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(Exact name of registrant as specified in its charter)
d/b/a AES Ohio
iOhio
i31-0258470
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1065 Woodman Drive
iDayton, iOhio
i45432
(Address
of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(i937) i259-7215
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
N/A
N/A
N/A
1
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
DPL Inc.
Yes
☐
iNo
☑
The
Dayton Power and Light Company
Yes
☐
iNo
☑
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
DPL
Inc.
iYes
☑
No
☐
The Dayton Power and Light Company
iYes
☑
No
☐
Indicate
by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
DPL Inc.
Yes
☐
iNo
☑
The
Dayton Power and Light Company
Yes
☐
iNo
☑
DPL Inc. and The Dayton Power and Light Company have filed all applicable reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.
Indicate by check mark whether each registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
DPL Inc.
iYes
☑
No
☐
The
Dayton Power and Light Company
iYes
☑
No
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large
accelerated Filer
Accelerated Filer
iNon-accelerated Filer
Smaller reporting company
Emerging growth company
DPL Inc.
☐
☐
☑
i☐
i☐
Large
accelerated Filer
Accelerated Filer
iNon-accelerated Filer
Smaller reporting company
Emerging growth company
The Dayton Power and Light Company
☐
☐
☑
i☐
i☐
2
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
DPL Inc.
☐
The Dayton Power and Light Company
☐
DPL Inc.
The
Dayton Power and Light Company
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
i☐
i☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.
i☐
i☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).
☐
☐
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DPL Inc.
Yes
i☐
No
☑
The
Dayton Power and Light Company
Yes
i☐
No
☑
All of the outstanding common stock of DPL Inc. is indirectly owned by The AES Corporation. All of the common stock of The Dayton Power and Light Company is owned by DPL Inc.
At December 31, 2023, each registrant had the following shares of
common stock outstanding:
This combined Form 10-K is separately filed by DPL Inc. and The Dayton Power and Light Company. Information
contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself.
THE REGISTRANTS MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
The following select terms, abbreviations or acronyms are used in this Form 10-K:
Term
Definition
401(k) Plans
AES Ohio sponsors two defined contribution plans, The Dayton
Power and Light Company Employee Savings Plan and The Dayton Power and Light Company Savings Plan for Collective Bargaining Employees
AES
The AES Corporation - a global energy company, the ultimate parent company of DPL
AES Ohio
The Dayton Power and Light Company, which does business as AES Ohio
AES Ohio Credit Agreement
$250.0 million AES Ohio Second Amended and Restated Credit Agreement, dated as of December 22, 2022
AES Ohio Generation
AES
Ohio Generation, LLC - a wholly-owned subsidiary of DPL that owned and operated generation facilities from which it made wholesale sales
AFUDC
Allowance for Funds Used During Construction
AMI
Advanced Metering Infrastructure - AES Ohio is currently deploying advanced meters to approximately 95% of its customers as part of the PUCO-approved Smart Grid Comprehensive Settlement.
AOCI
Accumulated Other Comprehensive Income
AOCL
Accumulated Other Comprehensive Loss
ASC
FASB
Accounting Standards Codification
BIL
Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act) - the congressional act passed in November 2021
CAA
U.S. Clean Air Act - the congressional act that directs the EPA’s regulation of stationary and mobile sources of air pollution to protect air quality and stratospheric ozone
Capacity Market
The purpose of the capacity market is to enable PJM to obtain sufficient resources to reliably meet the needs of electric customers within the PJM footprint. PJM procures capacity, through a multi-auction
structure, on behalf of the load serving entities to satisfy the load obligations. There are four auctions held for each Delivery Year (running from June 1 through May 31). The Base Residual Auction is held three years in advance of the Delivery Year and there is one Incremental Auction held in each of the subsequent three years.
CCR
Coal Combustion Residuals - which consists of bottom ash, fly ash, boiler slag and flue gas desulfurization materials generated from burning coal
Conesville
AES Ohio Generation's interest in Unit 4 at the Conesville EGU. Unit 4 was closed in May 2020 and AES Ohio Generation's interest was sold in June 2020.
COVID-19
The
disease caused by the novel coronavirus that resulted in a global pandemic beginning in 2020.
CRES
Competitive Retail Electric Service - In Ohio, generation service is competitive and all customers can elect to contract with a CRES provider to receive their generation service.
CSAPR
Cross-State Air Pollution Rule - the EPA's rule to address interstate air pollution transport to decrease emissions to downwind states
CWA
U.S. Clean Water Act - a federal law that regulates discharges of pollutants into the water of the United States and establishes
quality standards for surface waters
DIR
Distribution Investment Rider - established in the ESP 4 to recover certain distribution capital investments placed in service beginning June 30, 2020, for three years, and subject to increasing annual revenue limits and other terms. The annual revenue limit for 2024 is $38.4 million.
DPL
DPL Inc. and its subsidiaries
DPL Credit Agreement
DPL Inc. Amended and Restated Credit Agreement, dated as of June 19, 2019. This agreement was retired on June
14, 2023.
DP&L
The Dayton Power and Light Company - the principal subsidiary of DPL and a public utility which sells, transmits and distributes electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L is wholly-owned by DPL and does business as AES Ohio.
DRO
Distribution Rate Order - the order issued by the PUCO on December 14, 2022 establishing new base distribution rates for DP&L, which became effective on September 1, 2023.
ELG
Steam
Electric Power Effluent Limitations Guidelines - guidelines which cover wastewater discharges from power plants operating as utilities
EPA
U. S. Environmental Protection Agency
ERISA
The Employee Retirement Income Security Act of 1974
ESP
The Electric Security Plan - a cost-based plan that a utility may file with the PUCO to establish SSO rates pursuant to Ohio law
ESP 1
The ESP originally approved by PUCO order dated June
24, 2009. After DP&L withdrew its ESP 3 Application, the PUCO approved DP&L's request to revert to rates based on its ESP 1 rate plan, effective December 19, 2019. This ESP was superseded by ESP 4, which was approved on August 9, 2023.
ESP 3
DP&L's ESP - which was approved October 20, 2017 and became effective November 1, 2017. This ESP 3 was subsequently withdrawn, and DP&L reverted to its ESP 1 rate plan.
Generally Accepted Accounting Principles in the United States of America
Generation Separation
The transfer on October
1, 2017, to AES Ohio Generation of the DP&L-owned generating facilities and related liabilities, excluding those of the Beckjord and Hutchings Coal Stations, pursuant to an asset contribution agreement with a subsidiary that was then merged into AES Ohio Generation
GHG
Greenhouse gas - air pollutants largely emitted from combustion
kWh
Kilowatt hour
Master Trust
DP&L established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans
MATS
Mercury
and Air Toxics Standards - the EPA’s rules for existing and new power plants under Section 112 of the CAA
Merger
The merger of DPL and Dolphin Sub, Inc., a wholly-owned subsidiary of AES. On November 28, 2011, DPL became a wholly-owned subsidiary of AES.
Miami Valley Lighting
Miami Valley Lighting, LLC is a wholly-owned subsidiary of DPL established in 1985 to provide street and outdoor lighting services to customers in the Dayton region. Miami Valley Lighting serves businesses, communities and neighborhoods with over 70,000 lighting solutions for more than 190 businesses and 180 local governments.
MRO
Market
Rate Option - a market-based plan that a utility may file with PUCO to establish SSO rates pursuant to Ohio law
MVIC
Miami Valley Insurance Company is a wholly-owned insurance subsidiary of DPL that provides insurance services to DPL and its subsidiaries
MW
Megawatt
MWh
Megawatt hour
NAAQS
National Ambient Air Quality Standards - the EPA’s health and environmental based standards for six specified pollutants, as found in the ambient air
NERC
North
American Electric Reliability Corporation - a not-for-profit international regulatory authority whose mission is to assure the effective and efficient reduction of risks to the reliability and security of the electric grid
Non-bypassable
Charges that are assessed to all customers regardless of whom the customer selects as their retail electric generation supplier
O&M
Operation and Maintenance
OAQDA
Ohio Air Quality Development Authority
OCC
The
Ohio Consumers' Counsel - The OCC is the statewide legal representative for Ohio’s Residential consumers and advocates on their behalf in PUCO and Ohio Supreme Court proceedings.
OCI
Other Comprehensive Income
OSHA
The U.S. Occupational Safety and Health Administration
OVEC
Ohio Valley Electric Corporation, an electric generating company in which DP&L has a 4.9% interest
Pension Plans
AES
Ohio sponsors two defined benefit plans, The Dayton Power and Light Company Retirement Income Plan and The Dayton Power and Light Company Supplemental Executive Retirement Plan
PJM
PJM Interconnection, LLC, an RTO - AES Ohio is required by statute to be a member of an RTO and is currently a member of PJM, which coordinates the reliability and transmission operations of the bulk power system and operates wholesale energy and ancillary markets across 13 states and the District of Columbia.
PRP
Potentially Responsible Party - a PRP is considered by the EPA to be potentially responsible for ground contamination and the EPA will commonly require PRPs to conduct an investigation to determine the source of contamination and to perform
the cleanup before using Superfund money
PUCO
Public Utilities Commission of Ohio - The Commission regulates AES Ohio as it relates to the retail rates, tariffs and utility service to its customers.
RSC
Rate Stabilization Charge
RTO
Regional Transmission Organization
SEC
Securities and Exchange Commission
SEET
Significantly
Excessive Earnings Test - a test used by the PUCO to determine whether a utility's ESP or MRO produces significantly excessive earnings for the utility
Service Company
AES US Services, LLC - the shared services affiliate providing accounting, finance and other support services to certain AES U.S. companies including DPL and AES Ohio
Smart Grid Phase 1
In June 2021, the PUCO approved the first phase of AES Ohio's grid modernization plan, covering four years of investment.
Smart Grid Phase 2
In February 2024, AES Ohio applied for PUCO approval of the second phase of its grid modernization plan, covering
ten years of investment following Smart Grid Phase 1.
SSO
Standard Service Offer - the retail transmission, distribution and generation services offered by a utility through regulated rates, authorized by the PUCO
T&D
Transmission and Distribution - Transmission relates to long distance transmission of electricity under FERC jurisdiction, and Distribution relates to local distribution of electricity under PUCO jurisdiction
The
Universal Service Fund (USF) is a statewide program which provides qualified low-income customers in Ohio with income-based bills and energy efficiency education programs
This report includes the combined filing of DPL and of DP&L, which does business as and is also referred to herein as AES Ohio. DPL is a wholly-owned subsidiary of AES, a global energy company. Throughout this report, the terms "the Company", “we”, “us”, “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
FORWARD–LOOKING STATEMENTS
Certain statements contained in this report are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptions and expectations of future economic performance, considering the information currently available to management. These statements are not statements of historical fact and are typically identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will” and similar expressions. Such forward-looking statements are subject to risks and uncertainties and investors
are cautioned that outcomes and results may vary materially from those projected due to various factors beyond our control, including but not limited to:
•impacts of weather on retail sales;
•growth in our service territory and changes in demand and demographic patterns;
•weather-related damage to our electrical system;
•performance of our suppliers;
•transmission and distribution system reliability and capacity;
•regulatory actions and outcomes, including, but not limited to, the review and approval of our rates and charges by the PUCO;
•federal
and state legislation and regulations;
•changes in our credit ratings or the credit ratings of AES;
•fluctuations in the value of pension plan assets, fluctuations in pension plan expenses and our ability to fund defined benefit pension plans;
▪changes in financial or regulatory accounting policies;
▪environmental matters, including costs of compliance with, and liabilities related to, current and future environmental and climate change laws and requirements;
▪interest rates and the use of interest rate hedges, inflation rates and other costs of capital;
▪the
availability of capital;
▪the ability of subsidiaries to pay dividends or distributions to DPL;
▪level of creditworthiness of counterparties to contracts and transactions;
▪labor strikes or other workforce factors, including the ability to attract and retain key personnel;
▪facility or equipment maintenance, repairs and capital expenditures;
▪significant delays or unanticipated cost increases associated with construction projects;
▪the availability and cost of funds to finance working capital and capital needs, particularly during
periods when the time lag between incurring costs and recovery is long and the costs are material;
▪local economic conditions;
▪costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation;
▪industry restructuring, deregulation and competition;
▪issues related to our participation in PJM, including the cost associated with membership, allocation of costs, costs associated with transmission expansion, the recovery of costs incurred and the risk of default of other PJM participants;
▪changes in tax laws and the effects
of our tax strategies;
▪product development, technology changes and changes in prices of products and technologies;
▪cyberattacks, information security breaches or information system failures;
▪catastrophic
events such as fires, explosions, terrorist acts, acts of war, pandemic events or the future outbreak of any other highly infectious or contagious disease, including COVID-19, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snowstorms, droughts, or other similar occurrences, including as a result of climate change; and
▪the risks and other factors discussed in this report and other DPL and DP&L filings with the SEC.
Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. If we do update one or more forward-looking
statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and many are beyond our control. See Item 1A. - Risk Factors in this Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and the Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations section in this Annual Report on Form 10-K for a more detailed discussion of the foregoing and certain other factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating
our outlook. These risks may also be specifically described in our Quarterly Reports on Form 10-Q in Part II - Item 1A, Current Reports on Form 8-K and other documents that we may file from time to time with the SEC.
ITEM 1. BUSINESS
OVERVIEW
DPL is a regional energy company incorporated in 1985 under the laws of Ohio. All of DPL’s stock is owned by an AES subsidiary.
DPL has three primary subsidiaries: AES Ohio, MVIC and Miami Valley Lighting. AES Ohio is a public utility providing electric transmission and distribution services in West Central Ohio. For more information on the primary subsidiaries, see Note
1. Overview and Summary of Significant Accounting Policies of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements. All of DPL's subsidiaries are wholly-owned. DPL manages its business through one reportable operating segment, the Utility segment. See Note 12. Business Segments of DPL's Consolidated Financial Statements for more information regarding DPL’s reportable segment. AES Ohio also manages its business through one reportable operating segment, the Utility segment.
MVIC is our captive insurance company that provides insurance services to AES Ohio 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.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio 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. AES Ohio 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. AES Ohio’s share of this generation capacity is 103 MW. AES Ohio does not have any subsidiaries.
DPL, through
its subsidiaries, once owned all or a percentage of various generation facilities, the last of which was sold in June 2020. For more information on this event and DPL's other previously owned EGUs, see Note 14. Discontinued Operations of DPL's Consolidated Financial Statements.
DPL's employees are
essential to delivering and maintaining reliable service to our customers. DPL and its subsidiaries employed 710 people (628 full-time) at December 31, 2023, all of whom were employed by AES Ohio. Approximately 60% of all DPL employees are under a collective bargaining agreement that expires on October 31, 2026.
Safety
As part of AES, safety is one of our core values. Conducting safe operations at our facilities, so that 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 AES 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 OHSA 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 lost time incident rates for our employees and contractors based on OSHA standards. 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.
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 the 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 certain AES U.S. companies including, among other companies, DPL and AES Ohio. 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 AES Ohio, are not subsidizing costs incurred for the benefit of other businesses. See Note 11. Related Party Transactions of DPL's Consolidated Financial Statements and Note 10. Related Party Transactions of AES Ohio's 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. AES Ohio's sales typically reflect the seasonal weather patterns but can also be impacted by service territory economic activity and the number of retail customers we have, as well as customer-initiated energy efficiency efforts.
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 revenue and increase repair costs. Partially mitigating this impact is AES Ohio’s ability to timely recover certain O&M repair costs related to severe storms.
REGULATION
AND MARKET STRUCTURE
Retail Rate Regulation
AES Ohio'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 AES Ohio retail customers, under the regulatory authority of the PUCO, regardless of the customer’s retail electric supplier. AES Ohio'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 AES Ohio.
For additional discussion of the regulatory environment related to our business, see the discussion in Note 2. Regulatory Matters
of the Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, which is incorporated by reference herein.
Ohio Retail Rates
AES Ohio rates for transmission and distribution electric service currently remain the lowest among Ohio investor-owned utilities.
On September 26, 2022, AES Ohio filed its latest ESP (ESP 4) with the PUCO. ESP 4 is a comprehensive plan to enhance and upgrade its network and improve service reliability, provide greater safeguards for price stability and continue investments in local economic development. On April 10, 2023, AES Ohio entered
into a Stipulation and Recommendation with the PUCO Staff and seventeen parties (the “Settlement”) with respect to AES Ohio’s ESP 4 application, and, on August 9, 2023, the PUCO approved the Settlement without modification. With approval of this Settlement, the distribution rates that were approved by the PUCO on December 14, 2022, and are described in the paragraph below, became effective on September 1, 2023.
On December 14, 2022, the PUCO issued an order on AES Ohio's distribution rate case application that was filed on November 30, 2020. Among other matters, the order establishes a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service and provides for a return on equity of 9.999% and a cost of long-term debt of 4.4% on a distribution rate base of $783.5 million and based on a capital structure of 53.87% equity and 46.13% long-term debt.These rates went into effect on September 1, 2023 with the approval of AES Ohio’s ESP 4.
Ohio law and the PUCO
rules contain targets relating to renewable energy standards. AES Ohio is currently in full compliance with renewable energy standards and recovers the costs of its compliance with Ohio renewable energy standards through its Standard Offer Rate Tariff, 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. AES Ohio implemented a formula-based rate for its transmission service, effective May 3, 2020.
As a member of PJM, AES Ohio also receives revenue from the RTO related to AES Ohio’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. AES Ohio continues to recover non-market-based transmission and ancillary costs through its non-bypassable Transmission Cost Recovery Rider.
For more information regarding AES Ohio's ESP and distribution rate case and other regulatory items, see Note 2. Regulatory Matters of the Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Ohio Competition
Since January 2001, AES Ohio’s electric customers have been permitted to choose their retail electric generation supplier. The SSO generation supply is provided by third parties through a competitive bid process. AES Ohio 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 AES Ohio’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. AES Ohio 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
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from
federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, suspension or revocation of permits and/or facility shutdowns. There can be no assurance that we have been or will be at all times in full compliance with such laws, regulations and permits.
For further information about these risks, see Item 1A.– Risk Factors of this Annual Report on Form 10-K. Our operations are subject to significant government regulation and could be adversely affected by changes in the law or regulatory schemes; several of our businesses are subject to potentially significant remediation expenses, enforcement initiatives, private party lawsuits and reputational risk associated with CCR; our businesses are subject
to stringent environmental laws, rules and regulations; and concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses.
Where no accrued liability has been recognized, it is reasonably possible that some matters could have unfavorable outcomes for us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2023.
We have taken steps to limit our exposure
to environmental claims that could be raised with respect to our previously-owned and operated coal-fired generation units, but we cannot predict whether any such claims will be raised and, if they are, the extent to which they may have a material adverse effect on our results of operations, financial condition and cash flows.
From time to time, we are subject to enforcement actions for claims of noncompliance with environmental laws and regulations. DPL and AES Ohio cannot assure that they will be successful in defending against any claim of noncompliance. However, we do not believe any currently open environmental investigations will result in fines material to our results of operations, financial condition and cash flows.
Under certain environmental laws, we could be held responsible for costs relating to contamination at our past or present
facilities and at third-party waste disposal sites. We could also be held liable for human exposure to hazardous substances or for other environmental damage. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, results of operations, financial condition and cash flows. A discussion of the legislative and regulatory initiatives most likely to affect us follows.
Environmental Matters Related to Air Quality
As a result of DPL’s sale of its ownership interest in the Miami Fort and Zimmer Stations in 2017, retirement and subsequent sale of its Stuart and Killen Stations in 2019, and the retirement and sale of our interest in Conesville in 2020, thereby completing the exit of our generation business, the following
environmental matters, regulations and requirements are now not expected to have a material impact on DPL:
•the CAA and the following regulations:
◦CSAPR and associated updates;
◦MATS and any associated regulatory or judicial processes;
◦NAAQS; and
◦Greenhouse gas regulations established under CAA Section 111(d) for EGUs.
Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds
As a result of DPL’s sale of its ownership interest in the Miami Fort and Zimmer Stations, retirement and subsequent sale
of its Stuart and Killen Stations, and the retirement and sale of our interest in Conesville, thereby completing the exit 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 EPA on May 19, 2014;
•revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the EPA 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, AES Ohio and other parties received notices that the EPA considered AES Ohio and other parties PRPs for the Tremont City Landfill site, located near Dayton, Ohio. On October 16, 2019, AES Ohio received another notice from the EPA claiming that AES Ohio is a PRP for the portion of the site known as the barrel fill. While a review by AES Ohio of its records indicates that it did not contribute hazardous materials to the site, AES Ohio is currently unable to predict the outcome of this matter. If AES Ohio were required to contribute to the clean-up of the site, it could have an adverse effect on our business, financial
condition or results of operations.
In 2002, AES Ohio and other parties received a special notice that the EPA considered AES Ohio to be a PRP for the clean-up of hazardous substances at a third-party landfill known as the South Dayton Dump (“Landfill”). Several of the parties voluntarily accepted some of the responsibility for contamination at the Landfill and, in May
2010, three of those parties, Hobart Corporation, Kelsey-Hayes Company and NCR Corporation (“PRP Group”), filed a civil complaint in Ohio federal court (the “District Court”) against AES Ohio and numerous other defendants, alleging that the defendants contributed to the contamination at the landfill and were liable for contribution to the PRP group for costs associated with the investigation and remediation of the site.
While AES Ohio 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 EPA relating to vapor intrusion and again filed suit against AES Ohio and other defendants. Plaintiffs also added an additional ASAOC they entered into in 2016 pertaining to the investigation and remediation of all hazardous substances present in the Landfill - potentially including undefined
areas outside the original dump footprint - to the vapor intrusion trial proceeding. The 2013 vapor intrusion ASAOC settled in early 2020, but the 2016 ASAOC remains to be adjudicated after completion of the remedial investigation feasibility study. While AES Ohio is unable to predict the outcome of these matters, if AES Ohio were required to contribute to the clean-up of the site, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Regulation of CCR
On October 19, 2015, an EPA rule regulating CCR under the Resource Conservation and Recovery Act as nonhazardous solid waste became effective ("CCR Rule"). The rule established nationally applicable minimum criteria for the disposal of CCR in new and currently operating landfills and surface impoundments, including location restrictions,
design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. The 2016 Water Infrastructure Improvements for the Nation Act ("WIIN Act"), includes provisions to implement the CCR Rule through a state permitting program, or if the state chooses not to participate, a possible federal permit program. The EPA has indicated that they will implement a phased approach to amending the CCR Rule, which is ongoing. On February 20, 2020, the EPA published a proposed rule to establish a federal CCR permit program that would operate in states without approved CCR permit programs. 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.
On August 28, 2020, the EPA published
the CCR Part A Rule that, among other amendments, required certain CCR units to cease waste receipt and initiate closure by April 11, 2021. The CCR Part A Rule also allowed for extensions of the April 11, 2021 deadline if EPA determines certain criteria are met. Facilities seeking such an extension were required to submit a demonstration to EPA by November 30, 2020. On January 11, 2022, EPA released its first in a series of proposed determinations regarding nine CCR Part A Rule demonstrations, including for OVEC’s Clifty Creek and four compliance-related letters notifying certain other facilities of their compliance obligations under the federal CCR regulations. The determinations and letters include interpretations regarding implementation of the CCR Rule. On April
8, 2022, petitions for review were filed challenging these EPA actions. The petitions are consolidated in Electric Energy, Inc. v. EPA. It is too early to determine the direct or indirect impact of these letters or any determinations that may be made.
The CCR Rule, current or proposed amendments to, or EPA interpretations of, the CCR Rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material adverse effect on our results of operations, financial condition and cash flows.
Clean Water Act - Regulation of Water Discharge
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. A number of legal cases relevant to the determination of "functional equivalent" are ongoing in various jurisdictions. On November 27, 2023, the EPA issued draft guidance regarding functional equivalent discharge. It is too early to determine whether the Supreme Court decision or the result of litigation related to "functional equivalent" may have a material adverse effect on our results of operations, financial condition and cash flows.
The concept of "Waters of the U.S." ("WOTUS") defines the geographic reach and authority of the U.S. Army Corps of Engineers and the EPA (the "Agencies") to regulate streams, wetlands, and other water bodies under the CWA. There have been multiple Supreme Court decisions and dueling regulatory definitions over the past several years concerning the proper standard for how to properly determine whether a wetland or stream that is not navigable is considered a WOTUS. On May 25, 2023, the U.S. Supreme Court rendered a decision (the "Decision") in the case of Sackett v. Environmental Protection Agency, addressing the definition of
WOTUS with regards to the CWA. The Decision provides a clear standard that substantially restricts the Agencies' ability to regulate certain types of wetlands and streams. Specifically, wetlands that do not have a continuous surface connection with traditional interstate navigable water are not federally jurisdictional.
On September 8, 2023, the Agencies published final rule amendments in the Federal Register to amend the final “Revised Definition of ‘Waters of the United States’” rule. This final rule conforms the definition of WOTUS to the definition adopted in the Decision. The Agencies have amended key aspects of the regulatory text to conform the rule to the Decision.It is too early to determine whether any outcome of litigation or current or future revisions to rules interpreting federal jurisdiction
over waters over the U.S. may have a material adverse effect on our results of operations, financial condition and cash flows.
Climate Change Legislation and Regulation
Although we have exited our generation business, our continuing operations face certain risks related to existing and potential international, federal, state, regional and local GHG legislation and regulations, including risks related to increased capital expenditures or other compliance costs which could have a material adverse effect on our results of operations, financial condition and cash flows. Except as noted in the discussion below, at this time, we cannot estimate the costs of compliance with existing, proposed or potential international, federal, state or regional GHG emissions reductions legislation or initiatives due in part to the fact that many of these proposals are in earlier stages of development and any final
laws or regulations, if adopted, could vary drastically from current proposals. Any international, federal, state or regional legislation adopted in the U.S. that would require the reduction of GHG emissions could have a material adverse effect on our results of operations, financial condition and cash flows.
