| | 0.2 |
| | (0.5 | ) |
| Loss on disposal of business (Note 15) | | — |
| | 12.4 |
| | — |
|
| Total operating costs and expenses | | 584.7 |
| | 603.6 |
| | 597.9 |
|
| | | | | | | |
| Operating income | | 150.7 |
| | 135.1 |
| | 122.1 |
|
| | | | | | | |
| Other expense, net: | | | | | | |
| Interest expense | | (26.0 | ) | | (27.3 | ) | | (30.5 | ) |
| Loss on early extinguishment of debt | | — |
| | (0.6 | ) | | (1.1 | ) |
| Other expense | | (0.4 | ) | | (2.8 | ) | | (2.0 | ) |
| Other expense, net | | (26.4 | ) | | (30.7 | ) | | (33.6 | ) |
| | | | | | | |
| Income from continuing operations before income tax (a) | | $ | 124.3 |
| | $ | 104.4 |
| | $ | 88.5 |
|
(a)For purposes of discussing operating results, we present and discuss Income before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.
| |
(a) | For purposes of discussing operating results, we present and discuss Income from continuing operations before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance. |
The following review of results of operations compares the results for the year ended December 31, 2020 to the results for the year ended December 31, 2019. For discussion comparing the results for the year ended December 31, 2019 to the results for the year ended December 31, 2018. For discussion around results of operations for the year ended December 31, 2017,2018, see Item 7.-Management's7 – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 20182019 Annual Report on Form 10-K, filed with the SEC on February 26, 2019.27, 2020.
DP&L – Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Because of the impact of the Decoupling Rider (effective January 1, 2019 through December 18, 2019), weather had a minimal impact on our 2019 net operating results.
Additionally, our retail revenues are affected by regulated rates and riders, including the changes to our ESP, described in Note 3 – Regulatory Matters of Notes to DP&L's Consolidated Financial Statements.
DP&L's electric sales and billed customers were as follows:
|
| | | | | | |
ELECTRIC SALES AND CUSTOMERS (a) |
| | | DP&L |
| | | Years ended December 31, |
| | | 2019 | | 2018 |
Retail electric sales (b) | | 14,049 |
| | 14,439 |
|
Wholesale electric sales (c) | | 579 |
| | 755 |
|
| Total electric sales | | 14,628 |
| | 15,194 |
|
| | | | | |
| Billed electric customers (end of period) | | 525,801 |
| | 525,166 |
|
| |
(a) | Electric sales are presented in millions of kWh. |
| |
(b) | DP&L retail electric sales represent the total transmission and distribution retail sales for the periods presented. SSO sales were 3,913 million kWh and 3,977 million kWh for the years ended December 31, 2019 and 2018, respectively.Table of Contents |
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(c) | Included within wholesale electric sales is DP&L's 4.9% share of the generation output of OVEC.
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During the year ended December 31, 2019,2020, Revenues decreased $3.3$83.3 million to $735.4$652.1 million from $738.7$735.4 million in the same period of the prior year. This decrease was a result of:
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
| Retail | | |
| Rate | |
|
|
| Increase in Energy Efficiency and USF Revenue Rate Riders | | $ | 39.9 |
|
| Increase in base distribution rates due to the DRO | | 18.8 |
|
Increase due to the DIR, which was effective with the DRO (a) | | 16.5 |
|
Increase due to the Decoupling Rider, which was effective with the DRO and designed to eliminate the impacts of weather and demand from certain customer classes (a) | | 9.4 |
|
Decrease in the TCRR due to lower transmission costs and the impact of DP&L passing back the benefits of the PJM Transmission Enhancement Settlement to customers | | (32.8 | ) |
| Decrease due to the deferral of revenue to adjust for the impacts of the TCJA | | (14.0 | ) |
| Decrease due to energy efficiency lost revenues recorded in the prior year | | (13.6 | ) |
| Other | | (1.3 | ) |
| Net change in retail rate | | 22.9 |
|
| | | |
| Volume | | |
Decrease in volume primarily due to demand in the current year driven by a decrease in heating degree-days of 490, partially offset by an increase in cooling degree-days of 68 (excludes the decoupling impact in 2019, which is included in rates above) (a) | | (15.2 | ) |
| | | |
| Other miscellaneous | | 1.7 |
|
| Total retail change | | 9.4 |
|
| | | |
| Wholesale | | |
| Decrease due to lower wholesale prices and lower volumes, primarily due to no longer serving the load of other parties through their competitive bid process | | (12.7 | ) |
| | | |
| RTO ancillary and capacity revenues | | |
| Decrease primarily due to lower capacity prices | | (1.2 | ) |
| | | |
| Other | |
|
| Miscellaneous revenues | | 1.2 |
|
| | | |
| Net change in Revenues | | $ | (3.3 | ) |
| | | | | | | | |
(a)$ in millions | | The PUCO order approving the ESP 1 rate plan on December 18,2020 vs. 2019 included the |
| Retail | | |
| Rate | | |
| Decrease due to removal of DMR | | $ | (95.9) | |
| Decrease in competitive bid revenue rate rider | | (20.7) | |
| Decrease due to removal of DIR | | (20.4) | |
| Decrease due to removal of decoupling rider | | (11.9) | |
| | |
| Increase due to reinstatement of RSC rider | | 70.4 | |
| Increase in base distribution average rate per retail kWh sold, which goes up as usage declines due to fixed components in distribution rates | | 9.0 | |
Increase due to the DIR and Decoupling Rider. For more information, see Part II, Item 8, Note 3 – Regulatory Mattersdeferral of revenue to adjust for the impacts of the TCJA in the Notesprior year | | 5.4 | |
| | |
| Other | | 2.9 | |
| Net change in retail rate | | (61.2) | |
| | |
| Volume | | |
| Net decrease in the volume of kWh sold primarily due to unfavorable weather as compared to the prior year and lower demand from commercial and industrial customers due to the impacts of COVID-19, partially offset by higher demand from residential customers due to the impacts of COVID-19 | | DP&L's(18.7) | |
| | |
| Other miscellaneous | | (1.0) | |
| Total retail change | | (80.9) | |
| | |
| Wholesale | | |
| | |
| | |
| | |
| Decrease due to lower wholesale prices and lower volumes at OVEC | | (6.2) | |
| | |
| RTO ancillary and capacity revenues | | |
| Decrease primarily due to lower capacity prices | | (1.5) | |
| | |
| Miscellaneous revenue | | |
| Increase due to collections on legacy generation deferral rider | | 5.3 Financial Statements. | |
| | |
| | |
| Net change in Revenues | | $ | (83.3) | |
| | |
| | |
| | |
DP&L – Net Purchased Power
During the year ended December 31, 2019,2020, Net Purchased Power decreased $50.7$21.2 million compared to the prior year. This decrease was a result of:
| | | | | | | | |
| $ in millions | | 2020 vs. 2019 |
| Net purchased power | | |
| Purchased power | | |
| Rate | | |
| Decrease due to pricing in the competitive bid process | | $ | (23.3) | |
| Volume | | |
| Decrease due to lower retail load served primarily driven by weather | | (3.6) | |
| Total purchased power change | | (26.9) | |
| RTO charges | | |
| Increase primarily due to higher TCRR rates in the current year | | 5.7 | |
| | |
| | |
| | |
| | |
| Net change in purchased power | | $ | (21.2) | |
| | |
| | |
| | |
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
| Net purchased power | | |
| Purchased power | | |
| Rate | | |
| Increase due to pricing in the competitive bid process | | $ | 2.4 |
|
| Volume | | |
Decrease primarily due to lower retail load served due to milder weather and lower purchases as DP&L stopped purchasing power to serve the load of other parties through their competitive bid process after May of 2018 | | (18.3 | ) |
| Total purchased power change | | (15.9 | ) |
| RTO charges | | |
Decrease due to lower transmission and congestion charges, including a decrease due to benefits of the PJM Transmission Enhancement Settlement. RTO charges are incurred by DP&L as a member of PJM and primarily include transmission charges within our network, which are incurred and charged to customers in the Transmission Rider | | (32.6 | ) |
| | | |
| RTO capacity charges | | (2.2 | ) |
| | | |
| Net change in purchased power | | $ | (50.7 | ) |
DP&L - Operation and Maintenance
During the year ended December 31, 2019,2020, Operation and Maintenance expense increased $43.3decreased $1.1 million compared to the prior year. This increasedecrease was a result of:
|
| | | | |
| $ in millions | | 2019 vs. 2018 |
Increase in alternative energy and energy efficiency programs (a) | | $ | 26.7 |
|
Increase in uncollectible expenses for the low-income payment program, which is funded by the USF Revenue Rate Rider (a) | | 12.7 |
|
| Increase in costs charged from the Service Company for services provided | | 6.3 |
|
| Decrease due to prior year write-off of previously deferred rate case costs | | (5.3 | ) |
| Other, net | | 2.9 |
|
| Net change in Operations and Maintenance expense | | $ | 43.3 |
|
| | | | | | | | |
(a)$ in millions | There | 2020 vs. 2019 |
Decrease in alternative energy and energy efficiency programs (a) | | (12.2) | |
Increase in uncollectible expenses for the low-income payment program, which is correspondingfunded by the USF revenue associated with these programrate rider (a) | | $ | 6.6 | |
Increase in deferred storm costs resulting(a) | | 3.9 | |
| | |
| | |
| | |
| | |
| | |
| Other, net | | 0.6 | |
Net change in minimal impact to Net income.Operations and Maintenance expense | | $ | (1.1) | |
| | |
| | |
| | |
DP&L – Depreciation and Amortization
During the year ended December 31, 2019, Depreciation and amortization expense decreased $3.7 million compared(a)There is corresponding revenue associated with these program costs resulting in minimal impact to the prior year. The decrease was primarily due to lower software amortization in 2019.Net income.
DP&L – Taxes Other Than Income Taxes
During the year ended December 31, 2019, General2020, Taxes other than income taxes increased $4.6$1.4 million compared to the prior year. The increase was primarily the result of a favorable adjustment made in 2018 for 2017 Ohiofrom higher property taxes due to reflect actual payments.
DP&L– Loss on Disposal of Business
During the year ended December 31, 2018,2020, DP&L recorded a lossLoss on disposal of business of $12.4$4.7 million due to the loss on the transfer of business interests in the Beckjord facility.Hutchings Coal Station.
DP&L – Interest Expense
During the year ended December 31, 2019,2020, Interest expense decreased $1.3$1.7 million compared to the prior year. The decrease was primarily the result of the refinancing of debt repayments at DP&L in 20192020 and 20182019.
DP&L – Income Tax Expense
During the year ended December 31, 2019, Income tax expense of $17.7 million in 2018 changed to2020, Income tax benefit of $0.6 million in 2019 changed to Income tax expense of $7.0 million in 2020 primarily due to the impact of the September 26, 2019 PUCO order, which finalized the amount of excess deferred tax balances allocable to DP&L’s&L's utility customers. This change was partially offset by higher pre-taxtaxable income in the current year compared to the prior year.
KEY TRENDS AND UNCERTAINTIES
Following the issuance of the DRO in September 2018 and the resulting changes to the Decoupling Rider effective January 1, 2019, our financial results were not driven by retail demand and weather but were impacted by customer growth within our service territory. However, the Decoupling Rider was removed with the withdrawal of the 2017 ESP 3 and approved ESP 1 rates.rates, and weather impacted current results and may again impact future results. See further discussion on these changes in Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.Statements. In addition, DPL's and DP&L's financial results are likely to be driven by other factors including, but not limited to:
•regulatory outcomes;
•the passage of new legislation, implementation of regulations or other changes in regulations; and
•timely recovery of transmission and distribution expenditures;expenditures.
COVID-19 Pandemic
The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. In response to the COVID-19 pandemic, the PUCO issued an emergency order prohibiting electric utilities, including us, from discontinuing electric utility service to customers. This prohibition ended for DP&L on September 1, 2020.
exiting
In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, and such expenses may include those that relate to events outside of our control. For the year ended December 31, 2020 and into 2021, we experienced impacts from the pandemic and expect to continue to experience impacts during 2021, and any such impacts during that time or in other future periods could have a material adverse effect on our results of operations, financial condition and cash flows. The following discussion highlights our assessment of the impacts of the pandemic on our current financial and operating status, and our financial and operational outlook based on information known as of this filing. Also see Part I, Item 1A - Risk Factors of this Form 10-K.
Business Continuity - During the COVID-19 pandemic, we are taking a variety of measures to ensure our ability to generate, transmit, distribute and sell electric energy, to ensure the health and safety of our employees, contractors, customers and communities and to provide essential services to the communities in which we operate. We continue to respond to this global crisis through comprehensive measures to protect our employees and others while fulfilling our vital role in providing our customers with electric energy. While stay-at-home restrictions have been lifted in our service territory, most of our management and administrative personnel are able to work remotely, and we have not experienced significant issues affecting our operations or ability to maintain effective internal controls and produce reliable financial information.
Demand - The economic impact of the pandemic started to materialize in Ohio in the second half of March and continued for the remainder of 2020 and into 2021. See Note 14 – Revenue and Note 17 – Risks & Uncertainties of Notes to DPL's Consolidated Financial Statements and Note 13 – Revenue and Note 15 – Risks & Uncertainties of Notes to DP&L's Financial Statements for further discussion of how the COVID-19 pandemic has impacted our sales demand and a disaggregation of retail revenues by customer class. The declines for commercial and industrial customers were more severe in April and May, and partially recovered starting in June and into the second half of the year as stay-at-home orders were lifted. While we cannot predict the length and magnitude of the pandemic or how it could ultimately impact global or local economic conditions, continuous and/or further declines in future demand would adversely impact our financial results for 2021 and beyond.
Liquidity - We anticipate having sufficient liquidity to make all required payments, including payments for salaries and wages owed to our employees, during the pandemic. We do not foresee a significant impact to our access to capital or our liquidity position as a result of the pandemic. On June 19, 2020, DPL closed a $415.0 million issuance of senior unsecured notes, and the proceeds from this issuance together with cash on hand were used to redeem in-full the remaining generation assetbalance of $380.0 million of DPL's 7.25% senior unsecured notes. These bonds were redeemed at par plus accrued interest and a make-whole premium of $30.8 million on July 20, 2020. Additionally, on July 31, 2020 DP&L issued $140.0 million of First Mortgage Bonds and used the proceeds to purchase at par value the $140.0 million of outstanding tax-exempt Ohio Air Quality Development Authority Collateralized Pollution Control Revenue Refunding Bonds that had been issued in 2015. For further discussion of our financial condition, liquidity, and capital requirements, see Part II, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity of this Form 10-K.
Credit Exposures - We continue to monitor and manage our credit exposures in a prudent manner. During the year ended December 31, 2020 and continuing in 2021, we experienced credit-related impacts from utility customers due to the prohibition of electric utilities, including us, from discontinuing electric utility service to customers through September 1, 2020 and due to the economic impacts of the COVID-19 pandemic. This has resulted in an increase in past due customer receivable balances, and our allowance for credit losses has increased $2.4 million for both DPL and DP&L during the year ended December 31, 2020. During 2020, DP&L implemented and offered additional extended payment plans to customers as a result of the pandemic. If these credit-related impacts from the COVID-19 pandemic continue into 2021 or beyond, further deterioration in our credit exposures and customer collections could result. However, as discussed in Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements in Item 8. - Financial Statements and Supplementary Data of our Form 10-K, DP&L’s uncollectible expense is deferred for future collection.
Supply Chain - Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments.
Capital Projects - Despite the COVID-19 pandemic, our construction projects have proceeded without material delays. For further discussion of our capital requirements, see Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity of this Form 10-K.
CARES Act - The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was passed by the U.S. Congress and signed into law on March 27, 2020. While we currently co-owned by AES Ohio Generation.expect a limited impact from this legislation on our business, we have deferred the payment of federal payroll taxes in accordance with the provisions of this act. At December 31, 2020, the total deferral was approximately $2.1 million.
See Note 17 – Risks & Uncertainties of Notes to DPL's Consolidated Financial Statements and Note 15 – Risks & Uncertainties of Notes to DP&L's Financial Statements for more information and Part II, Item 1a - Risk Factors of this Form 10-Q for more information.
Operational
As part of our announced plan to exit our generation businesses, we closed on a sale of our Peaker assets in March 2018, retired the Stuart and Killen EGUs in May 2018 and closed on the transfer of these facilities to a third party in December 2019. In addition, we closed on a sale of our Peaker assets2019, and finally in March 2018. In October 2018,May 2020 AEP, the operator of the co-owned Conesville EGU, announced thatclosed Unit 4 would close byin May 2020 and sold this facility in June 2020. For additional information on these events and DPL's previously-owned coal-fired facilities, see Note 15 – Discontinued Operations of Notes to DPL's Consolidated Financial Statements.Statements.
Macroeconomic and Political
United States Tax Law Reform
Federal Taxes - In December 2017, the United States enacted the TCJA. The legislation significantly revised the U.S. corporate income tax system by, among other things, lowering the corporate income tax rate, introducing new limitations on interest expense deductions in 2018. These changes impacted our 2018 and 2019 effective tax rates and will materially impact our effective tax rate in future periods. Our interpretation of the TCJA may change as the U.S. Treasury and the Internal Revenue Service issue additional guidance. Such changes may be material.
State Taxes-The local taxing authorities in Ohio have largely conformed to the TCJA.
Reference Rate Reform
In July 2017, the U.K.UK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In the U.S., the Alternative Reference Rate Committee at the Federal Reserve identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. On November 30, 2020, the ICE Benchmark Association ("IBA") announced it had begun consultation on its intention to cease publication of two specific LIBOR rates by December 31, 2021, while extending the timeline for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates through June 30, 2023. The IBA expects to make separate announcements in this regard following the outcome of the consultation. We maintain financial instruments that use LIBOR as an interest rate benchmark andbenchmark. Although the full impact of the reform remains unknown, we have begun to engage with our counterparties to discuss specific action items to be undertaken in order to prepare for amendments when they become due.
Regulatory Environment
For a comprehensive discussion of the market structure and regulation of DPL and DP&L, see Part I, Item 1 - Business – Competition and Regulation.
Distribution Rate Case - On November 21, 2019, the PUCO issued an order modifying DP&L's Electric Security Plan ("ESP") by removing the DMR. On December 18, 2019, the PUCO partially approved DP&L's subsequent request to revert to the prior ESP 1 rates and maintain several other riders that were previously in effect; however, certain of those riders were disallowed. In the first quarter of30, 2020, DP&L filed a petition seeking authoritynew distribution rate case with the PUCO. This rate case proposes a revenue increase of $120.8 million.
Stipulation and Recommendation - On October 23, 2020, DP&L entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of DP&L and certain other parties with respect to, recordamong other matters, DP&L’s applications pending at the PUCO for (i) approval of DP&L’s plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that DP&L’s current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory assetstest. The settlement is subject to, accrue revenues that would have otherwise been collected underand conditioned upon, approval by the ESP through the Decoupling Rider. The outcomePUCO. A hearing was conducted January 11 - 15, 2021 for consideration of this petitionsettlement. If the ultimate outcome is pending.less favorable than the settlement agreement it could have a material adverse effect on our results of operations, financial condition and cash flows.
Ohio House Bill 6 - Legislation, such as Senate Bill 346 and House Bill 738, has been introduced in the Ohio General Assembly seeking to repeal Ohio House Bill 6. Ohio House Bill 6, among other things, does the following: beginning January 1, 2020, permitted DP&L to defer, recover or credit the net proceeds from selling energy and capacity received as part of DP&L's interest in OVEC and its OVEC-related costs through a non-bypassable recovery mechanism for recovery of prudently incurred OVEC costs through 2030; eliminates the annual energy efficiency targets for Ohio utilities after 2020; and allows Ohio utilities to construct customer-sited renewable generation for mercantile customers or groups of mercantile customers, the costs of which may only be recovered from those customers. If Ohio House Bill 6 is repealed without a replacement with comparable provisions, it could have a material adverse effect on our results of operations, financial condition and cash flows.
For more information regarding DP&L's ESP,on the above matters, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.Statements.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and restricted cash for DPL and DP&L was $47.0$25.5 million and $21.3$11.8 million, respectively, at December 31, 2019.2020. At that date, neither DPL nor DP&L had short-term investments. DPL and DP&L had aggregate principal amounts of long-term debt outstanding of $1,378.1$1,413.0 million and $582.5$582.4 million, respectively, at December 31, 2019.2020.
Approximately $140.2 million of DPL's long-term debt and $140.2 million of DP&L's long-term debt matures within the next twelve months, which we expect to repay using a combination of cash on hand, net cash provided by operating activities and/or net proceeds from the issuance of new debt. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions or otherwise when management believes such repurchases are favorable to make. The amounts involved in any such repurchases may be material.
We depend on timely and continued access to capital markets to manage our liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty could have material adverse effects on our financial condition and results of operations. In addition, changes in the timing of tariff increases or delays in the regulatory determinations as well as unfavorable regulatory outcomes could have a material adverse effect on our results of operations, financial condition and cash flows.
DP&L must first seek approval from the PUCO to issue new stocks, bonds, notes and other evidences of indebtedness. Annually, DP&L must receive authority to issue and assume liability on short-term debt, not to exceed 12 months. DP&L received an order from the PUCO granting authority through December 31, 20202021 to, among other things, issue up to $300.0 million in aggregate principal amount of short-term indebtedness. DP&L must also receive authority to issue and assume liability on long-term debt, in excess of 12 months. DP&L last received approval in 20192020 to, among other things, issue up to $425.0$140.0 million in aggregate principal amount of long-term indebtedness for a term not to exceed 40 years.First Mortgage Bonds. DP&L also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under existing debt obligations. DP&L does not believe such restrictions will be a limiting factor in our ability to issue debt in the ordinary course of prudent business operations.
CASH FLOWS
DPL’s financial condition, liquidity and capital requirements include the consolidated results of its principal subsidiary DP&L. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash Flow Analysis - DPL:
| | | | | | | | | | | | | | | | | | | | |
| DPL | | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 113.9 | | | $ | 180.3 | | | $ | 205.9 | |
| Net cash provided by / (used in) investing activities | | (185.7) | | | (222.6) | | | 129.9 | |
| Net cash provided by / (used in) financing activities | | 50.3 | | | (22.4) | | | (250.5) | |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | — | | | — | | | 1.5 | |
| | | | | | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (21.5) | | | (64.7) | | | 86.8 | |
| Balance at beginning of year | | 47.0 | | | 111.7 | | | 24.9 | |
| Cash, cash equivalents and restricted cash at end of year | | $ | 25.5 | | | $ | 47.0 | | | $ | 111.7 | |
|
| | | | | | | | | | | | |
| DPL | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net cash provided by operating activities | | $ | 180.3 |
| | $ | 205.9 |
| | $ | 131.7 |
|
| Net cash provided by / (used in) investing activities | | (222.6 | ) | | 129.9 |
| | (39.3 | ) |
| Net cash used in financing activities | | (22.4 | ) | | (250.5 | ) | | (149.6 | ) |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | — |
| | 1.5 |
| | 27.5 |
|
| | | | | | | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (64.7 | ) | | 86.8 |
| | (29.7 | ) |
| Balance at beginning of year | | 111.7 |
| | 24.9 |
| | 54.6 |
|
| Cash, cash equivalents and restricted cash at end of year | | $ | 47.0 |
| | $ | 111.7 |
| | $ | 24.9 |
|
Fiscal year 20192020 versus 2018:
DPL – Net cash from operating activities
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | | | $ change | | |
| $ in millions | | 2020 | | 2019 | | | | 2020 vs. 2019 | | |
| Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | | | $ | (106.4) | | | |
| Depreciation and amortization | | 79.3 | | | 58.7 | | | | | 20.6 | | | |
| Deferred income taxes | | 39.8 | | | 15.2 | | | | | 24.6 | | | |
| Fixed-asset impairment | | — | | | 3.5 | | | | | (3.5) | | | |
| Loss on early extinguishment of debt | | 31.7 | | | 44.9 | | | | | (13.2) | | | |
| Loss / (gain) on disposal and sale of business, net | | (1.4) | | | (20.1) | | | | | 18.7 | | | |
| | | | | | | | | | |
| Net income / (loss), adjusted for non-cash items | | 148.4 | | | 207.6 | | | | | (59.2) | | | |
| Net change in operating assets and liabilities | | (34.5) | | | (27.3) | | | | | (7.2) | | | |
| Net cash provided by operating activities | | $ | 113.9 | | | $ | 180.3 | | | | | $ | (66.4) | | | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, | | $ change |
| $ in millions | | 2019 | | 2018 | | 2019 vs. 2018 |
| Net income / (loss) | | $ | 105.4 |
| | $ | 70.1 |
| | $ | 35.3 |
|
| Depreciation and amortization | | 58.7 |
| | 55.7 |
| | 3.0 |
|
| Impairment expenses | | 3.5 |
| | 2.8 |
| | 0.7 |
|
| Loss on early extinguishment of debt | | 44.9 |
| | 6.5 |
| | 38.4 |
|
| Other adjustments to Net income / (loss) | | (4.0 | ) | | 2.2 |
| | (6.2 | ) |
| Net income / (loss), adjusted for non-cash items | | 208.5 |
| | 137.3 |
| | 71.2 |
|
| Net change in operating assets and liabilities | | (28.2 | ) | | 68.6 |
| | (96.8 | ) |
| Net cash provided by operating activities | | $ | 180.3 |
| | $ | 205.9 |
| | $ | (25.6 | ) |
The net change in operating assets and liabilities for the year ended December 31, 20192020 compared to the year ended December 31, 20182019 was driven by the following:
|
| | | | |
| $ in millions | | $ change |
| Decrease from accrued taxes primarily due to a current year income tax benefit and prior year income tax expense | | $ | (58.6 | ) |
| Decrease from accounts receivable primarily due to lower collections following the sale or closure of plants in 2018 | | (35.5 | ) |
| Decrease from inventory primarily due a significant decrease in inventory balances in 2018 due to the closure of the Stuart and Killen plants | | (19.0 | ) |
| Decrease from other non-current liabilities primarily due to the settlement of the Joint Owners' Agreement with the co-owners of Stuart and Killen in the current year | | (14.1 | ) |
| Increase from accounts payable primarily due to timing of payments | | 26.0 |
|
| Other | | 4.4 |
|
| Net change in cash from changes in operating assets and liabilities | | $ | (96.8 | ) |
| | | | | | | | |
| $ in millions | | $ change |
| Decrease from deferred regulatory costs, net primarily due to a decrease in regulatory liabilities as we return certain benefits to customers | | $ | (31.8) | |
| Decrease from accounts payable primarily due to timing of payments | | (19.8) | |
| Increase from accrued taxes payable / receivable primarily due to tax payment of $52.0 million from AES, partially offset by an increase in the current tax benefit in the current year | | 29.2 | |
| Increase from inventory primarily due to the closing and sale of Conesville in the current year | | 9.1 | |
| | |
| | |
| Other | | 6.1 | |
| Net change in cash from changes in operating assets and liabilities | | $ | (7.2) | |
| | |
DPL – Net cash from investing activities
During the year ended December 31, 2019,2020, net cash used in investing activities was $(222.6)$185.7 million compared to net cash provided byused in investing activities of $129.9$222.6 million for the year ended December 31, 2018.2019. This $352.5$36.9 million decrease in cash used primarily relates to a $234.9$43.7 million decrease in proceeds from the sale of DPL's Peaker Assets in 2018. Additionally,net payments on the disposal of business increased $36.5 million in 2019 primarily due tointerests driven by the payments on the transfer of the retired Stuart and Killen generating facilities. Lastly, capital expenditures increased $64.5facilities in the prior year. In addition, there were $5.1 million of proceeds received from the prior year mainly due to significant storm restoration costs and increased spending on transmission projects.sale of software in the current year. These decreases in cash used were partially offset by a $13.9 million increase in cost of removal payments.
DPL – Net cash from financing activities
During the year ended December 31, 2019,2020, net cash used inprovided by financing activities was $(22.4)$50.3 million compared to net cash used in financing activities of $(250.5)$(22.4) million for the year ended December 31, 2018.2019. This $228.1$72.7 million decrease in cash usedincrease was primarily relatesdue to $154.0a $160.5 million increase in net drawsissuances of long-term debt ($4.2 million net issuance of long-term debt in 2020 compared to net retirements on long-term debt of $156.3 million in 2019) and a $98.0
million equity contribution in the current year, partially offset by increased net payments on revolving credit facilities. Additionally, net repayments on long-term debt, including early payment premiums, decreased $84.2 million.facilities of $188.0 million in the current year.
Cash Flow Analysis - DP&L:
| | | | | | | | | | | | | | | | | | | | |
| DP&L | | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 91.0 | | | $ | 199.9 | | | $ | 195.8 | |
| Net cash used in investing activities | | (186.5) | | | (170.6) | | | (96.9) | |
| Net cash provided by / (used in) financing activities | | 86.0 | | | (74.2) | | | (38.3) | |
| | | | | | |
| | | | | | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (9.5) | | | (44.9) | | | 60.6 | |
| Balance at beginning of year | | 21.3 | | | 66.2 | | | 5.6 | |
| Cash, cash equivalents and restricted cash at end of year | | $ | 11.8 | | | $ | 21.3 | | | $ | 66.2 | |
|
| | | | | | | | | | | | |
| DP&L | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net cash provided by operating activities | | $ | 199.9 |
| | $ | 195.8 |
| | $ | 135.4 |
|
| Net cash used in investing activities | | (170.6 | ) | | (96.9 | ) | | (89.5 | ) |
| Net cash used in financing activities | | (74.2 | ) | | (38.3 | ) | | (68.9 | ) |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | — |
| | — |
| | 27.0 |
|
| | | | | | | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (44.9 | ) | | 60.6 |
| | 4.0 |
|
| Balance at beginning of year | | 66.2 |
| | 5.6 |
| | 1.6 |
|
| Cash, cash equivalents and restricted cash at end of year | | $ | 21.3 |
| | $ | 66.2 |
| | $ | 5.6 |
|
Fiscal year 20192020 versus 2018:
DP&L – Net cash from operating activities
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | | | $ change | | |
| $ in millions | | 2020 | | 2019 | | | | 2020 vs. 2019 | | |
| Net income | | $ | 51.1 | | | $ | 124.9 | | | | | $ | (73.8) | | | |
| Depreciation and amortization | | 75.5 | | | 74.5 | | | | | 1.0 | | | |
| Loss on disposal of business | | 4.7 | | | — | | | | | 4.7 | | | |
| Other adjustments to Net income | | 3.4 | | | (9.7) | | | | | 13.1 | | | |
| Net income, adjusted for non-cash items | | 134.7 | | | 189.7 | | | | | (55.0) | | | |
| Net change in operating assets and liabilities | | (43.7) | | | 10.2 | | | | | (53.9) | | | |
| Net cash provided by operating activities | | $ | 91.0 | | | $ | 199.9 | | | | | $ | (108.9) | | | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, | | $ change |
| $ in millions | | 2019 | | 2018 | | 2019 vs. 2018 |
| Net income | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 38.2 |
|
| Depreciation and amortization | | 74.5 |
| | 77.6 |
| | (3.1 | ) |
| Other adjustments to Net income | | (9.7 | ) | | 28.9 |
| | (38.6 | ) |
| Net income, adjusted for non-cash items | | 189.7 |
| | 193.2 |
| | (3.5 | ) |
| Net change in operating assets and liabilities | | 10.2 |
| | 2.6 |
| | 7.6 |
|
| Net cash provided by operating activities | | $ | 199.9 |
| | $ | 195.8 |
| | $ | 4.1 |
|
NetThe net change in operating assets and liabilities for the year ended December 31, 2019 did not change significantly2020 compared to the year ended December 31, 2018.2019 was driven by the following:
| | | | | | | | |
| $ in millions | | $ change |
| Decrease from deferred regulatory costs, net primarily due to a decrease in regulatory liabilities as we return certain benefits to customers | | $ | (31.8) | |
| Decrease from accounts receivable due to PJM transmission enhancement settlement collections in the prior year | | (18.9) | |
| Decrease from accounts payable primarily due to timing of payments | | (16.9) | |
| Increase from accrued taxes payable / receivable primarily due to higher current portion of income tax expense in the current year compared to the prior year | | 11.7 | |
| | |
| Other | | 2.0 | |
| Net change in cash from changes in operating assets and liabilities | | $ | (53.9) | |
| | |
DP&L – Net cash from investing activities
During the year ended December 31, 2019,2020, net cash used in investing activities was $(170.6)$186.5 million compared to net cash used in investing activities of $(96.9)$170.6 million for the year ended December 31, 2018.2019. This $73.7$15.9 million increase in cash used primarily relates to ana $13.9 million increase in capital expenditurescost of $74.0removal payments and a $7.0 million which was driven by significant storm restoration costs and increased spending on transmission projects in 2019, and proceeds of $10.6 million related to the transmission asset swap with Duke and AEP in 2018. These were partially offset by the payment made on the disposal of Beckjordbusiness interests in Hutchings Coal Station in the current year, partially offset by a $2.8 million decrease in the purchase of $14.5renewable energy credits and a $2.2 million decrease in 2018.
DP&L – Net cash from financing activities
During the year ended December 31, 2019,2020, net cash used inprovided by financing activities was $(74.2)$86.0 million compared to net cash used in financing activities of $(38.3)$(74.2) million during the year ended December 31, 2018.2019. This $35.9$160.2 million increase in cash used primarily relates to an $80.0a $150.0 million capitalequity contribution from DPL in 2018 andthe current year, a $51.2$52.3 million increasedecrease in returnsreturn of capital paidpayments toDPL compared to the prior year, and $13.8 million in 2019. These items werenet retirements on long-term debt in the prior year, partially offset by a $50.7 million decrease in net repayments on long-term debt, including early payment premiums, and a $50.0$60.0 million increase in net drawspayments on revolving credit facilities in 2019.the current year.
Liquidity
We expect our existing sources of liquidity to remain sufficient to meet our anticipated operating needs. Our business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and carrying costs, taxes and dividend payments. For 20202021 and subsequent years, we expect to satisfy these requirements with cash from operations, funds from debt financing and/or equity capital contributions as our internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under bank credit facilities will continue to be available to manage working capital requirements during those periods.
At December 31, 2019,2020, DPL and DP&L have access to the following revolving credit facilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Type | | Maturity | | Commitment | | Amounts available as of December 31, 2020 |
| DPL | | Revolving | | June 2023 | | $ | 110.0 | | | $ | 25.0 | |
| | | | | | | | |
| DP&L | | Revolving | | June 2024 | | 175.0 | | | 153.9 | |
| | | | | | | | |
| | | | | | $ | 285.0 | | | $ | 178.9 | |
|
| | | | | | | | | | | | |
| $ in millions | | Type | | Maturity | | Commitment | | Amounts available as of December 31, 2019 |
| DPL | | Revolving | | June 2023 | | $ | 125.0 |
| | $ | 11.3 |
|
| | | | | | | | | |
| DP&L | | Revolving | | June 2024 | | 175.0 |
| | 133.9 |
|
| | | | | | | | | |
| | | | | | | $ | 300.0 |
| | $ | 145.2 |
|
DPL has a revolving credit facility of $125.0$110.0 million, with a $75.0 million letter of credit sublimit and a feature that provides DPL the ability to increase the size of the facility by an additional $50.0 million. This facility is secured by a pledge of common stock that DPL owns in DP&L, limited to the amount permitted to be pledged under certain Indentures dated October 3, 2011 and April 17, 2019 between DPL and Wells Fargo Bank, NA and U.S. Bank National Association, respectively, as Trustee.. The facility expires in June 2023. At December 31, 2019,2020, there were five letterswas one letter of credit in the aggregate amount of $9.7$5.0 million outstanding under this facility and $104.0$80.0 million drawn under this facility, with the remaining $11.3$25.0 million available to DPL.Fees associated with this facility were not material during the years ended December 31, 2019, 2018 or 2017.
DP&L's revolving credit facility has a commitment of $175.0 million, with a $75.0 million letter of credit sublimit and a feature that provides DP&L the ability to increase the size of the facility by an additional $100.0 million. This facility expires June 2024. At December 31, 2019,2020, DP&L had $40.0$20.0 million drawn under this facility and had one letter of credit in the amount of $1.1 million outstanding, with the remaining $133.9$153.9 million available to DP&L.Fees associated with this facility were not material during the years ended December 31, 2019, 2018 or 2017.
Capital Requirements
ConstructionCapital Additions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Projected |
| $ in millions | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| DPL | | $ | 94 | | | $ | 164 | | | $ | 174 | | | $ | 254 | | | $ | 271 | | | $ | 242 | |
| | | | | | | | | | | | |
| DP&L | | $ | 91 | | | $ | 162 | | | $ | 170 | | | $ | 252 | | | $ | 268 | | | $ | 238 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Actual | | Projected |
| $ in millions | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| DPL | | $ | 108 |
| | $ | 84 |
| | $ | 161 |
| | $ | 210 |
| | $ | 211 |
| | $ | 200 |
|
| | | | | | | | | | | | | |
| DP&L | | $ | 83 |
| | $ | 82 |
| | $ | 159 |
| | $ | 206 |
| | $ | 209 |
| | $ | 198 |
|
Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental laws, rules and regulations, among other factors.
DPL is projecting to spend an estimated $621.0$767.0 million in capital projects for the period 20202021 through 2022,2023, which includes an estimated $613.0$758.0 million for DP&L. DP&L's projection includes expected spending under DP&L's Distribution ModernizationSmart Grid Plan filed with the PUCO in December 2018 and included in the Stipulation and Recommendation entered into on October 23, 2020, as well as new transmission projects. See Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements for more information.
DP&L is subject to the mandatory reliability standards of NERC and ReliabilityFirst Corporation (RF), one of the six NERC regions, of which DP&L is a member. DP&L anticipates spending approximately $73.0$76.0 million within the next five years to reinforce its transmission system to comply with mandatory NERC and FERC Form 715 planning requirements. These anticipated costs are included in the overall capital projections above.
Debt Covenants
For information regarding our long-term debt covenants, see Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements.Statements.
Debt Ratings
The following table outlines the debt ratings and outlook for DPL and DP&L, along with the effective or affirmed date of each rating.
|
| | | | | | | | | | | | | | | | | | | | | | |
| DPL | | DP&L | | Outlook | | Effective or Affirmed |
| Fitch Ratings | BBB-BB+(a) / BB+BB(b)
| | BBB+ (c) | | Negative | | December 2019April 2020 |
| Moody's Investors Service, Inc. | Ba1 (b) | | A3 (c) | | Negative | | DPL - June 2020 DP&L - December 2019 |
| Standard & Poor's Financial Services LLC | BBBB+ (b)
| | BBBBBB+ (c)
| | NegativeDeveloping | | November 20192020 |
| |
(a) | (a)Rating relates to DPL’s senior secured debt. (b)Rating relates to DPL's senior unsecured debt. (c)Rating relates to DP&L’s senior secured debt.
DPL’s senior secured debt.
|
| |
(b) | Rating relates to DPL's senior unsecured debt.
|
| |
(c) | Rating relates to DP&L’s senior secured debt.
|
Credit Ratings
The following table outlines the credit ratings (issuer/corporate rating) and outlook for each company, along with the effective or affirmed dates of each rating and outlook for DPL and DP&L.
|
| | | | | | | | | | | | | | | | | | | | | | |
| DPL | | DP&L | | Outlook | | Effective or Affirmed |
| Fitch Ratings | BB+BB | | BBB- | | Negative | | December 2019April 2020 |
| Moody's Investors Service, Inc. | Ba1 | | Baa2 | | Negative | | December 2019 |
| Standard & Poor's Financial Services LLC | BBBB+ | | BBBB+ | | NegativeDeveloping | | November 20192020 |
If the rating agencies reduce our debt or credit ratings, our borrowing costs may increase, our potential pool of investors and funding resources may be reduced and we may be required to post additional collateral under certain contracts. These events may have an adverse effect on our results of operations, financial condition and cash
flows. In addition, any such reduction in our debt or credit ratings may adversely affect the trading price of our outstanding debt securities. Non-investment grade companies may experience higher costs to issue new securities.
Off-Balance Sheet Arrangements
DPL – Guarantees
In the normal course of business,Previously, DPL entersentered into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements arewere entered into primarily to support or enhance the creditworthiness otherwise attributed to the subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish this subsidiary's intended commercial purposes. With the completion of our plan to exit generation, AES Ohio Generation currently does not require such assurances to third parties, and existing guarantees will expire in June, 2021. During the year ended December 31, 2019,2020, DPL did not incur any losses related to the guarantees of these obligations and we believe it is unlikely that DPL would be required to perform or incur any losses in the future associated with any of the above guarantees.
At December 31, 2019,2020, DPL had $21.0$1.9 million of such guarantees on behalf of AES Ohio Generation to third parties for future financial or performance assurance under such agreements. The guarantee arrangements entered into by DPL with these third parties cover present and future obligations of AES Ohio Generation to such beneficiaries and are terminable at any time by DPL upon written notice to the beneficiaries. Generation. There were no outstanding balances for commercial transactions covered by these guarantees at December 31, 20192020 or December 31, 2018.2019.
DP&L owns a 4.9% equity ownership interest in OVEC which is recorded using the cost method of accounting under GAAP. At December 31, 2019,2020, DP&L could be responsible for the repayment of 4.9%, or $66.4$62.6 million, of a $1,354.7$1,276.7 million debt obligation comprised of both fixed and variable rate securities with maturities between 2022 and 2040. This would only happen if this electric generation company defaulted on its debt payments. At December 31, 2019,2020, we have no knowledge of such a default.
Commercial Commitments and Contractual Obligations
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2019,2020, these include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| DPL: | | | | | | | | | | |
| Long-term debt | | $ | 1,413.0 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 415.4 | | | $ | 997.0 | |
| Interest payments | | 819.1 | | | 57.8 | | | 115.5 | | | 107.0 | | | 538.8 | |
| Electricity purchase commitments | | 120.8 | | | 86.0 | | | 34.8 | | | — | | | — | |
| Purchase orders and other contractual obligations | | 92.5 | | | 87.8 | | | 4.7 | | | — | | | — | |
| Total contractual obligations | | $ | 2,445.4 | | | $ | 231.8 | | | $ | 155.4 | | | $ | 522.4 | | | $ | 1,535.8 | |
| | | | | Payments due in: | | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years | $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| DPL: | | | | | | | | | | | |
| DP&L: | | DP&L: | | | | | | | | | | |
| Long-term debt | | $ | 1,378.1 |
| | $ | 140.2 |
| | $ | 380.4 |
| | $ | 0.4 |
| | $ | 857.1 |
| Long-term debt | | $ | 582.4 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 581.4 | |
| Interest payments | | 741.7 |
| | 64.9 |
| | 94.4 |
| | 72.4 |
| | 510.0 |
| Interest payments | | 583.9 | | | 22.0 | | | 44.0 | | | 44.0 | | | 473.9 | |
| Pension and postretirement payments | | 259.5 |
| | 27.6 |
| | 54.0 |
| | 52.7 |
| | 125.2 |
| |
| Electricity purchase commitments | | 173.2 |
| | 115.8 |
| | 57.4 |
| | — |
| | — |
| Electricity purchase commitments | | 120.8 | | | 86.0 | | | 34.8 | | | — | | | — | |
| Purchase orders and other contractual obligations | | 52.8 |
| | 45.0 |
| | 7.8 |
| | — |
| | — |
| Purchase orders and other contractual obligations | | 90.3 | | | 85.6 | | | 4.7 | | | — | | | — | |
| Total contractual obligations | | $ | 2,605.3 |
| | $ | 393.5 |
| | $ | 594.0 |
| | $ | 125.5 |
| | $ | 1,492.3 |
| Total contractual obligations | | $ | 1,377.4 | | | $ | 193.8 | | | $ | 83.9 | | | $ | 44.4 | | | $ | 1,055.3 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| DP&L: | | | | | | | | | | |
| Long-term debt | | $ | 582.5 |
| | $ | 140.2 |
| | $ | 0.4 |
| | $ | 0.4 |
| | $ | 441.5 |
|
| Interest payments | | 515.1 |
| | 18.7 |
| | 35.0 |
| | 35.0 |
| | 426.4 |
|
| Pension and postretirement payments | | 259.5 |
| | 27.6 |
| | 54.0 |
| | 52.7 |
| | 125.2 |
|
| Electricity purchase commitments | | 173.2 |
| | 115.8 |
| | 57.4 |
| | — |
| | — |
|
| Purchase orders and other contractual obligations | | 52.5 |
| | 44.7 |
| | 7.8 |
| | — |
| | — |
|
| Total contractual obligations | | $ | 1,582.8 |
| | $ | 347.0 |
| | $ | 154.6 |
| | $ | 88.1 |
| | $ | 993.1 |
|
Long-term debt:
DPL’s Long-term debt at December 31, 20192020 consists of DPL’s unsecured notes and Capital Trust II securities, along with DP&L’s First Mortgage Bonds tax-exempt First Mortgage Bonds and the Wright-Patterson Air Force Base (WPAFB)WPAFB note. These long-term debt amounts include current maturities but exclude unamortized debt discounts, premiums and fair value adjustments.
DP&L’s Long-term debt at December 31, 20192020 consists of its First Mortgage Bonds, tax-exempt First Mortgage Bonds and the WPAFB note. These long-term debt amounts include current maturities but exclude unamortized debt discounts.
See Note 7 – Long-term debt of the Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of the Notes to DP&L's Financial Statements.Statements.
Interest payments:
Interest payments are associated with the long-term debt described above. The interest payments relating to variable-rate debt are projected using the interest rates in effect at December 31, 2019.
Pension and postretirement payments:2020.
At December 31, 2019,
DPL, through its principal subsidiary DP&L, had estimated future benefit payments as outlined in Note 9 – Benefit Plans of Notes to DPL's Consolidated Financial Statements and Note 9 – Benefit Plans of Notes to DP&L's Financial Statements. These estimated future benefit payments are projected through 2029. This amount also includes postretirement benefit costs.
Electricity purchase commitments:
DPL enters into long-term contracts for the purchase of electricity. In general, these contracts are subject to variable quantities or prices and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2019,2020, DPL and DP&L had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DPL's and DP&L's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above. This table also does not include regulatory liabilities (see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements)Statements) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL's Consolidated Financial Statements and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DP&L's Financial Statements)Statements). See Note 12 – Related Party Transactions of Notes to DPL's Consolidated Financial Statements and Note 12 – Related Party Transactions of Notes to DP&L's Financial Statements for additional information on charges between related parties and amounts due to or from related parties.
Reserve for uncertain tax positions:
Due to the uncertainty regarding the timing of future cash outflows associated with our unrecognized tax benefits of $3.5$1.4 million at December 31, 2019,2020, we are unable to make a reliable estimate of the periods of cash settlement with the respective tax authorities and have not included such amounts in the contractual obligations table above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
DPL’s Consolidated Financial Statements and DP&L’s Financial Statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, our management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on our historical experience and assumptions that we believe to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Our significant accounting policies are described in Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DPL's Consolidated Financial Statements and Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DP&L's Financial Statements.Statements.
Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Historically, however, recorded estimates have not differed materially from actual results. Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of allowances for deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.
Revenue Recognition (including Unbilled Revenue)
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making our estimates of unbilled revenue, we use complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. The effect on 20192020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 20192020 is immaterial. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted.
Income Taxes
We are subject to federal and state income taxes. Our income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the potential outcome of tax examinations when determining the adequacy of our income tax provisions by considering the technical merits of the filing position, case law and results of previous tax examinations. Accounting guidance for uncertainty in income taxes prescribes a more-likely-than-not recognition threshold and measurement requirements for financial statement reporting of our income tax positions. Tax reserves have been established which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While we believe that the amount of the tax reserves is reasonable, it is possible that the ultimate outcome of current or future examinations may be materially different than the reserve amounts.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective income tax bases. We establish a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
Regulatory Assets and Liabilities
Application of the provisions of GAAP relating to regulatory accounting requires us to reflect the effect of rate regulation in DPL’s Consolidated Financial Statements and DP&L’s Financial Statements. For regulated businesses subject to federal or state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by non-regulated companies. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, we defer these costs as Regulatory assets that otherwise would be expensed by non-regulated companies. Likewise, we recognize Regulatory liabilities when it is probable that regulators will require customer refunds through future rates and when revenue is collected from customers for expenses that are not yet incurred. Regulatory assets are amortized into expense and Regulatory liabilities are amortized into income over the recovery period authorized by the regulator.
We evaluate our Regulatory assets to determine whether or not they are probable of recovery through future rates and make various assumptions in our analyses. The expectations of future recovery are generally based on orders issued by regulatory commissions or historical experience, as well as discussions with applicable regulatory authorities. If recovery of a regulatory asset is determined to be less than probable, it will be expensed in the period the assessment is made. We currently believe the recovery of our Regulatory assets is probable. See Note 3 –
Regulatory Matters of Notes to DPL's Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Financial Statements.Statements.
AROs
In accordance with the provisions of GAAP relating to the accounting for AROs, legal obligations associated with the retirement of long-lived assets are required to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. These GAAP provisions also require that components of previously recorded depreciation related to the cost of removal of assets upon future retirement, whether legal
AROs or not, must be removed from a company’s accumulated depreciation reserve and be reclassified as a regulatory liability. We make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to AROs. These assumptions and estimates are based on historical experience and assumptions that we believe to be reasonable at the time. See Note 4 – Property, Plant and Equipment of Notes to DPL's Consolidated Financial Statements and Note 4 – Property, Plant and Equipment of Notes to DP&L's Financial Statements for more information.
Impairments
In accordance with the provisions of GAAP relating to the accounting for impairments, long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset group. Impairment losses on assets held-for-sale are recognized based on the fair value of the disposal group. We determine the fair value of these assets based upon estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. In analyzing the fair value and recoverability using future cash flows, we make projections based on a number of assumptions and estimates of growth rates, future economic conditions, assignment of discount rates and estimates of terminal values. An impairment loss is recognized if the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows. The measurement of impairment loss is the difference between the carrying amount and fair value of the asset.
Pension and Postretirement Benefits
We account for and disclose pension and postemployment benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postemployment plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. See Note 9 – Benefit Plans of Notes to DPL's Consolidated Financial Statements and Note 9 – Benefit Plans of Notes to DP&L's Financial Statements for more information.
Contingent and Other Obligations
During the conduct of our business, we are subject to a number of federal and state laws and regulations, as well as other factors and conditions that potentially subject us to environmental, litigation, insurance and other risks. We periodically evaluate our exposure to such risks and record estimated liabilities for those matters where a loss is considered probable and reasonably estimable in accordance with GAAP. In recording such estimated liabilities, we may make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to contingent and other obligations. These assumptions and estimates are based on historical experience and assumptions and may be subject to change. We believe such estimates and assumptions are reasonable.
Recently Issued Accounting Pronouncements
A discussion of recently issued accounting pronouncements is in Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DPL's Consolidated Financial Statements and Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DP&L's Financial Statements and such discussion is incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.
LEGAL AND OTHER MATTERS
Discussions of legal and other matters are provided in Item 1 – Business "Environmental Matters", Item 1 – Business "Competition and Regulation" and Item 3 – Legal Proceedings. Such discussions are incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.
|
| |
| Item 7A – Quantitative and Qualitative Disclosures about Market Risk |
Overview
We are subject to certain market risks including, but not limited to, changes in commodity prices for electricity and fluctuations in interest rates. We use various market risk-sensitive instruments, including derivative contracts, primarily to limit our exposure to fluctuations in interest rates. Our U.S. Risk Management Committee (U.S. RMC),
comprised of members of senior management, is responsible for establishing risk management policies and the monitoring and reporting of risk exposures related to our operations. The U.S. RMC meets on a regular basis with the objective of identifying, assessing and quantifying material risk issues and developing strategies to manage these risks.
The disclosures presented in this section are based upon a number of assumptions; actual effects may differ. The safe harbor provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 shall apply to the disclosures contained in this section. For further information regarding market risk, see Item 1A.-Risk Factors. Our businesses may incur substantial costs and liabilities and be exposed to price volatility as a result of risks associated with the electricity markets, which could have a material adverse effect on our financial performance; and we may not be adequately hedged against our exposure to changes in interest rates.
Purchased power costs
DP&L conducts competitive bid auctions to purchase power for SSO service, as all of DP&L's SSO is sourced through the competitive bid auction.
