Retail customers, especially residential and commercial customers, consume more electricity duringon warmer and colder weather than they do during mild temperatures.days. Therefore,our retail sales volumedemand is impactedaffected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days typically have a more significant impacteffect than heating degree-days since some residential customers do not use electricity to heat their homes. Because of the impact of the decoupling riderDecoupling Rider (effective January 1, 2019 through December 18, 2019), weather hashad a minimal impact on our 2019 net operating results.
KEY TRENDS AND UNCERTAINTIES
Following the issuance of the DRO in September 2018 and the resulting changes to the decoupling rider, we expect thatDecoupling Rider effective January 1, 2019, our financial results will be lesswere not driven by retail demand and weather but will bewere impacted by customer growth within our service territory. However, the Decoupling Rider was removed with the withdrawal of the ESP 3 and approved ESP 1 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 included elsewhere in this prospectus. 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;
regulatory outcomes;
•the passage of new legislation, implementation of regulations or other changes in regulation;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.
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• | with respect to DPL, exiting generation assets currently owned by AES Ohio Generation.
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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 "Risk Factors: elsewhere in this prospectus.
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 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 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 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.
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 included elsewhere in this prospectus, 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.
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 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 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, and finally in May 2020 AEP, the operator of the co-owned Conesville EGU, closed Unit 4 in 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.
Macroeconomic and Political
Reference Rate Reform
In July 2017, the 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. 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 Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements included elsewhere in this prospectus.
DPL’s, DP&L’sDistribution Rate Case and our other subsidiaries’ facilities and operations are subject to- On November 30, 2020, DP&L filed a wide range of regulations and laws by federal, state and local authorities. As well as imposing continuing compliance obligations, these laws 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 these facilities and operations in an effort to comply, or to determine compliance, with such regulations. We record liabilities for losses that are probable and can be reasonably estimated. In addition to matters discussed or updated herein, our 2018 Form 10-K and Forms 10-Q previously filednew distribution rate case with the SEC during 2019 describe other regulatory matters which have not materially changed since those filings.PUCO. This rate case proposes a revenue increase of $120.8 million.
Ohio Regulatory Proceedings
DMR
Stipulation and Recommendation - On October 20, 2017,23, 2020, DP&L entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO approved DP&L’s 2017 ESP. On January 7, 2019, the Ohio Consumers' Counsel appealed to the Supreme Courtand various customers, and organizations representing customers of Ohio the 2017 ESPDP&L and certain other parties with respect to, the bypassability of the Reconciliation Rider and the exclusion of the DMR from the SEET. That proceeding has been stayedamong other matters, DP&L’s applications pending an appeal in a related case involving another utility.
Pursuant to the 2017 ESP, on January 22, 2019, DP&L filed a request withat the PUCO for a two-year extension(i) approval of DP&L’s plan to modernize its DMR through October 2022,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 proposed amountaggregate (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 $199.0 million for eachthis settlement. If the ultimate outcome is less favorable than the settlement agreement it could have a material adverse effect on our results of the two additional years. The extension request was set at a level expected to reduce debt obligations at both DP&Loperations, financial condition and DPL and to position DP&L to make capital expenditures to maintain and modernize its electric grid. DP&L’s DMP investments are contingent upon the PUCO approving the two-year extension of its DMR.cash flows.
A rehearing process in DP&L's 2017 ESP case, including the DMR, remains pending. On August 1, 2019, DP&L filed a supplemental brief with the PUCO focused on the applicability of a recent court decision involving another Ohio utility’s DMR which is similar to, but not identical to, DP&L’s DMR.
Ohio House Bill 6
On July 23, 2019, - Legislation, such as Senate Bill 346 and House Bill 738, has been introduced in the Governor of Ohio signedGeneral Assembly seeking to repeal Ohio House Bill 6. Ohio House Bill 6, which, 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
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• | beginning January 1, 2020, replaces DP&L’s non-bypassable Reconciliation Rider, permitting 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 2023, with a non-bypassable recovery mechanism for recovery of prudently incurred OVEC costs through 2030;
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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.
Regulatory impact of tax reform
On September 26, 2019For more information on the PUCO approved a unanimous stipulation agreeing to return a total of $65.1 million, $83.2 million when including taxes associated with the refunds, to distribution customers.
See Part I, Item 1,above matters, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements included elsewhere in this prospectus.
CAPITAL RESOURCES AND LIQUIDITY
Cash, cash equivalents and restricted cash for DPL and DP&L was $25.5 million and $11.8 million, respectively, at December 31, 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 $1,413.0 million and $582.4 million, respectively, at December 31, 2020.
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, 2021 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 2020 to, among other things, issue up to $140.0 million in 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:
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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 | |
Fiscal year 2020 versus 2019:
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) | | | |
The net change in operating assets and liabilities for the year ended December 31, 2020 compared to the year ended December 31, 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 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) | |
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DPL – Net cash from investing activities
During the year ended December 31, 2020, net cash used in investing activities was $185.7 million compared to net cash used in investing activities of $222.6 million for the year ended December 31, 2019. This $36.9 million decrease in cash used primarily relates to a $43.7 million decrease in net payments on the disposal of business interests driven by the payments on the transfer of the retired Stuart and Killen generating facilities in the prior year. In addition, there were $5.1 million of proceeds received from the 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, 2020, net cash provided by financing activities was $50.3 million compared to net cash used in financing activities of $(22.4) million for the year ended December 31, 2019. This $72.7 million increase was primarily due to a $160.5 million increase in net issuances 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 of $188.0 million in the current year.
Cash Flow Analysis - DP&L:
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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) | |
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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 | |
Fiscal year 2020 versus 2019:
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) | | | |
The net change in operating assets and liabilities for the year ended December 31, 2020 compared to the year ended December 31, 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) | |
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DP&L – Net cash from investing activities
During the year ended December 31, 2020, net cash used in investing activities was $186.5 million compared to net cash used in investing activities of $170.6 million for the year ended December 31, 2019. This $15.9 million increase in cash used primarily relates to a $13.9 million increase in cost of removal payments and a $7.0 million payment made on the disposal of business interests in Hutchings Coal Station in the current year, partially offset by a $2.8 million decrease in the purchase of renewable energy credits and a $2.2 million decrease in capital expenditures.
DP&L – Net cash from financing activities
During the year ended December 31, 2020, net cash provided by financing activities was $86.0 million compared to net cash used in financing activities of $(74.2) million during the year ended December 31, 2019. This $160.2 million increase primarily relates to a $150.0 million equity contribution from DPL in the current year, a $52.3 million decrease in return of capital payments to DPL compared to the prior year, and $13.8 million in net retirements on long-term debt in the prior year, partially offset by a $60.0 million increase in net payments on revolving credit facilities in the current year.
Liquidity
We expect our existing sources of liquidity to remain sufficient to meet our anticipated operating needs. Our business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and carrying costs, taxes and dividend payments. For 2021 and subsequent years, we expect to satisfy these requirements with cash from operations, funds from debt financing and/or equity capital contributions as our internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under bank credit facilities will continue to be available to manage working capital requirements during those periods.
At December 31, 2020, DPL and DP&L have access to the following revolving credit facilities:
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$ in millions | | Type | | Maturity | | Commitment | | Amounts available as of December 31, 2020 |
DPL | | Revolving | | June 2023 | | $ | 110.0 | | | $ | 25.0 | |
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DP&L | | Revolving | | June 2024 | | 175.0 | | | 153.9 | |
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| | | | | | $ | 285.0 | | | $ | 178.9 | |
DPL has a revolving credit facility of $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. The facility expires in June 2023. At December 31, 2020, there was one letter of credit in the aggregate amount of $5.0 million outstanding under this facility and $80.0 million drawn under this facility, with the remaining $25.0 million available to DPL.
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, 2020, DP&L had $20.0 million drawn under this facility and had one letter of credit in the amount of $1.1 million outstanding, with the remaining $153.9 million available to DP&L.
Capital Requirements
Capital Additions
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| | Actual | | Projected |
$ in millions | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
DPL | | $ | 94 | | | $ | 164 | | | $ | 174 | | | $ | 254 | | | $ | 271 | | | $ | 242 | |
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DP&L | | $ | 91 | | | $ | 162 | | | $ | 170 | | | $ | 252 | | | $ | 268 | | | $ | 238 | |
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 $767.0 million in capital projects for the period 2021 through 2023, which includes an estimated $758.0 million for DP&L. DP&L's projection includes expected spending under DP&L's Smart 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 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 $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.
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.
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| DPL | | DP&L | | Outlook | | Effective or Affirmed |
Fitch Ratings | BB+(a) / BB(b) | | BBB+ (c) | | Negative | | April 2020 |
Moody's Investors Service, Inc. | Ba1 (b) | | A3 (c) | | Negative | | DPL - June 2020 DP&L - December 2019 |
Standard & Poor's Financial Services LLC | BB+ (b) | | BBB+ (c) | | Developing | | November 2020 |
(a) CondensedRating 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.
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.
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| DPL | | DP&L | | Outlook | | Effective or Affirmed |
Fitch Ratings | BB | | BBB- | | Negative | | April 2020 |
Moody's Investors Service, Inc. | Ba1 | | Baa2 | | Negative | | December 2019 |
Standard & Poor's Financial Services LLC | BB+ | | BB+ | | Developing | | November 2020 |
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
Previously, DPL entered into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements were 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, 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, 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.
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, 2020, DP&L could be responsible for the repayment of 4.9%, or $62.6 million, of a $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, 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, 2020, these include:
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| | 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 | |
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| | 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 | | $ | 582.4 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 581.4 | |
Interest payments | | 583.9 | | | 22.0 | | | 44.0 | | | 44.0 | | | 473.9 | |
Electricity purchase commitments | | 120.8 | | | 86.0 | | | 34.8 | | | — | | | — | |
Purchase orders and other contractual obligations | | 90.3 | | | 85.6 | | | 4.7 | | | — | | | — | |
Total contractual obligations | | $ | 1,377.4 | | | $ | 193.8 | | | $ | 83.9 | | | $ | 44.4 | | | $ | 1,055.3 | |
Long-term debt:
DPL’s Long-term debt at December 31, 2020 consists of DPL’s unsecured notes and Capital Trust II securities, along with DP&L’s First Mortgage Bonds and the 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, 2020 consists of its 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 included in Notes to DPL's Consolidated Financial 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, 2020.
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, 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) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL's Consolidated Financial Statements). See Note 12 – Related Party Transactions of Notes to DPL's Consolidated 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 $1.4 million at December 31, 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 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.
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 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 2020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 2020 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. 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.
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 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 such discussion is incorporated by reference in this Management's Discussion and Analysis of Results of Operations and Financial Condition and made a part hereof.
BUSINESS
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: DP&L, MVIC and 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. For additional information, see Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DPL's Consolidated 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 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, owned an undivided interest in Conesville. AES Ohio Generation's share of this EGU's capacity was 129 MW. AES Ohio Generation sold all of its energy and capacity into the wholesale market. AEP Generation, the operator of the co-owned Conesville EGU, closed Unit 4 in May 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.
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.
HUMAN CAPITAL MANAGEMENT
DPL's employees are essential to delivering and maintaining reliable service to our customers. DPL and its subsidiaries employed 631 people (512 full-time) at January 31, 2021 all of which were employed by DP&L.
Approximately 58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 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 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 utilities 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.
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. DP&L has requested authority from the PUCO 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.
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 distribution 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 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.
COMPETITION AND REGULATION
Ohio Retail Rates
DP&L rates for electric service currently remain the lowest among Ohio investor-owned utilities.
ESP 1 established 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 regulatory matters.DP&L's ESP, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial 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. 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.
In December 2018, DP&L filed its 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 Smart 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. On October 23, 2020 DP&L filed a comprehensive settlement (the “Settlement”) with the PUCO that, among other matters, includes resolution of this Smart Grid application. If approved, DP&L plans to implement the plan that will
deliver benefits to customers, society as a whole and to DP&L. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements.
Ohio law and the PUCO rules contain targets relating to renewable energy standards. DP&L is currently in full compliance with renewable energy standards. DP&L recovers the costs of its compliance with Ohio renewable energy standards through a separate rider which is 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. DP&L implemented a formula-based rate for its transmission service, effective May 3, 2020. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated 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 prospectus, 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. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial 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.
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 are 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;
•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;
•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 Tax Law Reform
Considering the significant changesexcept pursuant to the U.S. tax system enacted in 2017, the U.S. Treasury Departmentappropriate permits; and Internal Revenue Service have issued numerous regulations. While certain regulations are now final, there are many regulations that are proposed and still others anticipated to be issued in proposed form. The final version of any regulations may vary from the proposed form. When final, these regulations may materially impact our effective tax rate. Certain of the proposed regulations, when final, may have retroactive effect to January 1, 2018 or January 1, 2019.
Environmental Matters
•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 severala 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 andor cash flows. We refer to the discussion in “Item 1. Business - Environmental Matters” in our 2018 Form 10-K for a discussion of certain recent developments in environmental laws and regulations.
We have several pending environmental matters associated with our stations. Some ofpreviously-owned and operated coal-fired generation units. We do not expect these matters couldto have a material adverse effectimpact on our results of operations, financial condition andor cash flows. See Note 11 – Contractual Obligations, Commercial Commitments and Contingencies – "Environmental Matters” of Notes to DPL's Consolidated 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
BecauseOn January 20, 2021, President Biden issued an Executive Order (the "EO") titled “Protecting Public Health and the Environment and Restoring Science to Tackle 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. Department of DPL’s decisionJustice seeking to retireobtain abeyances or stays of proceedings in pending litigation that seeks review of regulations promulgated during the Trump Administration. The Biden Administration also issued a Memorandum titled “Regulatory Freeze Pending Review” directing agencies to refrain from proposing or issuing 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, financial condition, or results of operations.
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.
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:
•DPL:
The CAA and the following regulations:regulations
•CSAPR and associated updates;
•MATS and any associated regulatory or judicial processes;
•NAAQS; and
the•CPP or Affordable Clean Energy Rule.(ACE) rule.
Litigation Involving Co-Owned Stations
Additionally, becauseAs 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 Station 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 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
On February 15, 2017, the USEPA issued an NOV alleging violations in opacity at the Stuart Station in 2016. Operations at the Stuart Station have ceased. Given the retirement and sale of the Stuart Station and 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 noted above,Stations, the sale of its ownership interest in the Miami Fort and Zimmer Stations and the 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 with respect to either of the twothese generating stations: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 and2014;
•revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the USEPA on November 3, 2015.2015 (and revised on October 13, 2020) and commonly referred to as the ELG rules; and
•Clean Water Act Regulation of Water Discharge
On January 7, 2013, the Ohio EPA issued a final NPDES permit to the Stuart Station which included a compliance schedulerules for performing a study to justify an alternate thermal limitation or take undefined measures to meet certain temperature limits. On February 1, 2013, selenium.DP&L appealed various aspects of the final permit to the ERAC. On August 8, 2019, the ERAC dismissed the appeal in response to a Joint Motion to Dismiss.
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 a specialanother notice from the USEPA claiming that USEPA considers DP&L, along with other parties, to be is a PRP for the clean-upportion of hazardous substances at a third-party landfillthe site known as the Tremont City Barrel Site, located near Dayton, Ohio.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 matter. If DP&L were required to contribute to the clean-up of the site, it could have a materialan adverse effect on our business, financial condition or results of operations.
RegulationCapital Requirements
Capital 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 | |
Capital projects are subject to continuing review and are revised in light of Waste Disposalchanges 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 $767.0 million in capital projects for the period 2021 through 2023, which includes an estimated $758.0 million for DP&L. DP&L's projection includes expected spending under DP&L's Smart 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 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 $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.
Debt Ratings
The USEPA's final CCR rule becamefollowing 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 | BB+(a) / BB(b) | | BBB+ (c) | | Negative | | April 2020 |
Moody's Investors Service, Inc. | Ba1 (b) | | A3 (c) | | Negative | | DPL - June 2020 DP&L - December 2019 |
Standard & Poor's Financial Services LLC | BB+ (b) | | BBB+ (c) | | Developing | | November 2020 |
(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.
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 | | BBB- | | Negative | | April 2020 |
Moody's Investors Service, Inc. | Ba1 | | Baa2 | | Negative | | December 2019 |
Standard & Poor's Financial Services LLC | BB+ | | BB+ | | Developing | | November 2020 |
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 October 2015. Generally,our debt or credit ratings may adversely affect the rule regulates CCR as nonhazardous solid waste and establishes national minimum criteria for existing andtrading price of our outstanding debt securities. Non-investment grade companies may experience higher costs to issue new CCR landfillssecurities.
Off-Balance Sheet Arrangements
DPL – Guarantees
Previously, DPL entered into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements were 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, 2020, DPL did not incur any losses related to the guarantees of these obligations and new CCR ash ponds, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. Onwe 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 16, 2016, President Obama signed into law31, 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.
DP&L owns a 4.9% equity ownership interest in OVEC which is recorded using the Water Infrastructure Improvementscost method of accounting under GAAP. At December 31, 2020, DP&L could be responsible for the Nation Act ("WIIN Act")repayment of 4.9%, which includes provisionsor $62.6 million, of a $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, 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, 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: |
$ in millions | | Total | | Less than 1 year | | 2 - 3 years | | 4 - 5 years | | More than 5 years |
DP&L: | | | | | | | | | | |
Long-term debt | | $ | 582.4 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 581.4 | |
Interest payments | | 583.9 | | | 22.0 | | | 44.0 | | | 44.0 | | | 473.9 | |
Electricity purchase commitments | | 120.8 | | | 86.0 | | | 34.8 | | | — | | | — | |
Purchase orders and other contractual obligations | | 90.3 | | | 85.6 | | | 4.7 | | | — | | | — | |
Total contractual obligations | | $ | 1,377.4 | | | $ | 193.8 | | | $ | 83.9 | | | $ | 44.4 | | | $ | 1,055.3 | |
Long-term debt:
DPL’s Long-term debt at December 31, 2020 consists of DPL’s unsecured notes and Capital Trust II securities, along with DP&L’s First Mortgage Bonds and the 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, 2020 consists of its 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 included in Notes to implementDPL's Consolidated Financial Statements.
Interest payments:
Interest payments are associated with the CCR rule through a state permitting program,long-term debt described above. The interest payments relating to variable-rate debt are projected using the interest rates in effect at December 31, 2020.
Electricity purchase commitments:
DPL enters into long-term contracts for the purchase of electricity. In general, these contracts are subject to variable quantities or ifprices and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 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 state chooses nottiming and payment of future obligations to participate, a possible federal permit program. The USEPA has indicated that they will implement a phased approachthe Service Company, and DPL's and DP&L's ability to amending the CCR rule. In July 2018, the USEPA published final CCR rule amendments (Phase One, Part One)terminate such obligations upon 90 days' notice, we have excluded such amounts in the Federal Register. In August 2018, the D.C. Circuit Court issued a decision in certain CCR litigation matters, which may result incontractual obligations table above. This table also does not include regulatory liabilities (see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL's Consolidated Financial Statements). See Note 12 – Related Party Transactions of Notes to DPL's Consolidated Financial Statements for additional revisionsinformation on charges between related parties and amounts due to or from related parties.
Reserve for uncertain tax positions:
Due to the CCR rule.uncertainty regarding the timing of future cash outflows associated with our unrecognized tax benefits of $1.4 million at December 31, 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 are prepared in accordance with GAAP. In October 2018, some environmental groups filed a petition for review challengingconnection with the USEPA's final CCR rule amendments (Phase One, Part One) which have since been remanded without vacaturpreparation of these financial statements, our management is required to make assumptions, estimates and judgments that affect the USEPA. On August 14, 2019, the USEPA published amendments to the CCR rule relating to the CCR rule’s criteria for determining beneficial usereported amounts of assets, liabilities, revenues, expenses and the regulationrelated disclosure of CCR piles, among other revisions. On November 4, 2019,contingent liabilities. These assumptions, estimates and judgments are based on our historical experience and assumptions that we believe to be reasonable at the USEPA signed additional amendmentstime. 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 the CCR Rule titled “A Holistic Approach To Closure Part A: Deadline To Initiate Closure.” The October 2015 CCR rule, current or proposed amendmentsbe 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 the October 2015 CCR rule, the results of groundwater monitoring data or the outcome of CCR-related litigationDPL's Consolidated Financial Statements.
Different estimates could have a material impacteffect on our business, financial conditionresults. 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 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 2020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 2020 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 operations.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 CAPITAL RESOURCES AND LIQUIDITYApplication of the provisions of GAAP relating to regulatory accounting requires us to reflect the effect of rate regulation in DPL’s Consolidated 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.
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 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 such discussion is incorporated by reference in this Management's Discussion and Analysis of Results of Operations and Financial Condition and made a part hereof.
BUSINESS
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: DP&L, MVIC and Miami Valley Lighting. DP&L, had unrestricted cash which also does business as AES Ohio, is a public utility providing electric transmission and cash equivalentsdistribution services in West Central Ohio. For additional information, see Note 1 – Overview and Summary of $36.8Significant Accounting Policies of Notes to DPL's Consolidated 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 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, owned an undivided interest in Conesville. AES Ohio Generation's share of this EGU's capacity was 129 MW. AES Ohio Generation sold all of its energy and capacity into the wholesale market. AEP Generation, the operator of the co-owned Conesville EGU, closed Unit 4 in May 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.
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.
HUMAN CAPITAL MANAGEMENT
DPL's employees are essential to delivering and maintaining reliable service to our customers. DPL and its subsidiaries employed 631 people (512 full-time) at January 31, 2021 all of which were employed by DP&L.
Approximately 58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 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 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 utilities 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.
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. DP&L has requested authority from the PUCO 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.
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 distribution 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 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.
COMPETITION AND REGULATION
Ohio Retail Rates
DP&L rates for electric service currently remain the lowest among Ohio investor-owned utilities.
ESP 1 established 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.
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. The DRO also provided for a return on equity of 9.999% and $14.4 million, respectively, at September 30, 2019. At that date, neither DPL nor DP&L had short-term investments. DPL and DP&L had aggregate principal amountsa cost of long-term debt outstanding of $1,378.2 million and $582.6 million, respectively.4.8%.
Approximately $139.6 millionOn November 30, 2020, DP&L filed a new distribution rate case with the PUCO. This rate case proposes a revenue increase of DPL's long-term debt, including $139.6 million of DP&L's long-term debt, matures within twelve months of the balance sheet date. 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. See Part I, Item 1,$120.8 million. For more information, see Note 63 – Long-term DebtRegulatory Matters of Notes to DPL's Condensed Consolidated Financial Statements.