On the international level, on December 12, 2015, 195 nations, including the U.S., finalized the text of an international climate change accord in Paris, France (the “Paris Agreement”), which agreement was signed and
officially entered into on April 22, 2016. The Paris Agreement calls for countries to set their own GHG emissions targets, make these emissions targets more stringent over time and be transparent about the GHG emissions reporting and the measures each
country will use to achieve its GHG emissions targets. A long-term goal of the
Paris Agreement is to limit global temperature increase to well below two degrees Celsius from temperatures in the
pre-industrial era. The U.S. withdrawal from the Paris Agreement became effective on November 4, 2020. However,
on January 20, 2021, President Biden signed and submitted an instrument for the U.S. to rejoin the Paris Agreement, which became effective on February 19, 2021. In November 2023, the international community
gathered for the 28th Conference to the Parties on the UN Framework Convention on Climate Change (“COP28”). The Parties agreed to non-binding language calling on countries to transition
away from fossil fuels in energy systems to achieve net zero emissions by 2050.
HOW TO CONTACT DPL AND AES Ohio AND SOURCES OF OTHER INFORMATION
Our principal offices are located at 1065 Woodman Drive, Dayton, Ohio45432, and our telephone number is (937) 259-7215. AES Ohio’s website address is www.aes-ohio.com. The information
on our website is not incorporated by reference into this report. The SEC maintains an internet website that contains this report and other information that we file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Investors should consider carefully the following risk factors that could cause our business, operating results and financial condition to be materially adversely affected. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance. The categories of risk we have identified in this item include risks associated with
our operations, governmental regulation and laws and our indebtedness and financial condition. These risk factors should be read in conjunction with the other detailed information concerning DPL set forth in the DPL's Consolidated Financial Statements and concerning AES Ohio set forth in the AES Ohio's Financial Statements in Item 8. – Financial Statements and Supplementary Data
and more information in Item 7.
– Management's Discussion and Analysis of Financial Condition and Results of Operations herein. The risks and uncertainties described below are not the only ones that we face.
RISKS ASSOCIATED WITH OUR OPERATIONS
We may be negatively affected by a lack of growth or a decline in the number of customers.
Customer growth is affected by a number of factors outside our control, such as population changes, job and income growth, housing starts, new business formation and the overall level of economic activity. A significant lack of growth, or decline, in the number of customers in our service territory could have a material adverse effect on our results of operations, financial condition and cash flows and may cause us to fail to fully realize
anticipated benefits from investments and expenditures.
Our business is sensitive to weather and seasonal variations.
Weather conditions significantly affect the demand for electric power and, accordingly, our business is affected by variations in general weather conditions and unusually severe weather. As a result of these factors, our operating revenue and associated operating expenses are not generated evenly by month during the year. We forecast electric sales based on normal weather, which represents a long-term historical average. In addition, severe or unusual weather, such as floods, tornadoes and ice or snowstorms, may cause outages and property damage that may require us to incur additional costs that may not be insured or recoverable from customers. While AES Ohio is permitted to seek recovery of storm damage costs, if AES Ohio is unable
to fully recover such costs in a timely manner, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our membership in a regional transmission organization presents risks that could have a material adverse effect on our results of operations, financial condition and cash flows.
On October 1, 2004, in compliance with Ohio law, AES Ohio turned over control of its transmission functions and fully integrated into PJM, a regional transmission organization.
The rules governing the various regional power markets may also change from time to time which could affect our costs and revenue and have a material adverse effect on our results of operations, financial condition and cash flows. We may
be required to expand our transmission system according to decisions made by PJM rather than our internal planning process. Various proposals and proceedings before the FERC may cause transmission rates to change from time to time. In addition, PJM developed and continues to refine rules associated with the allocation and methodology of assigning costs associated with improved transmission reliability, reduced transmission congestion and firm transmission rights that may have a financial effect on us. We also incur fees and costs to participate in PJM.
Non-market-based RTO-related charges are being recovered from all retail customers through the Transmission Rider. If in the future, however, we are unable to recover all of these costs in a timely manner this could have a material adverse effect on our results of operations, financial condition and cash flows.
As
members of PJM, AES Ohio is also subject to certain additional risks including those associated with the allocation of losses caused by unreimbursed defaults of other participants in PJM markets among PJM members and those associated with complaint cases filed against PJM that may seek refunds of revenue previously earned by PJM members including AES Ohio. These amounts could be significant and have a material adverse effect on our results of operations, financial condition and cash flows.
Costs associated with new transmission projects could have a material adverse effect on our results of operations, financial condition and cash flows.
Annually, PJM performs a review of the capital additions required to provide reliable electric transmission services throughout its territory. PJM traditionally allocated the costs of constructing these facilities
to those entities that benefited directly from the additions. Over the last several years, however, some of the costs of constructing large, new transmission facilities have been “socialized” across PJM without a direct relationship between the costs assigned to and benefits received by particular PJM members. To date, the additional costs charged to AES Ohio
for large, new transmission approved projects have not been material. Over time, as more new
transmission projects are constructed and if the allocation method is not changed, the annual costs could become material. AES Ohio is recovering the Ohio retail jurisdictional share of these allocated costs from its retail customers through the Transmission Rider. To the extent that any costs in the future are material and we are unable to recover them from our customers, such costs could have a material adverse effect on our results of operations, financial condition and cash flows.
Our transmission and distribution system is subject to operational, reliability and capacity risks.
The ongoing reliable performance of our transmission and distribution system is subject to risks due to, among other things, weather damage, intentional or unintentional damage, equipment or process failure, catastrophic events, such as fires and/or explosions, facility
outages, labor disputes, accidents or injuries, operator error or inoperability of key infrastructure internal or external to us and events occurring on third party systems that interconnect to and affect our system. The failure of our transmission and distribution system to fully operate and deliver the energy demanded by customers could have a material adverse effect on our results of operations, financial condition and cash flows, and if such failures occur frequently and/or for extended periods of time, could result in adverse regulatory action. In addition, the advent and quick adoption of new products and services that require increased levels of electrical energy cannot be predicted and could result in insufficient transmission and distribution system capacity. Also, as a result of the above risks and other potential risks and hazards associated with transmission and distribution operations, we may from time to time become exposed to significant liabilities for
which we may not have adequate insurance coverage. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Further, any increased costs or adverse changes in the insurance markets may cause delays or inability in maintaining insurance coverage on terms similar to those presently available to us or at all. A successful claim for which we are not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows.
Current and future conditions in the economy may adversely affect our customers, suppliers and other counterparties in a way which could materially and adversely affect our results of operations, financial condition and cash flows.
Our
business, results of operations, financial condition and cash flows have been and will continue to be affected by general economic conditions. Slowing economic growth, credit market conditions, fluctuating consumer and business confidence, fluctuating commodity prices and other challenges currently affecting the general economy, have caused and may continue to cause some of our customers to experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing customers may reduce their electricity consumption and may not be able to fulfill their payment obligations to us in a normal, timely fashion. In addition, some existing commercial and industrial customers may discontinue their operations. Sustained downturns, recessions or a sluggish economy generally affect the markets in which we operate and negatively influence our energy operations. A contracting, slow or sluggish economy could reduce the demand for energy
in areas in which we are doing business. For example, during economic downturns, our commercial and industrial customers may see a decrease in demand for their products, which in turn may lead to a decrease in the amount of energy they require. Furthermore, projects which may result in potential new customers may be delayed until economic conditions improve. Some of our suppliers, customers, other counterparties and others with whom we transact business experience financial difficulties, which may impact their ability to fulfill their obligations to us. For example, our counterparties on forward purchase contracts and financial institutions involved in our credit facility may become unable to fulfill their contractual obligations to us or result in their declaring bankruptcy or similar insolvency-like proceedings. We may not be able to enter into replacement agreements on terms as favorable as our existing agreements. Reduced demand for our electric services, failure
by our customers to timely remit full payment owed to us and supply delays or unavailability could have a material adverse effect on our results of operations, financial condition and cash flows. In particular, the projected economic growth and total employment in AES Ohio’s service territory are important to the realization of our forecasts for annual energy sales.
Economic conditions relating to the asset performance and interest
rates of our pension and postemployment benefit plans could materially and adversely impact our results of operations, financial condition and cash flows.
Pension costs are based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets, level of employer contributions, the expected life span of pension plan beneficiaries and the discount rate used to determine the present value of future pension obligations. Any of these assumptions could prove to be wrong, resulting in a shortfall of our pension and postemployment benefit plan assets compared to obligations under our pension and postemployment benefit plans. Further, the performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under our pension and postemployment benefit plans. These assets are subject to market fluctuations and will yield
uncertain returns, which may fall below our projected return rates. A decline in the market value of the pension and postemployment benefit plan assets will increase the funding requirements under our pension and postemployment benefit plans if the actual asset returns do not recover these declines in value in the foreseeable future. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. We are responsible for funding any shortfall of our pension and postemployment benefit plans’ assets compared to obligations under the pension and postemployment benefit plans, and a significant increase in our pension liabilities could materially and adversely impact our results of operations, financial condition and cash flows. We are subject to the Pension Protection Act of 2006, which requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding.
As a result, our required contributions to these plans, at times, have increased and may increase in the future. In addition, our pension and postemployment benefit plan liabilities are sensitive to changes in interest rates. When interest rates decrease, the discounted liabilities increase benefit expense and funding requirements. Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements for the obligations related to the pension and other postemployment benefit plans. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Pension Plans and for more information, see Note 8. Benefit Plans of
DPL's Consolidated Financial Statements and Note 7. Benefit Plans of AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data. Declines in market values and increased funding requirements could have a material adverse effect on our results of operations, financial condition and cash flows.
Counterparties providing materials or services may fail to perform their obligations, which could materially and adversely impact our results of operations, financial condition and cash flows.
We enter into transactions with and rely on many counterparties in connection with our business, including for purchased power, for our capital improvements and additions and to provide professional services, such as actuarial calculations,
payroll processing and various consulting services. If any of these counterparties fails to perform its obligations to us or becomes unavailable, our business plans may be materially disrupted, we may be forced to discontinue certain operations if a cost-effective alternative is not readily available or we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause delays. Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than relief provided by these mitigation provisions. Any of the foregoing could result in regulatory actions, cost overruns, delays or other losses, any of which (or a combination of which) could have a material adverse effect on our results of operations, financial condition and cash flows.
Further, our construction program
calls for extensive expenditures for capital improvements and additions, including the installation of upgrades, improvements to transmission and distribution facilities, as well as other initiatives. As a result, we may engage contractors and enter into agreements to acquire necessary materials and/or obtain required construction related services. In addition, some contracts may provide for us to assume the risk of price escalation and availability of certain metals and key components. This could force us to enter into alternative arrangements at then-current market prices that may exceed our contractual prices or cause construction delays in a significant manner. It could also subject us to enforcement action by regulatory authorities to the extent that such a contractor failure resulted in a failure by AES Ohio to comply with requirements or expectations, particularly with regard to the cost of the project. If these events were to occur, we might incur losses or delays
in completing construction.
The COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, could impact our business and operations.
The COVID-19 pandemic has impacted global economic activity, caused significant volatility and negative pressure in financial markets and reduced the demand for energy in our service territory. In addition
to reduced revenue and lower margins resulting from decreased energy demand within our service territory in recent years, we have also incurred expenses relating to COVID-19, including expenses relating to events outside of our control. In addition to contributing to economic slowdown or a recession, COVID-19 or another pandemic could have material and adverse effects on our results of operations, financial condition and cash flows due to, among other factors:
•further decline in customer demand as a result of general decline in business activity;
•further destabilization of the markets and decline in business activity negatively impacting our customer growth or the number of customers in our service territory as well as our customers’ ability to pay for our services when due (or at all);
•delay
or inability in obtaining regulatory actions and outcomes that could be material to our business, including for recovery of COVID-19 related expenses and losses such as uncollectible customer amounts and the review and approval of our applications, rates and charges by the PUCO;
•difficulty accessing the capital and credit markets on favorable terms, or at all, a disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;
•negative impacts on the health of our essential personnel, especially if a significant number of them are affected, and on our operations as a result of implementing stay-at-home, quarantine and other social distancing measures;
•a
deterioration in our ability to ensure business continuity during a disruption, including increased cybersecurity attacks related to the work-from-home environment;
•delays or inability to access, transport and deliver materials to our facilities due to restrictions on business operations or other factors affecting us and our third-party suppliers;
•delays or inability to access equipment or the availability of personnel to perform planned and unplanned maintenance, which can, in turn, lead to disruption in operations;
•delays or inability in achieving our financial goals, growth strategy and digital transformation; and
•delays in the implementation of expected rules and regulations.
The
impact of the COVID-19 pandemic also depends on factors, including the effectiveness and timing of updated vaccines to address new variants, the development of more virulent COVID-19 variants as well as third-party actions taken to contain its spread and mitigate its public health effects. A resurgence or material worsening of the COVID-19 pandemic could present material uncertainty which could materially and adversely affect our transmission and distribution systems, results of operations, financial condition and cash flows. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
Failure
to maintain an effective system of internal controls over financial reporting could result in material misstatements in our financial statements, the disallowance of cost recovery, or incorrect payment processing.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP in the United States of America, laws and regulations, taxation requirements and federal securities laws and regulations in order to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with our reporting requirements under federal securities, tax and other laws and regulations and to properly process payments. We have also implemented corporate governance, internal control and accounting policies and procedures
in connection with the Sarbanes-Oxley Act of 2002. Our internal controls and policies have been and continue to be closely monitored by management and our Board of Directors. While we believe these controls, policies, practices and systems are adequate to verify data integrity, the identification of
significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner could lead to undetected errors that could
result in material misstatements in our financial statements, the disallowance of cost recovery, or incorrect payment processing. The consequences of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
If we are unable to maintain a qualified and properly motivated workforce, it could have a material adverse effect on our results of operations, financial condition and cash flows.
One of the challenges we face is to retain a skilled, efficient and cost-effective workforce while recruiting new talent to replace losses in knowledge and skills due to resignations, terminations or retirements. This undertaking could require us to make additional financial commitments and incur increased costs. If we are unable to successfully attract and retain an appropriately qualified workforce, it could
have a material adverse effect on our results of operations, financial condition and cash flows. In addition, we have employee compensation plans that reward the performance of our employees. We seek to ensure that our compensation plans encourage acceptable levels for risk and high performance through pay mix, performance metrics and timing. We may not be able to successfully train new personnel as current workers with significant knowledge and expertise retire. We also may be unable to staff our business with qualified personnel in the event of significant absenteeism related to a pandemic illness. Excessive risk-taking by our employees to achieve performance targets, through mitigated by policies and procedures, could result in events that have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements that could adversely
affect our business, results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements with employees who are members of a union. Over half of our employees are represented by a collective bargaining agreement. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreement or at the expiration of the collective bargaining agreement before a new agreement is negotiated. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.
The use of non-derivative and derivative instruments in the normal
course of business could result in losses that could materially and adversely impact our results of operations, financial position and cash flows.
From time to time, we use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage financial risks. These trades are affected by a range of factors, including fluctuations in interest rates and optimization opportunities. We have attempted to manage our risk exposure by establishing and enforcing risk limits and risk management policies. Despite our efforts, however, these risk limits and management policies may not work as planned and fluctuating prices and other events could adversely affect our results of operations, financial condition and cash flows. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these instruments can involve management’s judgment or the
use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of some of these contracts. We could also recognize financial losses as a result of volatility in the market values of these contracts, a counterparty failing to perform or the underlying transactions which the instruments are intended to hedge failing to materialize, which could result in a material adverse effect on our results of operations, financial condition and cash flows.
Potential security breaches (including cybersecurity breaches) and terrorism risks could materially and adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our transmission, distribution and other facilities. We
also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cybersecurity attacks and other causes and also may be subject to acts of sabotage and vandalism. In particular, given the importance of energy and the electric grid, there is the possibility that our systems
and facilities could be targets of terrorism or acts of war, and there has been
an increased focus on the U.S. energy grid that is believed to be related to the Russia/Ukraine conflict. We have implemented measures to help prevent unauthorized access to our systems and facilities, including network and system monitoring, identification and deployment of secure technologies and certain other measures to comply with mandatory regulatory reliability standards. Pursuant to NERC requirements, we have a robust cybersecurity plan in place and are subject to regular audits by an independent auditor approved by NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks and identify areas for improvement. In addition, we provide cybersecurity training for our employees and perform exercises designed to raise employee awareness of cyber risks on a regular basis. To date, cyberattacks on our business and operations have not had a material impact on our operations or
financial results. Despite these efforts, if our systems or facilities were to be breached or disabled, we may be unable to recover them in a timely manner to fulfill critical business functions, including the supply of electric services to our customers, and we could experience decreases in revenue and increases in costs that could materially and adversely affect our results of operations, financial condition and cash flows.
In the course of our business, we also store and use customer, employee and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in liability or penalties under privacy laws, negative publicity, remediation costs
and potential litigation, damages, consent orders, injunctions, fines and other relief.
To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.
Failure or disruption in our information systems or those of businesses we rely on, or implementation of new processes and information systems could, if significant, interrupt our operations and adversely affect our business, results of operations, financial condition and cash flows in a material manner.
Our business depends on numerous information systems to manage our operations and business processes, financial information, and customer
billings. From time to time, we have experienced, and may in the future experience, damage or disruptions in our information technology and computer systems from various risks including, but not limited to, power outages, facility damage, computer and telecommunications failures, computer viruses, security breaches, vandalism, theft, natural disasters, catastrophic events, human error and potential cyber threats, and our disaster recovery planning cannot account for all eventualities.
In addition, we are currently making, and expect to continue to make, investments in our information technology systems and infrastructure, some of which are significant. We are in the midst of an initiative to replace certain information systems, including our customer information and billing system. Failure to successfully implement this initiative could affect our ability to bill and collect from our customers which could,
if significant, result in a material adverse effect on our business, operating results and financial condition.
RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS
We may not always be able to recover our costs to deliver electricity to our retail customers. The costs we can recover and the return on capital we are permitted to earn for the most substantial part of our business are regulated and governed by the laws of Ohio and the rules, policies and procedures of the PUCO.
In Ohio, transmission and distribution businesses are regulated. Even though rate regulation is premised on full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCO will agree that all of our costs have been prudently incurred or are
recoverable. There can be no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs or permitted rates of return. Accordingly, the revenue AES Ohio receives may or may not match its expenses at any given time.
Changes in or reinterpretations of, or the unexpected application of the laws, rules, policies and procedures that set or govern
electric rates, permitted rates of return, rate structures, operation of a competitive bid structure to supply retail generation service to SSO customers, reliability initiatives, capital expenditures and investments and the recovery of these and other costs on a full or timely basis through rates, power market prices and the frequency and timing of rate increases, could have a material adverse effect on our results of operations, financial condition and cash flows.
Our increased costs due to renewable energy requirements may not be fully recoverable in the future.
The renewable energy standards have increased our costs and are expected to continue to increase (and could materially increase) these costs. AES Ohio is currently entitled to recover costs associated with its renewable energy compliance. If, in the future, we are unable to timely or
fully recover these costs, it could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, if we were found not to be in compliance with these standards, monetary penalties could apply. These penalties are not permitted to be recovered from customers and significant penalties could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to numerous environmental laws, rules and regulations that require capital expenditures, increase our cost of operations and may expose us to environmental liabilities.
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the remediation of retired generation and other facilities, storage, handling,
use, storage, disposal and transportation of coal combustion residuals and other materials, some of which may be defined as hazardous materials, the emission and discharge of hazardous and other materials or items into the environment, such as GHGs; and the health and safety of our employees. Such laws, rules and regulations can become stricter over time, and we could also become subject to additional environmental laws, rules and regulations and other requirements in the future. Environmental laws, rules and regulations also require us to comply with inspections and obtain and comply with a wide variety of environmental licenses, permits, inspections and other governmental authorizations. These laws, rules and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and other governmental authorizations from federal, state and local agencies. If we are not able to timely comply with inspections and obtain, maintain or comply
with all environmental laws, rules and regulations and all licenses, permits and other government authorizations required to operate our business, then our operations could be prevented, delayed or subject to additional costs. A violation of environmental laws, rules, regulations, licenses, permits or other requirements can result in substantial fines, penalties, other sanctions, permit revocation, facility shutdowns, the imposition of stricter environmental standards and controls or other injunctive measures affecting operating assets. In addition, any actual or alleged violation of these laws, rules or regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations. AES Ohio has an ownership interest in OVEC, which operates generating stations. We generally are responsible for our respective pro rata share of expenditures for complying with environmental laws, rules, regulations, licenses, permits
and other requirements at this generating station, but have limited control over the compliance measures taken by the operator. Under certain environmental laws, we could also be held strictly, jointly and severally responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to such hazardous substances or for other environmental damage.
In particular, we are subject to potentially significant remediation expenses, enforcement initiatives, private-party lawsuits and reputational risk associated with CCR, which consists of bottom ash, fly ash, boiler slag and flue gas desulfurization materials generated from burning coal generated at our formerly owned coal-fired generation plant sites. CCR currently remains onsite at OVEC's facilities, including in CCR ponds. Compliance with the CCR rule, amendments
to the federal CCR rule, or other federal, state, or foreign rules or programs addressing CCR may require us to incur substantial costs. In addition, CCR, particularly with respect to its beneficial use and regulation as nonhazardous solid waste, has been the subject of interest from environmental non-governmental organizations and the media. Any of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws, rules and regulations or other environmental requirements. We cannot assure that we will be
successful in defending against any claim of noncompliance. Any actual or alleged violation of these laws, rules, regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations and expose us to unexpected costs. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1. - Business - Environmental Matters for a more comprehensive discussion of these and other environmental matters impacting us.
Concerns about
GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our business.
Although we have exited our generation business, our continuing operations face risks from regulatory developments related to climate change, as well as the physical impacts of climate change. At the federal, state and regional levels, policies are under development or have been developed to regulate GHG emissions. There currently is no U.S. federal legislation imposing mandatory GHG emission reductions (including for CO2) that affects our current operations. In addition, it is likely that there will be increased focus on climate change from a President Biden administration, which may result in additional legislation and regulations regarding GHG emissions.
In
December 2015, the parties to the United Nations Framework Convention on Climate Change convened for the 21st Conference of the parties and the resulting Paris Agreement established a long-term goal of keeping the increase in global average temperature well below 2°C above pre-industrial levels. We anticipate that the Paris Agreement will continue the trend toward efforts to de-carbonize the global economy. Although the U.S. was officially able to withdraw from the Paris Agreement on November 4, 2020, on January 20, 2021, President Biden began the 30-day process of rejoining the Paris Agreement, which became effective for the U.S. on February 19, 2021. In November 2023, the international community gathered for COP28. The Parties agreed to non-binding language calling on countries to transition away from fossil fuels in
energy systems to achieve net zero emissions by 2050.
Any existing or future international, federal, state or regional legislation or regulation of GHG emissions, to the extent directly or indirectly applicable to our electric transmission and distribution operations, could have a material adverse impact on our financial performance.
Furthermore, according to the Intergovernmental Panel on Climate Change, physical risks from climate change could include, but are not limited to, increased runoff and earlier spring peak discharge in many glacier and snow-fed rivers, warming of lakes and rivers, an increase in sea level, changes and variability in precipitation and in the intensity and frequency of extreme weather events. Physical impacts may have the potential to significantly affect our business and operations. For example, extreme weather events
could result in increased downtime and operation and maintenance costs at our electric power transmission and distribution assets and facilities. Variations in weather conditions, primarily temperature and humidity, would also be expected to affect the energy needs of customers. A decrease in energy consumption could decrease our revenue. In addition, while revenue would be expected to increase if the energy consumption of customers increased, such increase could prompt the need for additional investment in generation capacity.
If any of the foregoing risks materialize, we expect our costs to increase or revenue to decrease and there could be a material adverse effect on our business and on our consolidated results of operations, financial condition, cash flows and reputation if such changes are significant. Please see Item 1. - Business - Environmental Matters
for more information of environmental matters impacting us, including those relating to regulation of GHG emissions.
If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties.
As an owner of a bulk power transmission system, AES Ohio is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. In addition, AES Ohio is subject to Ohio reliability standards and targets. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from
customers through regulated rates, there can be no assurance that the PUCO will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability
standards, we could be subject to sanctions, including substantial monetary penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject
to extensive laws and local, state and federal regulation, as well as litigation and other proceedings that affect our operations and costs.
We are subject to extensive regulation at the federal, state, and local levels. For example, at the federal level, AES Ohio is regulated by the FERC and the NERC and, at the state level, by the PUCO. The regulatory power of the PUCO over AES Ohio is both comprehensive and typical of the traditional form of regulation generally imposed by state public utility commissions. We face the risk of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Ohio. AES Ohio is subject to regulation by the PUCO as to our services and facilities, the valuation of property, the construction, purchase, or lease of electric facilities, the classification of accounts, rates of depreciation, the increase or decrease in retail rates and charges, the issuance of
securities and incurrence of debt, the acquisition and sale of some public utility properties or securities and certain other matters. As a result of the Energy Policy Act of 2005 and subsequent legislation affecting the electric utility industry, we have been required to comply with rules and regulations in areas including mandatory reliability standards, cybersecurity, transmission expansion and energy efficiency. Complying with the regulatory environment to which we are subject requires us to expend a significant amount of funds and resources. The failure to comply with this regulatory environment could subject us to substantial financial costs and penalties and changes, either forced or voluntary, in the way we operate our business that could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to litigation, regulatory proceedings, administrative
proceedings, audits, settlements, investigations and claims from time to time that require us to expend significant funds to address. There can be no assurance that the outcome of these matters will not have a material adverse effect on our business, results of operations, financial condition and cash flows. Asbestos and other regulated substances are, and may continue to be, present at our facilities, and we have been named as a defendant in asbestos litigation. The continued presence of asbestos and other regulated substances at these facilities could result in additional litigation being brought against us, which could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1. - Business - Regulation And Market Structure, Item 1. - Business - Environmental Matters, and Item 3. - Legal Proceedings
for a summary of significant regulatory matters and legal proceedings involving us.