As a result of DPL's exit from the majority of its coal-fired generation, changes in the prices of fuel and purchased power are not expected to have a material impact on our results of operations, financial position or cash flows. Further, DP&L's exposure to fluctuations in the price of power is limited because we recover our power purchased from the competitive bid auction through the Standard Offer Rate tariff.
Interest rate risk
We use long-term debt as a significant source of capital in our business, which exposes us to interest rate risk. We do not enter into market risk sensitive instruments for trading purposes. We manage our exposure to interest rate risk through the use of fixed-rate debt and by refinancing existing long-term debt at times when it is deemed economic and prudent.DPL and DP&L have both fixed-rate and variable rate long-term debt. On November 21, 2016, the DP&L $200.0 million variable-rate First Mortgage Bonds were hedged with floating for fixed interest rate swaps, reducing interest rate risk exposure for the term of the bonds. On January 1, 2018 the interest rate on these bonds was adjusted and as a result the bonds are no longer fully hedged and are treated as variable. In 2018, we redeemed $60.0 million of these bonds, resulting in a combined notional amount of $140.0 million as of December 31, 2019 and 2018. In regard to our fixed rate debt, the interest rate risk with respect to long-term debt primarily relates to the potential impact a change in interest rates has on the fair value of our fixed-rate debt and not on our financial condition or results of operations. Our interest rate risk on our fixed-rate debt is associated with refinancing activity. Market indexes can be affected by market demand, supply, market interest rates and other economic conditions. See Note 7 – Long-term debt of Notes to DPL's Consolidated Financial Statements and Note 7 – Long-term debt of Notes to DP&L's Financial Statements.Statements.
At December 31, 2019,2020, our variable rate debt consisted of $104.0$80.0 million under DPL's revolving credit facility $40.0and $20.0 million under DP&L's revolving credit facility and $140.0 million under DP&L's tax-exempt first mortgage bonds.facility. At December 31, 2019,2020, a 100-basis point change in the applicable rates on our variable-rate debt would result in an approximately $2.8approximate $1.0 million change in DPL's interest expense and an approximately $1.8approximate $0.2 million change in DP&L's interest expense.
Principal payments and interest rate detail by contractual maturity date
The principal amount of DPL’s long-term debt was $1,378.1$1,413.0 million at December 31, 2019,2020, consisting of DPL’s unsecured notes, secured term loan, Capital Trust II securities along with DP&L’s First Mortgage Bonds, tax-exempt First Mortgage Bonds and the WPAFB note. All of DPL’s existing debt was adjusted to fair value at the Merger date according to FASB Accounting Standards Codification No. 805, “Business Combinations”. The fair value of this debt at December 31, 20192020 was $1,404.0$1,571.6 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DPL’s debt obligations that are sensitivesubject to interest rate changes:refinancing risk:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DPL | | Years ending December 31, | | | | Principal amount at December 31, | | Fair value at December 31, |
| $ in millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | 2020 | | 2020 |
| Long-term debt | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Fixed-rate debt | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 415.2 | | | $ | 997.0 | | | 1,413.0 | | | 1,571.6 | |
| | | | | | | | | | | | | | | | |
| Average interest rate | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.1 | % | | 4.1 | % | | | | |
| | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | $ | 1,413.0 | | | $ | 1,571.6 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DPL | | Years ending December 31, | | | | Principal amount at December 31, | | Fair value at December 31, |
| $ in millions | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | 2019 | | 2019 |
| Long-term debt | | | | | | | | | | | | | | | | |
| Variable-rate debt | | $ | 140.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 140.0 |
| | $ | 140.0 |
|
| | | | | | | | | | | | | | | | | |
| Average interest rate | | 4.2 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | | | |
| | | | | | | | | | | | | | | | | |
| Fixed-rate debt | | $ | 0.2 |
| | $ | 380.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 857.1 |
| | 1,238.1 |
| | 1,264.0 |
|
| | | | | | | | | | | | | | | | | |
| Average interest rate | | 2.4 | % | | 7.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.3 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | $ | 1,378.1 |
| | $ | 1,404.0 |
|
The principal amount of DP&L’s long-term debt was $582.5$582.4 million at December 31, 2019,2020, consisting of its First Mortgage Bonds, tax-exempt First Mortgage Bonds and the WPAFB note. The fair value of this debt at December 31, 20192020 was $600.5$656.0 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DP&L’s debt obligations that are sensitivesubject to interest rate changes.refinancing risk. The DP&L debt was not revalued using push-down accounting as a result of the Merger.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DP&L | | Years ending December 31, | | | | Principal amount at December 31, | | Fair value at December 31, |
| $ in millions | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | 2020 | | 2020 |
| Long-term debt | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Fixed-rate debt | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | 581.4 | | | 582.4 | | | 656.0 | |
| | | | | | | | | | | | | | | | |
| Average interest rate | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 3.8 | % | | | | |
| | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | $ | 582.4 | | | $ | 656.0 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DP&L | | Years ending December 31, | | | | Principal amount at December 31, | | Fair value at December 31, |
| $ in millions | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | 2019 | | 2019 |
| Long-term debt | | | | | | | | | | | | | | | | |
| Variable-rate debt | | $ | 140.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 140.0 |
| | $ | 140.0 |
|
| | | | | | | | �� | | | | | | | | | |
| Average interest rate | | 2.4 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | | | |
| | | | | | | | | | | | | | | | | |
| Fixed-rate debt | | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 0.2 |
| | $ | 441.5 |
| | 442.5 |
| | 460.5 |
|
| | | | | | | | | | | | | | | | | |
| Average interest rate | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.2 | % | | 4.0 | % | | | | |
| | | | | | | | | | | | | | | | | |
| Total | | | | | | | | | | | | | | $ | 582.5 |
| | $ | 600.5 |
|
Equity price risk
At December 31, 2019,2020, approximately 40%42% of the defined benefit pension plan assets were comprised of investments in equity securities and 60%58% related to investments in fixed income securities, cash and cash equivalents and alternative investments. The equity securities are carried at their market value of approximately $142.9
$153.8 million at December 31, 2019.2020. A hypothetical 10% decrease in prices quoted by stock exchanges would result in a $14.3$15.4 million reduction in fair value at December 31, 20192020 and approximately a $2.0 million increase to the 20202021 pension expense. See Note 9 – Benefit Plans of Notes to DPL's Consolidated Financial Statements and Note 9 – Benefit Plans of Notes to DP&L's Financial Statements for more information on our pension plans.
Credit risk
Credit risk is the risk of an obligor's failure to meet the terms of any investment contract, loan agreement or otherwise perform as agreed. Credit risk arises from all activities in which success depends on issuer, borrower or counterparty performance, whether reflected on or off the balance sheet. We limit our credit risk by assessing the creditworthiness of potential counterparties before entering into transactions with them and continue to evaluate their creditworthiness after transactions have been originated. We use the three leading corporate credit rating agencies and other current market-based qualitative and quantitative data to assess the financial strength of counterparties on an ongoing basis. We may require various forms of credit assurance from counterparties to mitigate credit risk.
|
| |
| Item 8 – Financial Statements and Supplementary Data |
This report includes the combined filing of DPL and DP&L. Throughout this report, the terms “we,” “us,” “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
FINANCIAL STATEMENTS
DPL INC.
Report of Independent Registered Public Accounting Firm
To the Shareholder and Board of Directors of DPL Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DPL Inc. (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, comprehensive income / (loss), cash flows and shareholder’s equitydeficit for each of the three years in the period ended December 31, 2019,2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| Regulatory Accounting | |
| | |
| Description of the Matter | As described in Note 3 to the consolidated financial statements, the Company applies the provisions of FASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the PUCO and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous over-collections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; operating revenues; and depreciation expense, and related disclosures in the Company’s consolidated financial statements. | |
| | |
| Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the consolidated financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of December 31, 2020, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the regulatory assets and liabilities and related disclosures. | |
| | |
| How We Addressed the Matter in Our Audit | To test the Company’s accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates. | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Indianapolis, Indiana
February 27, 202024, 2021
|
| | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Operations |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Revenues | | $ | 763.3 |
| | $ | 775.9 |
| | $ | 743.9 |
|
| | | | | | | |
| Operating costs and expenses | | | | | | |
| Net fuel cost | | 16.0 |
| | 17.5 |
| | 9.0 |
|
| Net purchased power cost | | 253.0 |
| | 305.0 |
| | 291.0 |
|
| Operation and maintenance | | 191.4 |
| | 156.8 |
| | 186.1 |
|
| Depreciation and amortization | | 72.7 |
| | 73.1 |
| | 76.1 |
|
| Taxes other than income taxes | | 78.2 |
| | 73.5 |
| | 77.1 |
|
| Fixed-asset impairment (Note 17) | | 3.5 |
| | 2.8 |
| | — |
|
| Loss / (gain) on asset disposal | | 1.0 |
| | — |
| | (0.6 | ) |
| Loss on disposal of business (Note 16) | | — |
| | 11.7 |
| | — |
|
| Total operating costs and expenses | | 615.8 |
| | 640.4 |
| | 638.7 |
|
| | | | | | | |
| Operating income | | 147.5 |
| | 135.5 |
| | 105.2 |
|
| | | | | | | |
| Other income / (expense), net | | | | | | |
| Interest expense | | (82.2 | ) | | (98.0 | ) | | (110.0 | ) |
| Loss on early extinguishment of debt | | (44.9 | ) | | (6.5 | ) | | (3.3 | ) |
| Other income | | 3.7 |
| | 0.9 |
| | 1.6 |
|
| Other expense, net | | (123.4 | ) | | (103.6 | ) | | (111.7 | ) |
| | | | | | | |
| Income / (loss) from continuing operations before income tax | | 24.1 |
| | 31.9 |
| | (6.5 | ) |
| | | | | | | |
| Income tax expense / (benefit) from continuing operations | | (21.8 | ) | | 0.7 |
| | (5.0 | ) |
| | | | | | | |
| Net income / (loss) from continuing operations | | 45.9 |
| | 31.2 |
| | (1.5 | ) |
| | |
|
| |
|
| |
|
|
| Discontinued operations (Note 15) | | | | | | |
| Income / (loss) from discontinued operations before income tax | | 55.0 |
| | 70.5 |
| | (127.4 | ) |
| Gain / (loss) from disposal of discontinued operations | | 20.1 |
| | (1.6 | ) | | 14.0 |
|
| Income tax expense / (benefit) from discontinued operations | | 15.6 |
| | 30.0 |
| | (20.3 | ) |
| Net income / (loss) from discontinued operations | | 59.5 |
| | 38.9 |
| | (93.1 | ) |
| | |
|
| |
|
| |
|
|
| Net income / (loss) | | $ | 105.4 |
| | $ | 70.1 |
| | $ | (94.6 | ) |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Comprehensive Income / (Loss) |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net income / (loss) | | $ | 105.4 |
| | $ | 70.1 |
| | $ | (94.6 | ) |
| Equity securities activity: | | | | | | |
| Change in fair value of equity securities, net of income tax expense of $0.0, $0.0 and ($0.2) for each respective period | | — |
| | — |
| | 0.5 |
|
| Reclassification to earnings, net of income tax expense of $0.0 for each respective period | | — |
| | — |
| | (0.1 | ) |
| Net change in fair value of equity securities | | — |
| | — |
| | 0.4 |
|
| Derivative activity: | | | | | | |
| Change in derivative fair value, net of income tax benefit / (expense) of $0.1, $0.1 and ($5.3) for each respective period | | (1.0 | ) | | (0.1 | ) | | 9.6 |
|
| Reclassification to earnings, net of income tax expense of $0.1, $0.4 and $0.3 for each respective period | | (1.1 | ) | | (0.8 | ) | | (0.7 | ) |
| Reclassification of earnings related to discontinued operations, net of income tax expense / (benefit) of ($0.4), ($1.2) and $4.1 for each respective period | | (0.4 | ) | | 3.2 |
| | (7.3 | ) |
| Net change in fair value of derivatives | | (2.5 | ) | | 2.3 |
| | 1.6 |
|
| Pension and postretirement activity: | | | | | | |
| Prior service cost for the period, net of income tax benefit of $0.0, $0.6 and $0.4 for each respective period | | (0.1 | ) | | (2.2 | ) | | (0.7 | ) |
| Net gain / (loss) for the period, net of income tax benefit / (expense) of $0.8, ($0.5) and $1.1 for each respective period | | (3.4 | ) | | 1.7 |
| | (1.8 | ) |
| Reclassification to earnings, net of income tax benefit of $0.0, ($0.2) and ($0.5) for each respective period | | 0.2 |
| | 0.6 |
| | 1.0 |
|
| Net change in unfunded pension and postretirement obligations | | (3.3 | ) | | 0.1 |
| | (1.5 | ) |
| | | | | | | |
| Other comprehensive income / (loss) | | (5.8 | ) | | 2.4 |
| | 0.5 |
|
| | | | | | | |
| Net comprehensive income / (loss) | | $ | 99.6 |
| | $ | 72.5 |
| | $ | (94.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Operations |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Revenues | | $ | 660.5 | | | $ | 743.7 | | | $ | 747.3 | |
| | | | | | |
| Operating costs and expenses | | | | | | |
| Net fuel cost | | 1.7 | | | 2.5 | | | 2.5 | |
| Net purchased power cost | | 230.6 | | | 251.9 | | | 302.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Operation and maintenance | | 181.6 | | | 184.2 | | | 138.3 | |
| Depreciation and amortization | | 73.3 | | | 72.3 | | | 76.2 | |
| Taxes other than income taxes | | 79.4 | | | 77.9 | | | 73.3 | |
| | | | | | |
| Loss on asset disposal | | 0.1 | | | 0 | | | 0 | |
| Loss on disposal of business (Note 16) | | 4.7 | | | 0 | | | 11.7 | |
| | | | | | |
| | | | | | |
| Total operating costs and expenses | | 571.4 | | | 588.8 | | | 604.7 | |
| | | | | | |
| Operating income | | 89.1 | | | 154.9 | | | 142.6 | |
| | | | | | |
| Other income / (expense), net | | | | | | |
| Interest expense | | (71.3) | | | (82.2) | | | (98.0) | |
| Loss on early extinguishment of debt | | (31.7) | | | (44.9) | | | (6.5) | |
| Other income | | 2.0 | | | 3.7 | | | 0.8 | |
| Other expense, net | | (101.0) | | | (123.4) | | | (103.7) | |
| | | | | | |
| Income / (loss) from continuing operations before income tax | | (11.9) | | | 31.5 | | | 38.9 | |
| | | | | | |
| Income tax expense / (benefit) from continuing operations | | (5.5) | | | (20.3) | | | 2.2 | |
| | | | | | |
| Net income / (loss) from continuing operations | | (6.4) | | | 51.8 | | | 36.7 | |
| | | | | | |
| Discontinued operations (Note 15) | | | | | | |
| Income / (loss) from discontinued operations before income tax | | (0.6) | | | 47.6 | | | 63.5 | |
| Gain / (loss) from disposal of discontinued operations | | 6.1 | | | 20.1 | | | (1.6) | |
| Income tax expense from discontinued operations | | 0.1 | | | 14.1 | | | 28.5 | |
| Net income from discontinued operations | | 5.4 | | | 53.6 | | | 33.4 | |
| | | | | | |
| Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | $ | 70.1 | |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | |
| DPL INC. |
| Consolidated Balance Sheets |
| $ in millions | | December 31, 2019 | | December 31, 2018 |
| ASSETS | |
| |
|
| Current assets: | |
| |
|
| Cash and cash equivalents | | $ | 36.5 |
| | $ | 90.5 |
|
| Restricted cash | | 10.5 |
| | 21.2 |
|
| Accounts receivable, net (Note 2) | | 68.6 |
| | 90.5 |
|
| Inventories (Note 2) | | 14.1 |
| | 10.7 |
|
| Taxes applicable to subsequent years | | 77.8 |
| | 72.6 |
|
| Regulatory assets, current (Note 3) | | 19.7 |
| | 41.1 |
|
| Taxes receivable | | 23.6 |
| | — |
|
| Prepayments and other current assets | | 7.6 |
| | 12.9 |
|
| Current assets of discontinued operations and held-for-sale businesses (Note 15) | | 17.7 |
| | 8.7 |
|
| Total current assets | | 276.1 |
| | 348.2 |
|
| | | | | |
| Property, plant and equipment: | |
| |
|
| Property, plant & equipment | | 1,701.9 |
| | 1,615.6 |
|
| Less: Accumulated depreciation and amortization | | (362.6 | ) | | (310.8 | ) |
| | | 1,339.3 |
| | 1,304.8 |
|
| Construction work in process | | 106.3 |
| | 32.2 |
|
| Total net property, plant & equipment | | 1,445.6 |
| | 1,337.0 |
|
| Other non-current assets: | |
| |
|
| Regulatory assets, non-current (Note 3) | | 173.8 |
| | 152.6 |
|
| Intangible assets, net of amortization | | 19.4 |
| | 18.4 |
|
| Other non-current assets | | 20.9 |
| | 21.6 |
|
| Non-current assets of discontinued operations and held-for-sale businesses (Note 15) | | — |
| | 5.3 |
|
| Total other non-current assets | | 214.1 |
| | 197.9 |
|
| | | | | |
| Total assets | | $ | 1,935.8 |
| | $ | 1,883.1 |
|
| | | | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY | |
| |
|
| Current liabilities: | |
| |
|
| Short-term and current portion of long-term debt (Note 7) | | $ | 283.8 |
| | $ | 103.6 |
|
| Accounts payable | | 74.4 |
| | 58.1 |
|
| Accrued taxes | | 79.6 |
| | 76.7 |
|
| Accrued interest | | 11.4 |
| | 14.3 |
|
| Customer deposits | | 20.7 |
| | 21.3 |
|
| Regulatory liabilities, current (Note 3) | | 27.9 |
| | 34.9 |
|
| Accrued and other current liabilities | | 21.2 |
| | 22.0 |
|
| Current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 6.9 |
| | 12.2 |
|
| Total current liabilities | | 525.9 |
| | 343.1 |
|
| Non-current liabilities: | |
| |
|
| Long-term debt (Note 7) | | 1,223.3 |
| | 1,372.3 |
|
| Deferred income taxes (Note 8) | | 127.2 |
| | 116.1 |
|
| Taxes payable | | 81.4 |
| | 76.1 |
|
| Regulatory liabilities, non-current (Note 3) | | 243.6 |
| | 278.3 |
|
| Accrued pension and other post-retirement benefits (Note 9) | | 79.9 |
| | 82.3 |
|
| Other non-current liabilities | | 20.2 |
| | 17.4 |
|
| Non-current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 6.2 |
| | 69.2 |
|
| Total non-current liabilities | | 1,781.8 |
| | 2,011.7 |
|
| | | | | |
| Commitments and contingencies (Note 11) | |
| |
|
| | | | | |
| Common shareholder's deficit: | |
| |
|
| Common stock: | |
| |
|
| 1,500 shares authorized; 1 share issued and outstanding | |
| |
|
| at December 31, 2019 and 2018 | | — |
| | — |
|
| Other paid-in capital | | 2,370.7 |
| | 2,370.5 |
|
| Accumulated other comprehensive income / (loss) | | (3.6 | ) | | 2.2 |
|
| Accumulated deficit | | (2,739.0 | ) | | (2,844.4 | ) |
| Total common shareholder's deficit: | | (371.9 | ) | | (471.7 | ) |
| | | | | |
| Total liabilities and shareholder's equity | | $ | 1,935.8 |
| | $ | 1,883.1 |
|
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Cash Flows |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | |
| Net income / (loss) | | $ | 105.4 |
| | $ | 70.1 |
| | $ | (94.6 | ) |
| Adjustments to reconcile Net income / (loss) to Net cash from operating activities | | | | | | |
| Depreciation and amortization | | 53.1 |
| | 50.2 |
| | 106.9 |
|
| Amortization of deferred financing costs | | 5.6 |
| | 5.5 |
| | 3.6 |
|
| Deferred income taxes | | 15.2 |
| | (9.1 | ) | | (22.2 | ) |
| Loss on early extinguishment of debt | | 44.9 |
| | 6.5 |
| | 3.3 |
|
| Fixed-asset impairment | | 3.5 |
| | 2.8 |
| | 175.8 |
|
| Loss / (gain) on disposal and sale of business, net | | (20.1 | ) | | 13.3 |
| | (14.0 | ) |
| Loss / (gain) on asset disposal, net | | 0.9 |
| | (2.0 | ) | | 16.1 |
|
| Changes in certain assets and liabilities: | | | | | | |
| Accounts receivable, net | | 10.2 |
| | 45.7 |
| | 18.1 |
|
| Inventories | | (4.2 | ) | | 14.8 |
| | 7.7 |
|
| Taxes applicable to subsequent years | | (2.8 | ) | | 0.1 |
| | 2.3 |
|
| Deferred regulatory costs, net | | (2.2 | ) | | (9.2 | ) | | (23.7 | ) |
| Accounts payable | | 9.7 |
| | (16.3 | ) | | (36.3 | ) |
| Accrued taxes payable / receivable | | (21.2 | ) | | 37.4 |
| | (3.7 | ) |
| Accrued interest | | (2.9 | ) | | (2.1 | ) | | (1.3 | ) |
| Accrued pension and other post-retirement benefits | | (8.8 | ) | | (3.4 | ) | | 4.7 |
|
| Insurance and claims costs | | — |
| | 1.1 |
| | (2.4 | ) |
| Other non-current liabilities | | (14.6 | ) | | (0.5 | ) | | (4.8 | ) |
| Other | | 8.6 |
| | 1.0 |
| | (3.8 | ) |
| Net cash provided by operating activities | | 180.3 |
| | 205.9 |
| | 131.7 |
|
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (168.1 | ) | | (103.6 | ) | | (121.5 | ) |
| Proceeds from disposal and sale of business | | — |
| | 234.9 |
| | 70.1 |
|
| Payments on disposal and sale of business | | (51.0 | ) | | (14.5 | ) | | — |
|
| Proceeds from sale of property | | — |
| | 10.6 |
| | 0.1 |
|
| Insurance proceeds | | — |
| | 3.0 |
| | 12.3 |
|
| Other investing activities, net | | (3.5 | ) | | (0.5 | ) | | (0.3 | ) |
| Net cash provided by / (used in) investing activities | | (222.6 | ) | | 129.9 |
| | (39.3 | ) |
| Cash flows from financing activities: | | | | | | |
| Payments of deferred financing costs | | (9.9 | ) | | — |
| | — |
|
| Retirement of debt | | (978.0 | ) | | (240.5 | ) | | (159.5 | ) |
| Issuance of long-term debt, net of discount | | 821.7 |
| | — |
| | — |
|
| Borrowings from revolving credit facilities | | 204.0 |
| | 30.0 |
| | 102.5 |
|
| Repayment of borrowings from revolving credit facilities | | (60.0 | ) | | (40.0 | ) | | (92.5 | ) |
| Other financing activities, net | | (0.2 | ) | | — |
| | (0.1 | ) |
| Net cash used in financing activities | | (22.4 | ) | | (250.5 | ) | | (149.6 | ) |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | — |
| | 1.5 |
| | 27.5 |
|
| Cash, cash equivalents and restricted cash: | | | | | | . |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (64.7 | ) | | 86.8 |
| | (29.7 | ) |
| Balance at beginning of year | | 111.7 |
| | 24.9 |
| | 54.6 |
|
| Cash, cash equivalents and restricted cash at end of year | | $ | 47.0 |
| | $ | 111.7 |
| | $ | 24.9 |
|
| Supplemental cash flow information: | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 80.8 |
| | $ | 93.7 |
| | $ | 105.2 |
|
| Income taxes (refunded) / paid, net | | $ | 1.8 |
| | $ | (1.4 | ) | | $ | — |
|
| Non-cash financing and investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 16.9 |
| | $ | 10.4 |
| | $ | 12.9 |
|
| Non-cash proceeds from sale of business | | $ | — |
| | $ | 4.1 |
| | $ | — |
|
| Non-cash capital contribution (Note 10) | | $ | — |
| | $ | 40.0 |
| | $ | 97.1 |
|
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Shareholder's Deficit |
| | | Common Stock (a) | | | | | | | | |
| $ in millions | | Outstanding Shares | | Amount | | Other Paid-in Capital | | Accumulated Other Comprehensive Income / (Loss) | | Accumulated Deficit | | Total |
| Year ended December 31, 2017 | | | | | | | | | | | | |
| Beginning balance | | 1 |
| | $ | — |
| | $ | 2,233.0 |
| | $ | 0.3 |
| | $ | (2,820.9 | ) | | $ | (587.6 | ) |
| Net comprehensive loss | | | | | | | | 0.5 |
| | (94.6 | ) | | (94.1 | ) |
Capital contributions (b) | | | | | | 97.1 |
| | | | | | 97.1 |
|
| Other | | | | | | 0.3 |
| | | |
|
| | 0.3 |
|
| Ending balance | | 1 |
| | — |
| | 2,330.4 |
| | 0.8 |
| | (2,915.5 | ) | | (584.3 | ) |
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | 2.4 |
| | 70.1 |
| | 72.5 |
|
Capital contributions (b) | | | | | | 40.0 |
| | | | | | 40.0 |
|
Other (c) | | | | | | 0.1 |
| | (1.0 | ) | | 1.0 |
| | 0.1 |
|
| Ending balance | | 1 |
| | — |
| | 2,370.5 |
| | 2.2 |
| | (2,844.4 | ) | | (471.7 | ) |
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | (5.8 | ) | | 105.4 |
| | 99.6 |
|
| Other | | | | | | 0.2 |
| |
|
| |
|
| | 0.2 |
|
| Ending balance | | 1 |
| | $ | — |
| | $ | 2,370.7 |
| | $ | (3.6 | ) | | $ | (2,739.0 | ) | | $ | (371.9 | ) |
| | | | | | | | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Comprehensive Income / (Loss) |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | $ | 70.1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Derivative activity: | | | | | | |
| Change in derivative fair value, net of income tax benefit of $0.0, $0.1 and $0.1 for each respective period | | 0 | | | (1.0) | | | (0.1) | |
| Reclassification to earnings, net of income tax expense of $0.2, $0.1 and $0.4 for each respective period | | (0.9) | | | (1.1) | | | (0.8) | |
| Reclassification of earnings related to discontinued operations, net of income tax benefit of $0.0, $(0.4) and $(1.2) for each respective period | | 0 | | | (0.4) | | | 3.2 | |
| Net change in fair value of derivatives | | (0.9) | | | (2.5) | | | 2.3 | |
| Pension and postretirement activity: | | | | | | |
| Prior service cost for the period, net of income tax benefit of $0.0, $0.0 and $0.6 for each respective period | | 0 | | | (0.1) | | | (2.2) | |
| Net gain / (loss) for the period, net of income tax benefit / (expense) of $2.6, $0.8 and $(0.5) for each respective period | | (8.8) | | | (3.4) | | | 1.7 | |
| Reclassification to earnings, net of income tax benefit of $(0.3), $0.0 and $(0.2) for each respective period | | 1.0 | | | 0.2 | | | 0.6 | |
| Net change in unfunded pension and postretirement obligations | | (7.8) | | | (3.3) | | | 0.1 | |
| | | | | | |
| Other comprehensive income / (loss) | | (8.7) | | | (5.8) | | | 2.4 | |
| | | | | | |
| Net comprehensive income / (loss) | | $ | (9.7) | | | $ | 99.6 | | | $ | 72.5 | |
| |
(a) | 1,500 shares authorized. |
| |
(b) | Represents the conversion of a tax sharing payable to AES to contributed capital, as DP&L's 2017 ESP restricted tax sharing payments to AES during the term of the ESP. See Note 8 – Income Taxes.
|
| |
(c) | 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 Accumulated deficit. |
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Balance Sheets |
| $ in millions | | December 31, 2020 | | December 31, 2019 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 25.4 | | | $ | 36.5 | |
| Restricted cash | | 0.1 | | | 10.5 | |
| Accounts receivable, net of allowance for credit losses of $2.8 and $0.4, respectively (Note 2) | | 69.7 | | | 67.9 | |
| Inventories | | 8.8 | | | 10.4 | |
| Taxes applicable to subsequent years | | 78.0 | | | 77.5 | |
| Regulatory assets, current (Note 3) | | 27.5 | | | 19.7 | |
| Taxes receivable | | 17.9 | | | 23.6 | |
| Prepayments and other current assets | | 5.8 | | | 7.6 | |
| Current assets of discontinued operations and held-for-sale businesses (Note 15) | | 0 | | | 22.3 | |
| Total current assets | | 233.2 | | | 276.0 | |
| | | | |
| Property, plant and equipment: | | | | |
| Property, plant & equipment | | 1,839.3 | | | 1,701.9 | |
| Less: Accumulated depreciation and amortization | | (415.7) | | | (362.6) | |
| | | 1,423.6 | | | 1,339.3 | |
| Construction work in process | | 141.7 | | | 106.3 | |
| Total net property, plant & equipment | | 1,565.3 | | | 1,445.6 | |
| Other non-current assets: | | | | |
| Regulatory assets, non-current (Note 3) | | 193.6 | | | 173.8 | |
| Intangible assets, net of amortization | | 19.3 | | | 19.3 | |
| Other non-current assets | | 24.6 | | | 20.0 | |
| Non-current assets of discontinued operations and held-for-sale businesses (Note 15) | | 0 | | | 1.1 | |
| Total other non-current assets | | 237.5 | | | 214.2 | |
| | | | |
| Total assets | | $ | 2,036.0 | | | $ | 1,935.8 | |
| | | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
| Current liabilities: | | | | |
| Short-term and current portion of long-term debt (Note 7) | | $ | 100.2 | | | $ | 283.8 | |
| | | | |
| Accounts payable | | 84.5 | | | 72.6 | |
| Accrued taxes | | 83.0 | | | 79.3 | |
| Accrued interest | | 16.0 | | | 11.4 | |
| Customer deposits | | 19.4 | | | 20.7 | |
| Regulatory liabilities, current (Note 3) | | 18.0 | | | 27.9 | |
| | | | |
| Accrued and other current liabilities | | 21.0 | | | 21.2 | |
| Current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 0 | | | 9.0 | |
| Total current liabilities | | 342.1 | | | 525.9 | |
| Non-current liabilities: | | | | |
| Long-term debt (Note 7) | | 1,393.4 | | | 1,223.3 | |
| Deferred income taxes (Note 8) | | 177.2 | | | 133.7 | |
| Taxes payable | | 80.4 | | | 81.1 | |
| Regulatory liabilities, non-current (Note 3) | | 218.3 | | | 243.6 | |
| Accrued pension and other post-retirement benefits (Note 9) | | 93.9 | | | 79.9 | |
| | | | |
| Other non-current liabilities | | 14.2 | | | 11.8 | |
| Non-current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 0 | | | 8.4 | |
| Total non-current liabilities | | 1,977.4 | | | 1,781.8 | |
| | | | |
| Commitments and contingencies (Note 11) | | 0 | | 0 |
| | | | |
| Common shareholder's deficit: | | | | |
| Common stock: | | | | |
| 1,500 shares authorized; 1 share issued and outstanding | | | | |
| at December 31, 2020 and 2019 | | 0 | | | 0 | |
| Other paid-in capital | | 2,468.8 | | | 2,370.7 | |
| Accumulated other comprehensive loss | | (12.3) | | | (3.6) | |
| Accumulated deficit | | (2,740.0) | | | (2,739.0) | |
| Total common shareholder's deficit: | | (283.5) | | | (371.9) | |
| | | | |
| Total liabilities and shareholder's deficit: | | $ | 2,036.0 | | | $ | 1,935.8 | |
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Cash Flows |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | $ | 70.1 | |
| Adjustments to reconcile Net income / (loss) to Net cash from operating activities | | | | | | |
| Depreciation and amortization | | 73.6 | | | 53.1 | | | 50.2 | |
| | | | | | |
| Amortization of deferred financing costs | | 5.7 | | | 5.6 | | | 5.5 | |
| | | | | | |
| Deferred income taxes | | 39.8 | | | 15.2 | | | (9.1) | |
| Loss on early extinguishment of debt | | 31.7 | | | 44.9 | | | 6.5 | |
| Fixed-asset impairment | | 0 | | | 3.5 | | | 2.8 | |
| Loss / (gain) on disposal and sale of business, net | | (1.4) | | | (20.1) | | | 13.3 | |
| | | | | | |
| Changes in certain assets and liabilities: | | | | | | |
| Accounts receivable, net | | 11.2 | | | 10.2 | | | 45.7 | |
| Inventories | | 4.9 | | | (4.2) | | | 14.8 | |
| | | | | | |
| Taxes applicable to subsequent years | | (0.2) | | | (2.8) | | | 0.1 | |
| Deferred regulatory costs, net | | (34.0) | | | (2.2) | | | (9.2) | |
| Accounts payable | | (10.1) | | | 9.7 | | | (16.3) | |
| Accrued taxes payable / receivable | | 8.0 | | | (21.2) | | | 37.4 | |
| Accrued interest | | 4.6 | | | (2.9) | | | (2.1) | |
| | | | | | |
| Accrued pension and other post-retirement benefits | | (11.8) | | | (8.8) | | | (3.4) | |
| | | | | | |
| | | | | | |
| Other non-current liabilities | | 1.5 | | | (14.6) | | | (0.5) | |
| Other | | (8.6) | | | 9.5 | | | 0.1 | |
| Net cash provided by operating activities | | 113.9 | | | 180.3 | | | 205.9 | |
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (157.3) | | | (156.5) | | | (96.1) | |
| Cost of removal payments | | (25.5) | | | (11.6) | | | (7.5) | |
| Proceeds from disposal and sale of business interests | | 1.6 | | | 0 | | | 234.9 | |
| Payments on disposal and sale of business interests | | (8.9) | | | (51.0) | | | (14.5) | |
| Proceeds from sale of property | | 5.1 | | | 0 | | | 10.6 | |
| Insurance proceeds | | 0 | | | 0 | | | 3.0 | |
| | | | | | |
| | | | | | |
| Other investing activities, net | | (0.7) | | | (3.5) | | | (0.5) | |
| Net cash provided by / (used in) investing activities | | (185.7) | | | (222.6) | | | 129.9 | |
| Cash flows from financing activities: | | | | | | |
| Payments of deferred financing costs | | (7.8) | | | (9.9) | | | 0 | |
| | | | | | |
| Retirement of debt | | (550.8) | | | (978.0) | | | (240.5) | |
| Issuance of long-term debt, net of discount | | 555.0 | | | 821.7 | | | 0 | |
| Borrowings from revolving credit facilities | | 185.0 | | | 204.0 | | | 30.0 | |
| Repayment of borrowings from revolving credit facilities | | (229.0) | | | (60.0) | | | (40.0) | |
| Equity contribution from parent | | 98.0 | | | 0 | | | 0 | |
| Other financing activities, net | | (0.1) | | | (0.2) | | | 0 | |
| Net cash provided by / (used in) financing activities | | 50.3 | | | (22.4) | | | (250.5) | |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | 0 | | | 0 | | | 1.5 | |
| Cash, cash equivalents and restricted cash: | | | | | | . |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (21.5) | | | (64.7) | | | 86.8 | |
| Balance at beginning of year | | 47.0 | | | 111.7 | | | 24.9 | |
| Cash, cash equivalents and restricted cash at end of year | | $ | 25.5 | | | $ | 47.0 | | | $ | 111.7 | |
| Supplemental cash flow information: | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 67.8 | | | $ | 80.8 | | | $ | 93.7 | |
| Income taxes (refunded) / paid, net | | $ | (51.9) | | | $ | 1.8 | | | $ | (1.4) | |
| Non-cash financing and investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 31.7 | | | $ | 16.9 | | | $ | 10.4 | |
| Non-cash proceeds from sale of business | | $ | 0 | | | $ | 0 | | | $ | 4.1 | |
| Accruals from sale of business | | $ | 2.2 | | | $ | 0 | | | $ | 0 | |
| Non-cash capital contribution (Note 10) | | $ | 0 | | | $ | 0 | | | $ | 40.0 | |
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| DPL INC. |
| Consolidated Statements of Shareholder's Deficit |
| | Common Stock (a) | | | | | | | | |
| $ in millions | | Outstanding Shares | | Amount | | Other
Paid-in
Capital | | Accumulated Other Comprehensive Income / (Loss) | | Accumulated Deficit | | Total |
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Beginning balance | | 1 | | | $ | 0 | | | $ | 2,330.4 | | | $ | 0.8 | | | $ | (2,915.5) | | | $ | (584.3) | |
| Net comprehensive income | | | | | | | | 2.4 | | | 70.1 | | | 72.5 | |
Capital contributions (b) | | | | | | 40.0 | | | | | | | 40.0 | |
Other (c) | | | | | | 0.1 | | | (1.0) | | | 1 | | | 0.1 | |
| Ending balance | | 1 | | | 0 | | | 2,370.5 | | | 2.2 | | | (2,844.4) | | | (471.7) | |
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | (5.8) | | | 105.4 | | | 99.6 | |
| | | | | | | | | | | | |
| Other | | | | | | 0.2 | | | 0 | | 0 | | 0.2 | |
| Ending balance | | 1 | | | 0 | | | 2,370.7 | | | (3.6) | | | (2,739.0) | | | (371.9) | |
| Year ended December 31, 2020 | | | | | | | | | | | | |
| Net comprehensive loss | | | | | | | | (8.7) | | | (1.0) | | | (9.7) | |
| Equity contribution from parent | | | | | | 98.0 | | | | | | | 98.0 | |
| Other | | | | | | 0.1 | | | | | 0 | | 0.1 | |
| Ending balance | | 1 | | | $ | 0 | | | $ | 2,468.8 | | | $ | (12.3) | | | $ | (2,740.0) | | | $ | (283.5) | |
(a)1,500 shares authorized.
(b)Represents the conversion of a tax sharing payable to AES to contributed capital, as DP&L's ESP 3 restricted tax sharing payments to AES during the term of the ESP. See Note 8 – Income Taxes.
(c)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 Accumulated deficit.
See Notes to Consolidated Financial Statements.
DPL Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2020, 2019 2018 and 20172018
Note 1 – Overview and Summary of Significant Accounting Policies
Description of Business
DPL is a diversified regional energy company organized in 1985 under the laws of Ohio. DPL has 1 reportable segment, the Utility segment. See Note 13 – Business Segments for more information relating to our reportable segment. The terms “we”, “us”, “our” and “ours” are used to refer to DPL and its subsidiaries.
On November 28, 2011, DPL was acquired by AES in the Merger and DPL became a wholly-owned subsidiary of AES. Following the merger of DPL and Dolphin Subsidiary II, Inc., DPL became an indirectly wholly-owned subsidiary of AES.
DP&L, DPL's wholly-owned subsidiary, is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation service, however transmission and distributiondistribution services are still regulated. DP&L has the exclusive right to provide such service to its approximately526,000 531,000 customers located in West Central Ohio. DP&L provides retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L sources all of the generation for its SSO customers through a competitive bid process. Through September 30, 2017, DP&L owned undivided interests inmultiple coal-fired the retired power stations of Beckjord and multiple peaking electric generating facilities as well asHutchings until their transfers in 2018 and 2020, respectively, and currently owns numerous transmission facilities. On October 1, 2017, the DP&L-owned generating facilities, excluding the Beckjord Facility and Hutchings EGU, were transferred to AES Ohio Generation, an affiliate of DP&L and wholly-owned subsidiary of DPL, through an asset contribution agreement to a subsidiary that was merged into AES Ohio Generation. Principal industries located in DP&L’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. DP&L's sales reflect the generalgeneral economic conditions, seasonal weather patterns of the area and the market price of electricity. Through the date of Generation Separation, DP&L sold energy and capacity into the wholesale market.
DPL’s other primary subsidiaries includeare MVIC and AES Ohio Generation.Miami Valley Lighting. MVIC is our captive insurance company that provides insurance services to DPLDP&L and our subsidiaries.other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in the Dayton region. In prior periods, AES Ohio Generation owns an undivided interest in Conesville. AES Ohio Generation sellswas also a primary subsidiary and sold all of its energy and capacity into the wholesale market. In 2020, AES Ohio Generation's only operating asset was an undivided interest in Conesville, which closed in May 2020 and was sold in June 2020. See Note 15 – Discontinued Operations for additional information. DPL's subsidiaries are wholly-owned.
On December 8, 2017, AES Ohio Generation completed the sale of the Miami Fort and Zimmer stations to subsidiaries of Dynegy in accordance with an asset purchase agreement dated April 21, 2017. In addition, on March 27, 2018, DPL and AES Ohio Generation completed the sale of their Peaker assets to Kimura Power, LLC. Further, on May 31, 2018, DPL and AES Ohio Generation retired the Stuart Station coal-fired and diesel-fired generating units and the Killen Station coal-fired generating unit and combustion turbine, as planned. On December 20, 2019, DPL and AES Ohio Generation, together with AES Ohio Generation's joint owners in the retired Stuart and Killen generating facilities, completed the transfer of the retired generating facilities, including the associated environmental liabilities, to an unaffiliated third-party purchaser. See Note 15 – Discontinued Operations for additional information.
DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders.
DPL and its subsidiaries employed 633631 people (512 full-time) at January 31, 2020,2021, all of which 630 were employed by DP&L. Approximately 59%58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 2020.2023.
Financial Statement Presentation
We prepare Consolidated Financial Statements for DPL. DPL’s Consolidated Financial Statements include the accounts of DPL and its wholly-owned subsidiaries except for DPL Capital Trust II which is not consolidated, consistent with the provisions of GAAP.
AES Ohio Generation's undivided ownership interest in a coal-fired generating station is included in the financial statements at amortized cost, net of subsequent impairments. Operating revenues and expenses are included on a pro rata basis in the corresponding lines in the Consolidated Statement of Operations.
Through June 2018, DP&L had undivided ownership interests in numerous transmission facilities. These undivided interests in jointly-owned facilities were accounted for on a pro rata basis in the Consolidated Financial Statements. In June 2018, DP&L closed on a transmission asset transaction with Duke and AEP, where ownership stakes in certain previously co-owned transmission assets were exchanged to eliminate co-ownership. Each previously co-owned transmission asset became wholly-owned by one of DP&L, Duke or AEP after the transaction. See Note 4 – Property, Plant and Equipment for more information.
All material intercompany accounts and transactions are eliminated in consolidation. We have evaluated subsequent events through the date this report is issued.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the revenues and expenses of the periods reported. Actual results could differ from these estimates. Significant items subject to such estimates and judgments include: the carrying value of Property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents.
Restricted Cash
Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restriction includes an agreement related to cash collected under the DMR, which iswas restricted to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure.
The following table summarizes cash, cash equivalents and restricted cash amounts reported on the Consolidated Balance SheetSheets that reconcile to the total of such amounts as shown on the Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Cash and cash equivalents | | $ | 25.4 | | | $ | 36.5 | |
| Restricted cash | | 0.1 | | | 10.5 | |
| Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 25.5 | | | $ | 47.0 | |
|
| | | | | | | | |
| $ in millions | | December 31, 2019 | | December 31, 2018 |
| Cash and cash equivalents | | $ | 36.5 |
| | $ | 90.5 |
|
| Restricted cash | | 10.5 |
| | 21.2 |
|
| Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 47.0 |
| | $ | 111.7 |
|
Allowance for Uncollectible AccountsCredit Losses
We establish provisions for uncollectible accounts by using both historical average loss percentages to project future losses and by establishing specific provisions for known credit issues. Amounts are written off when reasonable collections efforts have been exhausted.
Inventories
Inventories are carried at average cost, net of reserves, and include coal, limestone and materials and supplies used for utility operations.
Regulatory Accounting
As a regulated utility, DP&L applies the provisions of FASC 980 “Regulated Operations”, which gives recognition to the ratemaking and accounting practices of the PUCO and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory assets have been included as allowable costs for ratemaking purposes, as authorized by the PUCO or established regulatory practices. Regulatory liabilities generally represent obligations to make refunds or future rate reductions to customers for previous over collections or the deferral of revenues collected for costs that DP&L expects to incur in the future.
The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific orders from the PUCO or FERC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Our regulatory assets and liabilities have been created pursuant to a specific order of the PUCO or FERC or established regulatory practices, such as other utilities under the jurisdiction of the PUCO or FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to PUCO or FERC approval. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 3 – Regulatory Matters for more information.
Property, Plant and Equipment
We record our ownership share of our undivided interest in our jointly-held station as an asset in property, plant and equipment. We record our ownership share of our undivided interest in jointly-owned transmission and distribution property as an asset in property, plant and equipment. New property, plant and equipment additions are stated at cost. For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and an allowance for funds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $3.0 million, $3.2 million $0.5 million and $1.7$0.5 million in the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
For unregulated generation property, cost includes direct labor and material, allocable overhead expenses and interest capitalized during construction per the provisions of GAAP related to the accounting for capitalized interest.
For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization, consistent with composite depreciation practices.
Property is evaluatedImpairment of Long-lived Assets
GAAP requires that we test long-lived assets for impairment when events or changesindicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The net book value of our property, plant, and equipment was $1,565.3 million and $1,445.6 million as of December 31, 2020 and 2019, respectively. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and distribution capacity of the assets; the expected ability to recover additional expenditures in circumstances indicate that its carrying amount may not be recoverable.the assets; and the anticipated demand and relative pricing of retail electricity in our service territory.
Depreciation
Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For DPL’s generation, transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates that approximated 3.8% in 2020, 4.0% in 2019 and 4.3% in 2018 and 5.0% in 2017 (including property classified in non-current assets of discontinued operations and held-for-sale businesses in 2017).2018. Depreciation expense was $68.1$70.0 million, $66.5$67.9 million and $70.4$69.7 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
Intangibles
Intangibles include software, emission allowances and renewable energy credits. Emission allowances are carried on a first-in, first-out (FIFO) basis for purchased emission allowances. Net gains or losses on the sale of excess emission allowances, representing the difference between the sales proceeds and the cost of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized. Emission allowances are amortized as they are used in our operations on a FIFO basis. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired.
Software is amortized over seven years. Amortization expense was $4.6$3.3 million, $6.6$4.4 million and $5.7$6.5 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. The estimated amortization expense of this internal-
useinternal-use software over the next five years is $15.3$10.7 million ($4.6 million in 2020, $4.63.0 million in 2021, $4.6$2.2 million in 2022, and $1.5$2.0 million in 2023)2023, $1.8 million in 2024 and $1.7 million in 2025).
Implementation Costs Related to Software as a Service
DPL has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $4.1 million and these are recorded within Other Non-current Assets on the accompanying Consolidated Balance Sheets as of December 31, 2020.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and presented as a direct reduction from the face amount of that debt and amortized over the related financing period using the effective interest method. Debt issuance costs related to a line-of-credit or revolving credit facility are deferred and presented as an asset and amortized over the related financing period. Make-whole payments in connection with early debt retirements are classified as cash flows used in financing activities.
Financial Instruments
Our Master Trust investments in debt and equity financial instruments of publicly traded entities are classified as equity investments. These equity securities are carried at fair value and unrealized gains and losses on these securities are recorded in Other income. As these financial instruments are held to be used for the benefit of employees or former employees participating in employee benefit plans and are not used for general operating purposes, they are classified as non-current in Other non-current assets on the Consolidated Balance Sheets. See
Note 5 – Fair Value for additional information.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
We usehave, in the past, used interest rate hedges to manage the interest rate risk of our variable rate debt. We use cash flow hedge accounting when the hedge or a portion of the hedge is deemed to be highly effective, which results in changes in fair value being recorded within accumulated other comprehensive income / (loss), a component of shareholder’s deficit. We have elected not to offset net derivative positions in the financial statements. Accordingly, we do not offset such derivative positions against the fair value of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting agreements. See Note 6 – Derivative Instruments and Hedging Activities for additional information.
Insurance and Claims Costs
In addition to insurance obtained from third-party providers, MVIC, a wholly-owned captive subsidiary of DPL, provides insurance coverage solely to us and our subsidiaries for workers’ compensation, general liability and property damage on an ongoing basis. Insurance and claims costs associated with MVIC include estimated liabilities of approximately $4.5$3.2 million and $4.1$4.5 million at December 31, 20192020 and 2018,2019, respectively, within Accrued and other current liabilities on the DPL Consolidated Balance Sheets. DPL has estimated liabilities for medical, life, disability and other reserves for claims costs below certain coverage thresholds of third-party providers of approximately $3.3$11.1 million and $4.3$3.3 million at December 31, 20192020 and 2018,2019, respectively, within Accrued and other current liabilities and Other non-current liabilities on the balance sheets. The estimated liabilities for workers’ compensation, medical, life and disability costs at DPL are actuarially determined using certain assumptions. There is uncertainty associated with these loss estimates, and actual results may differ from the estimates. Modification of these loss estimates based on experience and changed circumstances is reflected in the period in which the estimate is re-evaluated.
Revenue Recognition
Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Energy sales to customers are based on the reading of their meters that occurs on a systematic basis throughout the month. We recognize the revenues on our Consolidated Statements of Operations using an accrual method for retail and other energy sales that have not yet been billed, but where electricity has been consumed. This is termed “unbilled revenues” and is a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenues are determined by the estimation of unbilled energy provided to customers since the date of the last meter reading, estimated line losses, the assignment of unbilled energy provided to customer classes and the average rate per customer class.
The power sales and purchases within DP&L’s service territory are reported on a net hourly basis as revenues or purchased power on our Consolidated Statements of Operations. All of the power produced at the generation
station is sold to an RTO. We record expenses when purchased electricity is received and when expenses are incurred. For additional information, see Note 14 – Revenue.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenues in the accompanying Consolidated Statements of Operations. The amounts for the years ended December 31, 2020, 2019 and 2018, and 2017, were $48.1 million, $50.1 million $51.7 million and $49.4$51.7 million, respectively.
Repairs and Maintenance
Costs associated with maintenance activities are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
Pension and Postretirement Benefits
We recognize in our Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes from actuarial gains or losses related to our regulated operations, that would otherwise be recognized in AOCI,AOCL, recorded as a regulatory asset as this can be recovered through future rates. Such changes that are not related to our regulated operations are recognized in AOCI.AOCL. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of FASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
See Note 9 – Benefit Plans for more information.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective income tax bases. We establish an allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Our tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting. Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. Our policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statement of Operations.
Income taxes payable, which are includable in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 3 – Regulatory Matters for additional information.
DPL and its subsidiaries file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8 – Income Taxes for additional information.
Related Party Transactions
In the normal course of business, DPL enters into transactions with related parties. All material intercompany accounts and transactions are eliminated in DPL’s Consolidated Financial Statements. See Note 12 – Related Party Transactions for more information on Related Party Transactions.
DPL Capital Trust II
DPL has a wholly-owned business trust, DPL Capital Trust II (the Trust), formed for the purpose of issuing trust capital securities to third-party investors. In 2003, DPL deconsolidated the Trust upon adoption of the accounting standards related to variable interest entities and currently treats the Trust as an unconsolidated subsidiary. The Trust holds mandatorily redeemable trust capital securities. The investment in the Trust, which amounts to $0.2 million and $0.2 million at December 31, 20192020 and 2018,2019, respectively, is included within Other noncurrent assets on the consolidated balance sheets. DPL also has a note payable to the Trust amounting to $15.6 million and $15.6 million at December 31, 20192020 and 2018,2019, respectively, that was established upon the Trust’s deconsolidation in 2003. See Note 7 – Long-term debt for additional information.
In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation which represents a full and unconditional guarantee of payments to the capital security holders of the Trust.
Held-for-sale Businesses
A business classified as held-for-sale is reflected on the balance sheet at the lower of its carrying amount or estimated fair value less cost to sell. A loss is recognized if the carrying amount of the business exceeds its estimated fair value less cost to sell. This loss is limited to the carrying value of long-lived assets until the completion of the sale, at which point, any additional loss is recognized. If the fair value of the business subsequently exceeds the carrying amount while the business is still held-for-sale, any impairment expense previously recognized will be reversed up to the lower of the previously recognized expense or the subsequent excess.
Assets and liabilities related to a business classified as held-for-sale are segregated in the current balance sheet in the period in which the business is classified as held-for-sale. Assets and liabilities of held-for-sale businesses are classified as current when they are expected to be disposed of within twelve months. Transactions between the business held-for-sale and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. See Note 15 – Discontinued Operations for further information.
