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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
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 are voluntary filers. 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☐
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
☐
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 outstanding common stock of The Dayton Power and Light Company is owned by DPL Inc.
As of November 2, 2023, each registrant had the following shares of common stock outstanding:
Registrant
Description
Shares
Outstanding
DPL Inc.
Common Stock, no par value
i1
The
Dayton Power and Light Company
Common Stock, $0.01 par value
i41,172,173
2
This combined Form 10-Q 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 following select terms, abbreviations or acronyms are used in this Form 10-Q:
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
The AES Corporation - a global power company and 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 Amended and Restated Credit Agreement, dated as of December
22, 2022
AES Ohio Generation
AES Ohio Generation, LLC - a wholly-owned subsidiary of DPL, which previously operated EGUs and made wholesale sales
AFUDC
Allowance for Funds Used During Construction
AOCI
Accumulated Other Comprehensive Income
AOCL
Accumulated Other Comprehensive Loss
ASU
Accounting Standards Update
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
CCR
Coal Combustion Residuals
Conesville
AES Ohio Generation's interest in Unit 4 at the Conesville EGU. This was sold on June 5, 2020.
CWA
U.S.
Clean Water Act
DPL
DPL Inc. and its consolidated subsidiaries
DPL Credit Agreement
DPL Inc. Amended and Restated Credit Agreement, dated as of June 19, 2019.
DP&L
The Dayton Power and Light Company - the principal subsidiary of DPL and a public utility that delivers electricity to residential, commercial, industrial and governmental customers in a 6,000-square mile area of West Central Ohio. DP&L does business as AES Ohio.
EPA
U.S.
Environmental Protection Agency
ESP
The Electric Security Plan - a plan that a utility must file with the PUCO to establish SSO rates pursuant to Ohio law
ESP 1
ESP originally approved by PUCO order dated June 24, 2009. After DP&L withdrew its 2017 ESP Application, the PUCO approved DP&L's request to revert to rates based on its ESP 1 rate plan effective December 19, 2019. With the approval of DP&L's ESP 4 on August 9, 2023, ESP 1 is no longer effective.
ESP
4
DP&L's ESP filed September 26, 2022 which was approved by the PUCO in August 2023
FASB
Financial Accounting Standards Board
FASC
FASB Accounting Standards Codification
FERC
Federal Energy Regulatory Commission
Form 10-K
DPL’s and DP&L’s combined Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed on March
1, 2023
First and Refunding Mortgage
DP&L’s First and Refunding Mortgage, dated October 1, 1935, as amended, with the Bank of New York Mellon as Trustee
GAAP
Generally Accepted Accounting Principles in the United States of America
kWh
Kilowatt-hours - a measure of electrical energy equivalent to a power consumption of 1,000 watts for 1 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
Miami Valley Lighting
Miami Valley Lighting, LLC is a wholly-owned subsidiary of DPL established in 1985 to provide street and outdoor lighting services to customers in the Dayton region. Miami Valley Lighting serves businesses, communities and neighborhoods in West Central Ohio with over 70,000 lighting solutions for more than 190 businesses and 180 local governments.
MRO
Market Rate Option
- a market-based plan that a utility may file with PUCO to establish SSO rates pursuant to Ohio law
MVIC
Miami Valley Insurance Company is a wholly-owned insurance subsidiary of DPL that provides insurance services to DPL and its subsidiaries
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
OAQDA
Ohio Air Quality Development Authority
OCC
The Office of the Ohio Consumers’ Counsel (OCC) is the statewide legal representative for Ohio’s residential consumers in matters related to their investor-owned electric, natural gas, telephone, and water services.
Ohio Valley Electric Corporation - an electric generating company in which DP&L holds a 4.9% equity 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
PUCO
Public Utilities Commission of Ohio
RSC
The Rate Stabilization Charge is a non-bypassable rider intended to compensate DP&L for providing stabilized rates to customers.
RTO
Regional Transmission Organization - an entity that is independent from all generation and power marketing interests and has exclusive responsibility for grid operations, short-term reliability, and transmission service within a region
SEC
U.S.
Securities and Exchange Commission
SEET
Significantly Excessive Earnings Test - a test used by the PUCO to determine whether a utility's ESP or MRO produces significantly excessive earnings for the utility
Service Company
AES US Services, LLC - the shared services affiliate providing accounting, finance, and other support services to AES’ U.S. businesses
SGF
Solar Generation Fund rider - a statewide program that collects monthly payments for all Ohio electric distribution utilities related to in-state solar and nuclear resources
SSO
Standard
Service Offer represents the regulated rates, authorized by the PUCO, charged to DP&L retail customers that take retail generation service from DP&L within DP&L’s service territory
T&D
Transmission and distribution
TCRR
Transmission Cost Recovery Rider
U.S.
United States of America
USF
The Universal Service Fund is a statewide program which provides qualified low-income customers in Ohio with income-based bills and energy
efficiency education programs
Utility segment
DPL's Utility segment is made up of DP&L’s electric transmission and distribution businesses, which transmit and distribute electricity to residential, commercial, industrial and governmental customers
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 or other projects;
•the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material;
•local economic conditions;
•costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation;
•industry restructuring, deregulation and competition;
•issues related to our participation in PJM, including the cost associated with membership, allocation of costs, costs
associated with transmission expansion, the recovery of costs incurred and the risk of default of other PJM participants;
•changes in tax laws and the effects of our tax strategies;
•product development, technology changes and changes in prices of products and technologies;
•cyberattacks and information security breaches;
•the use of derivative contracts;
•catastrophic events such as fires, explosions, terrorist acts, acts of war, pandemic events, 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 to Part I in our Annual Report on Form 10-K and the Management's Discussion and Analysis of Financial Condition and Results of Operations section in our Form 10-K and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, and June 30, 2023 and this Quarterly Report on Form 10-Q 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.
Our SEC filings are available to the public from the SEC’s website at www.sec.gov.
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 be clearly noted in the applicable section.
1.
iOVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
DPL, an indirectly wholly-owned subsidiary of AES, is a holding 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 Ohio consumers the right to choose the electric generation supplier from whom they purchase retail generation service; however, retail transmission and distribution services are still regulated. AES Ohio has the exclusive right to provide such transmission and distribution services to approximately i538,000
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 Ohioowns 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. 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.
/
Consolidation
i
DPL’s Condensed 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. We have evaluated subsequent events through the date this report is issued. All material intercompany accounts and transactions are eliminated in consolidation.
Interim Financial Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with GAAP, as contained in the FASB FASC, for interim financial information and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, comprehensive income or loss, changes in shareholder's
equity / (deficit), and cash flows. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of expected results for the year ending December 31, 2023. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2022 audited consolidated financial statements and footnotes thereto, which are included in our Form 10-K.