See Note 2. Regulatory Matters and Note 10. Contractual Obligations, Commercial Commitments and Contingencies of DPL's Consolidated Financial Statements and Note 2. Regulatory Matters and Note 9. Contractual Obligations, Commercial Commitments and Contingencies of to the Financial Statements of AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for a summary of significant regulatory matters and legal proceedings involving us.
Tax legislation initiatives
or challenges to our tax positions could adversely affect our operations and financial condition.
We are subject to the tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative measures may be enacted that could adversely affect our overall tax positions regarding income or other taxes. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these legislative measures.
In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will be sustained if challenged by relevant tax authorities and if not sustained, there could be a material adverse effect on our results of operations, financial condition and cash flows.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION
The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility, and a material change in market interest rates could adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2023, the carrying value of DPL's debt was $1,852.6 million and the carrying value of AES Ohio's debt was $1,027.5 million. Of AES Ohio's indebtedness, there was $1,005.0 million of First Mortgage Bonds
as of December 31, 2023, which are secured by the pledge of substantially all of the assets of AES Ohio under the terms of AES Ohio’s First and Refunding Mortgage. This level of indebtedness and related security has important consequences, including:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•limiting,
along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.
If AES Ohio issues additional debt in the future, we will be subject to the terms of such debt agreements and be required to obtain regulatory approvals. To the extent we increase our leverage, the risks described above would also increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flows from operations may not be sufficient to repay all of the outstanding debt as it becomes due and, in that event, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt as it becomes due. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default thereunder. For further discussion of our outstanding debt
obligations, see Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity and Note 6. Debt of DPL's Consolidated Financial Statements and Note 5. Debt of AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
AES Ohio has variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted
by interest rate fluctuations. As such, any event which impacts market interest rates could have a material effect on our results of operations, financial condition and cash flows. In addition, rating agencies issue ratings on our credit and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Credit ratings also govern the collateral provisions of certain of our contracts. If rating agencies downgrade our credit ratings, our borrowing costs would likely increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional collateral under select contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.
We rely on access to the financial markets.
General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms, or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the ability of corporations to raise capital can be negatively affected. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. Our ability to raise capital on favorable terms, or at all, can be adversely affected by unfavorable market conditions or declines in our creditworthiness, and we may be unable to access adequate funding to refinance our debt as it becomes due or finance capital expenditures. The extent of any impact
will depend on several factors, including our operating cash flows, financial condition and prospects, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing, the financial condition, performance and prospects of other companies in our
industry or with similar financial circumstances and other general economic and business conditions. It may also depend on the performance of credit counterparties and
financial institutions with which we do business. Access to funds under our existing financing arrangements is also dependent on the ability of our counterparties to meet their financing commitments and our satisfying conditions to borrowing. Our inability to obtain financing on reasonable terms, or at all, with creditworthy counterparties could adversely affect our results of operations, financial condition and cash flows. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which would adversely impact our profitability. See Note 6. Debt of DPL's Consolidated Financial Statements and Note 5. Debt of AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data
of this Annual Report on Form 10-K for information regarding indebtedness. See also Item 7A. - Quantitative and Qualitative Disclosures about Market Risk for information related to market risks.
DPL is a holding company and parent of AES Ohio and other subsidiaries. DPL’s cash flow is dependent on the cash flows of AES Ohio and its other subsidiaries and their ability to pay cash to DPL.
DPL is a holding company with no material assets other than the ownership of its subsidiaries, and accordingly all cash is generated by the activities of its subsidiaries, principally AES Ohio. As such, DPL’s cash flow is largely dependent on the cash flows of AES Ohio and its ability to pay cash to DPL. There are a number of rate proceedings pending or anticipated that we cannot predict the outcome of, which could
adversely affect DPL and AES Ohio. See Note 2. Regulatory Matters of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for descriptions of AES Ohio's ESP and other regulatory proceedings. In addition, AES Ohio is regulated by the PUCO, which possesses broad oversight powers to ensure that the needs of utility customers are being met. The PUCO could impose additional restrictions on the ability of AES Ohio to distribute, loan or advance cash to DPL pursuant to these broad powers. A significant limitation on AES Ohio’s ability to pay distributions or loan or advance funds to DPL could have a material adverse effect on DPL’s results of operations, financial condition and cash flows.
Our ownership
by AES subjects us to potential risks that are beyond our control.
All of AES Ohio’s common stock is owned by DPL, and DPL is an indirectly wholly owned subsidiary of AES. Due to our relationship with AES, any adverse developments and announcements concerning AES may impair our ability to access the capital markets and to otherwise conduct business. In particular, downgrades in AES’s credit ratings could result in DPL’s or AES Ohio’s credit ratings being downgraded.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
1C. CYBERSECURITY
We recognize the importance of maintaining the safety and security of our people, systems, and data and have a holistic process, supported by our management and Board of Directors, for overseeing and managing cybersecurity and related risks. As part of AES, we are also supported by AES’ cyber risk management program.
AES’ Chief Information Security Officer (“CISO”) reports to AES’ General Counsel and is the head of the Company’s cybersecurity team. The CISO is responsible for assessing and managing AES’ cyber risk management program globally, including DPL and its subsidiaries. In this role, the CISO informs senior management regarding the prevention, detection, mitigation, and remediation of cybersecurity incidents and supervises such efforts. AES’ CISO has extensive experience assessing and managing cybersecurity programs
and cybersecurity risk and has served in that position since 2020.
The CISO manages a global team of cybersecurity professionals with broad experience and expertise, including in cybersecurity threat assessments and detection, cloud security, mitigation technologies, cybersecurity training, incident response, cyber forensics, insider threats and regulatory compliance. We rely on threat intelligence as well as other information obtained from governmental, public, or private sources, including contracted external consultants. The global team includes local cyber security professionals that manage the operational technology
(OT) network security of DPL to demonstrate compliance with the NERC-Critical Infrastructure Protection (CIP) standards and PUCO regulation.
The Board of Directors oversees our cybersecurity risk exposures and the steps taken by management to monitor and mitigate cybersecurity risks. The CISO briefs the Board of Directors on the effectiveness of our cyber risk management program periodically and as needed.
We consider cybersecurity as part of the enterprise risk process, including organized and structured reporting protocols. The prioritization of cybersecurity risk is aligned with overall risk management processes.
In
addition, the Company’s management team considers risks relating to cybersecurity, among other significant risks, and applicable mitigation plans to address such risks, at monthly performance review meetings. The Company's CEO, CFO and other members of senior management participate in such meetings.
We have also established an Incident Response Team and associated protocol led by AES’ CISO that governs our assessment, response, and notifications internally and externally upon the occurrence of a cybersecurity incident. Depending on the nature and severity of an incident, this protocol provides for escalating notification to our CEO and the Board. We regularly practice our incident response through executive tabletop exercises.
Our policies, standards, processes, and practices for assessing, identifying, and managing material risks from cybersecurity
threats are integrated into our overall risk management program and are informed by frameworks established by the National Institute of Standards and Technology (“NIST”) and other applicable industry standards. Our cybersecurity program addresses threats in a prioritized manner and, in particular, focuses on the following key areas:
•gap analysis to identify programmatic opportunities for improvement that can be incorporated into the cyber strategy;
•policies and standards that are annually reviewed and communicated;
•exceptions management and internal audits that support cybersecurity requirements through assessing control implementation risks; and
•monitoring and
regular reporting of cyber resilience and posture at operational and strategic levels.
We engage assessors, consultants, auditors, or other third parties in connection with any such processes, including:
•external vulnerability assessments, including penetration tests;
•internal audit reviews;
•threat intelligence;
•incident management;
•audits of NERC-Critical Infrastructure Protection regulated environments by the NERC Registered Regional Entity; and
•program development support,
as needed.
Our risk management program for third-party service providers includes risk-based assessments of their interactions with our data and systems. We implement monitoring and response processes for key third-party service providers.
We provide awareness training to our employees to help identify, avoid, and mitigate cybersecurity threats. Our employees participate in training, including phishing exercises, monthly safety meetings, and an annual cybersecurity awareness update. We also periodically host tabletop exercises with management and other employees to practice rapid cyber incident response.
We face cybersecurity risks in connection with our business. Although such risks have not materially affected us to date, we have, from time to time, experienced threats to and breaches
of our data and systems. For more information about the cybersecurity risks we face, see the risk factor entitled Potential security breaches (including cybersecurity breaches) and terrorism risks could materially and adversely affect our business in Item 1A—Risk Factors of this Annual Report on Form 10-K.
Information relating to our properties is contained in Note 3. Property, Plant and Equipment of the Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio. This facility and the remainder of our material properties are owned directly by AES Ohio. These properties include our distribution service center in Dayton, Ohio, various substations and other transmission and distribution equipment and property.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the
mortgage securing AES Ohio’s First and Refunding Mortgage. See Note 5. Debt of AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to various lawsuits, actions, claims, and other proceedings. We are also from time to time involved in other reviews, investigations and proceedings by governmental and regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. We have accrued
in our Financial Statements for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters (including those matters noted below), and to comply with applicable laws and regulations will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided for in our Financial Statements, cannot be reasonably determined, but could be material. For more information, see Note 2. Regulatory Matters and Note 10. Contractual Obligations, Commercial
Commitments and Contingencies to DPL's Consolidated Financial Statements and Note 2. Regulatory Matters and Note 9. Contractual Obligations, Commercial Commitments and Contingencies to AES Ohio's Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
The following additional information is incorporated by reference into this Item: information about the legal proceedings contained in Regulation And Market Structure and Environmental Matters in Item 1. Business of this Annual Report on Form 10-K.
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
All of the outstanding common stock of DPL is owned indirectly by AES and directly by a wholly-owned subsidiary of AES. AES Ohio’s common stock is held solely by DPL. As a result, DPL and AES Ohio stock is not listed for trading on any stock exchange.
Distributions
During the years ended December 31, 2023, 2022 and 2021, DPL paid no distributions to AES. AES Ohio declares and pays distributions on its common shares to its parent DPL from time to time as declared by the AES Ohio Board of Directors. During the years ended December 31, 2023 and
2022, AES Ohio declared and paid distributions totaling $83.0 million and $64.0 million, respectively. During the year ended December 31, 2021, AES Ohio declared distributions of $42.0 million and paid distributions of $52.0 million.
DPL’s Amended Articles of Incorporation contains restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency is below investment grade. As of December 31, 2023, DPL did not meet these requirements and was prohibited under its Articles of Incorporation from making a distribution to its shareholder
or making a loan to any of its affiliates (other than its subsidiaries). For more information see Note 6. Debt of DPL's Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with DPL’s
audited Consolidated Financial Statements and the related Notes thereto and AES Ohio’s audited Financial Statements and the related Notes thereto included in Item 8. Financial Statements and Supplementary Data of this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. See “Forward-Looking Statements” at the beginning of this Form 10-K and Item 1A. Risk Factors. For a list of certain terms, abbreviations or acronyms in this discussion, see Glossary of Terms at the beginning of this Form 10-K.
OVERVIEW OF 2023 RESULTS AND STRATEGIC PERFORMANCE
The most important matters on which we focus in evaluating our financial condition and operating performance and
allocating our resources include: (i) recurring factors which have significant impacts on operating performance such as: regulatory action, environmental matters, weather and weather-related damage in our service area, customer growth, and the local economy; (ii) our progress on performance improvement and growth strategies designed to maintain high standards in several operating areas (including safety, reliability, customer satisfaction, operations, financial and enterprise-wide performance, talent management/people, capital allocation/sustainability and corporate social responsibility) simultaneously; and (iii) our short-term and long-term financial and operating strategies. For a discussion of how we are impacted by regulation and environmental matters, please see Note 2. Regulatory Matters of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements included in Item 8. Financial
Statements and Supplementary Data and Item 1. Business – Environmental Matters of this Annual Report on Form 10-K.
Operational Excellence
Our objective is to optimize AES Ohio’s performance in the U.S. utility industry by focusing on the following areas: safety, operations (reliability and customer satisfaction), financial and enterprise-wide performance (efficiency and cost savings, talent management/people, capital allocation/sustainability and corporate social responsibility). We set and measure these objectives carefully, balancing them in a way and to a degree necessary to ensure a sustainable
high level of performance in these areas simultaneously compared to our peers. We monitor our performance in these areas, and where practical and meaningful, compare performance in some areas to peer utilities. Because some of our financial and enterprise-wide performance measures are company-specific performance goals, they are not benchmarked.
Our safety performance is measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of lost time incident ("LTI") rates for our employees and contractors based on OSHA standards. 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.
AES Ohio measures delivery reliability by Customer Average Interruption Duration Index ("CAIDI"), System Average Interruption Duration Index ("SAIDI") and System Average Interruption Frequency Index ("SAIFI") and benchmarks the reliability metrics against other utilities at both the state and national levels. AES Ohio also measures customer centricity on more of an individual basis by the industry metric of Customers that Experience Multiple Interruption of five or more times (“CEMI-5”). We measure customer satisfaction using Research America Utilities Market Research - Consumer Insight. Monitoring performance in the areas such as competitive rates, operational reliability and customer
service supports our ongoing work to deliver reliable service to our customers.
EXECUTIVE SUMMARY
The following review of results of operations compares the results for the year ended December 31, 2023 to the results for the year ended December 31, 2022. For a discussion comparing the results of operations for the year ended December 31, 2022 to the year ended December 31, 2021, see Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022
Annual Report on Form 10-K, filed with the SEC on March 1, 2023.
DPL
Compared with the prior year, DPL's results for the year ended December 31, 2023 reflect an increase in income / (loss) from continuing operations before income tax of $56.6 million, or 396%, primarily due to factors including, but not limited to:
$ in millions
2023 vs. 2022
Increase due to deferral
of purchased power costs in the current year, which were recognized in the prior year, and additional carrying costs associated with the approval of ESP 4
$
67.9
Increase due to higher transmission revenue driven by an increase in transmission rates
24.8
Increase in the DIR, with the approval of ESP 4
6.0
Decrease due to higher operation and maintenance expenses
(16.2)
Decrease
due to higher taxes other than income taxes driven by higher assessed values
(15.5)
Decrease in retail margin due to lower demand driven by weather
(8.0)
Other
(2.4)
Net change in income / (loss) from continuing operations before income tax
Compared with the prior year, AES Ohio's results for the year ended December 31, 2023 reflect an increase in income before income tax of $59.1 million, or 374%, primarily due to factors including, but not limited to:
$ in millions
2023 vs. 2022
Increase
due to deferral of purchased power costs in the current year, which were recognized in the prior year, and additional carrying costs associated with the approval of ESP 4
$
67.9
Increase due to higher transmission revenue driven by an increase in transmission rates
24.8
Increase in the DIR, with the approval of ESP 4
6.0
Decrease due to higher taxes other than income taxes driven by higher assessed values
(15.5)
Decrease
due to higher operation and maintenance expenses
(13.5)
Decrease in retail margin due to lower demand driven by weather
(8.0)
Other
(2.6)
Net change in income before income tax
$
59.1
RESULTS
OF OPERATIONS – DPL
The following review of consolidated results of operations compares the results for the year ended December 31, 2023 to the results for the year ended December 31, 2022. For discussion comparing the results for the year ended December 31, 2022 to the results for the year ended December 31, 2021, see Item 7. – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Annual Report on Form 10-K, filed with the SEC on March 1, 2023.
DPL’s results of operations include the results of its subsidiaries,
including the consolidated results of its principal subsidiary AES Ohio. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for AES Ohio is presented elsewhere in this report.
INCOME
/ (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX (a)
$
42.3
$
(14.3)
$
22.4
$
56.6
396
%
$
(36.7)
(164)
%
(a)For
purposes of discussing operating results, we present and discuss INCOME / (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.
DPL – Revenue
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Additionally, our retail revenue is affected by regulated rates and riders, including the changes to our ESP, described in Note
2. Regulatory Matters of DPL's Consolidated Financial Statements.
(a)Heating and cooling degree-days are a measure
of the relative heating or cooling required for a home or business. The heating degrees in a day are calculated as the degrees that the average actual daily temperature is below 65 degrees Fahrenheit. For example, if the average temperature on March 20th was 40 degrees Fahrenheit, the heating degrees for that day would be the 25-degree difference between 65 degrees and 40 degrees. Similarly, cooling degrees in a day are calculated as the degrees that the average actual daily temperature is above 65 degrees Fahrenheit.
(b)30-year average is computed from observed degree-days in the Dayton area on a trailing 30-year basis.
DPL's and AES Ohio's electric sales and billed customers were as follows:
(a)Electric
sales are presented in millions of kWh.
(b)DPL andAES Ohio retail electric sales represent the total transmission and distribution retail sales for the periods presented. SSO sales were 2,714 million kWh and 4,135 million kWh for the years ended December 31, 2023 and 2022, respectively.
(c)Wholesale electric sales are AES Ohio's 4.9% share of the generation output of OVEC.
The following graph shows the percentage changes in weather-normalized and actual retail electric sales volumes by customer class for the year ended December 31, 2023, compared to the prior year:
During the year ended December 31, 2023, Revenue decreased $8.0 million to $861.0 million from $869.0 million in the same period of the prior year. This decrease was a result of:
$ in millions
2023 vs. 2022
Retail
Rate
Increase
in the USF Revenue Rate Rider
$
25.3
Increase in the Infrastructure Investment Rider
6.6
Increase in the DIR, with the approval of ESP 4
6.0
Increase in the Storm Rider
2.8
Decrease in the TCRR Rider
(7.5)
Other
4.3
Net
change in retail rate
37.5
Volume
Net decrease in demand primarily driven by weather
(37.2)
Other miscellaneous
1.0
Total retail change
1.3
Wholesale
revenue
Decrease primarily due to lower rates and volumes on power sales at OVEC
(25.1)
RTO ancillary and capacity revenue
Increase primarily due to higher transmission formula rates
24.0
Miscellaneous
revenue
Decrease due to the Legacy Generation Resource Rider
(8.2)
Net change in revenue
$
(8.0)
DPL
– Net Purchased Power
During the year ended December 31, 2023, Net purchased power decreased $123.3 million compared to the prior year. This decrease was a result of:
$ in millions
2023 vs. 2022
Net purchased power
Purchased power
Rate
Increase
was primarily due to higher prices in the competitive bid process, partially offset by the deferral of purchased power costs, which were recognized in the prior year, associated with the approval of ESP 4.
$
4.9
Volume
Decrease primarily due to lower retail SSO load served due to demand driven by weather and decreased SSO customers
During the year ended December 31, 2023, Operation and maintenance expense increased $47.4 million compared to the prior year. This increase was a result of:
$ in millions
2023 vs. 2022
Increase
in uncollectible expenses, including the low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$
25.3
Increase in net charges from Service Company
8.4
Increase in compensation and benefits expense, primarily health and other insurance benefits
6.2
Increase in contracted services expenses, primarily due to overhead distribution line maintenance, including tree trimming
3.5
Increase
in Smart Grid O&M amortization (a)
3.1
Increase in deferred storm costs (a)
2.8
Other, net
(1.9)
Net change in Operation and maintenance expense
$
47.4
(a) There
is corresponding revenue associated with these program costs resulting in minimal impact to Net income.
DPL – Depreciation and Amortization
During the year ended December 31, 2023, Depreciation and amortization increased $2.1 million compared to the prior year, primarily due to additional assets placed in service.
DPL – Taxes Other Than Income Taxes
During the year ended December 31, 2023, Taxes other than income taxes increased $15.5 million compared to the prior year. The increase was primarily the result of higher property taxes due to higher assessed values in the current year, partially offset by lower rates.
DPL
– Interest Expense, Net
During the year ended December 31, 2023, Interest expense, net decreased $4.2 million compared to the same periods in the prior year. The decrease was primarily the result of the deferral of carrying costs with the approval of ESP 4, partially offset by the issuance of additional debt at AES Ohio in 2023 and 2022.
DPL – Other Income, Net
During the year ended December 31, 2023, Other income, net increased $2.6 million compared to the prior year, driven primarily by Master Trust asset performance partially offset by lower AFUDC equity.
DPL – Income Tax Expense / (Benefit)
Income tax expense was $6.6 million for the year ended
December 31, 2023 compared to a benefit of $9.6 million for the year ended December 31, 2022. The changes were primarily due to income from continuing operations before income tax, less the reversal of excess deferred items, in the current year compared to a loss from continuing operations before income tax, less the reversal of excess deferred items, in the prior year.
RESULTS OF OPERATIONS BY SEGMENT – DPL
DPL manages its business through one reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this
measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segment. The Utility segment is comprised of AES Ohio, a public electric transmission and distribution utility, with all other nonutility business activities aggregated separately. See Note 1. Overview and Summary of Significant Accounting Policies of DPL's Consolidated Financial Statements for further information on AES Ohio. The “Other” nonutility category primarily includes interest expense, cash and other immaterial balances. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
See Note 12. Business Segments of DPL's Consolidated
Financial Statements for additional information regarding DPL’s reportable segment.
The following table presents DPL’s Income / (loss) from continuing operations before income tax by business segment:
Years
ended December 31,
$ in millions
2023
2022
2021
Utility
$
74.9
$
15.8
$
52.8
Other
(32.6)
(30.1)
(30.4)
Income
/ (loss) from continuing operations before income tax
$
42.3
$
(14.3)
$
22.4
Statement of Operations Highlights - DPL – Utility Segment
The results of operations of the Utility segment for DPL are identical in all material respects and for all periods presented to those of AES Ohio, which are included in Part II - Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations (Statements of Operations Highlights – AES Ohio) of this Form 10-K.
RESULTS OF OPERATIONS – AES Ohio
Statements of Operations Highlights – AES Ohio
Years
ended December 31,
Change 2023 vs. 2022
Change 2022 vs. 2021
$ in millions
2023
2022
2021
$
%
$
%
REVENUE:
Retail
$
744.9
$
743.6
$
583.3
$
1.3
—
%
$
160.3
27
%
Wholesale
15.8
41.0
19.5
(25.2)
(61)
%
21.5
110
%
RTO
ancillary
88.4
63.6
49.9
24.8
39
%
13.7
27
%
Capacity revenue
3.5
4.3
5.9
(0.8)
(19)
%
(1.6)
(27)
%
Miscellaneous
revenue
(0.6)
7.6
5.1
(8.2)
(108)
%
2.5
49
%
Total revenue
852.0
860.1
663.7
(8.1)
(1)
%
196.4
30
%
Operating
costs and expenses:
Net
fuel cost
—
—
0.5
—
—
%
(0.5)
(100)
%
Purchased
power:
Purchased power
278.4
392.5
208.0
(114.1)
(29)
%
184.5
89
%
RTO
charges
67.6
76.5
67.1
(8.9)
(12)
%
9.4
14
%
Net
purchased power cost
346.0
469.0
275.1
(123.0)
(26)
%
193.9
70
%
Operation
and maintenance
229.8
185.1
152.1
44.7
24
%
33.0
22
%
Depreciation and amortization
80.7
78.7
74.6
2.0
3
%
4.1
5
%
Taxes
other than income taxes
100.6
85.1
81.9
15.5
18
%
3.2
4
%
Gain
on disposal of business
—
(0.6)
—
0.6
(100)
%
(0.6)
—
%
Total
operating costs and expenses
757.1
817.3
584.2
(60.2)
(7)
%
233.1
40
%
Operating
income
94.9
42.8
79.5
52.1
122
%
(36.7)
(46)
%
Other
expense, net:
Interest expense, net
(25.8)
(28.8)
(24.2)
3.0
(10)
%
(4.6)
19
%
Other
income / (expense), net
5.8
1.8
(2.5)
4.0
222
%
4.3
(172)
%
Total other expense, net
(20.0)
(27.0)
(26.7)
7.0
(26)
%
(0.3)
1
%
INCOME
BEFORE INCOME TAX (a)
$
74.9
$
15.8
$
52.8
$
59.1
374
%
$
(37.0)
(70)
%
(a)For
purposes of discussing operating results, we present and discuss INCOME BEFORE INCOME TAX. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.
The following review of results of operations compares the results for the year ended December 31, 2023 to the results for the year ended December 31, 2022. For discussion comparing the results for the year ended December 31, 2022 to the results for the year ended December 31, 2021, see Item 7. – Management's Discussion and Analysis of Financial Condition and Results of Operations
of our 2022 Annual Report on Form 10-K, filed with the SEC on March 1, 2023.
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days
typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Additionally, our retail revenue is affected by regulated rates and riders, including the changes to our ESP, described in Note 2. Regulatory Matters of AES Ohio's Financial Statements.
During the year ended December 31, 2023, Revenue decreased $8.1 million to $852.0 million from $860.1 million in the same period of the prior year. This decrease was a result of:
$ in millions
2023
vs. 2022
Retail
Rate
Increase in the USF Revenue Rate Rider
$
25.3
Increase in the Infrastructure Investment Rider
6.6
Increase in the DIR, with the approval of ESP 4
6.0
Increase in the
Storm Rider
2.8
Decrease in the TCRR Rider
(7.5)
Other
4.3
Net change in retail rate
37.5
Volume
Net
decrease in demand primarily driven by weather
(37.2)
Other miscellaneous
1.0
Total retail change
1.3
Wholesale
Decrease
primarily due to lower rates and volumes on power sales at OVEC
(25.2)
RTO ancillary and capacity revenue
Increase primarily due to higher transmission formula rates
24.0
Miscellaneous revenue
Decrease
due to the Legacy Generation Resource Rider
(8.2)
Net change in Revenue
$
(8.1)
AES Ohio – Net Purchased Power
During the
year ended December 31, 2023, Net purchased power decreased $123.0 million compared to the prior year. This decrease was a result of:
$ in millions
2023 vs. 2022
Net purchased power
Purchased power
Rate
Increase
was primarily due to higher prices in the competitive bid process, partially offset by the deferral of purchased power costs, which were recognized in the prior year, associated with the approval of ESP 4.