Discontinued Operations
Discontinued operations reporting occurs only when the disposal of a business or a group of assets represents a strategic shift that has (or will have) a major effect on our operations and financial results. We report financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Prior period amounts in the statement of operations and balance sheet are retrospectively revised to reflect the businesses determined to be discontinued operations. The cash flows of businesses that are determined to be discontinued operations are included within the relevant categories within operating, investing and financing activities on the face of the Consolidated Statements of Cash Flows.
Transactions between the businesses determined to be discontinued operations and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. The results of discontinued operations include any gain or loss recognized on closing or adjustment of the carrying amount to fair value. See Note 15 – Discontinued Operations for further information.
New accounting pronouncements
The following table provides a brief description of recent accounting pronouncements that had an impact on our consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on our consolidated financial statements.
|
| | | | | | | | | | |
| Accounting Standard | Description | Date of Adoption | Effect on the financial statements upon adoption |
| New Accounting Standards Adopted |
2017-12, Derivatives and Hedging2016-13, 2018-19, 2019-04, 2019-05, 2019-10, Financial Instruments — Credit Losses (Topic 815)326): Targeted improvements to Accounting for Hedging ActivitiesMeasurement of Credit Losses on Financial Instruments | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that 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.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings asSee discussion of the initial application date. Prospective for presentation and disclosures.ASUs below. | January 1, 2019.2020. | The adoption of this standard had no material effect on our consolidated financial statements. |
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from AOCI | This amendment allows a reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act from AOCI to retained earnings. Because this amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. | January 1, 2019. | The adoption of this standard had no material effect on our consolidated financial statements. |
2016-02, 2018-01, 2018-10, 2018-11, 2018-20
Leases (Topic 842) | See discussion of the ASU below. | January 1, 2019. | The adoption of this standard had no material effect on our consolidated financial statements. |
Adoption of FASC Topic 842, "Leases"326, "Financial Instruments - Credit Losses"
On January 1, 2019,2020, we adopted FASC 842 LeasesASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates (“FASC 842”("ASC 326"). Under thisThe new standard lesseesupdates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to recognize assets and liabilitiesuse a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for most leasescredit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet and recognize expenses inwith a manner similarcorresponding adjustment to the prior accounting method. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under FASC 842, it is expected that fewer contracts will contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases will qualify as sales-type leases and direct financing leases. Under these two models, a lessor will derecognize the asset and will recognize a net investment in a lease. According to FASC 842, the net investmentearnings in the lease includes the fair value of the plant after the contract period but does not include variable payments such as margin on the sale of energy. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting FASC 842, we applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
| |
a. | whether any expired or existing contracts are or contain leases, |
| |
b. | lease classification for any expired or existing leases, and |
| |
c. | whether initial direct costs for any expired or existing leases qualify for capitalization under FASC 842. |
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. We applied the practical expedient to all classes of underlying assets when valuing right-of-use assets and lease liabilities. Contracts where we are the lessor were separated between the lease and non-lease components.
We applied the modified retrospective method of adoption and elected to continue to apply the guidance in FASC 840 Leases to the comparative periods presented in the year of adoption.for ASC 326. Under this transition method, we applied the transition provisions starting at the date of adoption.
The CECL model primarily impacts the calculation of our expected credit losses in gross customer trade accounts receivable. The adoption of FASC 842ASC 326 and the application of CECL on our trade accounts receivable did not have a material impact on our consolidated financial statements.Consolidated Financial Statements.
New accounting pronouncements issued but not yet effective - The following table provides a brief description of recent accounting pronouncements that could have a material impact on our consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on our consolidated financial statements.
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| | | | | | | | | | |
| Accounting Standard | Description | Date of Adoption | Effect on the financial statements upon adoption |
| New Accounting Standards Issued but Not Yet Effective |
2019-12, Income Taxes2020-04, Reference Rate Reform (Topic 740)848): SimplifyingFacilitation of the Accounting for Income TaxesEffects of Reference Rate Reform on Financial Reporting | The standard removes certainprovides optional expedients and exceptions for recognizing deferred taxesapplying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform. This standard is effective for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxesa limited period of time (March 12, 2020 - December 21, 2022). | Effective for tax goodwill and allocating taxes to membersall entities as of a consolidated group.
Transition Method: variousMarch 12, 2020 through December 31, 2022. | January 1, 2021. Early adoption is permitted. | We are currently evaluating the impact of adopting the standard on our consolidated financial statements. |
2016-13, 2018-19, 2019-04, 2019-05, 2019-10, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | See discussion of the ASUs below. | January 1, 2020. Early adoption is permitted only as of January 1, 2019. | We will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on the consolidated financial statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss (“CECL”) model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses as it is done today, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
We are currently evaluating the impact of adopting the standard on our consolidated financial statements. We expect that the new current expected credit loss model will primarily impact the calculation of expected credit losses on $69.0 million in gross trade accounts receivable. We do not expect a material impact to result from the application of CECL on our trade accounts receivable.
Note 2 – Supplemental Financial Information
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| | | | | | | | |
| | | December 31, |
| $ in millions | | 2019 | | 2018 |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 46.3 |
| | $ | 55.8 |
|
| Unbilled revenue | | 19.4 |
| | 16.8 |
|
| Amounts due from affiliates | | 0.3 |
| | — |
|
Due from PJM transmission enhancement settlement (a) | | 1.8 |
| | 16.5 |
|
| Other | | 1.2 |
| | 2.3 |
|
| Provisions for uncollectible accounts | | (0.4 | ) | | (0.9 | ) |
| Total accounts receivable, net | | $ | 68.6 |
| | $ | 90.5 |
|
| | | | | |
| Inventories, at average cost | | | | |
| Fuel and limestone | | $ | 3.5 |
| | $ | 1.9 |
|
| Materials and supplies | | 10.6 |
| | 8.3 |
|
| Other | | — |
| | 0.5 |
|
| Total inventories, at average cost | | $ | 14.1 |
| | $ | 10.7 |
|
Accounts receivable are as follows at December 31, 2020 and 2019:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 48.5 | | | $ | 45.7 | |
| Unbilled revenue | | 21.6 | | | 19.4 | |
| Amounts due from affiliates | | 0.2 | | | 0.3 | |
Due from PJM transmission enhancement settlement (a) | | 1.7 | | | 1.8 | |
| Other | | 0.5 | | | 1.1 | |
| Allowance for credit losses | | (2.8) | | | (0.4) | |
| Total accounts receivable, net | | $ | 69.7 | | | $ | 67.9 | |
| | | | |
| | | | |
| |
(a) | See Note 3 – Regulatory Matters for more information. |
(a) See Note 3 – Regulatory Matters for more information.
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Beginning Allowance Balance at January 1, 2020 | | Current Period Provision | | Write-offs Charged Against Allowances | | Recoveries Collected | | Ending Allowance Balance at December 31, 2020 |
| Allowance for credit losses | | $ | 0.4 | | | $ | 3.0 | | | $ | (2.3) | | | $ | 1.7 | | | $ | 2.8 | |
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions would impact collectability, as applicable, including the economic impacts of the COVID-19 pandemic on our receivable balance as of December 31, 2020. Amounts are written off when reasonable collections efforts have been exhausted. On March 12, 2020, the PUCO issued an emergency order prohibiting electric utilities, including us, from discontinuing electric utility service to customers through September 1, 2020 due to the economic impacts of COVID-19. This order along with the economic impacts of COVID-19 has resulted in an increase in past due customer receivable balances, and thus the current period provision and the allowance for credit losses have increased during 2020. See Note 17 – Risks & Uncertainties for additional discussion of the COVID-19 pandemic.
However, as discussed in Note 3 – Regulatory Matters, DP&L’s uncollectible expense is deferred for future collection.
Accumulated Other Comprehensive Income / (Loss)
The amounts reclassified out of Accumulated Other Comprehensive Income / (Loss) by component during the years ended December 31, 2020, 2019 2018 and 20172018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details about Accumulated Other Comprehensive Income / (Loss) Components | | Affected line item in the Consolidated Statements of Operations | | Years ended December 31, |
| $ in millions | | | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Gains and losses on cash flow hedges (Note 6): | | | | | | |
| | Interest expense | | (1.1) | | | (1.2) | | | (1.2) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Income tax expense | | 0.2 | | | 0.1 | | | 0.4 | |
| | Net of income taxes | | (0.9) | | | (1.1) | | | (0.8) | |
| | | | | | | | |
| | Loss from discontinued operations | | 0 | | | 0 | | | 4.4 | |
| | Tax benefit from discontinued operations | | 0 | | | (0.4) | | | (1.2) | |
| | Net of income taxes | | 0 | | | (0.4) | | | 3.2 | |
| | | | | | | | |
| Amortization of defined benefit pension items (Note 9): | | | | | | |
| | Other expense | | 1.3 | | | 0.2 | | | 0.8 | |
| | Income tax benefit | | (0.3) | | | 0 | | | (0.2) | |
| | Net of income taxes | | 1.0 | | | 0.2 | | | 0.6 | |
| | | | | | | | |
| Total reclassifications for the period, net of income taxes | | $ | 0.1 | | | $ | (1.3) | | | $ | 3.0 | |
|
| | | | | | | | | | | | | | |
| Details about Accumulated Other Comprehensive Income / (Loss) Components | | Affected line item in the Consolidated Statements of Operations | | Years ended December 31, |
| $ in millions | | | | 2019 | | 2018 | | 2017 |
| Gains and losses on equity securities (Note 5): | | | | | | |
| | | Other deductions | | $ | — |
| | $ | — |
| | $ | (0.1 | ) |
| | | Income tax expense | | — |
| | — |
| | — |
|
| | | Net of income taxes | | — |
| | — |
| | (0.1 | ) |
| | | | | | | | | |
| Gains and losses on cash flow hedges (Note 6): | | | | | | |
| | | Interest expense | | (1.2 | ) | | (1.2 | ) | | (1.0 | ) |
| | | Income tax expense | | 0.1 |
| | 0.4 |
| | 0.3 |
|
| | | Net of income taxes | | (1.1 | ) | | (0.8 | ) | | (0.7 | ) |
| | | | | | | | | |
| | | Loss / (gain) from discontinued operations | | — |
| | 4.4 |
| | (11.4 | ) |
| | | Tax expense / (benefit) from discontinued operations | | (0.4 | ) | | (1.2 | ) | | 4.1 |
|
| | | Net of income taxes | | (0.4 | ) | | 3.2 |
| | (7.3 | ) |
| | | | | | | | | |
| Amortization of defined benefit pension items (Note 9): | | | | | | |
| | | Other expense | | 0.2 |
| | 0.8 |
| | 1.5 |
|
| | | Income tax benefit | | — |
| | (0.2 | ) | | (0.5 | ) |
| | | Net of income taxes | | 0.2 |
| | 0.6 |
| | 1.0 |
|
| | | | | | | | | |
| Total reclassifications for the period, net of income taxes | | $ | (1.3 | ) | | $ | 3.0 |
| | $ | (7.1 | ) |
The changes in the components of Accumulated Other Comprehensive Income / (Loss) during the years ended December 31, 20192020 and 20182019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | | | Gains / (losses) on cash flow hedges | | Change in unfunded pension obligation | | Total |
| Balance at January 1, 2019 | | | | $ | 17.0 | | | $ | (14.8) | | | $ | 2.2 | |
| | | | | | | | |
| Other comprehensive loss before reclassifications | | | | (1.0) | | | (3.5) | | | (4.5) | |
| Amounts reclassified from accumulated other comprehensive income / (loss) to earnings | | | | (1.5) | | | 0.2 | | | (1.3) | |
| Net current period other comprehensive loss | | | | (2.5) | | | (3.3) | | | (5.8) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at December 31, 2019 | | | | 14.5 | | | (18.1) | | | (3.6) | |
| | | | | | | | |
| Other comprehensive loss before reclassifications | | | | 0 | | | (8.8) | | | (8.8) | |
| Amounts reclassified from accumulated other comprehensive loss to earnings | | | | (0.9) | | | 1.0 | | | 0.1 | |
| Net current period other comprehensive loss | | | | (0.9) | | | (7.8) | | | (8.7) | |
| | | | | | | | |
| Balance at December 31, 2020 | | | | $ | 13.6 | | | $ | (25.9) | | | $ | (12.3) | |
| | | | | | | | |
| | | | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Gains / (losses) on equity securities | | Gains / (losses) on cash flow hedges | | Change in unfunded pension obligation | | Total |
| Balance at December 31, 2017 | | $ | 1.0 |
| | $ | 14.7 |
| | $ | (14.9 | ) | | $ | 0.8 |
|
| | | | | | | | | |
| Other comprehensive loss before reclassifications | | — |
| | (0.1 | ) | | (0.5 | ) | | (0.6 | ) |
| Amounts reclassified from accumulated other comprehensive income to earnings | | — |
| | 2.4 |
| | 0.6 |
| | 3.0 |
|
| Net current period other comprehensive income | | — |
| | 2.3 |
| | 0.1 |
| | 2.4 |
|
| | | | | | | | | |
Amounts reclassified from accumulated other comprehensive income to accumulated deficit (a) | | (1.0 | ) | | — |
| | — |
| | (1.0 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2018 | | — |
| | 17.0 |
| | (14.8 | ) | | 2.2 |
|
| | | | | | | | | |
| Other comprehensive loss before reclassifications | | — |
| | (1.0 | ) | | (3.5 | ) | | (4.5 | ) |
| Amounts reclassified from accumulated other comprehensive income / (loss) to earnings | | — |
| | (1.5 | ) | | 0.2 |
| | (1.3 | ) |
| Net current period other comprehensive loss | | — |
| | (2.5 | ) | | (3.3 | ) | | (5.8 | ) |
| | | | | | | | | |
| Balance at December 31, 2019 | | $ | — |
| | $ | 14.5 |
| | $ | (18.1 | ) | | $ | (3.6 | ) |
| |
(a) | 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 Accumulated Deficit. |
Note 3 – Regulatory Matters
DP&L ESP and SEET Proceedings
Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, DP&L operated pursuant to an approved ESP plan, which was initially approved on October 20, 2017 (ESP 3). On November 21, 2019, the PUCO issued a supplemental order modifying the ESP 3 Stipulation by, among other matters, removing the DMR, which reduced DPL’s annual revenues by $105.0 million beginning November 29, 2019. As a result, DP&L filed a Notice of Withdrawal of its ESP 3 Application and requested to revert to rates based on its ESP 1. On December 18, 2019, the PUCO approved DP&L’s Notice of Withdrawal and reversion to its ESP 1 rate plan. Among other items, the PUCO Order approving the ESP 1 rate plan includes:
•Reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million;
•Continuation of DP&L’s Transmission Cost Recovery Rider, Storm Rider and the bypassable standard offer energy rate for DP&L’s customers based on competitive bid auctions;
•A placeholder rider to recover grid modernization costs, called the Infrastructure Investment Rider; and
•A requirement to conduct both an ESP v. MRO Test and a prospective SEET no later than April 1, 2020.
Separate from the ESP process, DP&L filed a petition seeking recovery of ongoing OVEC costs through a Legacy Generation Rider and was granted approval effective January 1, 2020.
DP&L filed its ESP v. MRO Test to validate that the ESP is expected to be more favorable in the aggregate than what would be experienced under an MRO, and a prospective SEET, with the PUCO on April 1, 2020. DP&L is also subject to an annual retrospective SEET whereby it must demonstrate its return on equity is not significantly excessive.
On October 23, 2020, DP&L entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of DP&L and certain other parties with respect to, among other matters, DP&L’s applications pending at the PUCO for (i) approval of DP&L’s plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that DP&L’s current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. The settlement is subject to, and conditioned upon, approval by the PUCO. A hearing was conducted January 11 - 15, 2021 for consideration of this settlement. The settlement would provide, among other items, for the following:
•Approval of the Smart Grid Plan outlined in the Smart Grid Plan application filed by DP&L with the PUCO, as modified by the terms of the settlement, including, subject to offsetting operational benefits and certain other conditions, a return on and recovery of up to $249.0 million of Smart Grid Plan Phase 1 capital investments and recovery of operational and maintenance expenses through DP&L’s existing Infrastructure Investment Rider for a term of four years, under an aggregate cap of $267.6 million on the amount of such investments and expenses that is recoverable, and an acknowledgement that DP&L may file a subsequent application with the PUCO within three years seeking approvals for Phase 2 of the Smart Grid Plan;
•A commitment by DP&L to invest in a customer information system and supporting technologies during Phase 1 of the Smart Grid Plan, with DP&L recovering a return on and of prudently incurred capital investments and operational and maintenance expenses, including deferred operational and maintenance expense amounts, in a future rate case;
•A determination that DP&L’s ESP 1 satisfies the prospective SEET and the MFA regulatory test;
•A recommendation by parties to the settlement that the PUCO also finds that DP&L satisfies the retrospective SEET for 2018 and 2019;
•A commitment by DP&L to file an application with the PUCO no later than October 1, 2023 for a new electric security plan that does not seek to implement certain non-bypassable charges, including those related to provider of last resort risks, stability, or financial integrity; and
•DP&L shareholder funding, in an aggregate amount of approximately $30.0 million over four years, for certain economic development discounts, incentives, and grants to certain commercial and industrial customers, including hospitals and manufacturers, assistance for low-income customers as well as the residents and businesses of the City of Dayton, and promotion of solar and resiliency development within DP&L’s service territory.
Certain parties which intervened in the ESP proceedings have filed petitions for rehearing of the recent PUCO ESP orders; some of which seek to eliminate DP&L’s RSC from the ESP 1 rates that are currently in place and others seek to re-implement ESP 3, but without the DMR. We are unable to predict the outcomes of these petitions, but if these result in terms that are more adverse than DP&L's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows. The parties signing the above-referenced Settlement have agreed to withdraw their respective petitions if the Settlement is approved by the PUCO without material modification.
Decoupling
On January 23, 2021 DP&L filed with the PUCO requesting approval to defer its decoupling costs consistent with the methodology approved in its Distribution Rate Case. If approved, deferral would be effective December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs and economic changes in customer demand.
COVID-19
In response to the PUCO’s COVID-19 emergency orders, DP&L filed an Application on March 23, 2020, requesting waivers of certain rule and tariff requirements and deferral of certain costs and revenues including those related to deposits and reconnection fees, late payment fees, credit card fees; and waived or uncollected amounts associated with putting customers on payment plans. On May 20, 2020, the PUCO approved the application and required DP&L to file a plan outlining the timing and steps it plans to take in an effort to return to normal operations. The authorized deferral of those certain costs and revenues must be offset by COVID-19 related savings. DP&L filed its plan on July 15, 2020 and was approved by the PUCO on August 12, 2020. As a result, DP&L has recorded a $1.2 million regulatory asset as of December 31, 2020. Recovery of these deferrals will be addressed in a future
rate proceeding.
Distribution Rate Order
On September 26, 2018 the PUCO issued the DRO establishing new base distribution rates for DP&L, which became effective October 1, 2018. The DRO approved, without modification, a stipulation and recommendation previously filed by DP&L, along with various intervening parties and the PUCO staff. The DRO established a revenue requirement for DP&L's electric service base distribution rates of $248.0 million, reflecting an increase to distribution revenues of approximately $29.8 million per year. The DRO, in conjunction with the 2017 ESP, provided for the following items (among other matters):$248.0 million.
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• | DIR- The DRO authorized DP&L to earn amounts through a Distribution Investment Rider ("DIR") set initially at $12.2 million annually, effective October 1, 2018. The DIR revenue cap for 2019 was $22.0 million. The DIR was removed on December 18, 2019 when the 2017 ESP was modified.
|
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• | Decoupling Rider - The DRO authorized a revenue requirement methodology that attempts to eliminate the impacts of weather and demand on DP&L’s revenues for residential and commercial distribution customers beginning January 1, 2019 by providing for certain distribution revenues to be collected through a Decoupling Rider. DP&L collected revenues under the Decoupling Rider until it was removed on December 18, 2019 when the 2017 ESP was modified.
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DP&L ESP Orders
Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, DP&L operated pursuant to an approved ESP plan, which DP&L initially filed on March 13, 2017 (the “2017 ESP”). The 2017 ESP included the following:
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• | A bypassable standard offer energy rider for DP&L’s customers based on competitive bid auctions;
|
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• | The establishment of a three-year non-bypassable DMR to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure;
|
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• | The establishment of the DIR, a non-bypassable Distribution Investment Rider to recover distribution capital investments incremental to the amount included in rate base in the DP&L DRO;
|
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• | A non-bypassable Reconciliation Rider, which allowed DP&L to recover its net ongoing costs from its investment in OVEC;
|
Implementation, effective November 1, 2017, of a Smart Grid Rider, Economic Development Rider, Economic Development Fund, Regulatory Compliance Rider and certain other new, or changes to existing rates and riders and competitive retail market enhancements, with tariffs consistent with the 2017 ESP;
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• | A commitment to commence a sale process to sell our ownership interests in the Miami Fort, Zimmer and Conesville coal-fired generation plants, with all sales proceeds used to pay debt of DPL and DP&L, and
|
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• | Restrictions on DPL making dividend or tax sharing payments and an obligation to convert then existing tax payments owed by DPL to AES into equity investments in DPL.
|
On November 21, 2019, the PUCO issued a supplemental order modifying the 2017 ESP Stipulation by, among other matters, removing the DMR, which reduced DPL’s annual revenues by $105.0 million beginning November 29, 2019. As a result, DP&L filed a Notice of Withdrawal of its 2017 ESP Application and requested to revert to rates based on its ESP 1. On December 18, 2019, the PUCO approved DP&L’s Notice of Withdrawal and reversion to its ESP 1 rate plan. Among other items, the PUCO Order approving the ESP 1 rate plan includes:
Reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million;
| |
• | Continuation of DP&L’s Transmission Cost Recovery Rider, Storm Rider and the bypassable standard offer energy rate for DP&L’s customers based on competitive bid auctions;
|
A placeholder rider to recover grid modernization costs, called the Infrastructure Investment Rider;
A requirement to conduct both an ESP v. MRO Test and a prospective SEET no later than April 1, 2020; and
Removal of the DIR, Reconciliation Rider, Decoupling Rider, Regulatory Compliance rider, and the Uncollectible rider.
DP&L is also subject to a retrospective SEET threshold whereby it must demonstrate its return on equity is below 12%, excluding DMR revenues. The ultimate outcome of this and the ESP v. MRO and prospective SEET could have a material adverse effect on our results of operations, financial condition and cash flows.
Separate from the ESP process, DP&L filed a petition seeking recovery of ongoing OVEC costs through a Legacy Generation Rider and was granted approval effective January 1, 2020. Additionally, in the first quarter of30, 2020, DP&L filed a separate petition seeking authority to recordnew distribution rate case with the PUCO. This rate case proposes a regulatory asset to accrue revenuesrevenue increase of $120.8 million per year and incorporates the DIR investments that would have otherwise been collected under the 2017 ESP through the Decoupling Rider. The outcome of this petition is pending.
Certain parties which intervenedwere planned and approved in the ESP proceedings have filed petitionslast rate case but not yet included in distribution rates, other distribution investments since September 2015 and investments necessitated by the tornados that occurred on Memorial Day in 2019. The rate case also includes a proposal for rehearingincreased tree-trimming expenses and certain customer demand-side management programs and recovery of the recent PUCO ESP orders; some of which seek to eliminate DP&L’s RSC from the ESP 1 rates that are currently in placeprior-approved regulatory assets for tree trimming, uncollectible expenses and others seek to re-implement the 2017 ESP, but without the DMR. We are unable to predict the outcomes of these petitions, but if these result in terms that are more adverse than DP&L's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows.case expense.
Regulatory Impact of Tax Reform
On January 10, 2018 the PUCO initiated a proceeding to consider the impacts of the TCJA to determine the appropriate course of action to pass benefits resulting from the legislation on to ratepayers. The PUCO also directed Ohio utilities to record deferred liabilities for the estimated reduction in federal income tax resulting from the TCJA beginning January 1, 2018. Under the terms of the stipulation in the distribution rate case mentioned above, DP&L filed an application at the PUCO to refund eligible excess accumulated deferred income taxes (ADIT) and any related regulatory liability over a 10-year period with a minimum reversal of $4.0$4.0 million per year over the first five years. Excess ADIT related to depreciation life and method differences will be returned to customers in accordance with federal tax law and related regulations. DP&L’s rates were set using the new tax rate as a result of the distribution rate case. Consistent with the DRO requirement, DP&L filed an application on March 1, 2019 and subsequently entered into a stipulation to resolve all remaining TCJA items related to its distribution rates. That stipulation was approved by the PUCO on September 26, 2019. In accordance with terms of that stipulation, DP&L will return a total of $65.1$65.1 million ($83.2 million when including taxes associated with the refunds). In connection with this stipulation, we reduced our long-term regulatory liability related to deferred income taxes by $23.4 million.million in 2019. See Note 8 – Income Taxes for additional information.
FERC Proceedings
On May 8, 2018, DP&L filed to adjust its FERC jurisdictional transmission rates to reflect the effects of the decrease in federal income tax rates on the current portion of income tax expense as part of the TCJA, resulting in a decrease of approximately $2.4 million annually. The revised rates are in effect and all DP&L over and undercollections dating back to the March 21st effective date were settled in December 2018.
On November 15, 2018 the FERC issued a Notice of Proposed Rulemaking (NOPR) to address amortization of excess accumulated deferred income taxes resulting from the TCJA and their impact on transmission rates. Such notice requires all public utility transmission providers with stated transmission rates under an Open Access Transmission Tariff (OATT) to determine the amount of excess deferred income taxes caused by the TCJATCJA.
.On March 3, 2020, DP&L filed an application before the FERC seeking to change its existing stated transmission rates to formula transmission rates that would be updated each calendar year. This filing was approved and made effective as of May 3, 2020, subject to possible refunds if the approved rates were modified. An uncontested settlement was filed December 10, 2020, which if approved, would be a reduction from the proposed rate which would require refunds for transmission services provided and billed after May 3, 2020. This settlement provides for an increase of approximately $7.0 million on an annualized basis from the rates in effect prior to the March 3, 2020 filing that was allowed to go into effect May 3, 2020. Among other things, the settlement establishes new depreciation rates for DP&L’s transmission assets and an authorized return on equity of 9.85%, which would rise to 9.99% if the FERC were to approve in a separate ongoing proceeding a return on equity “adder” to recognize DP&L’s continued membership in PJM.The settlement is unable to predictpending FERC approval which is expected early in the outcomefirst quarter of 2021. The NOPR, therefore, was addressed and resolved as part of this notice or the impact it may have on our Consolidated Financial Statementsformula transmission rate proceeding .
PJM Transmission Enhancement Settlement
On May 31, 2018, the FERC issued an Order on Contested Settlement regarding the cost allocation method for existing and new transmission facilities contained in the PJM Interconnection’s OATT. The FERC order approved the settlement which reduces DP&L’s transmission costs through PJM beginning in August 2018, including credits to reimburse DP&L for amounts overcharged in prior years. DP&L estimates the prior overcharge by PJM to be $41.1$40.8 million,, of which approximately $30.4$32.1 million has been repaid to DP&L through December 31, 20192020 and $1.8$1.7 million is classified as current in "Accounts receivable, net" and $8.9$7.0 million is classified as non-current in "Other non-current assets" on the accompanying Consolidated Balance Sheet. All of the transmission charges and credits impacted by this FERC order are items that are included for full recovery in DP&L’s non-bypassable TCRR. Accordingly, DP&L has also established offsetting regulatory liabilities. While this development will have a temporary cash flow benefit to DP&L, there is no impact to operating income or net income as all credits will be passed to DP&L’s customers through the TCRR, which began in November 2018.
Regulatory Assets and Liabilities
In accordance with FASC 980, we have recognized total regulatory assets of $193.5$221.1 million and $193.7$193.5 million at December 31, 20192020 and 2018,2019, respectively, and total regulatory liabilities of $271.5$236.3 million and $313.2$271.5 million at December 31, 20192020 and 2018,2019, respectively. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 1 – Overview and Summary of Significant Accounting Policies for accounting policies regarding Regulatory Assets and Liabilities.
The following table presents DPL’s Regulatory assets and liabilities:
|
| | | | | | | | | | | | |
| | | Type of Recovery | | Amortization Through | | December 31, |
| $ in millions | | | | 2019 | | 2018 |
| Regulatory assets, current: | | | | | | | | |
| Undercollections to be collected through rate riders | | A/B |
| 2020 | | $ | 19.1 |
| | $ | 40.5 |
|
| Rate case expenses being recovered in base rates | | B | | 2020 | | 0.6 |
| | 0.6 |
|
| Total regulatory assets, current | |
|
|
| | 19.7 |
| | 41.1 |
|
| | | | | | | | | |
| Regulatory assets, non-current: | |
|
|
| | | | |
| Pension benefits | | B |
| Ongoing | | 83.9 |
| | 87.5 |
|
| Unrecovered OVEC charges | | C |
| Undetermined | | 29.1 |
| | 28.7 |
|
| Fuel costs | | B |
|
| | — |
| | 3.3 |
|
| Regulatory compliance costs | | B |
| Undetermined | | 6.3 |
| | 6.1 |
|
| Smart grid and AMI costs | | B |
| Undetermined | | 8.5 |
| | 8.5 |
|
| Unamortized loss on reacquired debt | | B |
| Various | | 10.0 |
| | 6.0 |
|
| Deferred storm costs | | A |
| Undetermined | | 5.1 |
| | 4.7 |
|
| Deferred vegetation management and other | | A/B | | Undetermined | | 12.7 |
| | 7.8 |
|
| Decoupling deferral | | C | | Undetermined | | 13.8 |
| | — |
|
| Uncollectible deferral | | C | | Undetermined | | 4.4 |
| | — |
|
| Total regulatory assets, non-current | |
|
|
| | 173.8 |
| | 152.6 |
|
| | |
|
|
| | | | |
| Total regulatory assets | |
|
|
| | $ | 193.5 |
| | $ | 193.7 |
|
| | |
|
|
| | | | |
| Regulatory liabilities, current: | |
|
|
| | | | |
| Overcollection of costs to be refunded through rate riders | | A/B |
| 2020 | | $ | 27.9 |
| | $ | 34.9 |
|
| Total regulatory liabilities, current | |
|
|
| | 27.9 |
| | 34.9 |
|
| | | | | | | | | |
| Regulatory liabilities, non-current: | |
|
|
| | | | |
| Estimated costs of removal - regulated property | |
|
| Not Applicable | | 143.6 |
| | 139.1 |
|
| Deferred income taxes payable through rates | |
|
| Various | | 73.6 |
| | 116.3 |
|
| TCJA regulatory liability | | B | | Ongoing | | 12.9 |
| | — |
|
| PJM transmission enhancement settlement | | A | | 2025 | | 8.9 |
| | 16.9 |
|
| Postretirement benefits | | B |
| Ongoing | | 4.6 |
| | 6.0 |
|
| Total regulatory liabilities, non-current | |
|
|
| | 243.6 |
| | 278.3 |
|
| | |
|
|
| | | | |
| Total regulatory liabilities | |
|
|
| | $ | 271.5 |
| | $ | 313.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Type of Recovery | | Amortization Through | | December 31, |
| $ in millions | | | | 2020 | | 2019 |
| Regulatory assets, current: | | | | | | | | |
| Undercollections to be collected through rate riders | | A/B | | 2021 | | $ | 26.8 | | | $ | 19.1 | |
| Rate case expenses being recovered in base rates | | B | | 2021 | | 0.7 | | | 0.6 | |
| Total regulatory assets, current | | | | | | 27.5 | | | 19.7 | |
| | | | | | | | |
| Regulatory assets, non-current: | | | | | | | | |
| Pension benefits | | B | | Ongoing | | 94.4 | | | 83.9 | |
| Unrecovered OVEC charges | | C | | Undetermined | | 28.9 | | | 29.1 | |
| | | | | | | | |
| Regulatory compliance costs | | B | | Undetermined | | 6.3 | | | 6.3 | |
| Smart grid and AMI costs | | B | | Undetermined | | 8.5 | | | 8.5 | |
| Unamortized loss on reacquired debt | | B | | Various | | 7.1 | | | 10.0 | |
| Deferred storm costs | | A | | Undetermined | | 11.5 | | | 5.1 | |
| Deferred vegetation management and other | | A/B | | Undetermined | | 15.7 | | | 12.7 | |
| Decoupling deferral | | C | | Undetermined | | 13.8 | | | 13.8 | |
| Uncollectible deferral | | C | | Undetermined | | 7.4 | | | 4.4 | |
| Total regulatory assets, non-current | | | | | | 193.6 | | | 173.8 | |
| | | | | | | | |
| Total regulatory assets | | | | | | $ | 221.1 | | | $ | 193.5 | |
| | | | | | | | |
| Regulatory liabilities, current: | | | | | | | | |
| Overcollection of costs to be refunded through rate riders | | A/B | | 2021 | | $ | 18.0 | | | $ | 27.9 | |
| Total regulatory liabilities, current | | | | | | 18.0 | | | 27.9 | |
| | | | | | | | |
| Regulatory liabilities, non-current: | | | | | | | | |
| Estimated costs of removal - regulated property | | | | Not Applicable | | 138.8 | | | 143.6 | |
| Deferred income taxes payable through rates | | | | Various | | 61.2 | | | 73.6 | |
| TCJA regulatory liability | | B | | Ongoing | | 7.2 | | | 12.9 | |
| PJM transmission enhancement settlement | | A | | 2025 | | 7.0 | | | 8.9 | |
| Postretirement benefits | | B | | Ongoing | | 4.1 | | | 4.6 | |
| Total regulatory liabilities, non-current | | | | | | 218.3 | | | 243.6 | |
| | | | | | | | |
| Total regulatory liabilities | | | | | | $ | 236.3 | | | $ | 271.5 | |
A – Recovery of incurred costs plus rate of return.
B – Recovery of incurred costs without a rate of return.
C – Recovery not yet determined, but recovery is probable of occurring in future rate proceedings.
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate order; recovery for the remaining costs is probable, but not certain. DP&L is earning a net return on $5.5 million of this net deferral. These items include undercollection of:costs include: (i) the Energy Efficiency Rider, (ii) the Alternative Energy Rider, (iii) unrecovered OVEC costs andthe Legacy Generation Resource Rider, (iv) the Economic Development Rider and the (v) Transmission Cost Recovery Rider. It also includesAlso included are the current portion of deferred fuel costs and deferred stormrate case expense costs which do not earn a return and are described in greater detail below. As currentCurrent regulatory liabilities this includesinclude the overcollection of competitive bidding energy and auction costs and certain transmission related costs, including the current portion of the PJM transmission enhancement settlement and the TCJA regulatory liability (see above).
DP&L is earning a return on $16.3 million of this net current deferral including: (i) the Energy Efficiency Rider, (ii) the Alternative Energy Rider, (iii) the Legacy Generation Resource Rider, (iv) the Economic Development Rider and (v) the Transmission Cost Recovery Rider. These regulatory assets are partially offset by the overcollection of competitive bidding energy and auction costs.
Pension benefits represent the qualifying FASC 715 “Compensation - Retirement Benefits” costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI. As per PUCO and FERC precedents, these costs are probable of future rate recovery.
Unrecovered OVEC charges includes the portion of charges from OVEC that were not recoverable through DP&L’s Fuel Rider from October 2014 through October 2017. Additionally, it includes net OVEC costs from December 19, 2019 through December 31, 2019. DP&L expects to recover these costs through a future rate proceeding. Beginning on November 1, 2017, through December 18, 2019, current OVEC costs were being recovered through DP&L’s reconciliation rider which was authorized as part of the 2017 ESP.ESP 3. Beginning January 1, 2020, DP&L began recovering its current net OVEC costs through its Legacy Generation Rider, established pursuant to ORC 4928.148.
Fuel costs represent unrecovered fuel costs related to DP&L’s Fuel Rider from 2010 through 2015 resulting from a declining SSO customer base. DP&L was granted recovery of these costs without a return through the SSO as approved in the 2017 ESP; this authorization continued in the approval of ESP 1. These costs are being recovered over the three-year period that began November 1, 2017.
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff and (vi) Supplier Consolidated Billing. All of these costs except for Generation Separation earn a return. These costs were being recovered over a three-year period that began November 1, 2017 through a rider approved in the 2017 ESP.ESP 3. That rider was eliminated with the approval of the ESP 1 rate plan, so the balance as of December 18, 2019 remains a regulatory asset for future recovery.
Rate case costsexpenses represents costs associated with preparing a distribution rate case.cases. DP&L was granted recovery of these costs for the 2015 case which do not earn a return, as part of the DRO. Recovery of costs for the 2020 case were included in the pending filing.
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. In a PUCO order on January 5, 2011, the PUCO indicated that it expects DP&L to continue to monitor other utilities’ Smart Grid and AMI programs and to explore the potential benefits of investing in Smart Grid and AMI programs and that DP&L will, when appropriate, file new Smart Grid and/or AMI business cases in the future. DP&L requested recovery of theseThese costs as part ofare included in the December 2018 Distribution Modernization Plan filing with the PUCOOctober 23, 2020 settlement described in Item 1 Business - COMPETITION AND REGULATION.above.
Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the PUCO.
Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during 2017, 2018, 2019 and 2019. The 2017 ESP granted DP&L approval to establish a rider by which to seek recovery of these types of costs with a return. This authorization continued in the approval of ESP 1.2020. DP&L plans to file petitions seeking recovery of each calendar year of storm costs in the following calendar year. DP&L plans to file petitions seeking recovery of cash calendar year's storm costs in the following calendar year. Recovery of these costs is probable, but not certain.
Vegetation management costs represents costs incurred from outside contractors for tree trimming and other vegetation management services. Calculation terms were agreed to in the stipulation approved in the DRO. The terms were an annual baseline of $10.7$10.7 million in 2018 and $15.7 million thereafter. Amounts over the baseline will be deferred subject to an annual deferral maximum of $4.6 million. Annual spending less than the vegetation
management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability. A future filing will be made to determine how this cost will be collected from or returned to customers.These costs are included in DP&L's pending distribution rate case application.
Decoupling deferral represents the change in the revenue requirement based on a per customer methodology in the stipulation approved in the DRO and includes deferrals through December 18, 2019. These costs were previously recovered through a Decoupling Rider; however, DP&L withdrew its application in the 2017 ESP 3 and in doing so, the PUCO ordered on December 18, 2019 in the ESP 1 order, that DP&L no longer has a Decoupling Rider. As described above, DP&L recently filed a petition seeking authority to record a regulatory asset to accrue revenues that would have otherwise been collected through the Decoupling Rider.
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenues associated with the bypassable uncollectible portion of the standard offer rate. The DRO established that these costs would be recovered in a rider outside of base rates, thus no uncollectible expense is included in base rates. A future filing will be made to determine how these expenses will be collected from customers.These costs are included in our pending distribution rate case.
Estimated costs of removal - regulated property reflect an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.
Deferred income taxes payable through rates represent deferred income tax liabilities recognized from the normalization of flow-through items as the result of taxes previously charged to customers. A deferred income tax asset or liability is created from a difference in income recognition between tax laws and accounting methods. As a
regulated utility, DP&L includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes DP&L expects to return to customers in future periods.
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess ADIT for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, DP&L agreed that savings from the TCJA attributable to distribution facilities, including the excess ADIT and the regulatory liability, constitute amounts that will be returned to customers. As a result of the TCJA and subsequent DRO, DP&L entered into a stipulation to resolve all remaining TCJA items related to its distribution rates, including a proposal to return no less than $4.0$4.0 million per year for the first five years unless fully returned in the first five years via a tax savings cost rider for the distribution portion of the balance. On September 26, 2019, an order approved the stipulation in its entirety.
PJM Transmission rates are regulated by FERC and DP&LEnhancement Settlement has reduced its stated transmission rate to reflectliability represents the effects of the lower current tax rate. With respect to the transmission portion of amortization of excess ADIT, on November 15, 2018, FERC issued a Notice of Proposed Rulemaking entitled, “Public Utility Transmission Rate Changes to Address Accumulated Deferred Income Taxes.” Among other things, this notice proposes “to require all public utilities with transmission stated rates to determine the amount of excess and deferred income tax caused by the Tax Cuts and Jobs Act’s reduction to the federal corporate income tax rate and return or recover this amount to or from customers.”Enhancement Settlement charges for which DP&L is due a public utility withrefund per FERC Order EL05-121-009 issued on May 31, 2018. The Order states that customers are due a refund for part of these charges which will be received starting August 2018 through 2025. Refunds received will be returned to customers via the transmission stated rates and will make a filing in conformance to the requirements once the proposed rule is finalized.cost rider.
Postretirement benefits represent the qualifying FASC 715 “Compensation – Retirement Benefits” gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.
Note 4 – Property, Plant and Equipment
The following is a summary of DPL’s Property, plant and equipment with corresponding composite depreciation rates at December 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| $ in millions | | | | Composite Rate | | | | Composite Rate |
| Regulated: | | | | | | | | |
| Transmission | | $ | 273.0 | | | 3.2% | | $ | 235.8 | | | 3.9% |
| Distribution | | 1,453.7 | | | 4.0% | | 1,364.2 | | | 4.1% |
| General | | 17.7 | | | 7.6% | | 16.5 | | | 9.0% |
| Non-depreciable | | 65.1 | | | N/A | | 61.6 | | | N/A |
| Total regulated | | 1,809.5 | | | | | 1,678.1 | | | |
| Unregulated: | | | | | | | | |
| | | | | | | | |
| Other | | 24.8 | | | 4.5% | | 19.0 | | | 7.6% |
| Non-depreciable | | 5.0 | | | N/A | | 4.8 | | | N/A |
| Total unregulated | | 29.8 | | | | | 23.8 | | | |
| | | | | | | | |
| Total property, plant and equipment in service | | $ | 1,839.3 | | | 3.8% | | $ | 1,701.9 | | | 4.0% |
|
| | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| $ in millions | | | | Composite Rate | | | | Composite Rate |
| Regulated: | | | | | | | | |
| Transmission | | $ | 235.8 |
| | 3.9% | | $ | 223.2 |
| | 4.1% |
| Distribution | | 1,364.2 |
| | 4.1% | | 1,289.8 |
| | 4.5% |
| General | | 16.5 |
| | 9.0% | | 13.2 |
| | 8.5% |
| Non-depreciable | | 61.6 |
| | N/A | | 60.4 |
| | N/A |
| Total regulated | | 1,678.1 |
| | | | 1,586.6 |
| | |
| Unregulated: | | | | | | | | |
| Other | | 19.0 |
| | 7.6% | | 21.2 |
| | 6.7% |
| Non-depreciable | | 4.8 |
| | N/A | | 7.8 |
| | N/A |
| Total unregulated | | 23.8 |
| | | | 29.0 |
| | |
| | | | | | | | | |
| Total property, plant and equipment in service | | $ | 1,701.9 |
| | 4.0% | | $ | 1,615.6 |
| | 4.3% |
In June 2018, DP&Lclosed on a transmission asset transaction with Duke and AEP, where ownership stakes in certain previously co-owned transmission assets were exchanged to eliminate co-ownership. Each previously co-owned transmission asset became wholly-owned by one of DP&L, Duke or AEP after the transaction. This transaction also resulted in cash proceeds to DP&L of $10.6$10.6 million and no gain or loss was recorded on the transaction.
AROs
We recognizerecognized AROs in accordance with GAAP which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the related asset. Our legal obligations arewere associated with the retirement of our long-lived assets,
consisting primarily of asbestos abatement and ash disposal facilities. Our generation AROs related to Conesville and the closed Hutchings EGU are recorded within Other non-current liabilities on the consolidated balance sheets. As of December 31, 2018,2020, our generation AROs have all been settled through the AROs related tosale of our interest in Conesville and the retired Stuart and Killen generating facilities were recorded in Non-current liabilities of discontinued operations and held-for-sale businesses on the consolidated balance sheets and are excluded from the table below.Hutchings Coal Station. See Note 1516 – Discontinued OperationsDispositions for additional information.
Estimating the amount and timing of future expenditures of this type requires significant judgment. ManagementPreviously, management routinely updatesupdated these estimates as additional information becomesbecame available.
Changes in the Liability for AROs
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Balance as of January 1 | | $ | 4.7 | | | $ | 4.7 | |
| | | | |
| | | | |
Settlements (a) | | (4.7) | | | 0 | |
| Balance as of December 31 | | $ | 0 | | | $ | 4.7 | |
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Balance as of January 1 | | $ | 9.4 |
| | $ | 15.1 |
|
| Revisions to cash flow and timing estimates | | 3.4 |
| | (2.6 | ) |
| Accretion expense | | 0.2 |
| | 0.3 |
|
Settlements (a) | | — |
| | (3.4 | ) |
| Balance as of December 31 | | $ | 13.0 |
| | $ | 9.4 |
|
(a) Settlements related to sale of DP&L's Hutchings Coal Station. See Note 16 – Dispositions for more information on the sale of the Hutchings Coal Station.
| |
(a) | Primarily includes settlement related to transfer of Beckjord Facility. See Note 16 – Dispositions for additional information. |
Asset Removal Costs
We continue to record costs of removal for our regulated transmission and distribution assets through our depreciation rates and recover those amounts in rates charged to our customers. There are no known legal AROs associated with these assets. We have recorded $143.6$138.8 million and $139.1$143.6 million in estimated costs of removal at December 31, 20192020 and 2018,2019, respectively, as regulatory liabilities for our transmission and distribution property. These amounts represent the excess of the cumulative removal costs recorded through depreciation rates versus the cumulative removal costs actually incurred. See Note 3 – Regulatory Matters for additional information.
Changes in the Regulatory Liability for Transmission and Distribution Asset Removal Costs
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Balance as of January 1 | | $ | 143.6 | | | $ | 139.1 | |
| Additions | | 15.6 | | | 14.8 | |
| Settlements | | (20.4) | | | (10.3) | |
| Balance as of December 31 | | $ | 138.8 | | | $ | 143.6 | |
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Balance as of January 1 | | $ | 139.1 |
| | $ | 132.8 |
|
| Additions | | 14.8 |
| | 14.3 |
|
| Settlements | | (10.3 | ) | | (8.0 | ) |
| Balance as of December 31 | | $ | 143.6 |
| | $ | 139.1 |
|
Note 5 – 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 method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future.
The table below presents the fair value and cost of our non-derivative financial instruments at December 31, 20192020 and 2018.2019. See Note 6 – Derivative Instruments and Hedging Activities for the fair values of our derivative instruments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| $ in millions | | Cost | | Fair Value | | Cost | | Fair Value |
| Assets | | | | | | | | |
| Money market funds | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.3 | |
| Equity securities | | 2.1 | | | 4.5 | | | 2.3 | | | 4.2 | |
| Debt securities | | 4.0 | | | 4.1 | | | 4.0 | | | 4.1 | |
| Hedge funds | | 0 | | | 0 | | | 0.1 | | | 0.1 | |
| | | | | | | | |
| Tangible assets | | 0 | | | 0 | | | 0.1 | | | 0.1 | |
| Total assets | | $ | 6.4 | | | $ | 8.9 | | | $ | 6.8 | | | $ | 8.8 | |
| | | | | | | | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities | | | | | | | | |
| Long-term debt | | $ | 1,393.6 | | | $ | 1,571.6 | | | $ | 1,363.1 | | | $ | 1,404.0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| $ in millions | | Cost | | Fair Value | | Cost | | Fair Value |
| Assets | | | | | | | | |
| Money market funds | | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.4 |
| | $ | 0.4 |
|
| Equity securities | | 2.3 |
| | 4.2 |
| | 2.4 |
| | 3.5 |
|
| Debt securities | | 4.0 |
| | 4.1 |
| | 4.1 |
| | 4.0 |
|
| Hedge funds | | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Tangible assets | | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Total assets | | $ | 6.8 |
| | $ | 8.8 |
| | $ | 7.1 |
| | $ | 8.1 |
|
| | | | | | | | | |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities | | | | | | | | |
| Long-term debt | | $ | 1,363.1 |
| | $ | 1,404.0 |
| | $ | 1,475.9 |
| | $ | 1,519.6 |
|
Fair Value Hierarchy
Fair value is defined as the exchange 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 among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 20192020 and 2018.2019.
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 debt is presented at the carrying value, net of unamortized premium or discount, in the financial statements. The debt amounts include the current portion payable in the next twelve months and have maturities that range from 20202025 to 2061.
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$1.6 million ($1.0 million net of tax) was reversed to Accumulated Deficit 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 years ended December 31, 2019 or 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 deferrednon-current assets on the consolidated balance sheets and classified as available for sale.
Duringequity securities. Gains and losses on these assets were not material during the yearyears ended December 31, 2020, 2019 $0.3 million ($0.2 million after tax) of various investments were sold to facilitate the distribution of benefits.or 2018.
The fair value of assets and liabilities at December 31, 20192020 and 20182019 and the respective category within the fair value hierarchy for DPL was determined as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Fair Value at December 31, 2020 (a) | | Fair Value at December 31, 2019 (a) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | |
| Master trust assets | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 0.3 | | | $ | 0 | | | $ | 0 | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0 | | | $ | 0 | | | $ | 0.3 | |
| Equity securities | | 0 | | | 4.5 | | | 0 | | | 4.5 | | | 0 | | | 4.2 | | | 0 | | | 4.2 | |
| Debt securities | | 0 | | | 4.1 | | | 0 | | | 4.1 | | | 0 | | | 4.1 | | | 0 | | | 4.1 | |
| Hedge funds | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.1 | | | 0 | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| Tangible assets | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.1 | | | 0 | | | 0.1 | |
| Total Master trust assets | | 0.3 | | | 8.6 | | | 0 | | | 8.9 | | | 0.3 | | | 8.5 | | | 0 | | | 8.8 | |
| Derivative assets | | | | | | | | | | | | | | | | |
| Interest rate hedge | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.1 | | | 0 | | | 0.1 | |
| Total Derivative assets | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0.1 | | | 0 | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 0.3 | | | $ | 8.6 | | | $ | 0 | | | $ | 8.9 | | | $ | 0.3 | | | $ | 8.6 | | | $ | 0 | | | $ | 8.9 | |
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 0 | | | $ | 1,554.2 | | | $ | 17.4 | | | $ | 1,571.6 | | | $ | 0 | | | $ | 1,386.5 | | | $ | 17.5 | | | $ | 1,404.0 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total liabilities | | $ | 0 | | | $ | 1,554.2 | | | $ | 17.4 | | | $ | 1,571.6 | | | $ | 0 | | | $ | 1,386.5 | | | $ | 17.5 | | | $ | 1,404.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Fair Value at December 31, 2019 (a) | | Fair Value at December 31, 2018 (a) |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | |
| Master trust assets | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 0.3 |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | 0.4 |
|
| Equity securities | | — |
| | 4.2 |
| | — |
| | 4.2 |
| | — |
| | 3.5 |
| | — |
| | 3.5 |
|
| Debt securities | | — |
| | 4.1 |
| | — |
| | 4.1 |
| | — |
| | 4.0 |
| | — |
| | 4.0 |
|
| Hedge funds | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Tangible assets | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Total Master trust assets | | 0.3 |
| | 8.5 |
| | — |
| | 8.8 |
| | 0.4 |
| | 7.7 |
| | — |
| | 8.1 |
|
| Derivative assets | | | | | | | | | | | | | | | | |
| Interest rate hedge | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 1.5 |
| | — |
| | 1.5 |
|
| Total Derivative assets | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 1.5 |
| | — |
| | 1.5 |
|
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 0.3 |
| | $ | 8.6 |
| | $ | — |
| | $ | 8.9 |
| | $ | 0.4 |
| | $ | 9.2 |
| | $ | — |
| | $ | 9.6 |
|
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | — |
| | $ | 1,386.5 |
| | $ | 17.5 |
| | $ | 1,404.0 |
| | $ | — |
| | $ | 1,501.9 |
| | $ | 17.7 |
| | $ | 1,519.6 |
|
| | | | | | | | |
|
| | | | | | | |
|
|
| Total liabilities | | $ | — |
| | $ | 1,386.5 |
| | $ | 17.5 |
| | $ | 1,404.0 |
| | $ | — |
| | $ | 1,501.9 |
| | $ | 17.7 |
| | $ | 1,519.6 |
|
(a)Includes credit valuation adjustment
| |
(a) | Includes credit valuation adjustment |
Our financial instruments are valued using the market approach in the following categories:
•Level 1 inputs are used 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 interest rate hedge contracts which are valued using a benchmark interest rate. 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 certain debt balances are considered a Level 3 input because the notes are not publicly traded. Our long-term debt is fair valued for disclosure purposes only.