Use of Management Estimates
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 credit losses 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, Cash Equivalents and Restricted Cash
i
The
following table summarizes cash, cash equivalents, and restricted cash amounts reported on the Condensed Consolidated Balance Sheets that reconcile to the total of such amounts as shown on the Condensed Consolidated Statements of Cash Flows:
The
following table is a roll forward of our allowance for credit losses related to the accounts receivable balances for the nine months ended September 30, 2023 and 2022:
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 in Item 8. Financial Statements and Supplementary Data of our Form 10-K for more information.
AFUDC
i
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. During the three and nine months ended September 30, 2023 and 2022, AFUDC equity and AFUDC debt were as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
AFUDC equity
$
i1.3
$
i2.0
$
i3.8
$
i4.0
AFUDC
debt
$
i1.6
$
(i0.4)
$
i4.5
$
i0.8
/
AOCL
i
The
amounts reclassified out of AOCL by component during the three and nine months ended September 30, 2023 and 2022 are as follows:
Details about AOCL
components
Affected line item in the Condensed Consolidated Statements of Operations
Three months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Net
gains on cash flow hedges (Note 4):
Interest expense
$
(i0.2)
$
(i0.2)
$
(i0.7)
$
(i0.7)
Income
tax effect
i—
i0.1
i0.1
i0.2
Net
of income taxes
(i0.2)
(i0.1)
(i0.6)
(i0.5)
Amortization
of unfunded pension and other postretirement obligations (Note 7):
Other expense
i—
i0.3
i0.1
i0.9
Income
tax effect
i—
(i0.1)
i—
(i0.2)
Net
of income taxes
i—
i0.2
i0.1
i0.7
Total
reclassifications for the period, net of income taxes
$
(i0.2)
$
i0.1
$
(i0.5)
$
i0.2
/
i
The
changes in the components of AOCL during the nine months ended September 30, 2023 are as follows:
$ in millions
Change in cash flow hedges
Change in unfunded pension and other postretirement obligations
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
i
AES Ohio collects certain excise taxes levied by state or local governments from its customers. These taxes are accounted for on a net basis and not included in revenue. The amounts of such taxes collected for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Excise taxes collected
$
i12.8
$
i13.0
$
i35.4
$
i37.6
/
i
New
Accounting Pronouncements Adopted in 2023
We have assessed and determined that the new accounting pronouncements adopted did not have a material impact on our consolidated financial statements.
i
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on our consolidated financial statements. Accounting pronouncements not listed below were assessed
and determined to be either not applicable or are expected to have no material impact on our consolidated financial statements.
/
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
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.
We are currently evaluating the impact of adopting the standard on our condensed 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, 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 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 (the Smart Grid Plan), (ii) findings that AES Ohio passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's ESP 1 satisfies the SEET prospectively 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.
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 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.
3. iFAIR VALUE
The fair value of our financial assets and liabilities approximates 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. For further information on our valuation techniques and policies, see Note 4.Fair Value in Item 8. Financial Statements and Supplementary Data of our Form 10-K.
Financial Assets
i
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 assets are recorded at fair value within Other non-current assets on the Condensed Consolidated Balance Sheets and are classified as equity investments. Net unrealized gains / (losses) related to equity investments still held as of September 30, 2023 and 2022 are as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Net unrealized gains / (losses) (a)
$
(i0.2)
$
(i0.4)
$
i0.2
$
(i1.8)
(a) These
amounts are included in Other income, net in our Condensed Consolidated Statements of Operations.
We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the nine months ended September 30, 2023 or 2022.
Recurring Fair Value Measurements
i
The
fair value of assets and liabilities as of September 30, 2023 and December 31, 2022 measured on a recurring basis and the respective category within the fair value hierarchy for DPL is as follows:
Financial
Instruments not Measured at Fair Value in the Condensed Consolidated Balance Sheets
The fair value of long-term debt is based on current public market prices for disclosure purposes only. 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. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2025 to 2061.
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 Condensed Consolidated Balance Sheets as of the periods indicated, but for which fair value is disclosed:
For further information on our derivative and hedge accounting policies, see Note 1. Overview and Summary of Significant Accounting Policies – Financial Derivatives and Note 5. Derivative Instruments and Hedging Activities of Item 8. Financial Statements and Supplementary Data in our Form 10-K.
Cash
Flow Hedges
DPL previously used derivative financial instruments primarily to manage the interest rate risk associated with our long-term debt. These interest rate derivative contracts were settled in 2013, and we continue to amortize amounts out of AOCL into interest expense.
The
following tables provide information concerning gains or losses recognized in AOCL for the cash flow hedges for the three and nine months ended September 30, 2023 and 2022:
Portion
expected to be reclassified to earnings in the next twelve months
$
(i0.8)
/
5.
iDEBT
Long-term debt is as followsi:
Interest
September
30,
December 31,
$ in millions
Rate
Due
2023
2022
AES Ohio debt
First Mortgage Bonds
i3.95
%
2049
$
i425.0
$
i425.0
First
Mortgage Bonds
i3.20
%
2040
i140.0
i140.0
First
Mortgage Bonds
i5.19
%
2033
i100.0
i—
Tax-exempt
First Mortgage Bonds (a)
i4.25
%
2027
i100.0
i100.0
Tax-exempt
First Mortgage Bonds (b)
i4.00
%
2027
i40.0
i40.0
U.S.
Government note
i4.20
%
2061
i16.9
i17.0
Unamortized
deferred financing costs
(i6.7)
(i6.9)
Unamortized
debt discounts, net
(i2.3)
(i2.4)
Total
long-term debt at AES Ohio
i812.9
i712.7
DPL
Inc. debt
Senior unsecured bonds
i4.125
%
2025
i415.0
i415.0
Senior
unsecured bonds
i4.35
%
2029
i400.0
i400.0
Note
to DPL Capital Trust II (c)
i8.125
%
2031
i15.6
i15.6
Unamortized
deferred financing costs
(i5.3)
(i6.7)
Unamortized
debt discounts, net
(i0.7)
(i0.7)
Total
DPL consolidated long-term debt
i1,637.5
i1,535.9
Less:
current portion
(i0.2)
(i0.2)
DPL
consolidated long-term debt, net of current portion
$
i1,637.3
$
i1,535.7
(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.
Revolving credit agreements
The DPL Credit Agreement was paid off and retired on June 14, 2023. The balance outstanding on this credit facility as of December
31, 2022 was $i35.0 million.
As of September 30, 2023 and December 31, 2022, the AES Ohio Credit Agreement had outstanding borrowings of $i120.0 million and
$i120.0 million, respectively.
Significant transactions
On April 13, 2023, AES Ohio issued $i100.0 million of First Mortgage
Bonds and used the proceeds from the offering to repay amounts outstanding under the AES Ohio Credit Agreement and for general corporate purposes. The new First Mortgage Bonds carry an interest rate of i5.19% and mature on April 13, 2033.