$
4.9
Volume
Decrease primarily due to lower retail SSO load served due to demand driven by weather and decreased SSO customers
During the year ended December 31, 2023, Operation and maintenance expense increased $44.7 million compared to the prior year. This increase was a result of:
$ in millions
2023 vs. 2022
Increase
in uncollectible expenses, including the low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$
25.3
Increase in net charges from Service Company
9.1
Increase in compensation and benefits expense, primarily health and other insurance benefits
4.2
Increase in Smart Grid O&M amortization (a)
3.1
Increase
in contracted services expenses, primarily due to overhead distribution line maintenance, including tree trimming
3.0
Increase in deferred storm costs (a)
2.8
Other, net
(2.8)
Net change in Operations and Maintenance expense
$
44.7
(a)There
is corresponding revenue associated with these program costs resulting in minimal impact to Net income.
AES Ohio – Depreciation and Amortization
During the year ended December 31, 2023, Depreciation and amortization increased $2.0 million compared to the prior year, primarily due to additional assets placed in service.
AES Ohio – Taxes Other Than Income Taxes
During the year ended December 31, 2023, Taxes other than income taxes increased $15.5 million compared to the prior year. The increase was primarily the result of higher property taxes due to higher assessed values in the current year, partially offset by lower rates.
AES
Ohio – Interest Expense, Net
During the year ended December 31, 2023, Interest expense, net decreased $3.0 million compared to the same periods in the prior year. The decrease was primarily the result of the deferral of carrying costs with the approval of ESP 4, partially offset by the issuance of additional debt at AES Ohio in 2023 and 2022.
AES Ohio – Other Income / (Expense), Net
During the year ended December 31, 2023, Other income / (expense), net increased $4.0 million, primarily driven by lower defined benefit plan costs and Master Trust asset performance, partially offset by lower AFUDC equity.
AES Ohio – Income Tax Expense / (Benefit)
Income
tax expense was $13.5 million during the year ended December 31, 2023 compared to a benefit of $3.1 million during the year ended December 31, 2022. The changes were primarily due to higher income before income tax, less the reversal of excess deferred items, in the current year compared to the prior year.
KEY TRENDS AND UNCERTAINTIES
During 2023 and beyond, we expect that our financial results will be driven primarily by retail demand and weather. In addition, DPL'sand AES Ohio'sfinancial results are likely to be driven by other factors including,
but not limited to:
•regulatory outcomes and impacts;
•the passage of new legislation, implementation of regulations or other changes in regulations; and
•timely recovery of transmission and distribution expenditures.
As
discussed in Note 2. Regulatory Mattersof DPL's Consolidated Financial Statements and AES Ohio's Financial Statements included in Item 8. – Financial Statements and Supplementary Data of this report, the OCC has appealed to the Ohio Supreme Court the PUCO’s decision approving the reversion to ESP 1 as well as argued for a refund of the RSC revenue dating back to August 2021. Additionally, the OCC has appealed to the Ohio Supreme Court the PUCO’s decision approving the Smart Grid Comprehensive Settlement as it relates to the 2018 and 2019 SEET. These appeals have been consolidated and oral arguments are expected but not yet scheduled.
Operational Capital Projects – Our construction projects have experienced some indications
of delays and price increases due to supply chain disruptions; however, they are currently proceeding without material delays. For further discussion of our capital requirements, see PART II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity of this Form 10-K.
Macroeconomic and Political
U.S. Income Tax – The macroeconomic and political environments in the U.S. have changed during 2022 and 2023. This could result in significant impacts to tax law.
Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act) - In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which provides for approximately $1.2 trillion of federal spending over
the next five years across the United States. The BIL’s energy-related provisions include new federal funding for power grid infrastructure and resiliency investments, new and existing energy efficiency and weatherization programs, electric vehicle infrastructure for public chargers and additional Low Income Home Energy Assistance Program funding. AES Ohio has identified potential opportunities associated with the BIL and is actively submitting concept papers and grants for those that align with our strategy going forward.
Inflation – In the markets in which we operate, there have been higher rates of inflation recently. If inflation increases in our market, it may increase our expenses that we may not be able to pass through to customers. AES Ohio may have the ability to recover operations and maintenance costs through the regulatory process; however, timing impacts on recovery may
vary. In addition, the standard service offer auction process has reflected current macroeconomic conditions in terms of pricing.
Interest Rates – In the U.S. there has been a rise in interest rates during 2021 through 2023. Looking ahead, we anticipate a landscape marked by volatility in interest rates in the near term. Although all of our existing DPL and AES Ohio long-term debt is at fixed rates, an increase in interest rates can have several impacts on our business. For our existing short-term debt under floating rate structures and any future debt refinancings or future new money financings, rising interest rates will increase future financing costs. Our floating rate debt is currently limited to short-term borrowings under the AES Ohio Credit Agreement. For future debt financings, DPL manages a hedging program to help reduce uncertainty and exposure to future interest rates.
Regulatory
For
a comprehensive discussion of the market structure and regulation of DPL and AES Ohio, see Item 1. – Business – Regulation And Market Structure.
ESP 4 – On September 26, 2022, AES Ohio filed its latest ESP (ESP 4) with the PUCO. ESP 4 is a comprehensive plan to enhance and upgrade its network and improve service reliability, provide greater safeguards for price stability and continue investments in local economic development. On April 10, 2023, AES Ohio entered into a Stipulation and Recommendation with the PUCO Staff and seventeen parties (the “Settlement”) with respect to AES Ohio’s ESP 4 application, and, on August 9, 2023, the PUCO
approved the Settlement without modification. With approval of this Settlement, the distribution rates that were approved by the PUCO on December 14, 2022, and are described in the paragraph below, became effective on September 1, 2023.
Distribution Rate Case – On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order establishes
a revenue increase of $75.6
million for AES Ohio’s base rates for electric distribution service, which went into effect September 1, 2023 with the approval of AES Ohio’s ESP 4.
Smart Grid Comprehensive Settlement – On October 23, 2020, AES Ohio entered into a Stipulation and
Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio’s applications pending at the PUCO for (i) approval of AES Ohio’s plan to modernize its distribution grid (Smart Grid Phase 1), (ii) findings that AES Ohio passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio’s ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. A hearing was held in January 2021 for consideration of this settlement and on June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed this decision to the Ohio Supreme Courton December 6, 2021. Oral arguments regarding this appeal, which have been consolidated
with the appeal regarding the reversion to ESP 1, are expected but not yet scheduled.
Smart Grid Phase 2 Plan - In February 2024, AES Ohio filed a Smart Grid Phase 2 with the PUCO proposing to invest approximately $i683 million in capital projects over a 10-year period following the Smart Grid Phase 1, which ends June 2025. There are three principal components of AES Ohio’s Smart Grid Phase 2: 1) Distribution Operations, 2) Advanced Intelligence 3) Telecommunications and Cybersecurity.These
initiatives will also allow AES Ohio to be ready to leverage and integrate Distributed Energy Resources into its grid. If approved, AES Ohio will implement a comprehensive grid modernization project that will deliver benefits to customers, society as a whole and to AES Ohio.A procedural schedule is expected that will provide for an Order by the second quarter of 2025 prior to the end of Smart Grid Phase 1.
For more information on the above matters, see Note 2. Regulatory Mattersof DPL's Consolidated Financial Statements and AES Ohio's Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
DPL
and AES Ohio had unrestricted cash and cash equivalents of $41.0 million and $15.5 million, respectively, as of December 31, 2023. At that date, neither DPL nor AES Ohio had short-term investments. Available borrowing capacity at AES Ohio was $235.0 million at December 31, 2023. DPL and AES Ohio had aggregate principal amounts of long-term debt outstanding of $1,852.4 million and $1,021.8 million, respectively, at December 31, 2023.
From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions or otherwise when management believes such repurchases are favorable to make. The amounts involved in any such repurchases may be material.
We depend
on timely and continued access to capital markets to manage our liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty or otherwise could have material adverse effects on our results of operations, financial condition and cash flows. In addition, changes in the timing of tariff increases or delays in the regulatory determinations could affect the cash flows and results of operations of our businesses. See "RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS" and "RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION" in Item 1A. - Risk Factors and Item 1. – Business – Regulation And Market Structure.
AES
Ohio must first seek approval from the PUCO to issue new stocks, bonds, notes and other evidences of indebtedness. Annually, AES Ohio must receive authority to issue and assume liability on short-term debt, not to exceed 12 months. AES Ohio received an order from the PUCO on December 13, 2023 granting authority through December 31, 2024 to, among other things, issue up to $400.0 million in aggregate principal amount of short-term indebtedness. AES Ohio must also receive authority to issue and assume liability on long-term debt, in excess of 12 months. AES Ohio last received approval in 2023 to, among other things, issue up to $300 million in First Mortgage Bonds. AES Ohio 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. AES Ohio 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 AES Ohio. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash Flow Analysis - DPL:
The
following table summarizes the changes in operating, investing, and financing cash flows of DPL for the years shown:
Years ended December 31,
$ in millions
2023
2022
2021
Net
cash provided by operating activities
$
26.7
$
86.4
$
116.9
Net cash used in investing activities
(414.5)
(309.9)
(213.0)
Net cash provided by financing activities
398.3
227.4
97.3
Net
increase in cash, cash equivalents and restricted cash
10.5
3.9
1.2
Cash, cash equivalents and restricted cash at beginning of year
30.6
26.7
25.5
Cash, cash equivalents and restricted cash at end of year
$
41.1
$
30.6
$
26.7
The
following cash flow review compares the cash flows of DPL for the year ended December 31, 2023 to the cash flows for the year ended December 31, 2022. For discussion comparing the cash flows for the year ended December 31, 2022 to the cash flows for the year ended December 31, 2021, see Item 7. – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Annual Report on Form 10-K, filed with the SEC on March 1, 2023.
2023 versus 2022:
DPL – Operating activities
For
the years ended December 31,
$ Change
$ in millions
2023
2022
2023 vs. 2022
Net income / (loss)
$
35.7
$
(4.7)
$
40.4
Depreciation
and amortization
82.1
80.0
2.1
Deferred income taxes
26.2
(2.0)
28.2
Gain
on disposal and sale of business
—
(0.6)
0.6
Net income / (loss), adjusted for non-cash items
144.0
72.7
71.3
Net
change in operating assets and liabilities and other
(117.3)
13.7
(131.0)
Net cash provided by operating activities
$
26.7
$
86.4
$
(59.7)
The
net change in operating assets and liabilities and other for the year ended December 31, 2023 compared to the year ended December 31, 2022 was driven by the following:
$ in millions
$ Change
Decrease from current and non-current regulatory assets and liabilities primarily due to the deferral of purchased power costs, which were recognized in the prior year, and additional carrying costs associated with the approval of ESP 4 as well as a decrease in regulatory liabilities as we return certain
benefits to customers
$
(113.5)
Decrease from accounts payable primarily due to the timing of payments
(33.7)
Decrease from taxes applicable to subsequent years primarily due to higher property taxes
(8.1)
Increase from accrued taxes payable / receivable primarily due to tax payments of $21.0 million from AES in the current year and current year income tax expense compared to prior year income tax benefit
28.3
Other
(4.0)
Net
change in operating assets and liabilities and other
Net cash used in investing activities increased $104.6
million during the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
$ in millions
$ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects
$
(100.6)
Higher cost of removal payments
(4.4)
Other
0.4
Net
change in investing activities
$
(104.6)
DPL – Financing activities
Net cash provided by financing activities increased $170.9 million during the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
$
in millions
$ Change
Equity contributions from AES
$
239.0
Higher issuances of debt at AES Ohio
160.0
Higher net repayments on revolving credit facilities
(230.0)
Other
1.9
Net
change in financing activities
$
170.9
Cash Flow Analysis - AES Ohio:
The
following table summarizes the changes in operating, investing, and financing cash flows of AES Ohio for the years shown:
Years ended December 31,
$ in millions
2023
2022
2021
Net
cash provided by operating activities
$
35.4
$
117.6
$
130.2
Net cash used in investing activities
(410.9)
(305.7)
(205.5)
Net cash provided by financing activities
371.3
193.4
78.0
Net
increase / (decrease) in cash, cash equivalents and restricted cash
(4.2)
5.3
2.7
Cash, cash equivalents and restricted cash at beginning of year
19.8
14.5
11.8
Cash, cash equivalents and restricted cash at end of year
$
15.6
$
19.8
$
14.5
The
following cash flow review compares the cash flows of AES Ohio for the year ended December 31, 2023 to the cash flows for the year ended December 31, 2022. For discussion comparing the cash flows for the year ended December 31, 2022 to the cash flows for the year ended December 31, 2021, see Item 7. – Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Annual Report on Form 10-K, filed with the SEC on March 1, 2023.
2023 versus 2022:
AES Ohio – Operating activities
For
the years ended December 31,
$ change
$ in millions
2023
2022
2023 vs. 2022
Net income
$
61.4
$
18.9
$
42.5
Depreciation
and amortization
80.7
78.7
2.0
Deferred income taxes
9.0
(2.3)
11.3
Gain
on disposal of business
—
(0.6)
0.6
Net income, adjusted for non-cash items
151.1
94.7
56.4
Net
change in operating assets and liabilities and other
The net change in operating assets and liabilities and other for the year ended December 31, 2023 compared to the year ended December 31, 2022 was driven by the following:
$ in millions
$ Change
Decrease from current and non-current
regulatory assets and liabilities primarily due to the deferral of purchased power costs, which were recognized in the prior year, and additional carrying costs associated with the approval of ESP 4 as well as a decrease in regulatory liabilities as we return certain benefits to customers
$
(113.5)
Decrease from accounts payable primarily due to the timing of payments
(33.5)
Decrease from taxes applicable to subsequent years primarily due to higher property taxes
(8.1)
Increase
from accrued taxes payable / receivable primarily due to current year income tax expense compared to prior year income tax benefit
24.8
Other
(8.3)
Net change in operating assets and liabilities and other
$
(138.6)
AES
Ohio – Investing activities
Net cash used in investing activities increased $105.2 million during the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
$ in millions
$ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects
$
(100.6)
Higher
cost of removal payments
(4.4)
Other
(0.2)
Net change in investing activities
$
(105.2)
AES
Ohio – Financing activities
Net cash provided by financing activities increased $177.9 million during the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily driven by the following:
$ in millions
$ Change
Equity contributions from DPL
$
260.0
Higher
issuances of debt
160.0
Higher net repayments on revolving credit facilities
(225.0)
Higher distributions to DPL
(19.0)
Other
1.9
Net change in financing activities
$
177.9
LIQUIDITY
We
expect our existing cash balances, cash generated from operating activities and borrowing capacity on our existing credit facilities will be adequate to meet our anticipated operating needs, including interest expense on our debt and any distributions to our equity owners. Our business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and carrying costs, taxes and any dividend payments. For 2024 and subsequent years, we expect to satisfy these requirements with a combination of cash from operations, funds from debt financing and funds from equity capital contributions as our internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under the AES Ohio Credit Agreement will continue to be available to manage working capital requirements during those periods. The absence of adequate liquidity could adversely affect our ability to operate our business
and have a material adverse effect on our results of operations, financial condition and cash flows.
At December 31, 2023, AES Ohio has access to the following revolving credit agreements:
As of December 31, 2023 and 2022, AES Ohio had $15.0 million and $120.0 million in outstanding borrowings on the agreement, respectively. For more information on the AES Ohio Credit Agreement, see Note 5. Debt
of AES Ohio's Financial Statements.
Our capital expenditure program, including development and permitting costs, for the three-year period from 2024 through 2026 is currently estimated to cost approximately $1.2 billion and includes estimates as follows:
$
in millions
2024
2025
2026
For the three-year period from 2024 through 2026
Distribution-related additions, improvements and extensions
$
166.0
$
217.0
$
185.0
$
568.0
Transmission-related
additions and improvements
203.0
158.0
151.0
512.0
Smart Grid Phase 1 improvements and additions
89.0
14.0
—
103.0
Other
26.0
10.0
9.0
45.0
Total
for AES Ohio
484.0
399.0
345.0
1,228.0
Other subsidiaries
3.0
6.0
5.0
14.0
Total
for DPL
$
487.0
$
405.0
$
350.0
$
1,242.0
AES Ohio's projection includes expected spending under its Smart Grid Phase 1 included in the comprehensive settlement approved by the PUCO on June 16, 2021, as well as new transmission and distribution projects. AES Ohio’s spending programs are contingent on, among other events, successful
regulatory outcomes in pending proceedings. See Note 2. Regulatory Matters of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements for more information.
AES Ohio is subject to the mandatory reliability standards of NERC and ReliabilityFirst Corporation, one of the six NERC regions, of which AES Ohio is a member. Anticipated costs related to these standards are included in the overall capital projections above.
Debt Covenants
For information regarding our long-term debt covenants, see Note 6. Debt of DPL's Consolidated Financial Statements and Note 5. Debt of AES Ohio's Financial Statements.
Credit
Ratings
Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rate on AES Ohio’s Credit Agreement (as well as the amount of certain other fees in the agreements) are dependent upon the credit ratings of AES Ohio. Downgrades in the credit ratings of AES could result in DPL's or AES Ohio’s credit ratings being downgraded. Any 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.
The following table presents the debt ratings and credit ratings (issuer/corporate rating) and outlook for DPL and AES Ohio.
Debt
Ratings
DPL
AES Ohio
Outlook
Fitch Ratings
BB (a)
BBB+ (b)
Stable
Moody's Investors Service, Inc.
Ba2 (a)
Baa1
(b)
Stable
Standard & Poor's Financial Services LLC
BB (a)
BBB (b)
Stable
Credit ratings
DPL
AES
Ohio
Outlook
Fitch Ratings
BB
BBB-
Stable
Moody's Investors Service, Inc.
Ba2
Baa3
Stable
Standard & Poor's Financial Services LLC
BB
BB
Stable
(a) Rating
relates to DPL's senior unsecured debt.
(b) Rating relates to AES Ohio’s senior secured debt.
We cannot predict whether the current debt and credit ratings of DPL or the debt and credit ratings of AES Ohio will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. A security rating is not a recommendation to buy, sell or hold securities. Such ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be
evaluated independently of any other rating. 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 selected contracts. These events could 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.
Off-Balance Sheet Arrangements
AES Ohio owns a 4.9% equity ownership interest in OVEC which is recorded using the cost method of accounting
under GAAP. At December 31, 2023, AES Ohio could be responsible for the repayment of 4.9%, or $52.5 million, of a $1,070.5 million debt obligation comprised of both fixed and variable rate securities with maturities between 2026 and 2040. This would only happen if OVEC defaulted on its debt payments. At December 31, 2023, we have no knowledge of such a default.
Contractual Obligations
We enter into various contractual obligations that may affect the liquidity of our operations. At December 31, 2023, 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
$
1,852.4
$
0.2
$
415.4
$
232.9
$
1,203.9
Interest
payments
819.0
80.0
135.7
117.0
486.3
Electricity purchase commitments
569.3
365.8
203.5
—
—
Purchase
orders and other contractual obligations
421.1
318.3
83.4
19.4
—
Total contractual obligations
$
3,661.8
$
764.3
$
838.0
$
369.3
$
1,690.2
Payments
due in:
$ in millions
Total
Less than 1 year
2 - 3 years
4 - 5 years
More than 5 years
AES Ohio:
Long-term
debt
$
1,021.8
$
0.2
$
0.4
$
232.9
$
788.3
Interest payments
689.3
44.2
88.4
79.7
477.0
Electricity
purchase commitments
569.3
365.8
203.5
—
—
Purchase orders and other contractual obligations
419.4
316.6
83.4
19.4
—
Total
contractual obligations
$
2,699.8
$
726.8
$
375.7
$
332.0
$
1,265.3
Long-term debt
DPL’s Long-term debt at December 31, 2023 consists of DPL’s unsecured notes and Capital Trust
II securities, along with AES Ohio’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.
AES Ohio’s Long-term debt at December 31, 2023 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 6. Debt of DPL's Consolidated Financial Statements and Note 5. Debt of AES Ohio's 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, 2023.
Electricity purchase commitments
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
At December 31, 2023, DPL and AES Ohio 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 AES Ohio'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 2. Regulatory Mattersof DPL's Consolidated Financial Statements and AES Ohio's Financial Statements.);
•taxes
(see Note 7. Income Taxes of DPL's Consolidated Financial Statements and Note 6. Income Taxes of AES Ohio's Financial Statements);
•pension and other postretirement employee benefit liabilities (see Note 8. Benefit Plans of DPL's Consolidated Financial Statements and Note 7. Benefit Plans of AES Ohio's Financial Statements);
•contingencies (see Note 10. Contractual Obligations, Commercial Commitments and Contingencies of DPL's Consolidated Financial Statements and Note 9. Contractual Obligations, Commercial Commitments and Contingencies of AES Ohio's Financial
Statements); and
•amounts due to related parties (see Note 11. Related Party Transactions of DPL's Consolidated Financial Statements and Note 10. Related Party Transactions of AES Ohio's Financial Statements).
Reserve for uncertain tax positions
Due to the uncertainty regarding the timing of future cash outflows associated with our unrecognized tax benefits of $0.4 million at December 31, 2023, 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 AES Ohio’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 DPL's Consolidated Financial Statements and AES Ohio's 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 revenue; the valuation of allowances for deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
Revenue Recognition
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 2023 revenue and ending unbilled revenue of a one percentage point change in estimated line losses for the month of December 2023 is immaterial. For further information regarding the nature of our revenue streams and our critical accounting policies affecting revenue recognition, see Note 1. Overview
and Summary of Significant Accounting Policies and Note 13. Revenue of DPL's Consolidated Financial Statements and Note 1. Overview and Summary of Significant Accounting Policies and Note 11. Revenue of AES Ohio's Financial Statements.
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.
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 AES Ohio’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
2. Regulatory Mattersof DPL's Consolidated Financial Statements and AES Ohio's Financial Statements.
Pension Plans
The valuation of our benefit obligation, fair value of plan assets, and net periodic benefit costs requires various estimates and assumptions, the most significant of which include the discount rate and expected return on plan assets. We review these and other assumptions, such as mortality, on an annual basis. See Note 1. Overview and Summary of Significant Accounting Policies of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements for information on our accounting policies regarding the Pension Plans.
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.
See Note 1. Overview and Summary of Significant Accounting Policies of DPL's Consolidated Financial Statements and AES Ohio's Financial Statements for a discussion of new accounting pronouncements and the potential impact to our results of operations, financial condition and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
We are subject to certain market risks including, but not limited to, changes in commodity prices for electricity and fluctuations in interest rates. We use various market risk-sensitive instruments, including derivative contracts, primarily to limit our exposure to fluctuations in interest rates. Our U.S. Risk Management Committee (U.S. RMC), comprised of members of senior management,
is responsible for establishing risk management policies and the monitoring and reporting of risk exposures related to our operations. The U.S. RMC meets on a regular basis with the objective of identifying, assessing and quantifying material risk issues and developing strategies to manage these risks.
The disclosures presented in this section are based upon a number of assumptions; actual effects may differ. The safe harbor provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 shall apply to the disclosures contained in this section. For further information regarding market risk, see Item 1A. – Risk Factors. Our businesses may incur substantial costs and liabilities and be exposed to price volatility as a result of risks associated with the electricity markets, which could have a material adverse effect on
our financial performance.
Purchased power costs
AES Ohio conducts competitive bid auctions to purchase power for SSO service, as all of AES Ohio's SSO is sourced through the competitive bid auction.
As a result of DPL's exit from the majority of its coal-fired generation, changes in the prices of fuel and purchased power are not expected to have a material impact on our results of operations, financial position or cash flows. Further, AES Ohio's exposure to fluctuations in the price of power is limited because we recover our power purchased from the competitive bid auction through the Standard Offer Rate tariff.
Interest rate risk
We use long-term debt as a significant
source of capital in our business, which exposes us to interest rate risk. We do not enter into market risk sensitive instruments for trading purposes. We manage our exposure to interest rate risk through the use of fixed-rate debt and by refinancing existing long-term debt at times when it is deemed economic and prudent. In regard to our fixed rate debt, the interest rate risk with respect to long-term debt primarily relates to the potential impact a change in interest rates has on the fair value of our fixed-rate debt and not on our financial condition or results of operations. Our interest rate risk on our fixed-rate debt is associated with refinancing activity. Market indexes can be affected by market demand, supply, market interest rates and other economic conditions. See Note 6. Debt of DPL's Consolidated Financial Statements and Note 5. Debt of AES Ohio's Financial Statements.
At
December 31, 2023, DPL's variable rate debt totaled $15.0 million, consisting of $15.0 million under AES Ohio's revolving credit facility. At December 31, 2023, a 100-basis point change in the applicable rates on our variable-rate debt would result in an approximate $0.2 million change in DPL's interest expense and an approximate $0.2 million change in AES Ohio's interest expense.
The principal amount of DPL’s long-term debt was $1,852.4 million at December 31, 2023, consisting of DPL’s unsecured notes, Capital Trust II securities along with AES Ohio’s First Mortgage Bonds and the WPAFB note. All of DPL’s existing debt was adjusted to fair value at the Merger date according to ASC 805 - Business Combinations. The
fair value of this debt at December 31, 2023 was $1,723.0 million, based on current market prices or
discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DPL’s debt obligations that are subject to refinancing risk:
DPL
Years
ending December 31,
Principal amount at December 31,
Fair value at December 31,
$ in millions
2024
2025
2026
2027
2028
Thereafter
2023
2023
Long-term
debt
Fixed-rate
debt
$
0.2
$
415.2
$
0.2
$
140.2
$
92.7
$
1,203.9
1,852.4
1,723.0
Average
interest rate
4.2%
4.1%
4.2%
4.2%
5.5%
4.3%
Total
$
1,852.4
$
1,723.0
The
principal amount of AES Ohio’s long-term debt was $1,021.8 million at December 31, 2023, consisting of its First Mortgage Bonds and the WPAFB note. The fair value of this debt at December 31, 2023 was $926.7 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about AES Ohio’s debt obligations that are subject to refinancing risk.