All 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.
Note 6 – 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.
DPL's interest rate swaps arewere designated as a cash flow hedge and havehad a combined notional amount of $140.0 million as of December 31, 2019 and 2018.2019. These swaps settled during 2020 when the related debt was repaid.
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.
In prior years, we entered 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 whichAugust 2020, the contracts settle. As of December 31, 2018, we no longer held any positions in forward power contracts or forward natural gas contracts.
We have 2 interest rate swaps to hedge the variable interest on ourthe $140.0 million variable interest rate tax-exempt First Mortgage Bonds due August 2020.expired, as the associated debt reached maturity. The interest rate swaps havehad a combined notional amount of $140.0 million and will settlesettled monthly based on a one-month LIBOR. The original notional amount was $200.0 million, but 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 AOCIAOCL associated with the remaining swaps will bewas amortized out of AOCIAOCL 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 AOCL into interest expense.
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 AOCIAOCL and into earnings in those periods in which hedged interest payments occur.
The following tables provide information on gains or losses recognized in AOCIAOCL for the cash flow hedges for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| $ in millions (net of tax) | | Interest Rate
Hedge | | Power | | Interest Rate
Hedge | | Power | | Interest Rate
Hedge |
| Beginning accumulated derivative gain in AOCL | | $ | 14.5 | | | $ | 0.4 | | | $ | 16.6 | | | $ | (2.8) | | | $ | 17.5 | |
| | | | | | | | | | |
| Net gains / (losses) associated with current period hedging transactions | | 0 | | | 0 | | | (1.0) | | | 0 | | | (0.1) | |
| Net (gains) / losses reclassified to earnings: | | | | | | | | | | |
| Interest Expense | | (0.9) | | | 0 | | | (1.1) | | | 0 | | | (0.8) | |
| (Income) / loss from discontinued operations before income tax | | 0 | | | (0.4) | | | 0 | | | 3.2 | | | 0 | |
| Ending accumulated derivative gain in AOCL | | $ | 13.6 | | | $ | 0 | | | $ | 14.5 | | | $ | 0.4 | | | $ | 16.6 | |
| | | | | | | | | | |
| Portion expected to be reclassified to earnings in the next twelve months | | $ | (0.8) | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| $ in millions (net of tax) | | Power | | Interest Rate
Hedges | | Power | | Interest Rate
Hedges | | Power | | Interest Rate
Hedges |
| Beginning accumulated derivative gain / (loss) in AOCI | | $ | 0.4 |
| | $ | 16.6 |
| | $ | (2.8 | ) | | $ | 17.5 |
| | $ | (4.3 | ) | | $ | 17.4 |
|
| | | | | | | | | | | | | |
| Net gains / (losses) associated with current period hedging transactions | | — |
| | (1.0 | ) | | — |
| | (0.1 | ) | | 8.8 |
| | 0.8 |
|
| Net (gains) / losses reclassified to earnings: | | | | | | | | | | | | |
| Interest Expense | | — |
| | (1.1 | ) | | — |
| | (0.8 | ) | | — |
| | (0.7 | ) |
| (Income) / loss from discontinued operations before income tax | | (0.4 | ) | | — |
| | 3.2 |
| | — |
| | (7.3 | ) | | — |
|
| Ending accumulated derivative gain / (loss) in AOCI | | $ | — |
| | $ | 14.5 |
| | $ | 0.4 |
| | $ | 16.6 |
| | $ | (2.8 | ) | | $ | 17.5 |
|
| | | | | | | | | | | | | |
| 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) | |
|
| | 8 |
| | | | | | | | |
Net gains or losses associated with the ineffective portion of the hedging transactions were immaterial for the years ended December 31, 2018 and 2017.
Derivatives Not Designated as Hedges
In prior years certain derivative contracts were entered into on a regular basis as part of our risk management program but did not qualify for hedge accounting or the normal purchases and sales exceptions under FASC 815. Accordingly, such contracts were 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 entered into as part of our risk management program may have been settled financially, by physical delivery or net settled with the counterparty. For the years ended December 31, 2018 and 2017, all amounts related to such contracts are presented in discontinued operations. As of December 31, 2018, we no longer had any such contracts.
Certain qualifying derivative instruments we previously held were 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. For the years ended December 2018 and 2017, all amounts related to such contracts are presented in discontinued operations. As of December 31, 2018, we no longer had any such contracts.
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, 2018 and 2017:
|
| | | | | | | | | | | | | | | | |
| | | Year ended December 31, 2018 |
| $ in millions | | FTRs | | Power | | Natural Gas | | Total |
| Change in unrealized gain / (loss) | | $ | 0.3 |
| | $ | — |
| | $ | (0.1 | ) | | $ | 0.2 |
|
| Realized gain / (loss) | | 0.4 |
| | — |
| | 0.3 |
| | 0.7 |
|
| Total | | $ | 0.7 |
| | $ | — |
| | $ | 0.2 |
| | $ | 0.9 |
|
| | |
| |
| |
| |
|
| Recorded in Statement of Operations: gain / (loss) |
| Income / (loss) from discontinued operations before income tax | | $ | 0.7 |
| | $ | — |
| | $ | 0.2 |
| | $ | 0.9 |
|
| Total | | $ | 0.7 |
| | $ | — |
| | $ | 0.2 |
| | $ | 0.9 |
|
|
| | | | | | | | | | | | | | | | |
| | | 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 in Statement of Operations: gain / (loss) |
| Income / (loss) from discontinued operations before income tax | | $ | 0.4 |
| | $ | 1.2 |
| | $ | 1.6 |
| | $ | 3.2 |
|
| Total | | $ | 0.4 |
| | $ | 1.2 |
| | $ | 1.6 |
| | $ | 3.2 |
|
When applicable, 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. As of December 31, 20192020 and 2018,2019, DPL did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of DPL’s derivative instruments.interest rate swaps.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| $ in millions | Hedging Designation | | Balance sheet classification | | 2020 | | 2019 |
| Interest rate swap | Cash Flow Hedge | | Prepayments and other current assets | | $ | 0 | | | $ | 0.1 | |
| | | | | | | |
|
| | | | | | | | | | | |
| | | | | | December 31, |
| | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 |
| Interest rate hedges in a current asset position | Cash Flow Hedge | | Prepayments and other current assets | | $ | 0.1 |
| | $ | 0.9 |
|
| Interest rate hedges in a non-current asset position | Cash Flow Hedge | | Other non-current assets | | $ | — |
| | $ | 0.6 |
|
Note 7 – Long-term debt
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | | | | | | |
| $ in millions | | Interest Rate | | Maturity | | December 31, 2020 | | December 31, 2019 |
| First Mortgage Bonds | | 3.95% | | 2049 | | $ | 425.0 | | | $ | 425.0 | |
| First Mortgage Bonds | | 3.20% | | 2040 | | 140.0 | | | — | |
| Tax-exempt First Mortgage Bonds - rates from: 1.16% - 2.47% (a) and 2.4% - 3.07% (b) | | | | 2020 | | 0 | | | 140.0 | |
| U.S. Government note | | 4.20% | | 2061 | | 17.4 | | | 17.5 | |
| | | | | | | | |
| Unamortized deferred financing costs | | | | | | (5.7) | | | (5.4) | |
| Unamortized debt discounts and premiums, net | | | | | | (2.6) | | | (2.7) | |
| Total long-term debt at subsidiary | | | | | | 574.1 | | | 574.4 | |
| | | | | | | | |
| Senior unsecured bonds | | 7.25% | | 2021 | | — | | | 380.0 | |
| Senior unsecured bonds | | 4.125% | | 2025 | | 415.0 | | | 0 | |
| Senior unsecured bonds | | 4.35% | | 2029 | | 400.0 | | | 400.0 | |
| Note to DPL Capital Trust II (c) | | 8.125% | | 2031 | | 15.6 | | | 15.6 | |
| Unamortized deferred financing costs | | | | | | (10.2) | | | (5.9) | |
| Unamortized debt discounts and premiums, net | | | | | | (0.9) | | | (1.0) | |
| Total long-term debt | | | | | | 1,393.6 | | | 1,363.1 | |
| Less: current portion | | | | | | (0.2) | | | (139.8) | |
| Long-term debt, net of current portion | | | | | | $ | 1,393.4 | | | $ | 1,223.3 | |
|
| | | | | | | | | | | | |
| Long-term debt | | | | | | | | |
| $ in millions | | Interest Rate | | Maturity | | December 31, 2019 | | December 31, 2018 |
| First Mortgage Bonds | | 3.95% | | 2049 | | $ | 425.0 |
| | $ | — |
|
| Term loan - rates from: 3.57% - 4.82% (a) and 4.00% - 4.60% (b) | | | | 2022 | | — |
| | 436.1 |
|
| Tax-exempt First Mortgage Bonds - rates from: 2.49% - 2.93% (a) and 1.29% - 1.42% (b) | | | | 2020 | | 140.0 |
| | 140.0 |
|
| U.S. Government note | | 4.2% | | 2061 | | 17.5 |
| | 17.7 |
|
| Unamortized deferred financing costs | | | | | | (5.4 | ) | | (6.3 | ) |
| Unamortized debt discounts and premiums, net | | | | | | (2.7 | ) | | (1.4 | ) |
| Total long-term debt at subsidiary | | | | | | 574.4 |
| | 586.1 |
|
| | | | | | | | | |
| Senior unsecured bonds | | 6.75% | |
| | — |
| | 99.0 |
|
| Senior unsecured bonds | | 7.25% | | 2021 | | 380.0 |
| | 780.0 |
|
| Senior unsecured bonds | | 4.35% | | 2029 | | 400.0 |
| | — |
|
| Note to DPL Capital Trust II (c) | | 8.125% | | 2031 | | 15.6 |
| | 15.6 |
|
| Unamortized deferred financing costs | | | | | | (5.9 | ) | | (4.3 | ) |
| Unamortized debt discounts and premiums, net | | | | | | (1.0 | ) | | (0.5 | ) |
| Total long-term debt | | | | | | 1,363.1 |
| | 1,475.9 |
|
| Less: current portion | | | | | | (139.8 | ) | | (103.6 | ) |
| Long-term debt, net of current portion | | | | | | $ | 1,223.3 |
| | $ | 1,372.3 |
|
(a) Range of interest rates for the year ended December 31, 2020.
(b) Range of interest rates for the year ended December 31, 2019.
(c) Note payable to related party. See Note 12 – Related Party Transactions for additional information.
| |
(a) | Range of interest rates for the year ended December 31, 2019. |
| |
(b) | Range of interest rates for the year ended December 31, 2018. |
| |
(c) | Note payable to related party. See Note 12 – Related Party Transactions for additional information. |
At December 31, 2019,2020, maturities of long-term debt are summarized as follows:
| | | | | |
| Due during the years ending December 31, | |
| $ in millions | |
| 2021 | $ | 0.2 | |
| 2022 | 0.2 | |
| 2023 | 0.2 | |
| 2024 | 0.2 | |
| 2025 | 415.2 | |
| Thereafter | 997.0 | |
| 1,413.0 | |
| Unamortized discounts and premiums, net | (3.5) | |
| Deferred financing costs, net | (15.9) | |
| Total long-term debt | $ | 1,393.6 | |
| |
| |
| |
| |
| |
| |
|
| | | |
| Due during the years ending December 31, | |
| $ in millions | |
| 2020 | $ | 140.2 |
|
| 2021 | 380.2 |
|
| 2022 | 0.2 |
|
| 2023 | 0.2 |
|
| 2024 | 0.2 |
|
| Thereafter | 857.1 |
|
| | 1,378.1 |
|
| Unamortized discounts and premiums, net | (3.7 | ) |
| Deferred financing costs, net | (11.3 | ) |
| Total long-term debt | $ | 1,363.1 |
|
Premiums or discounts recognized at the Merger date are amortized over the life of the debt using the effective interest method.
Revolving Credit Facilities
At December 31, 2020 and December 31, 2019, the DPL revolving credit facility had outstanding borrowings on its revolving credit facility of $80.0 million and $104.0 million, and at December 31, 2018 there were no outstanding borrowings on its revolving credit facility.respectively. At December 31, 2020 and December 31, 2019, the DP&L revolving credit facility had outstanding borrowings of $20.0 million and $40.0 million, respectively.
Significant Transactions
On July 31, 2020, DP&L issued $140.0 million of First Mortgage Bonds and on August 3, 2020 used the proceeds to purchase at par value the $140.0 million of outstanding tax-exempt Ohio Air Quality Development Authority (OAQDA) Collateralized Pollution Control Revenue Refunding Bonds that had been issued in 2015. The new First Mortgage Bonds carry an interest rate of 3.20% and mature on July 31, 2040. The OAQDA Revenue bonds have not been legally cancelled and can be re-issued at the discretion of DP&L at any time. These bonds will be held in trust while we continue to evaluate market conditions and explore suitable long-term financing alternatives.
On June 1, 2020 DPL amended its secured revolving credit facilityfacility. As a result of $40.0the amendment, the borrowing limit was reduced from $125.0 million to $110.0 million, the Total Debt to EBITDA covenant was eliminated, the EBITDA to Interest Expense covenant was reduced from 2.25 to 1.00 to 1.70 to 1.00, increasing to 1.75 to 1.00 as of September 30, 2022 and at2.00 to 1.00 as of December 31, 2018 there2022, and a trailing-twelve months minimum EBITDA covenant of $125.0 million was added, increasing to $130.0 million as of September 30, 2022 and $150.0 million as of December 31, 2022. Starting with the quarter ended September 30, 2021, the borrowing limit will be reduced by $5.0 million per quarter should DPL’s Total Debt to EBITDA ratio calculated for the period of four consecutive quarters exceed 7.00 to 1.00.
On June 19, 2020 DPL closed a $415.0 million issuance of senior unsecured notes. These notes carry an interest rate of 4.125% and mature on July 1, 2025. Proceeds from the issuance and cash on hand were no outstanding borrowingsused to redeem in-full the remaining balance of $380.0 million of DPL's 7.25% senior unsecured notes. These bonds were redeemed at par plus accrued interest and a make-whole premium of $30.8 million on its revolving credit facility.July 20, 2020.
Significant Transactions
On June 19, 2019, DP&L amended and restated its unsecured revolving credit facility. The revolving credit facility has a $175.0$175.0 million borrowing limit, with a $75.0 million letter of credit sublimit, a feature that provides DP&L the ability to increase the size of the facility by an additional $100.0$100.0 million,, a maturity date of June 2024, and a provision that provides DP&L the option to request up to two one-year extensions of the maturity date.
On June 6, 2019, DP&L closed on a $425.0 million issuance of First Mortgage Bonds due 2049. These new bonds carry an interest rate of 3.95%. The proceeds of this issuance were used to repay in full the outstanding principal of $435.0 million of DP&L's variable rate Term Loan B credit agreement.
On June 19, 2019, DPL amended and restated its secured revolving credit facility. The revolving credit facility has a $125.0 million borrowing limit, with a $75.0 million letter of credit sublimit, a feature that provides DPLthe ability to increase the size of the facility by an additional $50.0 million, and a maturity date of June 2023.
On June 6, 2019, DP&L closed on a $425.0 million issuance of First Mortgage Bonds due 2049. These new bonds carry an interest rate of 3.95%. The proceeds of this issuance were used to repay in full the outstanding principal of $435.0 million of DP&L's variable rate Term Loan B credit agreement.
On April 17, 2019, DPL closed a $400.0 million issuance of senior unsecured notes. These notes carry an interest rate of 4.35% and mature on April 15, 2029. Proceeds from the issuance and cash on hand were used to settle a partial redemption for $400.0 million of DPL's 7.25% senior unsecured notes maturing October 15, 2021, as discussed below. After the redemption, the DPL 7.25% senior notes due in 2021 havehad an outstanding balance of $380.0 million.
On April 8, 2019, DPL issued a Notice of Partial Redemption to the Trustee (Wells Fargo Bank N.A.) on the DPL 7.25% Senior Notes due 2021. DPL redeemed $400.0 million of the $780.0 million outstanding principal amount of these notes on May 7, 2019. These bonds were redeemed at par plus accrued interest and a make-whole premium of $41.4 million.
On March 4, 2019, DPL issued a Notice of Full Redemption to the Trustee (U.S. Bank) on the DPL 6.75% Senior Notes due 2019. DPL redeemed the remaining $99.0 million outstanding principal amount of these notes on April 4, 2019. These bonds were redeemed at par plus accrued interest and a make-whole premium of $1.5 million with cash on hand.
On March 30, 2018, DPL issued a Notice of Partial Redemption to the Trustee (U.S. Bank) on the DPL 6.75% Senior Notes due 2019. DPL notified the trustee that it was calling $101.0 million of the $200.0 million outstanding principal amount of these notes. These bonds were redeemed at par plus accrued interest and a make-whole premium of $5.1 million on April 30, 2018 with cash on hand.
On March 30, 2018, DP&L commenced a redemption of $60.0 million of outstanding tax exempt First Mortgage Bonds due 2020 at par value (plus accrued and unpaid interest). These bonds were redeemed at par plus accrued interest on April 30, 2018 with cash on hand.
On March 27, 2018, DPL made a $70.0 million prepayment to eliminate the outstanding balance of its bank term loan in full. As of March 31, 2018, the term loan was fully paid off.
On January 3, 2018, DP&L and its lenders amended DP&L's Term Loan B credit agreement. The amendment (a) modified the definition of "applicable rate", from 2.25% per annum to 1.00% per annum - in the case of the Base Rate and from 3.25% per annum to 2.00% per annum - in the case of the Eurodollar Rate and (b) included a "call protection" provision which stated that in the event the loan was repriced or any portion of the loans were prepaid, repaid, refinanced, substituted, or replaced on or prior July 3, 2018, such prepayment, acceleration, repayment, refinancing, substitution or replacement would be made at 101% of the principal amount so prepaid, repaid, refinanced, substituted or replaced. After July 3, 2018 any such transaction would occur at 100% of the principal amount of the then outstanding loans. There were no such transactions prior to July 3, 2018.
Debt Covenants and Restrictions
DPL’s revolving credit agreement has 2 financial covenants. The first financial covenant, a Total Debt tominimum EBITDA, ratio, is calculated at the end of each fiscal quarter by dividing total debt at the end of the current quarter by consolidated EBITDA for the 4four prior fiscal quarters. The ratio in the agreementsquarters, of $125.0 million is notrequired, stepping up to exceed 7.00 to 1.00.$130.0 million on September 30, 2022 and $150.0 million on December 31, 2022. As of December 31, 2019,2020, this financial covenant was met with a ratioin compliance.
The second financial covenant is an EBITDA to Interest Expense ratio that is calculated, at the end of each fiscal quarter, by dividing EBITDA for the four4 prior fiscal quarters by the consolidated interest charges for the same period. The ratio, per the agreement, is to be not less than 2.251.70 to 1.00, for any fiscal quarter.and steps up to 1.75 to 1.00 on September 30, 2022 and 2.00 to 1.00 as of December 31, 2022. As of December 31, 2019,2020, this financial covenant was met with a ratio of 3.20 to 1.00.in compliance.
DPL’s secured revolving credit agreement also restricts dividend payments from DPL to AES, such that DPL cannot make dividend payments unless at the time of, and/or as a result of the distribution, (i) DPL’s leverage ratio does not exceed 0.67 to 1.00 and DPL’s interest coverage ratio is not less than 2.50 to 1.00 or, if such ratios are not within the parameters, (ii) DPL’s senior long-term debt rating from two of the three major credit rating agencies is at least investment grade. As a result, as of December 31, 2019,2020, DPL was prohibited from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
DP&L’s &L's unsecured revolving credit facility and Bond Purchase and Covenants Agreement (financing document entered into in connection with the saleissuance of $200.0 million of variable rate tax-exemptDP&L's First Mortgage Bonds, dated as of August 1, 2015)on July 31, 2020) has 2one financial
covenants. covenant. The firstcovenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. DP&L’s Total Debt to Total Capitalization ratio shall not be greater than 0.65 to 1.00; except that the ratio is suspended as DP&L’s long-term indebtedness is less than or equal to $750.0 million. This financial covenant was met with a ratio of 0.57 to 1.00 as of December 31, 2019.
The second financial covenant measures EBITDA to Interest Expense. The TotalConsolidated EBITDA to Consolidated Interest Charges ratio is calculated, at the end of each fiscal quarter, by dividing consolidated EBITDA for the 4 prior fiscal quarters by the consolidated interest charges for the same period. The ratio, per the agreement, is to be not less than 2.50 to 1.00. This covenant was met with a ratio of 8.51 to 1.00 as of December 31, 2019.
DP&L's unsecured revolving credit facility has one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. DP&L’s Total Debt to Total Capitalization ratio shall not be greater than0.67 to 1.00. This financial covenant was met with a ratio of 0.57 to 1.00in compliance as of December 31, 2019.2020.
DP&L does not have any meaningful restrictions in its debt financing documents prohibiting dividends to its parent, DPL. As of December 31, 2019,2020, DP&L and DPL were in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage. All generation assets were released from the lien of DP&L's first and refunding mortgage in connection with the completion of Generation Separation on October 1, 2017.
Note 8 – Income Taxes
DPL’s components of income tax expense for both continuing and discontinued operations were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Components of tax expense / (benefit) | | | | | | |
| Federal - current | | $ | (45.1) | | | $ | (22.0) | | | $ | 40.0 | |
| State and Local - current | | (0.1) | | | 0.6 | | | 0.4 | |
| Total current | | (45.2) | | | (21.4) | | | 40.4 | |
| | | | | | |
| Federal - deferred | | 38.7 | | | 14.1 | | | (9.6) | |
| State and local - deferred | | 1.1 | | | 1.1 | | | (0.1) | |
| Total deferred | | 39.8 | | | 15.2 | | | (9.7) | |
| Tax expense / (benefit) | | $ | (5.4) | | | $ | (6.2) | | | $ | 30.7 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Components of tax expense / (benefit) | | | | | | |
| Federal - current | | $ | (22.0 | ) | | $ | 40.0 |
| | $ | (2.9 | ) |
| State and Local - current | | 0.6 |
| | 0.4 |
| | — |
|
| Total current | | (21.4 | ) | | 40.4 |
| | (2.9 | ) |
| | | | | | | |
| Federal - deferred | | 14.1 |
| | (9.6 | ) | | (22.0 | ) |
| State and local - deferred | | 1.1 |
| | (0.1 | ) | | (0.4 | ) |
| Total deferred | | 15.2 |
| | (9.7 | ) | | (22.4 | ) |
| Tax expense / (benefit) | | $ | (6.2 | ) | | $ | 30.7 |
| | $ | (25.3 | ) |
Effective and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to DPL's effective tax rate, as a percentage of total income before taxes for the years ended December 31, 2020, 2019, 2018 and 2017:2018:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Statutory Federal tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of Federal tax benefit | | (13.1) | % | | 1.4 | % | | 0.1 | % |
| AFUDC - equity | | (23.6) | % | | (0.1) | % | | (0.1) | % |
| Depreciation of flow-through differences | | 94.8 | % | | (28.2) | % | | (4.6) | % |
| Amortization of investment tax credits | | 4.1 | % | | (0.3) | % | | (0.3) | % |
| | | | | | |
| Deferred tax adjustments | | 0 | % | | 0 | % | | 15.5 | % |
| Permanent differences | | 0 | % | | 0 | % | | 0.1 | % |
| Other, net | | 1.2 | % | | (0.1) | % | | (1.2) | % |
| Effective tax rate | | 84.4 | % | | (6.3) | % | | 30.5 | % |
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Statutory Federal tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State taxes, net of Federal tax benefit | | 1.4 | % | | 0.1 | % | | 0.4 | % |
| AFUDC - equity | | (0.1 | )% | | (0.1 | )% | | 0.2 | % |
| Depreciation of flow-through differences | | (28.2 | )% | | (4.6 | )% | | (1.0 | )% |
| Amortization of investment tax credits | | (0.3 | )% | | (0.3 | )% | | 0.3 | % |
| Deferred tax adjustments | | — | % | | 15.5 | % | | (11.4 | )% |
| Permanent differences | | — | % | | 0.1 | % | | 0.1 | % |
| Other, net | | — | % | | (1.2 | )% | | (2.5 | )% |
| Effective tax rate | | (6.2 | )% | | 30.5 | % | | 21.1 | % |
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Net non-current assets / (liabilities) | | | | |
| Depreciation / property basis | | $ | (160.5) | | | $ | (118.3) | |
| Income taxes recoverable | | 14.4 | | | 17.1 | |
| Regulatory assets | | (21.0) | | | (24.8) | |
| Investment tax credit | | 0.6 | | | 0.6 | |
| Compensation and employee benefits | | (1.7) | | | 2.2 | |
| Intangibles | | (0.4) | | | (0.4) | |
| Long-term debt | | (1.3) | | | (2.1) | |
Other (a) | | (7.3) | | | (8.0) | |
| Net non-current liabilities | | $ | (177.2) | | | $ | (133.7) | |
|
| | | | | | | | |
| | | December 31, |
| $ in millions | | 2019 | | 2018 (b) |
| Net non-current assets / (liabilities) | | | | |
| Depreciation / property basis | | $ | (111.8 | ) | | $ | (77.4 | ) |
| Income taxes recoverable | | 17.1 |
| | 25.0 |
|
| Regulatory assets | | (24.8 | ) | | (15.4 | ) |
| Investment tax credit | | 0.6 |
| | 0.6 |
|
| Compensation and employee benefits | | 2.2 |
| | 2.2 |
|
| Intangibles | | (0.4 | ) | | (0.4 | ) |
| Long-term debt | | (2.1 | ) | | (2.1 | ) |
Other (a) | | (8.0 | ) | | (8.8 | ) |
| Net non-current liabilities | | $ | (127.2 | ) | | $ | (76.3 | ) |
(a) The Other caption includes deferred tax assets of $39.0 million in 2020 and $29.0 million in 2019 related to state and local tax net operating loss carryforwards, with related valuation allowances of $39.0 million in 2020 and $29.0 million in 2019. These net operating loss carryforwards expire from 2020 to 2037.
| |
(a) | The Other caption includes deferred tax assets of $29.0 million in 2019 and $29.9 million in 2018 related to state and local tax net operating loss carryforwards, with related valuation allowances of $29.0 million in 2019 and $29.9 million in 2018. These net operating loss carryforwards expire from 2020 to 2037. |
| |
(b) | The December 31, 2018 balance includes $39.8 million of deferred tax assets related to discontinued operations that is recorded within Non-current liabilities of discontinued operations and held-for-sale businesses on the Consolidated Balance Sheets. See Note 15 – Discontinued Operations for additional information. |
U.S. Tax Reform
On December 22, 2017, the U.S. enacted the TCJA. The TCJA significantly changeschanged U.S. corporate income tax law.
In 2017, we recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of FASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, our 2017 financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under FASC 740 was incomplete, but a reasonable estimate could be determined.
We completed our calculation of the impact of the TCJA in our income tax provision for the year ended December 31, 2018 in accordance with our understanding of the TCJA and guidance available, and as a result recognized $15.5$15.5 million and $13.7 million of discrete tax expense in the fourth quarter of 2018 and 2017 respectively.2018. Of this total, tax benefits of $1.2$1.2 million and $0.4 million are included in continuing operations in 2018 and 2017, respectively.2018. These amounts result from the remeasurement of certain deferred tax assets and liabilities as the rates changed from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurements of deferred tax assets and liabilities related to regulated utility property of $17.0 million and $135.2 million at December 31, 2018 and 2017 werewas recorded as a regulatory liabilitiesliability and werewas a non-cash adjustments.adjustment.
Per the terms of DP&L's 2017 ESP 3, DPL could not make any tax-sharing payments to AES and AES would forgo collection of the payments during the term of the DMR. In November 2019, the PUCO discontinued the DMR. Consequently, starting in 2020, DPL is no longer subject to this restriction. During the term of the DMR, current and non-current existing tax sharing liabilities with AES were converted into additional equity investment in DPL, per the requirements of the order. The 2017 ESP 3 also provided that none of these conversions to equity would be reversed. During the year ended December 31, 2019, we had a current tax benefit and there was no conversion of current tax liabilities in 2019.
During the yearsyear ended December 31, 2018 and 2017, respectively, we converted $40.0 million and $97.1 million of accrued tax sharing liabilities with AES to additional equity investment in2020, DPL in accordance with this requirement.received a payment from AES of $52.0 million against its tax receivable balance as part of a $150.0 million payment from AES. See Note 10 – Shareholder's Deficit for additional information.
The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Tax expense / (benefit) | | $ | (2.6) | | | $ | (0.5) | | | $ | 0.2 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Tax expense / (benefit) | | $ | (0.5 | ) | | $ | 0.2 |
| | $ | 0.2 |
|
Uncertain Tax Positions
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits was $1.4 million at December 31, 2020 and $3.5 million at both December 31, 2019 and December 31, 2018. There were no changes to these amounts in either of the two years in the period ended December 31, 2019.
Of the December 31, 20192020 balance of unrecognized tax benefits, $3.5$1.4 million is due to uncertainty in the timing of deductibility. The total amount of unrecognized tax benefits anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 20192020 is estimated to be between $0.0 million and $3.0 million, primarily relating to statute of limitation lapses.million.
We recognize interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts accrued and the tax expense / (benefit) recorded were not material for each period presented.
FollowingDPL is a summary of theno longer subject to U.S. or state income tax examinations for tax years through 2011, but is open to examination by major tax jurisdiction:for all subsequent periods.
U.S. Federal – 2011 and forward
State and Local – 2011 and forward
Note 9 – Benefit Plans
Defined Contribution Plans
DP&L sponsors two defined contribution plans. One is for non-union employees (the management plan) and one is for collective bargaining employees (the union plan). Both plans are qualified under Section 401 of the Internal Revenue Code.
Certain non-union and union employees become eligible to participate in their respective plan upon date of hire.
Participants may elect to contribute up to 85% of eligible compensation to their plan. Non-union participant contributions are matched 100% on the first 1% of eligible compensation and 50% on the next 5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant contributions are matched 150% but are capped at $2,500$2,600 for 20192020 and they are fully vested in their employer contributions after 3 years of service. All participants are fully vested in their own contributions.
We contributed $3.2 million, $3.1 million $3.7 million and $3.1$3.7 million for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively. DP&L matching contributions are paid quarterly, in arrears. Therefore, the contributions by year include the fourth quarter matching contribution that is paid in the following year. DP&L also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
Defined Benefit PlansPlans
DP&L sponsors a traditional defined benefit pension plan for most of the employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is 100% vested in all amounts credited to his or her account upon the completion of five vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from DP&L to the Service Company maintain their previous eligibility to participate in the DP&L pension plan.
Almost all management employees beginning employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become 100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCI.AOCL. We have historically recorded these costs on the accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $9.6$9.0 million and $9.2$9.6 million at December 31, 20192020 and 2018,2019, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following tables set forth the changes in our pension plan'splans' obligations and assets recorded on the Consolidated Balance Sheets at December 31, 20192020 and 2018.2019. The amounts presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $1.4 million, $1.8$1.4 million and $1.1$1.8 million of costs billed to the Service Company for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
| | | | | | | | | | | | | | |
| $ in millions | | Years ended December 31, |
| Change in benefit obligation | | 2020 | | 2019 |
| Benefit obligation at January 1 | | $ | 421.5 | | | $ | 386.5 | |
| Service cost | | 3.7 | | | 3.7 | |
| Interest cost | | 11.8 | | | 14.9 | |
| | | | |
| | | | |
| Actuarial loss | | 52.7 | | | 42.1 | |
| | | | |
| Benefits paid | | (40.2) | | | (25.7) | |
| Benefit obligation at December 31 | | 449.5 | | | 421.5 | |
| | | | |
| Change in plan assets | | | | |
| Fair value of plan assets at January 1 | | 352.0 | | | 312.9 | |
| Actual return on plan assets | | 45.6 | | | 57.0 | |
| Employer contributions | | 7.7 | | | 7.8 | |
| Benefits paid | | (40.2) | | | (25.7) | |
| Fair value of plan assets at December 31 | | 365.1 | | | 352.0 | |
| | | | |
| | | | |
| Unfunded status of plan | | $ | (84.4) | | | $ | (69.5) | |
| | | | |
| | December 31, |
| Amounts recognized in the Balance sheets | | 2020 | | 2019 |
| Current liabilities | | $ | (0.2) | | | $ | (0.2) | |
| Non-current liabilities | | (84.2) | | | (69.3) | |
| Net liability at end of year | | $ | (84.4) | | | $ | (69.5) | |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | | | |
| Components: | | | | |
| Prior service cost | | $ | 6.9 | | | $ | 7.9 | |
| Net actuarial loss | | 124.0 | | | 104.3 | |
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 130.9 | | | $ | 112.2 | |
| Recorded as: | | | | |
| Regulatory asset | | $ | 92.7 | | | $ | 83.7 | |
| | | | |
| Accumulated other comprehensive income | | 38.2 | | | 28.5 | |
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 130.9 | | | $ | 112.2 | |
|
| | | | | | | | |
| $ in millions | | Years ended December 31, |
| Change in benefit obligation | | 2019 | | 2018 |
| Benefit obligation at January 1 | | $ | 386.5 |
| | $ | 436.9 |
|
| Service cost | | 3.7 |
| | 6.1 |
|
| Interest cost | | 14.9 |
| | 13.8 |
|
| Plan amendments | | — |
| | 5.1 |
|
| Actuarial (gain) / loss | | 42.1 |
| | (34.6 | ) |
| Benefits paid | | (25.7 | ) | | (40.8 | ) |
| Benefit obligation at December 31 | | 421.5 |
| | 386.5 |
|
| | | | | |
| Change in plan assets | | | | |
| Fair value of plan assets at January 1 | | 312.9 |
| | 357.5 |
|
| Actual return on plan assets | | 57.0 |
| | (11.7 | ) |
| Employer contributions | | 7.8 |
| | 7.9 |
|
| Benefits paid | | (25.7 | ) | | (40.8 | ) |
| Fair value of plan assets at December 31 | | 352.0 |
| | 312.9 |
|
| | | | | |
| Unfunded status of plan | | $ | (69.5 | ) | | $ | (73.6 | ) |
| |
| |
|
| | | December 31, |
| Amounts recognized in the Balance sheets | | 2019 | | 2018 |
| Current liabilities | | $ | (0.2 | ) | | $ | (0.4 | ) |
| Non-current liabilities | | (69.3 | ) | | (73.2 | ) |
| Net liability at end of year | | $ | (69.5 | ) | | $ | (73.6 | ) |
| | | | | |
| Amounts recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | | | |
| Components: | | | | |
| Prior service cost | | $ | 7.9 |
| | $ | 9.1 |
|
| Net actuarial loss | | 104.3 |
| | 103.3 |
|
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 112.2 |
| | $ | 112.4 |
|
| Recorded as: | |
| |
|
| Regulatory asset | | $ | 83.7 |
| | $ | 87.2 |
|
| Accumulated other comprehensive income | | 28.5 |
| | 25.2 |
|
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 112.2 |
| | $ | 112.4 |
|
The accumulated benefit obligation for our defined benefit pension plans was $414.1$436.4 million and $378.7$414.1 million at December 31, 20192020 and 2018,2019, respectively.
The net periodic benefit cost of the pension plans was:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Service cost | | $ | 3.7 | | | $ | 3.7 | | | $ | 6.1 | |
| Interest cost | | 11.8 | | | 14.9 | | | 13.8 | |
| Expected return on assets | | (18.6) | | | (20.1) | | | (21.2) | |
| Amortization of unrecognized: | | | | | | |
| Actuarial loss | | 1.0 | | | 4.2 | | | 6.4 | |
| Prior service cost | | 6.1 | | | 1.3 | | | 0.9 | |
| Net periodic benefit cost | | $ | 4.0 | | | $ | 4.0 | | | $ | 6.0 | |
| | | | | | |
| Rates relevant to each year's expense calculations | | | | | | |
| Discount rate | | 3.33 | % | | 4.35 | % | | 3.66 | % |
| Expected return on plan assets | | 5.60 | % | | 6.25 | % | | 6.25 | % |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Service cost | | $ | 3.7 |
| | $ | 6.1 |
| | $ | 5.7 |
|
| Interest cost | | 14.9 |
| | 13.8 |
| | 14.2 |
|
| Expected return on assets | | (20.1 | ) | | (21.2 | ) | | (22.8 | ) |
Plan curtailment (a) | | — |
| | — |
| | 4.1 |
|
| Amortization of unrecognized: | | | | | | |
| Actuarial loss | | 4.2 |
| | 6.4 |
| | 5.3 |
|
| Prior service cost | | 1.3 |
| | 0.9 |
| | 1.1 |
|
| Net periodic benefit cost | | $ | 4.0 |
| | $ | 6.0 |
| | $ | 7.6 |
|
| | | | | | | |
| Rates relevant to each year's expense calculations | | | | | | |
| Discount rate | | 4.35 | % | | 3.66 | % | | 4.28 | % |
| Expected return on plan assets | | 6.25 | % | | 6.25 | % | | 6.50 | % |
(a) As a result of the decision to retire certain coal-fired plants, we recognized a plan curtailment of $4.1 million in 2017.
Other Changes in Plan Assets and Benefit Obligation Recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net actuarial loss | | $ | 25.8 | | | $ | 5.3 | | | $ | 3.4 | |
| | | | | | |
Plan curtailment (a) | | 0 | | | 0 | | | 0 | |
| Reversal of amortization item: | | | | | | |
| Net actuarial loss | | (1.0) | | | (4.2) | | | (6.4) | |
| Prior service cost | | (6.1) | | | (1.3) | | | (0.9) | |
| Total recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 18.7 | | | $ | (0.2) | | | $ | (3.9) | |
| | | | | | |
| Total recognized in net periodic benefit cost and Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 22.7 | | | $ | 3.8 | | | $ | 2.1 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net actuarial loss | | $ | 5.3 |
| | $ | 3.4 |
| | $ | 9.1 |
|
Plan curtailment (a) | | — |
| | — |
| | (4.1 | ) |
| Reversal of amortization item: | | | | | | |
| Net actuarial loss | | (4.2 | ) | | (6.4 | ) | | (5.3 | ) |
| Prior service cost | | (1.3 | ) | | (0.9 | ) | | (1.1 | ) |
| Total recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | (0.2 | ) | | $ | (3.9 | ) | | $ | (1.4 | ) |
| | | | | | | |
| Total recognized in net periodic benefit cost and Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 3.8 |
| | $ | 2.1 |
| | $ | 6.2 |
|
(a) As a result of the decision to retire certain coal-fired plants, we recognized a plan curtailment of $4.1 million in 2017.
Significant Gains and Losses Related to Changes in the Benefit Obligation
The actuarial loss of $52.7 million increased the benefit obligation for the year ended December 31, 2020 and an actuarial loss of $42.1 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $34.6 million decreased the benefit obligation for the year ended December 31, 2018.2019. The actuarial loss in 2020 and 2019 was primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and appropriateness.
At December 31, 2019,2020, we are decreasing our long-term rate of return assumption to 5.60%4.55% for pension plan assets. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2019,2020, we have decreased our assumed discount rate to 3.33%2.44% from 4.35%3.33% for pension expense to reflect current duration-based yield curve discount rates. A 1 percent increase in the rate of return assumption for pension would result in a decrease in 20202021 pension expense of approximately $3.3 million. A 1 percent decrease in the rate of return assumption for pension would result in an increase in 20202021 pension expense of approximately $3.3 million. A 25-basis point increase in the discount rate for pension would result in a decrease of approximately $0.4 million to 20202021 pension expense. A 25-basis point decrease in the discount rate for pension would result in an increase of approximately $0.4$0.5 million to 20202021 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2019.2020. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are then discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit
payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of FASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
The weighted average assumptions used to determine benefit obligations at December 31, 2020, 2019 2018 and 20172018 were:
| | | | | | | | | | | | | | | | | | | | |
| Benefit Obligation Assumptions | | Pension |
| | 2020 | | 2019 | | 2018 |
| Discount rate for obligations | | 2.44% | | 3.33% | | 4.35% |
| Rate of compensation increases | | 3.21% | | 3.94% | | 3.94% |
|
| | | | | | |
| Benefit Obligation Assumptions | | Pension |
| | | 2019 | | 2018 | | 2017 |
| Discount rate for obligations | | 3.33% | | 4.35% | | 3.66% |
| Rate of compensation increases | | 3.94% | | 3.94% | | 3.94% |
Pension Plan Assets
Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Plan's funded status improve and is therefore broadly described as the Dynamic De-risking Strategy. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Plan's liabilities.
Strategic asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are 40% – 50% for return seeking assets and 50% – 60% for liability hedging assets. returnReturn seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield bond funds and emerging market debt funds.
The investment approach is to move the Plan to a more de-risked position, if and when the overall funded status of the Plan improves, by periodically rebalancing the allocation of the Plan's investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Plan's ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 20192020 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
The following table summarizes our target pension plan allocation for 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | Long-Term
Mid-Point
Target
Allocation | | Percentage of plan assets as of December 31, |
Asset category (a) | | | 2020 | | 2019 |
| Equity Securities | | 41% | | 42% | | 40% |
| Debt Securities | | 59% | | 57% | | 58% |
| Cash and Cash Equivalents | | 0% | | 1% | | 1% |
| Real Estate | | 0% | | 0% | | 1% |
| | | | | | |
|
| | | | | | |
| | | Long-Term
Mid-Point
Target
Allocation | | Percentage of plan assets as of December 31, |
Asset category (a) | | | 2019 | | 2018 |
| Equity Securities | | 41% | | 40% | | 33% |
| Debt Securities | | 59% | | 58% | | 58% |
| Cash and Cash Equivalents | | —% | | 1% | | 1% |
| Real Estate | | —% | | 1% | | 8% |
The fair values of our pension plan assets at December 31, 2020 by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2020 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
| Asset category | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 153.8 | | | $ | 0 | | | $ | 153.8 | | | $ | 0 | |
Mutual fund - debt (b) | | 144.6 | | | 0 | | | 144.6 | | | 0 | |
Government debt securities (c) | | 64.8 | | | 0 | | | 64.8 | | | 0 | |
Cash and cash equivalents (d) | | 1.9 | | | 1.9 | | | 0 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
| Total pension plan assets | | $ | 365.1 | | | $ | 1.9 | | | $ | 363.2 | | | $ | 0 | |
(a) This category includes investments in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our pension plan assets at December 31, 2019 by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2019 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
| Asset category | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 142.9 | | | $ | 0 | | | $ | 142.9 | | | $ | 0 | |
Mutual fund - debt (b) | | 115.6 | | | 0 | | | 115.6 | | | 0 | |
Government debt securities (c) | | 89.1 | | | 0 | | | 89.1 | | | 0 | |
Cash and cash equivalents (d) | | 1.9 | | | 1.9 | | | 0 | | | 0 | |
| Other investments: | | | | | | | | |
Core property collective fund (e) | | 2.5 | | | 0 | | | 2.5 | | | 0 | |
| Total pension plan assets | | $ | 352.0 | | | $ | 1.9 | | | $ | 350.1 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2019 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
Asset category (f) | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 142.9 |
| | $ | — |
| | $ | 142.9 |
| | $ | — |
|
Mutual fund - debt (b) | | 115.6 |
| | — |
| | 115.6 |
| | — |
|
Government debt securities (c) | | 89.1 |
| | — |
| | 89.1 |
| | — |
|
Cash and cash equivalents (d) | | 1.9 |
| | 1.9 |
| | — |
| | — |
|
| Other investments: | | | | | | | | |
Core property collective fund (e) | | 2.5 |
| | — |
| | 2.5 |
| | — |
|
| Total pension plan assets | | $ | 352.0 |
| | $ | 1.9 |
| | $ | 350.1 |
| | $ | — |
|
| |
(a) | This category includes investments in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method. |
| |
(b) | This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method. |
| |
(c) | This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
|
| |
(d) | This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or instrumentalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost. |
| |
(e) | (b) This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method. (c) This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method. (d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost. (e) This category represents a property fund that invests in commercial real estate. The fair value of the fund is valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(f) | In 2019, the DP&L plan moved all investments into collective trusts; therefore, the 2019 balances under all asset categories shown above represent investments through collective trusts. The plan has chosen collective trusts for which the underlying investments are mutual funds, common stock. debt securities, or real estate in alignment with the target asset allocation. |
Most of our plan assets at December 31, 2018 are measured using quoted, observable prices which are considered Level One inputs in the Fair Value Hierarchy. The Core Property Collective Fund is measured using Level Two inputs that are quoted prices for identical assets in markets that are less active.the underlying investments is used to value the fund.
The fair values of our pension plan assets at December 31, 2018 by asset category are as follows:
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2018 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
Asset category (f) | | | | (Level 1) | | (Level 2) | | (Level 3) |
| Mutual funds: | | | | | | | | |
U.S. equities (a) | | $ | 79.3 |
| | $ | 79.3 |
| | $ | — |
| | $ | — |
|
International equities (a) | | 25.9 |
| | 25.9 |
| | — |
| | — |
|
Fixed income (b) | | 143.7 |
| | 143.7 |
| | — |
| | — |
|
| Fixed income securities: | | | | | | | | |
| U.S. Treasury securities | | 37.5 |
| | 37.5 |
| | — |
| | — |
|
| Cash and cash equivalents: | | | | | | | | |
Money market funds (c) | | 2.4 |
| | 2.4 |
| | — |
| | — |
|
| Other investments: | | | | | | | | |
Core property collective fund (d) | | 24.1 |
| | — |
| | 24.1 |
| | — |
|
| Total pension plan assets | | $ | 312.9 |
| | $ | 288.8 |
| | $ | 24.1 |
| | $ | — |
|
| |
(a) | This category includes investments in equity securities of large, small and medium sized U.S. companies and equity securities of foreign companies including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(b) | This category includes investments in investment-grade fixed-income instruments, U.S. dollar-denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(c) | This category is comprised of investments in U.S. treasury obligations that seek to preserve principal and maintain liquidity while providing current income. The funds are valued at the assets’ amortized cost to maintain a stable per share net asset value. |
| |
(d) | This category represents a property fund that invests in commercial real estate. The fair value of the fund is valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, in addition, make voluntary contributions from time to time. We contributed $7.5 million to the pension plan in each of the years ended December 31, 2020, 2019 and 2018, and $5.0 million to the pension plan in the year ended December 31, 2017.2018.
We expect to make contributions of $0.2 million to our SERP in 20202021 to cover benefit payments. We also expect to make contributions of $7.5$9.8 million to our pension plan during 2020.2021.
Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as
amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, DP&L’s funded target liability percentage was estimated to be 100%101%. In addition, DP&L must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $5.3$5.3 million in 2020,2021, which includes $2.0 million for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over seven years.years. DP&L’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments, which reflect future service, are expected to be paid as follows:
| | | | | | | | |
| Estimated future benefit payments | | |
| $ in millions due within the following years: | | Pension |
| 2021 | | $ | 26.4 | |
| 2022 | | $ | 26.0 | |
| 2023 | | $ | 25.7 | |
| 2024 | | $ | 25.3 | |
| 2025 | | $ | 24.7 | |
| 2026 - 2030 | | $ | 118.1 | |
|
| | | | |
| Estimated future benefit payments | | |
| $ in millions due within the following years: | | Pension |
| 2020 | | $ | 26.6 |
|
| 2021 | | $ | 26.3 |
|
| 2022 | | $ | 26.0 |
|
| 2023 | | $ | 25.8 |
|
| 2024 | | $ | 25.4 |
|
| 2025 - 2029 | | $ | 122.0 |
|
Note 10 – EquityShareholder's Deficit
Dividend Restrictions
DPL’s Amended Articles of Incorporation (the Articles) contain provisions which state that DPL may not make a distribution to its shareholder or make a loan to any of its affiliates (other than its subsidiaries), unless: (a) there exists no Event of Default (as defined in the Articles) and no such Event of Default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, DPL’s leverage ratio does not exceed 0.67 to 1.00 and DPL’s interest coverage ratio is not less than 2.50 to 1.00 or, (b)(ii) if such ratios are not within the parameters, DPL’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. Further, the restrictions on the payment of distributions to a shareholder and the making of loans to its affiliates (other than subsidiaries) cease to be in effect if the three major credit rating agencies confirm that a lowering of DPL’s senior long-term debt rating below investment grade by the credit rating agencies would not occur without these restrictions.
As described above, DPL’s Amended Articles of Incorporation contain restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency is below investment grade. As of December 31, 20192020, , DPL’sDPL leverage ratio was at 1.32 to 1.00 and DPL’s senior long-term debt rating from a major credit rating agency was below investment grade.did not meet these requirements. As a result, as of December 31, 2019,2020, DPL was prohibited under its Articles of Incorporation from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
Common Stock
Effective on the Merger date, DPL's Amended Articles of Incorporation provided for 1,500 authorized common shares, of which 1 share is outstanding at December 31, 2019.2020.
DP&L has 50,000,000 authorized common shares, of which 41,172,173 are outstanding at December 31, 2019.2020. All common shares are held by DP&L’s parent, DPL.
Capital Contributions from AES
In DP&L's six-year 2017 ESP 3, the PUCO imposed restrictions on DPL making dividend payments to its parent company, AES, during the term of the ESP, as well as on making tax-sharing payments to AES during the term of the DMR. The PUCO also required that existing tax payments owed by DPL to AES, and similar tax payments that accrue during the term of the DMR, be converted into equity investments in DPL. With the November 21, 2019 order from the PUCO that removed the DMR and the subsequent approval of DP&L's ESP 1 rate plan, these requirements were eliminated. See Note 3 – Regulatory Matters for additional information on changes to DP&L's ESP and the removal of the DMR.
For the year ended December 31, 2020, DPL received $150.0 million in a cash contribution from AES, which DPL then used to make a $150.0 million equity contribution to DP&L. The contribution at DPL represented an equity contribution of $98.0 million and a payment of $52.0 million against its tax receivable. The proceeds from the equity contribution at DP&L will primarily be used for funding needs to support DP&L's capital expenditure program, mainly new investments in and upgrades to DP&L’s transmission and distribution system.
For the year ended December 31, 2019, DPL had a current tax benefit so there was no conversion of current tax liabilities.
For the year ended December 31, 2018, AES made capital contributions of $40.0 million by converting the amount owed to it by DPL related to tax-sharing payments for current tax liabilities. For the year ended December 31, 2017, AES agreed to make non-cash capital contributions of $97.1 million and waive the amount owed to it by DPL related to tax-sharing payments for current tax liabilities through December 31, 2017. See Note 8 – Income Taxes for additional information.
Note 11 – Contractual Obligations, Commercial Commitments and Contingencies
Guarantees
In the normal course of business,Previously, DPL entersentered into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements arewere entered into primarily to support or enhance the creditworthiness otherwise attributed to thisthe subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish this subsidiary's intended commercial purposes.
At With the completion of our plan to exit generation, AES Ohio Generation currently does not require such assurances to third parties, and existing guarantees will expire in June, 2021. During the year ended December 31, 2019,2020, DPL had $21.0 million of guarantees on behalf of AES Ohio Generation to third parties for future financial or performance assurance under such agreements. The guarantee arrangements entered into by DPL with these third parties cover present and future obligations of AES Ohio Generation to such beneficiaries and are terminable at any time by DPL upon written notice to the beneficiaries. There were no outstanding balances for commercial transactions covered by these guarantees at December 31, 2019 or December 31, 2018.
To date, DPL hasdid not incurredincur any losses related to the guarantees of these guaranteesobligations and we believe it is remoteunlikely that DPL would be required to perform or incur any losses in the future associated with any of the above guarantees. At December 31, 2020, DPL had $1.9 million of such guarantees on behalf of AES Ohio Generation. There were no outstanding balances for commercial transactions covered by these guarantees at December 31, 2020 or December 31, 2019.