In December 2018, DP&L filed its 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 Smart 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. On October 23, 2020 DP&L filed a comprehensive settlement (the “Settlement”) with the PUCO that, among other matters, includes resolution of this Smart Grid application. If approved, DP&L plans to implement the plan that will
deliver benefits to customers, society as a whole and to DP&L. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements.
Ohio law and the PUCO rules contain targets relating to renewable energy standards. DP&L is currently in full compliance with renewable energy standards. DP&L recovers the costs of its compliance with Ohio renewable energy standards through a separate rider which is 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. DP&L implemented a formula-based rate for its transmission service, effective May 3, 2020. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated 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 prospectus, 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. For more information, see Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial 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.
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 are 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;
We depend on timely•Rules and continued accessfuture 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;
•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 capital marketsappropriate permits; and
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain waste.
In addition to manageimposing continuing compliance obligations, environmental 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 liquidity needs. The inabilityfacilities to raise capital on favorable terms, to refinance existing indebtednesscomply, or to fund operationsdetermine compliance, with such laws, rules and other commitments during timesregulations. We record liabilities for loss contingencies related to environmental matters when a loss is probable of politicaloccurring 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 economic uncertainty 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 andor cash flows.
In addition, changes in the timing of tariff increases or delays in regulatory determinations could affect the cash flowsWe 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, of our businesses.
Our discussion of DPL’sfinancial condition liquidityor cash flows. See Note 11 – Contractual Obligations, Commercial Commitments and capital requirements includeContingencies – "Environmental Matters” of Notes to DPL's Consolidated 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 Tackle 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. Department of Justice seeking to obtain abeyances or stays of proceedings in pending litigation that seeks review of regulations promulgated during the Trump Administration. The Biden Administration also issued a Memorandum titled “Regulatory Freeze Pending Review” directing agencies to refrain from proposing or issuing 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, financial condition, or results of its principal subsidiary DP&L.operations.
CASH FLOWS
DPL’sWe 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 liquidityor cash flows.
Environmental Matters Related to Air Quality
As a result of DPL’s retirement and capital requirements include the consolidated resultssubsequent sale of its principal subsidiary DP&L. All material intercompany accountsStuart and transactions have been eliminated in consolidation.
Cash Flow Analysis - DPL
The following table summarizes the cash flows of DPL:
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DPL | | Nine months ended September 30, |
$ in millions | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 136.3 |
| | $ | 152.9 |
|
Net cash provided by / (used in) investing activities | | (125.9 | ) | | 157.5 |
|
Net cash used in financing activities | | (67.7 | ) | | (249.4 | ) |
Decrease in cash and restricted cash of discontinued operations and held-for-sale businesses | | — |
| | 1.5 |
|
Net change | | (57.3 | ) | | 62.5 |
|
Balance at beginning of period | | 111.7 |
| | 24.9 |
|
Cash, cash equivalents, and restricted cash at end of period | | $ | 54.4 |
| | $ | 87.4 |
|
DPL – Change in cash flows from operating activities
|
| | | | | | | | | | | | |
| | Nine months ended September 30, | | $ change |
$ in millions | | 2019 | | 2018 | | 2019 vs. 2018 |
Net income | | $ | 61.4 |
| | $ | 41.4 |
| | $ | 20.0 |
|
Depreciation and amortization | | 34.2 |
| | 62.4 |
| | (28.2 | ) |
Deferred income taxes | | (8.7 | ) | | (17.8 | ) | | 9.1 |
|
Loss on early extinguishment of debt | | 44.9 |
| | 6.4 |
| | 38.5 |
|
Other adjustments to Net income | | 5.1 |
| | 19.8 |
| | (14.7 | ) |
Net income, adjusted for non-cash items | | 136.9 |
| | 112.2 |
| | 24.7 |
|
Net change in operating assets and liabilities | | (0.6 | ) | | 40.7 |
| | (41.3 | ) |
Net cash provided by operating activities | | $ | 136.3 |
| | $ | 152.9 |
| | $ | (16.6 | ) |
The net change in operating assets and liabilities during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was driven by the following:
|
| | | | |
$ in millions | | $ Change |
Decrease from accrued taxes primarily due to higher current portion of income tax expense in prior year compared to the current year | | (23.9 | ) |
Decrease from inventory primarily due a significant decrease in inventory balances in 2018 due to the closure of the Stuart and Killen plants | | (17.9 | ) |
Decrease from accounts receivable is primarily due to prior year collections of the remaining amounts due from partners in jointly-owned stations | | (16.4 | ) |
Increase from accounts payable is primarily due to timing of payments | | 12.3 |
|
Other | | 4.6 |
|
Net decrease in cash from changes in operating assets and liabilities | | $ | (41.3 | ) |
DPL – Cash flows from investing activities
Net cash provided by / (used in) investing activities was $(125.9) million for the nine months ended September 30, 2019 compared to $157.5 million for the nine months ended September 30, 2018. The investing activity for the nine months ended September 30, 2019 primarily relates to capital expenditures of $122.4 million, which increased from the prior year mainly due to significant storm restoration efforts in the third quarter of 2019. The investing activity for the nine months ended September 30, 2018 primarily relates to proceeds fromKillen Stations, the sale of businessits ownership interest in the Miami Fort and Zimmer Stations and the 2020 retirement of $234.9 million due toConesville, followed by the sale of our interest in Conesville and our exiting of our generation business, the Peaker assets,following environmental matters, regulations and proceedsrequirements are now not expected to have a material impact on DPL:
•The CAA and the following regulations
•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 $10.6 milliona 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 Station 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 June transmission swapconsent 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 Dukethe retirement of the Stuart Station, DPL and AEP. This was partially offset by capital expendituresthe other owners submitted a request for
termination of $75.8 million and a payment on the disposal of Beckjord of $14.5 million.
DPL – Cash flows from financing activities
Net cash used in financing activities was $(67.7) million forconsent decree to thenine months ended September 30, 2019 compared to $(249.4) million from financing activities U.S. District Court. On July 14, 2020, the U.S. District Court for the nine months ended September 30, 2018. The financingSouthern District of Ohio granted the request and terminated the Consent Decree.
Notices of Violation Involving Co-Owned Units
On February 15, 2017, the USEPA issued an NOV alleging violations in opacity at the Stuart Station in 2016. Operations at the Stuart Station have ceased. Given the retirement and sale of the Stuart Station and 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 Stations, the sale of its ownership interest in the Miami Fort and Zimmer Stations and the 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 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;
•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 nine months ended September 30,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 primarily due to debt repayments, including early payment premiums, of $978.0 million, and $9.2 million of payments of deferred financing costs. This was partially offset by debt issuances, net of discount, of $821.7 million, and net revolving credit facility borrowings of $98.0 million. The financing activitya PRP for the nine months ended September 30, 2018 is primarily due to debt repaymentsportion of $239.4 million.
Cash Flow Analysis - the site known as the barrel fill. While a review by DP&L
The following table summarizes the cash flows of DP&L:
|
| | | | | | | | |
DP&L | | Nine months ended September 30, |
$ in millions | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 138.9 |
| | $ | 113.2 |
|
Net cash used in investing activities | | (124.6 | ) | | (69.0 | ) |
Net cash used in financing activities | | (48.5 | ) | | (37.1 | ) |
Net change | | (34.2 | ) | | 7.1 |
|
Balance at beginning of period | | 66.2 |
| | 5.6 |
|
Cash, cash equivalents, and restricted cash at end of period | | $ | 32.0 |
| | $ | 12.7 |
|
DP&L – Change in cash flows from operating activities
|
| | | | | | | | | | | | |
| | Nine months ended September 30, | | $ change |
$ in millions | | 2019 | | 2018 | | 2019 vs. 2018 |
Net income | | $ | 103.7 |
| | $ | 61.9 |
| | $ | 41.8 |
|
Depreciation and amortization | | 52.9 |
| | 56.5 |
| | (3.6 | ) |
Deferred income taxes | | (17.2 | ) | | (7.5 | ) | | (9.7 | ) |
Other adjustments to Net income | | — |
| | 13.0 |
| | (13.0 | ) |
Net income, adjusted for non-cash items | | 139.4 |
| | 123.9 |
| | 15.5 |
|
Net change in operating assets and liabilities | | (0.5 | ) | | (10.7 | ) | | 10.2 |
|
Net cash provided by operating activities | | $ | 138.9 |
| | $ | 113.2 |
| | $ | 25.7 |
|
The net change in operating assets and liabilities during the nine months ended September 30, 2019 comparedits records indicates that it did not contribute hazardous materials to the nine months ended September 30, 2018 was driven bysite, DP&L is currently unable to predict the following:
|
| | | | |
$ in millions | | $ Change |
Increase from accounts receivable primarily due to higher rates following the DRO | | $ | 22.2 |
|
Decrease from accrued taxes primarily due to higher current portion of income tax expense in prior year compared to the current year | | (6.9 | ) |
Other | | (5.1 | ) |
Net increase in cash from changes in operating assets and liabilities | | $ | 10.2 |
|
outcome of this matter. If DP&L – Cash flows from investing activities
Net cash used in investing activities was $(124.6) million for thenine months ended September 30, 2019 compared were required to $(69.0) million for the nine months ended September 30, 2018. The investing activity for the nine months ended September 30, 2019 primarily represents capital expenditures of $121.1 million, which increased from the prior year mainly due to significant storm restoration efforts in the third quarter of 2019. The investing activity for the nine months ended September 30, 2018 is primarily capital expenditures of $65.0 million and a payment on the disposal of Beckjord of $14.5 million. This was partially offset by proceeds of $10.6 million relatedcontribute to the June transmission swap with Duke and AEP.
DP&L – Cash flows from financing activities
Net cash used in financing activities was $(48.5) million for the nine months ended September 30, 2019 compared to $(37.1) million from financing activities for the nine months ended September 30, 2018. The financing activity for the nine months ended September 30, 2019 is primarily due to returns of capital paid to parent of $90.0 million, debt repayments, including early payment premium, of $436.1 million, and payments of deferred financing costs of $4.6 million. This was partially offset by debt issuances, net of discount, of $422.3 million. The financing activity for the nine months ended September 30, 2018 is primarily related to $63.3 million of debt repayments and returns of capital paid to parent of $43.8 million. This was partially offset by an $80.0 million capital contribution from DPL.
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, debt carrying costs and, for DP&L, dividend payments to DPL. In 2019 and subsequent years, we expect to satisfy these requirements with a combination of cash from operations and funds from debt financing as internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under bank credit facilities will continue to be available to us to manage working capital requirements during these periods.
At September 30, 2019, DP&L and DPL have access to the following revolving credit facilities:
|
| | | | | | | | | | | | |
$ in millions | | Type | | Maturity | | Commitment | | Amounts available as of September 30, 2019 |
DP&L | | Revolving | | June 2024 | | $ | 175.0 |
| | $ | 113.9 |
|
DPL | | Revolving | | June 2023 | | 125.0 |
| | 75.9 |
|
| | | | | | $ | 300.0 |
| | $ | 189.8 |
|
DP&L has an unsecured revolving credit agreement with a syndicated bank group with a borrowing limit of $175.0 million and a $75.0 million letter of credit sublimit, as well as a feature that provides DP&L the ability to increase the sizeclean-up of the facility bysite, it could have an additional $100.0 million. This facility expires in June 2024. At September 30, 2019, there was one letteradverse effect on our business, financial condition or results of credit in the amount of $1.1 million outstanding under this facility, and $60.0 million in borrowings, with the remaining $113.9 million available to DP&L. Fees associated with this letter of credit facility were not material during the nine months ended September 30, 2019 or 2018.operations.
DPL has a revolving credit facility of $125.0 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 September 30, 2019, there were six letters of credit in the aggregate amount of $11.1 million outstanding and $38.0 million in borrowings, with the remaining $75.9 million available to DPL. Fees associated with this facility were not material during the nine months ended September 30, 2019 or 2018.
Capital Requirements
Capital 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 | |
Planned construction additions for 2019 relate primarily to new investments in and upgrades to
DP&L’s transmission and distribution system.
Capital projects are subject to continuing review and are revised consideringin light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental requirements,laws, rules and regulations, among other factors.
DPL is projecting to spend an estimated $657.0$767.0 million in capital projects for the period 20192021 through 2021, of2023, which $649.0includes an estimated $758.0 million is projected to be spent by for DP&L. These amounts includeDP&L's projection includes expected spending under DP&L's Distribution Modernization Smart Grid Plan filed with the PUCO in December 2018. On January 22, 2019, DP&L filed a request with the PUCO for a two-year extension of its DMR through October 2022,2018 and included in the proposed amountStipulation and Recommendation entered into on October 23, 2020, as well as new transmission projects. See Note 3 – Regulatory Matters of $199.0 millionNotes to DPL's Consolidated Financial Statements for each of the two additional years. The request was made pursuant to the PUCO’s October 20, 2017 ESP order, which approved the DMR and had the option for more information.
DP&Lto file for a two-year extension. The extension request was set at a level expected to reduce debt obligations at both DP&L and DPL and to position DP&L to make capital expenditures to maintain and modernize its electric grid. To that end, DP&L’s DMP investments are contingent upon the PUCO approving the two-year extension of its DMR.
DP&L is subject to the mandatory reliability standards of NERC and Reliability FirstReliabilityFirst Corporation (RFC)(RF), one of the eightsix NERC regions, of which DP&L is a member. DP&L anticipates spending approximately $221.0$76.0 million within the next five years to reinforce its 138-kVtransmission system to comply with mandatory NERC standards. Our ability to completeand FERC Form 715 planning requirements. These anticipated costs are included in the overall capital projects and the reliability of future service will be affected by our financial condition, the availability of internal funds and the reasonable cost of external funds. We expect to finance our construction additions with a combination of cash on hand, short-term financing, long-term debt and cash flows from operations.projections above.
Debt Covenants
Long-term debt covenants
For information regarding our long-term debt covenants, see Part I, Item 1, Note 67 – Long-term Debtdebt of Notes to DPL's Condensed Consolidated Financial Statements.
Debt and Credit Ratings
The following table presents, as of the filing of this report,outlines the debt ratings and outlook for DPL and DP&L,, along with the effective or affirmed date of each rating.
|
| | | | | | | | | | | | | | | | | | | | | | |
| DPL | DPL | DP&L | DP&L | Outlook | Outlook | | Effective or Affirmed |
Fitch Ratings | | BBBBB+(a) / BBB-BB(b)
| | A-BBB+ (c)
| | StableNegative | | October 2018April 2020 |
Moody's Investors Service, Inc. | | Ba1 (b) | | A3 (c) | | StableNegative | | DPL - June 2020 DP&L - December 2019 |
Standard & Poor's Financial Services LLC | | BBB-BB+ (b)
| | BBB+ (c) | | NegativeDeveloping | | October 2019November 2020 |
| |
(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.
|
(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.
Credit Ratings
The following table presents, as of the filing of this report,outlines the credit ratings (issuer/corporate rating) and outlook for DPL and DP&L,each company, along with the effective or affirmed datedates of each rating.
rating and outlook for DPL and DP&L. |
| | | | | | | | | | | | | | | | | | | | | | |
| DPL | DPL | DP&L | DP&L | Outlook | Outlook | | Effective or Affirmed |
Fitch Ratings | BB | BBB- | BBB- | BBB | Negative | Stable | | October 2018April 2020 |
Moody's Investors Service, Inc. | Ba1 | Ba1 | Baa2 | Baa2 | Negative | Stable | | JuneDecember 2019 |
Standard & Poor's Financial Services LLC | BB+ | BBB- | BB+ | BBB- | Developing | Negative | | October 2019November 2020 |
If the rating agencies were to 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 selectedcertain contracts. These events couldmay 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
For informationDPL – Guarantees
Previously, DPL entered into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements were 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, 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, 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.
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, 2020, DP&L could be responsible for the repayment of 4.9%, or $62.6 million, of a $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, 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, 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: |
$ in millions | | Total | | Less than 1 year | | 2 - 3 years | | 4 - 5 years | | More than 5 years |
DP&L: | | | | | | | | | | |
Long-term debt | | $ | 582.4 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 0.4 | | | $ | 581.4 | |
Interest payments | | 583.9 | | | 22.0 | | | 44.0 | | | 44.0 | | | 473.9 | |
Electricity purchase commitments | | 120.8 | | | 86.0 | | | 34.8 | | | — | | | — | |
Purchase orders and other contractual obligations | | 90.3 | | | 85.6 | | | 4.7 | | | — | | | — | |
Total contractual obligations | | $ | 1,377.4 | | | $ | 193.8 | | | $ | 83.9 | | | $ | 44.4 | | | $ | 1,055.3 | |
Long-term debt:
DPL’s Long-term debt at December 31, 2020 consists of DPL’s unsecured notes and Capital Trust II securities, along with DP&L’s First Mortgage Bonds and the 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, 2020 consists of its 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 included in Notes to DPL's Consolidated Financial 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, 2020.
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, 2020, DPL and DP&L had various other contractual obligations see Part I, Item 1,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 103 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements) or contingencies (see Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL's Condensed Consolidated Financial Statements.Statements). See Note 12 – Related Party Transactions of Notes to DPL's Consolidated 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 $1.4 million at December 31, 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.
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 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 2020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 2020 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.
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.
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.
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 Condensed Consolidated Financial Statements and such discussion is incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations and Financial Condition and made a part hereof.
BUSINESS
DPL is a diversified regional energy company incorporated in 1985 under the laws of the StateOhio. All of Ohio in 1985 withDPL’s stock is owned by an AES subsidiary.
DPL has three primary subsidiaries: DP&L, MVIC and Miami Valley Lighting. DP&L, which also does business as AES Ohio, Generation. DP&L is a public utility providing electric transmission and distribution services in West Central Ohio. For additional information, see Note 1 – Overview and Summary of Significant Accounting Policies of Notes to DPL's Consolidated 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 for further information.
DPL’s other primary subsidiaries are MVIC and Miami Valley Lighting. MVIC is DPL’sour captive insurance company that provides insurance services to DPLDP&L and its subsidiaries. AES Ohio Generation owns an undivided interestour other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in a coal-fired generating facility and sells all of its energy and capacity into the wholesale market. 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. All of DPL’s subsidiaries are wholly-owned.
DP&L is a public utility incorporated in 1911 under the laws of Ohio. DP&L offers retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio and has the exclusive right to provide distribution and transmission services to more than 524,000 customers in that service area. In addition to 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, owned an undivided interest in Conesville. AES Ohio Generation's share of this EGU's capacity was 129 MW. AES Ohio Generation sold all of its energy and capacity into the wholesale market. AEP Generation, the operator of the co-owned Conesville EGU, closed Unit 4 in May 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.
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.
HUMAN CAPITAL MANAGEMENT
DPL's employees are essential to delivering and maintaining reliable service to our customers. DPL and its subsidiaries employed 631 people (512 full-time) at January 31, 2021 all of which were employed by DP&L.
Approximately 58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 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 principal industries locatedSMS 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 DP&L’s service territory include automotive, food processing, paper, plastic, manufacturingsafety and defense. DP&L’s sales reflect general economichave 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 conditions, seasonal weather patternsand 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 on behalf of companies that are part of the areaU.S. SBU, including, among other companies, DPL and DP&L. The Service Company allocates the growth of energy efficiency initiatives, however, its distribution revenues have been decoupled from weathercosts for these services based on cost drivers designed to result in fair and energy efficiency variations beginning January 1, 2019 as a result ofequitable allocations. This includes ensuring that the decoupling rider the PUCO approved in the DRO.
DPL strives to achieve stable, long-term growth through efficient operations and strong customer and regulatory relations. More specifically, DPL’s strategy is to utilize the transmission and distribution assets that transfer electricity at the most efficient cost, and to maintain the highest level of customer service and reliability. DPL’s total consolidated revenue and net incomeregulated utilities served, including DP&L, are not subsidizing costs incurred for the nine months ended September 30, 2019 were $592.2 million and $61.4 million, respectively. In addition, asbenefit of September 30, 2019, DPL had total assetsother businesses. See Note 12 – Related Party Transactions of approximately $1.8 billion. DPL’s business is not dependent on any single customer or group of customers.Notes to DPL's Consolidated Financial Statements.
DPL’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DPL applies the accounting standards for regulated operations to DPL’s 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.
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&L's sales typically reflect the seasonal weather patterns and the growth of energy efficiency initiatives, however, afterinitiatives. However, the approvalimpacts 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. DP&L has requested authority from the distribution rate order in 2018, our distributionPUCO to create a regulatory asset for the ongoing revenues that would have been decoupled from weather and energy efficiency variations. Becausecharged in the Decoupling Rider going back to December 18, 2019. See Note 3 – Regulatory Matters of the impact of the new decoupling rider (effective January 1, 2019) and because DP&L’s generation has greatly decreased in recent years dueNotes to plant sales and closures, we expect that weather and other factors influencing demand will have minimal impact on our net operating results going forward.DPL's Consolidated 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.
Rate Regulation and Government LegislationMARKET STRUCTURE
Retail rate regulation
DP&L’s delivery&L's distribution 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 of DP&L’s&L retail customers, under the regulatory authority of the PUCO, regardless of the customer’s retail electric supplier. DP&L’s&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 Ohio Consumers’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’sPUCO's supervisory powers to a holding company system’ssystem'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’s balance sheets.&L. See Note 3 – Regulatory Matters of Notes to DPL's Consolidated Financial Statements.
Competition and RegulationCOMPETITION AND REGULATION
Ohio Matters
Ohio Retail Rates
DP&L filed an amended stipulation to its 2017 rates for electric service currently remain the lowest among Ohio investor-owned utilities.
ESP case on March 13, 2017. The PUCO issued a final decision on October 20, 2017, modifying and adopting the amended stipulation and recommendation. The six-year 2017 ESP establishes1 established DP&L’s&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.
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&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 providesprovided 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, regarding DPL’s ESP and DRO, see Note 3 – Regulatory Matters of the Notes to DPL’s consolidated financial statements.DPL's Consolidated Financial Statements.
In December 2018, DP&L filed a Distribution Modernizationits Smart Grid Plan (“DMP”) 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 DMP:Smart 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.
These initiatives will also allow On 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 willplans to implement a comprehensive grid modernization projectthe plan that will
deliver benefits to customers, society as a whole and to the Company.