The AES Ohio Credit Agreement and Fifty-Third and Fifty-Fourth Supplemental Indentures to the First Mortgage, pursuant to which the 3.20% Bonds due 2040 and the 5.19% Bonds due 2033 were issued, respectively, each contain one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than i0.67
to 1.00. As of September 30, 2023, AES Ohio was in compliance with this financial covenant.
AES Ohio does not have any meaningful restrictions in its debt financing documents prohibiting dividends and return of capital payments to its parent, DPL. As of September 30, 2023, AES Ohio was in compliance with all debt covenants, including the financial covenant 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.
6. iINCOME
TAXES
DPL’s provision for income taxes is based on the estimated annual effective tax rate, plus discrete items. The effective combined state and federal income tax rates were i19.9% and i13.3%
for the three and nine months ended September 30, 2023, respectively, compared to i17.2% and i67.7%
for the three and nine months ended September 30, 2022, respectively. The year-to-date rate is different from the combined federal and state statutory rate of i22.4% primarily due to the flowthrough of the net tax benefit related to the reversal of excess deferred taxes of AES Ohio as a percentage of pre-tax book income or loss. As a result of the PUCO decision in AES Ohio's most recent distribution rate case in December of 2022, AES Ohio began to amortize a deferred tax shortage arising from net municipal
apportioned tax rate increase. This new amortization, when combined with the ongoing amortization of the Tax Cut and Jobs Act (TCJA), results in a net tax benefit lowering the Company’s effective tax rate.
DPL's income tax expense for the nine months ended September 30, 2023 was calculated using the estimated annual effective income tax rate for 2023 of i13.2% on ordinary income. Management estimates the annual effective tax rate based on its forecast of annual pre-tax income or
loss.
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.
7. iBENEFIT PLANS
The
amounts presented in the following tables for pension include both of the Pension Plans. The pension costs below have not been adjusted for amounts billed to the Service Company for former AES Ohio employees who are now employed by the Service Company or other AES affiliates that are still participants in the AES Ohio plans.
i
The following table presents the net periodic benefit cost of the Pension Plans for the three and nine months ended September 30, 2023 and 2022:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Service cost
$
i0.8
$
i1.2
$
i2.2
$
i3.7
Interest
cost
i3.9
i2.4
i11.9
i7.2
Expected
return on plan assets
(i4.4)
(i4.0)
(i13.2)
(i11.9)
Amortization
of unrecognized:
Prior service cost
i0.3
i0.3
i0.8
i0.8
Actuarial
loss
i0.2
i1.4
i0.5
i4.1
Net
periodic benefit cost
$
i0.8
$
i1.3
$
i2.2
$
i3.9
/
The
components of net periodic benefit cost other than service cost are included in Other income, net in the Condensed Consolidated Statements of Operations.
There were $ii7.5/ million
in employer contributions during each of the nine months ended September 30, 2023 and 2022.
In addition, AES Ohio provides postretirement health care and life insurance benefits to certain retired employees, their spouses and eligible dependents. 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 $i6.6
million and $i7.0 million as of September 30, 2023 and December 31, 2022, respectively, were not material to the financial statements in the periods covered by this report.
8. iEQUITY
During
the nine months ended September 30, 2023, DPL received $i260.0 million in cash contributions from AES, and DPL made $i260.0 million in equity contributions to AES Ohio. The cash contributions
at DPL represented equity contributions of $i239.0 million and payments of $i21.0 million against the tax receivable.
The proceeds from these equity
contributions allow AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity.
9. iCOMMITMENTS AND CONTINGENCIES
Contingencies
Legal Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters
asserted under various laws and regulations. We believe the amounts provided in our Condensed 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 discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30, 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 and CCR; 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 us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of September 30, 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 September 30, 2023, AES Ohio could be
responsible for the repayment of i4.9%, or
$i53.0 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. iBUSINESS
SEGMENTS
DPL manages its business through ione reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) 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, net, 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.
(a)"All
Other" includes Eliminations for all periods presented.
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 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. For further discussion of our Retail, Wholesale, RTO ancillary, and Capacity revenue, see Note 13.Revenue in Item 8.Financial Statements and Supplementary Data of our Form 10-K.
DPL's revenue from contracts with customers was $i225.8
million and $i259.6 million for the three months ended September 30, 2023 and 2022, respectively, and $i668.7 million
and $i645.6 million for the nine months ended September 30, 2023 and 2022, respectively.
i
The
following table presents our revenue from contracts with customers and other revenue by segment for the three and nine months ended September 30, 2023 and 2022:
Total
retail revenue from contracts with customers
i556.8
i—
i—
i556.8
Wholesale
revenue
Wholesale revenue from contracts with customers
i32.1
i—
(i0.6)
i31.5
RTO
ancillary revenue
i46.2
i0.1
i—
i46.3
Capacity
revenue
i3.8
i—
i—
i3.8
Miscellaneous
revenue
Miscellaneous revenue from contracts with customers (c)
i—
i7.2
i—
i7.2
Other
miscellaneous revenue
i6.7
i2.6
(i2.6)
i6.7
Total
revenue
$
i645.6
$
i9.9
$
(i3.2)
$
i652.3
(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) Other retail revenue primarily includes alternative revenue programs not accounted for under ASC 606 - Revenue Recognition ("ASC 606").
(c) 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 $i76.2
million and $i85.3 million as of September 30, 2023 and December 31, 2022, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days, unless a customer qualifies for payment extension.
(a) AES
Ohio made distributions of $i65.0 million during the nine months ended September 30, 2023. Of this amount, $i8.7 million were dividends and $i56.3
million were return of capital payments for the portion of current year distributions to shareholder in excess of retained earnings at the time of distribution.
(b) AES Ohio made distributions of $i49.0 million during the nine months ended September 30, 2022. Of this amount, $i15.0
million were dividends and $i34.0 million were return of capital payments for the portion of current year distributions to shareholder in excess of retained earnings at the time of distribution.
1. iOVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
DP&L,
which does business as AES Ohio, is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave Ohio consumers the right to choose the electric generation supplier from whom they purchase retail generation service; however, retail transmission and distribution services are still regulated. AES Ohio has the exclusive right to provide such transmission and distribution services to approximately i538,000 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. AES Ohio has ione
reportable segment, the Utility segment. In addition to AES Ohio's electric transmission and distribution businesses, the Utility segment includes revenue and expenses associated with AES Ohio's investment in OVEC. AES Ohio is a subsidiary of DPL. 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.
/
i
Financial
Statement Presentation
AES Ohio does not have any subsidiaries. We have evaluated subsequent events through the date this report is issued.
Interim Financial Presentation
The accompanying unaudited condensed financial statements and footnotes have been prepared in accordance with GAAP, as contained in the FASB FASC, for interim financial information and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, comprehensive income or loss, changes in shareholder's equity, and cash flows. The results of operations for the three and nine
months ended September 30, 2023 are not necessarily indicative of expected results for the year ending December 31, 2023. The accompanying condensed financial statements are unaudited and should be read in conjunction with the 2022 audited consolidated financial statements and footnotes thereto, which are included in our Form 10-K.