AES
Ohio
Years ending December 31,
Principal amount at December 31,
Fair value at December 31,
$ in millions
2024
2025
2026
2027
2028
Thereafter
2023
2023
Long-term
debt
Fixed-rate
debt
$
0.2
$
0.2
$
0.2
$
140.2
$
92.7
$
788.3
1,021.8
926.7
Average
interest rate
4.2%
4.2%
4.2%
4.2%
5.5%
4.2%
Total
$
1,021.8
$
926.7
Equity
price risk
At December 31, 2023, approximately 32% of the defined benefit pension plan assets were comprised of investments in equity securities and 68% related to investments in fixed income securities and cash and cash equivalents. The equity securities are carried at their market value of approximately $84.5 million at December 31, 2023. A hypothetical 10% decrease in prices quoted by stock exchanges would result in an $8.5 million reduction in fair value at December 31, 2023 and approximately a $1.2 million increase to the 2024 pension expense. See Note 8. Benefit Plans of DPL's Consolidated Financial Statements and Note 7. Benefit Plans of AES Ohio's Financial Statements
for more information on our pension plans.
Credit risk
Credit risk is the risk of an obligor's failure to meet the terms of any investment contract, loan agreement or otherwise perform as agreed. Credit risk arises from all activities in which success depends on issuer, borrower or counterparty performance, whether reflected on or off the balance sheet. We limit our credit risk by assessing the creditworthiness of potential counterparties before entering into transactions with them and continue to evaluate their creditworthiness after transactions have been originated. We use the three leading corporate credit rating agencies and other current market-based qualitative and quantitative data to assess the financial strength of counterparties on an ongoing basis. We may require various forms of credit assurance from counterparties to mitigate credit
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This report includes the combined filing of DPL and DP&L. Throughout this report, the terms “we,”“us,”“our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of DPL Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DPL Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income / (loss), shareholder’s equity / (deficit) and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and
financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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. 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 Board of Directors 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.
As
described in Note 2 to the consolidated financial statements, the Company applies the provisions of FASB Accounting Standards Codification 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the Public Utilities Commission of Ohio and the Federal Energy Regulatory Commission. 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 overcollections 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 consolidated financial statement line items, including property, plant, and equipment; regulatory assets and liabilities;
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 through December 31, 2023, 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 consolidated financial statements and related disclosures.
How We Addressed the Matter in Our Audit
To evaluate the Company’s significant judgments in 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.
1.
iOVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
DPL, an indirectly wholly-owned subsidiary of AES, is a diversified regional energy company organized in 1985 under the laws of Ohio. DPL owns all of the outstanding common stock of DP&L, which does business
as AES Ohio. Substantially all of DPL’s business consists of transmitting, distributing and selling of electric energy conducted through its principal subsidiary, AES Ohio. The terms “we”, “us”, “our” and “ours” are used to refer to DPL and its subsidiaries.
AES Ohio 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 distribution services are still regulated. AES Ohio has the exclusive right to provide such service to its approximately i539,000
customers located in West Central Ohio. Principal industries located in AES Ohio’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. AES Ohio also provides retail SSO electric service to residential, commercial, industrial and governmental customers in a i6,000-square mile area of West Central Ohio. AES Ohio sources all of the generation for its SSO customers through a competitive bid process. AES Ohio's sales reflect the general economic conditions, seasonal weather patterns of the area, the market price of electricity and customer energy efficiency initiatives. AES Ohio owns numerous
transmission facilities. AES Ohio records revenue and expenses for its proportional share of energy and capacity from its investment in OVEC.
DPL’s other primary subsidiaries are MVIC and Miami Valley Lighting. MVIC is our captive insurance company that provides insurance services to AES Ohio and our other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in the Dayton region. In prior periods, AES Ohio Generation was also a primary subsidiary, selling all of its energy and capacity into the wholesale market. AES Ohio Generation retired and sold its only remaining operating asset in 2020. See Note 14. Discontinued Operations for more information. DPL's subsidiaries are all 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.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio 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.
/
Financial Statement Presentation
iDPL’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. All material intercompany accounts and transactions are eliminated in consolidation. We have evaluated subsequent events through the date this report was issued.
Reclassifications
iCertain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management
Estimates
i
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the revenue and expenses of the periods reported. Actual results could differ from these estimates and assumptions. Significant items subject to such estimates and assumptions include: the carrying value of Property, plant and equipment; unbilled revenue; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities
related to employee benefits.
i
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 includes cash which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral.
i
The following table summarizes cash, cash equivalents and restricted cash amounts reported within 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
2023
2022
Cash and cash equivalents
$
i41.0
$
i30.5
Restricted
cash (included in Prepayments and other current assets)
i0.1
i0.1
Total
cash, cash equivalents and restricted cash
$
i41.1
$
i30.6
/
Accounts
Receivable and Allowance for Credit Losses
i
The following table summarizes accounts receivable as of December 31, 2023 and 2022:
December
31,
$ in millions
2023
2022
Accounts receivable, net
Customer receivables
$
i71.0
$
i61.3
Unbilled
revenue
i19.4
i24.0
Amounts due from affiliates
i0.8
i3.2
Other
i2.2
i3.9
Allowance
for credit losses
(i0.9)
(i0.5)
Total
accounts receivable, net
$
i92.5
$
i91.9
/
i
The
following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the years ended December 31, 2023 and 2022:
December 31,
$ in millions
2023
2022
Allowance
for credit losses:
Beginning balance
$
i0.5
$
i0.3
Current
period provision
i5.4
i2.5
Write-offs charged against allowance
(i6.0)
(i4.1)
Recoveries
collected
i1.0
i1.8
Ending
balance
$
i0.9
$
i0.5
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 are expected to impact collectability. Amounts are written off when reasonable collections efforts have been exhausted.
/
Inventories
i
Inventories
are carried at average cost, net of reserves, and consist of materials and supplies used for utility operations.
Regulatory Accounting
i
As a regulated utility, AES Ohio applies the provisions of ASC 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 revenue collected for costs that AES Ohio 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 the 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 the FERC or established regulatory practices, such as other utilities under the jurisdiction of the PUCO or the FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to approval by the PUCO or the FERC. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 2. Regulatory Matters for more information.
Property, Plant and Equipment
i
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 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.
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. 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 i3.2% in 2023, i3.3%
in 2022 and i3.7% in 2021. Depreciation expense was $i78.0 million, $i76.7 million
and $i72.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Depreciation and amortization expense in the Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
AFUDC
In
accordance with the Uniform System of Accounts prescribed by FERC, AES Ohio capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return on equity funds) used for construction purposes during the period of construction with a corresponding credit to income. AFUDC equity and AFUDC debt were as follows for the years ended December 31, 2023, 2022 and 2021:
Years
ended December 31,
$ in millions
2023
2022
2021
AFUDC equity
$
i5.0
$
i5.7
$
i2.1
AFUDC
debt
$
i6.5
$
i1.3
$
i1.6
Impairment
of Long-lived Assets
i
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 $i2,221.0 million
and $i1,885.0 million as of December 31, 2023 and 2022, 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.
/
Intangible
Assets
i
Intangibles include software and renewable energy credits. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired. Finite-lived intangible assets include capitalized
software amortized on a straight-line basis over their estimated useful lives. These capitalized
software intangible assets have a seven year-weighted average amortization period.
The following table presents information related to the Company's capitalized software balances, including the gross amount capitalized and related amortization:
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 $i14.8 million and $i12.5 million as of December 31,
2023 and 2022, respectively, which are recorded within Other non-current assets on the accompanying Consolidated Balance Sheets.
Debt Issuance Costs
i
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 from financing activities.
Contingencies
DPL accrues for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations and are involved in certain legal proceedings. If DPL’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. Accruals for loss contingencies were not material as of December 31, 2023 and 2022. See Note 10. Contractual Obligations,
Commercial Commitments and Contingencies for additional information.
Financial Instruments
iOur 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 recorded within Other non-current assets on the accompanying Consolidated Balance Sheets. See Note 4. Fair Value for more information.
i
Financial Derivatives
We have contracts involving the physical delivery of energy. These contracts qualify for the normal purchases and normal sales scope exception in ASC 815 - Derivatives and Hedging, thus we have elected to account for them as accrual contracts,
which are not adjusted for changes in fair value.
We have, in the past, used interest rate hedges to manage the interest rate risk of our variable rate debt. We used cash flow hedge accounting when the hedge or a portion of the hedge was deemed to be highly effective, which resulted in changes in fair value being recorded within accumulated other comprehensive loss, a component of shareholder’s equity / (deficit). We elected not to offset net derivative positions in the consolidated financial statements. Accordingly, we did 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 5. Derivative Instruments and Hedging Activities for more information.
Accumulated other comprehensive loss
i
The amounts reclassified out of Accumulated other comprehensive loss by component during the years ended December 31, 2023, 2022
and 2021 are as follows:
Details about AOCL Components
Affected line in the Consolidated Statements of Operations
Years ended December 31,
$ in millions
2023
2022
2021
Gains
and losses on cash flow hedges (Note 5):
Interest expense, net
$
(i1.0)
$
(i1.0)
$
(i1.0)
Income
tax effect
i0.2
i0.2
i0.2
Net
of income taxes
(i0.8)
(i0.8)
(i0.8)
Amortization
of unfunded pension and other postretirement obligations (Note 8):
Other expense
i0.2
i1.3
i2.5
Income
tax effect
i—
(i0.3)
(i0.6)
Net
of income taxes
i0.2
i1.0
i1.9
Total
reclassifications for the period, net of income taxes
$
(i0.6)
$
i0.2
$
i1.1
/
i
The
changes in the components of Accumulated other comprehensive loss during the years ended December 31, 2023 and 2022 are as follows:
$ in millions
Gains / (losses) on cash flow hedges
Change in unfunded pension and other postretirement obligations
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 $i1.8 million and $i1.6 million
at December 31, 2023 and 2022, respectively, within Accrued and other current liabilities on the accompanying 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 $i8.0 million and $i7.8 million
at December 31, 2023 and 2022, respectively, within
Accrued and other current liabilities and Other non-current liabilities on the accompanying Consolidated 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
i
Revenue is 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 revenue 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 revenue” and is a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenue is 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 more information, see Note 13. Revenue.
Accounting for Taxes Collected from Customers and Remitted to Governmental
Authorities
AES Ohio icollects certain excise taxes levied by state or local governments from its customers. AES Ohio’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenue in the accompanying Consolidated Statements of Operations. The amounts of such taxes were as follows:
Years
ended December 31,
$ in millions
2023
2022
2021
Excise taxes collected
$
i46.6
$
i49.2
$
i48.7
Repair
and Maintenance Costs
i
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
i
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, which would otherwise be recognized in 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 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 ASC 715 - Compensation - Retirement Benefits, 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 8. Benefit Plans for more information.
Income Taxes
i
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated 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 consolidated 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 Statements 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 2. Regulatory Matters for more 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 as specified in our tax allocation agreement, and which provides a consistent, systematic and rational approach. See
Note 7. Income Taxes for more information.
Related Party Transactions
i
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 11. Related Party Transactions for more information.
i
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 Master Trust.
Discontinued Operations
i
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 Consolidated Statements of Operations and Consolidated Balance Sheets are retrospectively revised to reflect the businesses determined to be discontinued operations. The cash flows of businesses that are determined to be discontinued operations are included within the relevant categories within operating, investing and financing activities on the face of the Consolidated Statements of Cash Flows.
Transactions between the businesses determined to be discontinued operations and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. The results of discontinued operations include any gain or loss recognized on closing or adjustment of the carrying amount to fair value. See Note 14. Discontinued Operations
for further information.
The following table provides a brief description of recent accounting pronouncements that could have 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.
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
New Accounting Standards Issued But Not Yet Effective
2023-06 Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative
In
U.S. Securities and Exchange Commission (SEC) Release No. 33-10532, Disclosure Update and Simplification, issued August 17, 2018, the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, generally accepted accounting principles (GAAP) to the FASB for potential incorporation into the Codification. The amendments in this Update are the result of the Board’s decision to incorporate into the Codification 14 of the 27 disclosures referred by the SEC.
The amendments in this Update represent changes to clarify or improve disclosure and presentation requirements of a variety of Topics. Many of the amendments allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the SEC’s requirements. Also, the amendments
align the requirements in the Codification with the SEC’s regulations.
The effective date for each amendment will be the date on which the SEC's removal of that related disclosure becomes effective, with early adoption prohibited. The amendments in this Update should be applied prospectively
We will provide the required disclosures on a prospective basis on the date each amendment becomes effective. We do not expect ASU 2023-06 will have any impact on our Consolidated Financial Statements.
2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
The amendments in this section are designed to improve the disclosures related to Segment reporting on an interim and annual basis. Public companies must disclose significant segment
expenses and an amount for other segment items. This will also require that a company disclose its annual disclosures under Topic 280 in each interim period. Furthermore, companies will need to disclose the Chief Operating Decision Maker (CODM) and how the CODM assesses the performance of a segment. Lastly, public companies that have a single reportable segment must report the required disclosures under topic 280.
The amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.
We are currently evaluating the impact of adopting the standard on our Consolidated Financial Statements.
2023-09
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
The amendments in this Update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. Furthermore, companies are required to disclose a disaggregated amount of income taxes paid at a federal, state, and foreign level as well as a break down of income taxes paid in an jurisdiction that comprises 5% of a company's total income taxes paid. Lastly, this ASU requires that companies disclose income (loss) from continuing operations before income tax at a domestic and foreign level and that companies disclose income tax expense from continuing operations on a federal, state, and foreign level.
The amendments in this Update are effective
for fiscal years beginning after December 15, 2024
We are currently evaluating the impact of adopting the standard on our Consolidated Financial Statements.
2. iREGULATORY MATTERS
AES Ohio ESPs and Smart Grid Comprehensive Settlement
AES
Ohio ESP - Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. AES Ohio is currently operating pursuant to ESP 4, described in the paragraph below. From November 1, 2017 through December 18, 2019, AES Ohio operated pursuant to an approved ESP plan, which was initially approved on October 20, 2017 (ESP 3). On December 18, 2019, the PUCO approved AES Ohio's Notice of Withdrawal and reversion to its prior rate plan (ESP 1). Among other items, the PUCO Order approving the ESP 1 rate plan included reinstating the non-bypassable RSC Rider, which provided annual revenue of approximately $i79.0 million.
The OCC has appealed to the Ohio Supreme Court the PUCO’s decision approving the reversion to ESP 1 as well as argued for a refund of the RSC revenue dating back to August 2021. Oral argument regarding this appeal, which has been consolidated with the appeal regarding the Smart Grid Comprehensive Settlement described in the paragraph below, is expected but not yet scheduled. We are unable to predict the outcome of this appeal, but if this results in terms that are more adverse than AES Ohio's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Smart Grid Comprehensive Settlement - On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO, various customers and organizations representing
customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio's applications pending at the PUCO for (i) approval of AES Ohio's plan to modernize its distribution grid (Smart Grid Phase 1), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. On June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed the final PUCO order to the Ohio Supreme Court on December 6, 2021. Oral arguments regarding this appeal, which have been consolidated with the appeal regarding the reversion to ESP 1 described in the paragraph above, are expected but not yet scheduled.
Smart
Grid Phase 2 Plan - In February 2024, AES Ohio filed a Smart Grid Phase 2 with the PUCO proposing to invest approximately $i683 million in capital projects over a 10-year period following the Smart Grid Phase 1, which ends June 2025. There are three principal components of AES Ohio’s Smart Grid Phase 2: 1) Distribution Operations, 2) Advanced Intelligence 3) Telecommunications and Cybersecurity.These initiatives will also allow AES Ohio to be ready to leverage and integrate Distributed Energy Resources into its grid. If approved, AES Ohio will
implement a comprehensive grid modernization project that will deliver benefits to customers, society as a whole and to AES Ohio.A procedural schedule is expected that will provide for an Order by the second quarter of 2025 prior to the end of Smart Grid Phase 1.
ESP 4 - On September 26, 2022, AES Ohio filed its latest ESP (ESP 4) with the PUCO. ESP 4 is a comprehensive plan to enhance and upgrade its network and improve service reliability, provide greater safeguards for price stability and continue investments in local economic development.
On April 10, 2023, AES Ohio entered into a Stipulation and Recommendation with the PUCO Staff and seventeen parties (the “Settlement”)
with respect to AES Ohio’s ESP 4 application, and, on August 9, 2023, the PUCO approved the Settlement without modification. The Settlement provides for a three-year ESP without a rate stability charge, and, in addition to other items, provides for the following:
•A Distribution Investment Rider for the term of the ESP allowing for the timely recovery of distribution investments by AES Ohio based on a i9.999% return on equity, subject to revenue caps;
•The
recovery of approximately $i66.0 million related to past expenditures by AES Ohio plus future carrying costs and the recovery of incremental vegetation management expenses up to certain annual limits during the term of ESP 4. During the third quarter of 2023, AES Ohio deferred $i28.3 million
of previously recognized purchased power costs and an additional $i10.7 million of carrying costs related to this recovery; and
•Funding of programs for assistance to low-income customers and for economic development.
Additionally, with approval of this Settlement, the distribution rates that were approved by the PUCO on December 14, 2022, and are described in the paragraph below, became effective on September
1, 2023.
Distribution Rate Case
On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order:
•Establishes a revenue increase of $i75.6 million
for AES Ohio’s base rates for electric distribution service; and
•Provides for a return on equity of i9.999% and a cost of long-term debt of i4.4% on a distribution rate base of $i783.5 million
and based on a capital structure of i53.87% equity and i46.13% long-term debt.
These rates went into effect on September 1, 2023 with the approval
of AES Ohio's ESP 4.
FERC Transmission Rates
On March 3, 2020, AES Ohio 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. An uncontested settlement was filed December 10, 2020 and approved April 15, 2021. Among other things, the settlement established new depreciation rates for AES Ohio’s transmission assets and an authorized return on equity of i9.85%,
and started an amortization process to return excess deferred taxes created by the TCJA. Pursuant to the approved
mechanisms and formula, transmission rates are adjusted each calendar year to reflect projected costs, adjusted to a true-up of actual revenue and costs incurred in the prior year.
Regulatory Assets and Liabilities
In accordance with ASC 980 - Regulated Operations ("ASC 980"), we have recognized total regulatory assets of $i212.3 million
and $i169.0 million at December 31, 2023 and 2022, respectively, and total regulatory liabilities of $i200.1 million and $i239.1 million
at December 31, 2023 and 2022, 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.
i
The following table presents DPL’s Regulatory assets and liabilities:
Type
of Recovery
Amortization Through
December 31,
$ in millions
2023
2022
Regulatory assets, current:
Undercollections to be collected through rate riders
iA/B
i2024
$
i51.7
$
i38.7
Uncollectible
expense being recovered in base rates
iB
i2024
i1.7
i—
Vegetation
management being recovered in base rates
iB
i2024
i2.7
i—
Rate
case expenses being recovered in base rates
iB
i2024
i0.5
i0.5
Total
regulatory assets, current
i56.6
i39.2
Regulatory
assets, non-current:
Pension benefits
iA/B
iOngoing
i62.6
i64.2
Regulatory
compliance costs
iA
i2028
i45.0
i6.4
Energy
efficiency
iD
iUndetermined
i4.1
i—
Smart
grid and AMI costs
iB/C
iOngoing
i3.2
i2.3
Unamortized
loss on reacquired debt
iB
iOngoing
i1.1
i2.0
Deferred
storm costs
iB
iOngoing
i2.2
i8.7
Deferred
rate case costs
iB
i2028
i1.5
i1.9
Deferred
vegetation management
iB
i2028
i19.9
i21.9
CIS
replacement
iD
iUndetermined
i3.1
i1.1
Transmission
formula rate debits
iB
i2025
i6.7
i—
Decoupling
deferral
iA
i2028
i—
i13.8
Uncollectible
deferral
iB
i2028
i6.3
i7.5
Total
regulatory assets, non-current
i155.7
i129.8
Total
regulatory assets
$
i212.3
$
i169.0
Regulatory
liabilities, current:
Overcollection of costs to be refunded through rate riders
iA/B
i2024
$
i14.7
$
i27.6
Transmission
formula rate credits
iB
i2024
i3.3
i12.8
Total
regulatory liabilities, current
i18.0
i40.4
Regulatory
liabilities, non-current:
Estimated costs of removal - regulated property
Not Applicable
i134.2
i136.8
Deferred
income taxes payable through rates
iOngoing
i42.6
i45.2
TCJA
regulatory liability
iB
iOngoing
i1.0
i4.5
Transmission
formula rate credits
iB
i2024
i—
i5.4
PJM
transmission enhancement settlement
iB
i2025
i1.7
i3.5
Postretirement
benefits
iB
iOngoing
i2.6
i3.3
Total
regulatory liabilities, non-current
i182.1
i198.7
Total
regulatory liabilities
$
i200.1
$
i239.1
A
– Recovery of incurred costs plus rate of return.
B – Recovery of incurred costs without a rate of return.
C – Includes costs associated with Smart Grid Phase 2 development for which recovery is not yet determined but is considered probable of occurring in future rate proceedings.
D – Recovery not determined, but recovery is probable of occurring in future rate proceedings.
Current regulatory assets primarily represent costs that are being recovered per specific rate orders; recovery for the remaining costs is probable, but not certain. Current regulatory assets include: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Storm Cost Rider, (iv) the Legacy Generation Rider, (v) the Infrastructure Investment Rider, (vi) the Regulatory Compliance Rider, (vii) the Proactive Reliability Optimization Rider, and (viii) the Distribution Investment Rider. Also included are the current portion of rate case expense, vegetation management, and uncollectible expense costs.
Current regulatory liabilities include the overcollection of standard offer costs and certain transmission related costs, including the current portion of the PJM transmission enhancement settlement
(discussed below), the transmission rate true-up, the Transmission Cost Recovery Rider overcollection and the TCJA regulatory liability.
AES Ohio is earning a return on $i9.3 million of the net undercollections / (overcollections) to be collected / (refunded) through rate riders including: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, and (iii) the Regulatory Compliance Rider, partially offset by the overcollection of standard offer costs and transmission costs.
Pension benefits
Pension
benefits represent the qualifying ASC 715 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.
Regulatory compliance costs
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation,
(iv) Bill Format Redesign, (v) Green Pricing Tariff, (vi) Supplier Consolidated Billing, (vii) Decoupling, (viii) a portion of previously deferred uncollectible costs, and (ix) unrecovered purchased power deferrals, and related carrying charges, approved in ESP 4. The balance of this regulatory asset earns a return with a maximum total to be accrued of $i4.0 million. These costs are being recovered over a five-year period that began September 2023 through the Regulatory Compliance Rider approved in ESP 4.
Energy Efficiency
Rider
Energy Efficiency Rider represents deferred expense and shared savings associated with energy efficiency programs that provide incentives and rebates for customers to improve the way they use electricity. The deferred expenses and shared savings were incurred prior to Ohio’s energy efficiency change in legislation and are therefore probable for recovery. The PUCO is currently conducting a prudency review, and a PUCO staff report was issued on February 2, 2024.
Smart Grid and AMI costs
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI related to Smart Grid Phase 1 and 2. AES Ohio developed Smart Grid Phase 1, which focuses on implementing
new technology in the distribution business to upgrade customer meters, provide new customer programs related to energy efficiency and time-based rates, make certain infrastructure improvements, and upgrade substation and telecommunication equipment. Smart Grid Phase 1 costs are being recovered over a period of 4 years. AES Ohio has proposed Smart Grid Phase 2, which is pending before the PUCO.
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
Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during the second-half of 2023. AES Ohio files semi-annual petitions seeking recovery of storm costs. Recovery of these costs is probable, but not certain.
Rate case expenses
Rate case expenses represent costs associated with preparing distribution rate cases. AES Ohio was granted recovery of the 2020 rate case costs through base rates over a period of 5 years, without a rate of return.
Vegetation management costs
Vegetation
management costs represent costs incurred from outside contractors for tree trimming and other vegetation management services. Historically deferred costs from 2018-2020 are being recovered in base rates with an amortization period of five years. In addition, ESP 4 approved a Proactive Reliability Optimization Rider which granted recovery of costs deferred starting from 2021 forward with an annual baseline of $i20.0 million, subject to an annual maximum deferral of $i7.5 million.
These historical costs are also being recovered with an amortization period of five years. Annual spending less than the vegetation management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability.
CIS replacement costs
Customer Information System (“CIS”) replacement costs represent operation and maintenance expenses associated with the implementation of a new CIS system. Deferral of these costs subject to an $i8.8 million maximum
deferral was approved in the Smart Grid Phase 1 Order, subject to demonstration that the functionality is available and a reasonableness prudence review. Recovery of these costs was requested and approved in Case No. 22-0900-EL-SSO to be included in the new Regulatory Compliance Rider, once the CIS is used and useful.
Transmission formula rate debits/credits
Transmission formula rate assets and liabilities represent the amounts due from/to customers as a result of the implementation of transmission formula rates, which are adjusted each year based on actual revenue and costs from a previous year, as described above under "FERC Transmission Rates".
Decoupling deferral
The decoupling deferral was approved for recovery
via the Regulatory Compliance Rider in the ESP 4 Order and was reclassified to the Regulatory Compliance Rider asset in August 2023. The decoupling deferral represented 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.
Uncollectible deferral
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenue associated with the bypassable uncollectible portion of the standard offer rate. The 2023 distribution rate case order established that these costs would be recovered in base rates over a period of five years.
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
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, AES Ohio includes in ratemaking
the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes AES Ohio expects to return to customers in future periods.
TCJA regulatory liability
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess Accumulated Deferred Income Taxes ("ADIT") for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, AES Ohio 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, AES Ohio entered into a stipulation to resolve all remaining TCJA items related to its distribution rates,
including a proposal to return no less than $i4.0 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
PJM transmission enhancement settlement liability represents the transmission enhancement settlement charges
for which AES Ohio 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
Postretirement benefits represent the qualifying ASC 715 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.