On January 22, 2019, DP&L filed a request with the PUCO for a two-year extension&L. For more information, see Note 3 – Regulatory Matters of its distribution modernization rider (“DMR”) through October 2022, in the proposed amount of $199.0 million for each of the two additional years. The request was made pursuantNotes to the PUCO’s October 20, 2017 ESP order, which approved the DMR and granted DP&L the option to file for a two-year extension. The extension request was set at a level expected to reduce both DPL and DP&L’s debt obligations and to position DP&L to make capital expenditures to maintain and modernize its electric grid. To that end, DP&L’s DMP investments are contingent upon the PUCO approving the two-year extension of its DMR.
A rehearing process in DP&L's 2017 ESP case, including the DMR, remains pending. On August 1, 2019, DP&L filed a supplemental brief with the PUCO focused on the applicability of a recent court decision involving another Ohio utility’s DMR which is similar to, but not identical to, DP&L’s DMR.DPL's Consolidated 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 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 ratescosts associated with providing high voltage transmission service and wholesale electric sales and ancillary services are subject to FERC jurisdiction. While DP&L has market-basedimplemented a formula-based rate authority for wholesale electric sales, DP&L would be requiredits transmission service, effective May 3, 2020. For more information, see Note 3 – Regulatory Matters of Notes to file an application at FERC under section 205 of the Federal Power Act, 15 U.S.C. section 824d, to change any of its cost-based transmission or ancillary service rates.DPL's Consolidated Financial Statements.
As a member of PJM, DP&L receives revenues from the RTO related to itsDP&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 transmission rider.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 prospectus, DP&L is subjectunable to a significantly excessive earnings test (“SEET”) threshold and is requiredpredict the ultimate outcome of the investigation. Several other utilities within PJM are also being investigated by FERC’s Office of Enforcement with respect to apply general rules for calculating earnings and comparing them to a comparable group to determine whether there were significantly excessive earnings during a given calendar year. In future years, the SEET could have a material effect on resultssame issue of operations, financial condition and cash flows. Seechanges in the generation portfolio that occurred in between rate proceedings. For more information, see Note 3 – Regulatory Matters of the notesNotes to our consolidated financial statements.DPL's Consolidated Financial Statements.
Ohio Competitive Considerations and ProceedingsCompetition
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’sstate��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 5065 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 utilitiesENVIRONMENTAL MATTERS
DPL’s and energy marketers, AES Ohio Generation may sell or purchase electric products in the wholesale market. AES Ohio Generation competes with other generators, power marketers, privatelyDP&L's current and municipally-owned electric utilities and rural electric cooperatives when selling electricity. The ability of AES Ohio Generation to sell this electricity will depend not only on the performance of its generating unit, but also on how AES Ohio Generation’s prices, terms and conditions compare to those of other suppliers.
Ohio House Bill 6
On July 23, 2019, the Governor of Ohio signed Ohio House Bill 6, which, among other things, does the following:
beginning January 1, 2020, replaces DP&L’s non-bypassable Reconciliation Rider, permitting 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 2023, with 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;
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.
Environmental Matters
DPL's and DP&L’sformer 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 decision to retire the Stuart and Killen generating stations, the sale of DPL’s ownership interest in the Miami Fort and Zimmer generating stations, the planned 2020 retirement of Conesville, and DP&L transferring its generation assets to AES Ohio Generation in 2017, certain of these environmental regulations and laws are now not expected to have a material impact on us with respect to these generating stations.discussed below.
•The federal Clean Air Act (“CAA”)CAA and state laws and regulations (including state implementation plans)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 change;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; • | Rules and future rules issued by the USEPA, the Ohio Environmental Protection Agency (the “Ohio EPA”) or other authorities that require or will require substantial reductions in SO2, particulates, mercury, acid gases, NOx, and other air emissions;
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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, (“CWA”), which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permitspermits; and regulates the design and operation of cooling water intake structures for power plants and other industrial facilities; 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 the chance of a loss occurring 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 the notesNotes to our consolidated financial statementsDPL's Consolidated 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.
In responseBiden 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 ownedpreviously-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 decision to retire theretirement and subsequent sale of its Stuart and Killen generating stations,Stations, the sale of DPL’sits ownership interest in the Miami Fort and Zimmer generating stations,Stations and the planned 2020 retirement of Conesville, followed by the sale of our interest in Conesville and DP&L transferring itsour exiting of our generation assets to AES Ohio Generation in 2017,business, the following environmental matters, regulations and requirements are now not expected to have a material impact on us:DPL:
•The CAA and the following regulations:regulations
The Cross-State Air Pollution Rule•CSAPR and associated updates;
Mercury and Air Toxic Standards•MATS and any associated regulatory or judicial processes;
National Ambient Air Quality Standards;•NAAQS; and
The Clean Power Plan, the USEPA’s final CO2 emission rules for existing power plants under CAA Section 111(d)•CPP or a potential replacement rule, for example, the Affordable Clean Energy Rule.(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 station areStation 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 plan to submitsubmitted a request for
termination of the consent decree.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 a notice of violation (“NOV”) to the then DP&L-operated Stuart generating station (co-owned by AES Ohio Generation, AEP Generation Resources Inc. (“AEP Generation”) and Dynegy, Inc. 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. To date, neither action has been taken. We cannot predict the outcome of this matter.
On September 9, 2011, DP&L received an NOV from the USEPA with respect to its then co-owned Stuart generating station based on a compliance evaluation inspection conducted by the USEPA and the Ohio EPA in 2009. The notice alleged non-compliance by DP&L with certain provisions of the Resource Conservation and Recovery Act (“RCRA”), the CWA National Pollutant Discharge Elimination System (“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 plans 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 in any material effect on our results of operations, financial condition or cash flows.
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. However, we are currently unable to predictGiven the outcome of these matters.
Notices of Violation Involving Wholly-Owned Stations
On November 18, 2009, the USEPA issued an NOV to DP&L for alleged New Source Review, a preconstruction program regulating new or significantly modified sources of air pollution (“NSR”), violationsretirement and sale of the CAA atStuart Station and the Hutchings energy generating unit, which was closed in 2013, relating to capital projects performed in 2001 involving Unit 3 and Unit 6. Wefact there has been no recent activity, we do not believe that the two projects described in the NOV were modifications subject to NSR. We cannot predict the outcome ofexpect any further material developments regarding this matter.
NOV.
Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds
As a result of DPL’s decision to retire theretirement and subsequent sale of its Stuart and Killen generating stations,Stations, the sale of DPL’sits ownership interest in the Miami Fort and Zimmer generating stations,Stations and the planned 2020 retirement of Conesville, followed by the sale of our interest in Conesville and DP&L transferring itsour exiting of our generation assets to AES Generation in 2017,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(although certain of theseother requirements related to water quality, waste disposal and CCRash 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 generating station;
•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 Steam Electric Power Effluent Limitations GuidelinesELG rules; and
CWA rules for Selenium.
Clean Water Act-Regulation of Water Discharge
On January 7, 2013, the Ohio EPA issued a final NPDES permit to the Stuart generating station which included a compliance schedule for performing a study to justify an alternate thermal limitation or take undefined measures to meet certain temperature limits. On February 1, 2013, DP&L appealed various aspects of the final permit to the Environmental Review Appeals Commission. On August 8, 2019, the ERAC dismissed the appeal in response to a Joint Motion to Dismiss. As a result of DPL’s decision to retire the Stuart generating station we do not expect this to have a material impact on us.
•Clean Water Act rules for Seleniumselenium.
On July 13, 2016,Notice of Potential Liability for Third Party Disposal Site
In December 2003, DP&L and other parties received notices that the USEPA published the final updated chronic aquatic life criterionconsidered DP&L and other parties PRPs for the pollutant selenium in freshwater per section 304(a)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 CWA. The rule will be implemented after state rulemaking occurs, and requirements will be incorporated into NPDES permits with compliance schedules in some cases. Itsite 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 too early incurrently unable to predict the rulemaking processoutcome of this matter. If DP&L were required to determinecontribute to the impact, if any,clean-up of the site, it could have an adverse effect on our operations,business, financial positioncondition 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 potentially responsible party (“PRP”)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 Landfilllandfill and were liable for contribution to the PRP Groupgroup 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. Trial for that issue was scheduled to be held in 2019, but the District Court recently vacated that trial date and it is unknown when it will be rescheduled. Plaintiffs also attempted to addadded an additional ASAOC they entered into in 2016 pertaining to the investigation and remediation of all hazardous substances present in the Landfill-potentiallyLandfill - potentially including undefined areas outside the original dump footprint-tofootprint - to the vapor intrusion trial proceeding. The District Court allowed the claim to be added to the litigation2013 vapor intrusion ASAOC settled in early 2020, but ruled that the 2016 ASAOC could notremains to be adjudicated until after completion of the remedial investigation feasibility study, which is expected to be complete years after the vapor intrusion trial.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 business,results of operations, financial condition or results of operations.
On October 16, 2019, DP&L received a special notice that USEPA considers DP&L, along with other parties, to be a PRP for the clean-up of hazardous substances at a third-party landfill known as the Tremont City Barrel Site, located near Dayton, Ohio. While DP&L is 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 a material adverse effect on our business, financial condition or results of operations.
and cash flows.
Regulation of CCR
The USEPA's finalOn October 19, 2015, a USEPA rule regulating CCR rule became effective in October 2015. Generally,under the rule regulates CCRResource Conservation and Recovery Act as nonhazardous solid waste and establishes nationalbecame effective (CCR Rule). The rule established nationally applicable minimum criteria for existingthe disposal of CCR in new and new CCRcurrently operating landfills and existing and new CCR ash ponds,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.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 CCR rule amendments (Phase One, Part One) in the Federal Register. In August 2018, the D.C. Circuit Court issued a decision in certain CCR litigation matters, which may result in additional revisions to the CCR Rule. In October 2018, some environmental groups filed a petition for review challenging the USEPA's final CCR rule amendments (Phase One,Rule titled “A Holistic Approach to Closure Part One)A: Deadline to Initiate Closure”, which have since been remanded without vacatur to the USEPA.amends certain regulatory provisions that govern CCR. On August 14, 2019,November 12, 2020, the USEPA published amendments to the CCR rule; the amendment published on August 14, 2019 relatesRule titled “A Holistic Approach to the CCR rule’s criteria for determiningClosure Part B” and indicated that it would address this issue of beneficial use and the regulation of CCR piles, among other revisions. 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,Rule, current or proposed amendments to the CCR rule,Rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material impactadverse effect on our business,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 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 future outcomes or decisions related to this matter could have a material adverse effect on our results of operations.operations, financial condition and cash flows.
On April 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 point source into navigable waters. On December 10, 2020, the USEPA published a Notice of Availability of draft guidance memorandum addressing how the Supreme Court’s decision applies to NPDES permits.It is too early to determine whether this decision may have a material adverse effect on our results of operations, financial condition and cash flows.
DESCRIPTION OF THE NOTES
In this Description of the Notes, “DPL” refers only to DPL Inc. and any successor obligor on the notes, and not to any of its subsidiaries, and references to the “Company,” “we,” “us,” and “our” refer to DPL. You can find the definitions of certain terms used in this description under “-Certain“—Certain Definitions.”
We issued the notes under an indenture in an aggregate principal amount of $400,000,000$415,000,000 between us and U.S. Bank National Association, as trustee, dated as of April 17, 2019.June 19, 2020. The terms of the notes include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939 (the “Trust Indenture Act”).
The following is a summary of the material provisions of the indenture and the notes. Because this is a summary, it may not contain all the information that is important to you. You should read the indenture in its entirety because it, not this description, defines your rights as holders of the notes. Copies of the indenture are available as described under “Where You Can Find More Information,” and the indenture is filed as an exhibit to the registration statement of which this prospectus is part.
In exchange for the notes issued on April 17, 2019,June 19, 2020, we are issuing the new notes under the indenture for public resale pursuant to this prospectus. All references to notes below refer to the old notes and/or the new notes unless the context otherwise requires.
Basic Terms of Notes
The notes:
•are senior unsecured obligations of DPL;
•are effectively subordinated to any secured senior obligations of DPL, to the extent of the value of the collateral securing such obligations;
•rank equally with the existing and future unsubordinated and unsecured obligations of DPL;
•are structurally subordinated in right of payment to obligations of the subsidiaries of DPL;
•mature on April 15, 2029;July 1, 2025;
•are issued in an original aggregate principal amount of $400.0$415.0 million; and
•bear interest at 4.35%4.125% per annum, payable semiannually on each April 15July 1 and October 15January 1 to holders of record on the April 1June 15 or October 1December 15 immediately preceding the interest payment date. Interest on the notes accrues from the most recent date to which interest has been paid.
Interest will be computed on the basis of a 360-day year of twelve 30-day months.
Our ability to pay interest on the notes will be dependent upon the receipt of dividends and other distributions from our direct and indirect subsidiaries, including The Dayton Power and Light Company (“DP&L”) in particular. The availability of distributions from our subsidiaries is subject to the satisfaction of various covenants and conditions contained in the applicable subsidiaries’ existing and future financing and governance documents.
The indenture does not limit the amount of debt securities we may issue under the indenture and provides that debt securities may be issued from time to time in one or more series. We may from time to time, without notice to or the consent of the holders of the notes, create and issue additional debt securities (“Additional Notes”) under the indenture governing the notes having the same terms as, and ranking equally with, the notes in all respects (except for the offering price and issue date). Any Additional Notes, together with the notes offered hereby, will constitute a single series of notes under the indenture, and will be treated as a single class for all purposes thereunder, including voting under the indenture; provided that, if the Additional Notes are not fungible with the notes for U.S. federal income tax purposes, the Additional Notes will have a separate CUSIP number.
Optional Redemption
Prior to January 15, 2029 (theApril 1, 2025,(the date that is three months prior to the maturity date), we may redeem the notes at our option, at any time in whole or from time to time in part, on at least 20 days’ prior written notice mailed to the registered holders of the notes, at a redemption price, together with accrued and unpaid interest to the date of redemption, equal to the greater of:
100% of the principal amount of the notes being redeemed; or
•the sum of the present values of the principal amount of the notes to be redeemed and the remaining scheduled payments of interest on the notes from the redemption date to January 15, 2029 (theApril 1, 2025
(the date that is three months prior to the maturity date), discounted from their respective scheduled payment dates to the redemption date semiannually, assuming a 360-day year consisting of twelve 30-day months, at a discount rate equal to the Treasury Rate (as defined herein) plus 3050 basis points.
On or after January 15, 2029April 1, 2025 (the date that is three months prior to the maturity date), we may redeem the notes at our option, at any time in whole or from time to time in part, on at least 30 days’ prior written notice mailed to the registered holders of the notes, at a redemption price equal to 100% of the principal amount of the notes being redeemed, together with accrued and unpaid interest to the date of redemption.
For purposes of the foregoing discussion of our right to redeem the notes, the following definitions are applicable:
“Comparable Treasury Issue” means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term (as measured from the date of redemption) of the notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the notes.
“Comparable Treasury Price” means, with respect to any redemption date, (i) the average of five Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii) if the Company obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such quotations.
“Quotation Agent” means any Reference Treasury Dealer appointed by us.
“Reference Treasury Dealer” means (i) each of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC and J.P. Morgan Securities LLC (or their respective affiliates that are Primary Treasury Dealers) and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a “Primary Treasury Dealer”), we will substitute therefor another Primary Treasury Dealer, and (ii) any other Primary Treasury Dealers selected by us.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Quotation Agent by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day preceding such redemption date.
“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.
The redemption price will be calculated by the Quotation Agent and we, the trustee and any paying agent for the notes of that series to be redeemed will be entitled to rely on such calculation. It shall be the Company’s sole obligation to calculate the present value of the payments in connection with a redemption and the trustee shall have no obligation to calculate or verify any such payment amounts.
Notice of redemption must be given not less than 30 days nor more than 60 days prior to the date of redemption. If fewer than all the notes are to be redeemed, selection of notes for redemption will be made by the trustee in any manner the trustee deems fair and appropriate.
Unless we default in payment of the redemption price from and after the redemption date, the notes or portions of them called for redemption will cease to bear interest, and the holders of the notes will have no right in respect to such notes except the right to receive the redemption price for them.
No Other Mandatory Redemption or Sinking Fund
There will be no mandatory redemption or sinking fund payments for the notes.
Repurchase at the Option of Holders
If a Change of Control Triggering Event (as defined herein) occurs, unless we have exercised our right to redeem the notes as described above, holders of all outstanding notes will have the right to require us to repurchase all or any part (no note of a principal amount of $2,000 or less will be repurchased in part) of their notes pursuant to the offer described below (the “Change of Control Offer”) on the terms set forth in the indenture. In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, if any, on the notes repurchased, to, but excluding, the date of
purchase (the “Change of Control Payment”). Within 30 days following any Change of Control Triggering Event, we will be required to send a notice to holders of notes describing the transaction or transactions that constitute the Change of Control Triggering Event and offering to repurchase the notes on the date specified in the notice, which date will be no earlier than 30 days and no later than 60 days from the date such notice is mailed (the “Change of Control Payment Date”), pursuant to the procedures required by the indenture and described in such notice. We must comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control Triggering Event. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control provisions of the notes, we will be required to comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control provisions of the notes by virtue of such conflicts.
On the Change of Control Payment Date, we will be required, to the extent lawful, to:
•accept for payment all notes or portions of notes properly tendered pursuant to the Change of Control Offer;
◦deposit with the paying agent, which shall initially be the trustee, an amount equal to the Change of Control Payment in respect of all notes or portions of notes properly tendered; and
◦deliver or cause to be delivered to the trustee the notes properly accepted.
The definition of Change of Control (defined herein) includes a phrase relating to the direct or indirect sale, lease, transfer, conveyance or other disposition of “all or substantially all” of the properties or assets of us and our subsidiaries taken as a whole. Although there is a limited body of case law interpreting the phrase “substantially all,” there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of notes to require us to repurchase its notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of us and our subsidiaries taken as a whole to another person may be uncertain.
For purposes of the foregoing discussion of a repurchase at the option of holders, the following definitions are applicable:
“Change of Control” means the occurrence of any of the following: (1) the direct or indirect sale, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the properties or assets of the Company and its subsidiaries taken as a whole to any person (as such term is used in Section 13(d) of the Exchange Act) other than the Company or one of its subsidiaries; (2) the consummation of any transaction (including, without limitation, any merger or consolidation), the result of which is that any person (as such term is used in Section 13(d) of the Exchange Act) other than a Permitted Holder (as defined herein) becomes the beneficial owner, directly or indirectly, of more than 50% of the then outstanding number of shares of the Company’s Voting Stock; or (3) the first day on which a majority of the members of the Company’s board of directors are not Continuing Directors of the Company.
“Change of Control Triggering Event” means the occurrence of a Rating Event and a Change of Control.
“Continuing Directors” means, as of any date of determination, any member of the applicable board of directors who (1) was a member of such board of directors on the date of the issuance of the notes; or (2) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were
members of such board of directors at the time of such nomination or election (either by vote of the board of directors or by approval of the stockholders, or, if applicable, after receipt of a proxy statement in which such member was named as a nominee for election as a director, without objection to such nomination).
“Permitted Holder” means, at any time, AES and its Affiliates. In addition, any person or group whose acquisition of beneficial ownership constitutes a Change of Control in respect of which a Change of Control Offer is made in accordance with the requirements of the indenture will thereafter, together with its Affiliates, constitute an additional Permitted Holder.
“Rating Agencies” means (a) each of Fitch, Moody’s and S&P and (b) if any of Fitch, Moody’s or S&P ceases to rate the notes or fails to make a rating of the notes publicly available for reasons outside of our control, a “nationally recognized statistical rating organization” (within the meaning of Section 3(a)(62) of the Exchange Act) selected by us as a replacement Rating Agency for a former Rating Agency.
“Rating Event” means the rating on the notes is lowered by two of the three Rating Agencies on any day within the period commencing on the earlier of (a) the occurrence of a Change of Control and (b) public notice of the occurrence of a Change of Control or our intention to effect a Change of Control and ending 60 days following the consummation of such Change of Control (which 60-day period will be extended so long as the rating of the notes is under publicly announced consideration for a possible downgrade by any of the Rating Agencies).
“Voting Stock” of any specified person means the capital stock of such person that is at the time entitled to vote generally in the election of the board of directors of such person.
It shall be the Company’s sole obligation to determine if a Rating Event has occurred and the trustee shall have no obligation to determine or verify if such an event has occurred.
Ranking
Structural Subordination. DPL is a holding company. Substantially all of DPL’s operations are conducted through its subsidiaries. Claims of creditors of DPL’s subsidiaries, including trade creditors, secured creditors and creditors holding debt and guarantees issued by those subsidiaries, and claims of preferred and minority stockholders (if any) of those subsidiaries generally will have priority with respect to the assets and earnings of those subsidiaries over the claims of creditors of DPL, including holders of the notes. The notes will be effectively subordinated in right of payment to creditors (including trade creditors) and preferred and minority stockholders (if any) of DPL’s subsidiaries.
At September 30, 2019,December 31, 2020, DPL’s direct and indirect subsidiaries had approximately $574.2$574.1 million in long-term debt, all of which would be effectively senior to the notes. Moreover, the indenture does not impose any limitation on the incurrence of additional liabilities or the issuance of additional preferred stock or minority interests by subsidiaries of DPL (subject to compliance with the Limitation on Liens covenant in the case of secured debt).
The notes are senior unsecured obligations of DPL and are effectively subordinated to any secured senior obligations of DPL, to the extent of the value of the collateral securing such obligations. The notes rank equally in right of payment with the existing and future unsubordinated and unsecured obligations of DPL and are structurally subordinated to obligations of the subsidiaries of DPL.
Moreover, as a holding company, DPL owns assets primarily through its ownership interests in its subsidiaries. None of its subsidiaries is obligated under the notes and none of its subsidiaries will guarantee the notes. DPL’s principal asset is its ownership interest in DP&L. DP&L is a regulated public utility and is subject to regulation at both the state and federal level. At the state level, it is subject to regulation by the PUCO. At the federal level, it is subject to regulation by FERC. See “Business-Rate Regulation and Government Legislation” and “Business-Competition and Regulation” appearing elsewhere in this prospectus. Regulation by the PUCO and FERC includes regulation with respect to the change of control and transfer or ownership of utility property. Accordingly, if the trustee under the indenture or the holders of the notes institute proceedings against us with respect to the notes, the remedies available to them may be limited and may be subject to the approval by the PUCO and FERC.