Equity Ownership Interest
DP&L has a 4.9% equity ownership interest in OVEC which is recorded using the cost method of accounting under GAAP. At December 31, 2019,2020, DP&L could be responsible for the repayment of 4.9%, or $66.4$62.6 million, of a $1,354.7$1,276.7 million debt obligation comprised of both fixed and variable rate securities with maturities between 2022 and 2040. OVEC could also seek additional contributions from us to avoid a default in the event that other OVEC members defaulted on their respective OVEC obligations. One of the other OVEC members with a 4.85% interest in OVEC,had filed for bankruptcy protection and the bankruptcy court had approved that member's rejection of the OVEC arrangement and its related obligations on July 31, 2018. The bankruptcy court was orderedobligations. Subsequent to reconsider such rejection by the U.S. Court of Appeals for the 6th Circuit on December 12, 2019. We do not expect these events to have a material impact on our financial condition, results of operations or cash flows.that decision, another entity has assumed that member's ownership interest and all related liabilities.
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2019,2020, these include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| Electricity purchase commitments | | $ | 120.8 | | | $ | 86.0 | | | $ | 34.8 | | | $ | 0 | | | $ | 0 | |
| Purchase orders and other contractual obligations | | $ | 92.5 | | | $ | 87.8 | | | $ | 4.7 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| Electricity purchase commitments | | $ | 173.2 |
| | $ | 115.8 |
| | $ | 57.4 |
| | $ | — |
| | $ | — |
|
| Purchase orders and other contractual obligations | | $ | 52.8 |
| | $ | 45.0 |
| | $ | 7.8 |
| | $ | — |
| | $ | — |
|
Electricity purchase commitments:
DP&L enters into long-term contracts for the purchase of electricity. In general, these contracts are subject to variable quantities or prices and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2019,2020, DPL had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DPL's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above. This table also does not include regulatory liabilities (see Note 3 – Regulatory Matters) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies)below). See Note 12 – Related Party Transactions for additional information on charges between related parties and amounts due to or from related parties.
Contingencies
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Consolidated Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2019,2020, cannot be reasonably determined.
Environmental Matters
DPL’s facilities and operations are subject to a wide range of federal, state and local environmental laws, rules and regulations. The environmental issues that may affect us include the following.
•The federal CAA and state laws and regulations (including SIPs) which require compliance, obtaining permits and reporting as to air emissions;
•Litigation with federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating stations require additional permitting or pollution control technology, or whether emissions from coal-fired generating stations cause or contribute to global climate changes;
| |
• | •Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require substantial reductions in SO2, particulates, mercury, acid gases, NOx and other air emissions; •2, particulates, mercury, acid gases, NOx and other air emissions; |
Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require reporting and reductions of GHGs;
•Rules and future rules issued by the USEPA, the Ohio EPA or other authorities associated with the federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits; and
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain waste. Most of the solid waste created from the combustion of coal and fossil fuels is fly ash and other coal combustion by-products.
In addition to imposing continuing compliance obligations, theseenvironmental laws, rules and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at our facilities to comply, or to determine compliance, with such laws, rules and regulations. We record liabilities for loss contingencies related to environmental matters when a loss is probable of occurring and can be reasonably estimated in accordance with the provisions of GAAP. Accordingly, we have immaterial accruals for loss contingencies for environmental matters. We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable, or a loss cannot be reasonably estimated. We evaluate the potential liability related to environmental matters quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows.
We have several pending environmental matters associated with our current and previously-owned and operated coal-fired generation units. Some ofWe do not expect these matters couldto have a material adverse impactsimpact on our results of operations, financial condition or cash flows.
Note 12 – Related Party Transactions
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including DP&L, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare
Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
Long-term Compensation Plan
During 2020, 2019 2018 and 2017,2018, some of DPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2020, 2019 and 2018 and 2017 was $0.0$0.1 million, $0.4$0.0 million and $0.4 million,, respectively, and was included in “Operation and maintenance” on DPL’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on DPL’s Consolidated Balance Sheets in accordance with FASC 718 “Compensation - Stock Compensation.”
The following table provides a summary of our related party transactions:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Transactions with the Service Company | | | | | | |
| Charges for services provided | | $ | 38.8 | | | $ | 33.8 | | | $ | 41.0 | |
| Charges to the Service Company | | $ | 4.2 | | | $ | 3.6 | | | $ | 4.9 | |
| Transactions with other AES affiliates: | | | | | | |
| Payments for health, welfare and benefit plans | | $ | 10.7 | | | $ | 11.2 | | | $ | 7.9 | |
| Consulting and other services | | $ | 0.8 | | | $ | 0.7 | | | $ | 2.0 | |
| | | | | | |
| Balances with related parties: | | At December 31, 2020 | | At December 31, 2019 | | |
| Net payable to the Service Company | | $ | (14.8) | | | $ | (11.0) | | | |
| Net receivable from / (payable to) AES and other AES affiliates (a) | | $ | (1.7) | | | $ | 2.0 | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Transactions with the Service Company | | | | | | |
| Charges for services provided | | $ | 33.8 |
| | $ | 41.0 |
| | $ | 46.5 |
|
| Charges to the Service Company | | $ | 3.6 |
| | $ | 4.9 |
| | $ | 4.2 |
|
| Transactions with other AES affiliates: | | | | | | |
| Payments for health, welfare and benefit plans | | $ | 11.2 |
| | $ | 7.9 |
| | $ | 15.4 |
|
| Consulting services | | $ | 0.7 |
| | $ | 2.0 |
| | $ | — |
|
| | | | | | | |
| Balances with related parties: | | At December 31, 2019 | | At December 31, 2018 | | |
| Net payable to the Service Company | | $ | (11.0 | ) | | $ | (4.8 | ) | | |
| Net receivable from / (payable to) AES and other AES affiliates (a) | | $ | 2.0 |
| | $ | (0.5 | ) | | |
(a)The December 31, 2019 net receivable amount includes a $5.1 million receivable balance with AES related to the sale of software previously recorded on AES Ohio Generation during the year ended December 31. 2019. There was no gain or loss recorded on the transaction. These $5.1 million of proceeds on the sale were received in 2020.
| |
(a) | The December 31, 2019 net receivable amount includes a $5.1 million receivable balance with AES related to the sale of software previously recorded on AES Ohio Generation during the year ended December 31. 2019. There was no gain or loss recorded on the transaction. |
DPL Capital Trust II
DPL has a wholly-owned business trust, DPL Capital Trust II (the Trust), formed for the purpose of issuing trust capital securities to third-party investors. Effective in 2003, DPL deconsolidated the Trust upon adoption of the accounting standards related to variable interest entities and currently treats the Trust as a nonconsolidated subsidiary. The Trust holds mandatorily redeemable trust capital securities. The investment in the Trust, which amounted to $0.2 million and $0.2 million at December 31, 20192020 and 2018,2019, respectively, is included in Other non-current assets. DPL also has a note payable to the Trust amounting to $15.6 million and $15.6 million at December 31, 20192020 and 2018,2019, respectively, that was established upon the Trust’s deconsolidation in 2003. See Note 7 – Long-term debt for additional information.
In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation which represents a full and unconditional guarantee of payments to the capital security holders of the Trust.
Income Taxes
AES files federal and state income tax returns which consolidate DPL and its subsidiaries. Under a tax sharing agreement with AES, DPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. Effective with the approval of DP&L's 2017 ESP 3, through November 21, 2019, DPL was restricted from making tax sharing payments to AES throughout the term of the DMR and amounts that would otherwise have been tax sharing liabilities were converted to deemed capital contributions. With the November 21, 2019 order from the PUCO that removed the DMR, this requirement was eliminated. See Note 8 – Income Taxes for more information.
Note 13 – Business Segments
DPL has presented the results of operations of Miami Fort Station, Zimmer Station, the Peaker Assets, Stuart Station and Killen Station as discontinued operations as a group of components for all periods presented. For more information, see Note 15 – Discontinued Operations of Notes to DPL's Consolidated Financial Statements. As such, AES Ohio Generation only has operating activity coming from its undivided ownership interest in Conesville, which does not meet the threshold to be a separate reportable operating segment. Because of this, DPL manages its business through only 1 reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segments. The Utility segment is discussed further below:
Utility Segment
The Utility segment is comprised primarily of DP&L’s electric transmission and distribution businesses, which distribute electricity to residential, commercial, industrial and governmental customers. DP&L distributes electricity to more than 526,000531,000 retail customers who are located in a 6,000 square mile area of West Central Ohio. DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future
customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs. The Utility segment includes revenues and costs associated with our investment in OVEC and the historical results of DP&L’s Beckjord Facility,Station, which was closed in 2014 and transferred to a third party in the first quarter of 2018, and the Hutchings Coal generating facility,Station, which was closed in 2013. These assets did not transfer2013 and transferred to AES Ohio Generation as part of DP&L's Generation Separation on October 1, 2017. Thus, they are grouped within the Utility segment for segment reporting purposes. In addition, regulatory deferrals and collections, which include fuel deferrals in historical periods, are includeda third party in the Utility segment.fourth quarter of 2020.
Included within the “Other” column are other businesses that do not meet the GAAP requirements for disclosure as reportable segments as well as certain corporate costs, which include interest expense and loss on early extinguishment of debt on DPL’s long-term debt as well as adjustments related to purchase accounting from the Merger. DPL's undivided interest in Conesville is included within the "Other" column as it no longer meets the requirement for disclosure as a reportable operating segment, since the results of operations of the other EGUs are presented as discontinued operations. The accounting policies of the reportable segments are the same as those described in Note 1 – Overview and Summary of Significant Accounting Policies. Intersegment sales, costs of sales and expenses are eliminated in consolidation. Certain shared and corporate costs are allocated between "Other" and the Utility reporting segment.
The following tables present financial information for DPL’s reportable business segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other | | Adjustments and Eliminations | | DPL Consolidated |
| Year ended December 31, 2020 |
| Revenues from external customers | | $ | 651.2 | | | $ | 9.3 | | | $ | 0 | | | $ | 660.5 | |
| Intersegment revenues | | 0.9 | | | 3.6 | | | (4.5) | | | 0 | |
| Total revenues | | $ | 652.1 | | | $ | 12.9 | | | $ | (4.5) | | | $ | 660.5 | |
| | | | | | | | |
| Depreciation and amortization | | $ | 71.8 | | | $ | 1.5 | | | $ | 0 | | | $ | 73.3 | |
| | | | | | | | |
| Interest expense | | $ | 24.3 | | | $ | 47.0 | | | $ | 0 | | | $ | 71.3 | |
| Loss on early extinguishment of debt | | $ | 0 | | | $ | 31.7 | | | $ | 0 | | | $ | 31.7 | |
| Income / (loss) from continuing operations before income tax | | $ | 58.1 | | | $ | (70.0) | | | $ | 0 | | | $ | (11.9) | |
| | | | | | | | |
| Cash capital expenditures | | $ | 153.3 | | | $ | 4.0 | | | $ | 0 | | | $ | 157.3 | |
| | | $ in millions | | Utility | | Other (a) | | Adjustments and Eliminations | | DPL Consolidated | $ in millions | | Utility | | Other | | Adjustments and Eliminations | | DPL Consolidated |
| Year ended December 31, 2019 | Year ended December 31, 2019 | Year ended December 31, 2019 |
| Revenues from external customers | | $ | 734.3 |
| | $ | 29.0 |
| | $ | — |
| | $ | 763.3 |
| Revenues from external customers | | $ | 734.3 | | | $ | 9.4 | | | $ | 0 | | | $ | 743.7 | |
| Intersegment revenues | | 1.1 |
| | 3.2 |
| | (4.3 | ) | | — |
| Intersegment revenues | | 1.1 | | | 3.2 | | | (4.3) | | | 0 | |
| Total revenues | | $ | 735.4 |
|
| $ | 32.2 |
| | $ | (4.3 | ) | | $ | 763.3 |
| Total revenues | | $ | 735.4 | | | $ | 12.6 | | | $ | (4.3) | | | $ | 743.7 | |
| | | | | | | | | | | | | | | | | |
| Depreciation and amortization | | $ | 70.8 |
| | $ | 1.9 |
| | $ | — |
| | $ | 72.7 |
| Depreciation and amortization | | $ | 70.8 | | | $ | 1.5 | | | $ | 0 | | | $ | 72.3 | |
| Fixed-asset impairment | | $ | — |
| | $ | 3.5 |
| | $ | — |
| | $ | 3.5 |
| |
| | Interest expense | | $ | 26.0 |
| | $ | 56.2 |
| | $ | — |
| | $ | 82.2 |
| Interest expense | | $ | 26.0 | | | $ | 56.2 | | | $ | 0 | | | $ | 82.2 | |
| Loss on early extinguishment of debt | | $ | — |
| | $ | 44.9 |
| | $ | — |
| | $ | 44.9 |
| Loss on early extinguishment of debt | | $ | 0 | | | $ | 44.9 | | | $ | 0 | | | $ | 44.9 | |
| Income / (loss) from continuing operations before income tax | | $ | 124.3 |
| | $ | (100.2 | ) | | $ | — |
| | $ | 24.1 |
| Income / (loss) from continuing operations before income tax | | $ | 124.3 | | | $ | (92.8) | | | $ | 0 | | | $ | 31.5 | |
| | | | | | | | | | |
| Cash capital expenditures | | $ | 167.1 |
| | $ | 1.0 |
| | $ | — |
| | $ | 168.1 |
| Cash capital expenditures | | $ | 155.5 | | | $ | 1.0 | | | $ | 0 | | | $ | 156.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other (a) | | Adjustments and Eliminations | | DPL Consolidated |
| Year ended December 31, 2018 |
| Revenues from external customers | | $ | 737.8 | | | $ | 9.5 | | | $ | 0 | | | $ | 747.3 | |
| Intersegment revenues | | 0.9 | | | 2.9 | | | (3.8) | | | 0 | |
| Total revenues | | $ | 738.7 | | | $ | 12.4 | | | $ | (3.8) | | | $ | 747.3 | |
| | | | | | | | |
| Depreciation and amortization | | $ | 74.5 | | | $ | 1.7 | | | $ | 0 | | | $ | 76.2 | |
| | | | | | | | |
| Interest expense | | $ | 27.3 | | | $ | 70.7 | | | $ | 0 | | | $ | 98.0 | |
| Loss on early extinguishment of debt | | $ | 0.6 | | | $ | 5.9 | | | $ | 0 | | | $ | 6.5 | |
| Income / (loss) from continuing operations before income tax | | $ | 104.4 | | | $ | (65.5) | | | $ | 0 | | | $ | 38.9 | |
| | | | | | | | |
| Cash capital expenditures | | $ | 85.6 | | | $ | 10.5 | | | $ | 0 | | | $ | 96.1 | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other (a) | | Adjustments and Eliminations | | DPL Consolidated |
| Year ended December 31, 2018 |
| Revenues from external customers | | $ | 737.8 |
| | $ | 38.1 |
| | $ | — |
| | $ | 775.9 |
|
| Intersegment revenues | | 0.9 |
| | 2.9 |
| | (3.8 | ) | | — |
|
| Total revenues | | $ | 738.7 |
| | $ | 41.0 |
| | $ | (3.8 | ) | | $ | 775.9 |
|
| | | | | | | | | |
| Depreciation and amortization | | $ | 74.5 |
| | $ | (1.4 | ) | | $ | — |
| | $ | 73.1 |
|
| Fixed-asset impairment | | $ | — |
| | $ | 2.8 |
| | $ | — |
| | $ | 2.8 |
|
| Interest expense | | $ | 27.3 |
| | $ | 70.7 |
| | $ | — |
| | $ | 98.0 |
|
| Income / (loss) from continuing operations before income tax | | $ | 104.4 |
| | $ | (72.5 | ) | | $ | — |
| | $ | 31.9 |
|
| | | | | | | | | |
| Cash capital expenditures | | $ | 93.1 |
| | $ | 10.5 |
| | $ | — |
| | $ | 103.6 |
|
| | | | | | | | | | | | | | | | | | | | |
| Total Assets | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
| Utility | | $ | 2,014.7 | | | $ | 1,883.2 | | | $ | 1,819.6 | |
All Other (a) | | 21.3 | | | 52.6 | | | 63.5 | |
DPL Consolidated | | $ | 2,036.0 | | | $ | 1,935.8 | | | $ | 1,883.1 | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other (a) | | Adjustments and Eliminations | | DPL Consolidated |
| Year ended December 31, 2017 |
| Revenues from external customers | | $ | 718.9 |
| | $ | 25.0 |
| | $ | — |
| | $ | 743.9 |
|
| Intersegment revenues | | 1.1 |
| | 4.4 |
| | (5.5 | ) | | — |
|
| Total revenues | | $ | 720.0 |
| | $ | 29.4 |
| | $ | (5.5 | ) | | $ | 743.9 |
|
| | | | | | | | | |
| Depreciation and amortization | | $ | 75.3 |
| | $ | 0.8 |
| | $ | — |
| | $ | 76.1 |
|
| Interest expense | | $ | 30.5 |
| | $ | 79.5 |
| | $ | — |
| | $ | 110.0 |
|
| Income / (loss) from continuing operations before income tax | | $ | 88.5 |
| | $ | (95.0 | ) | | $ | — |
| | $ | (6.5 | ) |
| | | | | | | | | |
| Cash capital expenditures | | $ | 85.6 |
| | $ | 35.9 |
| | $ | — |
| | $ | 121.5 |
|
| |
(a) | "Other" includes Cash capital expenditures related to assets of discontinued operations and held-for-sale businesses for all periods presented. |
(a) "All Other" includes Total assets related to the assets of discontinued operations and held-for-sale businesses and Eliminations as of December 31, 2020, 2019 and 2018. "All Other" Total assets as of December 31, 2020 is primarily cash on hand from debt issuances. |
| | | | | | | | | | | | |
| Total Assets | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 |
| Utility | | $ | 1,883.2 |
| | $ | 1,819.6 |
| | $ | 1,695.9 |
|
All Other (a) | | 52.6 |
| | 63.5 |
| | 353.3 |
|
DPL Consolidated | | $ | 1,935.8 |
| | $ | 1,883.1 |
| | $ | 2,049.2 |
|
| |
(a) | "All Other" includes Total assets related to the assets of discontinued operations and held-for-sale businesses and Eliminations as of December 31, 2019, 2018 and 2017. |
Note 14 – Revenue
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue – DP&L energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. DP&L sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenues are satisfied over time as energy is delivered and the same method is used to measure progress, and thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right to sell or distribute electricity in our service area, DP&L is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that DP&L is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that DP&L has the right to bill corresponds directly with the value to the customer of DP&L's performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and DP&L only serves as a billing agent if requested by the CRES provider. As such, DP&L recognizes the consolidated billing arrangement with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue –All of the power produced from DPL's ownership interest in Conesville and DP&L's share of the power produced at OVEC is sold to PJM and these revenues are classified as Wholesale revenues.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity market and the two products can be transacted independently of one another. Therefore, wholesale revenues are a
separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
RTO ancillary revenue – Compensation for use of DP&L’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenues. As DP&L owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. DP&L) and recognized as transmission revenues.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that DP&L, as the transmission operator, has the right to bill (received as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue – Compensation received from PJM for making installed generationDP&L records its share of OVEC capacity available to satisfy system integrityrevenues as Capacity revenues. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and reliability requirements is classified as RTO capacity revenues. Capacity, which is a stand-ready obligation to deliver energy when called upon byperformance of the RTO, is measured using MWs. If plant availability exceeds a contractual target, weOVEC units, there may receive abe additional performance bonus payment, or if the plant availability falls below a guaranteed minimum target, we may incur a non-availability penalty. Such bonuses or penalties, represent a form of variable consideration and are estimated andwhich would be recognized whenonly if it isbecomes probable that theresuch bonus or penalties will not be a significant reversal and therefore the transaction price is recognized on an output basis based on the MWs.incurred.
RTO capacity revenues have a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
DPL's revenue from contracts with customers was $740.2$645.0 million, $720.6 million and $743.8$715.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The following table presents our revenue from contracts with customers and other revenue by segment for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other | | Adjustments and Eliminations | | Total |
| | Year ended December 31, 2020 |
| Retail revenue | | | | | | | | |
| Retail revenue from contracts with customers | | | | | | | | |
| Residential revenue | | $ | 362.3 | | | $ | 0 | | | $ | 0 | | | $ | 362.3 | |
| Commercial revenue | | 114.6 | | | 0 | | | 0 | | | 114.6 | |
| Industrial revenue | | 51.2 | | | 0 | | | 0 | | | 51.2 | |
| Governmental revenue | | 36.6 | | | 0 | | | 0 | | | 36.6 | |
| Other (a) | | 12.7 | | | 0 | | | 0 | | | 12.7 | |
| Total retail revenue from contracts with customers | | 577.4 | | | 0 | | | 0 | | | 577.4 | |
| Other retail revenue (b) | | 9.0 | | | 0 | | | 0 | | | 9.0 | |
| Wholesale revenue | | | | | | | | |
| Wholesale revenue from contracts with customers | | 11.0 | | | 0 | | | (0.9) | | | 10.1 | |
| RTO ancillary revenue | | 44.0 | | | 0 | | | 0 | | | 44.0 | |
| Capacity revenue | | 4.2 | | | 0 | | | 0 | | | 4.2 | |
| Miscellaneous revenue | | | | | | | | |
| Miscellaneous revenue from contracts with customers (c) | | 0 | | | 9.3 | | | 0 | | | 9.3 | |
| Miscellaneous revenue | | 6.5 | | | 3.6 | | | (3.6) | | | 6.5 | |
| Total revenues | | $ | 652.1 | | | $ | 12.9 | | | $ | (4.5) | | | $ | 660.5 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Utility | | Other | | Adjustments and Eliminations | | Total |
| | Year ended December 31, 2019 |
| Retail revenue | | | | | | | | |
| Retail revenue from contracts with customers | | | | | | | | |
| Residential revenue | | $ | 403.5 | | | $ | 0 | | | $ | 0 | | | $ | 403.5 | |
| Commercial revenue | | 130.3 | | | 0 | | | 0 | | | 130.3 | |
| Industrial revenue | | 55.3 | | | 0 | | | 0 | | | 55.3 | |
| Governmental revenue | | 42.4 | | | 0 | | | 0 | | | 42.4 | |
| Other (a) | | 13.8 | | | 0 | | | 0 | | | 13.8 | |
| Total retail revenue from contracts with customers | | 645.3 | | | 0 | | | 0 | | | 645.3 | |
| Other retail revenue (b) | | 22.0 | | | 0 | | | 0 | | | 22.0 | |
| Wholesale revenue | | | | | | | | |
| Wholesale revenue from contracts with customers | | 17.2 | | | 0 | | | (1.0) | | | 16.2 | |
| RTO ancillary revenue | | 43.5 | | | 0 | | | 0 | | | 43.5 | |
| Capacity revenue | | 6.2 | | | 0 | | | 0 | | | 6.2 | |
| Miscellaneous revenue | | | | | | | | |
| Miscellaneous revenue from contracts with customers (c) | | 0 | | | 9.4 | | | 0 | | | 9.4 | |
| Miscellaneous revenue | | 1.2 | | | 3.2 | | | (3.3) | | | 1.1 | |
| Total revenues | | $ | 735.4 | | | $ | 12.6 | | | $ | (4.3) | | | $ | 743.7 | |
| | | | | | | | |
| | | $ in millions | | Utility | | Other | | Adjustments and Eliminations | | Total | $ in millions | | Utility | | Other | | Adjustments and Eliminations | | Total |
| | | Year ended December 31, 2019 | | | Year ended December 31, 2018 |
| Retail revenue | | | | | | | | | Retail revenue | | |
| Retail revenue from contracts with customers | | $ | 645.3 |
| | $ | — |
| | $ | — |
| | $ | 645.3 |
| Retail revenue from contracts with customers | |
Other retail revenue (a) | | 22.0 |
| | — |
| | — |
| | 22.0 |
| |
| Residential revenue | | Residential revenue | | $ | 404.0 | | | $ | 0 | | | $ | 0 | | | $ | 404.0 | |
| Commercial revenue | | Commercial revenue | | 118.9 | | | 0 | | | 0 | | | 118.9 | |
| Industrial revenue | | Industrial revenue | | 48.9 | | | 0 | | | 0 | | | 48.9 | |
| Governmental revenue | | Governmental revenue | | 40.8 | | | 0 | | | (1.0) | | | 39.8 | |
| Other (a) | | Other (a) | | 13.2 | | | 0 | | | 0 | | | 13.2 | |
| Total retail revenue from contracts with customers | | Total retail revenue from contracts with customers | | 625.8 | | | 0 | | | (1.0) | | | 624.8 | |
| Other retail revenue (b) | | Other retail revenue (b) | | 32.1 | | | 0 | | | 0 | | | 32.1 | |
| Wholesale revenue | | | | | | | | | Wholesale revenue | |
| Wholesale revenue from contracts with customers | | 17.2 |
| | 14.2 |
| | (1.1 | ) | | 30.3 |
| Wholesale revenue from contracts with customers | | 29.9 | | | 0 | | | 0 | | | 29.9 | |
| RTO ancillary revenue | | 43.5 |
| | 0.2 |
| | — |
| | 43.7 |
| RTO ancillary revenue | | 43.1 | | | 0 | | | 0 | | | 43.1 | |
| Capacity revenue | | 6.2 |
| | 5.3 |
| | — |
| | 11.5 |
| Capacity revenue | | 7.8 | | | 0.1 | | | 0 | | | 7.9 | |
Miscellaneous revenue from contracts with customers (b) | | — |
| | 9.4 |
| | — |
| | 9.4 |
| |
| Miscellaneous revenue | | Miscellaneous revenue | |
| Miscellaneous revenue from contracts with customers (c) | | Miscellaneous revenue from contracts with customers (c) | | 0 | | | 9.5 | | | 0 | | | 9.5 | |
| Miscellaneous revenue | | 1.2 |
| | 3.1 |
| | (3.2 | ) | | 1.1 |
| Miscellaneous revenue | | 0 | | | 2.8 | | | (2.8) | | | 0 | |
| Total revenues | | $ | 735.4 |
| | $ | 32.2 |
| | $ | (4.3 | ) | | $ | 763.3 |
| Total revenues | | $ | 738.7 | | | $ | 12.4 | | | $ | (3.8) | | | $ | 747.3 | |
| | | | | | | | | | |
| | | Year ended December 31, 2018 | |
| Retail revenue | | | | | | | | | |
| Retail revenue from contracts with customers | | $ | 625.8 |
| | $ | — |
| | $ | (1.0 | ) | | $ | 624.8 |
| |
Other retail revenue (a) | | 32.1 |
| | — |
| | — |
| | 32.1 |
| |
| Wholesale revenue | | | | | | | | | |
| Wholesale revenue from contracts with customers | | 29.9 |
| | 22.1 |
| | — |
| | 52.0 |
| |
| RTO ancillary revenue | | 43.1 |
| | 0.1 |
| | — |
| | 43.2 |
| |
| Capacity revenue | | 7.8 |
| | 6.6 |
| | — |
| | 14.4 |
| |
Miscellaneous revenue from contracts with customers (b) | | — |
| | 9.4 |
| | — |
| | 9.4 |
| |
| Miscellaneous revenue | | — |
| | 2.8 |
| | (2.8 | ) | | — |
| |
| Total revenues | | $ | 738.7 |
| | $ | 41.0 |
| | $ | (3.8 | ) | | $ | 775.9 |
| |
| |
(a) | Other retail revenue primarily includes alternative revenue programs not accounted for under FASC 606. |
| |
(b) | Miscellaneous revenue from contracts with customers primarily includes revenues for various services provided by Miami Valley Lighting. |
(a) "Other" primarily includes Wright-Patterson Air Force Base revenues, billing service fees from CRES providers and other miscellaneous retail revenues from contracts with customers.
(b) Other retail revenue primarily includes alternative revenue programs not accounted for under FASC 606.
(c) Miscellaneous revenue from contracts with customers primarily includes revenues for various services provided by Miami Valley Lighting.
The balances of receivables from contracts with customers were $65.7$70.1 million and $72.6$65.1 million as of December 31, 20192020 and 2018,2019, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under FASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for DPL.
Note 15 – Discontinued Operations
Conesville - In May 2020, AEP, the operator of the formerly co-owned Conesville EGU, retired Conesville Unit 4 as planned. On June 5, 2020, DPL and AES Ohio Generation, together with AEP, completed the transfer of their interests in the retired Unit 4, including the associated environmental liabilities, to an unaffiliated third-party purchaser. As a result, DPL recognized a gain on the transfer of $4.5 million for the year ended December 31, 2020. For the transaction, DPL will make quarterly cash expenditures, totaling $4.0 million, through July 2022, of which $1.8 million has been paid through December 31, 2020. The transfer of Conesville Unit 4 was the last step in DPL's plan to exit its AES Ohio Generation business operations.
Stuart and Killen – On May 31, 2018, DPL and AES Ohio Generation retired the Stuart Station coal-fired and diesel-fired generating units and the Killen Station coal-fired generating unit and combustion turbine, as planned. On December 20, 2019, DPL and AES Ohio Generation, together with AES Ohio Generation's joint owners in the retired Stuart and Killen generating facilities, completed the transfer of the retired generating facilities, including the associated environmental liabilities, to an unaffiliated third-party purchaser. As a result, DPL made cash expenditures of $51.0 million and recognized a gain on the transfer of $20.0 million for the year ended December 31, 2019.
Peaker Assets – On March 27, 2018, DPL and AES Ohio Generation completed the sale transaction of the Peaker assets, which resulted in net proceeds of $234.9 million and a loss on sale of $1.9 million for the year ended December 31, 2018.
Miami Fort and Zimmer
– On December 8, 2017, DPL and AES Ohio Generation completed the sale transaction of their entire undivided interest in the Miami Fort Station and the Zimmer Station, which resulted in net proceeds of $70.1 million and a gain on sale of $14.0 million for the year ended December 31, 2017.
DPL determined that the transfers of Conesville, Stuart and Killen along with the sales of the Peaker Assets in 2018 and Miami Fort and Zimmer in 2017 constitute the disposal of a group of components, which, as a whole, represent a strategic shift to exit its AES Ohio Generation business. As such, the disposal of this group of components as a whole represents a strategic shift to exit generation, and, as such, qualifies to be presented as discontinued operations. Therefore, the results of operations, assets and financial position forliabilities of this group of components were reported as such in the Consolidated Statements of Operations and Consolidated Balance Sheets for all periods presented.
The following table summarizes the major categories of assets and liabilities at the dates indicated:
|
| | | | | | | | |
| $ in millions | | December 31, 2019 | | December 31, 2018 |
| Accounts receivable, net | | 17.4 |
| | 4.0 |
|
| Taxes applicable to subsequent years | | — |
| | 2.3 |
|
| Prepayments and other current assets | | 0.3 |
| | 2.4 |
|
| Intangible assets, net of amortization | | — |
| | 5.3 |
|
| Total assets of the disposal group classified as assets of discontinued operations and held-for-sale businesses in the balance sheets | | $ | 17.7 |
| | $ | 14.0 |
|
| | | | | |
| Accounts payable | | $ | 3.8 |
| | $ | 3.9 |
|
| Accrued taxes | | — |
| | 3.1 |
|
| Accrued and other current liabilities | | 3.1 |
| | 5.2 |
|
Deferred income taxes (a) | | — |
| | (39.8 | ) |
| Taxes payable | | — |
| | 2.3 |
|
| Accrued pension and other post-retirement benefits | | — |
| | 9.7 |
|
| Asset retirement obligations | | — |
| | 90.4 |
|
| Other non-current liabilities | | 6.2 |
| | 6.6 |
|
| Total liabilities of the disposal group classified as liabilities of discontinued operations and held-for-sale businesses in the balance sheets | | $ | 13.1 |
| | $ | 81.4 |
|
| | | | | | | | |
(a)$ in millions | | December 31, 2019 |
| Accounts receivable, net | | $ | 18.0 | |
| Inventories | | 3.7 | |
| Taxes applicable to subsequent years | | 0.3 | |
| Prepayments and other current assets | | 0.3 | |
| Intangible assets, net of amortization | | 0.1 | |
| Other non-current assets | | 1.0 | |
| Total assets of the disposal group classified as assets of discontinued operations and held-for-sale businesses in the balance sheets | | $ | 23.4 | |
| | |
| Accounts payable | | $ | 5.6 | |
| Accrued taxes | | 0.3 | |
| Accrued and other current liabilities | | 3.1 | |
Deferred income taxes represent the tax asset position(a) | | (6.5) | |
| Taxes payable | | 0.3 | |
| Asset retirement obligations | | 8.3 | |
| Other non-current liabilities | | 6.3 | |
Total liabilities of the disposal group classified as liabilities of discontinued group of components, which were netted with liabilities on operations and held-for-sale businesses in the balance sheets | | DPL$ | prior to classification as discontinued operations.17.4 | |
(a)Deferred income taxes represent the tax asset position of the discontinued group of components, which were netted with liabilities on DPL prior to classification as discontinued operations.
The following table summarizes the revenues, operating costs, other expenses and income tax of discontinued operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Revenues | | $ | 24.2 | | | $ | 70.9 | | | $ | 187.3 | |
| Operating costs and other expenses | | (24.8) | | | (19.8) | | | (121.0) | |
| | | | | | |
| Fixed-asset impairment | | 0 | | | (3.5) | | | (2.8) | |
| Income / (loss) from discontinued operations | | (0.6) | | | 47.6 | | | 63.5 | |
| Gain / (loss) from disposal of discontinued operations | | 6.1 | | | 20.1 | | | (1.6) | |
| Income tax expense from discontinued operations | | 0.1 | | | 14.1 | | | 28.5 | |
| Net income from discontinued operations | | $ | 5.4 | | | $ | 53.6 | | | $ | 33.4 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Revenues | | $ | 51.4 |
| | $ | 158.6 |
| | $ | 492.9 |
|
| Operating costs and other expenses | | 3.6 |
| | (88.1 | ) | | (444.5 | ) |
| Fixed-asset impairment | | — |
| | — |
| | (175.8 | ) |
| Income / (loss) from discontinued operations | | 55.0 |
| | 70.5 |
| | (127.4 | ) |
| Gain / (loss) from disposal of discontinued operations | | 20.1 |
| | (1.6 | ) | | 14.0 |
|
| Income tax expense / (benefit) from discontinued operations | | 15.6 |
| | 30.0 |
| | (20.3 | ) |
| Net income / (loss) from discontinued operations | | $ | 59.5 |
| | $ | 38.9 |
| | $ | (93.1 | ) |
Cash flows related to discontinued operations are included in our Consolidated Statements of Cash Flows. Cash flows from operating activities for discontinued operations were $24.0$3.2 million, $40.6$21.3 million and $194.8$35.0 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Cash flows from investing activities for discontinued operations were $4.9 million, $(51.0) million $233.8 million and $51.8$233.6 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
Joint OperatingOwners' Agreement offor Stuart and Killen
Pursuant to an amendedthe Joint Owners' AgreementAgreements for Stuart and Killen entered into in December 2019, existing assets and liabilities between the joint owners were settled and resulted in a credit to DPL's operating costs and other expenses of $19.4 million for the year ended December 31, 2019 in the table above.
AROs of Discontinued Operations
Prior to the transfer of the retired Stuart and Killen generating facilities, the facilities carried ARO liabilities consisting primarily of river intake and discharge structures, coal unloading facilities, landfills and ash disposal facilities. In the
first quarter of 2019 and the fourth quarter of 2018, DPL reduced the ARO liability related to the Stuart and Killen ash ponds and landfills by $22.5 million and $27.6 million, respectively, based on updated internal analyses that reduced estimated closure costs associated with these ash ponds and landfills. The remaining ARO liability related to Stuart and Killen was included in the total liabilities of the disposal group classified as liabilities of discontinued operations and held-for-sale businesses in the balance sheet as of December 31, 2018 and was included in the 2019 sale described above. As these plants were no longer in service, the reductions to the ARO liability were also recorded as credits to depreciation and amortization expense in the same amounts. The credits to depreciation and amortization expense are included in operating costs and other expenses of discontinued operations for the years ended December 31, 2019 and 2018 in the table above.
Note 16 – Dispositions
Beckjord FacilityHutchings Coal Station – On February 26, 2018,December 3, 2020, DP&L andtransferred its co-owners of the retired Beckjord Facility agreed to transfer their interests in the retired FacilityHutchings Coal Station to a third party, including theirits obligations to remediate the FacilityStation and its site, and the transfer occurred on that same date. As a result, DPL recognized a loss on the transfer of $4.7 million and made cash expenditures of $7.0 million, inclusive of cash expenditures for the transfer charges. $11.7DPL agreed to pay an additional $2.3 million by December 1, 2021 for the transfer. The Hutchings Coal Station was retired in 2013, and, as such, the income / (loss) from continuing operations before income tax related to the Hutchings Coal Station was immaterial for the years ended December 31, 2020, 2019 and 2018, excluding the loss on transfer noted above. Prior to the transfer, the Hutchings Coal Station was included in the Utility segment.
Beckjord Station – On February 26, 2018, DP&L and its co-owners of the retired Beckjord Station agreed to transfer their interests in the retired Station to a third party, including their obligations to remediate the Station and its site, and the transfer occurred on that same date. As a result, DPL recognized a loss on the transfer of $11.7 million and made cash expenditures of $14.5 million, inclusive of cash expenditures for the transfer charges. The Beckjord FacilityStation was retired in 2014, and, as such, the income / (loss) from continuing operations before income tax related to the Beckjord FacilityStation was immaterial for the yearsyear ended December 31, 2018, and 2017, excluding the loss on transfer noted above. Prior to the transfer, the Beckjord FacilityStation was included in the Utility segment.
Note 17 – Fixed-asset Impairments
During
COVID-19 Pandemic
The COVID-19 pandemic has severely impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. The global impact of the yearsoutbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and social distancing measures as well as restricting travel. The State of Ohio has implemented, among other things, stay-at-home and other social distancing measures to slow the spread of the virus, which has impacted energy demand within our service territory, though the stay-at-home restrictions have now been lifted in our service territory. On March 12, 2020, the PUCO also issued an emergency order prohibiting electric utilities, including us, from discontinuing electric utility service to customers. This prohibition ended December 31, 2019for DP&L on September 1, 2020. We are taking a variety of measures in response to the spread of COVID-19 to ensure our ability to transmit, distribute and 2018, DPL recognized a total pre-tax asset impairment expensesell electric energy, ensure the health and safety of $3.5 millionour employees, contractors, customers and $2.8 million, respectively,communities and provide essential services to the communities in which we operate. In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, and such expenses may include those that relate to events outside of our control.
As the economic impact of the COVID-19 pandemic started to materialize in Ohio in the second half of March 2020 and continued for the Conesville asset group,duration of 2020, the COVID-19 pandemic primarily impacted our retail sales demand as it was determined that additional amounts capitalizedshown by the changes in weather-normalized volumes of kWh sold compared to the weather-normalized volumes for AROsthe same periods in 20192019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three month periods ended | | For the year ended |
| Customer class | | March 31, 2020 | | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | December 31, 2020 |
| Commercial | | (3.2)% | | | (11.0)% | | (2.3)% | | (5.0)% | | (5.3)% |
| Industrial | | (1.5)% | | | (19.9)% | | 0.9% | | 1.1% | | (5.0)% |
| Residential | | 0.3% | | | 8.5% | | 11.0% | | (0.9)% | | 4.2% |
As noted above, we also have incurred, and 2018, respectively, were not recoverable.expect to continue to incur, expenses relating to COVID-19; however, see Note 3 – Regulatory Matters for a discussion of regulatory measures, which partially mitigate the impact of these expenses. The ultimate magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.
FINANCIAL STATEMENTS
The Dayton Power and Light Company
Report of Independent Registered Public Accounting Firm
To the Shareholder and Board of Directors of The Dayton Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of The Dayton Power & Light Company (the Company) as of December 31, 20192020 and 2018,2019, the related statements of operations, comprehensive income/(loss),income, cash flows and shareholder’s equity for each of the three years in the period ended December 31, 2019,2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | |
| Regulatory Accounting |
| |
| Description of the Matter | As described in Note 3 to the financial statements, the Company applies the provisions of FASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the PUCO and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous over-collections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; revenues; and depreciation expense, and related disclosures in the Company’s financial statements. |
| |
| Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of December 31, 2020, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the regulatory assets and liabilities and related disclosures. |
| |
| How We Addressed the Matter in Our Audit | To test the Company’s accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Indianapolis, Indiana
February 27, 202024, 2021
|
| | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Operations |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Revenues | | $ | 735.4 |
| | $ | 738.7 |
| | $ | 720.0 |
|
| | | | | | | |
| Operating costs and expenses | | | | | | |
| Net fuel costs | | 2.5 |
| | 2.4 |
| | 0.5 |
|
| Net purchased power cost | | 250.6 |
| | 301.3 |
| | 289.8 |
|
| Operation and maintenance | | 183.0 |
| | 139.7 |
| | 156.5 |
|
| Depreciation and amortization | | 70.8 |
| | 74.5 |
| | 75.3 |
|
| Taxes other than income taxes | | 77.7 |
| | 73.1 |
| | 76.3 |
|
| Loss / (gain) on asset disposal | | 0.1 |
| | 0.2 |
| | (0.5 | ) |
| Loss on disposal of business (Note 15) | | — |
| | 12.4 |
| | — |
|
| Total operating costs and expenses | | 584.7 |
| | 603.6 |
| | 597.9 |
|
| | | | | | | |
| Operating income | | 150.7 |
| | 135.1 |
| | 122.1 |
|
| | | | | | | |
| Other income / (expense), net | | | | | | |
| Interest expense | | (26.0 | ) | | (27.3 | ) | | (30.5 | ) |
| Loss on early extinguishment of debt | | — |
| | (0.6 | ) | | (1.1 | ) |
| Other expense | | (0.4 | ) | | (2.8 | ) | | (2.0 | ) |
| Other expense, net | | (26.4 | ) | | (30.7 | ) | | (33.6 | ) |
| | | | | | | |
| Income from continuing operations before income tax | | 124.3 |
| | 104.4 |
| | 88.5 |
|
| | | | | | | |
| Income tax expense / (benefit) from continuing operations | | (0.6 | ) | | 17.7 |
| | 31.1 |
|
| | | | | | | |
| Net income from continuing operations | | 124.9 |
| | 86.7 |
| | 57.4 |
|
| | |
|
| |
|
| |
|
|
| Discontinued operations (Note 14) | | | | | | |
| Loss from discontinued operations before income tax | | — |
| | — |
| | (56.3 | ) |
| Income tax benefit from discontinued operations | | — |
| | — |
| | (15.9 | ) |
| Net loss from discontinued operations | | — |
| | — |
| | (40.4 | ) |
| | | | | | | |
| Net income | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 17.0 |
|
| | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Operations |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Revenues | | $ | 652.1 | | | $ | 735.4 | | | $ | 738.7 | |
| | | | | | |
| Operating costs and expenses | | | | | | |
| Net fuel costs | | 1.6 | | | 2.5 | | | 2.4 | |
| Net purchased power cost | | 229.4 | | | 250.6 | | | 301.3 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Operation and maintenance | | 181.9 | | | 183.0 | | | 139.7 | |
| Depreciation and amortization | | 71.8 | | | 70.8 | | | 74.5 | |
| Taxes other than income taxes | | 79.1 | | | 77.7 | | | 73.1 | |
| | | | | | |
| | | | | | |
| Loss on asset disposal | | 0.1 | | | 0.1 | | | 0.2 | |
| Loss on disposal of business (Note 15) | | 4.7 | | | 0 | | | 12.4 | |
| | | | | | |
| | | | | | |
| Total operating costs and expenses | | 568.6 | | | 584.7 | | | 603.6 | |
| | | | | | |
| Operating income | | 83.5 | | | 150.7 | | | 135.1 | |
| | | | | | |
| Other income / (expense), net | | | | | | |
| Interest expense | | (24.3) | | | (26.0) | | | (27.3) | |
| Loss on early extinguishment of debt | | 0 | | | 0 | | | (0.6) | |
| Other expense | | (1.1) | | | (0.4) | | | (2.8) | |
| Other expense, net | | (25.4) | | | (26.4) | | | (30.7) | |
| | | | | | |
| Income before income tax | | 58.1 | | | 124.3 | | | 104.4 | |
| | | | | | |
| Income tax expense / (benefit) | | 7.0 | | | (0.6) | | | 17.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Net income | | $ | 51.1 | | | $ | 124.9 | | | $ | 86.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
See Notes to Financial Statements.
|
| | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Comprehensive Income |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net income | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 17.0 |
|
| Equity securities activity: | | | | | | |
| Change in fair value of equity securities, net of income tax expense of $0.0, $0.0 and ($0.2) for each respective period | | — |
| | — |
| | 0.5 |
|
| Reclassification to earnings, net of income tax benefit of $0.0, $0.0 and $0.0 for each respective period | | — |
| | — |
| | (0.1 | ) |
| Net change in fair value of equity securities | | — |
| | — |
| | 0.4 |
|
| Derivative activity: | | | | | | |
| Change in derivative fair value, net of income tax benefit / (expense) of $0.3, $0.1 and ($7.2) for each respective period | | (0.8 | ) | | (0.1 | ) | | 12.4 |
|
| Reclassification to earnings, net of income tax expense of $0.0, $0.4 and $0.2 for each respective period | | (0.2 | ) | | (0.7 | ) | | (0.7 | ) |
| Reclassification of earnings related to discontinued operations, net of income tax expense of $0.0, $0.0 and $3.0 for each respective period | | — |
| | — |
| | (5.5 | ) |
| Net change in fair value of derivatives | | (1.0 | ) | | (0.8 | ) | | 6.2 |
|
| Pension and postretirement activity: | | | | | | |
| Prior service cost for the period, net of income tax benefit of $0.0, $0.6 and $1.0 for each respective period | | — |
| | (2.2 | ) | | (1.9 | ) |
| Net gain / (loss) for the period, net of income tax benefit / (expense) of $0.6, ($0.4) and $0.4 for each respective period | | (3.6 | ) | | 1.7 |
| | (0.8 | ) |
| Reclassification to earnings, net of income tax benefit of ($0.5), ($1.0) and ($2.3) for each respective period | | 3.0 |
| | 3.3 |
| | 4.5 |
|
| Net change in unfunded pension and postretirement obligations | | (0.6 | ) | | 2.8 |
| | 1.8 |
|
| | | | | | | |
| Other comprehensive income / (loss) | | (1.6 | ) | | 2.0 |
| | 8.4 |
|
| | | | | | | |
| Net comprehensive income | | $ | 123.3 |
| | $ | 88.7 |
| | $ | 25.4 |
|
| | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Comprehensive Income |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net income | | $ | 51.1 | | | $ | 124.9 | | | $ | 86.7 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Derivative activity: | | | | | | |
| Change in derivative fair value, net of income tax benefit / (expense) of $(0.2), $0.3 and $0.1 for each respective period | | (0.2) | | | (0.8) | | | (0.1) | |
| Reclassification to earnings, net of income tax expense of $0.8, $0.0 and $0.4 for each respective period | | 0.6 | | | (0.2) | | | (0.7) | |
| Net change in fair value of derivatives | | 0.4 | | | (1.0) | | | (0.8) | |
| Pension and postretirement activity: | | | | | | |
| Prior service cost for the period, net of income tax benefit of $0.0, $0.0 and $0.6 for each respective period | | 0 | | | 0 | | | (2.2) | |
| Net gain / (loss) for the period, net of income tax benefit / (expense) of $2.6, $0.6 and $(0.4) for each respective period | | (8.7) | | | (3.6) | | | 1.7 | |
| Reclassification to earnings, net of income tax benefit of $(0.9), $(0.5) and $(1.0) for each respective period | | 3.1 | | | 3.0 | | | 3.3 | |
| Net change in unfunded pension and postretirement obligations | | (5.6) | | | (0.6) | | | 2.8 | |
| | | | | | |
| Other comprehensive income / (loss) | | (5.2) | | | (1.6) | | | 2.0 | |
| | | | | | |
| Net comprehensive income | | $ | 45.9 | | | $ | 123.3 | | | $ | 88.7 | |
See Notes to Financial Statements.
|
| | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Balance Sheets |
| $ in millions | | December 31, 2019 | | December 31, 2018 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 10.8 |
| | $ | 45.0 |
|
| Restricted cash | | 10.5 |
| | 21.2 |
|
| Accounts receivable, net (Note 2) | | 70.9 |
| | 90.4 |
|
| Inventories (Note 2) | | 10.4 |
| | 7.7 |
|
| Taxes applicable to subsequent years | | 77.4 |
| | 72.4 |
|
| Regulatory assets, current (Note 3) | | 19.7 |
| | 41.1 |
|
| Taxes receivable | | 35.7 |
| | 19.6 |
|
| Prepayments and other current assets | | 10.8 |
| | 13.3 |
|
| Total current assets | | 246.2 |
| | 310.7 |
|
| | | | | |
| Property, plant and equipment: | | | | |
| Property, plant & equipment | | 2,333.6 |
| | 2,274.4 |
|
| Less: Accumulated depreciation and amortization | | (1,012.7 | ) | | (988.0 | ) |
| | | 1,320.9 |
| | 1,286.4 |
|
| Construction work in process | | 104.5 |
| | 31.7 |
|
| Total net property, plant & equipment | | 1,425.4 |
| | 1,318.1 |
|
| Other non-current assets: | | | | |
| Regulatory assets, non-current (Note 3) | | 173.8 |
| | 152.6 |
|
| Intangible assets, net of amortization | | 18.2 |
| | 17.2 |
|
| Other non-current assets | | 19.6 |
| | 21.0 |
|
| Total other non-current assets | | 211.6 |
| | 190.8 |
|
| Total assets | | $ | 1,883.2 |
| | $ | 1,819.6 |
|
| | | | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
| Current liabilities: | | | | |
| Short-term and current portion of long-term debt (Note 7) | | $ | 179.8 |
| | $ | 4.6 |
|
| Accounts payable | | 74.4 |
| | 55.8 |
|
| Accrued taxes | | 79.4 |
| | 75.7 |
|
| Accrued interest | | 1.4 |
| | 0.4 |
|
| Customer deposits | | 20.6 |
| | 21.3 |
|
| Regulatory liabilities, current (Note 3) | | 27.9 |
| | 34.9 |
|
| Accrued and other current liabilities | | 16.3 |
| | 17.5 |
|
| Total current liabilities | | 399.8 |
| | 210.2 |
|
| | | | | |
| Non-current liabilities: | | | | |
| Long-term debt (Note 7) | | 434.6 |
| | 581.5 |
|
| Deferred income taxes (Note 8) | | 158.1 |
| | 131.7 |
|
| Taxes payable | | 82.3 |
| | 77.1 |
|
| Regulatory liabilities, non-current (Note 3) | | 243.6 |
| | 278.3 |
|
| Accrued pension and other post-retirement benefits (Note 9) | | 79.9 |
| | 83.2 |
|
| Other non-current liabilities | | 11.5 |
| | 12.3 |
|
| Total non-current liabilities | | 1,010.0 |
| | 1,164.1 |
|
| | | | | |
| Commitments and contingencies (Note 11) | |
| |
|
| | | | | |
| Common shareholder's equity: | | | | |
| Common stock, par value of $0.01 per share | | 0.4 |
| | 0.4 |
|
| 50,000,000 shares authorized, 41,172,173 shares issued and outstanding | | | | |
| Other paid-in capital | | 617.0 |
| | 711.8 |
|
| Accumulated other comprehensive loss | | (36.9 | ) | | (35.3 | ) |
| Accumulated deficit | | (107.1 | ) | | (231.6 | ) |
| Total common shareholder's equity | | 473.4 |
| | 445.3 |
|
| | | | | |
| Total liabilities and shareholder's equity | | $ | 1,883.2 |
| | $ | 1,819.6 |
|
| | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Balance Sheets |
| $ in millions | | December 31, 2020 | | December 31, 2019 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 11.7 | | | $ | 10.8 | |
| Restricted cash | | 0.1 | | | 10.5 | |
| Accounts receivable, net of allowance for credit losses of $2.8 and $0.4, respectively (Note 2) | | 70.2 | | | 70.9 | |
| Inventories | | 8.8 | | | 10.4 | |
| Taxes applicable to subsequent years | | 77.6 | | | 77.4 | |
| Regulatory assets, current (Note 3) | | 27.5 | | | 19.7 | |
| Taxes receivable | | 32.5 | | | 35.7 | |
| Prepayments and other current assets | | 6.4 | | | 10.8 | |
| | | | |
| Total current assets | | 234.8 | | | 246.2 | |
| | | | |
| Property, plant and equipment: | | | | |
| Property, plant & equipment | | 2,437.3 | | | 2,333.6 | |
| Less: Accumulated depreciation and amortization | | (1,032.1) | | | (1,012.7) | |
| | 1,405.2 | | | 1,320.9 | |
| Construction work in process | | 138.8 | | | 104.5 | |
| Total net property, plant & equipment | | 1,544.0 | | | 1,425.4 | |
| Other non-current assets: | | | | |
| Regulatory assets, non-current (Note 3) | | 193.6 | | | 173.8 | |
| Intangible assets, net of amortization | | 18.3 | | | 18.2 | |
| Other non-current assets | | 24.0 | | | 19.6 | |
| Total other non-current assets | | 235.9 | | | 211.6 | |
| Total assets | | $ | 2,014.7 | | | $ | 1,883.2 | |
| | | | |
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
| Current liabilities: | | | | |
| Short-term and current portion of long-term debt (Note 7) | | $ | 20.2 | | | $ | 179.8 | |
| | | | |
| Accounts payable | | 85.5 | | | 74.4 | |
| Accrued taxes | | 82.7 | | | 79.4 | |
| Accrued interest | | 2.6 | | | 1.4 | |
| Customer deposits | | 19.1 | | | 20.6 | |
| Regulatory liabilities, current (Note 3) | | 18.0 | | | 27.9 | |
| Accrued and other current liabilities | | 25.0 | | | 16.3 | |
| | | | |
| Total current liabilities | | 253.1 | | | 399.8 | |
| | | | |
| Non-current liabilities: | | | | |
| Long-term debt (Note 7) | | 573.9 | | | 434.6 | |
| Deferred income taxes (Note 8) | | 172.1 | | | 158.1 | |
| Taxes payable | | 80.3 | | | 82.3 | |
| Regulatory liabilities, non-current (Note 3) | | 218.3 | | | 243.6 | |
| Accrued pension and other post-retirement benefits (Note 9) | | 93.9 | | | 79.9 | |
| | | | |
| | | | |
| Other non-current liabilities | | 6.4 | | | 11.5 | |
| Total non-current liabilities | | 1,144.9 | | | 1,010.0 | |
| | | | |
| Commitments and contingencies (Note 11) | | 0 | | 0 |
| | | | |
| Common shareholder's equity: | | | | |
| Common stock, par value of $0.01 per share | | 0.4 | | | 0.4 | |
| 50,000,000 shares authorized, 41,172,173 shares issued and outstanding | | | | |
| Other paid-in capital | | 714.4 | | | 617.0 | |
| Accumulated other comprehensive loss | | (42.1) | | | (36.9) | |
| Accumulated deficit | | (56.0) | | | (107.1) | |
| Total common shareholder's equity | | 616.7 | | | 473.4 | |
| | | | |
| Total liabilities and shareholder's equity | | $ | 2,014.7 | | | $ | 1,883.2 | |
See Notes to Financial Statements.