The fair value of our financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of our assets and liabilities have been determined using available market information. Because these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are categorized using the market approach as follows for DPL:
•Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market. This includes inputs used for money market accounts that are considered cash equivalents, open-ended mutual funds and exchange-traded funds in the Master Trust. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions;
•Level
2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets. This includes the common collective trust pension plan assets valued using the net asset value method. See Note 8. Benefit Plans for more information; and
•Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. These inputs are used for certain debt balances because the notes are not publicly traded. The fair value reflects management’s own assumptions about the inputs used in pricing the liability. Our long-term debt is fair valued for disclosure purposes only.
The fair values of our financial instruments are based on published sources for pricing when possible. We rely on
valuation models only when no other method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future. Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency.
We did not have any transfers of the fair values of our financial instruments among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2023 and 2022.
These financial instruments are not subject to master netting agreements or collateral requirements and, as such, are presented in the Consolidated Balance Sheets at their gross fair value.
Financial Assets
AES Ohio established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans. These assets are not used for general operating purposes. These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit. These investments are recorded at fair value within Other non-current assets on the Consolidated Balance Sheets and are classified as equity securities. Net unrealized gains / (losses) related to equity investments still held as of December 31,
2023 and 2022 are as follows:
Years ended December 31,
$ in millions
2023
2022
Net unrealized gains / (losses) (a)
$
i0.5
$
(i1.5)
(a) These
amounts are included in Other income, net in our Consolidated Statements of Operations.
Recurring Fair Value Measurements
i
The fair value of assets at December 31, 2023 and 2022 and the respective category within the fair value hierarchy for DPL was determined as follows:
Financial
Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Our long-term debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets. These fair value inputs are considered Level 2 in the fair value hierarchy. As the Wright-Patterson Air Force Base note is not publicly traded, the fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs. Unrealized gains or losses are not recognized in the financial statements as long-term debt is presented at carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2025 to 2061. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair
value.
i
The following table presents the carrying amount, fair value, and fair value hierarchy of our financial liabilities that are not measured at fair value in the Consolidated Balance Sheets as of the periods indicated, but for which fair value is disclosed:
DPL previously entered into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. The derivative instruments were used for risk management purposes and were designated as cash flow hedges if they qualified under ASC 815 for accounting purposes. These interest rate derivative contracts were settled in 2013 and we continue to amortize amounts out of AOCL into interest expense.
(a)First
mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of November 1, 2040 but are subject to a mandatory put in June 2027.
(b)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of January 1, 2034 but are subject to a mandatory put in June 2027.
(c) Note payable to related party. See Note 11. Related Party Transactions for more information.
/
Revolving Credit
Agreements
The DPL Credit Agreement was a committed line of credit secured by a pledge of common stock that DPL owns in AES Ohio and was used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement was retired on June 14, 2023. At December 31, 2022 the DPL Credit Agreement had outstanding borrowings of $i35.0 million.
AES Ohio entered
into a second amendment and restatement of the AES Ohio Credit Agreement on December 22, 2022 with a syndication of bank lenders. The AES Ohio Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on December 22, 2027, and bears interest at variable rates as described in the agreement. It includes an uncommitted $i100.0 million
accordion feature to provide AES Ohio with an option to request an increase in the size of the facility, subject to approval by the lenders.
The AES Ohio Credit Agreement also includes two one-year extension options, allowing AES Ohio to extend the maturity date subject to approval by the lenders. At December 31, 2023 and 2022, the AES Ohio Credit Agreement had outstanding borrowings of $i15.0 million
and $i120.0 million, respectively.
Debt Maturities
i
At December 31, 2023, maturities of long-term debt are summarized as
follows:
Due during the years ending December 31,
$ in millions
2024
$
i0.2
2025
i415.2
2026
i0.2
2027
i140.2
2028
i92.7
Thereafter
i1,203.9
i1,852.4
Unamortized
debt discounts
(i2.8)
Deferred financing costs, net
(i12.0)
Total
long-term debt
$
i1,837.6
/
Significant
Transactions
On December 28, 2023, AES Ohio completed the offering of (i) $i92.5 million in aggregate principal amount of First Mortgage Bonds, i5.49%
Series due 2028 and (ii) $i107.5 million aggregate principal amount of its First Mortgage Bonds, i5.70% Series due 2033 in a private placement. The proceeds from the offerings were used to repay existing indebtedness, including
amounts outstanding under the AES Ohio Credit Agreement, and for general corporate purposes.
On April 13, 2023, AES Ohio issued $i100.0 million in aggregate principal amount of First Mortgage Bonds, i5.19%
Series due 2033 in a private placement. The proceeds from the offering were used to repay amounts outstanding under the AES Ohio Credit Agreement and for general corporate purposes.
On June 1, 2022, AES Ohio re-issued $i140.0 million of tax-exempt OAQDA Collateralized Pollution Revenue Refunding Bonds that had been held in trust, Series 2015A&B. AES Ohio re-issued $i140.0 million
aggregate principal amount of first mortgage bonds to the OAQDA in two series: $i100.0 million Series 2015A bonds at an interest rate of i4.25% and $i40.0 million
Series 2015B at an interest rate of i4.00% to secure the loan of proceeds from these bonds issued by the OAQDA. These bonds are subject to a mandatory put date of June 1, 2027.
Debt Covenants and Restrictions
The AES Ohio Credit Agreement and Fifty-Third, Fifty-Fourth and Fifty-Fifth Supplemental Indentures, pursuant to which the i3.20%
Bonds due 2040, the i5.19% Bonds due 2033, the i5.49% Bonds due 2028 and the i5.70%
Bonds due 2033 were issued, each contain one financial covenant, respectively. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt by total capitalization. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than i0.67 to 1.00. As of December 31, 2023, AES Ohio was in compliance with this financial covenant.
AES Ohio does not have any meaningful restrictions in its debt financing
documents prohibiting distributions to its parent, DPL. As of December 31, 2023, AES Ohio and DPL were in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.
DPL’s components of income tax expense for both continuing and discontinued operations were as follows:
Years
ended December 31,
$ in millions
2023
2022
2021
Components of tax expense / (benefit)
Federal - current
$
(i20.0)
$
(i7.6)
$
(i5.5)
State
and local - current
i0.4
i—
i—
Total
current
(i19.6)
(i7.6)
(i5.5)
Federal
- deferred
i24.5
(i2.1)
i4.4
State
and local - deferred
i1.7
i0.1
i0.4
Total
deferred
i26.2
(i2.0)
i4.8
Tax
expense / (benefit)
$
i6.6
$
(i9.6)
$
(i0.7)
/
Effective
and Statutory Rate Reconciliation
i
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to the effective tax rate, as a percentage of total income before taxes:
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
i
December
31,
$ in millions
2023
2022
Net non-current assets / (liabilities)
Depreciation / property basis
$
(i199.4)
$
(i185.5)
Income
taxes recoverable
i9.5
i9.2
Regulatory
assets
(i39.3)
(i22.8)
Investment
tax credit
i—
i0.1
Compensation
and employee benefits
(i3.7)
(i2.8)
Long-term
debt
i4.9
i5.1
Other
(a)
i0.7
(i2.3)
Net non-current
liabilities
$
(i227.3)
$
(i199.0)
(a) The
Other caption includes deferred tax assets of $i35.9 million in 2023 and $i36.6 million in 2022 related to state and local tax net operating loss carryforwards, with related valuation
allowances of $i35.7 million in 2023 and $i36.6 million
in 2022. These net operating loss carryforwards expire from 2024 to 2038.
/
During the year ended December 31, 2023, DPL received a payment from AES of $i21.0 million against its tax receivable balance as part of the $i260.0 million
in contributions received from AES. During the year ended December 31, 2021, DPL received a payment from AES of $i17.5 million against its tax receivable balance as part of a $i150.0 million
contribution from AES. See Note 9. Shareholder's Equity / (Deficit) for more information.
The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments
that were credited to Accumulated other comprehensive loss:
Years ended December 31,
$ in millions
2023
2022
2021
Tax
expense / (benefit)
$
(i0.6)
$
i0.8
$
i2.2
/
Uncertain
Tax Positions
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits did not change in 2023 and was $i0.4 million at December 31, 2023 and 2022.
The amount anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 2023 is estimated to be $i0.0 million.
The
following table presents the changes to our uncertain tax positions:
i
$ in millions
2023
2022
2021
Unrecognized
tax benefits at January 1
$
i0.4
$
i0.4
$
i1.4
Gross
decreases - prior period tax positions
i—
i—
(i1.0)
Unrecognized
tax benefits at December 31
$
i0.4
$
i0.4
$
i0.4
/
Tax
years subsequent to 2016 remain open to examination by taxing authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe we have appropriately accrued for our uncertain tax positions. However, audit outcomes and the timing of audit settlements and future events that would impact our previously recorded unrecognized tax benefits are subject to significant uncertainty. It is possible that the ultimate outcome of future examinations may exceed our provision for current unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in Income tax benefit. The amounts accrued and the tax expense / (benefit) recorded were not material for each period presented.
DPL is no longer subject to U.S. federal income tax examinations
for tax years through 2016, but all subsequent periods are open. DPL is no longer subject to state income tax examinations for tax years through 2019 but all subsequent periods are open.
8. iBENEFIT PLANS
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life
insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $i7.2 million and $i7.0
million at December 31, 2023 and 2022, respectively, were not material to the Consolidated Financial Statements in the periods covered by this report.
Defined Contribution Plans
The 401(k) Plans are qualified under Section 401 of the Internal Revenue Code.
Participants may elect to contribute up to i85% of
eligible compensation to their plan. Non-union participant contributions are matched i100% on the first i1% of eligible compensation and i50%
on the next i5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant contributions are matched i150% but are capped
at $i2,750 for 2023 and they are fully vested in their employer contributions after 3 years of service. Certain non-union and union employees become eligible to participate in their respective plan upon date of hire. All participants are fully vested in their own contributions.
We contributed $i3.5
million, $i3.3 million and $i3.3 million for the years ended December 31,
2023, 2022 and 2021, respectively. AES Ohio matching contributions are paid bi-weekly, in arrears. The contributions by year may include
the bi-weekly matching contribution that is paid in the following year in addition to employer matching true-up contributions. AES Ohio also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
Defined Benefit Plans
AES Ohio sponsors a traditional defined benefit
pension plan for most of the employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is i100% vested in all amounts credited to their account upon the completion of five vesting years, as defined in The Dayton
Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming i100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from AES Ohio to the Service Company maintain their previous eligibility to participate in the AES Ohio pension plan.
Almost
all management employees beginning employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become i100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or
disability, prior to such participant becoming i100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan ("SERP") for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain
terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCL. We have historically recorded these costs on an accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
The following tables set forth the changes in the Pension Plans' obligations and assets recorded on the Consolidated Balance Sheets at December 31, 2023 and 2022. The amounts
presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $i0.9 million, $i1.7
million and $i1.7 million of costs billed to the Service Company for the years ended December 31, 2023, 2022 and 2021, respectively.
$
in millions
Years ended December 31,
Change in benefit obligation
2023
2022
Benefit obligation at January 1
$
i309.0
$
i416.2
Service
cost
i3.0
i4.9
Interest cost
i15.8
i9.6
Plan
amendments
i1.4
i—
Actuarial
loss / (gain)
i9.6
(i98.0)
Benefits
paid
(i40.2)
(i23.7)
Benefit
obligation at December 31
i298.6
i309.0
Change
in plan assets
Fair value of plan assets at January 1
i274.4
i363.5
Actual
return / (loss) on plan assets
i26.5
(i73.1)
Employer
contributions
i7.7
i7.7
Benefits
paid
(i40.2)
(i23.7)
Fair
value of plan assets at December 31
i268.4
i274.4
Unfunded
status of plan
$
(i30.2)
$
(i34.6)
December
31,
Amounts recognized in the Consolidated Balance Sheets
2023
2022
Current liabilities
$
(i0.2)
$
(i0.2)
Non-current
liabilities
(i30.0)
(i34.4)
Net
liability at end of year
$
(i30.2)
$
(i34.6)
Amounts
recognized in Accumulated other comprehensive loss, Regulatory assets, non-current,pre-tax
Components:
Prior service cost
$
i7.7
$
i7.3
Net
actuarial loss
i78.7
i78.6
Accumulated
other comprehensive loss, Regulatory assets, pre-tax
$
i86.4
$
i85.9
Recorded
in:
Regulatory asset, non-current
$
i60.7
$
i62.0
Accumulated
other comprehensive loss
i25.7
i23.9
Accumulated
other comprehensive loss, Regulatory assets, pre-tax
$
i86.4
$
i85.9
//
The
accumulated benefit obligation for our Pension Plans was $i290.0 million and $i301.3 million at December 31, 2023 and 2022,
respectively.
The net periodic benefit cost of the Pension Plans was:
Years
ended December 31,
$ in millions
2023
2022
2021
Service cost
$
i3.0
$
i4.9
$
i4.5
Interest
cost
i15.8
i9.6
i8.2
Expected
return on assets
(i17.6)
(i15.8)
(i15.0)
Amortization
of unrecognized:
Actuarial loss
i0.6
i5.5
i9.0
Prior
service cost
i1.0
i1.1
i0.9
Net
periodic benefit cost
$
i2.8
$
i5.3
$
i7.6
Rates
relevant to each year's expense calculations
Discount rate
i5.41
%
i2.83
%
i2.44
%
Expected
return on plan assets
i5.40
%
i4.60
%
i4.55
%
/
The
components of net periodic benefit cost other than service cost are included in Total other expense, net in the Consolidated Statements of Operations.
i
The following table presents other changes in Pension Plan assets and benefit obligations recognized in Accumulated other comprehensive loss, Regulatory assets, non-current and Regulatory liabilities, non-current:
Years
ended December 31,
$ in millions
2023
2022
2021
Net actuarial loss / (gain)
$
i0.7
$
(i9.1)
$
(i21.7)
Plan
amendments
i1.4
i—
i2.3
Reversal
of amortization item:
Net actuarial loss
(i0.6)
(i5.5)
(i9.0)
Prior
service cost
(i1.0)
(i1.1)
(i0.9)
Total
recognized in Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$
i0.5
$
(i15.7)
$
(i29.3)
Total
recognized in net periodic benefit cost and Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$
i3.3
$
(i10.4)
$
(i21.7)
/
Significant
Gains and Losses Related to Changes in the Benefit Obligation
The actuarial loss of $i9.6 million increased the benefit obligation for the year ended December 31, 2023 and an actuarial gain of $i98.0 million
decreased the benefit obligation for the year ended December 31, 2022. The actuarial
loss in 2023 was primarily due to a decrease in the discount rate and the actuarial gain in 2022 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and
appropriateness.
At December 31, 2023, we decreased the expected long-term rate of return on plan assets assumption to i5.15%. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2023, we decreased our assumed discount rate to i5.14%
from i5.41% for pension expense to reflect current duration-based yield curve discount rates. A i1% increase / decrease in the rate of return assumption for pension would result in a corresponding
decrease / increase in 2024 pension expense of approximately $i2.9 million. A i0.25-percentage point increase / decrease in the discount rate for pension would result in a corresponding decrease / increase of approximately $i0.3 million
to 2024 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2023. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are then discounted back to the measurement date using the appropriate
spot rate for each half-year from the yield curve, thereby obtaining a present value
of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
i
The
weighted average assumptions used to determine benefit obligations were:
Benefit Obligation Assumptions
Pension
2023
2022
2021
Discount
rate for obligations
i5.14%
i5.41%
i2.83%
Rate
of compensation increases
i3.21%
i3.21%
i3.21%
/
Pension
Plan Assets
Pension Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Pension Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Pension Plan's funded status improve. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Pension Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Pension Plans' liabilities.
Strategic
asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are i30% – i40%
for return seeking assets and i60% – i70% for liability hedging assets. Return seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield
bond funds and emerging market debt funds.
The investment approach is to move the Pension Plans to a more de-risked position, if and when the overall funded status of the Pension Plans improve, by periodically rebalancing the allocation of the Pension Plans' investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Pension Plans' ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 2023 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value
hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
i
The following table summarizes our target pension plan allocation:
Quoted prices in active markets for identical assets
Significant observable inputs
Significant unobservable inputs
Asset category
(Level 1)
(Level 2)
(Level 3)
Common
collective trusts
Equities (a)
$
i84.5
$
i—
$
i84.5
$
i—
Debt
securities (b)
i121.1
i—
i121.1
i—
Government
debt securities (c)
i61.0
i—
i61.0
i—
Total
common collective trusts
i266.6
i—
i266.6
i—
Cash
and cash equivalents (d)
i1.8
i1.8
i—
i—
Total
pension plan assets
$
i268.4
$
i1.8
$
i266.6
$
i—
(a) This
category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips,
U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our Pension Plans' assets at December 31, 2022 by asset category are as follows:
Quoted prices in active markets for identical assets
Significant observable inputs
Significant unobservable inputs
Asset category
(Level 1)
(Level 2)
(Level 3)
Common
collective trusts
Equities (a)
$
i88.5
$
i—
$
i88.5
$
i—
Debt
securities (b)
i125.7
i—
i125.7
i—
Government
debt securities (c)
i58.3
i—
i58.3
i—
Total
common collective trusts
i272.5
i—
i272.5
i—
Cash
and cash equivalents (d)
i1.9
i1.9
i—
i—
Total
pension plan assets
$
i274.4
$
i1.9
$
i272.5
$
i—
(a) This
category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips,
U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
/
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements
of the Employee Retirement Income Security Act of 1974 ("ERISA") and, in addition, make voluntary contributions from time to time. We contributed $i7.5 million, $i7.5 million and $i9.8
million to the pension plan in the years ended December 31, 2023, 2022 and 2021.
We expect to make contributions of $i0.2 million to our SERP in 2024 to cover benefit payments. We also expect to make contributions of $i7.5
million to our pension plan during 2024.
Funding for the Pension Plans is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, AES Ohio’s funded target liability percentage was estimated to be i100%.
In addition, AES Ohio must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $i5.1 million in 2024, which includes $i1.6
million for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over iseven years. AES Ohio’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
i
Benefit
payments, which reflect future service, are expected to be paid as follows:
Estimated future benefit payments
$ in millions due within the following years:
Pension
2024
$
i22.4
2025
i22.1
2026
i22.1
2027
i21.9
2028
i21.8
2029
- 2033
i106.7
/
9. iSHAREHOLDER'S
EQUITY / (DEFICIT)
Common Stock
Effective on the Merger date, DPL's Amended Articles of Incorporation provided for i1,500 authorized common shares, of which ione
share is outstanding at December 31, 2023.
AES Ohio has i50,000,000 authorized common shares, of which i41,172,173 are outstanding at December 31,
2023. All common shares are held by AES Ohio’s parent, DPL.
Capital Contributions from AES
DPL received $i260.0 million and $i150.0 million in cash
contributions from AES during the years ended December 31, 2023 and 2021, respectively; which DPL then used to make equity contributions of $i260.0 million and $i150.0 million,
respectively, to AES Ohio. The cash contributions at DPL represented equity contributions of $i239.0 million in 2023 and $i132.5 million in 2021; and payments of $i21.0 million
and $i17.5 million against its tax receivable in 2023 and 2021, respectively. The proceeds from the equity contributions at AES Ohio have enabled AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity. DPL did not receive any contributions from AES in 2022.
Dividend Restrictions
DPL’s Amended Articles of Incorporation (the Articles) contain provisions which state that DPL may not make a distribution to its shareholder or make a loan to any of its
affiliates (other than its subsidiaries), unless: (a) there exists no Event of Default (as defined in the Articles) and no such Event of Default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, DPL’s leverage ratio does not exceed i0.67 to 1.00 and DPL’s interest coverage ratio is not less than i2.50
to 1.00 or, (b)(ii) if such ratios are not within the parameters, DPL’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. Further, the restrictions on the payment of distributions to a shareholder and the making of loans to its affiliates (other than subsidiaries) cease to be in effect if the three major credit rating agencies confirm that a lowering of DPL’s senior long-term debt rating below investment grade by the credit rating agencies would not occur without these restrictions.
As described above, DPL’s Amended Articles of Incorporation contains restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency
is below investment grade. As of December 31, 2023, DPL did not meet these requirements and was prohibited under its Articles of Incorporation from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
10. iCONTRACTUAL
OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
i
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2023, these include:
Payments
due in:
$ in millions
Total
Less than 1 year
2 - 3 years
4 - 5 years
More than 5 years
Electricity purchase commitments
$
i569.3
$
i365.8
$
i203.5
$
i—
$
i—
Purchase
orders and other contractual obligations
$
i421.1
$
i318.3
$
i83.4
$
i19.4
$
i—
/
Electricity
purchase commitments
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
Purchase orders and other contractual obligations
At December 31, 2023, DPL had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DPL's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above.
Contingencies
Legal
Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Consolidated Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2023, cannot be reasonably determined.
Environmental Matters
We
are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
Where
no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2023.
We have taken steps to limit our exposure to environmental claims that could be raised with respect to our previously-owned and operated coal-fired generation units, but we cannot predict whether any such claims will be raised and, if they are, the extent to which they may have a material adverse effect on our results of operations, financial condition and cash flows.
AES Ohio has a i4.9% equity ownership interest in OVEC, which is recorded using the cost method of accounting under GAAP. AES Ohio, along with several non-affiliated energy companies party to an OVEC arrangement,
receive and pay for OVEC capacity and energy and are responsible for OVEC debt obligations and other fixed costs in proportion to their power participation ratios under the arrangement, which, for AES Ohio, is the same as its equity ownership interest. As of December 31, 2023, AES Ohio could be responsible for the repayment of i4.9%, or $i52.5 million,
of $i1.1 billion OVEC debt obligations if they came due, comprised of both fixed and variable rate securities with maturities from 2026 to 2040. OVEC could also seek additional contributions from AES Ohio to avoid a default in the event that other OVEC members defaulted on their respective OVEC obligations.
11. iRELATED
PARTY TRANSACTIONS
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including AES Ohio, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
Long-term
Compensation Plan
During 2023, 2022 and 2021, some of DPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense for the years ended December 31, 2023, 2022 and 2021 was not material and is included in Operation and maintenance on DPL’s Consolidated Statements
of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder included in Other paid-in capital on DPL’s Consolidated Balance Sheets in accordance with ASC 718 - Compensation - Stock Compensation.
i
The following table provides a summary of our related party transactions:
Years
ended December 31,
$ in millions
2023
2022
2021
The following transactions are included in Operation and Maintenance on the Consolidated Statements of Operations:
Net charges from the Service Company
$
i48.3
$
i39.9
$
i34.9
Services
provided by AES and other AES affiliates
$
i16.8
$
i16.5
$
i15.5
Services
provided by other related parties
$
i1.7
$
i2.5
$
i1.6
Balances
with related parties (included in Accounts Receivable, net and Accounts Payable):
DPL has a wholly-owned business trust, DPL Capital Trust II (the Trust), formed for the purpose of issuing trust capital securities to third-party investors. Effective in 2003, DPL deconsolidated the Trust upon adoption of the accounting standards related to variable interest entities and currently treats the Trust as a nonconsolidated subsidiary. The Trust holds mandatorily redeemable trust capital securities. The investment in the Trust, which amounted to $i0.1 million and $i0.2 million
at December 31, 2023 and 2022, respectively, is included in Other non-current assets on the Consolidated Balance Sheets. DPL also has a note payable to the Trust amounting to $i15.6 million and $i15.6 million
at December 31, 2023 and 2022, respectively, that was established upon the Trust’s deconsolidation in 2003. This note payable is included in Long-term debt on the Consolidated Balance Sheets.
In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation which represents a full and unconditional guarantee of payments to the capital security holders of the Trust.
Income Taxes
AES
files federal and state income tax returns which consolidate DPL and its subsidiaries. Under a tax sharing agreement with AES, DPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method.
12. iBUSINESS SEGMENTS
DPL manages its business through ione
reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segment. The Utility segment is comprised of AES Ohio, a public electric transmission and distribution utility, with all other nonutility business activities aggregated separately. See Note 1. Overview and Summary of Significant Accounting Policies for further information on AES Ohio. The “Other” nonutility category primarily includes interest expense, cash and other immaterial balances. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
i
The
following tables present financial information for DPL’s reportable business segment:
(a)"All
Other" includes Eliminations for all periods presented.
13. iREVENUE
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be
entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue
AES Ohio energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. AES Ohio sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenue are satisfied over time as energy is delivered and the same method is used to measure progress, and thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right
to sell or distribute electricity in our service area, AES Ohio is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that AES Ohio is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that AES Ohio has the right to bill corresponds directly with the value to the customer of AES Ohio's performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and AES Ohio only serves as a billing agent if requested by the CRES provider. As such, AES Ohio recognizes the consolidated billing arrangement
with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue
AES Ohio's share of the power produced at OVEC is sold to PJM and this revenue is classified as Wholesale revenue.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity market and the two products can be transacted independently of one another. Therefore, wholesale revenue is a separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
Compensation for use of AES Ohio’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenue. As AES Ohio owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. AES Ohio) and recognized as transmission revenue.
Transmission revenue has a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that AES Ohio, as the transmission operator, has the right to bill (received
as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue
AES Ohio records its share of OVEC capacity revenue as Capacity revenue. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and performance of the OVEC units, there may be additional performance bonuses or penalties, which would be recognized only if it becomes probable that such bonus or penalties will be incurred.
RTO capacity revenue has a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure
progress, the performance obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
i
DPL's revenue from contracts with customers was $i861.6 million,
$i861.4 million and $i667.6 million for the years ended December 31, 2023, 2022
and 2021, respectively. The following table presents our revenue from contracts with customers and other revenue by segment for the years ended December 31, 2023, 2022 and 2021:
Total
retail revenue from contracts with customers
i583.3
i—
i—
i583.3
Wholesale
revenue
Wholesale revenue from contracts with customers
i19.5
i—
(i0.7)
i18.8
RTO
ancillary revenue
i49.9
i0.1
i—
i50.0
Capacity
revenue
i5.9
i—
i—
i5.9
Miscellaneous
revenue
Miscellaneous revenue from contracts with customers (b)
i—
i9.6
i—
i9.6
Miscellaneous
revenue
i5.1
i3.5
(i3.5)
i5.1
Total
revenue
$
i663.7
$
i13.2
$
(i4.2)
$
i672.7
(a)"Other"
primarily includes operation and maintenance service revenue, billing service fees from CRES providers and other miscellaneous retail revenue from contracts with customers.