Use of Management Estimates
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 credit losses and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
The
following table summarizes cash, cash equivalents, and restricted cash amounts reported on the Condensed Balance Sheets that reconcile to the total of such amounts as shown on the Condensed Statements of Cash Flows:
The
following table is a roll forward of our allowance for credit losses related to the accounts receivable balances for the nine months ended September 30, 2023 and 2022:
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 in Item 8. Financial Statements and Supplementary Data of our Form 10-K for more information.
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. During the three and nine months ended September 30, 2023 and 2022, AFUDC equity and AFUDC debt were as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
AFUDC equity
$
i1.3
$
i2.0
$
i3.8
$
i4.0
AFUDC
debt
$
i1.6
$
(i0.4)
$
i4.5
$
i0.8
/
AOCL
The
amounts reclassified out of iAOCL by component during the three and nine months ended September 30, 2023 and 2022 are as follows:
Details
about AOCL components
Affected line item in the Condensed Statements of Operations
Three months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Amortization
of unfunded pension and other postretirement obligations (Note 6):
Other expense
$
i0.2
$
i0.8
$
i0.5
$
i2.6
Income
tax effect
(i0.1)
(i0.2)
(i0.2)
(i0.6)
Net
of income taxes
i0.1
i0.6
i0.3
i2.0
Total
reclassifications for the period, net of income taxes
$
i0.1
$
i0.6
$
i0.3
$
i2.0
i
The
changes in the components of AOCL during the nine months ended September 30, 2023 are as follows:
Accounting
for Taxes Collected from Customers and Remitted to Governmental Authorities
i
AES Ohio collects certain excise taxes levied by state or local governments from its customers. These taxes are accounted for on a net basis and not included in revenue. The amounts of such taxes collected for the three and nine months ended September 30, 2023 and 2022 were as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Excise taxes collected
$
i12.8
$
i13.0
$
i35.4
$
i37.6
/
iNew
Accounting Pronouncements Adopted in 2023 We have assessed and determined that the new accounting pronouncements adopted did not have a material impact on our financial statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on our consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on our consolidated financial statements.
ASU
Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
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.
We are currently evaluating the impact of adopting the standard on our condensed 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, 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 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
(the Smart Grid Plan), (ii) findings that AES Ohio passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's ESP 1 satisfies the SEET prospectively 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.
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 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.
3. iFAIR
VALUE
The fair value of our financial assets and liabilities approximates 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. For further information on our valuation techniques and policies, see Note 4. Fair Value in Item 8.– Financial Statements and Supplementary Data of our Form 10-K.
Financial Assets
i
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 assets are recorded at fair value within Other non-current assets on the Condensed Balance Sheets and are classified as equity investments. Net unrealized gains / (losses) related to equity investments still held as of September 30, 2023 and 2022 are as follows:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Net unrealized gains / (losses) (a)
$
(i0.2)
$
(i0.4)
$
i0.2
$
(i1.8)
(a) These
amounts are included in Other income, net in our Condensed Statements of Operations.
/
We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the nine months ended September 30, 2023 or 2022.
Recurring Fair Value Measurements
iThe
fair value of assets and liabilities as of September 30, 2023 and December 31, 2022 measured on a recurring basis and the respective category within the fair value hierarchy for AES Ohio is as follows:
Financial
Instruments not Measured at Fair Value in the Condensed Balance Sheets
The fair value of long-term debt is based on current public market prices for disclosure purposes only. 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. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2027 to 2061.
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 Condensed 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 agreements
/
As of September 30, 2023 and December 31, 2022, the AES Ohio
Credit Agreement had outstanding borrowings of $i120.0 million and $i120.0 million, respectively.
Significant transactions
On April 13, 2023, AES Ohio issued $i100.0 million
of First Mortgage Bonds and used the proceeds from the offering to repay amounts outstanding under the AES Ohio Credit Agreement and for general corporate purposes. The new First Mortgage Bonds carry an interest rate of i5.19% and mature on April 13, 2033.
The AES Ohio Credit Agreement and Fifty-Third and Fifty-Fourth Supplemental Indentures to the First Mortgage, pursuant to which the 3.20% Bonds due 2040 and the 5.19% Bonds due 2033 were issued, respectively, each contain one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than i0.67
to 1.00. As of September 30, 2023, AES Ohio was in compliance with this financial covenant.
As of September 30, 2023, AES Ohio was in compliance with all debt covenants, including the financial covenant described above.
AES Ohio does not have any meaningful restrictions in its debt financing documents prohibiting dividends and return of capital payments to its parent, DPL.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.
5.
iINCOME TAXES
AES Ohio's provision for income taxes is based on the estimated annual effective tax rate, plus discrete items. The effective combined state and federal income tax rates were i20.9%
and i17.6% for the three and nine months ended September 30, 2023, compared to i35.3% and (i24.8)%
for the three and nine months ended September 30, 2022, respectively. The year-to-date rate is different from the combined federal and state statutory rate of i22.4% primarily due to the flowthrough of the net tax benefit related to the reversal of excess deferred taxes of AES Ohio as a percentage of pre-tax book income or loss. As a result of the PUCO decision in AES Ohio's most recent distribution rate case in December of 2022, AES Ohio began to amortize a deferred tax shortage arising from net municipal
apportioned tax rate increase. This new amortization, when combined with the ongoing amortization of the Tax Cut and Jobs Act (TCJA), results in a net tax benefit lowering the Company’s effective tax rate.
AES files federal and state income tax returns, which consolidate 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.
6. iBENEFIT
PLANS
The amounts presented in the following tables for pension include both of the Pension Plans. The pension costs below have not been adjusted for amounts billed to the Service Company for former AES Ohio employees who are now employed by the Service Company or other AES affiliates or for amounts billed to AES Ohio Generation for former employees that were employed by AES Ohio Generation that are still participants in the AES Ohio plans.
i
The following table presents the net periodic benefit cost of the Pension
Plans for the three and nine months ended September 30, 2023 and 2022:
Three months ended
Nine months ended
September
30,
September 30,
$ in millions
2023
2022
2023
2022
Service cost
$
i0.8
$
i1.2
$
i2.2
$
i3.7
Interest
cost
i3.9
i2.4
i11.9
i7.2
Expected
return on plan assets
(i4.4)
(i4.0)
(i13.2)
(i11.9)
Amortization
of unrecognized:
Prior service cost
i0.2
i0.3
i0.8
i0.9
Actuarial
loss
i0.3
i2.0
i0.9
i5.8
Net
periodic benefit cost
$
i0.8
$
i1.9
$
i2.6
$
i5.7
/
The
components of net periodic benefit cost other than service cost are included in Other income, net in the Condensed Statements of Operations.