Open Market Purchases
DPL may at any time purchase notes in the open market or otherwise at any price. Any such purchased notes will not be resold, except in compliance with applicable requirements or exemptions under the relevant securities laws.
Covenants
Except as otherwise set forth under “-Defeasance“Defeasance and Discharge” below, for so long as any notes remain outstanding or any amount remains unpaid on any of the notes, we will comply with the terms of the covenants set forth below.
Payment of Principal and Interest
We will duly and punctually pay the principal of and interest on the notes in accordance with the terms of the notes and the indenture.
Merger, Consolidation, Sale, Lease or Conveyance
The indenture provides that we may not consolidate or merge with or into (whether or not we are the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our properties or assets in one or more related transactions, to another Person or entity unless (i) we are the surviving entity or the entity or the Person formed by or surviving any such consolidation or merger (if other than us) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is an entity organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than us) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made assumes all of our obligations under the notes and the indenture pursuant to a supplemental indenture; and (iii) immediately after such transaction no Default or Event of Default exists.
Limitations on Liens
Neither we nor any Significant Subsidiary (as defined herein) may issue, assume or guarantee any Indebtedness secured by a Lien upon any property or assets (other than any cash or cash equivalents) of us or such Significant Subsidiary (including, for the avoidance of doubt, any common stock of DP&L), as applicable, without effectively providing that the outstanding notes (together with, if we so determine, any other indebtedness or obligation then existing or thereafter created ranking equally with the notes) will be secured equally and ratably with (or prior to) such Indebtedness so long as such Indebtedness is so secured.
The foregoing limitation on Liens will not, however, apply to:
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(1) | (1) Liens in existence on the date of original issue of the notes; (2) any Lien created or arising over any property which is acquired, constructed or created by us or any of our Significant Subsidiaries, but only if: (a) such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation to that property or a guarantee given in respect of that property; (b) such Lien is created or arises on or before 180 days after the completion of such acquisition, construction or creation; and (c) such Lien is confined solely to the property so acquired, constructed or created; (3) (a) rights of financial institutions to offset credit balances in connection with the operation of cash management programs established for our benefit and/or a Significant Subsidiary or in connection with the issuance of letters of credit for our benefit and/or a Significant Subsidiary; (b) any Lien on accounts receivable securing our Indebtedness and/or a Significant Subsidiary incurred in connection with the financing of such accounts receivable; (c) any Lien incurred or deposits made in the ordinary course of business, including, but not limited to, (1) any mechanic’s, materialmen’s, carrier’s, workmen’s, vendors’ and other like Liens and (2) any Liens securing amounts in connection with workers’ compensation, unemployment insurance and other types of social security; (d) any Lien upon specific items of inventory or other goods of us and/or a Significant Subsidiary and the proceeds thereof securing obligations of us and/or a Significant Subsidiary in respect of bankers’ acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods; (e) any Lien incurred or deposits made securing the performance of tenders, bids, leases, trade contracts (other than for borrowed money), statutory obligations, surety bonds, appeal bonds, government contracts, performance bonds, return-of-money bonds, letters of credit not securing borrowings and other obligations of like nature incurred in the ordinary course of business; (f) any Lien created by us or a Significant Subsidiary under or in connection with or arising out of a Currency, Interest Rate or Commodity Agreement (as defined herein) or any transactions or arrangements entered into in connection with the hedging or management of risks relating to the electricity or natural gas distribution industry, including a right of set off or right over a margin call account or any form of cash or cash collateral or any similar arrangement for obligations incurred in respect of Currency, Interest Rate or Commodity Agreements; (g) any Lien arising out of title retention or like provisions in connection with the purchase of goods and equipment in the ordinary course of business; and (h) any Lien securing reimbursement obligations under letters of credit, guaranties and other forms of credit enhancement given in connection with the purchase of goods and equipment in the ordinary course of business; (4) Liens in favor of us or a subsidiary of ours; (5) (a) Liens on any property or assets acquired from an entity which is merged with or into us or a Significant Subsidiary or any Liens on the property or assets of any entity existing at the time such entity becomes a subsidiary of ours and, in either case, is not created in anticipation of the
transaction, unless the Lien was created to secure or provide for the payment of any part of the purchase price of that entity; (b) any Lien on any property or assets existing at the time of its acquisition and which is not created in anticipation of such acquisition, unless the Lien was created to secure or provide for the payment of any part of the purchase price of such property or assets; and (c) any Lien created or outstanding on or over any asset of any entity which becomes a Significant Subsidiary on or after the date of the issuance of the notes, where the Lien is created prior to the date on which that entity becomes a Significant Subsidiary; (6) (a) Liens required by any contract, statute or regulation in order to permit us or a Significant Subsidiary to perform any contract or subcontract made by it with or at the request of a governmental entity or any governmental department, agency or instrumentality, or to secure partial, progress, advance or any other payments by us or a Significant Subsidiary to such governmental unit under the provisions of any contract, statute or regulation; (b) any Lien securing industrial revenue, development, pollution control, solid waste disposal or similar bonds issued by or for our benefit or a Significant Subsidiary, provided that such industrial revenue, development, pollution control or similar bonds do not provide recourse generally to us and/or such Significant Subsidiary; and (c) any Lien securing taxes or assessments or other applicable governmental charges or levies; (7) any Lien which arises under any order of attachment, restraint or similar legal process arising in connection with court proceedings and any Lien which secures the reimbursement obligation for any bond obtained in connection with an appeal taken in any court proceeding, so long as the execution or other enforcement of such Lien arising under such legal process is effectively stayed and the claims secured by that Lien are being contested in good faith and, if appropriate, by appropriate legal proceedings, and any Lien in favor of a plaintiff or defendant in any action before a court or tribunal as security for costs and/or expenses; (8) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses, for amounts not exceeding the principal amount of the notes; |
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(2) | any Lien created or arising over any property which is acquired, constructed or created by us or any of our Significant Subsidiaries, but only if: |
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(a) | such Lien secures only principal amounts (not exceeding the cost of such acquisition, construction or creation) raised for the purposes of such acquisition, construction or creation, together with any costs, expenses, interest and fees incurred in relation to that property or a guarantee given in respect of that property; |
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(b) | such Lien is created or arises on or before 180 days after the completion of such acquisition, construction or creation; and |
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(c) | such Lien is confined solely to the property so acquired, constructed or created; |
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(3) | (a) rights of financial institutions to offset credit balances in connection with the operation of cash management programs established for our benefit and/or a Significant Subsidiary or in connection with the issuance of letters of credit for our benefit and/or a Significant Subsidiary; |
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(b) | any Lien on accounts receivable securing our Indebtedness and/or a Significant Subsidiary incurred in connection with the financing of such accounts receivable; |
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(c) | any Lien incurred or deposits made in the ordinary course of business, including, but not limited to, (1) any mechanic’s, materialmen’s, carrier’s, workmen’s, vendors’ and other like Liens and (2) any Liens securing amounts in connection with workers’ compensation, unemployment insurance and other types of social security; |
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(d) | any Lien upon specific items of inventory or other goods of us and/or a Significant Subsidiary and the proceeds thereof securing obligations of us and/or a Significant Subsidiary in respect of bankers’ acceptances issued or created for the account of such person to facilitate the purchase, shipment or storage of such inventory or other goods; |
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(e) | any Lien incurred or deposits made securing the performance of tenders, bids, leases, trade contracts (other than for borrowed money), statutory obligations, surety bonds, appeal bonds, government contracts, performance bonds, return-of-money bonds, letters of credit not securing borrowings and other obligations of like nature incurred in the ordinary course of business; |
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(f) | any Lien created by us or a Significant Subsidiary under or in connection with or arising out of a Currency, Interest Rate or Commodity Agreement (as defined herein) or any transactions or arrangements entered into in connection with the hedging or management of risks relating to the electricity or natural gas distribution industry, including a right of set off or right over a margin call account or any form of cash or cash collateral or any similar arrangement for obligations incurred in respect of Currency, Interest Rate or Commodity Agreements; |
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(g) | any Lien arising out of title retention or like provisions in connection with the purchase of goods and equipment in the ordinary course of business; and |
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(h) | any Lien securing reimbursement obligations under letters of credit, guaranties and other forms of credit enhancement given in connection with the purchase of goods and equipment in the ordinary course of business; |
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(4) | Liens in favor of us or a subsidiary of ours; |
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(5) | (a) Liens on any property or assets acquired from an entity which is merged with or into us or a Significant Subsidiary or any Liens on the property or assets of any entity existing at the time such entity becomes a subsidiary of ours and, in either case, is not created in anticipation of the transaction, unless the Lien was created to secure or provide for the payment of any part of the purchase price of that entity; |
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(b) | any Lien on any property or assets existing at the time of its acquisition and which is not created in anticipation of such acquisition, unless the Lien was created to secure or provide for the payment of any part of the purchase price of such property or assets; and |
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(c) | any Lien created or outstanding on or over any asset of any entity which becomes a Significant Subsidiary on or after the date of the issuance of the notes, where the Lien is created prior to the date on which that entity becomes a Significant Subsidiary; |
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(6) | (a) Liens required by any contract, statute or regulation in order to permit us or a Significant Subsidiary to perform any contract or subcontract made by it with or at the request of a governmental entity or any governmental department, agency or instrumentality, or to secure partial, progress, advance or any other payments by us or a Significant Subsidiary to such governmental unit under the provisions of any contract, statute or regulation; |
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(b) | any Lien securing industrial revenue, development, pollution control, solid waste disposal or similar bonds issued by or for our benefit or a Significant Subsidiary, provided that such industrial revenue, development, pollution control or similar bonds do not provide recourse generally to us and/or such Significant Subsidiary; and |
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(c) | any Lien securing taxes or assessments or other applicable governmental charges or levies; |
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(7) | any Lien which arises under any order of attachment, restraint or similar legal process arising in connection with court proceedings and any Lien which secures the reimbursement obligation for any bond obtained in connection with an appeal taken in any court proceeding, so long as the execution or other enforcement of such Lien arising under such legal process is effectively stayed and the claims secured by that Lien are being contested in good faith and, if appropriate, by appropriate legal proceedings, and any Lien in favor of a plaintiff or defendant in any action before a court or tribunal as security for costs and/or expenses; |
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(8) | any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Liens referred to in the foregoing clauses, for amounts not exceeding the principal amount of the |
Indebtedness secured by the Lien so extended, renewed or replaced, provided that such extension, renewal or replacement Lien is limited to all or a part of the same property or assets that were covered by the Lien extended, renewed or replaced (plus improvements on such property or assets);
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(9) | any Lien created in connection with Project Finance Debt; |
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(10) | any Lien created by DP&L or its subsidiaries securing Indebtedness of DP&L or its subsidiaries; |
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(11) | any Lien created in connection with the securitization of some or all of the assets of DP&L and the associated issuance of Indebtedness as authorized by applicable state or federal law in connection with the restructuring of jurisdictional electric or gas businesses; |
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(12) | any Lien on stock created in connection with a mandatorily convertible or exchangeable stock or debt financing, provided that any such financing may not be secured by or otherwise involve the creation of a Lien on any capital stock of DP&L or any successor entity to DP&L; and |
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(13) | any Lien under one or more credit facilities for Indebtedness in an aggregate principal amount outstanding at any time not to exceed 10% of Consolidated Net Assets. |
(9) any Lien created in connection with Project Finance Debt;
(10) any Lien created by DP&L or its subsidiaries securing Indebtedness of DP&L or its subsidiaries;
(11) any Lien created in connection with the securitization of some or all of the assets of DP&L and the associated issuance of Indebtedness as authorized by applicable state or federal law in connection with the restructuring of jurisdictional electric or gas businesses;
(12) any Lien on stock created in connection with a mandatorily convertible or exchangeable stock or debt financing, provided that any such financing may not be secured by or otherwise involve the creation of a Lien on any capital stock of DP&L or any successor entity to DP&L; and
(13) any Lien under one or more credit facilities for Indebtedness in an aggregate principal amount outstanding at any time not to exceed 10% of Consolidated Net Assets.
Reports and Other Information
At any time that we are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, or do not otherwise report on an annual and quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the SEC, the indenture requires us to deliver (which may be accomplished through the posting on the internet) to the trustee and to holders of the notes, without cost to any holder:
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(1) | within 90 days after the end of each fiscal year, audited financial statements; and |
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(2) | within 45 days after the end of each of the first three fiscal quarters of each fiscal year, quarterly unaudited financial statements. |
(1) within 90 days after the end of each fiscal year, audited financial statements; and
(2) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, quarterly unaudited financial statements.
Events of Default
An Event of Default with respect to the notes is defined in the indenture as being:
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(1) | default for 30 days in the payment of any interest on the notes; |
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(2) | default in the payment of principal of or any premium on, the notes at maturity, upon redemption, upon required purchase, upon acceleration or otherwise; |
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(3) | default in the performance, or breach, of any covenant or obligation in the indenture and continuance of the default or breach for a period of 30 days after written notice specifying the default is given to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount of the notes; |
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(4) | default in the payment of the principal of any bond, debenture, note or other evidence of indebtedness, in each case for money borrowed, issued by us, or in the payment of principal under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for Borrowed Money, of us or any Significant Subsidiary if such Indebtedness for Borrowed Money is not Project Finance Debt and provides for recourse generally to us or any Significant Subsidiary, which default for payment of principal is in an aggregate principal amount exceeding $40 million when such indebtedness becomes due and payable (whether at maturity, upon redemption or acceleration or otherwise), if such default shall continue unremedied or unwaived for more than 30 business days and the time for payment of such amount has not been expressly extended (until such time as such payment default is remedied, cured or waived); |
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(5) | a court having jurisdiction enters a decree or order for: |
(1) default for 30 days in the payment of any interest on the notes;
(2) default in the payment of principal of or any premium on, the notes at maturity, upon redemption, upon required purchase, upon acceleration or otherwise;
(3) default in the performance, or breach, of any covenant or obligation in the indenture and continuance of the default or breach for a period of 30 days after written notice specifying the default is given to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount of the notes;
(4) default in the payment of the principal of any bond, debenture, note or other evidence of indebtedness, in each case for money borrowed, issued by us, or in the payment of principal under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for Borrowed Money, of us or any Significant Subsidiary if such Indebtedness for Borrowed Money is not Project Finance Debt and provides for recourse generally to us or any Significant Subsidiary, which default for payment of principal is in an aggregate principal amount exceeding $40 million when such indebtedness becomes due and payable (whether at maturity, upon redemption or acceleration or otherwise), if such default shall continue unremedied or unwaived for more than 30 business days and the time for payment of such amount has not been expressly extended (until such time as such payment default is remedied, cured or waived);
(5) a court having jurisdiction enters a decree or order for:
▪relief in respect of us or any of our Significant Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect; or
▪appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of us or any of our Significant Subsidiaries or for all or substantially all of the property and assets of us or any of our Significant Subsidiaries; or
▪the winding up or liquidation of our affairs or any of our Significant Subsidiaries;
▪and, in either case, such decree or order remains unstayed and in effect for a period of 60 consecutive days; or
(6) we or any of our Significant Subsidiaries:
▪commences a voluntary case under any applicable bankruptcy, insolvency, or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law;
▪consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, or similar official of us or any of our Significant Subsidiaries or for all or substantially all of the property and assets of us or any of our Significant Subsidiaries; or
▪effects any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause (5) or (6) with respect to us) occurs and continues, then the trustee or the holders of at least 25% in principal amount of the notes then outstanding may, by written notice to us, and the trustee at the request of at least 25% in principal amount of the notes then outstanding will, declare the principal, premium, if any, and accrued interest on the outstanding notes to be immediately due and payable. Upon a declaration of acceleration, the principal, premium, if any, and accrued interest shall be immediately due and payable.
If an Event of Default specified in clause (5) or (6) above occurs with respect to us, the principal, premium, if any, and accrued interest on the notes shall be immediately due and payable, without any declaration or other act on the part of the trustee or any holder.
The holders of at least a majority in principal amount of the notes may, by written notice to us and to the trustee, waive all past defaults with respect to the notes and rescind and annul a declaration of acceleration with respect to the notes and its consequences if:
•all existing Events of Default applicable to the notes other than the nonpayment of the principal, premium, if any, and interest on the notes that have become due solely by that declaration of acceleration, have been cured or waived; and
•the rescission would not conflict with any judgment or decree of a court of competent jurisdiction.
No holder of the notes will have any right to institute any proceeding, judicial or otherwise, with respect to the indenture, or for the appointment of a receiver or trustee, or for any other remedy under the indenture, unless:
•such holder has previously given written notice to the trustee of a continuing Event of Default with respect to the notes;
•the holders of not less than 25% in principal amount of the notes shall have made written request to a responsible officer of the trustee to institute proceedings in respect of such Event of Default in its own name as trustee;
•such holder or holders have offered the trustee indemnity satisfactory to the trustee against the costs, expenses and liabilities to be incurred in compliance with such request;
•the trustee, for 60 days after its receipt of such notice, request and offer of indemnity, has failed to institute any such proceeding; and
•no direction inconsistent with such written request has been given to the trustee during such 60-day period by the holders of a majority in principal amount of the outstanding notes.
However, these limitations do not apply to the right of any holder of a note to receive payment of the principal, premium, if any, or interest on, that note or to bring suit for the enforcement of any payment, on or after the due date expressed in the notes, which right shall not be impaired or affected without the consent of the holder.
The indenture requires that certain of our officers certify, on or before a date not more than 120 days after the end of each fiscal year, that to the best of those officers’ knowledge, we have fulfilled all our obligations under the indenture. We are also obligated to notify the trustee of any default or defaults in the performance of any covenants or agreements under the indenture provided, however, that a failure by us to deliver such notice of a default shall not constitute a default under the indenture, if we have remedied such default within any applicable cure period.
No Liability of Directors, Officers, Employees, Incorporators and Stockholders
No director, officer, employee, incorporator, member or stockholder of us, as such, will have any liability for any of our obligations under the notes or the indenture or for any claim based on, in respect of, or by reason of, such obligations. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. This waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.
Amendments and Waivers
Amendments Without Consent of Holders. We and the trustee may amend or supplement the indenture or the notes without notice to or the consent of any holder:
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(1) | to cure any ambiguity, defect or inconsistency in the indenture or the notes; |
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(2) | to comply with “-Merger, Consolidation, Sale, Lease or Conveyance;” |
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(3) | to comply with any requirements of the SEC in connection with the qualification of the indenture under the Trust Indenture Act; |
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(4) | to evidence and provide for the acceptance of appointment hereunder by a successor trustee; |
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(5) | to provide for any guarantee of the notes, to secure the notes or to confirm and evidence the release, termination or discharge of any guarantee of or lien securing the notes when such release, termination or discharge is permitted by the indenture; |
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(6) | to provide for or confirm the issuance of additional notes; or |
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(7) | to make any other change that does not materially and adversely affect the rights of any holder. |
(1) to cure any ambiguity, defect or inconsistency in the indenture or the notes;
(2) to comply with “—Merger, Consolidation, Sale, Lease or Conveyance;”
(3) to comply with any requirements of the SEC in connection with the qualification of the indenture under the Trust Indenture Act;
(4) to evidence and provide for the acceptance of appointment hereunder by a successor trustee;
(5) to provide for any guarantee of the notes, to secure the notes or to confirm and evidence the release, termination or discharge of any guarantee of or lien securing the notes when such release, termination or discharge is permitted by the indenture;
(6) to provide for or confirm the issuance of additional notes; or
(7) to make any other change that does not materially and adversely affect the rights of any holder.
Amendments With Consent of Holders. (a) Except as otherwise provided in “-Events“—Events of Default” or paragraph (b), we and the trustee may amend the indenture with the written consent of the holders of a majority in principal amount of the outstanding notes and the holders of a majority in principal amount of the outstanding notes may waive future compliance by us with any provision of the indenture with respect to the notes.
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(b) | Notwithstanding the provisions of paragraph (a), without the consent of each holder of notes, an amendment or waiver may not: |
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(1) | reduce the principal amount of or change the stated maturity of any installment of principal of the notes; |
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(2) | reduce the rate of or change the stated maturity of any interest payment on the notes; |
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(3) | reduce the amount payable upon the redemption of the notes, in respect of an optional redemption, change the times at which the notes may be redeemed or, once notice of redemption has been given, the time at which they must thereupon be redeemed; |
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(4) | make the notes payable in money other than that stated in the notes; |
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(5) | impair the right of any holder of notes to receive any principal payment or interest payment on such holder’s notes, on or after the stated maturity thereof, or to institute suit for the enforcement of any such payment; |
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(6) | make any change in the percentage of the principal amount of the notes required for amendments or waivers; or |
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(7) |
(b) Notwithstanding the provisions of paragraph (a), without the consent of each holder of notes, an amendment or waiver may not: (1) reduce the principal amount of or change the stated maturity of any installment of principal of the notes; (2) reduce the rate of or change the stated maturity of any interest payment on the notes; (3) reduce the amount payable upon the redemption of the notes, in respect of an optional redemption, change the times at which the notes may be redeemed or, once notice of redemption has been given, the time at which they must thereupon be redeemed; (4) make the notes payable in money other than that stated in the notes; (5) impair the right of any holder of notes to receive any principal payment or interest payment on such holder’s notes, on or after the stated maturity thereof, or to institute suit for the enforcement of any such payment; (6) make any change in the percentage of the principal amount of the notes required for amendments or waivers; or (7) modify or change any provision of the indenture affecting the ranking of the notes in a manner adverse to the holders of the notes. |
It is not necessary for holders to approve the particular form of any proposed amendment, supplement or waiver, but is sufficient if their consent approves the substance thereof.
Neither we nor any of our Subsidiaries or Affiliates may, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the indenture or the notes unless such consideration is offered to be paid or agreed to be paid to all holders of the notes that consent, waive or agree to amend such term or provision within the time period set forth in the solicitation documents relating to the consent, waiver or amendment.