|
| | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Cash Flows |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 124.9 |
| | $ | 86.7 |
| | $ | 17.0 |
|
| Adjustments to reconcile Net income to Net cash from operating activities | | | | | | |
| Depreciation and amortization | | 70.8 |
| | 74.5 |
| | 87.2 |
|
| Amortization of deferred financing costs | | 3.7 |
| | 3.1 |
| | 1.1 |
|
| Deferred income taxes | | (9.7 | ) | | 16.3 |
| | 8.1 |
|
| Fixed-asset impairment | | — |
| | — |
| | 66.3 |
|
| Loss on disposal of business | | — |
| | 12.4 |
| | — |
|
| Loss on asset disposal | | — |
| | 0.2 |
| | 15.7 |
|
| Changes in certain assets and liabilities: | | | | | | |
| Accounts receivable, net | | 19.6 |
| | 13.5 |
| | 14.6 |
|
| Inventories | | (2.8 | ) | | (0.3 | ) | | 10.3 |
|
| Taxes applicable to subsequent years | | (5.0 | ) | | (1.3 | ) | | 6.4 |
|
| Deferred regulatory costs, net | | (2.2 | ) | | (9.2 | ) | | (23.7 | ) |
| Accounts payable | | 12.9 |
| | 3.8 |
| | (48.7 | ) |
| Accrued taxes payable / receivable | | (7.2 | ) | | (12.7 | ) | | (17.5 | ) |
| Accrued interest | | 0.9 |
| | (0.4 | ) | | (1.3 | ) |
| Accrued pension and other post-retirement benefits | | (8.8 | ) | | (2.4 | ) | | 4.8 |
|
| Other | | 2.8 |
| | 11.6 |
| | (4.9 | ) |
| Net cash provided by operating activities | | 199.9 |
| | 195.8 |
| | 135.4 |
|
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (167.1 | ) | | (93.1 | ) | | (101.7 | ) |
| Payments on disposal of business | | — |
| | (14.5 | ) | | — |
|
| Proceeds from sale of property | | — |
| | 10.6 |
| | — |
|
| Insurance proceeds | | — |
| | 0.4 |
| | 12.5 |
|
| Other investing activities, net | | (3.5 | ) | | (0.3 | ) | | (0.3 | ) |
| Net cash used in investing activities | | (170.6 | ) | | (96.9 | ) | | (89.5 | ) |
| Cash flows from financing activities | | | | | | |
| Dividends and returns of capital paid to parent | | (95.0 | ) | | (43.8 | ) | | (39.0 | ) |
| Capital contribution from parent | | — |
| | 80.0 |
| | 70.0 |
|
| Retirement of long-term debt | | (436.1 | ) | | (64.5 | ) | | (104.5 | ) |
| Issuance of long-term debt | | 422.3 |
| | — |
| | — |
|
| Payments of deferred financing costs | | (5.2 | ) | | — |
| | — |
|
| Borrowings from revolving credit facilities | | 60.0 |
| | 30.0 |
| | 40.0 |
|
| Repayment of borrowings from revolving credit facilities | | (20.0 | ) | | (40.0 | ) | | (30.0 | ) |
| Borrowings from related party | | — |
| | — |
| | 30.0 |
|
| Repayment of borrowings from related party | | — |
| | — |
| | (35.0 | ) |
| Other financing activities, net | | (0.2 | ) | | — |
| | (0.4 | ) |
| Net cash used in financing activities | | (74.2 | ) | | (38.3 | ) | | (68.9 | ) |
| Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | — |
| | — |
| | 27.0 |
|
| Cash, cash equivalents and restricted cash: | | | | | | . |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (44.9 | ) | | 60.6 |
| | 4.0 |
|
| Balance at beginning of year | | 66.2 |
| | 5.6 |
| | 1.6 |
|
| Cash, cash equivalents and restricted cash at end of year | | $ | 21.3 |
| | $ | 66.2 |
| | $ | 5.6 |
|
| Supplemental cash flow information: | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 20.3 |
| | $ | 22.9 |
| | $ | 28.4 |
|
| Income taxes paid, net | | $ | 24.3 |
| | $ | 13.1 |
| | $ | 28.1 |
|
| Non-cash financing and investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 16.5 |
| | $ | 10.8 |
| | $ | 19.7 |
|
| Distribution of generation assets to subsidiary of parent | | $ | — |
| | $ | (10.0 | ) | | $ | (86.2 | ) |
| | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Cash Flows |
| | | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 51.1 | | | $ | 124.9 | | | $ | 86.7 | |
| Adjustments to reconcile Net income to Net cash from operating activities | | | | | | |
| Depreciation and amortization | | 71.8 | | | 70.8 | | | 74.5 | |
| Amortization of deferred financing costs | | 3.7 | | | 3.7 | | | 3.1 | |
| | | | | | |
| Deferred income taxes | | 3.4 | | | (9.7) | | | 16.3 | |
| | | | | | |
| | | | | | |
| Loss on disposal of business | | 4.7 | | | 0 | | | 12.4 | |
| | | | | | |
| Changes in certain assets and liabilities: | | | | | | |
| Accounts receivable, net | | 0.7 | | | 19.6 | | | 13.5 | |
| Inventories | | 1.4 | | | (2.8) | | | (0.3) | |
| | | | | | |
| Taxes applicable to subsequent years | | (0.2) | | | (5.0) | | | (1.3) | |
| Deferred regulatory costs, net | | (34.0) | | | (2.2) | | | (9.2) | |
| Accounts payable | | (4.0) | | | 12.9 | | | 3.8 | |
| Accrued taxes payable / receivable | | 4.5 | | | (7.2) | | | (12.7) | |
| Accrued interest | | 1.3 | | | 0.9 | | | (0.4) | |
| | | | | | |
| Accrued pension and other post-retirement benefits | | (11.8) | | | (8.8) | | | (2.4) | |
| | | | | | |
| | | | | | |
| Other | | (1.6) | | | 2.8 | | | 11.8 | |
| Net cash provided by operating activities | | 91.0 | | | 199.9 | | | 195.8 | |
| Cash flows from investing activities: | | | | | | |
| Capital expenditures | | (153.3) | | | (155.5) | | | (85.6) | |
| | | | | | |
| | | | | | |
| Cost of removal payments | | (25.5) | | | (11.6) | | | (7.5) | |
| Payments on disposal and sale of business interests | | (7.0) | | | 0 | | | (14.5) | |
| Proceeds from sale of property | | 0 | | | 0 | | | 10.6 | |
| Insurance proceeds | | 0 | | | 0 | | | 0.4 | |
| Other investing activities, net | | (0.7) | | | (3.5) | | | (0.3) | |
| Net cash used in investing activities | | (186.5) | | | (170.6) | | | (96.9) | |
| Cash flows from financing activities | | | | | | |
| Dividends and returns of capital paid to parent | | (42.7) | | | (95.0) | | | (43.8) | |
| Equity contribution from parent | | 150.0 | | | 0 | | | 80.0 | |
| Retirement of long-term debt | | (140.0) | | | (436.1) | | | (64.5) | |
| Issuance of long-term debt | | 140.0 | | | 422.3 | | | — | |
| Payments of deferred financing costs | | (1.2) | | | (5.2) | | | 0 | |
| | | | | | |
| Borrowings from revolving credit facilities | | 95.0 | | | 60.0 | | | 30.0 | |
| Repayment of borrowings from revolving credit facilities | | (115.0) | | | (20.0) | | | (40.0) | |
| | | | | | |
| | | | | | |
| Other financing activities, net | | (0.1) | | | (0.2) | | | 0 | |
| Net cash provided by / (used in) financing activities | | 86.0 | | | (74.2) | | | (38.3) | |
| | | | | | |
| Cash, cash equivalents and restricted cash: | | | | | | . |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | | (9.5) | | | (44.9) | | | 60.6 | |
| Balance at beginning of year | | 21.3 | | | 66.2 | | | 5.6 | |
| Cash, cash equivalents and restricted cash at end of year | | $ | 11.8 | | | $ | 21.3 | | | $ | 66.2 | |
| Supplemental cash flow information: | | | | | | |
| Interest paid, net of amounts capitalized | | $ | 19.3 | | | $ | 20.3 | | | $ | 22.9 | |
| Income taxes paid, net | | $ | 0.1 | | | $ | 24.3 | | | $ | 13.1 | |
| Non-cash financing and investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 31.6 | | | $ | 16.5 | | | $ | 10.8 | |
| | | | | | |
| Distribution of generation assets to subsidiary of parent | | $ | 0 | | | $ | 0 | | | $ | (10.0) | |
See Notes to Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Shareholder's Equity |
| | | Common Stock (a) | | | | | | | | |
| $ in millions | | Outstanding Shares | | Amount | | Other Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
| Year ended December 31, 2017 | | | | | | | | | | | | |
| Beginning balance | | 41,172,173 |
| | $ | 0.4 |
| | $ | 810.7 |
| | $ | (42.5 | ) | | $ | (406.3 | ) | | $ | 362.3 |
|
| Net comprehensive income | | | | | | | | 8.4 |
| | 17.0 |
| | 25.4 |
|
| Common stock dividends and returns of capital | | | | | | (39.0 | ) | | | |
|
| | (39.0 | ) |
| Transfer of generation assets to subsidiary of parent | | | | | | (86.2 | ) | | (2.1 | ) | | | | (88.3 | ) |
| Capital contribution from parent | | | | | | 70.0 |
| | | | | | 70.0 |
|
Other (b) | | | | | | (69.7 | ) | | | | 70.0 |
| | 0.3 |
|
| Ending balance | | 41,172,173 |
| | 0.4 |
| | 685.8 |
| | (36.2 | ) | | (319.3 | ) | | 330.7 |
|
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | 2.0 |
| | 86.7 |
| | 88.7 |
|
| Common stock dividends and returns of capital | | | | | | (43.8 | ) | | | |
|
| | (43.8 | ) |
Transfer of generation assets to subsidiary of parent (c) | | | | | | (10.0 | ) | | | |
|
| | (10.0 | ) |
| Capital contribution from parent | | | | | | 80.0 |
| | | | | | 80.0 |
|
Other (d) | | | | | | (0.2 | ) | | (1.1 | ) | | 1.0 |
| | (0.3 | ) |
| Ending balance | | 41,172,173 |
| | 0.4 |
| | 711.8 |
| | (35.3 | ) | | (231.6 | ) | | 445.3 |
|
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | (1.6 | ) | | 124.9 |
| | 123.3 |
|
| Common stock dividends and returns of capital | | | | | | (95.0 | ) | | | |
|
| | (95.0 | ) |
| Other | | | | | | 0.2 |
| |
| | (0.4 | ) | | (0.2 | ) |
| Ending balance | | 41,172,173 |
| | $ | 0.4 |
| | $ | 617.0 |
| | $ | (36.9 | ) | | $ | (107.1 | ) | | $ | 473.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| Statements of Shareholder's Equity |
| | Common Stock (a) | | | | | | | | |
| $ in millions | | Outstanding Shares | | Amount | | Other Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
| Year ended December 31, 2018 | | | | | | | | | | | | |
| Beginning balance | | 41,172,173 | | | $ | 0.4 | | | $ | 685.8 | | | $ | (36.2) | | | $ | (319.3) | | | $ | 330.7 | |
| Net comprehensive income | | | | | | | | 2.0 | | | 86.7 | | | 88.7 | |
| Common stock dividends and returns of capital | | | | | | (43.8) | | | | | 0 | | (43.8) | |
Transfer of generation assets to subsidiary of parent (b) | | | | | | (10.0) | | | 0 | | | | (10.0) | |
| Equity contribution from parent | | | | | | 80.0 | | | | | | | 80.0 | |
Other (c) | | | | | | (0.2) | | | (1.1) | | | 1.0 | | | (0.3) | |
| Ending balance | | 41,172,173 | | | 0.4 | | | 711.8 | | | (35.3) | | | (231.6) | | | 445.3 | |
| Year ended December 31, 2019 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | (1.6) | | | 124.9 | | | 123.3 | |
| Common stock dividends and returns of capital | | | | | | (95.0) | | | | | 0 | | (95.0) | |
| Other | | | | | | 0.2 | | | 0 | | (0.4) | | | (0.2) | |
| Ending balance | | 41,172,173 | | | 0.4 | | | 617.0 | | | (36.9) | | | (107.1) | | | 473.4 | |
| Year ended December 31, 2020 | | | | | | | | | | | | |
| Net comprehensive income | | | | | | | | (5.2) | | | 51.1 | | | 45.9 | |
| Common stock dividends and returns of capital | | | | | | (52.7) | | | | | 0 | | (52.7) | |
| Equity contribution from parent | | | | | | 150.0 | | | | | | | 150.0 | |
| Other | | | | | | 0.1 | | | | | 0 | | | 0.1 | |
| Ending balance | | 41,172,173 | | | $ | 0.4 | | | $ | 714.4 | | | $ | (42.1) | | | $ | (56.0) | | | $ | 616.7 | |
| |
(a) | $0.01 par value, 50,000,000 shares authorized. |
| |
(b) | In 2017, we reclassified the presentation of the December 2016 dividend payment of $70.0 million. This was originally recorded as a charge to Accumulated deficit but was reclassified as a charge to Other paid-in capital as it represented a return of capital. |
| |
(c) | (a)$0.01 par value, 50,000,000 shares authorized. (b)In 2018, DP&L transferred additional deferred taxes to AES Ohio Generation under the provisions of SAB 118 through an equity transaction with DPL. See Note 8 – Income Taxes for additional information. (c)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.
DP&L transferred additional deferred taxes to AES Ohio Generation under the provisions of SAB 118 through an equity transaction with DPL. See Note 8 – Income Taxes for additional information.
|
| |
(d) | 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. |
See Notes to Financial Statements.
The Dayton Power and Light Company
Notes to Financial Statements
For the years ended December 31, 2020, 2019 2018 and 20172018
Note 1 – Overview and Summary of Significant Accounting Policies
Description of Business
DP&L is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation service, however transmission and distributiondistribution services are still regulated. DP&L has the exclusive right to provide such service to its approximately 526,000 531,000 customers located in West Central Ohio. DP&L provides retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L sources all of the generation for its SSO customers through a competitive bid process. Through September 30, 2017, DP&L owned undivided interests in multiple coal-fired the retired power stations of Beckjord and multiple peaking electric generating facilities as well asHutchings until their transfers in 2018 and 2020, respectively, and currently owns numerous transmission facilities. On October 1, 2017, the DP&L-owned generating facilities, excluding the Beckjord Facility and Hutchings EGU, were transferred to AES Ohio Generation, an affiliate of DP&L and wholly-owned subsidiary of DPL, through an asset contribution agreement to a subsidiary that was merged into AES Ohio Generation. Principal industries located in DP&L’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. DP&L's sales reflect the generalgeneral economic conditions, seasonal weather patterns of the area and the market price of electricity. Through the date of Generation Separation, DP&L sold energy and capacity into the wholesale market. As a result of Generation Separation, DP&L nowhas only has one reportable segment, the Utility segment. In addition to DP&L's electric transmission and distribution businesses, the Utility segment includes revenues and costs associated with DP&L's investment in OVEC and the historical results of DP&L’s retired Beckjord and Hutchings Coal generating facilities,Stations, which were either closed or sold in prior periods.2018 and 2020, respectively.
DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders.
DP&L employed 630631 people (512 full-time) at January 31, 2020.2021. Approximately 59%58% of all employees are under a collective bargaining agreement that expires on October 31, 2020.2023.
Financial Statement Presentation
DP&L does not have any subsidiaries.
Through June 2018, DP&L had undivided ownership interests in numerous jointly-owned transmission facilities. These undivided interests in jointly-owned facilities were accounted for on a pro rata basis in the Financial Statements. In June 2018, DP&L closed on a transmission asset transaction with Duke and AEP, where ownership stakes in certain previously co-owned transmission assets were exchanged to eliminate co-ownership. Each previously co-owned transmission asset became wholly-owned by one of DP&L, Duke or AEP after the transaction. See Note 4 – Property, Plant and Equipment for more information.
We have evaluated subsequent events through the date this report is issued.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the revenues and expenses of the periods reported. Actual results could differ from these estimates. Significant items subject to such estimates and judgments include: the carrying value of Property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents.
Restricted Cash
Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restriction includes an agreement related to cash collected under the DMR, which iswas restricted to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure.
The following table summarizes cash, cash equivalents and restricted cash amounts reported on the Balance SheetSheets that reconcile to the total of such amounts as shown on the Statements of Cash Flows:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Cash and cash equivalents | | $ | 11.7 | | | $ | 10.8 | |
| Restricted cash | | 0.1 | | | 10.5 | |
| Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 11.8 | | | $ | 21.3 | |
|
| | | | | | | | |
| $ in millions | | December 31, 2018 | | December 31, 2017 |
| Cash and cash equivalents | | $ | 10.8 |
| | $ | 45.0 |
|
| Restricted cash | | 10.5 |
| | 21.2 |
|
| Cash, Cash Equivalents and Restricted Cash, End of Period | | $ | 21.3 |
| | $ | 66.2 |
|
Allowance for Uncollectible AccountsCredit Losses
We establish provisions for uncollectible accounts by using both historical average loss percentages to project future losses and by establishing specific provisions for known credit issues. Amounts are written off when reasonable collections efforts have been exhausted.
Inventories
Inventories are carried at average cost, net of reserves, and include materials and supplies used for utility operations.
Regulatory Accounting
As a regulated utility, DP&L applies the provisions of FASC 980 “Regulated Operations”, which gives recognition to the ratemaking and accounting practices of the PUCO and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory assets have been included as allowable costs for ratemaking purposes, as authorized by the PUCO or established regulatory practices. Regulatory liabilities generally represent obligations to make refunds or future rate reductions to customers for previous over collections or the deferral of revenues collected for costs that DP&L expects to incur in the future.
The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific orders from the PUCO or FERC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Our regulatory assets and liabilities have been created pursuant to a specific order of the PUCO or FERC or established regulatory practices, such as other utilities under the jurisdiction of the PUCO or FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to PUCO or FERC approval. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 3 – Regulatory Matters for more information.
Property, Plant and Equipment
We record our ownership share of our undivided interest in jointly-owned transmission and distribution property as an asset in property, plant and equipment. New property, plant and equipment additions are stated at cost. For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and an allowance for funds used during construction (AFUDC). AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $3.0 million, $3.2 million $0.5 million and $1.5$0.5 million in the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization, consistent with composite depreciation practices.
Impairment of Long-lived Assets
Property is evaluatedGAAP requires that we test long-lived assets for impairment when events or changesindicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The net book value of our property, plant, and equipment was $1,544.0 million and $1,425.4 million as of
December 31, 2020 and 2019, respectively. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and distribution capacity of the assets; the expected ability to recover additional expenditures in circumstances indicate that its carrying amount may not be recoverable.the assets; and the anticipated demand and relative pricing of retail electricity in our service territory.
Depreciation
Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For DP&L’s transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates that approximated 2.8% in 2020, 2.9% in 2019 and 3.0% in 2018 and 3.4% in 2017.2018. Depreciation expense was $68.6 million, $66.5 million $68.2 million and $69.6$68.2 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
Intangibles
Intangibles include software, emission allowances and renewable energy credits. Emission allowances are carried on a first-in, first-out (FIFO) basis for purchased emission allowances. Net gains or losses on the sale of excess emission allowances, representing the difference between the sales proceeds and the cost of emission allowances, are recorded as a component of our fuel costs and are reflected in Operating income when realized. Emission allowances are amortized as they are used in our operations on a FIFO basis. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired.
Software is amortized over seven years. Amortization expense was $4.3$3.2 million, $6.3$4.3 million and $5.7$6.3 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. The estimated amortization expense of this internal-use software over the next five years is $11.1$10.2 million ($3.5 million in 2020, $3.32.9 million in 2021, $3.2$2.1 million in 2022, $1.0$1.9 million in 2023, and $0.1$1.7 million in 2024)2024 and $1.6 million in 2025).
Implementation Costs Related to Software as a Service
DP&L has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $4.1 million and these are recorded within Other Non-current Assets on the accompanying Balance Sheets as of December 31, 2020.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and presented as a direct reduction from the face amount of that debt and amortized over the related financing period using the effective interest method. Debt issuance costs related to a line-of-credit or revolving credit facility are deferred and presented as an asset and amortized over the related financing period. Make-whole payments in connection with early debt retirements are classified as cash flows used in financing activities.
Financial Instruments
Our Master Trust investments in debt and equity financial instruments of publicly traded entities are classified as equity investments. These equity securities are carried at fair value and unrealized gains and losses on these securities are recorded in Other income. As these financial instruments are held to be used for the benefit of employees or former employees participating in employee benefit plans and are not used for general operating purposes, they are classified as non-current in Other non-current assets on the Balance Sheets. See Note 5 – Fair Value for additional information.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
We usehave, in the past, used interest rate hedges to manage the interest rate risk of our variable rate debt. We use cash flow hedge accounting when the hedge or a portion of the hedge is deemed to be highly effective, which results in changes in fair value being recorded within accumulated other comprehensive income / (loss), a component of shareholder’s equity. We have elected not to offset net derivative positions in the financial statements. Accordingly, we do not offset such derivative positions against the fair value of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting agreements. See Note 6 – Derivative Instruments and Hedging Activities for additional information.
Insurance and Claims Costs
In addition to insurance obtained from third-party providers, MVIC, a wholly-owned captive subsidiary of DPL, provides insurance coverage solely to us and other DPL subsidiaries for workers’ compensation, general liability and property damage on an ongoing basis. DP&L is responsible for claims costs below certain coverage thresholds of MVIC and third-party insurers for the insurance coverage noted above. DP&L has estimated liabilities for medical, life, disability and other reserves for claims costs below certain coverage thresholds of third-party providers of approximately $3.3$3.5 million and $4.3$3.3 million at December 31, 20192020 and 2018,2019, respectively, within Accrued and other current liabilities and Other non-current liabilities on the balance sheets. The estimated liabilities for workers’ compensation, medical, life and disability costs at DP&L are actuarially determined using certain assumptions.
There is uncertainty associated with these loss estimates, and actual results may differ from the estimates. Modification of these loss estimates based on experience and changed circumstances is reflected in the period in which the estimate is re-evaluated.
Revenue Recognition
Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Energy sales to customers are based on the reading of their meters that occurs on a systematic basis throughout the month. We recognize the revenues on our Consolidated Statements of Operations using an accrual method for retail and other energy sales that have not yet been billed, but where electricity has been consumed. This is termed “unbilled revenues” and is a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenues are determined by the estimation of unbilled energy provided to customers since the date of the last meter reading, estimated line losses, the assignment of unbilled energy provided to customer classes and the average rate per customer class.
The power sales and purchases within DP&L’s service territory are reported on a net hourly basis as revenues or purchased power on our Consolidated Statements of Operations. All of the power produced at the generation station is sold to an RTO. We record expenses when purchased electricity is received and when expenses are incurred. For additional information, see Note 13 – Revenue.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenues in the accompanying Statements of Operations. The amounts for the years ended December 31, 2020, 2019 and 2018, and 2017, were $48.1 million, $50.1 million $51.7 million and $49.4$51.7 million, respectively.
Repairs and Maintenance
Costs associated with maintenance activities are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
Pension and Postretirement Benefits
We recognize in our Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes from actuarial gains or losses related to our regulated operations, that would otherwise be recognized in AOCI,AOCL, recorded as a regulatory asset as this can be recovered through future rates. Such changes that are not related to our regulated operations are recognized in AOCI.AOCL. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of FASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
See Note 9 – Benefit Plans for more information.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective income tax bases. We establish an allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Our tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting. Uncertain tax positions have
been classified as noncurrent income tax liabilities unless expected to be paid within one year. Our policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Statement of Operations.
Income taxes payable, which are includable in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 3 – Regulatory Matters for additional information.
DP&L files U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8 – Income Taxes for additional information.
Related Party Transactions
In the normal course of business, DP&L enters into transactions with other subsidiaries of DPL or AES. See Note 12 – Related Party Transactions for more information on Related Party Transactions.
Held-for-sale Businesses
A business classified as held-for-sale is reflected on the balance sheet at the lower of its carrying amount or estimated fair value less cost to sell. A loss is recognized if the carrying amount of the business exceeds its estimated fair value less cost to sell. This loss is limited to the carrying value of long-lived assets until the completion of the sale, at which point, any additional loss is recognized. If the fair value of the business subsequently exceeds the carrying amount while the business is still held-for-sale, any impairment expense previously recognized will be reversed up to the lower of the previously recognized expense or the subsequent excess.
Assets and liabilities related to a business classified as held-for-sale are segregated in the current balance sheet in the period in which the business is classified as held-for-sale. Assets and liabilities of held-for-sale businesses are classified as current when they are expected to be disposed of within twelve months. Transactions between the business held-for-sale and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. See Note 14 – Generation Separation for further information.
Discontinued Operations
Discontinued operations reporting occurs only when the disposal of a business or a group of assets represents a strategic shift that has (or will have) a major effect on our operations and financial results. We report financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Prior period amounts in the statement of operations and balance sheet are retrospectively revised to reflect the businesses determined to be discontinued operations. The cash flows of businesses that are determined to be discontinued operations are included within the relevant categories within operating, investing and financing activities on the face of the Consolidated Statements of Cash Flows.
Transactions between the businesses determined to be discontinued operations and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. The results of discontinued operations include any gain or loss recognized on closing or adjustment of the carrying amount to fair value. See Note 14 – Generation Separation for further information.
Generation Separation
With the transfer of DP&L's generation assets to an affiliate (see Note 14 – Generation Separation), DP&L's generation business is presented as a discontinued operation and the operating activities have been reclassified to "Discontinued operations" in the Statements of Operations for the year ended December 31, 2017 and in the notes to the financial statements.
New accounting pronouncements
The following table provides a brief description of recent accounting pronouncements that had an impact on our financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on our financial statements.
|
| | | | | | | | | | |
| Accounting Standard | Description | Date of Adoption | Effect on the financial statements upon adoption |
| New Accounting Standards Adopted |
2017-12, Derivatives and Hedging2016-13, 2018-19, 2019-04, 2019-05, 2019-10, Financial Instruments — Credit Losses (Topic 815)326): Targeted improvements to Accounting for Hedging ActivitiesMeasurement of Credit Losses on Financial Instruments | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that 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.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings asSee discussion of the initial application date. Prospective for presentation and disclosures.ASUs below. | January 1, 2019.2020. | The adoption of this standard had no material effect on our financial statements. |
2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from AOCI | This amendment allows a reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act from AOCI to retained earnings. Because this amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. | January 1, 2019. | The adoption of this standard had no material effect on our financial statements. |
2016-02, 2018-01, 2018-10, 2018-11, 2018-20
Leases (Topic 842) | See discussion of the ASU below. | January 1, 2019. | The adoption of this standard had no material effect on our financial statements. |
Adoption of FASC Topic 842, "Leases"326, "Financial Instruments - Credit Losses"
On January 1, 2019,2020, we adopted FASC 842 LeasesASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates (“FASC 842”("ASC 326"). Under thisThe new standard lesseesupdates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to recognize assets and liabilitiesuse a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for most leasescredit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet and recognize expenses inwith a manner similarcorresponding adjustment to the prior accounting method. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under FASC 842, it is expected that fewer contracts will contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases will qualify as sales-type leases and direct financing leases. Under these two models, a lessor will derecognize the asset and will recognize a net investment in a lease. According to FASC 842, the net investmentearnings in the lease includes the fair value of the plant after the contract period but does not include variable payments such as margin on the sale of energy. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting FASC 842, we applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
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a. | whether any expired or existing contracts are or contain leases, |
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b. | lease classification for any expired or existing leases, and |
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c. | whether initial direct costs for any expired or existing leases qualify for capitalization under FASC 842. |
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. We applied the practical expedient to all classes of underlying assets when valuing right-of-use assets and lease liabilities. Contracts where we are the lessor were separated between the lease and non-lease components.
We applied the modified retrospective method of adoption and elected to continue to apply the guidance in FASC 840 Leases to the comparative periods presented in the year of adoption.for ASC 326. Under this transition method, we applied the transition provisions starting at the date of adoption.
The CECL model primarily impacts the calculation of our expected credit losses in gross customer trade accounts receivable. The adoption of FASC 842ASC 326 and the application of CECL on our trade accounts receivable did not have a material impact on our financial statements.Financial Statements.
New accounting pronouncements issued but not yet effective - The following table provides a brief description of recent accounting pronouncements that could have a material impact on our financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on our financial statements.
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| Accounting Standard | Description | Date of Adoption | Effect on the financial statements upon adoption |
| New Accounting Standards Issued but Not Yet Effective |
2019-12, Income Taxes2020-04, Reference Rate Reform (Topic 740)848): SimplifyingFacilitation of the Accounting for Income TaxesEffects of Reference Rate Reform on Financial Reporting | The standard removes certainprovides optional expedients and exceptions for recognizing deferred taxesapplying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform. This standard is effective for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxesa limited period of time (March 12, 2020 - December 21, 2022). | Effective for tax goodwill and allocating taxes to membersall entities as of a consolidated group.
Transition Method: variousMarch 12, 2020 through December 31, 2022. | January 1, 2021. Early adoption is permitted. | We are currently evaluating the impact of adopting the standard on our financial statements |
2016-13, 2018-19, 2019-04, 2019-05, 2019-10, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | See discussion of the ASUs below. | January 1, 2020. Early adoption is permitted only as of January 1, 2019. | We will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on theconsolidated financial statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss (“CECL”) model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses as it is done today, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
We are currently evaluating the impact of adopting the standard on our financial statements. We expect that the new current expected credit loss model will primarily impact the calculation of expected credit losses on $71.3 million in gross trade accounts receivable. We do not expect a material impact to result from the application of CECL on our trade accounts receivable.
Note 2 – Supplemental Financial Information
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| | | | | | | | |
| | | December 31, |
| $ in millions | | 2019 | | 2018 |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 45.0 |
| | $ | 53.3 |
|
| Unbilled revenue | | 19.4 |
| | 16.8 |
|
| Amounts due from affiliates | | 3.9 |
| | 2.3 |
|
Due from PJM transmission enhancement settlement (a) | | 1.8 |
| | 16.5 |
|
| Other | | 1.2 |
| | 2.4 |
|
| Provisions for uncollectible accounts | | (0.4 | ) | | (0.9 | ) |
| Total accounts receivable, net | | $ | 70.9 |
| | $ | 90.4 |
|
| | | | | |
| Inventories, at average cost | | | | |
| Materials and supplies | | $ | 10.4 |
| | $ | 7.1 |
|
| Other | | — |
| | 0.6 |
|
| Total inventories, at average cost | | $ | 10.4 |
| | $ | 7.7 |
|
Accounts receivable are as follows at December 31, 2020 and 2019:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 47.6 | | | $ | 45.0 | |
| Unbilled revenue | | 21.6 | | | 19.4 | |
| Amounts due from affiliates | | 1.9 | | | 3.9 | |
Due from PJM transmission enhancement settlement (a) | | 1.7 | | | 1.8 | |
| Other | | 0.2 | | | 1.2 | |
| Allowance for credit losses | | (2.8) | | | (0.4) | |
| Total accounts receivable, net | | $ | 70.2 | | | $ | 70.9 | |
| | | | |
| | | | |
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(a) | See Note 3 – Regulatory Matters for more information. |
(a) See Note 3 – Regulatory Matters for more information.
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Beginning Allowance Balance at January 1, 2020 | | Current Period Provision | | Write-offs Charged Against Allowances | | Recoveries Collected | | Ending Allowance Balance at December 31, 2020 |
| Allowance for credit losses | | $ | 0.4 | | | $ | 3.0 | | | $ | (2.3) | | | $ | 1.7 | | | $ | 2.8 | |
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions would impact collectability, as applicable, including the economic impacts of the COVID-19 pandemic on our receivable balance as of December 31, 2020. Amounts are written off when reasonable collections efforts have been exhausted. On March 12, 2020, the PUCO issued an emergency order prohibiting electric utilities, including us, from discontinuing electric utility service to customers through September 1, 2020 due to the economic impacts of COVID-19. This order along with the economic impacts of COVID-19 has resulted in an increase in past due customer receivable balances, and thus the current period provision and the allowance for credit losses have increased during 2020. See Note 15 – Risks & Uncertainties for additional discussion of the COVID-19 pandemic. However, as discussed in Note 3 – Regulatory Matters, DP&L’s uncollectible expense is deferred for future collection.
Accumulated Other Comprehensive Income / (Loss)Loss
The amounts reclassified out of Accumulated Other Comprehensive Income / (Loss)Loss by component during the years ended December 31, 2020, 2019 2018 and 20172018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details about Accumulated Other Comprehensive Income / (Loss) Components | | Affected line item in the Statements of Operations | | Years ended December 31, |
| $ in millions | | | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Gains and losses on cash flow hedges (Note 6): | | | | | | |
| | Interest expense | | (0.2) | | | (0.2) | | | (1.1) | |
| | | | | | | | |
| | Income tax expense | | 0.8 | | | 0 | | | 0.4 | |
| | Net of income taxes | | 0.6 | | | (0.2) | | | (0.7) | |
| | | | | | | | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Amortization of defined benefit pension items (Note 9): | | | | | | |
| | Other expense | | 4.0 | | | 3.5 | | | 4.3 | |
| | Income tax benefit | | (0.9) | | | (0.5) | | | (1.0) | |
| | Net of income taxes | | 3.1 | | | 3.0 | | | 3.3 | |
| | | | | | | | |
| Total reclassifications for the period, net of income taxes | | $ | 3.7 | | | $ | 2.8 | | | $ | 2.6 | |
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| | | | | | | | | | | | | | |
| Details about Accumulated Other Comprehensive Income / (Loss) Components | | Affected line item in the Statements of Operations | | Years ended December 31, |
| $ in millions | | | | 2019 | | 2018 | | 2017 |
| Gains and losses on equity securities activity (Note 5): | | | | | | |
| | | Other deductions | | $ | — |
| | $ | — |
| | $ | (0.1 | ) |
| | | Income tax expense | | — |
| | — |
| | — |
|
| | | Net of income taxes | | — |
| | — |
| | (0.1 | ) |
| | | | | | | | | |
| Gains and losses on cash flow hedges (Note 6): | | | | | | |
| | | Interest expense | | (0.2 | ) | | (1.1 | ) | | (0.9 | ) |
| | | Income tax expense | | — |
| | 0.4 |
| | 0.2 |
|
| | | Net of income taxes | | (0.2 | ) | | (0.7 | ) | | (0.7 | ) |
| | | | | | | | | |
| | | Gain from discontinued operations | | — |
| | — |
| | (8.5 | ) |
| | | Income tax expense from discontinued operations | | — |
| | — |
| | 3.0 |
|
| | | Net of income taxes | | — |
| | — |
| | (5.5 | ) |
| | | | | | | | | |
| Amortization of defined benefit pension items (Note 9): | | | | | | |
| | | Other expense | | 3.5 |
| | 4.3 |
| | 6.8 |
|
| | | Income tax benefit | | (0.5 | ) | | (1.0 | ) | | (2.3 | ) |
| | | Net of income taxes | | 3.0 |
| | 3.3 |
| | 4.5 |
|
| | | | | | | | | |
| Total reclassifications for the period, net of income taxes | | $ | 2.8 |
| | $ | 2.6 |
| | $ | (1.8 | ) |
The changes in the components of Accumulated Other Comprehensive Income / (Loss)Loss during the years ended December 31, 20192020 and 20182019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | | | Gains / (losses) on cash flow hedges | | Change in unfunded pension obligation | | Total |
| Balance at January 1, 2019 | | | | $ | 0.6 | | | $ | (35.9) | | | $ | (35.3) | |
| | | | | | | | |
| Other comprehensive loss before reclassifications | | | | (0.8) | | | (3.6) | | | (4.4) | |
| Amounts reclassified from accumulated other comprehensive loss to earnings | | | | (0.2) | | | 3.0 | | | 2.8 | |
| Net current period other comprehensive loss | | | | (1.0) | | | (0.6) | | | (1.6) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Balance at December 31, 2019 | | | | (0.4) | | | (36.5) | | | (36.9) | |
| | | | | | | | |
| Other comprehensive loss before reclassifications | | | | (0.2) | | | (8.7) | | | (8.9) | |
| Amounts reclassified from accumulated other comprehensive loss to earnings | | | | 0.6 | | | 3.1 | | | 3.7 | |
| Net current period other comprehensive income / (loss) | | | | 0.4 | | | (5.6) | | | (5.2) | |
| | | | | | | | |
| Balance at December 31, 2020 | | | | $ | 0 | | | $ | (42.1) | | | $ | (42.1) | |
| | | | | | | | |
| | | | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Gains / (losses) on equity securities | | Gains / (losses) on cash flow hedges | | Change in unfunded pension obligation | | Total |
| Balance at December 31, 2017 | | $ | 1.1 |
| | $ | 1.4 |
| | $ | (38.7 | ) | | $ | (36.2 | ) |
| | | | | | | | | |
| Other comprehensive loss before reclassifications | | — |
| | (0.1 | ) | | (0.5 | ) | | (0.6 | ) |
| Amounts reclassified from accumulated other comprehensive income / (loss) to earnings | | — |
| | (0.7 | ) | | 3.3 |
| | 2.6 |
|
| Net current period other comprehensive income / (loss) | | — |
| | (0.8 | ) | | 2.8 |
| | 2.0 |
|
| | | | | | | | | |
Amounts reclassified from accumulated other comprehensive income to accumulated deficit (a) | | (1.1 | ) | | — |
| | — |
| | (1.1 | ) |
| | | | | | | | | |
| Balance at December 31, 2018 | | — |
| | 0.6 |
| | (35.9 | ) | | (35.3 | ) |
| | | | | | | | | |
| Other comprehensive loss before reclassifications | | — |
| | (0.8 | ) | | (3.6 | ) | | (4.4 | ) |
| Amounts reclassified from accumulated other comprehensive loss to earnings | | — |
| | (0.2 | ) | | 3.0 |
| | 2.8 |
|
| Net current period other comprehensive loss | | — |
| | (1.0 | ) | | (0.6 | ) | | (1.6 | ) |
| | | | | | | | | |
| Balance at December 31, 2019 | | $ | — |
| | $ | (0.4 | ) | | $ | (36.5 | ) | | $ | (36.9 | ) |
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(a) | 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. |
Note 3 – Regulatory Matters
DP&L ESP and SEET Proceedings
Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, DP&L operated pursuant to an approved ESP plan, which was initially approved on October 20, 2017 (ESP 3). On November 21, 2019, the PUCO issued a supplemental order modifying the ESP 3 Stipulation by, among other matters, removing the DMR, which reduced DPL’s annual revenues by $105.0 million beginning November 29, 2019. As a result, DP&L filed a Notice of Withdrawal of its ESP 3 Application and requested to revert to rates based on its ESP 1. On December 18, 2019, the PUCO approved DP&L’s Notice of Withdrawal and reversion to its ESP 1 rate plan. Among other items, the PUCO Order approving the ESP 1 rate plan includes:
•Reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million;
•Continuation of DP&L’s Transmission Cost Recovery Rider, Storm Rider and the bypassable standard offer energy rate for DP&L’s customers based on competitive bid auctions;
•A placeholder rider to recover grid modernization costs, called the Infrastructure Investment Rider; and
•A requirement to conduct both an ESP v. MRO Test and a prospective SEET no later than April 1, 2020.
Separate from the ESP process, DP&L filed a petition seeking recovery of ongoing OVEC costs through a Legacy Generation Rider and was granted approval effective January 1, 2020.
DP&L filed its ESP v. MRO Test to validate that the ESP is expected to be more favorable in the aggregate than what would be experienced under an MRO, and a prospective SEET, with the PUCO on April 1, 2020. DP&L is also subject to an annual retrospective SEET whereby it must demonstrate its return on equity is not significantly excessive.
On October 23, 2020, DP&L entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of DP&L and certain other parties with respect to, among other matters, DP&L’s applications pending at the PUCO for (i) approval of DP&L’s plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that DP&L’s current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. The settlement is subject to, and conditioned upon, approval by the PUCO. A hearing was conducted January 11 - 15, 2021 for consideration of this settlement. The settlement would provide, among other items, for the following:
•Approval of the Smart Grid Plan outlined in the Smart Grid Plan application filed by DP&L with the PUCO, as modified by the terms of the settlement, including, subject to offsetting operational benefits and certain other conditions, a return on and recovery of up to $249.0 million of Smart Grid Plan Phase 1 capital investments and recovery of operational and maintenance expenses through DP&L’s existing Infrastructure Investment Rider for a term of four years, under an aggregate cap of $267.6 million on the amount of such investments and expenses that is recoverable, and an acknowledgement that DP&L may file a subsequent application with the PUCO within three years seeking approvals for Phase 2 of the Smart Grid Plan;
•A commitment by DP&L to invest in a customer information system and supporting technologies during Phase 1 of the Smart Grid Plan, with DP&L recovering a return on and of prudently incurred capital investments and operational and maintenance expenses, including deferred operational and maintenance expense amounts, in a future rate case;
•A determination that DP&L’s ESP 1 satisfies the prospective SEET and the MFA regulatory test;
•A recommendation by parties to the settlement that the PUCO also finds that DP&L satisfies the retrospective SEET for 2018 and 2019;
•A commitment by DP&L to file an application with the PUCO no later than October 1, 2023 for a new electric security plan that does not seek to implement certain non-bypassable charges, including those related to provider of last resort risks, stability, or financial integrity; and
•DP&L shareholder funding, in an aggregate amount of approximately $30.0 million over four years, for certain economic development discounts, incentives, and grants to certain commercial and industrial customers, including hospitals and manufacturers, assistance for low-income customers as well as the residents and businesses of the City of Dayton, and promotion of solar and resiliency development within DP&L’s service territory.
Certain parties which intervened in the ESP proceedings have filed petitions for rehearing of the recent PUCO ESP orders; some of which seek to eliminate DP&L’s RSC from the ESP 1 rates that are currently in place and others seek to re-implement ESP 3, but without the DMR. We are unable to predict the outcomes of these petitions, but if these result in terms that are more adverse than DP&L's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows. The parties signing the above-referenced Settlement have agreed to withdraw their respective petitions if the Settlement is approved by the PUCO without material modification.
Decoupling
On January 23, 2021 DP&L filed with the PUCO requesting approval to defer its decoupling costs consistent with the methodology approved in its Distribution Rate Case. If approved, deferral would be effective December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs and economic changes in customer demand.
COVID-19
In response to the PUCO’s COVID-19 emergency orders, DP&L filed an Application on March 23, 2020, requesting waivers of certain rule and tariff requirements and deferral of certain costs and revenues including those related to deposits and reconnection fees, late payment fees, credit card fees; and waived or uncollected amounts associated with putting customers on payment plans. On May 20, 2020, the PUCO approved the application and required DP&L to file a plan outlining the timing and steps it plans to take in an effort to return to normal operations. The authorized deferral of those certain costs and revenues must be offset by COVID-19 related savings. DP&L filed its
plan on July 15, 2020 and was approved by the PUCO on August 12, 2020. As a result, DP&L has recorded a $1.2 million regulatory asset as of December 31, 2020. Recovery of these deferrals will be addressed in a future
rate proceeding.
Distribution Rate Order
On September 26, 2018 the PUCO issued the DRO establishing new base distribution rates for DP&L, which became effective October 1, 2018. The DRO approved, without modification, a stipulation and recommendation previously filed by DP&L, along with various intervening parties and the PUCO staff. The DRO established a revenue requirement for DP&L's electric service base distribution rates of $248.0 million, reflecting an increase to distribution revenues of approximately $29.8 million per year. The DRO, in conjunction with the 2017 ESP, provided for the following items (among other matters):$248.0 million.
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• | DIR- The DRO authorized DP&L to earn amounts through a Distribution Investment Rider ("DIR") set initially at $12.2 million annually, effective October 1, 2018. The DIR revenue cap for 2019 was $22.0 million. The DIR was removed on December 18, 2019 when the 2017 ESP was modified.
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• | Decoupling Rider - The DRO authorized a revenue requirement methodology that attempts to eliminate the impacts of weather and demand on DP&L’s revenues for residential and commercial distribution customers beginning January 1, 2019 by providing for certain distribution revenues to be collected through a Decoupling Rider. DP&L collected revenues under the Decoupling Rider until it was removed on December 18, 2019 when the 2017 ESP was modified.
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DP&L ESP Orders
Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, DP&L operated pursuant to an approved ESP plan, which DP&L initially filed on March 13, 2017 (the “2017 ESP”). The 2017 ESP included the following:
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• | A bypassable standard offer energy rider for DP&L’s customers based on competitive bid auctions;
|
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• | The establishment of a three-year non-bypassable DMR to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure;
|
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• | The establishment of the DIR, a non-bypassable Distribution Investment Rider to recover distribution capital investments incremental to the amount included in rate base in the DP&L DRO;
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• | A non-bypassable Reconciliation Rider, which allowed DP&L to recover its net ongoing costs from its investment in OVEC;
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Implementation, effective November 1, 2017, of a Smart Grid Rider, Economic Development Rider, Economic Development Fund, Regulatory Compliance Rider and certain other new, or changes to existing rates and riders and competitive retail market enhancements, with tariffs consistent with the 2017 ESP;
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• | A commitment to commence a sale process to sell our ownership interests in the Miami Fort, Zimmer and Conesville coal-fired generation plants, with all sales proceeds used to pay debt of DPL and DP&L, and
|
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• | Restrictions on DPL making dividend or tax sharing payments and an obligation to convert then existing tax payments owed by DPL to AES into equity investments in DPL.
|
On November 21, 2019, the PUCO issued a supplemental order modifying the 2017 ESP Stipulation by, among other matters, removing the DMR, which reduced DP&L’s annual revenues by $105.0 million beginning November 29, 2019. As a result, DP&L filed a Notice of Withdrawal of its 2017 ESP Application and requested to revert to rates based on its ESP 1. On December 18, 2019, the PUCO approved DP&L’s Notice of Withdrawal and reversion to its ESP 1 rate plan. Among other items, the PUCO Order approving the ESP 1 rate plan includes:
Reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million;
| |
• | Continuation of DP&L’s Transmission Cost Recovery Rider, Storm Rider and the bypassable standard offer energy rate for DP&L’s customers based on competitive bid auctions;
|
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• | A placeholder rider to recover grid modernization costs, called the Infrastructure Investment Rider;
|
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• | A requirement to conduct both an ESP v. MRO Test and a prospective SEET no later than April 1, 2020; and
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Removal of the DIR, Reconciliation Rider, Decoupling Rider, Regulatory Compliance rider, and the Uncollectible rider.
DP&L is also subject to a retrospective SEET threshold whereby it must demonstrate its return on equity is below 12%, excluding DMR revenues. The ultimate outcome of this and the ESP v. MRO and prospective SEET could have a material adverse effect on our results of operations, financial condition and cash flows.
Separate from the ESP process, DP&L filed a petition seeking recovery of ongoing OVEC costs through a Legacy Generation Rider and was granted approval effective January 1, 2020. Additionally, in the first quarter of30, 2020, DP&L filed a separate petition seeking authority to recordnew distribution rate case with the PUCO. This rate case proposes a regulatory asset to accrue revenuesrevenue increase of $120.8 million per year and incorporates the DIR investments that would have otherwise been collected under the 2017 ESP through the Decoupling Rider. The outcome of this petition is pending.
Certain parties which intervenedwere planned and approved in the ESP proceedings have filed petitionslast rate case but not yet included in distribution rates, other distribution investments since September 2015 and investments necessitated by the tornados that occurred on Memorial Day in 2019. The rate case also includes a proposal for rehearingincreased tree-trimming expenses and certain customer demand-side management programs and recovery of the recent PUCO ESP orders; some of which seek to eliminate DP&L’s RSC from the ESP 1 rates that are currently in placeprior-approved regulatory assets for tree trimming, uncollectible expenses and others seek to re-implement the 2017 ESP, but without the DMR. We are unable to predict the outcomes of these petitions, but if these result in terms that are more adverse than DP&L's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows.case expense.
Regulatory Impact of Tax Reform
On January 10, 2018 the PUCO initiated a proceeding to consider the impacts of the TCJA to determine the appropriate course of action to pass benefits resulting from the legislation on to ratepayers. The PUCO also directed Ohio utilities to record deferred liabilities for the estimated reduction in federal income tax resulting from the TCJA beginning January 1, 2018. Under the terms of the stipulation in the distribution rate case mentioned above, DP&L filed an application at the PUCO to refund eligible excess accumulated deferred income taxes (ADIT) and any related regulatory liability over a 10-year period with a minimum reversal of $4.0$4.0 million per year over the first five years. Excess ADIT related to depreciation life and method differences will be returned to customers in accordance with federal tax law and related regulations. DP&L’s rates were set using the new tax rate as a result of the distribution rate case. Consistent with the DRO requirement, DP&L filed an application on March 1, 2019 and subsequently entered into a stipulation to resolve all remaining TCJA items related to its distribution rates. That stipulation was approved by the PUCO on September 26, 2019. In accordance with terms of that stipulation, DP&L will return a total of $65.1$65.1 million ($83.2 million when including taxes associated with the refunds). In connection with this stipulation, we reduced our long-term regulatory liability related to deferred income taxes by $23.4 million.million in 2019. See Note 8 – Income Taxes for additional information.