There were $ii7.5/ million
in employer contributions during each of the nine months ended September 30, 2023 and 2022.
In addition, AES Ohio provides postretirement health care and life insurance benefits to certain retired employees, their spouses and eligible dependents. 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 $i6.6
million and $i7.0 million as of September 30, 2023 and December 31, 2022, respectively, were not material to the financial statements in the periods covered by this report.
7. iEQUITY
During
the nine months ended September 30, 2023, DPL made equity contributions of $i260.0 million to AES Ohio.
The proceeds from these equity contributions allow AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity.
8. iCOMMITMENTS
AND CONTINGENCIES
Contingencies
Legal Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under various laws and regulations. We believe the amounts provided in our Condensed 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 discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30,
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 and CCR; 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 us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of September 30, 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 September 30, 2023, AES Ohio could be responsible for the repayment of i4.9%, or $i53.0 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.
9. 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 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. For further discussion of our Retail, Wholesale, RTO ancillary, and Capacity revenue, see Note 11.Revenue in Item 8.Financial Statements and Supplementary Data of our Form 10-K.
AES Ohio's revenue from contracts with customers was $i223.6 million and $i257.4
million for the three months ended September 30, 2023 and 2022, respectively, and $i661.9 million and $i638.9 million
for the nine months ended September 30, 2023 and 2022, respectively.
i
The following table presents our revenue from contracts with customers and other revenue for the three and nine months ended September 30, 2023 and 2022:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Retail revenue
Retail
revenue from contracts with customers
Residential revenue
$
i127.8
$
i147.0
$
i377.9
$
i350.6
Commercial
revenue
i42.7
i50.5
i124.8
i123.5
Industrial
revenue
i16.5
i20.6
i50.4
i55.4
Governmental
revenue
i6.8
i6.2
i18.7
i18.2
Other
(a)
i3.5
i3.0
i9.9
i9.1
Total
retail revenue from contracts with customers
i197.3
i227.3
i581.7
i556.8
Other
retail revenue (b)
(i0.2)
i—
(i0.2)
i—
Wholesale
revenue
Wholesale revenue from contracts with customers
i4.2
i13.4
i11.3
i32.1
RTO
ancillary revenue
i21.4
i16.2
i65.7
i46.2
Capacity
revenue
i0.7
i0.5
i3.2
i3.8
Miscellaneous
revenue
(i1.4)
i2.5
(i2.2)
i6.7
Total
revenue
$
i222.0
$
i259.9
$
i659.5
$
i645.6
(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) Other retail revenue primarily includes alternative revenue programs not accounted for under ASC 606 - Revenue Recognition ("ASC 606").
/
The balances of receivables from contracts with customers were $i75.0 million
and $i84.6 million as of September 30, 2023 and December 31, 2022, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days, unless a customer qualifies for payment extension.
43
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes the combined filing of DPL and AES Ohio. AES Ohio is a wholly-owned subsidiary of DPL and is a public utility incorporated in 1911 under the laws of Ohio. On November 28, 2011, DPL became an indirectly wholly-owned subsidiary of AES, a global power company. Throughout this report, the terms “we,”“us,”“our” and “ours” are used to refer to both DPL and AES Ohio, respectively and together, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or AES Ohio will clearly be noted in the section.
The condensed consolidated financial statements included in PART I, ITEM 1. – Financial Statements
of this Form 10-Q and the discussions contained herein should be read in conjunction with our Form 10-K.
FORWARD–LOOKING STATEMENTS
The following discussion may contain forward-looking statements regarding us, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. These statements include, but are not limited to, statements regarding management’s intents, beliefs, and current expectations and typically contain, but are not limited to, the terms “anticipate,”“potential,”“expect,”“forecast,”“target,”“will,”“would,”“intend,”“believe,”“project,”“estimate,”“plan,” and similar words. Forward-looking statements are not intended to be a guarantee of future results, but instead constitute current expectations based on reasonable assumptions. Factors that could cause or contribute to such differences include, but are not limited to, those described in PART II, ITEM 1A of this quarterly report and ITEM 1A. Risk Factors and Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Form 10-K and subsequent filings with the SEC.
Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may
subsequently arise. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.
OVERVIEW OF OUR BUSINESS
DPL, an indirectly wholly-owned subsidiary of AES, is a holding company incorporated under the laws of the state of Ohio. DPL's principal subsidiary is AES Ohio, a regulated electric utility operating in the state of Ohio. Substantially all of our business consists of the transmission, distribution and sale of electric energy conducted through AES Ohio. Our business segments are “utility” and “all other.” For more information regarding
our business, see Item 1.Business of our Form 10-K.
44
EXECUTIVE SUMMARY
DPL
For the three months ended September 30, 2023, DPL's income before income tax of $48.2 million was higher by $72.0 million, or 303%, compared to the prior period loss before income tax of $23.8 million, and, for the nine months ended September 30, 2023, DPL's income before income tax of $39.9 million was higher by $52.6 million, or 414%, compared to the prior period
loss before income tax of $12.7 million, primarily due to factors including, but not limited to:
Three months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
vs. 2022
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
$
67.9
Increase due to higher transmission revenue driven by an increase in transmission rates
5.3
19.5
Decrease
due to higher taxes other than income taxes driven by higher assessed values
(4.8)
(13.8)
Increase / (decrease) due to operation and maintenance expenses
1.4
(10.9)
Decrease in retail margin due to lower demand driven by weather
(0.1)
(8.5)
Other
2.3
(1.6)
Net
change in Income / (loss) before income tax
$
72.0
$
52.6
AES
Ohio
For the three months ended September 30, 2023, AES Ohio's income before income tax of $55.1 million was higher by $70.7 million, or 453%, compared to the prior period loss before income tax of $15.6 million, and, for the nine months ended September 30, 2023, AES Ohio's income before income tax of $64.1 million was higher by $52.8 million, or 467%, compared to the prior period income before income tax of $11.3 million, primarily due to factors including, but not limited to:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Increase due to deferral of purchased power costs, which were recognized in the prior year, and additional carrying costs associated with the approval of ESP 4
$
67.9
$
67.9
Increase
due to higher transmission revenue driven by an increase in transmission rates
5.2
19.5
Decrease due to higher taxes other than income taxes driven by higher assessed values
(4.8)
(13.9)
Increase / (decrease) due to operation and maintenance expenses
0.7
(10.7)
Decrease
in retail margin due to lower demand driven by weather
(0.1)
(8.5)
Other
1.8
(1.5)
Net change in income / (loss) before income tax
$
70.7
$
52.8
45
RESULTS
OF OPERATIONS – DPL
DPL’s results of operations include the results of its subsidiaries, including its principal subsidiary AES Ohio. All material intercompany accounts and transactions have been eliminated in consolidation. A separate discussion of the results of operations for AES Ohio is presented elsewhere in this report.