Defeasance and Discharge
The indenture provides that we are deemed to have paid and will be discharged from all obligations in respect of the notes on the 123rd day after the deposit referred to below has been made, and that the provisions of the indenture will no longer be in effect with respect to the notes (except for, among other matters, certain obligations to register the transfer or exchange of the notes, to replace stolen, lost or mutilated notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things,
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(1) | we have deposited with the trustee, in trust, money and/or U.S. Government Obligations (as defined herein) that, through the payment of interest and principal in respect thereof, will provide money in an amount sufficient to pay the principal, premium, if any, and accrued interest on the notes, on the due date thereof or earlier redemption (irrevocably provided for under arrangements satisfactory to the trustee), as the case may be, in accordance with the terms of the indenture; |
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(2) | we have delivered to the trustee either: |
(1) we have deposited with the trustee, in trust, money and/or U.S. Government Obligations (as defined herein) that, through the payment of interest and principal in respect thereof, will provide money in an amount sufficient to pay the principal, premium, if any, and accrued interest on the notes, on the due date thereof or earlier redemption (irrevocably provided for under arrangements satisfactory to the trustee), as the case may be, in accordance with the terms of the indenture;
(2) we have delivered to the trustee either:
▪an opinion of counsel to the effect that beneficial owners of notes will not recognize income, gain or loss for federal income tax purposes as a result of the exercise of our option under this “Defeasance and Discharge” provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if the deposit, defeasance and discharge had not occurred, which opinion of counsel must be based upon a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law or related treasury regulations after the date of the indenture, or
▪a ruling directed to the trustee received from the Internal Revenue Service to the same effect as the aforementioned opinion of counsel;
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(3) | we have delivered to the trustee an opinion of counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law; |
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(4) | immediately after giving effect to that deposit on a pro forma basis, no Event of Default has occurred and is continuing on the date of the deposit or during the period ending on the 123rd day after the date of the deposit, and the deposit will not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which we are a party or by which we are bound; and |
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(5) | if at that time any notes are listed on a national securities exchange, we have delivered to the trustee an opinion of counsel to the effect that the notes will not be delisted as a result of a deposit, defeasance and discharge. |
(3) we have delivered to the trustee an opinion of counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the U.S. Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law;
(4) immediately after giving effect to that deposit on a pro forma basis, no Event of Default has occurred and is continuing on the date of the deposit or during the period ending on the 123rd day after the date of the
deposit, and the deposit will not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which we are a party or by which we are bound; and
(5) if at that time any notes are listed on a national securities exchange, we have delivered to the trustee an opinion of counsel to the effect that the notes will not be delisted as a result of a deposit, defeasance and discharge.
As more fully described in the indenture, the indenture also provides for defeasance of certain covenants.
Notices
For so long as notes in global form are outstanding, notices to be given to holders of the notes will be given to the depositary, in accordance with its applicable policies as in effect from time to time. If notes are issued in definitive form, notices to be given to holders of the notes will be deemed to have been given upon the mailing by first class mail, postage prepaid, of such notices to holders of the notes at their registered addresses as they appear in the register.
Notices will be deemed to have been given on the date of mailing or of publication as aforesaid or, if published on different dates, on the date of the first such publication.
Concerning the Trustee
U.S. Bank National Association acts as the trustee under the indenture.
Except during the continuance of an Event of Default, the trustee need perform only those duties that are specifically set forth in the indenture and no others, and no implied covenants or obligations will be read into the indenture against the trustee. In case an Event of Default has occurred and is continuing, the trustee shall exercise those rights and powers vested in it by the indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs. No provision of the indenture requires the trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of its duties or in the exercise of its rights or powers thereunder. The trustee shall be under no obligation to exercise any of the rights or powers vested in it by the indenture at the request or direction of any of the holders pursuant to the indenture, unless such holders shall have offered to the trustee security or indemnity satisfactory to the trustee against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction.
The indenture and provisions of the Trust Indenture Act incorporated by reference therein contain limitations on the rights of the trustee, should it become a creditor of us, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The trustee is permitted to engage in other transactions with us and our Affiliates; provided that if it acquires any conflicting interest it must either eliminate the conflict within 90 days, apply to the SEC for permission to continue or resign.
Form, Denomination and Registration of Notes
Except as set forth below, the notes will be issued in registered, global form in minimum denominations of $2,000 and integral multiples of $1,000 in excess thereof. The notes will be issued at the closing of this offering only against payment in immediately available funds.
The Global Notes will be deposited upon issuance with the trustee as custodian for DTC and registered in the name of DTC or its nominee, Cede & Co., in each case for credit to an account of a direct or indirect participant in DTC as described below. Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may be exchanged for Notes in certificated form. See “-Exchange“—Exchange of Global Notes for Certificated Notes.”
In addition, transfers of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and Clearstream), which may change from time to time.
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear and Clearstream are provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them. We and the trustee take no responsibility for these operations and procedures and urge investors to contact the system or their participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to hold securities for its participating organizations (collectively, the “Participants”) and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book-entry changes in accounts of its Participants. The Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the “Indirect Participants”). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
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(1) | (1) upon deposit of the Global Notes, DTC will credit the accounts of Participants with portions of the principal amount of the Global Notes; and |
(2) ownership of these interests in the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes).
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(2) | ownership of these interests in the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes). |
All interests in a Global Note, including those held through Euroclear or Clearstream, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream may also be subject to the procedures and requirements of such systems.
The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons will be limited to that extent. Because DTC can act only on behalf of the Participants, which in turn act on behalf of the Indirect Participants, the ability of a person having beneficial interests in a Global Note to pledge such interests to persons that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the Global Notes will not have notes registered in their names, will not receive physical delivery of notes in certificated form and will not be considered the registered owners or “holders” thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium, if any, on a Global Note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered holder under the indenture.
Under the terms of the indenture, we and the trustee will treat the persons in whose names the notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving payments and for all other purposes. Consequently, neither we, the trustee, nor any agent of ours or the trustee’s has or will have any responsibility or liability for:
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(1) | any aspect of DTC’s records or any Participant’s or Indirect Participant’s records relating to or payments made on account of beneficial ownership interest in the Global Notes or for maintaining, supervising or reviewing any of DTC’s records or any Participant’s or Indirect Participant’s records relating to the beneficial ownership interests in the Global Notes; or |
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(2) | any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. |
(1) any aspect of DTC’s records or any Participant’s or Indirect Participant’s records relating to or payments made on account of beneficial ownership interest in the Global Notes or for maintaining, supervising or reviewing any of DTC’s records or any Participant’s or Indirect Participant’s records relating to the beneficial ownership interests in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant Participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the Participants and the Indirect Participants to the beneficial owners of the notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the trustee or us. Neither we nor the trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the notes, and we and the trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Transfers between Participants in DTC will be effected in accordance with DTC’s procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and Clearstream will be effected in accordance with their respective rules and operating procedures.
Subject to compliance with any transfer restrictions applicable to the notes described herein, crossmarket transfers between the Participants in DTC, on the one hand, and Euroclear or Clearstream participants, on the other hand, will be effected through DTC in accordance with DTC’s rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a holder of the notes only at the direction of one or more Participants to whose account DTC has credited the interests in the Global Notes and only in respect of such portion of the aggregate principal amount of the notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the notes, DTC reserves the right to exchange the Global Notes for legended notes in certificated form, and to distribute such notes to its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among participants in DTC, Euroclear and Clearstream, they are under no obligation to perform or to continue to perform such procedures, and may discontinue such procedures at any time. Neither we nor the trustee nor any of our or their respective agents will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered certificated form (“Certificated Notes”) if:
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(1) | DTC (a) notifies us that it is unwilling or unable to continue as depositary for the Global Notes or (b) has ceased to be a clearing agency registered under the Exchange Act, and in each case we fail to appoint a successor depositary within 90 days of that notice or becoming aware that DTC is no longer so registered or willing or able to act as a depositary; |
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(2) | we determine not to have the Notes represented by a Global Note and provide written notice thereof to the trustee; or |
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(3) | there shall have occurred and be continuing a Default or Event of Default with respect to the notes and DTC requests such exchange. |
(1) DTC (a) notifies us that it is unwilling or unable to continue as depositary for the Global Notes or (b) has ceased to be a clearing agency registered under the Exchange Act, and in each case we fail to appoint a successor depositary within 90 days of that notice or becoming aware that DTC is no longer so registered or willing or able to act as a depositary;
(2) we determine not to have the Notes represented by a Global Note and provide written notice thereof to the trustee; or
(3) there shall have occurred and be continuing a Default or Event of Default with respect to the notes and DTC requests such exchange.
In all cases, certificated Notes delivered in exchange for any Global Note or beneficial interests in Global Notes will be in registered form, registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures).
Governing Law
The indenture and the notes are governed by, and construed in accordance with, the laws of the State of New York.
Certain Definitions
Set forth below are certain defined terms used in the indenture. We refer you to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used in this section of the prospectus for which no definition is provided.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise.
“Capitalized Lease Obligations” means all lease obligations of us and our Subsidiaries which, under GAAP, are or will be required to be capitalized, in each case taken at the amount of the lease obligation accounted for as indebtedness in conformity with those principles.
“Consolidated Net Assets” means the aggregate amount of assets (less reserves and other deductible items) after deducting current liabilities, as shown on the consolidated balance sheet of the Company and its subsidiaries contained in its latest audited financial statements and prepared in accordance with GAAP.
“Currency, Interest Rate or Commodity Agreements” means an agreement or transaction involving any currency, interest rate or energy price or volumetric swap, cap or collar arrangement, forward exchange transaction, option, warrant, forward rate agreement, futures contract or other derivative instrument of any kind for the hedging
or management of foreign exchange, interest rate or energy price or volumetric risks, it being understood, for purposes of this definition, that the term “energy” will include, without limitation, coal, gas, oil and electricity.
“Default” means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default.
“DTC” means The Depository Trust Company.
“Excluded Subsidiary” means any subsidiary of us:
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(1) | in respect of which neither we nor any subsidiary of ours (other than another Excluded Subsidiary) has undertaken any legal obligation to give any guarantee for the benefit of the holders of any Indebtedness for Borrowed Money (other than to another member of the Group) other than in respect of any statutory obligation and the subsidiaries of which are all Excluded Subsidiaries; and |
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(2) | which has been designated as such by us by written notice to the trustee; provided that we may give written notice to the trustee at any time that any Excluded Subsidiary is no longer an Excluded Subsidiary whereupon it shall cease to be an Excluded Subsidiary. |
(1) in respect of which neither we nor any subsidiary of ours (other than another Excluded Subsidiary) has undertaken any legal obligation to give any guarantee for the benefit of the holders of any Indebtedness for Borrowed Money (other than to another member of the Group) other than in respect of any statutory obligation and the subsidiaries of which are all Excluded Subsidiaries; and
(2) which has been designated as such by us by written notice to the trustee; provided that we may give written notice to the trustee at any time that any Excluded Subsidiary is no longer an Excluded Subsidiary whereupon it shall cease to be an Excluded Subsidiary.
“Fitch” means Fitch Ratings Inc.
“GAAP” means generally accepted accounting principles in the United States as in effect from time to time.
“Group” means DPL and its subsidiaries and “member of the Group” shall be construed accordingly.
“Indebtedness” means, with respect to us or any of our subsidiaries at any date of determination (without duplication):
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(1) | all Indebtedness for Borrowed Money (excluding any credit which is available but undrawn); |
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(2) | all obligations in respect of letters of credit (including reimbursement obligations with respect to letters of credit); |
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(3) | all obligations to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title to the property or the completion of such services, except trade payables; |
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(4) | all Capitalized Lease Obligations; |
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(5) | all indebtedness of other persons secured by a mortgage, charge, lien, pledge or other security interest on any asset of us or any of our subsidiaries, whether or not such indebtedness is assumed; provided that the amount of such Indebtedness must be the lesser of: (a) the fair market value of such asset at such date of determination and (b) the amount of the secured indebtedness; |
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(6) | all indebtedness of other persons of the types specified in the preceding clauses (1) through (5), to the extent such indebtedness is guaranteed by us or any of our subsidiaries; and |
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(7) | to the extent not otherwise included in this definition, net obligations under Currency, Interest Rate or Commodity Agreements. |
(1) all Indebtedness for Borrowed Money (excluding any credit which is available but undrawn);
(2) all obligations in respect of letters of credit (including reimbursement obligations with respect to letters of credit);
(3) all obligations to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title to the property or the completion of such services, except trade payables;
(4) all Capitalized Lease Obligations;
(5) all indebtedness of other persons secured by a mortgage, charge, lien, pledge or other security interest on any asset of us or any of our subsidiaries, whether or not such indebtedness is assumed; provided that the amount of such Indebtedness must be the lesser of: (a) the fair market value of such asset at such date of determination and (b) the amount of the secured indebtedness;
(6) all indebtedness of other persons of the types specified in the preceding clauses (1) through (5), to the extent such indebtedness is guaranteed by us or any of our subsidiaries; and
(7) to the extent not otherwise included in this definition, net obligations under Currency, Interest Rate or Commodity Agreements.
The amount of Indebtedness at any date will be the outstanding balance at such date of all unconditional obligations as described above and, upon the occurrence of the contingency giving rise to the obligation, the maximum liability of any contingent obligations of the types specified in the preceding clauses (1) through (7) at such date; provided that the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at such time as determined in conformity with GAAP.
“Indebtedness For Borrowed Money” means any indebtedness (whether being principal, premium, interest or other amounts) for:
•money borrowed;
•payment obligations under or in respect of any trade acceptance or trade acceptance credit; or
•any notes, bonds, loan stock or other debt securities offered, issued or distributed whether by way of public offer, private placement, acquisition consideration or otherwise and whether issued for cash or in whole or in part for a consideration other than cash;
provided, however, in each case, that such term will exclude:
•any indebtedness relating to any accounts receivable securitizations;
•any Indebtedness of the type permitted to be secured by Liens pursuant to clause (12) under the caption “-Limitations“—Limitations on Liens” described above; and
•any Preferred Securities which are issued and outstanding on the date of original issue of the notes or any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any such existing Preferred Securities, for amounts not exceeding the principal amount or liquidation preference of the Preferred Securities so extended, renewed or replaced.
“Independent Director” shall mean a director of us who, if we are listed on the New York Stock Exchange, meets the standards for independence set forth in the New York Stock Exchange Listing Standards, or if such standards are not applicable to us, who shall at no time be, or have been, a director, officer, stockholder, associate, customer or supplier of, be employed by, or hold or held at any time (directly or indirectly) any beneficial economic interest in us or our Parent or any subsidiary or Affiliate of Parent (excluding such director’s position as such Independent Director of us and any compensation received by such director in such capacity).
“Lien” means any mortgage, lien, pledge, security interest or other encumbrance; provided, however, that the term “Lien” does not mean any easements, rights-of-way, restrictions and other similar encumbrances and encumbrances consisting of zoning restrictions, leases, subleases, restrictions on the use of property or defects in title.
“Moody’s” means Moody’s Investors Service, Inc.
“Parent” shall mean any entity which owns directly or indirectly, 10% or more of the outstanding common shares of us.
“Permitted Debt” means Indebtedness for Borrowed Money issued in connection with a contract or contracts to purchase from us common stock of us, Parent or any Affiliate of Parent (which common stock was not held as an asset of us) for an aggregate amount equal to the aggregate principal amount of such Indebtedness for Borrowed Money.
“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
“Preferred Securities” means, without duplication, any trust preferred or preferred securities or related debt or guaranties of us or any of our subsidiaries.
“Project Finance Debt” means:
•any Indebtedness to finance or refinance the ownership, acquisition, development, design, engineering, procurement, construction, servicing, management and/or operation of any project or asset which is incurred by an Excluded Subsidiary; and
•any Indebtedness to finance or refinance the ownership, acquisition, development, design, engineering, procurement, construction, servicing, management and/or operation of any project or asset in respect of which the person or persons to whom any such Indebtedness is or may be owed by the relevant borrower (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group (other than an Excluded Subsidiary) for the repayment of that Indebtedness other than: (i) recourse to such member of the Group for amounts limited to the cash flow or net cash flow (other than historic cash flow or historic net cash flow) from, or ownership interests or other investments in, such project or asset; and/or (ii) recourse to such member of the Group for the purpose only of enabling amounts to be claimed in respect of such Indebtedness in an enforcement of any encumbrance given by such member of the Group over such project or asset or the income, cash flow or other proceeds deriving from the project (or given by any shareholder or the like, or other investor in, the borrower or in the owner of such project or asset over its
shares or the like in the capital of, or other investment in, the borrower or in the owner of such project or asset) to secure such Indebtedness, provided that the extent of such recourse to such member of the Group is limited solely to the amount of any recoveries made on any such enforcement; and/or (iii) recourse
to such borrower generally, or directly or indirectly to a member of the Group, under any form of assurance, indemnity, undertaking or support, which recourse is limited to a claim for damages (other than liquidated damages and damages required to be calculated in a specified way) for breach of an obligation (not being a payment obligation or an obligation to procure payment by another or an indemnity in respect of a payment obligation, or any obligation to comply or to procure compliance by another with any financial ratios or other tests of financial condition) by the person against which such recourse is available.
“S&P” means Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc.
“Significant Subsidiary” means, at any particular time, any subsidiary of ours whose gross assets or gross revenues (having regard to our direct and/or indirect beneficial interest in the shares, or the like, of that subsidiary) represent at least 25% of the consolidated gross assets or, as the case may be, consolidated gross revenues of us.
“Subsidiary” means, with respect to any person, any corporation, association, partnership, limited liability company or other business entity of which 50% or more of the total voting power of shares of capital stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees is at the time owned, directly or indirectly, by (1) such person, (2) such person and one or more subsidiaries of such person or (3) one or more subsidiaries of such person.
“U.S. Government Obligation” means any:
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(1) | security which is: (a) a direct obligation of the United States for the payment of which the full faith and credit of the United States is pledged or (b) an obligation of a person controlled or supervised by and acting as an agency or instrumentality of the United States the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which, in the case of clause (a) or (b), is not callable or redeemable at the option of the issuer of the obligation, and |
(1) security which is: (a) a direct obligation of the United States for the payment of which the full faith and credit of the United States is pledged or (b) an obligation of a person controlled or supervised by and acting as an agency or instrumentality of the United States the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which, in the case of clause (a) or (b), is not callable or redeemable at the option of the issuer of the obligation, and
(2) depositary receipt issued by a bank (as defined in the Securities Act) as custodian with respect to any security specified in clause (1) above and held by such bank for the account of the holder of such depositary receipt or with respect to any specific payment of principal of or interest on any such security held by any such bank, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depositary receipt.
THE EXCHANGE OFFER
General
We hereby offer to exchange a like principal amount of new notes for any or all outstanding old notes on the terms and subject to the conditions set forth in this prospectus. We often refer to this offer as the “exchange offer.” You may tender some or all of your outstanding old notes pursuant to this exchange offer. As of the date of this prospectus, $400,000,000$415,000,000 aggregate principal amount of the old notes are outstanding. Our obligation to accept old notes for exchange pursuant to the exchange offer is subject to certain conditions set forth hereunder.
Purpose and Effect of the Exchange Offer
In connection with the offering of the old notes, which was consummated on April 17, 2019,June 19, 2020, we entered into a registration rights agreement with the initial purchasers of the old notes, under which we agreed:
(1) to use our reasonable best efforts to cause to be filed a registration statement with respect to an offer to exchange the old notes for a new issue of securities, with terms substantially the same as of the old notes but registered under the Securities Act;
(2) to use our reasonable best efforts to cause the registration statement to be declared effective by the SEC and remain effective until the closing of the exchange offer; and
(3) to use our reasonable best efforts to consummate the exchange offer and issue the new notes within 390 days after the closing of the old notes offering.
The registration rights agreement provides that, if (a) we do not consummate the exchange offer registration on or prior to the date that is 390 days following the issuance of the old notes (the “exchange offer closing deadline”) or (b) we have not caused to become effective a shelf registration statement by the 90th day after such obligation arises (the “shelf effectiveness deadline”) (which in no event, however, shall be earlier than the exchange offer
closing deadline), the interest rate for the notes will increase by a rate of 0.25% per annum from the exchange offer closing deadline or the shelf effectiveness deadline, as applicable, during the first 90 day period, and shall further increase by 0.25% per annum beginning on the 91st day following either of the foregoing, until the exchange offer is completed, in the case of an exchange offer, or the shelf registration statement is declared effective. The additional interest rate for the old notes will not at any time exceed 0.50% per annum notwithstanding our failure to meet more than one of these requirements.
The exchange offer is not being made to, nor will we accept tenders for exchange from, holders of old notes in any jurisdiction in which the exchange offer or acceptance of the exchange offer would violate the securities or blue sky laws of that jurisdiction. Furthermore, each holder of old notes that wishes to exchange their old notes for new notes in this exchange offer will be required to make certain representations as set forth herein.
Terms of the Exchange Offer; Period for Tendering Old Notes
This prospectus contains the terms and conditions of the exchange offer. Upon the terms and subject to the conditions included in this prospectus, we will accept for exchange old notes which are properly tendered on or prior to the expiration date, unless you have previously withdrawn them.
•When you tender to us old notes as provided below, our acceptance of the old notes will constitute a binding agreement between you and us upon the terms and subject to the conditions in this prospectus.
•For each $2,000 principal amount of old notes (and $1,000 principal amount of old notes in excess thereof) surrendered to us in the exchange offer, we will give you $2,000 principal amount of new notes (and $1,000 principal amount of new notes in excess thereof). Outstanding notes may only be tendered in denominations of $2,000 and integral multiples of $1,000 in excess thereof.
•We will keep the exchange offer open for not less than 20 business days, or longer if required by applicable law, after the date that we first mail notice of the exchange offer to the holders of the old notes. We are sending this prospectus on or about the date of this prospectus to all of the registered holders of old notes at their addresses listed in the trustee’s security register with respect to the old notes.
•The exchange offer expires at 5:00 P.M., New York City time, on ; provided, however, that we, in our sole discretion, may extend the period of time for which the exchange offer is open. The term
“expiration “expiration date” means or, if extended by us, the latest time and date to which the exchange offer is extended.
•As of the date of this prospectus, $400,000,000$415,000,000 aggregate principal amount of the old notes were outstanding. The exchange offer is not conditioned upon any minimum principal amount of old notes being tendered.
•Our obligation to accept old notes for exchange in the exchange offer is subject to the conditions that we describe in the section called “Conditions to the Exchange Offer” below.
•We expressly reserve the right, at any time, to extend the period of time during which the exchange offer is open, and thereby delay acceptance of any old notes, by giving oral or written notice of an extension to the exchange agent and notice of that extension to the holders as described below. During any extension, all old notes previously tendered will remain subject to the exchange offer unless withdrawal rights are exercised. Any old notes not accepted for exchange for any reason will be returned without expense to the tendering holder promptly following the expiration or termination of the exchange offer.