(b) Miscellaneous revenue from contracts with customers primarily includes revenue for various services provided by Miami Valley Lighting.
The balances of receivables from contracts with customers were $i90.4 million and $i85.3
million as of December 31, 2023 and 2022, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under ASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for DPL.
In May 2020, AEP, the operator of the formerly co-owned Conesville EGU, retired Conesville Unit 4 as planned. On June 5, 2020, DPL and AES Ohio Generation, together with AEP, completed the transfer of their interests in the retired Unit 4, including the associated environmental liabilities, to an unaffiliated third-party purchaser. For the transaction, DPL made quarterly cash expenditures,
totaling $i4.0 million, through June 2022. The transfer of Conesville Unit 4 was the last step in DPL's plan to exit its AES Ohio Generation business operations.
DPL determined that the transfer of Conesville and the previous transfers and sales of other AES Ohio Generation assets constitute the disposal of a group of components, which, as a whole, represent a strategic shift to exit its AES Ohio Generation business. As such, the disposal of this group of components qualifies to be presented as discontinued operations. Therefore, the results of operations of
this group of components were reported as such in the Consolidated Statements of Operations for the period presented.
i
The following table summarizes the revenue, operating costs, other expenses and income tax of discontinued operations for the period indicated:
$
in millions
2021
Revenue
$
i1.4
Operating costs and other expenses
(i2.4)
Loss
from discontinued operations
(i1.0)
Income tax benefit from discontinued operations
(i0.2)
Net
loss from discontinued operations
$
(i0.8)
/
Cash flows related to discontinued operations are
included in our Consolidated Statements of Cash Flows. Cash flows from operating activities for discontinued operations were $(i0.8) million for the year ended December 31, 2021. Cash flows from investing activities for discontinued operations were $(i1.6) million
for the year ended December 31, 2021.
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of The Dayton Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of The Dayton Power & Light Company, d/b/a AES Ohio, (the Company) as of December
31, 2023 and 2022, the related statements of operations, comprehensive income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023 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. 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 were communicated or required to be communicated to the Board of Directors and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
As described in Note 2 to the financial statements, the Company applies the provisions of FASB Accounting Standards Codification 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the Public Utilities Commission of Ohio and the Federal Energy Regulatory Commission. 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 overcollections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant,
and equipment; regulatory assets and liabilities; revenues; and depreciation expense, and related disclosures in the Company’s financial statements.
Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred through December 31, 2023, 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 financial statements and related disclosures.
How We Addressed the Matter in Our Audit
To evaluate the Company’s significant judgments in 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.
1.
iOVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DP&L, which does business as AES Ohio, iis 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 distribution services are still regulated. AES Ohio has the exclusive right to provide such service to its approximately i539,000/customers located in West Central Ohio. Principal industries located in AES Ohio’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. AES Ohio also provides retail SSO electric service to residential, commercial, industrial and governmental customers in ai6,000square mile area of West Central Ohio. AES Ohio sources all of the generation for its SSO customers through a competitive bid process AES Ohio's sales reflect the general economic conditions, seasonal weather patterns of the area, the market price of electricity and customer energy efficiency initiatives. AES Ohio owns numerous transmission facilities. AES Ohio records revenue and expenses for its proportional share of energy and capacity from its investment in OVEC. AES Ohio has only one reportable segment, the Utility segment. In addition to AES Ohio's electric transmission
and distribution businesses, the Utility segment includes revenue and costs associated with AES Ohio's investment in OVEC. The terms “we,”“us,”“our” and “ours” are used to refer to AES Ohio.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio 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.
Financial Statement Presentation
AES Ohio idoes
not have any subsidiaries. We have evaluated subsequent events through the date this report was issued.
Reclassifications
i
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
i
The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the revenue and expenses of the periods reported. Actual results could differ from these estimates and assumptions. Significant items subject to such estimates and assumptions include: the carrying value of Property, plant and equipment; unbilled revenue; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
Cash and Cash Equivalents
i
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 restrictions includes restrictions imposed by agreements related to deposits held as collateral.
The
following table summarizes cash, cash equivalents and restricted cash amounts reported within the Balance Sheets that reconcile to the total of such amounts as shown on the Statements of Cash Flows:
December 31,
$ in millions
2023
2022
Cash and cash equivalents
$
i15.5
$
i19.7
Restricted
cash (included in Prepayments and other current assets)
i0.1
i0.1
Total
cash, cash equivalents and restricted cash
$
i15.6
$
i19.8
/
Accounts
Receivable and Allowance for Credit Losses
i
The following table summarizes accounts receivable as of December 31, 2023 and 2022:
December
31,
$ in millions
2023
2022
Accounts receivable, net
Customer receivables
$
i70.0
$
i60.6
Unbilled
revenue
i19.4
i24.0
Amounts due from affiliates
i2.4
i4.4
Other
i2.2
i3.8
Allowance
for credit losses
(i0.9)
(i0.5)
Total
accounts receivable, net
$
i93.1
$
i92.3
/
i
The
following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the years ended December 31, 2023 and 2022:
December 31,
$ in millions
2023
2022
Allowance
for credit losses:
Beginning balance
$
i0.5
$
i0.3
Current
period provision
i5.4
i2.5
Write-offs charged against allowances
(i6.0)
(i4.1)
Recoveries
collected
i1.0
i1.8
Ending
balance
$
i0.9
$
i0.5
/
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 are expected to impact collectability. Amounts are written off when reasonable collections efforts have been exhausted.
Inventories
Iinventories are carried at average cost, net of reserves, and include materials and supplies used for utility operations.
Regulatory
Accounting
i
As a regulated utility, AES Ohio applies the provisions of ASC 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 revenue collected for costs that AES Ohio 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 the 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 the FERC or established regulatory
practices, such as other utilities under the jurisdiction of the PUCO or the FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to approval by the PUCO or the FERC. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 2. Regulatory Matters for more information.
Property, Plant and Equipment
i
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 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.
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. Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For AES Ohio’s transmission and distribution assets, straight-line depreciation is applied monthly on an average
composite basis using group rates that approximated i2.6% in 2023, i2.8%
in 2022 and i2.8% in 2021. Depreciation expense was $i76.8 million, $i75.6 million
and $i71.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
AFUDC
In accordance with the Uniform System of Accounts prescribed by FERC, AES Ohio capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return on equity funds) used for construction purposes
during the period of construction with a corresponding credit to income. AFUDC equity and AFUDC debt were as follows for the years ended December 31, 2023, 2022 and 2021:
Years ended December 31,
$ in millions
2023
2022
2021
AFUDC
equity
$
i5.0
$
i5.7
$
i2.1
AFUDC
debt
$
i6.5
$
i1.3
$
i1.6
/
Impairment
of Long-lived Assets
i
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 $i2,195.9 million
and $i1,861.5 million as of December 31, 2023 and 2022, 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.
/
Intangible
Assets
i
Intangibles include software and renewable energy credits. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired. Finite-lived intangible assets include capitalized
software amortized on a straight-line basis over their estimated useful lives. These capitalized
software intangible assets have a seven year-weighted average amortization period.
The following table presents information related to the Company's capitalized software balances, including the gross amount capitalized and related amortization:
Implementation
Costs Related to Software as a Service
AES Ohio has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $i14.8 million and $i12.5 million as of December 31,
2023 and 2022, respectively, which are recorded within Other non-current assets on the accompanying Balance Sheets.
Debt Issuance Costs
i
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 from financing activities.
Contingencies
AES Ohio accrues for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations and are involved in certain legal proceedings. If AES Ohio’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. Accruals for loss contingencies were not material as of December 31, 2023 and 2022. See Note 9. Contractual Obligations, Commercial
Commitments and Contingencies for additional information.
Financial Instruments
i
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 recorded
within Other non-current assets on the accompanying Balance Sheets. See Note 4. Fair Value for more information.
Financial Derivatives
i
We have contracts involving the physical delivery of energy. These contracts qualify for the normal purchases and normal sales scope exception in ASC 815 - Derivatives and Hedging, thus we have elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
The amounts reclassified out of Accumulated other comprehensive loss by component during the years ended December 31, 2023, 2022 and 2021 are as follows:
Details
about AOCL Components
Affected line in the Statements of Operations
Years ended December 31,
$ in millions
2023
2022
2021
Amortization
of unfunded pension and other postretirement obligations (Note 7):
Other expense
$
i0.6
$
i3.6
$
i5.0
Income
tax effect
(i0.2)
(i0.9)
(i1.1)
Total
reclassifications for the period, net of income taxes
$
i0.4
$
i2.7
$
i3.9
/
The
changes in the components of Accumulated other comprehensive loss during the years ended December 31, 2023 and 2022 are as follows:
In addition to insurance obtained from third-party providers, MVIC, a wholly-owned captive subsidiary of DPL, provides insurance coverage solely to us and other DPL subsidiaries for workers’ compensation, general liability and property damage on an ongoing basis. AES Ohio is responsible for claims costs below certain coverage thresholds of MVIC and third-party insurers for the insurance coverage noted above. AES Ohio has estimated liabilities for medical, life, disability and other reserves for claims costs below certain coverage thresholds of third-party providers of approximately $i3.5
million and $i3.2 million at December 31, 2023 and 2022, respectively, within Accrued and other current liabilities and Other non-current liabilities on the accompanying Balance Sheets. The estimated liabilities for workers’ compensation, medical, life and disability costs at AES Ohio 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
Revenue is 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 revenue on our 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 revenue” and is
a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenue is 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 more information, see Note 11. Revenue.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
AES Ohio collects certain excise taxes levied by state or local governments from its customers.
AES Ohio’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenue in the accompanying Statements of Operations. The amounts of such taxes were as follows:
i
Years
ended December 31,
$ in millions
2023
2022
2021
Excise taxes collected
$
i46.6
$
i49.2
$
i48.7
/
Repair
and Maintenance Costs
Costs associated with maintenance activities are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
Pension and Postretirement Benefits
We recognize in our Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes from actuarial gains or losses related to our regulated operations, which would otherwise be recognized in 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 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 ASC 715 - Compensation - Retirement Benefits, 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 7. Benefit
Plans for more information.
i
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 Statements 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 2. Regulatory Matters for more information.
AES Ohio files U.S. federal income tax returnsas 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 as specified in our tax allocation agreement, and which provides a consistent, systematic and rational approach. See Note 6. Income Taxes for more information.
Related Party Transactions
In the normal course of business, AES Ohio enters into transactions with other subsidiaries of DPL or AES. See Note 10. Related Party Transactions for more information.
The following table provides a brief description of recent accounting pronouncements that could have an impact on our financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on our Financial Statements.
i
ASU
Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
New Accounting Standards Issued But Not Yet Effective
2023-06 Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative
In U.S. Securities and Exchange Commission (SEC) Release No. 33-10532, Disclosure Update and Simplification, issued August 17, 2018, the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, generally accepted accounting principles
(GAAP) to the FASB for potential incorporation into the Codification. The amendments in this Update are the result of the Board’s decision to incorporate into the Codification 14 of the 27 disclosures referred by the SEC.
The amendments in this Update represent changes to clarify or improve disclosure and presentation requirements of a variety of Topics. Many of the amendments allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the SEC’s requirements. Also, the amendments align the requirements in the Codification with the SEC’s regulations.
The effective date for each amendment will be the date on which the SEC's removal of that related disclosure becomes effective, with early adoption prohibited. The amendments in this Update should be applied
prospectively
We will provide the required disclosures on a prospective basis on the date each amendment becomes effective. We do not expect ASU 2023-06 will have any impact on our Financial Statements.
2023-07 Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
The amendments in this section are designed to improve the disclosures related to Segment reporting on an interim and annual basis. Public companies must disclose significant segment expenses and an amount for other segment items. This will also require that a company disclose its annual disclosures under Topic 280 in each interim period. Furthermore, companies will need to disclose the Chief Operating Decision Maker (CODM) and how the CODM assesses the performance of a segment. Lastly, public companies that have a single
reportable segment must report the required disclosures under topic 280.
The amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.
We are currently evaluating the impact of adopting the standard on our Financial Statements.
2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures
The amendments in this Update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that
meet a quantitative threshold. Furthermore, companies are required to disclose a disaggregated amount of income taxes paid at a federal, state, and foreign level as well as a break down of income taxes paid in an jurisdiction that comprises 5% of a company's total income taxes paid. Lastly, this ASU requires that companies disclose income (loss) from continuing operations before income tax at a domestic and foreign level and that companies disclose income tax expense from continuing operations on a federal, state, and foreign level.
The amendments in this Update are effective for fiscal years beginning after December 15, 2024
We are currently evaluating the impact of adopting the standard on our Financial Statements.
2.
iREGULATORY MATTERS
AES Ohio ESPs and Smart Grid Comprehensive Settlement
AES Ohio ESP - Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. AES Ohio is currently operating pursuant to ESP 4, described in the paragraph below. From November 1, 2017 through December 18, 2019, AES Ohio operated pursuant to an approved ESP plan, which was initially approved on October
20, 2017 (ESP 3). On December 18, 2019, the PUCO approved AES Ohio's Notice of Withdrawal and reversion to its prior rate plan (ESP 1). Among other items, the PUCO Order approving the ESP 1 rate plan included reinstating the non-bypassable RSC Rider, which provided annual revenue of approximately $i79.0 million. The OCC has appealed to the Ohio Supreme Court the PUCO’s decision approving the reversion to ESP 1 as well as argued for a refund of the RSC revenue dating back to August 2021. Oral argument regarding this appeal, which has been consolidated with the appeal regarding the Smart Grid Comprehensive Settlement
described in the paragraph below, is expected but not yet scheduled. We are unable to predict the outcome of this appeal, but if this results in terms that are more adverse than AES Ohio's current ESP rate plan, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Smart Grid Comprehensive Settlement - On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO, various customers and organizations representing
customers of
AES Ohio and certain other parties with respect to, among other matters, AES Ohio's applications pending at the PUCO for (i) approval of AES Ohio's plan to modernize its distribution grid (Smart Grid Phase 1), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. On June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed the final PUCO order to the Ohio Supreme Court on December 6, 2021. Oral arguments regarding this appeal, which have been consolidated with the appeal regarding the reversion to ESP 1 described in the paragraph above, are expected but not yet scheduled.
Smart Grid Phase 2 Plan - In February
2024, AES Ohio filed a Smart Grid Phase 2 with the PUCO proposing to invest approximately $i683 million in capital projects over a 10-year period following the Smart Grid Phase 1, which ends June 2025. There are three principal components of AES Ohio’s Smart Grid Phase 2: 1) Distribution Operations, 2) Advanced Intelligence 3) Telecommunications and Cybersecurity.These initiatives will also allow AES Ohio to be ready to leverage and integrate Distributed Energy Resources into its grid. If approved, AES Ohio will implement a comprehensive grid modernization project
that will deliver benefits to customers, society as a whole and to AES Ohio.A procedural schedule is expected that will provide for an Order by the second quarter of 2025 prior to the end of Smart Grid Phase 1.
ESP 4 - On September 26, 2022, AES Ohio filed its latest ESP (ESP 4) with the PUCO. ESP 4 is a comprehensive plan to enhance and upgrade its network and improve service reliability, provide greater safeguards for price stability and continue investments in local economic development.
On April 10, 2023, AES Ohio entered into a Stipulation and Recommendation with the PUCO Staff and seventeen parties (the “Settlement”) with respect to AES Ohio’s ESP 4 application, and,
on August 9, 2023, the PUCO approved the Settlement without modification. The Settlement provides for a three-year ESP without a rate stability charge, and, in addition to other items, provides for the following:
•A Distribution Investment Rider for the term of the ESP allowing for the timely recovery of distribution investments by AES Ohio based on a i9.999% return on equity, subject to revenue caps;
•The recovery of approximately $i66.0 million
related to past expenditures by AES Ohio plus future carrying costs and the recovery of incremental vegetation management expenses up to certain annual limits during the term of ESP 4. During the third quarter of 2023, AES Ohio deferred $i28.3 million of previously recognized purchased power costs and an additional $i10.7 million
of carrying costs related to this recovery; and
•Funding of programs for assistance to low-income customers and for economic development.
Additionally, with approval of this Settlement, the distribution rates that were approved by the PUCO on December 14, 2022, and are described in the paragraph below, became effective on September 1, 2023.
Distribution Rate Case
On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments
to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order:
•Establishes a revenue increase of $i75.6 million for AES Ohio’s base rates for electric distribution service; and
•Provides for a return on equity of i9.999%
and a cost of long-term debt of i4.4% on a distribution rate base of $i783.5 million and based on a capital structure of i53.87%
equity and i46.13% long-term debt.
These rates went into effect on September 1, 2023 with the approval of AES Ohio's ESP 4.
On
March 3, 2020, AES Ohio 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. An uncontested settlement was filed December 10, 2020 and approved April 15, 2021. Among other things, the settlement established new depreciation rates for AES Ohio’s transmission assets and an authorized return on equity of i9.85%, and started an amortization process to return excess deferred taxes created by the TCJA.
Pursuant to the approved mechanisms and formula, transmission rates are adjusted each calendar year to reflect projected costs, adjusted to a true-up of actual revenue and costs incurred in the prior year.
Regulatory Assets and Liabilities
In accordance with ASC 980 - Regulated Operations ("ASC 980"), we have recognized total regulatory assets of $i212.3 million and $i169.0 million
at December 31, 2023 and 2022, respectively, and total regulatory liabilities of $i200.1 million and $i239.1 million at December 31, 2023
and 2022, 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 AES Ohio’s Regulatory assets and liabilities:
Type of Recovery
Amortization Through
December 31,
$ in millions
2023
2022
Regulatory
assets, current:
Undercollections to be collected through rate riders
iA/B
i2024
$
i51.7
$
i38.7
Uncollectible
expense being recovered in base rates
iB
i2024
i1.7
i—
Vegetation
management being recovered in base rates
iB
i2024
i2.7
i—
Rate
case expenses being recovered in base rates
iB
i2024
i0.5
i0.5
Total
regulatory assets, current
i56.6
i39.2
Regulatory
assets, non-current:
Pension benefits
iA/B
iOngoing
i62.6
i64.2
Regulatory
compliance costs
iA
i2028
i45.0
i6.4
Energy
efficiency
iD
iUndetermined
i4.1
i—
Smart
grid and AMI costs
iB/C
iOngoing
i3.2
i2.3
Unamortized
loss on reacquired debt
iB
iOngoing
i1.1
i2.0
Deferred
storm costs
iB
iOngoing
i2.2
i8.7
Deferred
rate case costs
iB
i2028
i1.5
i1.9
Deferred
vegetation management
iB
i2028
i19.9
i21.9
CIS
replacement
iD
iUndetermined
i3.1
i1.1
Transmission
formula rate debits
iB
i2025
i6.7
i—
Decoupling
deferral
iA
i2028
i—
i13.8
Uncollectible
deferral
iB
i2028
i6.3
i7.5
Total
regulatory assets, non-current
i155.7
i129.8
Total
regulatory assets
$
i212.3
$
i169.0
Regulatory
liabilities, current:
Overcollection of costs to be refunded through rate riders
iA/B
i2024
$
i14.7
$
i27.6
Transmission
formula rate credits
iB
i2024
i3.3
i12.8
Total
regulatory liabilities, current
i18.0
i40.4
Regulatory
liabilities, non-current:
Estimated costs of removal - regulated property
Not Applicable
i134.2
i136.8
Deferred
income taxes payable through rates
iOngoing
i42.6
i45.2
TCJA
regulatory liability
iB
iOngoing
i1.0
i4.5
Transmission
formula rate credits
iB
i2024
i—
i5.4
PJM
transmission enhancement settlement
iB
i2025
i1.7
i3.5
Postretirement
benefits
iB
iOngoing
i2.6
i3.3
Total
regulatory liabilities, non-current
i182.1
i198.7
Total
regulatory liabilities
$
i200.1
$
i239.1
A
– Recovery of incurred costs plus rate of return.
B – Recovery of incurred costs without a rate of return.
C – Includes costs associated with Smart Grid Phase 2 development for which recovery is not yet determined but is considered probable of occurring in future rate proceedings.
D – Recovery not determined, but recovery is probable of occurring in future rate proceedings.
/
Current regulatory assets and liabilities
Current regulatory assets primarily represent costs that are being recovered per specific rate orders; recovery for the remaining costs is
probable, but not certain. Current regulatory assets include: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Storm Cost Rider, (iv) the Legacy Generation Rider, (v) the Infrastructure Investment Rider, (vi) the Regulatory Compliance Rider, (vii) the Proactive Reliability Optimization Rider, and (viii) the Distribution Investment Rider. Also included are the current portion of rate case expense, vegetation management, and uncollectible expense costs.
Current regulatory liabilities include the overcollection of standard offer costs and certain transmission related costs, including the current portion of the
PJM transmission enhancement settlement (discussed below), the transmission rate true-up, the Transmission Cost Recovery Rider overcollection and the TCJA regulatory liability.
AES Ohio is earning a return on $i9.3 million of the net undercollections / (overcollections) to be collected / (refunded) through rate riders including: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, and (iii) the Regulatory Compliance Rider, partially offset by the overcollection of standard offer costs and transmission costs.
Pension
benefits
Pension benefits represent the qualifying ASC 715 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.
Regulatory compliance costs
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer
Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff, (vi) Supplier Consolidated Billing, (vii) Decoupling, (viii) a portion of previously deferred uncollectible costs, and (ix) unrecovered purchased power deferrals, and related carrying charges, approved in ESP 4. The balance of this regulatory asset earns a return with a maximum total to be accrued of $i4.0 million. These costs are being recovered over a five-year period that began September 2023 through the Regulatory Compliance Rider approved in ESP 4.
Energy
Efficiency Rider
Energy Efficiency Rider represents deferred expense and shared savings associated with energy efficiency programs that provide incentives and rebates for customers to improve the way they use electricity. The deferred expenses and shared savings were incurred prior to Ohio’s energy efficiency change in legislation and are therefore probable for recovery. The PUCO is currently conducting a prudency review, and a PUCO staff report was issued on February 2, 2024.
Smart Grid and AMI costs
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI related to Smart Grid Phase 1 and 2. AES Ohio developed Smart Grid Phase 1, which
focuses on implementing new technology in the distribution business to upgrade customer meters, provide new customer programs related to energy efficiency and time-based rates, make certain infrastructure improvements, and upgrade substation and telecommunication equipment. Smart Grid Phase 1 costs are being recovered over a period of 4 years. AES Ohio has proposed Smart Grid Phase 2, which is pending before the PUCO.
Unamortized loss on reacquired debt
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
Deferred
storm costs represent the long-term portion of deferred costs for major storms which occurred during the second-half of 2023. AES Ohio files semi-annual petitions seeking recovery of storm costs. Recovery of these costs is probable, but not certain.
Rate case expenses represent costs associated with preparing distribution rate cases. AES Ohio was granted recovery of the 2020 rate case costs through base rates over a period of 5 years, without a rate of return.
Vegetation management
costs
Vegetation management costs represent costs incurred from outside contractors for tree trimming and other vegetation management services. Historically deferred costs from 2018-2020 are being recovered in base rates with an amortization period of five years. In addition, ESP 4 approved a Proactive Reliability Optimization Rider which granted recovery of costs deferred starting from 2021 forward with an annual baseline of $i20.0 million, subject to an annual maximum deferral of $i7.5 million.
These historical costs are also being recovered with an amortization period of five years. Annual spending less than the vegetation management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability.
CIS replacement costs
Customer Information System (“CIS”) replacement costs represent operation and maintenance expenses associated with the implementation of a new CIS system. Deferral of these costs subject to an $i8.8 million maximum
deferral was approved in the Smart Grid Phase 1 Order, subject to demonstration that the functionality is available and a reasonableness prudence review. Recovery of these costs was requested and approved in Case No. 22-0900-EL-SSO to be included in the new Regulatory Compliance Rider, once the CIS is used and useful.
Transmission formula rate debits/credits
Transmission formula rate assets and liabilities represent the amounts due from/to customers as a result of the implementation of transmission formula rates, which are adjusted each year based on actual revenue and costs from a previous year, as described above under "FERC Transmission Rates".
Decoupling deferral
The decoupling deferral was approved
for recovery via the Regulatory Compliance Rider in the ESP 4 Order and was reclassified to the Regulatory Compliance Rider asset in August 2023. The decoupling deferral represented 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.
Uncollectible deferral
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenue associated with the bypassable uncollectible portion of the standard offer rate. The 2023 distribution rate case order established that these costs would be recovered in base rates over a period of five years.
Estimated
costs of removal - regulated property
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
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, AES Ohio includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes AES Ohio expects to return to customers in future periods.
TCJA regulatory liability
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess Accumulated Deferred Income Taxes ("ADIT") for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, AES Ohio 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, AES Ohio entered into a stipulation to resolve all remaining TCJA items related to its distribution rates, including a proposal to return no less than $i4.0 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
PJM
transmission enhancement settlement liability represents the transmission enhancement settlement charges for which AES Ohio 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
Postretirement benefits represent the qualifying ASC 715 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.
3. iPROPERTY, PLANT AND EQUIPMENT
i
The
following is a summary of AES Ohio’s Property, plant and equipment with corresponding composite depreciation rates at December 31, 2023 and 2022:
The fair value of our financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of our assets and liabilities have been determined using available market information. Because these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are categorized using the market approach as follows for AES Ohio:
•Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market. This includes inputs used for money market accounts that are considered cash equivalents, open-ended mutual funds and exchange-traded funds in
the Master Trust. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions;
•Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets. This includes the common collective trust pension plan assets valued using the net asset value method. See Note 7. Benefit Plans for more information; and
•Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. These inputs are used for certain debt balances because the notes are not publicly traded. The fair value reflects management’s own assumptions about the inputs used in pricing the liability. Our long-term debt
is fair valued for disclosure purposes only.