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
$ change
% change
2023
2022
$
change
% change
REVENUE:
Retail
$
197.1
$
227.3
$
(30.2)
(13.3)
%
$
581.5
$
556.8
$
24.7
4.4
%
Wholesale
4.0
13.2
(9.2)
(69.7)
%
10.8
31.5
(20.7)
(65.7)
%
RTO
ancillary
21.5
16.2
5.3
32.7
%
65.8
46.3
19.5
42.1
%
Capacity
revenue
0.7
0.5
0.2
40.0
%
3.2
3.8
(0.6)
(15.8)
%
Miscellaneous
revenue
0.9
4.9
(4.0)
(81.6)
%
5.0
13.9
(8.9)
(64.0)
%
Total
revenue
224.2
262.1
(37.9)
(14.5)
%
666.3
652.3
14.0
2.1
%
OPERATING
COSTS AND EXPENSES:
Purchased
power:
Purchased power
47.8
161.8
(114.0)
(70.5)
%
225.7
299.5
(73.8)
(24.6)
%
RTO
charges
19.4
18.4
1.0
5.4
%
51.2
62.1
(10.9)
(17.6)
%
Net
purchased power cost
67.2
180.2
(113.0)
(62.7)
%
276.9
361.6
(84.7)
(23.4)
%
Operation
and maintenance
56.6
48.8
7.8
16.0
%
170.7
132.7
38.0
28.6
%
Depreciation
and amortization
20.6
20.0
0.6
3.0
%
60.9
59.6
1.3
2.2
%
Taxes
other than income taxes
25.2
20.4
4.8
23.5
%
77.4
63.6
13.8
21.7
%
Gain
on disposal of business
—
—
—
—
%
—
(0.6)
0.6
(100.0)
%
Total
operating costs and expenses
169.6
269.4
(99.8)
(37.0)
%
585.9
616.9
(31.0)
(5.0)
%
OPERATING
INCOME / (LOSS)
54.6
(7.3)
61.9
(847.9)
%
80.4
35.4
45.0
127.1
%
OTHER
INCOME / (EXPENSE), NET:
Interest expense, net
(7.8)
(18.1)
10.3
(56.9)
%
(45.2)
(50.1)
4.9
(9.8)
%
Other
income, net
1.4
1.6
(0.2)
(12.5)
%
4.7
2.0
2.7
135.0
%
Total
other expense, net
(6.4)
(16.5)
10.1
(61.2)
%
(40.5)
(48.1)
7.6
(15.8)
%
INCOME
/ (LOSS) BEFORE INCOME TAX (a)
$
48.2
$
(23.8)
$
72.0
(302.5)
%
$
39.9
$
(12.7)
$
52.6
(414.2)
%
(a)For
purposes of discussing operating results, we present and discuss Income / (loss) 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.
46
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 are affected by regulated rates and riders including the changes to our ESP described in Note 2. Regulatory Matters of our Form 10-K and Note 2. Regulatory Matters of Notes to DPL's Condensed 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
and AES Ohio retail electric sales represent the total transmission and distribution retail sales for the periods presented. SSO sales were 659 kWh and 2,211 kWh and 1,028 kWh and 3,248 kWh for the three and nine months ended September 30, 2023 and 2022, respectively.
(c)Wholesale electric sales are AES Ohio's 4.9% share of the generation output of OVEC.
47
The following charts show the percentage changes in weather-normalized and actual retail electric sales volumes by customer class for the three and nine months ended September 30, 2023
compared to the same periods in the prior year:
48
During the three months ended September 30, 2023, revenue decreased $37.9 million to $224.2 million compared to $262.1 million in the same period of the prior year, and, during the nine months ended September 30, 2023, revenue increased $14.0 million
to $666.3 million compared to $652.3 million in the same period of the prior year. These changes were primarily the result of changes in the components of revenue shown below:
Three months ended
Nine months ended
September 30,
September 30,
$
in millions
2023 vs. 2022
2023 vs. 2022
Retail
Rate
Increase / (decrease) in Competitive Bid Revenue Rate Rider
$
(32.5)
$
47.4
Increase
due to the USF Revenue Rate Rider
8.1
21.7
Increase in Infrastructure Investment Rider
1.5
3.7
Increase / (decrease) due to the Storm Rider
(0.3)
2.9
Increase
due to the Distribution Investment Rider, which was effective with the approval of ESP 4
1.2
1.2
Increase / (decrease) due to the TCRR Rider
1.9
(9.5)
Other
4.9
3.2
Net
change in retail rate
(15.2)
70.6
Volume
Net decrease in demand primarily driven by weather
(15.4)
(46.9)
Other
miscellaneous
0.4
1.0
Total retail change
(30.2)
24.7
Wholesale
revenue
Decrease primarily due to lower rates and volumes on power sales at OVEC
(9.2)
(20.7)
RTO ancillary and capacity revenue
Increase
primarily due to higher transmission formula rates in the current year
5.5
18.9
Miscellaneous
Decrease
due to the Legacy Generation Resource Rider
(4.0)
(8.9)
Net change in Revenue
$
(37.9)
$
14.0
49
DPL
– Net Purchased Power
During the three months ended September 30, 2023, net purchased power decreased $113.0 million to $67.2 million compared to $180.2 million in the same period of the prior year, and, during the nine months ended September 30, 2023, net purchased power decreased $84.7 million to $276.9 million compared to $361.6 million in the same period of the prior year. These changes were primarily the result of changes in the cost of purchased power shown below.
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Net purchased power
Purchased power
Rate
For
the three months ended, the decrease was primarily due to the deferral of purchased power costs, which were recognized in the prior year, associated with the approval of ESP 4 and lower prices in the competitive bid process. For the nine months ended, the 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.
$
(67.5)
$
10.5
Volume
Decrease
primarily due to lower retail SSO load served due to demand driven by weather and decreased SSO customers
(46.5)
(84.3)
Total purchased power change
(114.0)
(73.8)
RTO charges
Increase
/ (decrease) primarily due to changes in TCRR rates
1.0
(10.9)
Net change in purchased power
$
(113.0)
$
(84.7)
DPL
– Operation and Maintenance
During the three and nine months ended September 30, 2023, Operation and maintenance expense increased $7.8 million and $38.0 million, respectively, compared to the same periods in the prior year. The main drivers of these changes are as follows:
Three months ended
Nine months ended
September
30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Increase in uncollectible expenses, including the SGF and low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$
8.1
$
21.7
Increase in charges from Service
Company
1.3
5.0
Increase / (decrease) in contracted services expenses primarily due to overhead distribution line maintenance, including tree trimming
(2.6)
4.1
Increase / (decrease) in deferred storm costs (a)
(0.3)
2.9
Increase
in Smart Grid O&M amortization (a)
1.4
2.5
Other, net
(0.1)
1.8
Net change in operation and maintenance expense
$
7.8
$
38.0
(a) There
is a corresponding offset in Revenue associated with these costs.