•We expressly reserve the right to amend or terminate the exchange offer, and not to accept for exchange any old notes that we have not yet accepted for exchange, if any of the conditions of the exchange offer specified below under “Conditions to the Exchange Offer” are not satisfied. In the event of a material change in the exchange offer, including the waiver of a material condition, we will extend the offer period if necessary so that at least five business days remain in the exchange offer following notice of the material change.
•We will give oral or written notice of any extension, amendment, termination or non-acceptance described above to holders of the old notes promptly. If we extend the expiration date, we will give notice by means of a press release or other public announcement no later than 9:00 a.m., New York City time, on the business day after the previously scheduled expiration date. Without limiting the manner in which we may choose to make any public announcement and subject to applicable law, we will have no obligation to publish, advertise or otherwise communicate any public announcement other than by issuing a release to Dow Jones and Company News Agency and/or other similar news service.
•Holders of old notes do not have any appraisal or dissenters’ rights in connection with the exchange offer.
•Old notes which are not tendered for exchange or are tendered but not accepted in connection with the exchange offer will remain outstanding and be entitled to the benefits of the indenture, but will not be entitled to any further registration rights under the registration rights agreement.
•We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC thereunder.
Important rules concerning the exchange offer
You should note that:
•All questions as to the validity, form, eligibility, time of receipt and acceptance of old notes tendered for exchange will be determined by us in our sole discretion, which determination shall be final and binding.
•We reserve the absolute right to reject any and all tenders of any particular old notes not properly tendered or to not accept any particular old notes which acceptance might, in our judgment or the judgment of our counsel, be unlawful.
•We also reserve the absolute right to waive any defects or irregularities or conditions of the exchange offer as to any particular old notes either before or after the expiration date, including the right to waive the ineligibility of any holder who seeks to tender old notes in the exchange offer. Unless we agree to waive any defect or irregularity in connection with the tender of old notes for exchange, you must cure any defect or irregularity within any reasonable period of time as we shall determine.
•Our interpretation of the terms and conditions of the exchange offer as to any particular old notes either before or after the expiration date shall be final and binding on all parties.
•Neither DPL Inc., the exchange agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of old notes for exchange, nor shall any of them incur any liability for failure to give any notification.
Procedures for Tendering Old Notes
What to submit and how
If you, as the registered holder of an old note, wish to tender your old notes for exchange in the exchange offer, you must contact a DTC participant to complete the book-entry transfer procedures described below on or prior to the expiration date.
In addition,
(1) a timely confirmation of a book-entry transfer of old notes, if such procedure is available, into the exchange agent’s account at DTC using the procedure for book-entry transfer described below, must be received by the exchange agent prior to the expiration date, or
(2) you must comply with the guaranteed delivery procedures described below.
The method of delivery of notices of guaranteed delivery is at your election and risk. In all cases, sufficient time should be allowed to assure timely delivery.
How to sign your documents
Signatures on a notice of withdrawal, as the case may be, must be guaranteed unless the old notes being surrendered for exchange are tendered for the account of an eligible institution.
If signatures on a notice of withdrawal are required to be guaranteed, the guarantees must be by any of the following eligible institutions:
•a firm which is a member of a registered national securities exchange or a member of the Financial Industry Regulatory Authority, Inc. or
•a commercial bank or trust company having an office or correspondent in the United States.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Once all of the conditions to the exchange offer are satisfied or waived, we will accept, promptly after the expiration date, all old notes properly tendered and will issue the new notes promptly after the expiration of the exchange offer.
See “Conditions to the Exchange Offer” below. For purposes of the exchange offer, our giving of oral or written notice of our acceptance to the exchange agent will be considered our acceptance of the exchange offer.
In all cases, we will issue new notes in exchange for old notes that are accepted for exchange only after timely receipt by the exchange agent of a timely book-entry confirmation of transfer of old notes into the exchange agent’s account at DTC using the book-entry transfer procedures described below.
If we do not accept any tendered old notes for any reason included in the terms and conditions of the exchange offer, non-exchanged old notes will be credited to an account maintained with DTC promptly following the expiration or termination of the exchange offer.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect to the old notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution that is a participant in DTC’s systems may make book-entry delivery of old notes by causing DTC to transfer old notes into the exchange agent’s account in accordance with DTC’s Automated Tender Offer Program procedures for transfer. However, the exchange for the old notes so tendered will only be made after timely confirmation of book-entry transfer of old notes into the exchange agent’s account, and timely receipt by the exchange agent of an agent’s message, transmitted by DTC and received by the exchange agent and forming a part of a book-entry confirmation. The agent’s message must state that DTC has received an express acknowledgment from the participant tendering old notes that are the subject of that book-entry confirmation that the participant has received and agrees to be bound by the terms of the prospectus, and that we may enforce the agreement against that participant. we may enforce the agreement against that participant.
Although delivery of old notes may be effected through book-entry transfer into the exchange agent’s account at DTC, an agent’s message, properly completed and duly executed, with any required signature guarantees, must in any case be delivered to and received by the exchange agent at its address listed under “¯Exchange“Exchange Agent” on or prior to the expiration date.
If your old notes are held through DTC, you must complete a form called “instructions to registered holder and/or book-entry participant,” which will instruct the DTC participant through whom you hold your securities of your intention to tender your old notes or not tender your old notes. Please note that delivery of documents to DTC in accordance with its procedures does not constitute delivery to the exchange agent and we will not be able to accept your tender of notes until the exchange agent receives an agent’s message and a book-entry confirmation from DTC with respect to your notes. A copy of that form is available from the exchange agent.
Guaranteed Delivery Procedures
If you are a registered holder of old notes and you want to tender your old notes but your old notes are not immediately available, or time will not permit an agent’s message or your old notes to reach the exchange agent before the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if:
•the tender is made through an eligible institution,
•prior to the expiration date, the exchange agent receives, by facsimile transmission, mail or hand delivery, from that eligible institution a properly completed and duly executed notice of guaranteed delivery, substantially in the form provided by us, stating:
•the name and address of the holder of old notes;
•the amount of old notes tendered;
•the tender is being made by delivering that notice; and
•guaranteeing that within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, a book-entry confirmation will be deposited by that eligible institution with the exchange agent, and
•a book-entry confirmation is received by the exchange agent within three New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery.
Withdrawal Rights
You can withdraw your tender of old notes at any time on or prior to the expiration date.
For a withdrawal to be effective, a written notice of withdrawal must be received by the exchange agent at one of the addresses listed below under “Exchange Agent.” Any notice of withdrawal must specify:
•the name of the person having tendered the old notes to be withdrawn
•the old notes to be withdrawn
•the principal amount of the old notes to be withdrawn; and
•any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn old notes and otherwise comply with the procedures of that facility.
Please note that all questions as to the validity, form, eligibility and time of receipt of notices of withdrawal will be determined by us, and our determination shall be final and binding on all parties. Any old notes so withdrawn will be considered not to have been validly tendered for exchange for purposes of the exchange offer. If you have properly withdrawn old notes and wish to re-tender them, you may do so by following one of the procedures described under “Procedures for Tendering Old Notes” above at any time on or prior to the expiration date.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer, we will not be required to accept for exchange, or to issue new notes in exchange for, any old notes and may terminate or amend the exchange offer, if at any time before the expiration of the exchange offer:
•that acceptance or issuance would violate applicable law or any interpretation of the staff of the SEC; or
•any holder of the old bonds exchanged in the exchange offer has not represented that all new notes to be received by it shall be acquired in the ordinary course of its business and that at the time of the consummation of the exchange offer it shall have no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the new notes and shall have made such other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to render the use of Form S-4 or other appropriate form under the Securities Act available.
ThatThe conditions described above are for our sole benefit and may be asserted by us regardless of the circumstances giving rise to that condition. Our failure at any time to exercise the foregoing rights shall not be considered a waiver by us of that right. Our rights described in the prior paragraph are ongoing rights which we may assert at any time and from time to time prior to the expiration of the exchange offer.
In addition, we will not accept for exchange any old notes tendered, and no new notes will be issued in exchange for any old notes, if at that time any stop order shall be threatened or in effect with respect to the exchange offer to which this prospectus relates or the qualification of the indenture under the Trust Indenture Act.
Exchange Agent
U.S. Bank National Association has been appointed as the exchange agent for the exchange offer. Questions and requests for assistance, requests for additional copies of this prospectus and requests for notices of guaranteed delivery should be directed to the exchange agent, addressed as follows:
Deliver To:
By Registered, Regular or Certified Mail or Overnight Delivery:
U.S. Bank National Association
Attn: Corporate Trust-Specialized Finance
111 Fillmore Avenue E
St. Paul, Minnesota 55107
Facsimile Transmissions:
651-466-7367
To Confirm by Email:
cts.specfinance@usbank.com
To Confirm by Telephone or for Information:
800-934-6802
Delivery to an address other than as listed above or transmission of instructions via facsimile other than as listed above does not constitute a valid delivery.
Fees and Expenses
The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by our officers, regular employees and affiliates. We will not pay any additional compensation to any of our officers and employees who engage in soliciting tenders. We will not make any payment to brokers, dealers, or others soliciting acceptances of the exchange offer. However, we will pay the exchange agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection with the exchange offer.
The estimated cash expenses to be incurred in connection with the exchange offer, including legal, accounting, SEC filing, printing and exchange agent expenses, will be paid by us and are estimated in the aggregate to be $270,000.
Accounting Treatment
We will record the new notes in our accounting records at the same carrying value as the old notes, which is the aggregate principal amount as reflected in our accounting records on the date of exchange. Accordingly, we will not recognize any gain or loss for accounting purposes upon the consummation of this exchange offer. We will capitalize the expenses of this exchange offer and amortize them over the life of the notes.
Transfer Taxes
Holders who tender their old notes for exchange will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct us to register new notes in the name of, or request that old notes not tendered or not accepted in the exchange offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer tax thereon.
Resale of the New Notes
Under existing interpretations of the staff of the SEC contained in several no-action letters to third parties, the new notes would in general be freely transferable after the exchange offer without further registration under the Securities Act. The relevant no-action letters include the Exxon Capital Holdings Corporation letter, which was made available by the SEC on May 13, 1988, and the Morgan Stanley & Co. Incorporated letter, made available on June 5, 1991.
However, any purchaser of old notes who is an “affiliate” of DPL Inc. or who intends to participate in the exchange offer for the purpose of distributing the new notes
(1) will not be able to rely on the interpretation of the staff of the SEC,
(2) will not be able to tender its old notes in the exchange offer and
(3) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the securities unless that sale or transfer is made using an exemption from those requirements.
In addition, in connection with any resales of new notes, any broker-dealer participating in the exchange offer who acquired securities for its own account as a result of market-making or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The SEC has taken the position in the Shearman & Sterling no-action letter, which it made available on July 2, 1993, that participating broker-dealers may fulfill their prospectus delivery requirements with respect to the new notes, other than a resale of an unsold allotment from the original sale of the old notes, with the prospectus contained in the exchange offer registration statement. Under the registration rights agreement, we are required to allow participating broker-dealers and other persons, if any, subject to similar prospectus delivery requirements to use this prospectus as it may be amended or supplemented from time to time, in connection with the resale of new notes.
Failure to Exchange
Holders of old notes who do not exchange their old notes for new notes under the exchange offer will remain subject to the restrictions on transfer of such old notes as set forth in the legend printed on the notes as a consequence of the issuance of the old notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws, and otherwise set forth in the confidential offering memorandum distributed in connection with the private offering of the old notes.
Other
Participating in the exchange offer is voluntary, and you should carefully consider whether to accept. You are strongly urged to consult your financial, legal and tax advisors in making your own decision on what action to take.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The exchange of old notes for new notes in the exchange offer will not be a taxable event for holders. When a holder exchanges an old note for a new note in the exchange offer, the holder will have the same adjusted tax basis and holding period in the new note as in the old note immediately before the exchange.
Persons considering the exchange of old notes for new notes should consult their own tax advisers concerning the U.S. federal income tax consequences in light of their particular situations as well as any tax consequences arising under the laws of any other taxing jurisdiction.
PLAN OF DISTRIBUTION
Each broker-dealer that receives new notes for its own account in the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of new notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new notes received in exchange for old notes where old notes were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of 90 days after the expiration date, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any resale of new notes received by it in exchange for old notes.
We will not receive any proceeds from any sale of new notes by broker-dealers.
New notes received by broker-dealers for their own account in the exchange offer may be sold from time to time in one or more transactions:
•in the over-the-counter market;
•in negotiated transactions;
•through the writing of options on the new notes; or
•a combination of those methods of resale,
at market prices prevailing at the time of resale, at prices related to prevailing market prices or negotiated prices.
Any resale may be made:
•directly to purchasers; or
•to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer or the purchasers of any new notes.
Any broker-dealer that resells new notes that were received by it for its own account in the exchange offer and any broker or dealer that participates in a distribution of those new notes may be considered to be an “underwriter” within the meaning of the Securities Act. Any profit on any resale of those new notes and any commission or concessions received by any of those persons may be considered to be underwriting compensation under the Securities Act.
We have agreed to pay all expenses incident to the exchange offer, other than commissions or concessions of any brokers or dealers and will indemnify the holders of the securities, including any broker-dealers, against some liabilities, including liabilities under the Securities Act.Act
VALIDITY OF SECURITIES
Davis Polk & Wardwell LLP will opine for us on whether the new notes are valid and binding obligations of DPL Inc. and will rely on the opinion of Brian Hylander, Assistant General Counsel of DPL Inc., with respect to certain matters under the laws of the State of Ohio.
EXPERTS
The consolidated financial statements of DPL Inc. at December 31, 20182020 and 2017,2019, and for each of the three years in the period ended December 31, 2018,2020, and the related notes and schedule appearing in this registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, Washington, D.C. 20549, a registration statement on Form S-4 under the Securities Act with respect to our offering of the new notes. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to the company and the new notes, reference is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including exhibits and schedules thereto, is available to the public on the SEC’s website at https://www.sec.gov.
If for any reason we are not required to comply with the reporting requirements of the Securities Exchange Act of 1934, as amended, or we do not otherwise report on an annual or quarterly basis on forms provided for such annual and quarterly reporting pursuant to rules and regulations promulgated by the SEC, we are still required under the indenture to deliver (which may be accomplished through posting on the internet) to the trustee and to holders of the notes, without any cost to any holder: (1) within 90 days after the end of each fiscal year, audited financial statements and (2) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, quarterly unaudited financial statements. We are also required under the indenture to provide without charge upon the written request of (1) a holder of any notes or (2) a prospective holder of any of the notes who is a “qualified institutional buyer” within the meaning of Rule 144A and is designated by an existing holder of any of the notes with the information with respect to the Company required to be delivered under Rule 144A(d)(f) under the Securities Act to enable resales of the notes to be made pursuant to Rule 144A.
Any such requests should be directed to us at: DPL Inc., 1065 Woodman Drive, Dayton, Ohio 45432, Phone: (937) 259-7215, Attention: Treasurer.
We also maintain an Internet site at https://www.dpandl.com. Our website and the information contained therein or connected thereto shall not be deemed to be a part of this prospectus or the registration statement of which it forms a part.
INDEX TO FINANCIAL STATEMENTS
|
| | | | |
DPL Inc. Annual Consolidated Financial Statements | |
December 31, 2018, 20172020, 2019, and 20162018 | |
Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Income / (Loss) | |
Consolidated Balance Sheets | |
Consolidated Statements of Cash Flows | |
Consolidated Statements of Shareholder’s Equity | |
Notes to Consolidated Financial Statements | |
Schedule II –- Valuation and Qualifying Accounts | |
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. |
| |
DPL Inc. Condensed Consolidated Financial Statements | |
September 30, 2019 | |
Condensed Consolidated Statements of Operations | |
Condensed Consolidated Statements of Comprehensive Income | |
Condensed Consolidated Balance Sheets | |
Condensed Consolidated Statements of Cash Flows | |
Condensed Consolidated Statements of Shareholder's Deficit | |
Notes to Condensed Consolidated Financial Statements | |
| |
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, 20182020 and 2017,2019, 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, 2018,2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “financial“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, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182020 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 and in accordance with auditing standards generally accepted in the United States of America.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 26, 201924, 2021
| | DPL INC. | DPL INC. | DPL INC. |
Consolidated Statements of Operations | Consolidated Statements of Operations | Consolidated Statements of Operations |
| | Years ended December 31, | | Years ended December 31, |
$ in millions | | 2018 | | 2017 | | 2016 | $ in millions | | 2020 | | 2019 | | 2018 |
Revenues | | $ | 775.9 |
| | $ | 743.9 |
| | $ | 834.2 |
| Revenues | | $ | 660.5 | | | $ | 743.7 | | | $ | 747.3 | |
| | | | | | | |
Cost of revenues: | | | | | | | |
Operating costs and expenses | | Operating costs and expenses | |
Net fuel cost | | 17.5 |
| | 9.0 |
| | 17.4 |
| Net fuel cost | | 1.7 | | | 2.5 | | | 2.5 | |
Net purchased power cost | | 305.0 |
| | 291.0 |
| | 319.1 |
| Net purchased power cost | | 230.6 | | | 251.9 | | | 302.7 | |
Total cost of revenues | | 322.5 |
| | 300.0 |
| | 336.5 |
| |
| | | | | | | |
Gross margin | | 453.4 |
| | 443.9 |
| | 497.7 |
| |
| | | | | | | |
Operating expenses: | | | | | | | |
| Operation and maintenance | | 156.8 |
| | 186.1 |
| | 213.5 |
| Operation and maintenance | | 181.6 | | | 184.2 | | | 138.3 | |
Depreciation and amortization | | 73.1 |
| | 76.1 |
| | 73.6 |
| Depreciation and amortization | | 73.3 | | | 72.3 | | | 76.2 | |
General taxes | | 73.5 |
| | 77.1 |
| | 68.4 |
| |
Fixed-asset impairment | | 2.8 |
| | — |
| | 23.9 |
| |
Gain on asset disposal | | — |
| | (0.6 | ) | | (0.7 | ) | |
Taxes other than income taxes | | Taxes other than income taxes | | 79.4 | | | 77.9 | | | 73.3 | |
| Loss on asset disposal | | Loss on asset disposal | | 0.1 | | | 0 | | | 0 | |
Loss on disposal of business (Note 16) | | 11.7 |
| | — |
| | — |
| Loss on disposal of business (Note 16) | | 4.7 | | | 0 | | | 11.7 | |
Total operating expenses | | 317.9 |
| | 338.7 |
| | 378.7 |
| |
| Total operating costs and expenses | | Total operating costs and expenses | | 571.4 | | | 588.8 | | | 604.7 | |
| | | | | | | | | | | | |
Operating income | | 135.5 |
| | 105.2 |
| | 119.0 |
| Operating income | | 89.1 | | | 154.9 | | | 142.6 | |
| | | | | | | | | | | | |
Other income / (expense), net | | | | | | | Other income / (expense), net | |
Interest expense | | (98.0 | ) | | (110.0 | ) | | (107.4 | ) | Interest expense | | (71.3) | | | (82.2) | | | (98.0) | |
Charge for early redemption of debt | | (6.5 | ) | | (3.3 | ) | | (3.1 | ) | |
Loss on early extinguishment of debt | | Loss on early extinguishment of debt | | (31.7) | | | (44.9) | | | (6.5) | |
Other income | | 0.9 |
| | 1.6 |
| | 3.9 |
| Other income | | 2.0 | | | 3.7 | | | 0.8 | |
Other expense, net | | (103.6 | ) | | (111.7 | ) | | (106.6 | ) | Other expense, net | | (101.0) | | | (123.4) | | | (103.7) | |
| | | | | | | | | | | | |
Income / (loss) from continuing operations before income tax | | 31.9 |
| | (6.5 | ) | | 12.4 |
| Income / (loss) from continuing operations before income tax | | (11.9) | | | 31.5 | | | 38.9 | |
| | | | | | | |
Income tax expense / (benefit) from continuing operations | | 0.7 |
| | (5.0 | ) | | (2.4 | ) | Income tax expense / (benefit) from continuing operations | | (5.5) | | | (20.3) | | | 2.2 | |
| | | | | | | | | | | | |
Net income / (loss) from continuing operations | | 31.2 |
| | (1.5 | ) | | 14.8 |
| Net income / (loss) from continuing operations | | (6.4) | | | 51.8 | | | 36.7 | |
| | | | | | | | | | | | |
Discontinued operations (Note 15) | | | | | | | Discontinued operations (Note 15) | |
Income / (loss) from discontinued operations before income tax | | 70.5 |
| | (127.4 | ) | | (806.4 | ) | Income / (loss) from discontinued operations before income tax | | (0.6) | | | 47.6 | | | 63.5 | |
Gain / (loss) from disposal of discontinued operations | | (1.6 | ) | | 14.0 |
| | 49.2 |
| Gain / (loss) from disposal of discontinued operations | | 6.1 | | | 20.1 | | | (1.6) | |
Income tax expense / (benefit) from discontinued operations | | 30.0 |
| | (20.3 | ) | | (257.2 | ) | |
Net income / (loss) from discontinued operations | | 38.9 |
| | (93.1 | ) | | (500.0 | ) | |
Income tax expense from discontinued operations | | Income tax expense from discontinued operations | | 0.1 | | | 14.1 | | | 28.5 | |