FERC Proceedings
On May 8, 2018, DP&L filed to adjust its FERC jurisdictional transmission rates to reflect the effects of the decrease in federal income tax rates on the current portion of income tax expense as part of the TCJA, resulting in a
decrease of approximately $2.4 million annually. The revised rates are in effect and all DP&L over and undercollections dating back to the March 21st effective date were settled in December 2018.
On November 15, 2018 the FERC issued a Notice of Proposed Rulemaking (NOPR) to address amortization of excess accumulated deferred income taxes resulting from the TCJA and their impact on transmission rates. Such notice requires all public utility transmission providers with stated transmission rates under an Open Access Transmission Tariff (OATT) to determine the amount of excess deferred income taxes caused by the TCJATCJA.
.On March 3, 2020, DP&L filed an application before the FERC seeking to change its existing stated transmission rates to formula transmission rates that would be updated each calendar year. This filing was approved and made effective as of May 3, 2020, subject to possible refunds if the approved rates were modified. An uncontested settlement was filed December 10, 2020, which if approved, would be a reduction from the proposed rate which would require refunds for transmission services provided and billed after May 3, 2020. This settlement provides for an increase of approximately $7.0 million on an annualized basis from the rates in effect prior to the March 3, 2020 filing that was allowed to go into effect May 3, 2020. Among other things, the settlement establishes new depreciation rates for DP&L’s transmission assets and an authorized return on equity of 9.85%, which would rise to 9.99% if the FERC were to approve in a separate ongoing proceeding a return on equity “adder” to recognize DP&L’s continued membership in PJM.The settlement is unable to predictpending FERC approval which is expected early in the outcomefirst quarter of 2021. The NOPR, therefore, was addressed and resolved as part of this notice or the impact it may have on our Financial Statementsformula transmission rate proceeding .
PJM Transmission Enhancement Settlement
On May 31, 2018, the FERC issued an Order on Contested Settlement regarding the cost allocation method for existing and new transmission facilities contained in the PJM Interconnection’s OATT. The FERC order approved the settlement which reduces DP&L’s transmission costs through PJM beginning in August 2018, including credits to reimburse DP&L for amounts overcharged in prior years. DP&L estimates the prior overcharge by PJM to be $41.1$40.8 million, of which approximately $30.4$32.1 million has been repaid to DP&L through December 31, 20192020 and $1.7
million is classified as current in "Accounts receivable, net" and $8.9$7.0 million is classified as non-current in "Other non-current assets" on the accompanying Balance Sheet. All of the transmission charges and credits impacted by this FERC order are items that are included for full recovery in DP&L’s non-bypassable TCRR. Accordingly, DP&L has also established offsetting regulatory liabilities. While this development will have a temporary cash flow benefit to DP&L, there is no impact to operating income or net income as all credits will be passed to DP&L’s customers through the TCRR, which began in November 2018.
Regulatory Assets and Liabilities
In accordance with FASC 980, we have recognized total regulatory assets of $193.5$221.1 million and $193.7$193.5 million at December 31, 20192020 and 2018,2019, respectively, and total regulatory liabilities of $271.5$236.3 million and $313.2$271.5 million at December 31, 20192020 and 2018,2019, respectively. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 1 – Overview and Summary of Significant Accounting Policies for accounting policies regarding Regulatory Assets and Liabilities.
The following table presents DP&L’s Regulatory assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Type of Recovery | | Amortization Through | | December 31, |
| $ in millions | | | | 2020 | | 2019 |
| Regulatory assets, current: | | | | | | | | |
| Undercollections to be collected through rate riders | | A/B | | 2021 | | $ | 26.8 | | | $ | 19.1 | |
| Rate case expenses being recovered in base rates | | B | | 2021 | | 0.7 | | | 0.6 | |
| Total regulatory assets, current | | | | | | 27.5 | | | 19.7 | |
| | | | | | | | |
| Regulatory assets, non-current: | | | | | | | | |
| Pension benefits | | B | | Ongoing | | 94.4 | | | 83.9 | |
| Unrecovered OVEC charges | | C | | Undetermined | | 28.9 | | | 29.1 | |
| | | | | | | | |
| Regulatory compliance costs | | B | | Undetermined | | 6.3 | | | 6.3 | |
| Smart grid and AMI costs | | B | | Undetermined | | 8.5 | | | 8.5 | |
| Unamortized loss on reacquired debt | | B | | Various | | 7.1 | | | 10.0 | |
| Deferred storm costs | | A | | Undetermined | | 11.5 | | | 5.1 | |
| Deferred vegetation management and other | | A/B | | Undetermined | | 15.7 | | | 12.7 | |
| Decoupling deferral | | C | | Undetermined | | 13.8 | | | 13.8 | |
| Uncollectible deferral | | C | | Undetermined | | 7.4 | | | 4.4 | |
| Total regulatory assets, non-current | | | | | | 193.6 | | | 173.8 | |
| | | | | | | | |
| Total regulatory assets | | | | | | $ | 221.1 | | | $ | 193.5 | |
| | | | | | | | |
| Regulatory liabilities, current: | | | | | | | | |
| Overcollection of costs to be refunded through rate riders | | A/B | | 2021 | | $ | 18.0 | | | $ | 27.9 | |
| Total regulatory liabilities, current | | | | | | 18.0 | | | 27.9 | |
| | | | | | | | |
| Regulatory liabilities, non-current: | | | | | | | | |
| Estimated costs of removal - regulated property | | | | Not Applicable | | 138.8 | | | 143.6 | |
| Deferred income taxes payable through rates | | | | Various | | 61.2 | | | 73.6 | |
| TCJA regulatory liability | | B | | Ongoing | | 7.2 | | | 12.9 | |
| PJM transmission enhancement settlement | | A | | 2025 | | 7.0 | | | 8.9 | |
| Postretirement benefits | | B | | Ongoing | | 4.1 | | | 4.6 | |
| Total regulatory liabilities, non-current | | | | | | 218.3 | | | 243.6 | |
| | | | | | | | |
| Total regulatory liabilities | | | | | | $ | 236.3 | | | $ | 271.5 | |
|
| | | | | | | | | | | | |
| | | Type of Recovery | | Amortization Through | | December 31, |
| $ in millions | | | | 2019 | | 2018 |
| Regulatory assets, current: | | | | | | | | |
| Undercollections to be collected through rate riders | | A/B | | 2020 | | $ | 19.1 |
| | $ | 40.5 |
|
| Rate case expenses being recovered in base rates | | B | | 2020 | | 0.6 |
| | 0.6 |
|
| Total regulatory assets, current | | | | | | 19.7 |
| | 41.1 |
|
| | | | | | | | | |
| Regulatory assets, non-current: | | | | | | | | |
| Pension benefits | | B | | Ongoing | | 83.9 |
| | 87.5 |
|
| Unrecovered OVEC charges | | C | | Undetermined | | 29.1 |
| | 28.7 |
|
| Fuel costs | | B | |
| | — |
| | 3.3 |
|
| Regulatory compliance costs | | B | | Undetermined | | 6.3 |
| | 6.1 |
|
| Smart grid and AMI costs | | B | | Undetermined | | 8.5 |
| | 8.5 |
|
| Unamortized loss on reacquired debt | | B | | Various | | 10.0 |
| | 6.0 |
|
| Deferred storm costs | | A | | Undetermined | | 5.1 |
| | 4.7 |
|
| Deferred vegetation management and other | | A/B | | Undetermined | | 12.7 |
| | 7.8 |
|
| Decoupling deferral | | C | | Undetermined | | 13.8 |
| | — |
|
| Uncollectible deferral | | C | | Undetermined | | 4.4 |
| | — |
|
| Total regulatory assets, non-current | | | | | | 173.8 |
| | 152.6 |
|
| | | | | | | | | |
| Total regulatory assets | | | | | | $ | 193.5 |
| | $ | 193.7 |
|
| | | | | | | | | |
| Regulatory liabilities, current: | | | | | | | | |
| Overcollection of costs to be refunded through rate riders | | A/B | | 2020 | | $ | 27.9 |
| | $ | 34.9 |
|
| Total regulatory liabilities, current | | | | | | 27.9 |
| | 34.9 |
|
| | | | | | | | | |
| Regulatory liabilities, non-current: | | | | | | | | |
| Estimated costs of removal - regulated property | | | | Not Applicable | | 143.6 |
| | 139.1 |
|
| Deferred income taxes payable through rates | | | | Various | | 73.6 |
| | 116.3 |
|
| TCJA regulatory liability | | B | | Ongoing | | 12.9 |
| | — |
|
| PJM transmission enhancement settlement | | A | | 2025 | | 8.9 |
| | 16.9 |
|
| Postretirement benefits | | B | | Ongoing | | 4.6 |
| | 6.0 |
|
| Total regulatory liabilities, non-current | | | | | | 243.6 |
| | 278.3 |
|
| | | | | | | | | |
| Total regulatory liabilities | | | | | | $ | 271.5 |
| | $ | 313.2 |
|
A – Recovery of incurred costs plus rate of return.
B – Recovery of incurred costs without a rate of return.
C – Recovery not yet determined, but recovery is probable of occurring in future rate proceedings.
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate order; recovery for the remaining costs is probable, but not certain. DP&L is earning a net return on $5.5 million of this net deferral. These items include undercollection of:costs include: (i) the Energy Efficiency Rider, (ii) the Alternative Energy Rider, (iii) unrecovered OVEC costs andthe Legacy Generation Resource Rider, (iv) the Economic Development Rider and the (v) Transmission Cost Recovery Rider. It also includesAlso included are the current portion of deferred fuel costs and deferred stormrate case expense costs which do not earn a return and are described in greater detail below. As currentCurrent regulatory liabilities this includes
include the overcollection of competitive bidding energy and auction costs and certain transmission related costs, including the current portion of the PJM transmission enhancement settlement and the TCJA regulatory liability (see above).
DP&L is earning a return on $16.3 million of this net current deferral including: (i) the Energy Efficiency Rider, (ii) the Alternative Energy Rider, (iii) the Legacy Generation Resource Rider, (iv) the Economic Development Rider and (v) the Transmission Cost Recovery Rider. These regulatory assets are partially offset by the overcollection of competitive bidding energy and auction costs.
Pension benefits represent the qualifying FASC 715 “Compensation - Retirement Benefits” costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI. As per PUCO and FERC precedents, these costs are probable of future rate recovery.
Unrecovered OVEC charges includes the portion of charges from OVEC that were not recoverable through DP&L’s Fuel Rider from October 2014 through October 2017. Additionally, it includes net OVEC costs from December 19, 2019 through December 31, 2019. DP&L expects to recover these costs through a future rate proceeding. Beginning on November 1, 2017, through December 18, 2019, current OVEC costs were being recovered through DP&L’s reconciliation rider which was authorized as part of the 2017 ESP.ESP 3. Beginning January 1, 2020, DP&L began recovering its current net OVEC costs through its Legacy Generation Rider, established pursuant to ORC 4928.148.
Fuel costs represent unrecovered fuel costs related to DP&L’s Fuel Rider from 2010 through 2015 resulting from a declining SSO customer base. DP&L was granted recovery of these costs without a return through the SSO as approved in the 2017 ESP; this authorization continued in the approval of ESP 1. These costs are being recovered over the three-year period that began November 1, 2017.
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff and (vi) Supplier Consolidated Billing. All of these costs except for Generation Separation earn a return. These costs were being recovered over a three-year period that began November 1, 2017 through a rider approved in the 2017 ESP.ESP 3. That rider was eliminated with the approval of the ESP 1 rate plan, so the balance as of December 18, 2019 remains a regulatory asset for future recovery.
Rate case costsexpenses represents costs associated with preparing a distribution rate case.cases. DP&L was granted recovery of these costs for the 2015 case which do not earn a return, as part of the DRO. Recovery of costs for the 2020 case were included in the pending filing.
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. In a PUCO order on January 5, 2011, the PUCO indicated that it expects DP&L to continue to monitor other utilities’ Smart Grid and AMI programs and to explore the potential benefits of investing in Smart Grid and AMI programs and that DP&L will, when appropriate, file new Smart Grid and/or AMI business cases in the future. DP&L requested recovery of theseThese costs as part ofare included in the December 2018 Distribution Modernization Plan filing with the PUCOOctober 23, 2020 settlement described in Item 1 Business - COMPETITION AND REGULATION.above.
Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the PUCO.
Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during 2017, 2018, 2019 and 2019. The 2017 ESP granted DP&L approval to establish a rider by which to seek recovery of these types of costs with a return. This authorization continued in the approval of ESP 1.2020. DP&L plans to file petitions seeking recovery of each calendar year of storm costs in the following calendar year. DP&L plans to file petitions seeking recovery of cash calendar year's storm costs in the following calendar year. Recovery of these costs is probable, but not certain.
Vegetation management costs represents costs incurred from outside contractors for tree trimming and other vegetation management services. Calculation terms were agreed to in the stipulation approved in the DRO. The terms were an annual baseline of $10.7$10.7 million in 2018 and $15.7 million thereafter. Amounts over the baseline will be deferred subject to an annual deferral maximum of $4.6 million. Annual spending less than the vegetation management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability. A future filing will be made to determine how this cost will be collected from or returned to customers.These costs are included in DP&L's pending distribution rate case application.
Decoupling deferral represents the change in the revenue requirement based on a per customer methodology in the stipulation approved in the DRO and includes deferrals through December 18, 2019. These costs were previously recovered through a Decoupling Rider; however, DP&L withdrew its application in the 2017 ESP 3 and in doing so, the
PUCO ordered on December 18, 2019 in the ESP 1 order, that DP&L no longer has a Decoupling Rider. As described above, DP&L recently filed a petition seeking authority to record a regulatory asset to accrue revenues that would have otherwise been collected through the Decoupling Rider.
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenues associated with the bypassable uncollectible portion of the standard offer rate. The DRO established that these costs would be recovered in a rider outside of base rates, thus no uncollectible expense is included in base rates. A future filing will be made to determine how these expenses will be collected from customers.These costs are included in our pending distribution rate case.
Estimated costs of removal - regulated property reflect an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.
Deferred income taxes payable through rates represent deferred income tax liabilities recognized from the normalization of flow-through items as the result of taxes previously charged to customers. A deferred income tax asset or liability is created from a difference in income recognition between tax laws and accounting methods. As a
regulated utility, DP&L includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes DP&L expects to return to customers in future periods.
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess ADIT for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, DP&L agreed that savings from the TCJA attributable to distribution facilities, including the excess ADIT and the regulatory liability, constitute amounts that will be returned to customers. As a result of the TCJA and subsequent DRO, DP&L entered into a stipulation to resolve all remaining TCJA items related to its distribution rates, including a proposal to return no less than $4.0$4.0 million per year for the first five years unless fully returned in the first five years via a tax savings cost rider for the distribution portion of the balance. On September 26, 2019, an order approved the stipulation in its entirety.
PJM Transmission rates are regulated by FERC and DP&LEnhancement Settlement has reduced its stated transmission rate to reflectliability represents the effects of the lower current tax rate. With respect to the transmission portion of amortization of excess ADIT, on November 15, 2018, FERC issued a Notice of Proposed Rulemaking entitled, “Public Utility Transmission Rate Changes to Address Accumulated Deferred Income Taxes.” Among other things, this notice proposes “to require all public utilities with transmission stated rates to determine the amount of excess and deferred income tax caused by the Tax Cuts and Jobs Act’s reduction to the federal corporate income tax rate and return or recover this amount to or from customers.”Enhancement Settlement charges for which DP&L is due a public utility withrefund per FERC Order EL05-121-009 issued on May 31, 2018. The Order states that customers are due a refund for part of these charges which will be received starting August 2018 through 2025. Refunds received will be returned to customers via the transmission stated rates and will make a filing in conformance to the requirements once the proposed rule is finalized.cost rider.
Postretirement benefits represent the qualifying FASC 715 “Compensation – Retirement Benefits” gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.
Note 4 – Property, Plant and Equipment
The following is a summary of DP&L’s Property, plant and equipment with corresponding composite depreciation rates at December 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| $ in millions | | | | Composite Rate | | | | Composite Rate |
| Regulated: | | | | | | | | |
| Transmission | | $ | 425.5 | | | 2.1% | | $ | 391.7 | | | 2.3% |
| Distribution | | 1,917.0 | | | 3.1% | | 1,851.2 | | | 3.0% |
| General | | 29.7 | | | 3.6% | | 30.0 | | | 4.9% |
| Non-depreciable | | 65.1 | | | N/A | | 60.7 | | | N/A |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total property, plant and equipment in service | | $ | 2,437.3 | | | 2.8% | | $ | 2,333.6 | | | 2.9% |
|
| | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| $ in millions | | | | Composite Rate | | | | Composite Rate |
| Regulated: | | | | | | | | |
| Transmission | | $ | 391.7 |
| | 2.3% | | $ | 386.7 |
| | 2.4% |
| Distribution | | 1,851.2 |
| | 3.0% | | 1,796.4 |
| | 3.2% |
| General | | 30.0 |
| | 4.9% | | 30.9 |
| | 3.6% |
| Non-depreciable | | 60.7 |
| | N/A | | 60.4 |
| | N/A |
| Total property, plant and equipment in service | | $ | 2,333.6 |
| | 2.9% | | $ | 2,274.4 |
| | 3.0% |
In June 2018, DP&Lclosed on a transmission asset transaction with Duke and AEP, where ownership stakes in certain previously co-owned transmission assets were exchanged to eliminate co-ownership. Each previously co-ownedco-
owned transmission asset became wholly-owned by one of DP&L, Duke or AEP after the transaction. This transaction also resulted in cash proceeds to DP&L of $10.6$10.6 million and no gain or loss was recorded on the transaction.
AROs
We recognize AROs in accordance with GAAP which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the related asset. The DP&L AROs arewere for our retired Hutchings EGUCoal Station and relaterelated primarily to asbestos removal. These AROs are recorded within Other non-current liabilities onwere settled with the balance sheets.sale of the Hutchings Coal Station in December 2020.
Estimating the amount and timing of future expenditures of this type requires significant judgment. ManagementPreviously, management routinely updatesupdated these estimates as additional information becomesbecame available.
Changes in the Liability for Generation AROs
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Balance at beginning of year | | $ | 4.7 | | | $ | 4.7 | |
| | | | |
| | | | |
Settlements (a) | | (4.7) | | | 0 | |
| Balance at end of year | | $ | 0 | | | $ | 4.7 | |
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 4.7 |
| | $ | 8.0 |
|
Settlements (a) | | — |
| | (3.3 | ) |
| Balance at end of year | | $ | 4.7 |
| | $ | 4.7 |
|
(a) Primarily includes settlement related to transfer of the Hutchings Coal Station. See Note 14 – Dispositions for additional information.
| |
(a) | Primarily includes settlement related to transfer of Beckjord Facility. See Note 15 – Dispositions for additional information. |
Asset Removal Costs
We continue to record costs of removal for our regulated transmission and distribution assets through our depreciation rates and recover those amounts in rates charged to our customers. There are no known legal AROs associated with these assets. We have recorded $143.6$138.8 million and $139.1$143.6 million in estimated costs of removal at December 31, 20192020 and 2018,2019, respectively, as regulatory liabilities for our transmission and distribution property. These amounts represent the excess of the cumulative removal costs recorded through depreciation rates versus the cumulative removal costs actually incurred. See Note 3 – Regulatory Matters for additional information.
Changes in the Regulatory Liability for Transmission and Distribution Asset Removal Costs
| | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Balance at beginning of year | | $ | 143.6 | | | $ | 139.1 | |
| Additions | | 15.6 | | | 14.8 | |
| Settlements | | (20.4) | | | (10.3) | |
| Balance at end of year | | $ | 138.8 | | | $ | 143.6 | |
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Balance at beginning of year | | $ | 139.1 |
| | $ | 132.8 |
|
| Additions | | 14.8 |
| | 14.3 |
|
| Settlements | | (10.3 | ) | | (8.0 | ) |
| Balance at end of year | | $ | 143.6 |
| | $ | 139.1 |
|
Note 5 – 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 method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future.
The table below presents the fair value and cost of our non-derivative instruments at December 31, 20192020 and 2018.2019. See also Note 6 – Derivative Instruments and Hedging Activities for the fair values of our derivative instruments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| $ in millions | | Cost | | Fair Value | | Cost | | Fair Value |
| Assets | | | | | | | | |
| Money market funds | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0.3 | |
| Equity securities | | 2.1 | | | 4.5 | | | 2.3 | | | 4.2 | |
| Debt securities | | 4.0 | | | 4.1 | | | 4.0 | | | 4.1 | |
| Hedge funds | | 0 | | | 0 | | | 0.1 | | | 0.1 | |
| | | | | | | | |
| Tangible assets | | 0 | | | 0 | | | 0.1 | | | 0.1 | |
| Total assets | | $ | 6.4 | | | $ | 8.9 | | | $ | 6.8 | | | $ | 8.8 | |
| | | | | | | | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities | | | | | | | | |
| Long-term debt | | $ | 574.1 | | | $ | 656.0 | | | $ | 574.4 | | | $ | 600.5 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| $ in millions | | Cost | | Fair Value | | Cost | | Fair Value |
| Assets | | | | | | | | |
| Money market funds | | $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.4 |
| | $ | 0.4 |
|
| Equity securities | | 2.3 |
| | 4.2 |
| | 2.4 |
| | 3.5 |
|
| Debt securities | | 4.0 |
| | 4.1 |
| | 4.1 |
| | 4.0 |
|
| Hedge funds | | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Tangible assets | | 0.1 |
| | 0.1 |
| | 0.1 |
| | 0.1 |
|
| Total assets | | $ | 6.8 |
| | $ | 8.8 |
| | $ | 7.1 |
| | $ | 8.1 |
|
| | | | | | | | | |
| | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Liabilities | | | | | | | | |
| Long-term debt | | $ | 574.4 |
| | $ | 600.5 |
| | $ | 586.1 |
| | $ | 593.8 |
|
Fair Value Hierarchy
Fair value is defined as the exchange 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 among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 20192020 and 2018.2019.
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 debt is presented at the carrying value, net of unamortized premium or discount, in the financial statements. The debt amounts include the current portion payable in the next twelve months and have maturities that range from 20202040 to 2061.
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$1.7 million ($1.1 million net of tax) was reversed to Accumulated Deficit 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 years ended December 31, 2020, 2019 or 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 deferrednon-current assets on the consolidated balance sheets and classified as available for sale.
Duringequity securities. Gains and losses on these assets were not material during the yearyears ended December 31, 2020, 2019 $0.3 million ($0.2 million after tax)or 2018.
The fair value of assets and liabilities at December 31, 20192020 and 20182019 and the respective category within the fair value hierarchy for DP&L was determined as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Fair Value at December 31, 2020 (a) | | Fair Value at December 31, 2019 (a) |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | |
| Master trust assets | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 0.3 | | | $ | 0 | | | $ | — | | | $ | 0.3 | | | $ | 0.3 | | | $ | 0 | | | $ | — | | | $ | 0.3 | |
| Equity securities | | 0 | | | 4.5 | | | — | | | 4.5 | | | 0 | | | 4.2 | | | — | | | 4.2 | |
| Debt securities | | 0 | | | 4.1 | | | — | | | 4.1 | | | 0 | | | 4.1 | | | — | | | 4.1 | |
| Hedge funds | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0.1 | | | — | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| Tangible assets | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0.1 | | | — | | | 0.1 | |
| Total Master trust assets | | 0.3 | | | 8.6 | | | — | | | 8.9 | | | 0.3 | | | 8.5 | | | — | | | 8.8 | |
| Derivative assets | | | | | | | | | | | | | | | | |
| Interest rate hedges | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0.1 | | | — | | | 0.1 | |
| Total derivative assets | | 0 | | | 0 | | | — | | | 0 | | | 0 | | | 0.1 | | | — | | | 0.1 | |
| | | | | | | | | | | | | | | | |
| Total assets | | $ | 0.3 | | | $ | 8.6 | | | $ | — | | | $ | 8.9 | | | $ | 0.3 | | | $ | 8.6 | | | $ | 0 | | | $ | 8.9 | |
| | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 0 | | | $ | 638.6 | | | $ | 17.4 | | | $ | 656.0 | | | $ | 0 | | | $ | 583.0 | | | $ | 17.5 | | | $ | 600.5 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Total liabilities | | $ | 0 | | | $ | 638.6 | | | $ | 17.4 | | | $ | 656.0 | | | $ | 0 | | | $ | 583.0 | | | $ | 17.5 | | | $ | 600.5 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Fair Value at December 31, 2019 (a) | | Fair Value at December 31, 2018 (a) |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | |
| Master trust assets | | | | | | | | | | | | | | | | |
| Money market funds | | $ | 0.3 |
| | $ | — |
| | $ | — |
| | $ | 0.3 |
| | $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | 0.4 |
|
| Equity securities | | — |
| | 4.2 |
| | — |
| | 4.2 |
| | — |
| | 3.5 |
| | — |
| | 3.5 |
|
| Debt securities | | — |
| | 4.1 |
| | — |
| | 4.1 |
| | — |
| | 4.0 |
| | — |
| | 4.0 |
|
| Hedge funds | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Tangible assets | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
|
| Total Master trust assets | | 0.3 |
| | 8.5 |
| | — |
| | 8.8 |
| | 0.4 |
| | 7.7 |
| | — |
| | 8.1 |
|
| Derivative assets | | | | | | | | | | | | | | | | |
| Interest rate hedges | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 1.5 |
| | — |
| | 1.5 |
|
| Total derivative assets | | — |
| | 0.1 |
| | — |
| | 0.1 |
| | — |
| | 1.5 |
| | — |
| | 1.5 |
|
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 0.3 |
| | $ | 8.6 |
| | $ | — |
| | $ | 8.9 |
| | $ | 0.4 |
| | $ | 9.2 |
| | $ | — |
| | $ | 9.6 |
|
| | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | — |
| | $ | 583.0 |
| | $ | 17.5 |
| | $ | 600.5 |
| | $ | — |
| | $ | 576.1 |
| | $ | 17.7 |
| | $ | 593.8 |
|
| | |
|
| |
|
| |
|
| |
|
| | | | | | | |
|
|
| Total liabilities | | $ | — |
| | $ | 583.0 |
| | $ | 17.5 |
| | $ | 600.5 |
| | $ | — |
| | $ | 576.1 |
| | $ | 17.7 |
| | $ | 593.8 |
|
(a) Includes credit valuation adjustment
| |
(a) | Includes credit valuation adjustment |
Our financial instruments are valued using the market approach in the following categories:
•Level 1 inputs are used 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 interest rate hedge contracts which are valued using a benchmark interest rate. 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 certain debt balances are considered a Level 3 input because the notes are not publicly traded. Our long-term debt is fair valued for disclosure purposes only.
All 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.
Note 6 – 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.
DP&L's interest rate swaps arewere designated as a cash flow hedge and havehad a combined notional amount of $140.0 million as of December 31, 2019 and 2018.2019. These swaps settled during 2020 when the related debt was repaid.
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.
We haveIn August 2020, the 2 interest rate swaps to hedge the variable interest on ourthe $140.0 million variable interest rate tax-exempt First Mortgage Bonds due August 2020.expired, as the associated debt reached maturity. The interest rate swaps havehad a combined notional amount of $140.0 million and will settlesettled monthly based on a one-month LIBOR. The original notional amount was $200.0 million, but 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 AOCIAOCL associated with the remaining swaps will bewas amortized out of AOCIAOCL into interest expense over the remaining life of the underlying debt.
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 AOCIAOCL and into earnings in those periods in which hedged interest payments occur.
The following tables provide information on gains or losses recognized in AOCIAOCL for the cash flow hedges for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| $ in millions (net of tax) | | Interest Rate
Hedge | | Interest Rate
Hedge | | Interest Rate
Hedge |
| Beginning accumulated derivative gain / (loss) in AOCL | | $ | (0.4) | | | $ | 0.6 | | | $ | 1.4 | |
| | | | | | |
| Net gains associated with current period hedging transactions | | (0.2) | | | (0.8) | | | (0.1) | |
| Net gains reclassified to earnings: | | | | | | |
| Interest expense | | 0.6 | | | (0.2) | | | (0.7) | |
| Ending accumulated derivative gain / (loss) in AOCL | | $ | 0 | | | $ | (0.4) | | | $ | 0.6 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| $ in millions (net of tax) | | Interest Rate
Hedges | | Interest Rate
Hedges | | Power | | Interest Rate
Hedges |
| Beginning accumulated derivative gain / (loss) in AOCI | | $ | 0.6 |
| | $ | 1.4 |
| | $ | (4.3 | ) | | $ | 1.6 |
|
| | | | | | | | | |
| Net (gains) / losses associated with current period hedging transactions | | (0.8 | ) | | (0.1 | ) | | 11.9 |
| | 0.5 |
|
| Net gains reclassified to earnings: | | | | | | | | |
| Interest expense | | (0.2 | ) | | (0.7 | ) | | — |
| | (0.7 | ) |
| Loss from discontinued operations | | — |
| | — |
| | (5.5 | ) | | — |
|
| Transfer of generation assets to subsidiary of parent | | — |
| | — |
| | (2.1 | ) | | — |
|
| Ending accumulated derivative gain / (loss) in AOCI | | $ | (0.4 | ) | | $ | 0.6 |
| | $ | — |
| | $ | 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) | | 8 |
| | | | | | |
Net gains or losses associated with the ineffective portion of the hedging transactions were immaterial for the years ended December 31, 2018 and 2017.
When applicable, 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. As of December 31, 20192020 and 2018,2019, DP&L did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of DP&L’s derivative instruments.:interest rate swaps.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, |
| $ in millions | Hedging Designation | | Balance sheet classification | | 2020 | | 2019 |
| Interest rate swap | Cash Flow Hedge | | Prepayments and other current assets | | $ | 0 | | | $ | 0.1 | |
| | | | | | | |
|
| | | | | | | | | | | |
| | | | | | December 31, |
| | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 |
| Interest rate hedges in a current asset position | Cash Flow Hedge | | Prepayments and other current assets | | $ | 0.1 |
| | $ | 0.9 |
|
| Interest rate hedges in a non-current asset position | Cash Flow Hedge | | Other non-current assets | | $ | — |
| | $ | 0.6 |
|
Note 7 – Long-term debt
Long-term debt is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | | | | | | | |
| $ in millions | | Interest Rate | | Maturity | | December 31, 2020 | | December 31, 2019 |
| First Mortgage Bonds | | 3.95% | | 2049 | | $ | 425.0 | | | $ | 425.0 | |
| First Mortgage Bonds | | 3.2% | | 2040 | | 140.0 | | | — | |
| Tax-exempt First Mortgage Bonds - rates from: 1.16% - 2.47% (a) and 2.4% - 3.07% (b) | | | | 2020 | | 0 | | | 140.0 | |
| U.S. Government note | | 4.2% | | 2061 | | 17.4 | | | 17.5 | |
| | | | | | | | |
| | | | | | | | |
| Unamortized deferred financing costs | | | | | | (5.7) | | | (5.4) | |
| Unamortized debt discount | | | | | | (2.6) | | | (2.7) | |
| Total long-term debt | | | | | | 574.1 | | | 574.4 | |
| Less: current portion | | | | | | (0.2) | | | (139.8) | |
| Long-term debt, net of current portion | | | | | | $ | 573.9 | | | $ | 434.6 | |
| | | | | | | | |
|
| | | | | | | | | | | | |
| Long-term debt | | | | | | | | |
| $ in millions | | Interest Rate | | Maturity | | December 31, 2019 | | December 31, 2018 |
| First Mortgage Bonds | | 3.95% | | 2049 | | $ | 425.0 |
| | $ | — |
|
| Term loan - rates from: 3.57% - 4.82% (a) and 4.00% - 4.60% (b) | | | | 2022 | | — |
| | 436.1 |
|
| Tax-exempt First Mortgage Bonds - rates from: 2.49% - 2.93% (a) and 1.29% - 1.42% (b) | | | | 2020 | �� | 140.0 |
| | 140.0 |
|
| U.S. Government note | | 4.2% | | 2061 | | 17.5 |
| | 17.7 |
|
| Unamortized deferred financing costs | | | | | | (5.4 | ) | | (6.3 | ) |
| Unamortized debt discount | | | | | | (2.7 | ) | | (1.4 | ) |
| Total long-term debt | | | | | | 574.4 |
| | 586.1 |
|
| Less: current portion | | | | | | (139.8 | ) | | (4.6 | ) |
| Long-term debt, net of current portion | | | | | | $ | 434.6 |
| | $ | 581.5 |
|
| |
(a) | Range of interest rates for the year ended December 31, 2019. |
| |
(b) | Range of interest rates for the year ended December 31, 2018. |
(b) Range of interest rates for the year ended December 31, 2019.
At December 31, 2019,2020, maturities of long-term debt are summarized as follows:
| | | | | |
| Due during the years ending December 31, | |
| $ in millions | |
| 2021 | $ | 0.2 | |
| 2022 | 0.2 | |
| 2023 | 0.2 | |
| 2024 | 0.2 | |
| 2025 | 0.2 | |
| Thereafter | 581.4 | |
| 582.4 | |
| Unamortized discounts and premiums, net | (2.6) | |
| Deferred financing costs, net | (5.7) | |
| Total long-term debt | $ | 574.1 | |
|
| | | |
| Due during the years ending December 31, | |
| $ in millions | |
| 2020 | $ | 140.2 |
|
| 2021 | 0.2 |
|
| 2022 | 0.2 |
|
| 2023 | 0.2 |
|
| 2024 | 0.2 |
|
| Thereafter | 441.5 |
|
| | 582.5 |
|
| Unamortized discounts and premiums, net | (2.7 | ) |
| Deferred financing costs, net | (5.4 | ) |
| Total long-term debt | $ | 574.4 |
|
Revolving Credit Facility
At December 31, 2020 and December 31, 2019, the DP&L revolving credit facility had outstanding borrowings on its revolving credit facility of $20.0 million and $40.0 million, and at December 31, 2018 there were no outstanding borrowings on its revolving credit facility.respectively.
Significant Transactions
On July 31, 2020, DP&L issued $140.0 million of First Mortgage Bonds and on August 3, 2020 used the proceeds to purchase at par value the $140.0 million of outstanding tax-exempt Ohio Air Quality Development Authority (OAQDA) Collateralized Pollution Control Revenue Refunding Bonds that had been issued in 2015. The new First Mortgage Bonds carry an interest rate of 3.20% and mature on July 31, 2040. The OAQDA Revenue bonds have not been legally cancelled and can be re-issued at the discretion of DP&L at any time. These bonds will be held in trust while we continue to evaluate market conditions and explore suitable long-term financing alternatives.
On June 19, 2019, DP&L amended and restated its unsecured revolving credit facility. The revolving credit facility has a $175.0$175.0 million borrowing limit, with a $75.0 million letter of credit sublimit, a feature that provides DP&L the ability to increase the size of the facility by an additional $100.0$100.0 million,, a maturity date of June 2024, and a provision that provides DP&L the option to request up to two one-year extensions of the maturity date.
On June 6, 2019, DP&L closed on a $425.0$425.0 million issuance of First Mortgage Bonds due 2049. These new bonds carry an interest rate of 3.95%. The proceeds of this issuance were used to repay in full the outstanding principal of $435.0 million of DP&L's variable rate Term Loan B credit agreement.
On March 30, 2018, DP&L commenced a redemption of $60.0 million of outstanding tax exempt First Mortgage Bonds due 2020 at par value (plus accrued and unpaid interest). These bonds were redeemed at par plus accrued interest on April 30, 2018 with cash on hand.
On January 3, 2018, DP&L and its lenders amended DP&L's Term Loan B credit agreement. The amendment (a) modified the definition of "applicable rate", from 2.25% per annum to 1.00% per annum - in the case of the Base Rate and from 3.25% per annum to 2.00% per annum - in the case of the Eurodollar Rate and (b) included a "call protection" provision which stated that in the event the loan was repriced or any portion of the loans were prepaid, repaid, refinanced, substituted, or replaced on or prior July 3, 2018, such prepayment, acceleration, repayment, refinancing, substitution or replacement would be made at 101% of the principal amount so prepaid, repaid, refinanced, substituted or replaced. After July 3, 2018 any such transaction would occur at 100% of the principal amount of the then outstanding loans. There were no such transactions prior to July 3, 2018.
Debt Covenants and Restrictions
DP&L’s &L's unsecured revolving credit facility and Bond Purchase and Covenants Agreement (financing document entered into in connection with the saleissuance of $200.0 million of variable rate tax-exemptDP&L's First Mortgage Bonds, dated ason July 31, 2020) has one financial covenant. The
financial covenants. The firstcovenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. DP&L’s Total Debt to Total Capitalization ratio shall not be greater than 0.65 to 1.00; except that the ratio is suspended as DP&L’s long-term indebtedness is less than or equal to $750.0 million. This financial covenant was met with a ratio of 0.57 to 1.00 as of December 31, 2019.
The second financial covenant measures EBITDA to Interest Expense. The TotalConsolidated EBITDA to Consolidated Interest Charges ratio is calculated, at the end of each fiscal quarter, by dividing consolidated EBITDA for the 4 prior fiscal quarters by the consolidated interest charges for the same period. The ratio, per the agreement, is to be not less than 2.50 to 1.00. This covenant was met with a ratio of 8.51 to 1.00 as of December 31, 2019.
DP&L's unsecured revolving credit facility has one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. DP&L’s Total Debt to Total Capitalization ratio shall not be greater than0.67 to 1.00. This financial covenant was met with a ratio of 0.57 to 1.00in compliance as of December 31, 2019.2020.
DP&L does not have any meaningful restrictions in its debt financing documents prohibiting dividends to its parent, DPL. As of December 31, 2019,2020, DP&L was in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage. All generation assets were released from the lien of DP&L's first and refunding mortgage in connection with the completion of Generation Separation on October 1, 2017.
Note 8 – Income Taxes
DP&L’s components of income tax expense were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Components of tax expense / (benefit) | | | | | | |
| Federal - current | | $ | 3.5 | | | $ | 8.6 | | | $ | 1.4 | |
| State and Local - current | | 0.1 | | | 0.6 | | | 0 | |
| Total current | | 3.6 | | | 9.2 | | | 1.4 | |
| | | | | | |
| Federal - deferred | | 2.4 | | | (10.9) | | | 15.5 | |
| State and local - deferred | | 1.0 | | | 1.1 | | | 0.8 | |
| Total deferred | | 3.4 | | | (9.8) | | | 16.3 | |
| Tax expense / (benefit) | | $ | 7.0 | | | $ | (0.6) | | | $ | 17.7 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Components of tax expense / (benefit) | | | | | | |
| Federal - current | | $ | 8.6 |
| | $ | 1.4 |
| | $ | 13.5 |
|
| State and Local - current | | 0.6 |
| | — |
| | 0.2 |
|
| Total current | | 9.2 |
| | 1.4 |
| | 13.7 |
|
| | | | | | | |
| Federal - deferred | | (10.9 | ) | | 15.5 |
| | 17.0 |
|
| State and local - deferred | | 1.1 |
| | 0.8 |
| | 0.4 |
|
| Total deferred | | (9.8 | ) | | 16.3 |
| | 17.4 |
|
| Tax expense / (benefit) | | $ | (0.6 | ) | | $ | 17.7 |
| | $ | 31.1 |
|
Effective and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to DP&L's effective tax rate, as a percentage of income before taxes for the years ended December 31, 2020, 2019, 2018 and 2017:2018:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| Statutory Federal tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes, net of Federal tax benefit | | 1.5 | % | | 1.3 | % | | 0.6 | % |
| AFUDC - Equity | | 2.6 | % | | (0.1) | % | | (0.1) | % |
| Amortization of investment tax credits | | (0.5) | % | | (0.2) | % | | (0.3) | % |
| Depreciation of flow-through differences | | (10.6) | % | | (22.6) | % | | (4.0) | % |
| Change in tax reserves | | (6.1) | % | | 0 | % | | 0 | % |
| Other - net | | 4.1 | % | | 0.1 | % | | (0.2) | % |
| Effective tax rate | | 12.0 | % | | (0.5) | % | | 17.0 | % |
|
| | | | | | | | | |
| | | Years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| Statutory Federal tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State taxes, net of Federal tax benefit | | 1.3 | % | | 0.6 | % | | 0.4 | % |
| AFUDC - Equity | | (0.1 | )% | | (0.1 | )% | | 1.4 | % |
| Amortization of investment tax credits | | (0.2 | )% | | (0.3 | )% | | (0.4 | )% |
| Depreciation of flow-through differences | | (22.6 | )% | | (4.0 | )% | | — | % |
| Other - net | | 0.1 | % | | (0.2 | )% | | (1.3 | )% |
| Effective tax rate | | (0.5 | )% | | 17.0 | % | | 35.1 | % |
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| $ in millions | | 2020 | | 2019 |
| Net non-current assets / (liabilities) | | | | |
| Depreciation / property basis | | $ | (161.7) | | | $ | (141.5) | |
| Income taxes recoverable | | 14.4 | | | 17.1 | |
| Regulatory assets | | (21.7) | | | (25.6) | |
| Investment tax credit | | 0.5 | | | 0.5 | |
| Compensation and employee benefits | | (0.1) | | | 3.1 | |
| Other | | (3.5) | | | (11.7) | |
| Net non-current liabilities | | $ | (172.1) | | | $ | (158.1) | |
|
| | | | | | | | |
| | | December 31, |
| $ in millions | | 2019 | | 2018 |
| Net non-current assets / (liabilities) | | | | |
| Depreciation / property basis | | $ | (141.5 | ) | | $ | (130.6 | ) |
| Income taxes recoverable | | 17.1 |
| | 25.0 |
|
| Regulatory assets | | (25.6 | ) | | (16.2 | ) |
| Investment tax credit | | 0.5 |
| | 0.5 |
|
| Compensation and employee benefits | | 3.1 |
| | 0.3 |
|
| Other | | (11.7 | ) | | (10.7 | ) |
| Net non-current liabilities | | $ | (158.1 | ) | | $ | (131.7 | ) |
U.S. Tax Reform
On December 22, 2017, the U.S. enacted the TCJA. The TCJA significantly changeschanged U.S. corporate income tax law.
In 2017, we recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of FASC 740, Income Taxes, in the reporting period in
which the TCJA was signed into law. Accordingly, our 2017 financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under FASC 740 was incomplete, but a reasonable estimate could be determined.
We completed our calculation of the impact of the TCJA in our income tax provision for the year ended December 31, 2018 in accordance with our understanding of the TCJA and guidance available as of the date of this filing. As a result of this remeasurement, certain deferred tax assets and liabilities related to regulated utility property of $17.0 million and $135.2 million at December 31, 2018 and 2017 were recorded as regulatory liabilities and were non-cash adjustments. These amounts result from the remeasurement of certain deferred tax assets and liabilities as the rates changed from 35% to 21%. Additionally, consistent with the provisions of SAB 118, in 2018 we finalized the remeasurement of deferred tax asset balances transferred to AES Ohio Generation as part of Generation Separation which resulted in an additional $10.0 million return of capital to DPL in 2018.
The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Tax expense / (benefit) | | $ | (2.3) | | | $ | (0.4) | | | $ | (0.3) | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Tax expense / (benefit) | | $ | (0.4 | ) | | $ | (0.3 | ) | | $ | 4.0 |
|
Uncertain Tax Positions
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits was $1.4 million at December 31, 2020 and $4.8 million at both December 31, 2019 and December 31, 2018. There were no changes to these amounts in either of the two years in the period ended December 31, 2019. There was a decrease of $3.4 million in 2020 due to statute of limitation lapses.
Of the December 31, 20192020 balance of unrecognized tax benefits, $4.8$1.4 million is due to uncertainty in the timing of deductibility. The total amount of unrecognized tax benefits anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 20192020 is estimated to be between $0.0 million and $3.0 million, primarily relating to statute of limitation lapses.million.
We recognize interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts accrued and tax expense / (benefit) recorded were not material for each period presented.
FollowingDP&L is a summary of theno longer subject to U.S. income tax examinations for tax years through 2017, but is open to examination by major tax jurisdiction:for all subsequent periods.
U.S. Federal – 2011 and forward
State and Local – 2011 and forward
Note 9 – Benefit Plans
Defined Contribution Plans
DP&L sponsors two defined contribution plans. One is for non-union employees (the management plan) and one is for collective bargaining employees (the union plan). Both plans are qualified under Section 401 of the Internal Revenue Code.
Certain non-union and union employees become eligible to participate in their respective plan upon date of hire.
Participants may elect to contribute up to 85% of eligible compensation to their plan. Non-union participant contributions are matched 100% on the first 1% of eligible compensation and 50% on the next 5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant contributions are matched 150% but are capped at $2,500$2,600 for 20192020 and they are fully vested in their employer contributions after 3 years of service. All participants are fully vested in their own contributions.
We contributed $3.2 million, $3.1 million $3.7 million and $3.1$3.7 million for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively. DP&L matching contributions are paid quarterly, in arrears. Therefore, the contributions by year include the fourth quarter matching contribution that is paid in the following year. DP&L also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
Defined Benefit PlansPlans
DP&L sponsors a traditional defined benefit pension plan for most of the employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is 100% vested in all amounts credited to his or her account upon the completion of five vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from DP&L to the Service Company maintain their previous eligibility to participate in the DP&L pension plan. In addition, employees that transferred from DP&L to AES Ohio Generation due to Generation Separation maintain their previous eligibility to participate in the DP&L pension plan.
Almost all management employees beginning employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become 100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCI.AOCL. We have historically recorded these costs on the accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $9.6$9.0 million and $9.2$9.6 million at December 31, 20192020 and 2018,2019, respectively, were not material to the financial statements in the periods covered by this report.
The following tables set forth the changes in our pension plan'splans' obligations and assets recorded on the Balance Sheets at December 31, 20192020 and 2018.2019. The amounts presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $1.4 million, $1.8$1.4 million and $1.1$1.8 million of costs billed to the Service Company for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, or $1.4 million, $1.5 million $3.3 million and $0.7$3.3 million of costs billed to AES Ohio Generation for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
| | | | | | | | | | | | | | |
| $ in millions | | Years ended December 31, |
| Change in benefit obligation | | 2020 | | 2019 |
| Benefit obligation at January 1 | | $ | 421.5 | | | $ | 386.5 | |
| Service cost | | 3.7 | | | 3.7 | |
| Interest cost | | 11.8 | | | 14.9 | |
| | | | |
| | | | |
| Actuarial loss | | 52.7 | | | 42.1 | |
| | | | |
| Benefits paid | | (40.2) | | | (25.7) | |
| Benefit obligation at December 31 | | 449.5 | | | 421.5 | |
| | | | |
| Change in plan assets | | | | |
| Fair value of plan assets at January 1 | | 352.0 | | | 312.9 | |
| Actual return on plan assets | | 45.6 | | | 57.0 | |
| Employer contributions | | 7.7 | | | 7.8 | |
| Benefits paid | | (40.2) | | | (25.7) | |
| Fair value of plan assets at December 31 | | 365.1 | | | 352.0 | |
| | | | |
| | | | |
| Unfunded status of plan | | $ | (84.4) | | | $ | (69.5) | |
| | | | |
| | December 31, |
| Amounts recognized in the Balance sheets | | 2020 | | 2019 |
| Current liabilities | | $ | (0.2) | | | $ | (0.2) | |
| Non-current liabilities | | (84.2) | | | (69.3) | |
| Net liability at end of year | | $ | (84.4) | | | $ | (69.5) | |
| | | | |
| Amounts recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | | | |
| Components: | | | | |
| Prior service cost | | $ | 7.3 | | | $ | 8.6 | |
| Net actuarial loss | | 152.6 | | | 135.5 | |
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 159.9 | | | $ | 144.1 | |
| Recorded as: | | | | |
| Regulatory asset | | $ | 92.7 | | | $ | 83.7 | |
| | | | |
| Accumulated other comprehensive income | | 67.2 | | | 60.4 | |
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 159.9 | | | $ | 144.1 | |
|
| | | | | | | | |
| $ in millions | | Years ended December 31, |
| Change in benefit obligation | | 2019 | | 2018 |
| Benefit obligation at January 1 | | $ | 386.5 |
| | $ | 436.9 |
|
| Service cost | | 3.7 |
| | 6.1 |
|
| Interest cost | | 14.9 |
| | 13.8 |
|
| Plan amendments | | — |
| | 5.1 |
|
| Actuarial (gain) / loss | | 42.1 |
| | (34.6 | ) |
| Benefits paid | | (25.7 | ) | | (40.8 | ) |
| Benefit obligation at December 31 | | 421.5 |
| | 386.5 |
|
| | | | | |
| Change in plan assets | | | | |
| Fair value of plan assets at January 1 | | 312.9 |
| | 357.5 |
|
| Actual return on plan assets | | 57.0 |
| | (11.7 | ) |
| Employer contributions | | 7.8 |
| | 7.9 |
|
| Benefits paid | | (25.7 | ) | | (40.8 | ) |
| Fair value of plan assets at December 31 | | 352.0 |
| | 312.9 |
|
| | | | | |
| Unfunded status of plan | | $ | (69.5 | ) | | $ | (73.6 | ) |
| |
| |
|
| | | December 31, |
| Amounts recognized in the Balance sheets | | 2019 | | 2018 |
| Current liabilities | | $ | (0.2 | ) | | $ | (0.4 | ) |
| Non-current liabilities | | (69.3 | ) | | (73.2 | ) |
| Net liability at end of year | | $ | (69.5 | ) | | $ | (73.6 | ) |
| | | | | |
| Amounts recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | | | |
| Components: | | | | |
| Prior service cost | | $ | 8.6 |
| | $ | 10.4 |
|
| Net actuarial loss | | 135.5 |
| | 137.2 |
|
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 144.1 |
| | $ | 147.6 |
|
| Recorded as: | |
| |
|
| Regulatory asset | | $ | 83.7 |
| | $ | 87.3 |
|
| Accumulated other comprehensive income | | 60.4 |
| | 60.3 |
|
| Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities, pre-tax | | $ | 144.1 |
| | $ | 147.6 |
|
The accumulated benefit obligation for our defined benefit pension plans was $414.1$436.4 million and $378.7$414.1 million at December 31, 20192020 and 2018,2019, respectively.
The net periodic benefit cost of the pension plans was:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Service cost | | $ | 3.7 | | | $ | 3.7 | | | $ | 6.1 | |
| Interest cost | | 11.8 | | | 14.9 | | | 13.8 | |
| Expected return on assets | | (18.6) | | | (20.1) | | | (21.2) | |
| Amortization of unrecognized: | | | | | | |
| Actuarial loss | | 8.7 | | | 7.0 | | | 9.4 | |
| Prior service cost | | 1.3 | | | 1.8 | | | 1.4 | |
| Net periodic benefit cost | | $ | 6.9 | | | $ | 7.3 | | | $ | 9.5 | |
| | | | | | |
| Rates relevant to each year's expense calculations | | | | | | |
| Discount rate | | 3.33 | % | | 4.35 | % | | 3.66 | % |
| Expected return on plan assets | | 5.60 | % | | 6.25 | % | | 6.25 | % |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Service cost | | $ | 3.7 |
| | $ | 6.1 |
| | $ | 5.7 |
|
| Interest cost | | 14.9 |
| | 13.8 |
| | 14.2 |
|
| Expected return on assets | | (20.1 | ) | | (21.2 | ) | | (22.8 | ) |
Plan curtailment (a) | | — |
| | — |
| | 5.6 |
|
| Amortization of unrecognized: | | | | | | |
| Actuarial loss | | 7.0 |
| | 9.4 |
| | 8.7 |
|
| Prior service cost | | 1.8 |
| | 1.4 |
| | 1.5 |
|
| Net periodic benefit cost | | $ | 7.3 |
| | $ | 9.5 |
| | $ | 12.9 |
|
| | | | | | | |
| Rates relevant to each year's expense calculations | | | | | | |
| Discount rate | | 4.35 | % | | 3.66 | % | | 4.28 | % |
| Expected return on plan assets | | 6.25 | % | | 6.25 | % | | 6.50 | % |
(a) As a result of the decision to retire certain coal-fired plants, we recognized a plan curtailment of $5.6 million in 2017.