DPL – Taxes Other Than Income Taxes
During the three and nine months ended September 30, 2023, Taxes other than income taxes increased $4.8 million and $13.8 million, respectively, compared to the same periods in the prior year. The increase was primarily the result of higher property taxes due to higher assessed values in the current year.
DPL – Interest Expense, Net
During the three and nine months ended September 30, 2023, Interest expense, net decreased $10.3 million and $4.9 million, respectively, 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 the second quarter of 2023 and 2022.
50
DPL – Other Income, Net
During the three months ended September 30, 2023, Other income, net decreased $0.2 million compared to the same period in the prior year. The decrease was primarily driven by lower AFUDC, partially offset by Master Trust asset performance.
During the nine months ended September 30, 2023, Other income, net increased $2.7 million compared to the same period in the prior year, driven by Master Trust asset
performance.
DPL – Income Tax Expense / (Benefit)
Income tax expense was $9.6 million during the three months ended September 30, 2023 compared to a benefit of $4.1 million during the three months ended September 30, 2022. Income tax expense was $5.3 million during the nine months ended September 30, 2023 compared to a benefit of $8.6 million during the nine months ended September 30, 2022. The changes were primarily due to income before income tax in the current year versus a loss before income tax in the prior year.
See Note 6. Income Taxes in the Notes to DPL's Condensed
Consolidated Financial Statements for further discussion.
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) 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 Notes to DPL's Condensed Consolidated Financial Statements for further information on AES Ohio. The “Other” nonutility category primarily includes interest expense, net, 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 PART I, ITEM 1., Note 10. Business Segments of Notes to DPL's Condensed Consolidated Financial Statements for more information regarding DPL’s reportable segment.
The following table presents DPL’s Income / (loss) before income tax by business segment:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
2023
2022
Utility
$
55.1
$
(15.6)
$
64.1
$
11.3
Other
(6.9)
(8.2)
(24.2)
(24.0)
Income
/ (loss) before income tax (a)
$
48.2
$
(23.8)
$
39.9
$
(12.7)
(a)For purposes of discussing operating results, we present and discuss Income / (loss) 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.
RESULTS OF OPERATIONS BY SEGMENT – 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 I, ITEM 2., Management's Discussion and Analysis of Financial Condition and Results of Operations (RESULTS OF OPERATIONS – AES Ohio) of this Form 10-Q.
51
RESULTS
OF OPERATIONS – AES Ohio
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023
2022
$ change
% change
2023
2022
$
change
% change
REVENUE:
Retail
$
197.1
$
227.3
$
(30.2)
(13.3)
%
$
581.5
$
556.8
$
24.7
4.4
%
Wholesale
4.2
13.4
(9.2)
(68.7)
%
11.3
32.1
(20.8)
(64.8)
%
RTO
ancillary
21.4
16.2
5.2
32.1
%
65.7
46.2
19.5
42.2
%
Capacity
revenue
0.7
0.5
0.2
40.0
%
3.2
3.8
(0.6)
(15.8)
%
Miscellaneous
revenue
(1.4)
2.5
(3.9)
(156.0)
%
(2.2)
6.7
(8.9)
(132.8)
%
Total
revenue
222.0
259.9
(37.9)
(14.6)
%
659.5
645.6
13.9
2.2
%
OPERATING
COSTS AND EXPENSES:
Purchased
power:
Purchased power
47.9
161.8
(113.9)
(70.4)
%
225.7
299.4
(73.7)
(24.6)
%
RTO
charges
19.3
18.0
1.3
7.2
%
50.7
61.2
(10.5)
(17.2)
%
Net
purchased power cost
67.2
179.8
(112.6)
(62.6)
%
276.4
360.6
(84.2)
(23.3)
%
Operation
and maintenance
56.7
48.2
8.5
17.6
%
169.1
131.3
37.8
28.8
%
Depreciation
and amortization
20.3
19.8
0.5
2.5
%
59.9
58.7
1.2
2.0
%
Taxes
other than income taxes
25.2
20.4
4.8
23.5
%
77.3
63.4
13.9
21.9
%
Gain
on disposal of business
—
—
—
—
%
—
(0.6)
0.6
(100.0)
%
Total
operating costs and expenses
169.4
268.2
(98.8)
(36.8)
%
582.7
613.4
(30.7)
(5.0)
%
Operating
income / (loss)
52.6
(8.3)
60.9
(733.7)
%
76.8
32.2
44.6
138.5
%
OTHER
INCOME / (EXPENSE), NET:
Interest expense, net
1.3
(8.4)
9.7
(115.5)
%
(16.7)
(21.1)
4.4
(20.9)
%
Other
income, net
1.2
1.1
0.1
9.1
%
4.0
0.2
3.8
1,900.0
%
Total
other income / (expense), net
2.5
(7.3)
9.8
(134.2)
%
(12.7)
(20.9)
8.2
(39.2)
%
INCOME
/ (LOSS) BEFORE INCOME TAX(a)
$
55.1
$
(15.6)
$
70.7
(453.2)
%
$
64.1
$
11.3
$
52.8
467.3
%
(a)For
purposes of discussing operating results, we present and discuss Income / (loss) before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information used by management to make decisions regarding our financial performance.
AES Ohio – 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 are affected by regulated rates and riders including the changes to our ESP described in Note 2. Regulatory
Matters of our Form 10-K and Note 2 – Regulatory Matters of Notes to AES Ohio's Condensed Financial Statements.
52
During the three months ended September 30, 2023, revenue decreased $37.9 million to $222.0 million compared to $259.9 million in the same period of the prior year, and, during the nine months ended September 30, 2023, revenue increased $13.9 million to $659.5 million compared to $645.6 million in the same period of the prior year. These changes were primarily the result of changes in the components of revenue shown below:
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Retail
Rate
Increase
/ (decrease) in Competitive Bid Revenue Rate Rider
$
(32.5)
$
47.4
Increase due to the USF Revenue Rate Rider
8.1
21.7
Increase in Infrastructure Investment Rider
1.5
3.7
Increase /
(decrease) due to the Storm Rider
(0.3)
2.9
Increase due to the Distribution Investment Rider, which was effective with the approval of ESP 4
1.2
1.2
Increase / (decrease) due to the TCRR Rider
1.9
(9.5)
Other
4.9
3.2
Net
change in retail rate
(15.2)
70.6
Volume
Net decrease in demand primarily driven by weather
(15.4)
(46.9)
Other
miscellaneous
0.4
1.0
Total retail change
(30.2)
24.7
Wholesale
revenue
Decrease primarily due to lower rates and volumes on power sales at OVEC
(9.2)
(20.8)
RTO ancillary and capacity revenue
Increase
primarily due to higher transmission formula rates in the current year
5.4
18.9
Miscellaneous
Decrease
due to the Legacy Generation Resource Rider
(3.9)
(8.9)
Net change in revenue
$
(37.9)
$
13.9
53
AES
Ohio – Net Purchased Power
During the three months ended September 30, 2023, net purchased power decreased $112.6 million to $67.2 million compared to $179.8 million in the same period of the prior year, and, during the nine months ended September 30, 2023, net purchased power decreased $84.2 million to $276.4 million compared to $360.6 million in the same period of the prior year. These changes were primarily the result of changes in the cost of purchased power shown below.