Net income from discontinued operations | | Net income from discontinued operations | | 5.4 | | | 53.6 | | | 33.4 | |
| | | | | | | | | | | | |
Net income / (loss) | | $ | 70.1 |
| | $ | (94.6 | ) | | $ | (485.2 | ) | Net income / (loss) | | $ | (1.0) | | | $ | 105.4 | | | $ | 70.1 | |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | |
DPL INC. |
Consolidated Statements of Comprehensive Income / (Loss) |
| | Years ended December 31, |
$ in millions | | 2018 | | 2017 | | 2016 |
Net income / (loss) | | $ | 70.1 |
| | $ | (94.6 | ) | | $ | (485.2 | ) |
Equity securities activity: | | | | | | |
Change in fair value of equity securities, net of income tax expense of $0.0, ($0.2) and ($0.1) for each respective period | | — |
| | 0.5 |
| | 0.2 |
|
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 |
| | 0.2 |
|
Derivative activity: | | | | | | |
Change in derivative fair value, net of income tax benefit / (expense) of $0.1, ($5.3) and ($8.8) for each respective period | | (0.1 | ) | | 9.6 |
| | 16.1 |
|
Reclassification to earnings, net of income tax benefit of $0.4, $0.3 and $0.5 for each respective period | | (0.8 | ) | | (0.7 | ) | | (0.5 | ) |
Reclassification of earnings related to discontinued operations, net of income tax benefit / (expense) of ($1.2), $4.1 and $16.2 for each respective period | | 3.2 |
| | (7.3 | ) | | (29.2 | ) |
Net change in fair value of derivatives | | 2.3 |
| | 1.6 |
| | (13.6 | ) |
Pension and postretirement activity: | | | | | | |
Prior service cost for the period, net of income tax benefit of $0.6, $0.4 and $0.0 for each respective period | | (2.2 | ) | | (0.7 | ) | | — |
|
Net gain / (loss) for the period, net of income tax benefit / (expense) of ($0.5), $1.1 and $2.4 for each respective period | | 1.7 |
| | (1.8 | ) | | (4.7 | ) |
Reclassification to earnings, net of income tax expense of ($0.2), ($0.5) and ($0.6) for each respective period | | 0.6 |
| | 1.0 |
| | 1.0 |
|
Net change in unfunded pension and postretirement obligations | | 0.1 |
| | (1.5 | ) | | (3.7 | ) |
| | | | | | |
Other comprehensive income / (loss) | | 2.4 |
| | 0.5 |
| | (17.1 | ) |
| | | | | | |
Net comprehensive income / (loss) | | $ | 72.5 |
| | $ | (94.1 | ) | | $ | (502.3 | ) |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | |
DPL INC. |
Consolidated Balance Sheets |
$ in millions | | December 31, 2018 | | December 31, 2017 |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 90.5 |
| | $ | 24.5 |
|
Restricted cash | | 21.2 |
| | 0.4 |
|
Accounts receivable, net (Note 2) | | 90.5 |
| | 64.6 |
|
Inventories (Note 2) | | 10.7 |
| | 12.7 |
|
Taxes applicable to subsequent years | | 72.6 |
| | 71.3 |
|
Regulatory assets, current (Note 3) | | 41.1 |
| | 23.9 |
|
Other prepayments and current assets | | 12.9 |
| | 12.6 |
|
Current assets of discontinued operations and held-for-sale businesses (Note 15) | | 8.7 |
| | 315.6 |
|
Total current assets | | 348.2 |
| | 525.6 |
|
| | | | |
Property, plant and equipment: | | | | |
Property, plant and equipment | | 1,615.6 |
| | 1,544.1 |
|
Less: Accumulated depreciation and amortization | | (310.8 | ) | | (269.1 | ) |
| | 1,304.8 |
| | 1,275.0 |
|
Construction work in process | | 32.2 |
| | 46.5 |
|
Total net property, plant and equipment | | 1,337.0 |
| | 1,321.5 |
|
Other non-current assets: | | | | |
Regulatory assets, non-current (Note 3) | | 152.6 |
| | 163.2 |
|
Intangible assets, net of amortization | | 18.4 |
| | 18.8 |
|
Other deferred assets | | 21.6 |
| | 13.8 |
|
Non-current assets of discontinued operations and held-for-sale businesses (Note 15) | | 5.3 |
| | 6.3 |
|
Total other non-current assets | | 197.9 |
| | 202.1 |
|
| | | | |
Total Assets | | $ | 1,883.1 |
| | $ | 2,049.2 |
|
| | | | |
LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
Current liabilities: | | | | |
Current portion - long-term debt (Note 7) | | $ | 103.6 |
| | $ | 4.6 |
|
Short-term debt | | — |
| | 10.0 |
|
Accounts payable | | 58.1 |
| | 48.9 |
|
Accrued taxes | | 76.7 |
| | 77.3 |
|
Accrued interest | | 14.3 |
| | 16.4 |
|
Customer security deposits | | 21.3 |
| | 21.8 |
|
Regulatory liabilities, current (Note 3) | | 34.9 |
| | 14.8 |
|
Other current liabilities | | 22.0 |
| | 16.2 |
|
Current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 12.2 |
| | 66.9 |
|
Total current liabilities | | 343.1 |
| | 276.9 |
|
Non-current liabilities: | | | | |
Long-term debt (Note 7) | | 1,372.3 |
| | 1,700.2 |
|
Deferred taxes (Note 8) | | 116.1 |
| | 113.5 |
|
Taxes payable | | 76.1 |
| | 74.8 |
|
Regulatory liabilities, non-current (Note 3) | | 278.3 |
| | 221.2 |
|
Pension, retiree and other benefits (Note 9) | | 82.3 |
| | 90.3 |
|
Asset retirement obligations | | 9.4 |
| | 15.1 |
|
Other deferred credits | | 8.0 |
| | 8.5 |
|
Non-current liabilities of discontinued operations and held-for-sale businesses (Note 15) | | 69.2 |
| | 133.0 |
|
Total non-current liabilities | | 2,011.7 |
| | 2,356.6 |
|
| | | | |
Commitments and contingencies (Note 11) | | | | |
| | | | |
Common shareholder's deficit: | | | | |
Common stock: | | | | |
1,500 shares authorized; 1 share issued and outstanding | | | | |
at December 31, 2018 and 2017 | | — |
| | — |
|
Other paid-in capital | | 2,370.5 |
| | 2,330.4 |
|
Accumulated other comprehensive income | | 2.2 |
| | 0.8 |
|
Accumulated deficit | | (2,844.4 | ) | | (2,915.5 | ) |
Total common shareholder's deficit: | | (471.7 | ) | | (584.3 | ) |
| | | | |
Total Liabilities and Shareholder's Equity | | $ | 1,883.1 |
| | $ | 2,049.2 |
|
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | |
DPL INC. |
Consolidated Statements of Cash Flows |
| | Years ended December 31, |
$ in millions | | 2018 | | 2017 | | 2016 |
Cash flows from operating activities: | | | | | | |
Net income / (loss) | | $ | 70.1 |
| | $ | (94.6 | ) | | $ | (485.2 | ) |
Adjustments to reconcile Net income / (loss) to Net cash from operating activities | | | | | | |
Depreciation and amortization | | 50.2 |
| | 106.9 |
| | 132.3 |
|
Amortization of deferred financing costs | | 5.5 |
| | 3.6 |
| | 5.6 |
|
Unrealized (gain) / loss on derivatives | | (0.2 | ) | | (1.7 | ) | | (4.3 | ) |
Deferred income taxes | | (9.1 | ) | | (22.2 | ) | | (306.2 | ) |
Charge for early redemption of debt | | 6.5 |
| | 3.3 |
| | 3.1 |
|
Fixed-asset impairment | | 2.8 |
| | 175.8 |
| | 859.0 |
|
Loss / (Gain) on disposal and sale of business, net | | 13.3 |
| | (14.0 | ) | | (49.2 | ) |
Loss / (Gain) on asset disposal, net | | (2.0 | ) | | 16.1 |
| | (0.1 | ) |
Changes in certain assets and liabilities: | | | | | | |
Accounts receivable | | 45.7 |
| | 18.1 |
| | 25.6 |
|
Inventories | | 14.8 |
| | 7.7 |
| | 32.0 |
|
Taxes applicable to subsequent years | | 0.1 |
| | 2.3 |
| | 0.2 |
|
Deferred regulatory costs, net | | (9.2 | ) | | (23.7 | ) | | 4.1 |
|
Accounts payable | | (16.3 | ) | | (36.3 | ) | | 15.1 |
|
Accrued taxes payable | | 37.4 |
| | (3.7 | ) | | 45.1 |
|
Accrued interest payable | | (2.1 | ) | | (1.3 | ) | | (3.7 | ) |
Pension, retiree and other benefits | | (3.4 | ) | | 4.7 |
| | 3.0 |
|
Insurance and claims costs | | 1.1 |
| | (2.4 | ) | | (0.5 | ) |
Other | | 0.7 |
| | (6.9 | ) | | (8.8 | ) |
Net cash provided by operating activities | | 205.9 |
| | 131.7 |
| | 267.1 |
|
Cash flows from investing activities: | | | | | | |
Capital expenditures | | (103.6 | ) | | (121.5 | ) | | (148.5 | ) |
Proceeds from disposal and sale of business | | 234.9 |
| | 70.1 |
| | — |
|
Payments on disposal and sale of business | | (14.5 | ) | | — |
| | — |
|
Proceeds from sale of property | | 10.6 |
| | 0.1 |
| | 0.2 |
|
Insurance proceeds | | 3.0 |
| | 12.3 |
| | 6.3 |
|
Other investing activities, net | | (0.5 | ) | | (0.3 | ) | | 0.5 |
|
Net cash provided by / (used in) investing activities | | 129.9 |
| | (39.3 | ) | | (141.5 | ) |
Cash flows from financing activities: | | | | | | |
Payments of deferred financing costs | | — |
| | — |
| | (8.6 | ) |
Redemption of preferred stock | | — |
| | — |
| | (23.5 | ) |
Retirement of debt | | (240.5 | ) | | (159.5 | ) | | (577.8 | ) |
Issuance of long-term debt, net of discount | | — |
| | — |
| | 442.8 |
|
Borrowings from revolving credit facilities | | 30.0 |
| | 102.5 |
| | 15.0 |
|
Repayment of borrowings from revolving credit facilities | | (40.0 | ) | | (92.5 | ) | | (15.0 | ) |
Other financing activities, net | | — |
| | (0.1 | ) | | — |
|
Net cash used in financing activities | | (250.5 | ) | | (149.6 | ) | | (167.1 | ) |
Increase in cash and restricted cash of discontinued operations and held-for-sale businesses | | 1.5 |
| | 27.5 |
| | 15.8 |
|
Cash, cash equivalents and restricted cash: | | | | | | . |
Net increase / (decrease) in cash, cash equivalents and restricted cash | | 86.8 |
| | (29.7 | ) | | (25.7 | ) |
Balance at beginning of year | | 24.9 |
| | 54.6 |
| | 80.3 |
|
Cash, cash equivalents and restricted cash at end of year | | $ | 111.7 |
| | $ | 24.9 |
| | $ | 54.6 |
|
Supplemental cash flow information: | | | | | | |
Interest paid, net of amounts capitalized | | $ | 93.7 |
| | $ | 105.2 |
| | $ | 103.8 |
|
Income taxes (refunded) / paid, net | | $ | (1.4 | ) | | $ | — |
| | $ | 0.3 |
|
Non-cash financing and investing activities: | | | | | | |
Accruals for capital expenditures | | $ | 10.4 |
| | $ | 12.9 |
| | $ | 16.2 |
|
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 Equity |
| | Common Stock (a) | | | | | | | | |
$ in millions | | Outstanding Shares | | Amount | | Other Paid-in Capital | | Accumulated Other Comprehensive Income / (Loss) | | Accumulated Deficit | | Total |
Year ended December 31, 2016 | | | | | | | | | | | | |
Beginning balance | | 1 |
| | $ | — |
| | $ | 2,237.7 |
| | $ | 17.4 |
| | $ | (2,335.7 | ) | | $ | (80.6 | ) |
Net comprehensive loss | | | | | | | | (17.1 | ) | | (485.2 | ) | | (502.3 | ) |
Other (b) | | | | | | (4.7 | ) | | | | | | (4.7 | ) |
Ending balance | | 1 |
| | — |
| | 2,233.0 |
| | 0.3 |
| | (2,820.9 | ) | | (587.6 | ) |
Year ended December 31, 2017 | | | | | | | | | | | | |
Net comprehensive loss | | | | | | | | 0.5 |
| | (94.6 | ) | | (94.1 | ) |
Capital contributions (c) | | | | | | 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 (c) | | | | | | 40.0 |
| | | | | | 40.0 |
|
Other (d) | | | | | | 0.1 |
| | (1.0 | ) | | 1.0 |
| | 0.1 |
|
Ending balance | | 1 |
| | $ | — |
| | $ | 2,370.5 |
| | $ | 2.2 |
| | $ | (2,844.4 | ) | | $ | (471.7 | ) |
| | | | | | | | | | | | | | | | | | | | |
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) | Includes $5.1 million charged to Other paid-in capital for the redemption of the DP&L preferred shares. See Note 10 – Equity.
|
| |
(c) | Represents the conversion of a tax sharing payable to AES to contributed capital, as DP&L's 2017 ESP restricts tax sharing payments to AES during the term of the ESP. See Note 8 – Income Taxes.
|
| |
(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. 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, 2018, 20172020, 2019 and 2016
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 approximately525,000 531,000 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. Since January 2016, DP&L has been sourcing 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. Also, Stuart Station Unit 1 was retired on October 1, 2017. 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 Unit 4. AES Ohio Generation sellswas also a primary subsidiary and sold all of its energy and capacity into the wholesale market. DPL's subsidiaries are wholly-owned.
On December 8, 2017,In 2020, AES Ohio Generation completed the sale of the Miami FortGeneration's only operating asset was an undivided interest in Conesville, which closed in May 2020 and Zimmer stations to subsidiaries of Dynegywas sold 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.June 2020. See Note 15 – Discontinued Operations for additional information. DPL's subsidiaries are wholly-owned.
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 659631 people (512 full-time) at January 31, 2019,2021, all of which 647 were employed by DP&L. Approximately 57%58% of all DPL employees are under a collective bargaining agreement.
agreement that expires on October 31, 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 interests in certain coal-fired generating stations are 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 was 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 Sheets 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 | |
Allowance for Credit 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
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 and $0.5 million in the years ended December 31, 2020, 2019 and 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
GAAP requires that we test long-lived assets for impairment when indicators 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 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 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. Depreciation expense was $70.0 million, $67.9 million and $69.7 million for the years ended December 31, 2020, 2019 and 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 $3.3 million, $4.4 million and $6.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The estimated amortization expense of this internal-use software over the next five years is $10.7 million ($3.0 million in 2021, $2.2 million in 2022, $2.0 million in 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 have, 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 $3.2 million and $4.5 million at December 31, 2020 and 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 $11.1 million and $3.3 million at December 31, 2020 and 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. We record expenses when purchased electricity is received and when expenses are incurred. 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
AllowanceDP&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 Uncollectible Accounts
We establish provisionson a net basis and recorded as a reduction in revenues in the accompanying Consolidated Statements of Operations. The amounts 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.
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. 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. For non-regulated property, cost also includes capitalized interest. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $0.5 million, $1.7 million and $2.1 million in the years ended December 31, 2020, 2019 and 2018, 2017were $48.1 million, $50.1 million and 2016,$51.7 million, 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 evaluated for impairment when events or changes in circumstances indicate that its carrying amount may not be recoverable.
RepairsCash and MaintenanceCash Equivalents
Costs associatedCash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with maintenance activitiesoriginal maturities of three months or less are recognizedconsidered 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 was 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 timeConsolidated Balance Sheets that reconcile to the work is performed. These costs, whichtotal 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 | |
Allowance for Credit 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 labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
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 4.3% in 2018, 5.0% in 2017 and 6.1% in 2016 (including property classified in non-current assets of discontinued operations and held-for-sale businesses in 2017 and 2016). Depreciation expense was $66.5 million, $70.4 million and $67.0 millionused for the years ended December 31, 2018, 2017 and 2016, respectively.
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.
InventoriesProperty, Plant and Equipment
InventoriesNew property, plant and equipment additions are carriedstated 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 and $0.5 million in the years ended December 31, 2020, 2019 and 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
GAAP requires that we test long-lived assets for impairment when indicators 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 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 transmission and distribution assets, straight-line depreciation is applied monthly on an average cost, net of reserves,composite basis using group rates that approximated 3.8% in 2020, 4.0% in 2019 and include coal, limestone4.3% in 2018. Depreciation expense was $70.0 million, $67.9 million and materials$69.7 million for the years ended December 31, 2020, 2019 and supplies used for utility operations.
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. years. Amortization expense was $6.6$3.3 million, $5.7$4.4 million and $6.6$6.5 million for the years ended December 31, 2018, 20172020, 2019 and 2016,2018, respectively. The estimated amortization expense of this internal-use software over the next five years is $15.0$10.7 million ($4.2 million in 2019, $3.2 million in 2020, $3.03.0 million in 2021, $2.6$2.2 million in 2022, and $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
Income Taxes
Deferred tax assetsCosts incurred in connection with the issuance of long-term debt are deferred and liabilitiespresented 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 recognized fordeferred and presented as an asset and amortized over 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 positionsrelated financing period. Make-whole payments in connection with early debt retirements 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 taxescash flows used 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 liability 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.
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 deferrednon-current assets on the Consolidated Balance Sheets. See
Note 5 – Fair Value for additional information.
A business classifiedFinancial Derivatives
All derivatives are recognized as held-for-sale is reflected oneither assets or liabilities in the balance sheetsheets and are measured at fair value. Changes in the lower of its carrying amount or estimated fair value less costare 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 have, in the past, used interest rate hedges to sell. A loss is recognized ifmanage the carrying amountinterest rate risk of our variable rate debt. We use cash flow hedge accounting when the hedge or a portion of the business exceeds its estimatedhedge is deemed to be highly effective, which results in changes in fair value less costbeing recorded within accumulated other comprehensive income / (loss), a component of shareholder’s deficit. We have elected not to sell. This loss is limited tooffset net derivative positions in the carrying value of long-lived assets until the completion of the sale, at which point, any additional loss is recognized. Iffinancial statements. Accordingly, we do not offset such derivative positions against the fair value of amounts recognized for the business subsequently exceeds the carrying amount while the business is still held-for-sale, any impairment expense previously recognized will be reversed upright to the lower of the previously recognized expensereclaim cash collateral or the subsequent excess.obligation to return cash collateral under master netting agreements. See Note 6 – Derivative Instruments and Hedging Activities for additional information.
Insurance and Claims Costs
AssetsIn 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 related to a business classified as held-for-saleof approximately $3.2 million and $4.5 million at December 31, 2020 and 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 $11.1 million and $3.3 million at December 31, 2020 and 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 segregated inactuarially determined using certain assumptions. There is uncertainty associated with these loss estimates, and actual results may differ from the current balance sheetestimates. Modification of these loss estimates based on experience and changed circumstances is reflected in the period in which the businessestimate is classified as held-for-sale. Assetsre-evaluated.
Revenue Recognition
Revenues are recognized from retail and liabilitieswholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of held-for-sale businesses are classified as current when they are expectedcontrol of promised goods or services to customers in an amount that reflects the consideration to which we expect to be disposed of within twelve months. Transactions between the business held-for-sale and businesses thatentitled in exchange for those goods or services. Energy sales to customers 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 activitiesbased on the facereading of their meters that occurs on a systematic basis throughout the month. We recognize the revenues on our Consolidated Statements of Cash Flows.
Transactions betweenOperations 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 businessesend of each month, unbilled revenues are determined by the estimation of unbilled energy provided to be discontinued operations and businesses that are expected to continue to exist aftercustomers since 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 adjustmentdate of the carrying amountlast meter reading, estimated line losses, the assignment of unbilled energy provided to fair value. Seecustomer classes and the average rate per customer class. For additional information, see Note 1514 – Discontinued Operations for further information.
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, 2017were $48.1 million, $50.1 million and 2016, were $51.7 million, $49.4 million and $50.9 million, respectively.
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 restrictionsrestriction includes restrictions imposed by agreementsan agreement related to deposits held as collateral and 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 provides a summary ofsummarizes 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, 2018 | | December 31, 2017 |
Cash and cash equivalents | | $ | 90.5 |
| | $ | 24.5 |
|
Restricted cash | | 21.2 |
| | 0.4 |
|
Cash, Cash Equivalents, and Restricted Cash, End of Period | | $ | 111.7 |
| | $ | 24.9 |
|
Allowance for Credit 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
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 and $0.5 million in the years ended December 31, 2020, 2019 and 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
GAAP requires that we test long-lived assets for impairment when indicators 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 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 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. Depreciation expense was $70.0 million, $67.9 million and $69.7 million for the years ended December 31, 2020, 2019 and 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 $3.3 million, $4.4 million and $6.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The estimated amortization expense of this internal-use software over the next five years is $10.7 million ($3.0 million in 2021, $2.2 million in 2022, $2.0 million in 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 equity.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 on DPL’s Consolidated Balance Sheetsclaims costs associated with MVIC include estimated liabilities of approximately $4.1$3.2 million and $3.0$4.5 million at December 31, 20182020 and 2017, respectively. 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 $4.3$11.1 million and $4.4$3.3 million at December 31, 20182020 and 2017,2019, respectively, within OtherAccrued and other current liabilities and Other deferred creditsnon-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. 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, were $48.1 million, $50.1 million and $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. Effective inIn 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 $0.3$0.2 million at December 31, 20182020 and 2017,2019, respectively, is included in Other deferred assets within Other noncurrent assets. 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, 20182020 and 2017,2019, 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 adopted in 2018
The following table provides a brief description of recently adoptedrecent 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.
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Accounting Standard | Description | Date of Adoption | Effect on the financial statements upon adoption |
New Accounting Standards Adopted |
2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)2016-13, 2018-19, 2019-04, 2019-05, 2019-10, Financial Instruments — Credit Losses (Topic 326): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service ContractMeasurement of Credit Losses on Financial Instruments | This standard alignsSee discussion of the accounting for implementation costs incurred for a cloud computing arrangement that is a service with the requirement for capitalizing implementation costs associated with developing or obtaining internal-use software. Transition method: retrospective or prospective.ASUs below. | OctoberJanuary 1, 20182020. | We elected to early-adopt this standard on a prospective basis, effective for fiscal year 2018. The adoption of this standard did not have ahad no material impacteffect on our consolidated financial statements. |
2018-14, Compensation— Retirement Benefits — Defined Benefit Plans — General (Subtopic 715-20): Disclosure Framework | This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Transition method: retrospective. | Early adoption elected, January 1, 2018 | Impact limited to changes in financial statement disclosures. |
2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | This standard changes the presentation of non-service costs associated with defined benefit plans and updates the guidance so that only the service cost component will be eligible for capitalization. Transition method: retrospective for presentation of non-service cost and prospective for the change in capitalization. | January 1, 2018 | For the years ended December 31, 2017 and 2016 we reclassified non-service pension costs from Operating expenses to Other expense of $2.2 million and $3.2 million, respectively. |
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) | This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Transition method: retrospective. | January 1, 2018 | For the years ended December 31, 2017 and 2016, we reclassified from "Net cash used in investing activities" to "Net increase / (decrease) in cash, cash equivalents and restricted cash" $27.1 million and ($11.8) million, respectively. |
2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities | The standard significantly revises an entity’s accounting related to (1) classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosures of financial instruments.