Other Changes in Plan Assets and Benefit Obligation Recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Net actuarial loss | | $ | 25.8 | | | $ | 5.3 | | | $ | 3.4 | |
| Prior service cost | | 0 | | | 0 | | | 0 | |
| Reversal of amortization item: | | | | | | |
| Net actuarial loss | | (8.7) | | | (7.0) | | | (9.4) | |
| Prior service cost | | (1.3) | | | (1.8) | | | (1.4) | |
| Total recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 15.8 | | | $ | (3.5) | | | $ | (7.4) | |
| | | | | | |
| Total recognized in net periodic benefit cost and Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 22.7 | | | $ | 3.8 | | | $ | 2.1 | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
| Net actuarial loss | | $ | 5.3 |
| | $ | 3.4 |
| | $ | 9.1 |
|
Plan curtailment (a) | | — |
| | — |
| | (5.6 | ) |
| Reversal of amortization item: | | | | | | |
| Net actuarial loss | | (7.0 | ) | | (9.4 | ) | | (8.7 | ) |
| Prior service cost | | (1.8 | ) | | (1.4 | ) | | (1.5 | ) |
| Total recognized in Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | (3.5 | ) | | $ | (7.4 | ) | | $ | (6.7 | ) |
| | | | | | | |
| Total recognized in net periodic benefit cost and Accumulated Other Comprehensive Income, Regulatory Assets and Regulatory Liabilities | | $ | 3.8 |
| | $ | 2.1 |
| | $ | 6.2 |
|
(a) As a result of the decision to retire certain coal-fired plants, we recognized a plan curtailment of $5.6 million in 2017.
Significant Gains and Losses Related to Changes in the Benefit Obligation
The actuarial loss of $52.7 million increased the benefit obligation for the year ended December 31, 2020 and an actuarial loss of $42.1 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $34.6 million decreased the benefit obligation for the year ended December 31, 2018.2019. The actuarial loss in 2020 and 2019 was primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and appropriateness.
At December 31, 2019,2020, we are decreasing our long-term rate of return assumption to 5.60%4.55% for pension plan assets. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2019,2020, we have decreased our assumed discount rate to 3.33%2.44% from 4.35%3.33% for pension expense to reflect current duration-based yield curve discount rates. A 1one percent increase in the rate of return assumption for pension would result in a decrease in 20202021 pension expense of approximately $3.3 million. A 1 percent decrease in the rate of return assumption for pension would result in an increase in 20202021 pension expense of approximately $3.3$3.3 million. A 25-basis point increase in the discount rate for pension would result in a decrease of approximately $0.4 million to 20202021 pension expense. A 25-basis point decrease in the discount rate for pension would result in an increase of approximately $0.4$0.5 million to 20202021 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2019.2020. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are then discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit
payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of FASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
The weighted average assumptions used to determine benefit obligations at December 31, 2020, 2019 2018 and 20172018 were:
| | | | | | | | | | | | | | | | | | | | |
| Benefit Obligation Assumptions | | Pension |
| | 2020 | | 2019 | | 2018 |
| Discount rate for obligations | | 2.44% | | 3.33% | | 4.35% |
| Rate of compensation increases | | 3.21% | | 3.94% | | 3.94% |
|
| | | | | | |
| Benefit Obligation Assumptions | | Pension |
| | | 2019 | | 2018 | | 2017 |
| Discount rate for obligations | | 3.33% | | 4.35% | | 3.66% |
| Rate of compensation increases | | 3.94% | | 3.94% | | 3.94% |
Pension Plan Assets
Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Plan's funded status improve and is therefore broadly described as the Dynamic De-risking Strategy. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Plan's liabilities.
Strategic asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are 40% – 50% for return seeking assets and 50% – 60% for liability hedging assets. returnReturn seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield bond funds and emerging market debt funds.
The investment approach is to move the Plan to a more de-risked position, if and when the overall funded status of the Plan improves, by periodically rebalancing the allocation of the Plan's investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Plan's ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 20192020 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
The following table summarizes our target pension plan allocation for 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | Long-Term
Mid-Point
Target
Allocation | | Percentage of plan assets as of December 31, |
Asset category (a) | | | 2020 | | 2019 |
| Equity Securities | | 41% | | 42% | | 40% |
| Debt Securities | | 59% | | 57% | | 58% |
| Cash and Cash Equivalents | | 0% | | 1% | | 1% |
| Real Estate | | 0% | | 0% | | 1% |
|
| | | | | | |
| | | Long-Term
Mid-Point
Target
Allocation | | Percentage of plan assets as of December 31, |
Asset category (a) | | | 2019 | | 2018 |
| Equity Securities | | 41% | | 40% | | 33% |
| Debt Securities | | 59% | | 58% | | 58% |
| Cash and Cash Equivalents | | —% | | 1% | | 1% |
| Real Estate | | —% | | 1% | | 8% |
The fair values of our pension plan assets at December 31, 2020 by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2020 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
| Asset category | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 153.8 | | | $ | 0 | | | $ | 153.8 | | | $ | 0 | |
Mutual fund - debt (b) | | 144.6 | | | 0 | | | 144.6 | | | 0 | |
Government debt securities (c) | | 64.8 | | | 0 | | | 64.8 | | | 0 | |
Cash and cash equivalents (d) | | 1.9 | | | 1.9 | | | 0 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
| Total pension plan assets | | $ | 365.1 | | | $ | 1.9 | | | $ | 363.2 | | | $ | 0 | |
(a) This category includes investments in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our pension plan assets at December 31, 2019 by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2019 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
| Asset category | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 142.9 | | | $ | 0 | | | $ | 142.9 | | | $ | 0 | |
Mutual fund - debt (b) | | 115.6 | | | 0 | | | 115.6 | | | 0 | |
Government debt securities (c) | | 89.1 | | | 0 | | | 89.1 | | | 0 | |
Cash and cash equivalents (d) | | 1.9 | | | 1.9 | | | 0 | | | 0 | |
| Other investments: | | | | | | | | |
Core property collective fund (e) | | 2.5 | | | 0 | | | 2.5 | | | 0 | |
| Total pension plan assets | | $ | 352.0 | | | $ | 1.9 | | | $ | 350.1 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2019 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
Asset category (f) | | | | (Level 1) | | (Level 2) | | (Level 3) |
Mutual fund - equities (a) | | $ | 142.9 |
| | $ | — |
| | $ | 142.9 |
| | $ | — |
|
Mutual fund - debt (b) | | 115.6 |
| | — |
| | 115.6 |
| | — |
|
Government debt securities (c) | | 89.1 |
| | — |
| | 89.1 |
| | — |
|
Cash and cash equivalents (d) | | 1.9 |
| | 1.9 |
| | — |
| | — |
|
| Other investments: | |
| | | |
| | |
Core property collective fund (e) | | 2.5 |
| | — |
| | 2.5 |
| | — |
|
| Total pension plan assets | | $ | 352.0 |
| | $ | 1.9 |
| | $ | 350.1 |
| | $ | — |
|
| |
(a) | This category includes investments in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method. |
| |
(b) | This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method. |
| |
(c) | This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
|
| |
(d) | This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or instrumentalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost. |
| |
(e) | (b) This category includes investments in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method. (c) This category is comprised of investments U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method. (d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost. (e) This category represents a property fund that invests in commercial real estate. The fair value of the fund is valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(f) | In 2019, the DP&L plan moved all investments into collective trusts; therefore, the 2019 balances under all asset categories shown above represent investments through collective trusts. The plan has chosen collective trusts for which the underlying investments are mutual funds, common stock. debt securities, or real estate in alignment with the target asset allocation. |
Most of our plan assets at December 31, 2018 are measured using quoted, observable prices which are considered Level One inputs in the Fair Value Hierarchy. The Core Property Collective Fund is measured using Level Two inputs that are quoted prices for identical assets in markets that are less active.the underlying investments is used to value the fund.
The fair values of our pension plan assets at December 31, 2018 by asset category are as follows:
|
| | | | | | | | | | | | | | | | |
| $ in millions | | Market Value at December 31, 2018 | | Quoted prices
in active
markets for
identical assets | | Significant
observable
inputs | | Significant
unobservable
inputs |
Asset category (f) | | | | (Level 1) | | (Level 2) | | (Level 3) |
| Mutual funds: | | | | | | | | |
U.S. equities (a) | | $ | 79.3 |
| | $ | 79.3 |
| | $ | — |
| | $ | — |
|
International equities (a) | | 25.9 |
| | 25.9 |
| | — |
| | — |
|
Fixed income (b) | | 143.7 |
| | 143.7 |
| | — |
| | — |
|
| Fixed income securities: | | | | | | | | |
| U.S. Treasury securities | | 37.5 |
| | 37.5 |
| | — |
| | — |
|
| Cash and cash equivalents: | | | | | | | | |
Money market funds (c) | | 2.4 |
|
| 2.4 |
|
| — |
|
| — |
|
| Other investments: | |
| |
| | | |
|
Core property collective fund (d) | | 24.1 |
| | — |
| | 24.1 |
| | — |
|
| Total pension plan assets | | $ | 312.9 |
| | $ | 288.8 |
| | $ | 24.1 |
| | $ | — |
|
| |
(a) | This category includes investments in equity securities of large, small and medium sized U.S. companies and equity securities of foreign companies including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(b) | This category includes investments in investment-grade fixed-income instruments, U.S. dollar-denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
| |
(c) | This category is comprised of investments in U.S. treasury obligations that seek to preserve principal and maintain liquidity while providing current income. The funds are valued at the assets’ amortized cost to maintain a stable per share net asset value. |
| |
(d) | This category represents a property fund that invests in commercial real estate. The fair value of the fund is valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund. |
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and, in addition, make voluntary contributions from time to time. We contributed $7.5 million to the pension plan in each of the years ended December 31, 2020, 2019 and 2018, and $5.0 million to the pension plan in the year ended December 31, 2017.2018.
We expect to make contributions of $0.2 million to our SERP in 20202021 to cover benefit payments. We also expect to make contributions of $7.5$9.8 million to our pension plan during 2020.2021.
Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as
amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, DP&L’s funded target liability percentage was estimated to be 100%101%. In addition, DP&L must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $5.3$5.3 million in 2020,2021, which includes $2.0 million for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over seven years.years. DP&L’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments, which reflect future service, are expected to be paid as follows:
| | | | | | | | |
| Estimated future benefit payments | | |
| $ in millions due within the following years: | | Pension |
| 2021 | | $ | 26.4 | |
| 2022 | | $ | 26.0 | |
| 2023 | | $ | 25.7 | |
| 2024 | | $ | 25.3 | |
| 2025 | | $ | 24.7 | |
| 2026 - 2030 | | $ | 118.1 | |
|
| | | | |
| Estimated future benefit payments | | |
| $ in millions due within the following years: | | Pension |
| 2020 | | $ | 26.6 |
|
| 2021 | | $ | 26.3 |
|
| 2022 | | $ | 26.0 |
|
| 2023 | | $ | 25.8 |
|
| 2024 | | $ | 25.4 |
|
| 2025 - 2029 | | $ | 122.0 |
|
Note 10 – Shareholder's Equity
Common Stock
DP&L has 50,000,000 authorized common shares, of which 41,172,173 are outstanding at December 31, 2019.2020. All common shares are held by DP&L’s parent, DPL.
Capital Contribution and Returns of Capital
In 2020, DPL made a capital contribution of $150.0 million to DP&L. The proceeds will primarily be used for funding needs to support DP&L's capital expenditure program, mainly new investments in and upgrades to DP&L’s transmission and distribution system. Additionally, DP&L declared return of capital payments of $52.7 million to DPL, of which $42.7 million was paid during the year.
In 2019, DP&L made returns of capital payments of $95.0 million to DPL.
In 2018, DP&L received an $80.0 million capital contribution from its parent, DPL, and made returns of capital payments of $43.8 million to DPL. In addition, DP&L recorded $10.0 million in 2018 as a return of capital to transfer additional deferred tax amounts under Generation Separation. See Note 8 – Income Taxes and Note 14 – Generation Separation for more information.
In 2017, DP&L received a $70.0 million capital contribution from its parent, DPL. In addition, DP&L made returns of capital payments of $39.0 million to DPL. In connection with Generation Separation, DP&L recorded $86.2 million as a return of capital. See Note 14 – Generation Separation for more information.
Note 11 – Contractual Obligations, Commercial Commitments and Contingencies
DP&L – Equity Ownership Interest
DP&L has a 4.9% equity ownership interest in OVEC which is recorded using the cost method of accounting under GAAP. At December 31, 2019,2020, DP&L could be responsible for the repayment of 4.9%, or $66.4$62.6 million, of a $1,354.7$1,276.7 million debt obligation comprised of both fixed and variable rate securities with maturities between 2022 and 2040. OVEC could also seek additional contributions from us to avoid a default in the event that other OVEC
members defaulted on their respective OVEC obligations. One of the other OVEC members with a 4.85% interest in OVEC,had filed for bankruptcy protection and the bankruptcy court had approved that member's rejection of the OVEC arrangement and its related obligations on July 31, 2018. The bankruptcy court was orderedobligations. Subsequent to reconsider such rejection by the U.S. Courtthat decision, another entity has assumed that member's ownership interest and all related liabilities.
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2019,2020, these include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| Electricity purchase commitments | | $ | 120.8 | | | $ | 86.0 | | | $ | 34.8 | | | $ | 0 | | | $ | 0 | |
| Purchase orders and other contractual obligations | | $ | 90.3 | | | $ | 85.6 | | | $ | 4.7 | | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due in: |
| $ in millions | | Total | | Less than
1 year | | 2 - 3
years | | 4 - 5
years | | More than
5 years |
| Electricity purchase commitments | | $ | 173.2 |
| | $ | 115.8 |
| | $ | 57.4 |
| | $ | — |
| | $ | — |
|
| Purchase orders and other contractual obligations | | $ | 52.5 |
| | $ | 44.7 |
| | $ | 7.8 |
| | $ | — |
| | $ | — |
|
Electricity purchase commitments:
DP&L enters into long-term contracts for the purchase of electricity. In general, these contracts are subject to variable quantities or prices and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2019,2020, DP&L had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DP&L's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above. This table also does not include regulatory liabilities (see Note 3 – Regulatory Matters) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies)below). See Note 12 – Related Party Transactions for additional information on charges between related parties and amounts due to or from related parties.
Contingencies
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2019,2020, cannot be reasonably determined.
Environmental Matters
DP&L's facilities and operations are subject to a wide range of federal, state and local environmental laws, rules and regulations. The environmental issues that may affect us include the following.
•The federal CAA and state laws and regulations (including SIPs) which require compliance, obtaining permits and reporting as to air emissions;
•Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require reporting and reductions of GHGs;
•Rules and future rules issued by the USEPA, the Ohio EPA or other authorities associated with the federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits; and
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain waste.
In addition to imposing continuing compliance obligations, theseenvironmental laws, rules and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at our facilities to comply, or to determine compliance, with such laws, rules and regulations. We record liabilities for loss contingencies related to environmental matters when a loss is probable of occurring and can be reasonably estimated in accordance with the provisions of GAAP. Accordingly, we have immaterial accruals for loss contingencies for environmental matters.
We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable, or a loss cannot be reasonably estimated. We evaluate the potential liability related to environmental matters quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows.
We have several pending environmental matters associated with our current and previously-owned and operated coal-fired generation units. Some ofWe do not expect these matters couldto have a material adverse impactsimpact on our results of operations, financial condition or cash flows.
Note 12 – Related Party Transactions
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including DP&L, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
Long-term Compensation Plan
During 2020, 2019 2018 and 2017,2018, many of DP&L’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2020, 2019 and 2018 and 2017 was $0.1 million, $(0.3) million and $0.3 million, and $0.4 million, respectively, and was included in “Operation and maintenance” on DP&L’s Statements of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on DP&L’s Balance Sheets in accordance with FASC 718 “Compensation - Stock Compensation.”
The following table provides a summary of our related party transactions:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| | | | | | |
| | | | | | |
DP&L Operation & Maintenance Expenses: | | | | | | |
Premiums charged for insurance services provided by MVIC (a) | | $ | 3.4 | | | $ | 3.1 | | | $ | 2.7 | |
| Transactions with the Service Company: | | | | | | |
| Charges for services provided | | $ | 37.5 | | | $ | 31.2 | | | $ | 25.7 | |
| Charges to the Service Company | | $ | 4.1 | | | $ | 3.5 | | | $ | 4.9 | |
| Transactions with other AES affiliates: | | | | | | |
| Charges for health, welfare and benefit plans | | $ | 10.1 | | | $ | 10.4 | | | $ | 8.7 | |
Charges to affiliates for non-power goods or services (b) | | $ | 4.1 | | | $ | 4.1 | | | $ | 7.1 | |
| Consulting and other services | | $ | 0.8 | | | $ | 0.7 | | | $ | 2.0 | |
| | | | | | |
| Balances with related parties: | | At December 31, 2020 | | At December 31, 2019 | | |
| Net payable to the Service Company | | $ | (14.8) | | | $ | (11.0) | | | |
| | | | | | |
| Net payable to AES and other AES affiliates | | $ | (2.1) | | | $ | (3.5) | | | |
|
| | | | | | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 | | 2017 |
DP&L Cost of revenues: | | | | | | |
| Fuel and power purchased from AES Ohio Generation | | $ | — |
| | $ | — |
| | $ | 5.4 |
|
DP&L Operation & Maintenance Expenses: | | | | | | |
Premiums charged for insurance services provided by MVIC (a) | | $ | 3.1 |
| | $ | 2.7 |
| | $ | 3.1 |
|
| Transactions with the Service Company: | | | | | | |
| Charges for services provided | | $ | 31.2 |
| | $ | 25.7 |
| | $ | 39.0 |
|
| Charges to the Service Company | | $ | 3.5 |
| | $ | 4.9 |
| | $ | 4.2 |
|
| Transactions with other AES affiliates: | | | | | | |
| Charges for health, welfare and benefit plans | | $ | 10.4 |
| | $ | 8.7 |
| | $ | 14.3 |
|
Charges to affiliates for non-power goods or services (b) | | $ | 4.1 |
| | $ | 7.1 |
| | $ | 3.7 |
|
| Consulting services | | $ | 0.7 |
| | $ | 2.0 |
| | $ | — |
|
| | | | | | | |
| Balances with related parties: | | At December 31, 2019 | | At December 31, 2018 | | |
| Net payable to the Service Company | | $ | (11.0 | ) | | $ | (4.8 | ) | | |
| Net payable to AES and other AES affiliates | | $ | (3.5 | ) | | $ | (0.5 | ) | | |
| |
(a) | (a) MVIC, a wholly-owned captive insurance subsidiary of DPL, provides insurance coverage to DP&L and other DPL subsidiaries for workers’ compensation, general liability, property damages and directors’ and officers’ liability. These amounts represent insurance premiums charged by MVIC to DP&L. |
| |
(b) | In the normal course of business DP&L incurred and recorded expenses on behalf of DPL affiliates. Such expenses included but were not limited to employee-related expenses, accounting, information technology, payroll, legal and other administration expenses. DP&L subsequently charged these expenses to the affiliates at DP&L’s cost and credited the expense in which they were initially recorded.
|
(b) In the normal course of business DP&L incurred and recorded expenses on behalf of DPL affiliates. Such expenses included but were not limited to employee-related expenses, accounting, information technology, payroll, legal and other administration expenses. DP&L subsequently charged these expenses to the affiliates at DP&L’s cost and credited the expense in which they were initially recorded.
Income Taxes
AES files federal and state income tax returns which consolidate DPL and its subsidiaries, including DP&L. Under a tax sharing agreement with DPL, DP&L is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. Under this agreement, DP&L had a net receivable balance of $35.7$32.5 million and $19.6$35.7 million at December 31, 20192020 and 2018,2019, respectively, which is
recorded in Taxes receivable on the accompanying Balance Sheets. During 2020, 2019 2018 and 2017,2018, DP&L made net payments of $0.0 million, $22.5 million $14.6 million and $28.1$14.6 million respectively, to DPL for its share of income taxes.
Note 13 – Revenue
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue – DP&L energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. DP&L sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenues are satisfied over time as energy is delivered and the same method is used to measure progress, and thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right to sell or distribute electricity in our service area, DP&L is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that DP&L is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that DP&L has the right to bill corresponds directly with the value to the customer of DP&L's performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and DP&L only serves as a billing agent if requested by the CRES provider. As such, DP&L recognizes the consolidated billing arrangement with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue – DP&L's share of the power produced at OVEC is sold to PJM and is these revenues are classified as Wholesale revenues.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity market and the two products can be transacted independently of one another. Therefore, wholesale revenues are a separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
RTO ancillary revenue – Compensation for use of DP&L’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenues. As DP&L owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. DP&L) and recognized as transmission revenues.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that DP&L, as the transmission operator, has the right to bill (received as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue – Compensation received from PJM for making installed generationDP&L records its share of OVEC capacity available to satisfy system integrityrevenues as Capacity revenues. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and reliability requirements is classified as RTO capacity revenues. Capacity, which is a stand-ready obligation to deliver energy when called upon byperformance of the RTO, is measured using MWs. If plant availability
exceeds a contractual target, weOVEC units, there may receive abe additional performance bonus payment, or if the plant availability falls below a guaranteed minimum target, we may incur a non-availability penalty. Such bonuses or penalties, represent a form of variable consideration and are estimated andwhich would be recognized whenonly if it isbecomes probable that theresuch bonus or penalties will not be a significant reversal and therefore the transaction price is recognized on an output basis based on the MWs.incurred.
RTO capacity revenues have a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance
obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
DP&L's revenue from contracts with customers was $636.6 million, $712.2 million and $706.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The following table presents our revenue from contracts with customers and other revenue by segment for the years ended December 31, 2020, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in millions | | 2020 | | 2019 | | 2018 |
| Retail revenue | | | | | | |
| Retail revenue from contracts with customers | | | | | | |
| Residential revenue | | $ | 362.3 | | | $ | 403.5 | | | $ | 404.0 | |
| Commercial revenue | | 114.6 | | | 130.3 | | | 118.9 | |
| Industrial revenue | | 51.2 | | | 55.3 | | | 48.9 | |
| Governmental revenue | | 36.6 | | | 42.4 | | | 40.8 | |
| Other (a) | | 12.7 | | | 13.8 | | | 13.2 | |
| Total retail revenue from contracts with customers | | 577.4 | | | 645.3 | | | 625.8 | |
| Other retail revenue (b) | | 9.0 | | | 22.0 | | | 32.1 | |
| Wholesale revenue | | | | | | |
| Wholesale revenue from contracts with customers | | 11.0 | | | 17.2 | | | 29.9 | |
| RTO ancillary revenue | | 44.0 | | | 43.5 | | | 43.1 | |
| Capacity revenue | | 4.2 | | | 6.2 | | | 7.8 | |
| Miscellaneous revenue | | | | | | |
| Miscellaneous revenue | | 6.5 | | | 1.2 | | | 0 | |
| Total revenues | | $ | 652.1 | | | $ | 735.4 | | | $ | 738.7 | |
| | | | | | |
|
| | | | | | | | |
| | | Years ended December 31, |
| $ in millions | | 2019 | | 2018 |
| Retail revenue | | | | |
| Retail revenue from contracts with customers | | $ | 645.3 |
| | $ | 625.8 |
|
Other retail revenue (a) | | 22.0 |
| | 32.1 |
|
| Wholesale revenue | | | | |
| Wholesale revenue from contracts with customers | | 17.2 |
| | 29.9 |
|
| RTO ancillary revenue | | 43.5 |
| | 43.1 |
|
| Capacity revenue | | 6.2 |
| | 7.8 |
|
| Miscellaneous revenue | | 1.2 |
| | — |
|
| Total revenues | | $ | 735.4 |
| | $ | 738.7 |
|
(a) "Other" primarily includes Wright-Patterson Air Force Base revenues, billing service fees from CRES providers and other miscellaneous retail revenues from contracts with customers.
(b) Other retail revenue primarily includes alternative revenue programs not accounted for under FASC 606.
| |
(a) | Other retail revenue primarily includes alternative revenue programs not accounted for under FASC 606. |
The balances of receivables from contracts with customers were $64.4$69.2 million and $70.1$64.4 million as of December 31, 20192020 and 2018,2019, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under FASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for DP&L.
Note 14 – Generation Separation
Hutchings Coal Station – On October 1, 2017,December 3, 2020, DP&L completedagreed to transfer its interests in the retired Hutchings Coal Station to a third party, including its obligations to remediate the Station and its site, and the transfer occurred on that same date. As a result, DP&L recognized a loss on the transfer of its generating plants,$4.7 million and made cash expenditures of $7.0 million, inclusive of cash expenditures for the real property on which the generation plants and generation-related assets are sited, step-up transformers and other transmission plant assets used to interconnect with the electric transmission grid, fuel inventory, equipment inventory and spare parts, working capital and other miscellaneous generation-related assets and liabilities to AES Ohio Generation. The transfer was completed as a contribution through an asset contribution agreement to a wholly-owned subsidiary ofcharges. DP&L after which DP&L then distributed all of the outstanding equity in the subsidiaryagreed to DPL and then the subsidiary was merged into AES Ohio Generation.
The following table summarizes the carrying amounts of DP&L's Generation assets that were transferred to AES Ohio Generation on Octoberpay an additional $2.3 million by December 1, 2017:
|
| | | | |
| $ in millions | | October 1, 2017 |
| ASSETS | | |
| Restricted cash | | $ | 2.0 |
|
| Accounts receivable, net | | 31.3 |
|
| Inventories | | 42.0 |
|
| Taxes applicable to subsequent years | | 1.8 |
|
| Property, plant & equipment, net | | 87.0 |
|
| Intangible assets, net of amortization | | 0.7 |
|
| Other assets | | 15.5 |
|
| Total assets | | $ | 180.3 |
|
| | | |
| LIABILITIES | | |
| Accounts payable | | $ | 12.4 |
|
Accrued taxes (b) | | (3.9 | ) |
Long-term debt (a) | | 0.3 |
|
Deferred income taxes (b) | | (91.9 | ) |
| Accrued pension and other post-retirement benefits | | 9.6 |
|
| Unamortized investment tax credit | | 15.1 |
|
| Asset retirement obligations | | 126.3 |
|
| Other liabilities | | 24.1 |
|
| Total liabilities | | 92.0 |
|
| | | |
| Total accumulated other comprehensive income | | 2.1 |
|
| | | |
| Net assets transferred to AES Ohio Generation | | $ | 86.2 |
|
| |
(a) | Long-term debt that transferred to AES Ohio Generation relates to capital leases. |
| |
(b) | Accrued taxes and deferred income taxes transferred to AES Ohio Generation represent the tax asset position netted with liabilities on DP&L prior to Generation Separation.
|
DP&L's generation business met the criteria to be classified as a discontinued operation, and, accordingly, the historical activity has been reclassified to "Discontinued operations" in the Statements of Operations2021 for the yeartransfer. The Hutchings Coal Station was retired in 2013, and, as such, the income / (loss) from continuing operations before income tax related to the Hutchings Coal Station was immaterial for the years ended December 31, 2017.
The following table summarizes2020, 2019 and 2018, excluding the revenues, operating costs, other expenses and income tax of discontinued operations forloss on transfer noted above. Prior to the period indicated:
|
| | | | |
| | | Year ended December 31, |
| $ in millions | | 2017 |
| Revenues | | $ | 358.4 |
|
| Operating costs and other expenses | | (348.4 | ) |
| Fixed-asset impairment | | (66.3 | ) |
| Loss from discontinued operations | | (56.3 | ) |
| Income tax benefit from discontinued operations | | (15.9 | ) |
| Net loss from discontinued operations | | $ | (40.4 | ) |
In 2018, DP&L transferred additional deferred taxes to AES Ohio Generation undertransfer, the provisions of SAB 118 through an equity transaction with DPL in the amount of $10.0 million. See Note 8 – Income Taxes for additional information.
Cash flows related to discontinued operations areHutchings Coal Station was included in the Statements of Cash Flows. Cash flows from operating activities for discontinued operations were $21.8 million for the year ended December 31, 2017. Cash flows from investing activities for discontinued operations were $(3.5) million and for the year ended December 31, 2017.Utility segment.
Note 15 – Dispositions
Beckjord FacilityStation – On February 26, 2018, DP&L and its co-owners of the retired Beckjord FacilityStation agreed to transfer their interests in the retired Facility to a third party, including their obligations to remediate the FacilityStation and its site, and the transfer occurred on that same date. As a result, DP&L recognized a loss on the transfer of $12.4 million and made cash expenditures of $14.5 million, inclusive of cash expenditures for the transfer charges. The Beckjord
Facility Station was retired in 2014, and, as such, the income / (loss) from continuing operations before income tax related to the Beckjord FacilityStation was immaterial for the yearsyear ended December 31, 2018, and 2017, excluding the loss on transfer noted above.
Note 15 – Risks & Uncertainties
COVID-19 Pandemic
The COVID-19 pandemic has severely impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and social distancing measures as well as restricting travel. The State of Ohio has implemented, among other things, stay-at-home and other social distancing measures to slow the spread of the virus, which has impacted energy demand within our service territory, though the stay-at-home restrictions have now been lifted in our service territory. On March 12, 2020, the PUCO also issued an emergency order prohibiting electric utilities, including us, from discontinuing electric utility service to customers. This prohibition ended for DP&L on September 1, 2020. We are taking a variety of measures in response to the spread of COVID-19 to ensure our ability to transmit, distribute and sell electric energy, ensure the health and safety of our employees, contractors, customers and communities and provide essential services to the communities in which we operate. In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, and such expenses may include those that relate to events outside of our control.
As the economic impact of the COVID-19 pandemic started to materialize in Ohio in the second half of March 2020 and continued for the duration of 2020, the COVID-19 pandemic primarily impacted our retail sales demand as shown by the changes in weather-normalized volumes of kWh sold compared to the weather-normalized volumes for the same periods in 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three month periods ended | | For the year ended |
| Customer class | | March 31, 2020 | | | June 30, 2020 | | September 30, 2020 | | December 31, 2020 | | December 31, 2020 |
| Commercial | | (3.2)% | | | (11.0)% | | (2.3)% | | (5.0)% | | (5.3)% |
| Industrial | | (1.5)% | | | (19.9)% | | 0.9% | | 1.1% | | (5.0)% |
| Residential | | 0.3% | | | 8.5% | | 11.0% | | (0.9)% | | 4.2% |
As noted above, we also have incurred, and expect to continue to incur, expenses relating to COVID-19; however, see Note 3 – Regulatory Matters for a discussion of regulatory measures, which partially mitigate the impact of these expenses. The ultimate magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A – Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
We carried out the evaluation required by Rules 13a-15(b) and 15d-15(b), under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, our CEO and CFO concluded that as of December 31, 2019,2020, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements are prevented or detected timely.
Management, including our CEO and CFO, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2020. In making this assessment, management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on this assessment, management believes that we maintained effective internal control over financial reporting as of December 31, 2019.2020.
Changes in Internal Control Over Financial Reporting:
During the second quarter of 2019, we implemented a new core enterprise resource planning (ERP) system, which we expect to enhance our system of internal controls over financial reporting. As a result of this implementation, we modified certain existing internal controls as well as implemented new controls and procedures related to the new ERP. We continued to evaluate the design and operating effectiveness of these internal controls during the fourth quarter of 2019.
Except with respect to the implementation of the ERP, thereThere were no changes that occurred during the quarter ended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B – Other Information
None.
PART III
Item 10 – Directors, Executive Officers and Corporate Governance
Not applicable pursuant to General Instruction I of the Form 10-K.
Item 11 – Executive Compensation
Not applicable pursuant to General Instruction I of the Form 10-K.
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Not applicable pursuant to General Instruction I of the Form 10-K.
Item 13 – Certain Relationships and Related Transactions, and Director Independence
Not applicable pursuant to General Instruction I of the Form 10-K.
Item 14 – Principal Accountant Fees and Services
Accountant FeesThe Financial Audit Committee of AES pre-approves the audit and non-audit services provided by the independent auditors for itself and its subsidiaries, including DPL and its subsidiaries and DP&L. The AES Financial Audit Committee maintained its policy established in 2002 within which to judge if the independent auditor may be eligible to provide certain services outside of its main role as outside auditor. Services within the established framework include audit and related services and certain tax services. Services outside of the framework require AES Financial Audit Committee approval prior to the performance of the service. The Sarbanes-Oxley Act of 2002 addresses auditor independence and this framework is consistent with the provisions of the Act. No services performed by the independent auditor with respect to DPL and DP&L and its subsidiaries were approved after the fact by the AES Financial Audit Committee other than those that were considered to be de minimis and approved in accordance with Regulation 2-01(c)(7)(i)(C) to Regulation S-X of the Exchange Act.
In addition to the pre-approval policies of the AES Financial Audit Committee, the DPL and DP&L Boards of Directors will specifically approve the annual audit services and fees of the independent auditor and the taking of other related actions, such as entering into the terms of the engagement letter.
Audit fees are fees billed or expected to be billed by our principal accountant for professional services for the audit of the Financial Statements, included in DPL's and DP&L's annual report on Form 10-K and review of financial statements included in DPL's and DP&L's quarterly reports on Form 10-Q, services that are normally provided by our principal accountants in connection with statutory, regulatory or other filings or engagements or any other service performed to comply with generally accepted auditing standards and include comfort and consent letters in connection with SEC filings and financing transactions.
The following table presents the aggregate fees billed for professional services rendered to DPL and DP&L by Ernst & Young LLP during the years ended December 31, 20192020 and 2018.2019. Other than as set forth below, no professional services were rendered or fees billed by Ernst & Young LLP during the years ended December 31, 20192020 and 2018.2019.
| | | | | | | | | | | | | | |
| | Fees billed |
| | Years ended December 31, |
| | 2020 | | 2019 |
Audit Fees (a) | | $ | 976,183 | | | $ | 1,145,845 | |
Audit-related Fees (b) | | 245,680 | | | 297,680 | |
| Tax Fees | | — | | | — | |
| All Other Fees | | — | | | — | |
| Total | | $ | 1,221,863 | | | $ | 1,443,525 | |
|
| | | | | | | | |
| | | Fees billed |
| | | Years ended December 31, |
| | | 2019 | | 2018 |
Audit Fees (a) | | $ | 1,145,845 |
| | $ | 1,296,650 |
|
Audit-related Fees (b) | | 297,680 |
| | 84,000 |
|
| Tax Fees | | — |
| | — |
|
| All Other Fees | | — |
| | — |
|
| Total | | $ | 1,443,525 |
| | $ | 1,380,650 |
|
| |
(a) | (a) Audit fees relate to professional services rendered for the audit of our annual financial statements and the reviews of our quarterly financial statements and other services that are normally provided in connection with regulatory filing or engagements and services rendered under an agreed upon procedure engagement related to environmental studies. |
| |
(b) | Audit-related fees relate to services rendered to us for assurance and related services. |
The Boards of Directors of DPL Inc. and The Dayton Power and Light Company (collectively, the Board) pre-approve all audit and permitted non-audit services, including engagement fees and terms for such services in accordance with Section 10A of the Securities Exchange Act of 1934, as amended. The Board will generally pre-approve a listing of specific services and categories of services, including audit, audit-related and other services that are normally provided in connection with regulatory filing or engagements and services rendered under an agreed upon procedure engagement related to environmental studies.
(b) Audit-related fees relate to services rendered to us for the upcoming or current fiscal year, subject to a specified cost level. Any material service not included in the pre-approved listassurance and related services.
PART IV
Item 15 – Exhibits, Financial Statements and Financial Statement Schedules
|
| | | | |
| The following documents are filed as part of this report: | |
| 1. Financial Statements | |
| DPL – Report of Independent Registered Public Accounting Firms | |
DPL – Consolidated Statements of Operations for each of the three years in the period ended December 31, 20192020 | |
DPL – Consolidated Statements of Comprehensive Income / (Loss) for each of the three years in the period ended December 31, 20192020 | |
DPL – Consolidated Balance Sheets at December 31, 20192020 and 20182019 | |
DPL – Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 20192020 | |
DPL – Consolidated Statements of Shareholder’s Deficit for each of the three years in the period ended December 31, 20192020 | |
| DPL – Notes to Consolidated Financial Statements | |
| |
| DP&L – Report of Independent Registered Public Accounting Firm | |
DP&L – Statements of Operations for each of the three years in the period ended December 31, 20192020 | |
DP&L – Statements of Comprehensive Income for each of the three years in the period ended December 31, 20192020 | |
DP&L – Balance Sheets at December 31, 20192020 and 20182019 | |
DP&L – Statements of Cash Flows for each of the three years in the period ended December 31, 20192020 | |
DP&L – Statements of Shareholder’s Equity for each of the three years in the period ended December 31, 20192020 | |
| DP&L – Notes to Financial Statements | |
| |
| 2. Financial Statement Schedules | |
Schedule II – Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 20192020 | |
| The information required to be submitted in Schedules I, III, IV and V is omitted as not applicable or not required under rules of Regulation S-X. |
Exhibits
DPL and DP&L exhibits are incorporated by reference as described unless otherwise filed as set forth herein.
The exhibits filed as part of DPL’s and DP&L’s Annual Report on Form 10-K, respectively, are:
|
| | | | | | | | | | | | | |
| DPL | DP&L | Exhibit
Number
| Exhibit | Location |
| X | | 2(a) | Asset Purchase Agreement dated April 21, 2017, by and among Dynegy Zimmer, LLC, Dynegy Miami Fort, LLC, AES Ohio | |
| X | | 2(b) | Asset Purchase Agreement, dated as of December 15, 2017, by and among AES Ohio Generation, LLC, DPL Inc., Kimura Power, LLC and Rockland Power Partners III, LP | |
| X | | 3(a) | Amended Articles of Incorporation of DPL Inc., as amended through January 6, 2012 | |
| X | | 3(b) | Amended Regulations of DPL Inc., as amended through November 28, 2011 | |
| X | 3(c) | Amended Articles of Incorporation of The Dayton Power and Light Company, as of January 4, 1991 | |
| X | 3(d) | Regulations of The Dayton Power and Light Company, as of April 9, 1981 | |
| X | X | 4(a) | Composite Indenture dated as of October 1, 1935, between The Dayton Power and Light Company and Irving Trust Company, Trustee with all amendments through the Twenty-Ninth Supplemental Indenture | |
| X | X | 4(b) | Forty-First Supplemental Indenture dated as of February 1, 1999, between The Dayton Power and Light Company and The Bank of New York, Trustee | |
| X | X | 4(c) | Forty-Second Supplemental Indenture dated as of September 1, 2003, between The Dayton Power and Light Company and The Bank of New York, Trustee | |
| X | X | 4(d) | Forty-Third Supplemental Indenture dated as of August 1, 2005, between The Dayton Power and Light Company and The Bank of New York, Trustee | |
| X | | 4(e) | Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of New York, Trustee | |
| X | | 4(f) | First Supplemental Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of New York, as Trustee | |
| X | | 4(g) | Amended and Restated Trust Agreement dated as of August 31, 2001 among DPL Inc., The Bank of New York, The Bank of New York (Delaware), the administrative trustees named therein and several Holders as defined therein | |
| X | | 4(h) | Indenture dated October 3, 2011, between Dolphin Subsidiary II, Inc. and Wells Fargo Bank, National Association | |
| X | | 4(i) | Supplemental Indenture dated as of November 28, 2011, between DPL Inc. and Wells Fargo Bank, National Association | |
| X | X | 4(j) | Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series A bonds | |
| X | X | 4(k) | Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series B bonds | |
| X | X | 4(l) | Forty-Eighth Supplemental Indenture dated as of August 1, 2015 between The Bank of New York Mellon, Trustee and The Dayton Power and Light Company | |
| X | X | 4(m) | Forty-Ninth Supplemental Indenture dated as of August 1, 2015 between The Bank of New York Mellon, Trustee and The Dayton Power and Light Company | |
| X | X | 4(n) | Bond Purchase and Covenants Agreement dated as of August 1, 2015, among The Dayton Power and Light Company, SunTrust Bank, as Administrative Agent and the several lenders from time to time party thereto | |
| X | X | 4(o) | Amendment dated February 21, 2017 to Bond Purchase and Covenants Agreement by and among The Dayton Power and Light Company, SunTrust Bank, as Administrative Agent and several lenders from time to time party thereto, dated as of August 1, 2015 | |
|
| | | | | | | | | | | | | |
| DPL | DP&L | Exhibit
Number
| Exhibit | Location |
| X | X | 4(p) | Fiftieth Supplemental Indenture dated as of August 1, 2016, by and between The Dayton Power and Light Company and The Bank of New York Mellon, Trustee | |
| X | X | 4(q) | Fifty-First Supplemental Indenture between The Bank of New York Mellon, as Trustee, and The Dayton Power and Light Company | |
| X | | 4(r) | Registration Rights Agreement dated April 17, 2019 between DPL Inc. and J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC | |
| X | | 4(s) | Indenture dated April 17, 2019 between DPL Inc. and U.S. Bank National Association, as Trustee | |
| X | X | 4(t) | Fifty-Second Supplemental Indenture between The Bank of New York Mellon, as Trustee, and The Dayton Power and Light Company | |
| X | X | 4(u) | Registration Rights Agreement dated June 6, 2019 between The Dayton Power and Light Company and BofA Securities, Inc. and J.P. Morgan Securities LLC | |
| X | | 10(a)4(v) | Indenture, dated June 19, 2020, by and between DPL Inc. and U.S. Bank National Association. | |
| X | | 4(w) | Registration Rights Agreement, dated June 19, 2020, by and between DPL Inc. and J.P. Morgan Securities LLC, as representative of the initial purchasers. | |
| X | X | 4(x) | 53rd Supplemental Indenture, dated July 1, 2020, between The Dayton Power and Light Company and The Bank of New York Mellon. | |
| X | | 10(a) | Amended and Restated Credit Agreement, dated as of June 19, 2019, among DPL Inc., each lender from time to time party thereto, U.S. Bank National Association, as Administrative Agent, Collateral Agent, Swing Line Lender and an L/C Issuer, PNC Bank, National Association, as Syndication Agent and an L/C Issuer, and Fifth Third Bank, BMO Harris Bank, N.A., SunTrust Bank and The Huntington National Bank, as Documentation Agents. | |
| X | | 10(b) | Amended and Restated Pledge Agreement, dated as of June 19, 2019, between DPL Inc. and U.S. Bank National Association, as Collateral Agent. | |
| X | X | 10(c) | Amended and Restated Credit Agreement, dated as of June 19, 2019, among The Dayton Power and Light Company, each lender from time to time party thereto, PNC Bank, National Association, as Administrative Agent, Swing Line Lender and an L/C Issuer, U.S. Bank National Association, as Syndication Agent and an L/C Issuer, and Fifth Third Bank, BMO Harris Bank, N.A., SunTrust Bank and The Huntington National Bank, as Documentation Agents. | |
| X | | 31(a)10(d) | Amendment to the Amended and Restated Credit Agreement, dated as of June 1, 2020, among DPL, U.S. Bank, National Association, as administrative agent, and each of the lenders party thereto. | |
| X | X | 10(e) | Stipulation and Recommendation dated October 23, 2020. | |
| X | | 31(a) | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| X | | 31(b) | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| X | 31(c) | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| X | 31(d) | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| X | | 32(a) | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| X | | 32(b) | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| | | | | | | | | | | | | | |
| DPL | XDP&L | 32(c)Exhibit
Number | Exhibit | Location |
| X | 32(c) | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| X | 32(d) | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| X | X | 101.INS | XBRL Instance | Furnished herewith as Exhibit 101.INS |
| X | X | 101.SCH | XBRL Taxonomy Extension Schema | Furnished herewith as Exhibit 101.SCH |
| X | X | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | Furnished herewith as Exhibit 101.CAL |
| X | X | 101.DEF | XBRL Taxonomy Extension Definition Linkbase | Furnished herewith as Exhibit 101.DEF |
| X | X | 101.LAB | XBRL Taxonomy Extension Label Linkbase | Furnished herewith as Exhibit 101.LAB |
| X | X | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | Furnished herewith as Exhibit 101.PRE |
Exhibits referencing File No. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385 have been filed by The Dayton Power and Light Company.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, we may not file as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of us and our subsidiaries on a consolidated basis, but we hereby agree to furnish to the SEC on request any such instruments.
Item 16 – Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPL Inc. and The Dayton Power and Light Company have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
| | | | | |
| DPL Inc. |
| |
| |
| DPL Inc. |
| February 24, 2021 | /s/ Kristina Lund |
| Kristina Lund |
| |
February 27, 2020 | /s/ Barry J. Bentley |
| Barry J. Bentley |
| Interim President and Chief Executive Officer |
| (principal executive officer) |
| |
| |
| The Dayton Power and Light Company |
| |
| |
| |
February 27, 202024, 2021 | /s/ Vincent ParisiKristina Lund |
| Vincent ParisiKristina Lund |
| President and Chief Executive Officer |
| (principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of DPL Inc. and in the capacities and on the dates indicated.
| | | | | | | | | | | |
| /s/ Kenneth J. Zagzebski | | Director | February 24, 2021 |
| Kenneth J. Zagzebski | | | |
| | | |
/s/ Kenneth J. Zagzebski | | Director and Chairman | February 27, 2020 |
Kenneth/s/ Barry J. ZagzebskiBentley | | Director | February 24, 2021 |
| Barry J. Bentley | | | |
| | | |
/s/ Leonardo Moreno | | Director | February 27, 2020 |
Leonardo Moreno | | | |
| | | |
| | | |
| /s/ Lisa Krueger | | Director and Executive Chairman | February 27, 202024, 2021 |
| Lisa Krueger | | | |
| | | |
| | | |
| /s/ Michelle A. Dreyer | | Director | February 27, 202024, 2021 |
| Michelle A. Dreyer | | | |
| | | |
| | | |
/s/ Barry J. BentleyKristina Lund | | Director, Interim President and Chief Executive Officer | February 27, 202024, 2021 |
Barry J. BentleyKristina Lund | | (principal executive officer) | |
| | | |
| | | |
| /s/ Gustavo Garavaglia | | Chief Financial Officer | February 27, 202024, 2021 |
| Gustavo Garavaglia | | (principal financial officer) | |
| | | |
| | | |
| /s/ Karin M. Nyhuis | | Controller | February 27, 202024, 2021 |
| Karin M. Nyhuis | | (principal accounting officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Dayton Power and Light Company and in the capacities and on the dates indicated.
| | | | | | | | | | | |
| /s/ Kenneth J. Zagzebski | | Director | February 24, 2021 |
| Kenneth J. Zagzebski | | | |
| | | |
/s/ Kenneth J. Zagzebski | | Director and Chairman | February 27, 2020 |
Kenneth J. Zagzebski | | | |
| | | |
| | | |
| /s/ Barry J. Bentley | | Director | February 27, 202024, 2021 |
| Barry J. Bentley | | | |
| | | |
| | | |
| /s/ Paul Freedman | | Director | February 27, 202024, 2021 |
| Paul Freedman | | | |
| | | |
| | | |
| /s/ Lisa Krueger | | Director and Executive Chairman | February 27, 202024, 2021 |
| Lisa Krueger | | | |
| | | |
| | | |
| /s/ Tish Mendoza | | Director | February 27, 202024, 2021 |
| Tish Mendoza | | | |
| | | |
| | | |
| /s/ Mark Miller | | Director | February 27, 202024, 2021 |
| Mark Miller | | | |
| | | |
| | | |
/s/ Leonardo MorenoAnnmarie Reynolds | | Director | February 27, 202024, 2021 |
Leonardo MorenoAnnmarie Reynolds | | | |
| | | |
| | | |
| /s/ Thomas A. Raga | | Director | February 27, 202024, 2021 |
| Thomas A. Raga | | | |
| | | |
| | | |
/s/ Vincent ParisiKristina Lund | | Director, President and Chief Executive Officer | February 27, 202024, 2021 |
Vincent ParisiKristina Lund | | (principal executive officer) | |
| | | |
| | | |
| /s/ Gustavo Garavaglia | | Vice President and Chief Financial Officer | February 27, 202024, 2021 |
| Gustavo Garavaglia | | (principal financial officer) | |
| | | |
| | | |
| /s/ Karin M. Nyhuis | | Controller | February 27, 202024, 2021 |
| Karin M. Nyhuis | | (principal accounting officer) | |
Schedule II
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| DPL Inc. |
| VALUATION AND QUALIFYING ACCOUNTS |
| For each of the three years in the period ended December 31, 2020 |
| $ in millions |
| Description | | Balance at
Beginning
of Period | | Additions | | Deductions -
Net Write-offs | | Balance at
End of Period |
| Year ended December 31, 2020 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 0.4 | | | $ | 3.0 | | | $ | 0.6 | | | $ | 2.8 | |
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (a) | | $ | 29.0 | | | $ | 11.0 | | | $ | 1.0 | | | $ | 39.0 | |
| Year ended December 31, 2019 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 0.9 | | | $ | 3.0 | | | $ | 3.5 | | | $ | 0.4 | |
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (a) | | $ | 29.9 | | | $ | 2.2 | | | $ | 3.1 | | | $ | 29.0 | |
| Year ended December 31, 2018 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1.1 | | | $ | 3.4 | | | $ | 3.6 | | | $ | 0.9 | |
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (a) | | $ | 36.3 | | | $ | 1.7 | | | $ | 8.1 | | | $ | 29.9 | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| DPL Inc. |
| VALUATION AND QUALIFYING ACCOUNTS |
| For each of the three years in the period ended December 31, 2019 |
| $ in thousands |
| Description | | Balance at Beginning of Period | | Additions | | Deductions (a) | | Balance at End of Period |
| Year ended December 31, 2019 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 890 |
| | $ | 3,005 |
| | $ | 3,511 |
| | $ | 384 |
|
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (b) | | $ | 29,907 |
| | $ | 2,197 |
| | $ | 3,092 |
| | $ | 29,012 |
|
| Year ended December 31, 2018 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1,053 |
| | $ | 3,411 |
| | $ | 3,574 |
| | $ | 890 |
|
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (b) | | $ | 36,328 |
| | $ | 1,715 |
| | $ | 8,136 |
| | $ | 29,907 |
|
| Year ended December 31, 2017 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1,159 |
| | $ | 3,141 |
| | $ | 3,247 |
| | $ | 1,053 |
|
| Deducted from deferred tax assets - | | | | | | | | |
Valuation allowance for deferred tax assets (b) | | $ | 38,266 |
| | $ | 4,383 |
| | $ | 6,321 |
| | $ | 36,328 |
|
(a) Amounts written off, net of recoveries of accounts previously written off.
| |
(b) | Balances and activity for valuation allowances for deferred tax assets include amounts presented within both the "Deferred income taxes" line and the "Non-current liabilities of discontinued operations and held-for-sale businesses" line on DPL’s Consolidated Balance Sheets.
|
|
| | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| VALUATION AND QUALIFYING ACCOUNTS |
| For each of the three years in the period ended December 31, 2019 |
| $ in thousands |
| Description | | Balance at Beginning of Period | | Additions | | Deductions (a) | | Balance at End of Period |
| Year ended December 31, 2019 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 890 |
| | $ | 3,005 |
| | $ | 3,511 |
| | $ | 384 |
|
| Year ended December 31, 2018 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1,053 |
| | $ | 3,411 |
| | $ | 3,574 |
| | $ | 890 |
|
| Year ended December 31, 2017 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1,159 |
| | $ | 3,141 |
| | $ | 3,247 |
| | $ | 1,053 |
|
(a) Balances and activity for valuation allowances for deferred tax assets include amounts presented within both the (a) Amounts written off, net"Deferred income taxes" line and the "Non-current liabilities of recoveriesdiscontinued operations and held-for-sale businesses" line on DPL’s Consolidated Balance Sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| THE DAYTON POWER AND LIGHT COMPANY |
| VALUATION AND QUALIFYING ACCOUNTS |
| For each of the three years in the period ended December 31, 2020 |
| $ in millions |
| Description | | Balance at
Beginning
of Period | | Additions | | Deductions -
Net Write-offs | | Balance at
End of Period |
| Year ended December 31, 2020 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 0.4 | | | $ | 3.0 | | | $ | 0.6 | | | $ | 2.8 | |
| Year ended December 31, 2019 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 0.9 | | | $ | 3.0 | | | $ | 3.5 | | | $ | 0.4 | |
| Year ended December 31, 2018 | | | | | | | | |
| Deducted from accounts receivable - | | | | | | | | |
| Provision for uncollectible accounts | | $ | 1.1 | | | $ | 3.4 | | | $ | 3.6 | | | $ | 0.9 | |