The fair values of our financial instruments are based on published sources for pricing when possible. We rely on valuation models only when no other method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future. Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency.
We did not have any transfers of the fair values of our financial instruments among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31,
2023 and 2022
These financial instruments are not subject to master netting agreements or collateral requirements and, as such, are presented in the Balance Sheets at their gross fair value.
Financial Assets
AES Ohio established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans. These assets are not used for general operating purposes. These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit. These investments are recorded at fair value within Other non-current assets on the Balance Sheets and are classified as equity securities. Net unrealized gains / (losses) related to equity investments
still held as of December 31, 2023 and 2022 are as follows:
Years ended December 31,
$ in millions
2023
2022
Net unrealized gains / (losses) (a)
$
i0.5
$
(i1.5)
(a) These
amounts are included in Other income / (expense), net in our Statements of Operations.
The fair value of assets at December 31, 2023 and 2022 and the respective category within the fair
value hierarchy for AES Ohio was determined as follows:
Financial
Instruments not Measured at Fair Value in the Balance Sheets
Our long-term debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets. These fair value inputs are considered Level 2 in the fair value hierarchy. As the Wright-Patterson Air Force Base note is not publicly traded, the fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs. Unrealized gains or losses are not recognized in the financial statements as long-term debt is presented at carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2027 to 2061. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair value.
i
The
following table presents the carrying amount, fair value, and fair value hierarchy of our financial liabilities that are not measured at fair value in the Balance Sheets as of the periods indicated, but for which fair value is disclosed:
(a)First
mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of November 1, 2040 but are subject to a mandatory put in June 2027.
(b)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of January 1, 2034 but are subject to a mandatory put in June 2027.
Revolving Credit Agreement
AES Ohio entered into a second amendment and restatement of the AES Ohio Credit Agreement on December 22, 2022 with a syndication of bank lenders. The AES Ohio Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital
expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on December 22, 2027, and bears interest
at variable rates as described in the agreement. It includes an uncommitted $i100.0 million
accordion feature to provide AES Ohio with an option to request an increase in the size of the facility, subject to approval by the lenders. The AES Ohio Credit Agreement also includes two one-year extension options, allowing AES Ohio to extend the maturity date subject to approval by the lenders. At December 31, 2023 and 2022, the AES Ohio Credit Agreement had outstanding borrowings of $i15.0 million and $i120.0 million,
respectively.
Debt Maturities
i
At December 31, 2023, maturities of long-term debt are summarized as follows:
Due during the years ending December 31,
$ in millions
2024
$
i0.2
2025
i0.2
2026
i0.2
2027
i140.2
2028
i92.7
Thereafter
i788.3
i1,021.8
Unamortized
debt discounts
(i7.1)
Deferred financing costs, net
(i2.2)
Total
long-term debt
$
i1,012.5
/
Significant Transactions
On December 28, 2023, AES Ohio completed the offering of (i) $i92.5 million
in aggregate principal amount of First Mortgage Bonds, i5.49% Series due 2028 and (ii) $i107.5 million aggregate principal amount of its First Mortgage Bonds, i5.70%
Series due 2033 in a private placement. The proceeds from the offerings were used to repay existing indebtedness, including amounts outstanding under the AES Ohio Credit Agreement, and for general corporate purposes.
On April 13, 2023, AES Ohio issued $i100.0 million in aggregate principal amount of First Mortgage Bonds, i5.19%
Series due 2033 in a private placement. The proceeds from the offering were used to repay amounts outstanding under the AES Ohio Credit Agreement and for general corporate purposes.
On June 1, 2022, AES Ohio re-issued $i140.0 million of tax-exempt OAQDA Collateralized Pollution Revenue Refunding Bonds that had been held in trust, Series 2015A&B. AES Ohio re-issued $i140.0 million
aggregate principal amount of first mortgage bonds to the OAQDA in two series: $i100.0 million Series 2015A bonds at an interest rate of i4.25% and $i40.0 million
Series 2015B at an interest rate of i4.00% to secure the loan of proceeds from these bonds issued by the OAQDA. These bonds are subject to a mandatory put date of June 1, 2027.
Debt Covenants and Restrictions
The AES Ohio Credit Agreement and Fifty-Third, Fifty-Fourth and Fifty-Fifth Supplemental Indentures, pursuant to which the i3.20%
Bonds due 2040, the i5.19% Bonds due 2033, the i5.49% Bonds due 2028 and the i5.70%
Bonds due 2033 were issued, each contain one financial covenant, respectively. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt by total capitalization. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than i0.67 to 1.00. As of December 31, 2023 AES Ohio was in compliance with this financial covenant.
AES Ohio does not have any meaningful restrictions in its debt financing documents
prohibiting distributions to its parent, DPL. As of December 31, 2023, AES Ohio was in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.
AES Ohioi’s components of income tax expense were as follows:
Years
ended December 31,
$ in millions
2023
2022
2021
Components of tax expense / (benefit)
Federal - current
$
i4.1
$
(i0.8)
$
i1.1
State
and local - current
i0.4
i—
i0.1
Total
current
i4.5
(i0.8)
i1.2
Federal
- deferred
i7.3
(i2.4)
i4.1
State
and local - deferred
i1.7
i0.1
i0.4
Total
deferred
i9.0
(i2.3)
i4.5
Tax
expense / (benefit)
$
i13.5
$
(i3.1)
$
i5.7
Effective
and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to the effective tax rate, as a percentage of total income before taxes:
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
i
December
31,
$ in millions
2023
2022
Net non-current assets / (liabilities)
Depreciation / property basis
$
(i195.3)
$
(i181.3)
Income
taxes recoverable
i9.5
i9.2
Regulatory
assets
(i39.3)
(i22.8)
Investment
tax credit
i—
i0.1
Compensation
and employee benefits
(i4.1)
(i3.1)
Operating
loss carryforwards
i21.0
i2.4
Other
i2.1
i0.6
Net
non-current liabilities
$
(i206.1)
$
(i194.9)
/
The
following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits did not change in 2023 and was $ii0.4/
million at December 31, 2023 and December 31, 2022.
The amount anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 2023 is estimated to be $i0.0 million.
The
following table presents the changes to our uncertain tax positions:
i
$ in millions
2023
2022
2021
Unrecognized
tax benefits at January 1
$
i0.4
$
i0.4
$
i1.4
Gross
decreases - prior period tax positions
i—
i—
(i1.0)
Unrecognized
tax benefits at December 31
$
ii0.4/
$
i0.4
$
i0.4
/
Tax
years subsequent to 2016 remain open to examination by taxing authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe we have appropriately accrued for our uncertain tax positions. However, audit outcomes and the timing of audit settlements and future events that would impact our previously recorded unrecognized tax benefits are subject to significant uncertainty. It is possible that the ultimate outcome of future examinations may exceed our provision for current unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in Income tax benefit. The amounts accrued and the tax expense / (benefit) recorded were not material for each period presented.
AES Ohio is no longer subject to U.S. federal income tax examinations
for tax years through 2016, but all subsequent periods are open. AES Ohio is no longer subject to state income tax examinations for tax years through 2019, but all subsequent periods are open.
7. iBENEFIT PLANS
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care
and life insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $i7.2 million and $i7.0
million at December 31, 2023 and 2022, respectively, were not material to the Financial Statements in the periods covered by this report.
Defined Contribution Plans
The 401(k) Plans are qualified under Section 401 of the Internal Revenue Code.
Participants may elect to contribute up to i85% of eligible compensation
to their plan. Non-union participant contributions are matched i100% on the first i1% of eligible compensation and i50%
on the next i5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant contributions are matched i150% but are capped
at $i2,750 for 2023 and they are fully vested in their employer contributions after 3 years of service. Certain non-union and union employees become eligible to participate in their respective plan upon date of hire. All participants are fully vested in their own contributions.
We contributed $i3.5
million, $i3.3 million and $i3.3 million for the years ended December 31,
2023, 2022 and 2021, respectively. AES Ohio matching contributions are paid bi-weekly, in arrears. The contributions by year may include the bi-weekly matching contribution that is paid in the following year in addition to employer matching true-up contributions. AES Ohio also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
AES Ohio sponsors a traditional defined benefit pension plan for most of the
employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is i100% vested in all amounts credited to their account upon the completion of five vesting years, as defined in The Dayton Power and Light Company Retirement
Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming i100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from AES Ohio to the Service Company maintain their previous eligibility to participate in the AES Ohio pension plan.
Almost all management employees beginning
employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become i100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant
becoming i100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan ("SERP") for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCL. We have historically recorded these costs on an accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
The following tables set forth the changes in the Pension Plans' obligations and assets recorded on the Balance Sheets at December 31, 2023 and 2022. The amounts presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $i0.9
million, $i1.7 million and $i1.7 million of costs billed to the Service Company for the years ended December 31, 2023, 2022
and 2021, respectively, or $i0.2 million, $i0.9 million and $i1.9 million
of costs billed to AES Ohio Generation for the years ended December 31, 2023, 2022 and 2021, respectively.
$ in millions
Years ended December 31,
Change in benefit obligation
2023
2022
Benefit
obligation at January 1
$
i309.0
$
i416.2
Service
cost
i3.0
i4.9
Interest cost
i15.8
i9.6
Plan
amendments
i1.4
i—
Actuarial
loss / (gain)
i9.6
(i98.0)
Benefits
paid
(i40.2)
(i23.7)
Benefit
obligation at December 31
i298.6
i309.0
Change
in plan assets
Fair value of plan assets at January 1
i274.4
i363.5
Actual
return / (loss) on plan assets
i26.5
(i73.1)
Employer
contributions
i7.7
i7.7
Benefits
paid
(i40.2)
(i23.7)
Fair
value of plan assets at December 31
i268.4
i274.4
Unfunded
status of plan
$
(i30.2)
$
(i34.6)
December
31,
Amounts recognized in the Balance Sheets
2023
2022
Current liabilities
$
(i0.2)
$
(i0.2)
Non-current
liabilities
(i30.0)
(i34.4)
Net
liability at end of year
$
(i30.2)
$
(i34.6)
Amounts
recognized in Accumulated other comprehensive loss, Regulatory assets, non-current,pre-tax
Components:
Prior service cost
$
i7.6
$
i7.3
Net
actuarial loss
i102.3
i102.7
Accumulated
other comprehensive loss, Regulatory assets, pre-tax
$
i109.9
$
i110.0
Recorded
in:
Regulatory assets, non-current
$
i60.7
$
i62.0
Accumulated
other comprehensive loss
i49.2
i48.0
Accumulated
other comprehensive loss, Regulatory assets, pre-tax
$
i109.9
$
i110.0
/
The
accumulated benefit obligation for our Pension Plans was $i290.0 million and $i301.3 million at December 31, 2023 and 2022,
respectively.
The net periodic benefit cost of the Pension Plans was:
i
Years
ended December 31,
$ in millions
2023
2022
2021
Service cost
$
i3.0
$
i4.9
$
i4.5
Interest
cost
i15.8
i9.6
i8.2
Expected
return on assets
(i17.6)
(i15.8)
(i15.0)
Amortization
of unrecognized:
Actuarial loss
i1.1
i7.7
i11.4
Prior
service cost
i1.1
i1.2
i1.1
Net
periodic benefit cost
$
i3.4
$
i7.6
$
i10.2
Rates
relevant to each year's expense calculations
Discount rate
i5.41
%
i2.83
%
i2.44
%
Expected
return on plan assets
i5.40
%
i4.60
%
i4.55
%
/
The
components of net periodic benefit cost other than service cost are included in Total other expense, net in the Statements of Operations.
The following table presents other changes in plan assets and benefit obligations recognized in Accumulated other comprehensive loss, Regulatory assets, non-current and Regulatory liabilities, non-current:
i
Years
ended December 31,
$ in millions
2023
2022
2021
Net actuarial loss / (gain)
$
i0.7
$
(i9.1)
$
(i21.7)
Plan
amendments
i1.4
i—
i2.3
Reversal
of amortization item:
Net actuarial loss
(i1.1)
(i7.7)
(i11.4)
Prior
service cost
(i1.1)
(i1.2)
(i1.1)
Total
recognized in Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$
(i0.1)
$
(i18.0)
$
(i31.9)
Total
recognized in net periodic benefit cost and Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$
i3.3
$
(i10.4)
$
(i21.7)
/
Significant
Gains and Losses Related to Changes in the Benefit Obligation
The actuarial loss of $i9.6 million increased the benefit obligation for the year ended December 31, 2023 and an actuarial gain of $i98.0 million
decreased the benefit obligation for the year ended December 31, 2022. The actuarial
loss in 2023 was primarily due to a decrease in the discount rate and the actuarial gain in 2022 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and
appropriateness.
At December 31, 2023, we decreased the expected long-term rate of return on plan assets assumption to i5.15%. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2023, we decreased our assumed discount rate to i5.14%
from i5.41% for pension expense to reflect current duration-based yield curve discount rates. A i1% increase / decrease in the rate of return assumption for pension would result in a corresponding
decrease / increase in 2024 pension expense of approximately $i2.9 million. A i0.25-percentage point increase / decrease in the discount rate for pension would result in a corresponding decrease / increase of approximately $i0.3 million
to 2024 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2023. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are then discounted back to the measurement date using the appropriate
spot rate for each half-year from the yield curve, thereby obtaining a present value
of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
i
The
weighted average assumptions used to determine benefit obligations were:
Benefit Obligation Assumptions
Pension
2023
2022
2021
Discount
rate for obligations
i5.14%
i5.41%
i2.83%
Rate
of compensation increases
i3.21%
i3.21%
i3.21%
/
Pension
Plan Assets
Pension Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Pension Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Pension Plan's funded status improve. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Pension Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Pension Plans' liabilities.
Strategic
asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are i30% – i40%
for return seeking assets and i60% – i70% for liability hedging assets. Return seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield
bond funds and emerging market debt funds.
The investment approach is to move the Pension Plans to a more de-risked position, if and when the overall funded status of the Pension Plans improve, by periodically rebalancing the allocation of the Pension Plans' investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Pension Plans' ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 2023 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value
hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
i
The following table summarizes our target pension plan allocation:
Quoted prices in active markets for identical assets
Significant observable inputs
Significant unobservable inputs
Asset category
(Level 1)
(Level 2)
(Level 3)
Common
collective trusts
Equities (a)
$
i84.5
$
i—
$
i84.5
$
i—
Debt
securities (b)
i121.1
i—
i121.1
i—
Government
debt securities (c)
i61.0
i—
i61.0
i—
Total
common collective trusts
i266.6
i—
i266.6
i—
Cash
and cash equivalents (d)
i1.8
i1.8
i—
i—
Total
pension plan assets
$
i268.4
$
i1.8
$
i266.6
$
i—
(a) This
category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S.
treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our pension plan assets at December 31, 2022 by asset category are as follows:
Quoted prices in active markets for identical assets
Significant observable inputs
Significant unobservable inputs
Asset category
(Level 1)
(Level 2)
(Level 3)
Common
collective trusts
Equities (a)
$
i88.5
$
i—
$
i88.5
$
i—
Debt
securities (b)
i125.7
i—
i125.7
i—
Government
debt securities (c)
i58.3
i—
i58.3
i—
Total
common collective trusts
i272.5
i—
i272.5
i—
Cash
and cash equivalents (d)
i1.9
i1.9
i—
i—
Total
pension plan assets
$
i274.4
$
i1.9
$
i272.5
$
i—
(a) This
category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S.
treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
/
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA")
and, in addition, make voluntary contributions from time to time. We contributed $i7.5 million, $i7.5 million and $i9.8 million to
the pension plan in the years ended December 31, 2023, 2022 and 2021.
We expect to make contributions of $i0.2 million to our SERP in 2024 to cover benefit payments. We also expect to make contributions of $i7.5 million
to our pension plan during 2024.
Funding for the Pension Plans is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, AES Ohio’s funded target liability percentage was estimated to be i100%.
In addition, AES Ohio must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $i5.1 million in 2024, which includes $i1.6 million
for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over iseven years. AES Ohio’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
i
Benefit
payments, which reflect future service, are expected to be paid as follows:
Estimated future benefit payments
$ in millions due within the following years:
Pension
2024
$
i22.4
2025
i22.1
2026
i22.1
2027
i21.9
2028
i21.8
2029
- 2033
i106.7
/
8. iSHAREHOLDER'S
EQUITY
Common Stock
AES Ohio has i50,000,000 authorized common shares, of which i41,172,173 are outstanding at December 31,
2023. All common shares are held by AES Ohio’s parent, DPL.
Capital Contributions and Returns of Capital
AES Ohio received $i260.0 million and $i150.0 million
in capital contributions from DPL in the years ended December 31, 2023 and 2021, respectively. The proceeds from these equity contributions allow AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity. AES Ohio did not receive any contributions from DPL in 2022.
During the years ended December 31, 2023 and 2022, AES Ohio declared and paid distributions totaling $i83.0 million
and $i64.0 million, respectively. During the year ended December 31, 2021, AES Ohio declared distributions of $i42.0 million and paid distributions of $i52.0 million.
9.
iCONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
i
We enter into various contractual obligations and other commercial
commitments that may affect the liquidity of our operations. At December 31, 2023, these include:
Payments due in:
$ in millions
Total
Less
than 1 year
2 - 3 years
4 - 5 years
More than 5 years
Electricity purchase commitments
$
i569.3
$
i365.8
$
i203.5
$
i—
$
i—
Purchase
orders and other contractual obligations
$
i419.4
$
i316.6
$
i83.4
$
i19.4
$
i—
/
Electricity
purchase commitments
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
Purchase orders and other contractual obligations
At December 31, 2023, AES Ohio 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 AES Ohio's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above.
Contingencies
Legal Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Financial
Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2023, cannot be reasonably determined.
Environmental Matters
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal,
state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
Where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2023.
We have taken steps to limit our exposure to environmental claims that could be raised with respect to our previously-owned and operated coal-fired generation units, but we cannot predict whether any such claims will be raised and, if they are,
the extent to which they may have a material adverse effect on our results of operations, financial condition and cash flows.
AES Ohio has a i4.9% equity ownership interest in OVEC, which is recorded using the
cost method of accounting under GAAP. AES Ohio, along with several non-affiliated energy companies party to an OVEC arrangement, receive and pay for OVEC capacity and energy and are responsible for OVEC debt obligations and other fixed costs in proportion to their power participation ratios under the arrangement, which, for AES Ohio, is the same as its equity ownership interest. As of December 31, 2023, AES Ohio could be responsible for the repayment of i4.9%, or $i52.5 million,
of $i1.1 billion OVEC debt obligations if they came due, comprised of both fixed and variable rate securities with maturities from 2026 to 2040. OVEC could also seek additional contributions from AES Ohio to avoid a default in the event that other OVEC members defaulted on their respective OVEC obligations.
10. iRELATED
PARTY TRANSACTIONS
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including AES Ohio, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
During 2023, 2022 and 2021, many of AES Ohio’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense for the years ended December 31, 2023, 2022 and 2021 was not material and is included in
Operation and maintenance on AES Ohio’s Statements of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder included in Other paid-in capital on AES Ohio’s Balance Sheets in accordance with ASC 718 - Compensation - Stock Compensation.
i
The following table provides a summary of our related party transactions:
Years
ended December 31,
$ in millions
2023
2022
2021
The following transactions are included in Operation and Maintenance on the Statements of Operations:
Net charges from the Service Company
$
i47.5
$
i39.2
$
i33.9
Services
provided by AES and other AES affiliates
$
i32.2
$
i28.1
$
i21.9
Services
provided by other related parties
$
i1.7
$
i2.5
$
i1.6
Balances
with related parties (include in Accounts Receivable, net and Accounts Payable):
AES files federal and state income tax returns which consolidate DPL and its subsidiaries, including AES Ohio. Under a tax sharing agreement with DPL, AES Ohio is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. Under this agreement, AES Ohio had a net receivable balance of $i24.4 million and $i29.6
million at December 31, 2023 and 2022, respectively, which are recorded in Taxes receivable on the accompanying Balance Sheets. During 2023, 2022 and 2021, AES Ohio made no payments to DPL for its share of income taxes.
11. iREVENUE
Revenue is primarily
earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue
AES Ohio energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. AES Ohio sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenue are satisfied over time as energy is delivered and the same method is used to measure progress, and
thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right to sell or distribute electricity in our service area, AES Ohio is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that AES Ohio is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that AES Ohio has the right to bill corresponds directly with the value to the customer of AES Ohio's performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and AES Ohio only serves as a billing agent if requested by the CRES provider. As such, AES Ohio recognizes the consolidated billing arrangement with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue
AES Ohio's share of the power produced at OVEC is sold to PJM and this revenue is classified as Wholesale revenue.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity
market and the two products can be transacted independently of one another. Therefore, wholesale revenue is a separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
RTO ancillary revenue
Compensation for use of AES Ohio’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenue. As AES Ohio owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. AES Ohio) and recognized as transmission revenue.
Transmission revenue has a single performance obligation, as transmission services
represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that AES Ohio, as the transmission operator, has the right to bill (received as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue
AES Ohio records its share of OVEC capacity revenue as Capacity revenue. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and performance of the OVEC units, there may be additional performance bonuses or penalties, which would be recognized only if it becomes probable
that such bonus or penalties will be incurred.
RTO capacity revenue has a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
AES Ohioi's
revenue from contracts with customers was $i852.6 million, $i852.5 million and $i658.6 million
for the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents our revenue from contracts with customers and other revenue for the years ended December 31, 2023, 2022 and 2021:/
Years
ended December 31,
$ in millions
2023
2022
2021
Retail revenue
Retail revenue from contracts with customers
Residential revenue
$
i478.9
$
i467.3
$
i364.9
Commercial
revenue
i162.1
i166.0
i122.6
Industrial
revenue
i66.6
i74.3
i57.5
Governmental
revenue
i24.3
i24.1
i26.1
Other
(a)
i13.0
i11.9
i12.2
Total
retail revenue from contracts with customers
i744.9
i743.6
i583.3
Wholesale
revenue
Wholesale revenue from contracts with customers
i15.8
i41.0
i19.5
RTO
ancillary revenue
i88.4
i63.6
i49.9
Capacity
revenue
i3.5
i4.3
i5.9
Miscellaneous
revenue
(i0.6)
i7.6
i5.1
Total
revenue
$
i852.0
$
i860.1
$
i663.7
(a)"Other"
primarily includes operation and maintenance service revenue, billing service fees from CRES providers and other miscellaneous retail revenue from contracts with customers.
The balances of receivables from contracts with customers were $i89.4 million and $i84.6
million as of December 31, 2023 and 2022, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under ASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for AES Ohio.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
We carried out the evaluation required by Rules 13a-15(b) and 15d-15(b), under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, our CEO and CFO concluded that as of December 31, 2023, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange
Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance that unauthorized acquisition, use
or disposition of our assets that could have a material effect on the financial statements are prevented or detected timely.
Management, including our CEO and CFO, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates.
Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on this assessment, management believes that we maintained effective internal control over financial reporting as of December 31, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes that occurred during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Not applicable pursuant to General Instruction I of the Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Financial Audit Committee of AES pre-approves the audit and non-audit services provided by the independent auditors for itself and its subsidiaries, including DPL and its subsidiaries and AES Ohio. The AES Financial Audit Committee maintained its policy established in 2002 within which to judge if the independent auditor may be eligible to provide certain services outside of its main role as outside auditor. Services within the established framework include audit and related services and certain tax services. Services
outside of the framework require AES Financial Audit Committee approval prior to the performance of the service. The Sarbanes-Oxley Act of 2002 addresses auditor independence and this framework is consistent with the provisions of the Act. No services performed by the independent auditor with respect to DPL and AES Ohio and its subsidiaries were approved after the fact by the AES Financial Audit Committee other than those that were considered to be de minimis and approved in accordance with Regulation 2-01(c)(7)(i)(C) to Regulation S-X of the Exchange Act.
In addition to the pre-approval policies of the AES Financial Audit Committee, the DPL and AES Ohio Boards of Directors will specifically approve the annual audit services and fees of the independent auditor and the taking of other related actions, such as entering into the terms of the engagement letter.
Audit
fees are fees billed or expected to be billed by our principal accountant for professional services for the audit of the Financial Statements, included in this Annual Report on Form 10-K and review of financial statements included in DPL's and AES Ohio's quarterly reports on Form 10-Q, services that are normally provided by our principal accountants in connection with statutory, regulatory or other filings or engagements or any other service performed to comply with generally accepted auditing standards and include comfort and consent letters in connection with SEC filings and financing transactions.
The following table presents the aggregate fees billed to DPL and AES Ohio for products and services provided by our principal accountants:
Asset Purchase Agreement, dated as of December 15, 2017, by and among AES Ohio Generation, LLC, DPL Inc., Kimura Power, LLC and Rockland Power Partners III, LP
Composite Indenture dated as of October 1, 1935, between The Dayton Power and Light Company and Irving Trust Company, Trustee with all amendments through the Twenty-Ninth Supplemental Indenture
Amended and Restated Trust Agreement dated as of August
31, 2001 among DPL Inc., The Bank of New York, The Bank of New York (Delaware), the administrative trustees named therein and several Holders as defined therein
Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series B bonds
Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series B bonds
55th Supplemental Indenture, dated December 15, 2023, between The Dayton Power and Light Company d/b/a AES Ohio and The Bank of New York Mellon as Trustee
Amended and Restated Credit Agreement, dated as of December
22, 2022, among The Dayton Power and Light Company, each lender from time to time party thereto, PNC Bank, National Association, as administrative agent, swing loan lender and an issuing lender, PNC Capital Markets LLC, as joint bookrunner and joint lead arranger, and US Bank, National Association, as an issuing lender
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibits referencing File No. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385 have been filed by The Dayton Power and Light Company.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, we may not file as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of us and our subsidiaries on a consolidated basis, but we hereby agree to furnish to the SEC on request any such instruments.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPL Inc. and The Dayton Power and Light Company have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of DPL Inc. and in the capacities and on the dates indicated.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of The Dayton Power and Light Company
and in the capacities and on the dates indicated.