Transition method: modified retrospective. Prospective for equity investments without readily determinable fair value.
| January 1, 2018 | We adopted this standard January 1, 2018. At that date, we transferred $1.6 million ($1.0 million net of tax) of unrealized gains from AOCI to Accumulated Deficit. |
2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-10, 2017-13, Revenue from Contracts with Customers (Topic 606) | See discussion of the ASU below. | January 1, 2018 | See impact upon adoption of the standard below. |
Adoption of FASC Topic 606, "Revenue from Contracts with Customers"326, "Financial Instruments - Credit Losses"
On January 1, 2018,2020, we adopted ASU 2014-09, "Revenue from Contracts with Customers",ASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates ("FASC 606"ASC 326"). The core principlenew standard updates 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 use a new forward-looking "expected loss" model that generally results in the earlier recognition of this standard isan allowance for credit 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 entity shall recognize revenueallowance on the balance sheet with a corresponding adjustment to depictearnings in the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. income statement.
We applied the modified retrospective method of adoption to those contracts which were not completed asfor ASC 326. Under this transition method, we applied the transition provisions starting at the date of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under FASC 606, while prior period amounts were not adjusted and continue to be reportedadoption. The CECL model primarily impacts the calculation of our expected credit losses in accordance with our historic accounting under the previous revenue recognition standard. For contracts that were modified before January 1, 2018, we have not retrospectively restated the contracts for modifications. We instead reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. We do not expect thegross customer trade accounts receivable. The adoption of ASC 326 and the new revenue standard toapplication of CECL on our trade accounts receivable did not have a material impact toon our net income on an ongoing basis.
There was no cumulative effect to our January 1, 2018 Consolidated Balance Sheet resulting from the adoption of FASC 606.
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 |
2018-02, Income Statement - Reporting Comprehensive Income2020-04, Reference Rate Reform (Topic 220), Reclassification of Certain Tax Effects from AOCI | This amendment allows a reclassification848): Facilitation of the stranded tax effects resulting from the implementationEffects 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.Reference Rate Reform on Financial Reporting | January 1, 2019. Early adoption is permitted. | We do not expect any impact on our consolidated financial statements upon adoption of the standard on January 1, 2019. |
2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities | The standard updates the hedge accounting modelprovides optional expedients and exceptions for applying GAAP to expand the abilitycontracts, hedging relationships and other transactions that reference 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,LIBOR or another reference rate expected to be discontinued by reference rate reform. This standard is effective for 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 valuelimited period 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 earningstime (March 12, 2020 - December 21, 2022).
| Effective for all entities as of the initial application date. Prospective for presentation and disclosures.March 12, 2020 through December 31, 2022. | January 1, 2019. Early adoption is permitted. | We are currently evaluating the impact of adopting the standard on our consolidated financial statements. |
2018-19, 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | The standard updates the impairment model for financial assets measured at amortized cost. 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 the losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities.
Transition method: various.
| January 1, 2020. Early adoption is permitted only as of January 1, 2019. | We are currently evaluating the impact of adopting the standard 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. Early adoption is permitted. | We have adopted the standard on January 1, 2019; see below for the evaluation of the impact of its adoption on our consolidated financial statements. |
Adoption of FASC Topic 842, "Leases"
ASU 2016-02 and its subsequent corresponding updates require lessees to recognize assets and liabilities for most leases but recognize expenses in a manner similar to today’s accounting. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance also eliminates today’s real estate-specific provisions.
The standard must be adopted using a modified retrospective approach. The FASB has provided an optional transition method, which we have elected, that allows entities to continue to apply the guidance in FASC 840 Leases to the comparative periods presented in the year of adoption. Under this transition method, we will apply the transition provisions starting on January 1, 2019.
We have elected to apply a package of practical expedients that allow lessees and lessors not to reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) whether initial direct costs for any expired or existing leases qualify for capitalization under FASC 842. These three practical expedients must be elected as a package and must be consistently applied to all leases.
We have also elected to apply an optional transition practical expedient for land easements that allows an entity to continue applying its current accounting policy for all land easements that exist before the standard’s effective date that were not previously accounted for under FASC 840.
We established a task force focused on the identification of contracts that would be under the scope of the new standard and on the assessment and measurement of the right-of-use assets and related liabilities. Additionally, the implementation team has been working on the configuration of a lease accounting tool that will support the implementation and the subsequent accounting. The implementation team has also evaluated changes to our business processes, systems and controls to support recognition and disclosure under the new standard.
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 lease receivable. According to FASC 842, the lease receivable includes the fair value of the plant after the contract period but does not include any variable payments such as margin on the sale of energy. Therefore, the lease receivable could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized lease receivable and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
The adoption of FASC 842 did not have a material impact on our consolidated financial statements.
Note 2 – Supplemental Financial Information
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| | December 31, |
$ in millions | | 2018 | | 2017 |
Accounts receivable, net | | | | |
Customer receivables | | $ | 55.8 |
| | $ | 45.2 |
|
Unbilled revenue | | 16.8 |
| | 18.0 |
|
Due from PJM transmission enhancement settlement (a) | | 16.5 |
| | — |
|
Other | | 2.3 |
| | 2.5 |
|
Provisions for uncollectible accounts | | (0.9 | ) | | (1.1 | ) |
Total accounts receivable, net | | $ | 90.5 |
| | $ | 64.6 |
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| | | | |
Inventories, at average cost | | | | |
Fuel and limestone | | $ | 1.9 |
| | $ | 4.1 |
|
Materials and supplies | | 8.3 |
| | 8.1 |
|
Other | | 0.5 |
| | 0.5 |
|
Total inventories, at average cost | | $ | 10.7 |
| | $ | 12.7 |
|
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 | |
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(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:
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$ 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, 2018, 20172020, 2019 and 20162018 are as follows:
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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 |
| | | | | | |
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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 | |
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Total reclassifications for the period, net of income taxes | | $ | 0.1 | | | $ | (1.3) | | | $ | 3.0 | |
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Details about Accumulated Other Comprehensive Income / (Loss) Components | | Affected line item in the Consolidated Statements of Operations | | Years ended December 31, |
$ in millions | | | | 2018 | | 2017 | | 2016 |
Gains and losses on equity securities (Note 5): | | | | | | |
| | Other deductions | | $ | — |
| | $ | (0.1 | ) | | $ | — |
|
| | Income tax expense | | — |
| | — |
| | — |
|
| | Net of income taxes | | — |
| | (0.1 | ) | | — |
|
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Gains and losses on cash flow hedges (Note 6): | | | | | | |
| | Interest expense | | (1.2 | ) | | (1.0 | ) | | (1.0 | ) |
| | Income tax benefit | | 0.4 |
| | 0.3 |
| | 0.5 |
|
| | Net of income taxes | | (0.8 | ) | | (0.7 | ) | | (0.5 | ) |
| | | | | | | | |
| | Gain / (loss) from discontinued operations | | 4.4 |
| | (11.4 | ) | | (45.4 | ) |
| | Tax benefit / (expense) from discontinued operations | | (1.2 | ) | | 4.1 |
| | 16.2 |
|
| | Net of income taxes | | 3.2 |
| | (7.3 | ) | | (29.2 | ) |
| | | | | | | | |
Amortization of defined benefit pension items (Note 9): | | | | | | |
| | Other income | | 0.8 |
| | 1.5 |
| | 1.6 |
|
| | Income tax expense | | (0.2 | ) | | (0.5 | ) | | (0.6 | ) |
| | Net of income taxes | | 0.6 |
| | 1.0 |
| | 1.0 |
|
| | | | | | | | |
Total reclassifications for the period, net of income taxes | | $ | 3.0 |
| | $ | (7.1 | ) | | $ | (28.7 | ) |
The changes in the components of Accumulated Other Comprehensive Income / (Loss) during the years ended December 31, 20182020 and 20172019 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) | |
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| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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) | |
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$ in millions | | Gains / (losses) on equity securities | | Gains / (losses) on cash flow hedges | | Change in unfunded pension obligation | | Total |
Balance at December 31, 2016 | | $ | 0.6 |
| | $ | 13.1 |
| | $ | (13.4 | ) | | $ | 0.3 |
|
| | | | | | | | |
Other comprehensive income / (loss) before reclassifications | | 0.5 |
| | 9.6 |
| | (2.5 | ) | | 7.6 |
|
Amounts reclassified from accumulated other comprehensive income / (loss) | | (0.1 | ) | | (8.0 | ) | | 1.0 |
| | (7.1 | ) |
Net current period other comprehensive income / (loss) | | 0.4 |
| | 1.6 |
| | (1.5 | ) | | 0.5 |
|
| | | | | | | | |
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 |
|
| |
(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 of $248.0 millionfor DP&L's&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, and among other matters, the DRO provides for$248.0 million.
Distribution Rate Case
On November 30, 2020, DP&L filed a return on equity of 9.999% and a cost of long-term debt of 4.8% and for the following items:
DIR– The DRO authorized DP&L to begin charging a Distribution Investment Rider ("DIR") set initially at $12.2 million annually, effective October 1, 2018. The DIR revenue requirement shall be updated quarterly and will increase as DP&L makes qualified investments in its distribution network, subject to annual revenue limits which increase each year; the revenue limit for 2019 is $22.0 million. The DIR will expire in November 2022 unless DP&L files a basenew distribution rate case on or before October 31, 2022, in whichwith the PUCO. This rate case proposes a revenue increase of $120.8 million per year and incorporates the DIR will expire in November 2023.
Decoupling Rider – The DRO eliminated provisionsinvestments that were planned and approved in the existing decoupling rider which allowed DP&L to recover lost revenues resulting fromlast rate case but not yet included in distribution rates, other distribution investments since September 2015 and investments necessitated by the implementation of energy efficiency programs and replaced it with a revenue requirementtornados that attempts to eliminate the impacts of weather and demandoccurred on DP&L’s revenues from residential and commercial distribution customers beginning January 1,Memorial Day in 2019. As a result, in years with very mild weather and/or decreased demand, DP&L will be able to accrue a regulatory asset for recovery through the rider to normalize the revenues. Conversely, in periods of extreme temperatures or high demand for electricity, DP&L may record a liability for future reimbursement to customers. The riderrate case also includes a one-time $3.7 million revenue requirement based on the increase in the numberproposal for increased tree-trimming expenses and certain customer demand-side management programs and recovery of DP&L’s residentialprior-approved regulatory assets for tree trimming, uncollectible expenses and commercial customers from the rate case test year until September 30, 2018. Such amount was accrued and included in revenues in the third quarter of 2018 and will be collected by DP&L in 2019.expense.
TCJA – The DRO partially resolved the TCJA impacts. The new distribution rates include the impacts of the decrease in current federal income taxes beginning October 1, 2018. The DRO did not designate how much DP&L may owe for any overcollection of taxes from January 1, 2018 through September 30, 2018, nor did it resolve any decrease in future rates related to amortization of excess accumulated deferred income taxes (“ADIT”). The DRO did, however, stipulate that DP&L must refund its customers an amount no less than $4.0 million per year for the first five years of the amortization period unless all balances owed are fully returned within the first five years. For more on the impacts of the TCJA, see below.
Vegetation Management Costs – The DRO authorizes DP&L to defer as a regulatory asset, with no carrying costs, annual expenses for vegetation management performed by third-party vendors. For calendar year 2018 annual expenses which are incremental to the baseline of $10.7 million can be deferred up to a $4.6 million cap. For calendar years 2019 and thereafter, annual expenses in excess of $15.7 million can be deferred up to a $4.6 million annual cap. Annual spending of less than the vegetation management baseline amounts will result in a reduction to the regulatory asset or creation of a regulatory liability. For 2018, DP&L accrued a regulatory asset for the maximum amount of $4.6 million based upon such provisions and spending above the baseline.
In December 2018, DP&L filed a Distribution Modernization Plan (“DMP”) 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 DMP: 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.
ESP Order
On March 13, 2017, DP&L filed an amended stipulation to its 2017 ESP, which was subject to approval by the PUCO. A final decision was issued by the PUCO on October 20, 2017, modifying and adopting the amended stipulation and recommendation. The six-year 2017 ESP establishes 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 mechanisms which include, but are not limited to, the following:
| |
• | Bypassable standard offer energy rates for DP&L’s customers based on competitive bid auctions;
|
| |
• | The establishment of a three year non-bypassable Distribution Modernization Rider (DMR) designed 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 with an option for DP&L to file for
|
an extension of the rider for an additional two years in an amount subject to approval by the PUCO. Consistent with that settlement and the PUCO order, on January 22, 2019, DP&L filed a request to extend the DMR for the additional two years at an annual revenue amount of $199.0 million. That request is pending PUCO review;
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• | The establishment of a non-bypassable Distribution Investment Rider to recover incremental distribution capital investments, the amount of which was established in the DP&L DRO;
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• | A non-bypassable Reconciliation Rider permitting DP&L to defer, recover or credit the net proceeds from selling energy and capacity received as part of DP&L’s investment in OVEC and DP&L's OVEC related costs;
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• | Implementation by DP&L of a Smart Grid Rider, Economic Development Rider, Economic Development Fund, Regulatory Compliance Rider and certain other new, or changes to existing, rates, riders and competitive retail market enhancements, with tariffs consistent with the order. These riders became effective November 1, 2017;
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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;
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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. See Note 8 – Income Taxes and Note 10 – Equity for more information on the tax sharing payment restrictions; and
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Various other riders and competitive retail market enhancements.
On October 19, 2018 IGS, a retail electricity supplier, filed a Notice of Withdrawal from the amended settlement, citing a material modification by the PUCO's October 2017 order. To address the withdrawal, the PUCO established a new procedural schedule, including a hearing currently scheduled to begin April 1, 2019. Additionally, on January 7, 2019, the Ohio Consumers' Counsel appealed the 2017 ESP Order to the Supreme Court of Ohio. That appeal is pending.
DP&L is subject to a SEET threshold and is required to apply general rules for calculating earnings and comparing them to a comparable group to determine whether there were significantly excessive earnings during a given calendar year. The 2017 ESP maintains DP&L’s return on equity SEET threshold at 12% and provides that DMR amounts are excluded from the SEET calculation. On October 22, 2018, a stipulation was reached agreeing that DP&L did not exceed the SEET threshold for 2016 or 2017. That stipulation is pending PUCO approval. In future years, the SEET could have a material effect on results of operations, financial condition and cash flows.
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 ESP, DPL will not make tax sharing payments. Under the terms of the stipulation in the distribution rate case mentioned above, DP&L agreed to file filed an application at the PUCO by March 1, 2019 to refund eligible excess accumulated deferred income taxes (ADIT) and any related regulatory liability over a ten-year period.10-year period with a minimum reversal of $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 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 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 TCJA. TCJA.
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 $41.6$40.8 million,, of which approximately $14.3$32.1 million has been repaid to DP&L through December 31, 20182020 and $16.5$1.7 million is classified as current in "Accounts"Accounts receivable, net" and $10.8$7.0 million is classified as non-current in "Other deferred"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 nonbypassable 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 $193.7$221.1 million and $187.1$193.5 million at December 31, 20182020 and 2017,2019, respectively, and total regulatory liabilities of $313.2$236.3 million and $236.0$271.5 million at December 31, 20182020 and 2017,2019, 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:
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| | | | | | | | | | | | |
| | Type of Recovery | | Amortization Through | | December 31, |
$ in millions | | | | 2018 | | 2017 |
Regulatory assets, current: | | | | | | | | |
Undercollections to be collected through rate riders | | A/B |
| 2019 | | $ | 40.5 |
| | $ | 23.9 |
|
Rate case expenses being recovered in base rates | | B | | 2019 | | 0.6 |
| | — |
|
Total regulatory assets, current | |
|
|
| | 41.1 |
| | 23.9 |
|
| | | | | | | | |
Regulatory assets, non-current: | |
|
|
| | | | |
Pension benefits | | B |
| Ongoing | | 87.5 |
| | 92.4 |
|
Unrecovered OVEC charges | | C |
| Undetermined | | 28.7 |
| | 27.8 |
|
Fuel costs | | B |
| 2020 | | 3.3 |
| | 9.3 |
|
Regulatory compliance costs | | B |
| 2020 | | 6.1 |
| | 9.2 |
|
Smart grid and AMI costs | | B |
| Undetermined | | 8.5 |
| | 7.3 |
|
Unamortized loss on reacquired debt | | B |
| Various | | 6.0 |
| | 7.0 |
|
Deferred storm costs | | A |
| Undetermined | | 4.7 |
| | 2.1 |
|
Deferred vegetation management and other | | A/B | | Undetermined | | 7.8 |
| | 8.1 |
|
Total regulatory assets, non-current | |
|
|
| | 152.6 |
| | 163.2 |
|
| |
|
|
| | | | |
Total regulatory assets | |
|
|
| | $ | 193.7 |
| | $ | 187.1 |
|
| |
|
|
| | | | |
Regulatory liabilities, current: | |
|
|
| | | | |
Overcollection of costs to be refunded through rate riders | | A/B |
| 2019 | | $ | 34.9 |
| | $ | 14.8 |
|
Total regulatory liabilities, current | |
|
|
| | 34.9 |
| | 14.8 |
|
| | | | | | | | |
Regulatory liabilities, non-current: | |
|
|
| | | | |
Estimated costs of removal - regulated property | |
|
| Not Applicable | | 139.1 |
| | 132.8 |
|
Deferred income taxes payable through rates | |
|
| Various | | 116.3 |
| | 83.4 |
|
PJM transmission enhancement settlement | | A | | 2025 | | 16.9 |
| | — |
|
Postretirement benefits | | B |
| Ongoing | | 6.0 |
| | 5.0 |
|
Total regulatory liabilities, non-current | |
|
|
| | 278.3 |
| | 221.2 |
|
| |
|
|
| | | | |
Total regulatory liabilities | |
|
|
| | $ | 313.2 |
| | $ | 236.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) Distribution Modernizationthe Energy Efficiency Rider, revenues, (ii) decoupling rider (see above),the Alternative Energy Rider, (iii) uncollectible riderthe Legacy Generation Resource Rider, (iv) the Economic Development Rider and (iv) energy efficiency rider. It also includesthe (v) Transmission Cost Recovery Rider. Also included are the current portion of the following deferred fuel costs and rate case expense costs which do not earn a return and are described in greater detail below: unbilled fuel,below. Current regulatory compliance rider costs and deferred storm costs. As current liabilities this includesinclude the overcollection of: (i)of competitive bidding energy and auction costs (ii) energy efficiency program costs, (iii) alternative energy rider, (iv) economic development rider, (v)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 (vi) reconciliation rider.
(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 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, suchthrough December 18, 2019, current OVEC costs arewere being recovered through DP&L’s Reconciliation Rider reconciliation rider which was authorized as part of the 2017 ESP.
Fuel costs represent unrecovered fuelESP 3. Beginning January 1, 2020, DP&L began recovering its current net OVEC costs relatedthrough its Legacy Generation Rider, established pursuant to ORC 4928.148.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. These costs are being recovered over the three-year period that began November 1, 2017.
Regulatory compliance ridercosts representsrepresent the long-term portion of the regulatory compliance ridercosts which was established by the 2017 ESP to recoverinclude 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 arewere being recovered over a three-year period.period that began November 1, 2017 through a rider approved in the 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. On October 19, 2010, DP&L elected to withdraw its case pertaining to the Smart Grid and AMI programs. TheIn a PUCO accepted the withdrawal in an order issued on January 5, 2011. The2011, the PUCO also 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 DMP filing with the PUCOOctober 23, 2020 settlement described earlier.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 20172018, 2019 and 2018. The 2017 ESP granted 2020. DP&L approval to establish a rider by which to seek recovery of these types of costs with a return. 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, by 2020, 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 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. 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 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 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. 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. On December 22, 2017, the TCJA was signed, which includes a provision to, among other things, reduce the federal corporate income tax rate to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, DP&L remeasured its deferred income tax assets and liabilities using the new expected tax rate. DP&L believes that the portion of the reduction in the net deferred tax liability which is related to deferred taxes considered in ratemaking will be used in future ratemaking to reduce jurisdictional retail rates. 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 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 Enhancement Settlement liability represents the Transmission Enhancement Settlement charges for which DP&L is due a refund 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 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, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2018 | | December 31, 2017 |
$ in millions | | | | Composite Rate | | | | Composite Rate (a) |
Regulated: | | | | | | | | |
Transmission | | $ | 223.2 |
| | 4.1% | | $ | 242.7 |
| | 4.0% |
Distribution | | 1,289.8 |
| | 4.5% | | 1,197.5 |
| | 4.9% |
General | | 13.2 |
| | 8.5% | | 13.7 |
| | 7.1% |
Non-depreciable | | 60.4 |
| | N/A | | 64.7 |
| | N/A |
Total regulated | | 1,586.6 |
| | | | 1,518.6 |
| | |
Unregulated: | | | | | | | | |
Production / Generation | | — |
| | N/A | | 0.2 |
| | N/A |
Other | | 21.2 |
| | 6.7% | | 21.1 |
| | 7.0% |
Non-depreciable | | 7.8 |
| | N/A | | 4.2 |
| | N/A |
Total unregulated | | 29.0 |
| | | | 25.5 |
| | |
| | | | | | | | |
Total property, plant and equipment in service | | $ | 1,615.6 |
| | 4.3% | | $ | 1,544.1 |
| | 5.0% |
| |
(a) | Composite rates for 2017 include property classified in non-current assets of discontinued operations and held-for-sale businesses. |
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. 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 river intake and discharge structures, coal unloading facilities, loading docks, ice breakersasbestos abatement and ash disposal facilities. OurAs of December 31, 2020, our generation AROs related tohave all been settled through the sale of our interest in Conesville the closed Hutchings EGU, and the previously owned Beckjord Facility are recorded within Asset retirement obligations on the consolidated balance sheets. The generation AROs related to our other retired or sold generation facilities are 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 | |
|
| | | |
$ in millions | |
Balance at December 31, 2016 | $ | 15.0 |
|
Calendar 2017 | |
Revisions to cash flow and timing estimates | (0.1 | ) |
Accretion expense | 0.4 |
|
Settlements | (0.2 | ) |
Balance at December 31, 2017 | 15.1 |
|
Calendar 2018 | |
Revisions to cash flow and timing estimates | (2.6 | ) |
Accretion expense | 0.3 |
|
Settlements (a) | (3.4 | ) |
Balance at December 31, 2018 | $ | 9.4 |
|
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 $139.1$138.8 million and $132.8$143.6 million in estimated costs of removal at December 31, 20182020 and 2017,2019, 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.