Three
months ended
Nine months ended
September 30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Net purchased power
Purchased power
Rate
For
the three months ended, the decrease was primarily due to the deferral of purchased power costs, which were recognized in the prior year, associated with the approval of ESP 4 and lower prices in the competitive bid process. For the nine months ended, the 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.
$
(67.5)
$
10.5
Volume
Decrease
primarily due to lower retail SSO load served due to demand driven by weather and decreased SSO customers
(46.4)
(84.2)
Total purchased power change
(113.9)
(73.7)
RTO charges
Increase
/ (decrease) primarily due to changes in TCRR rates
1.3
(10.5)
Net change in purchased power
$
(112.6)
$
(84.2)
AES
Ohio – Operation and Maintenance
During the three and nine months ended September 30, 2023, Operation and Maintenance expense increased $8.5 million and $37.8 million, respectively, compared to the same periods in the prior year. The main drivers of these changes are as follows:
Three months ended
Nine months ended
September
30,
September 30,
$ in millions
2023 vs. 2022
2023 vs. 2022
Increase in uncollectible expenses, including the SGF and low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$
8.1
$
21.7
Increase in charges from Service
Company
1.9
5.5
Increase / (decrease) in contracted services expenses primarily due to overhead distribution line maintenance, including tree trimming
(2.7)
3.8
Increase in deferred storm costs (a)
(0.3)
2.9
Increase
/ (decrease) in Smart Grid O&M amortization (a)
1.4
2.5
Other, net
0.1
1.4
Net change in operation and maintenance expense
$
8.5
$
37.8
(a) There
is a corresponding offset in Revenue associated with these costs.
AES Ohio – Taxes Other Than Income Taxes
During the three and nine months ended September 30, 2023, Taxes other than income taxes increased $4.8 million and $13.9 million, respectively, compared to the same periods in the prior year. The increases were primarily the result of higher property taxes due to higher assessed values in the current year.
AES Ohio – Interest Expense, Net
During the three and nine months ended September 30, 2023, Interest expense, net decreased $9.7 million and $4.4 million, respectively, 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 in the second quarter of 2023 and 2022.
54
AES Ohio – Other Income, Net
During the three and nine months ended September 30, 2023, Other income increased $0.1 million and $3.8 million, respectively, compared to the same periods in the prior year. The increases were driven by lower defined benefit plan costs and Master Trust asset performance, partially offset by lower AFUDC.
AES Ohio – Income Tax Expense / (Benefit)
Income tax expense was $11.5 million during the three months ended
September 30, 2023 compared to a benefit of $5.5 million during the three months ended September 30, 2022. Income tax expense was $11.3 million during the nine months ended September 30, 2023 compared to a benefit of $2.8 million during the nine months ended September 30, 2022. The changes were primarily due to income before income tax in the current year versus a loss before income tax in the prior year.
See Note 5. Income Taxes of Notes to AES Ohio's Condensed Financial Statements for further discussion.
KEY
TRENDS AND UNCERTAINTIES
During 2023 and beyond, we expect our financial results will be primarily impacted by retail demand and weather. In addition, DPL's and AES Ohio's financial results are likely to be driven by other factors including, but not limited to:
•regulatory outcomes;
•the passage of new legislation, implementation of regulations or other changes in regulation; and
•the timely recovery of transmission and distribution expenditures.
If favorable outcomes related to these factors do not occur, or if the challenges described below and elsewhere in this Quarterly Report impact us more significantly than we
currently anticipate, then these factors, or other factors unknown to us, may impact our operating income, net income and cash flows. We continue to monitor our operations and address challenges as they arise. For a discussion of the risks related to our business, see Item 1. Business and Item 1A. Risk Factors in our Form 10-K.
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 I, ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations–Capital Resources and Liquidity of this Form 10-Q.
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. On August 16, 2022, the Inflation Reduction Act of 2022 was signed into U.S. law. We are currently evaluating the applicability and effect of the new 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 its 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 recently. From July 1 to September 30, 2023, the yield on 10-year U.S. Treasury Notes rose from 3.84% to 4.57%. 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
55
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
DPL’s, AES Ohio’s and our other subsidiaries’ facilities and operations are subject to a wide range of regulations and laws by federal, state and local authorities. As well as imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at these facilities and operations in an effort to comply, or to determine compliance, with such regulations. We record liabilities for losses that are probable and can be reasonably estimated. In addition to matters discussed or
updated herein, our 2022 Form 10-K and Forms 10-Q previously filed with the SEC during 2023 describe other regulatory matters, which have not materially changed since those filings.
Distribution Rate Case – On December 14, 2022, the PUCO issued an order on AES Ohio's pending distribution rate case application. Among other matters, the order established a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service. These rates went into effect on September 1, 2023 with the approval of AES Ohio's ESP 4.
ESP 4 – 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.
See PART I, ITEM 1., Note 2. Regulatory Matters of Notes to DPL's Condensed Consolidated Financial Statements and PART I, ITEM 1., Note 2. Regulatory Matters of Notes to AES Ohio's Condensed Financial Statements for further information regarding these and other regulatory matters.
Environmental
We have several pending environmental matters associated with our previously-owned stations. Some of these matters could have a material adverse
effect on our results of operations, financial condition and cash flows.
As a result of DPL now not directly owning or operating any generating stations, the following environmental matters, regulations and requirements are now not expected to have a material impact on DPL:
•MATS and any associated regulatory or judicial processes;
•NAAQS; and
•potential CAA Section 111(d) regulations for greenhouse gases from existing electric generating units.
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.
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 the EPA determines certain criteria are met. Facilities seeking such an extension were required to submit a demonstration to the EPA by November 30, 2020. On January 11, 2022, the 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. On April 8, 2022, petitions for review were filed challenging these
56
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.
On May 18, 2023, EPA published a proposed rule that would expand the scope of CCR units regulated by the CCR Rule to include inactive surface impoundments at inactive generating facilities as well as additional inactive and closed landfills and certain other accumulations of CCR. We are still
reviewing the proposal and it is too early to determine the potential impact.
With the sale of our coal-fired generating stations, we expect that the impact of these regulations would be limited to our interest in OVEC. The CCR Rule, current or proposed amendments to the CCR Rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material adverse effect on our results of operations, financial condition and cash flows.
Clean Water Act – Regulation of Water Discharge - The concept of the "Waters of the U.S." ("WOTUS") in the CWA and associated rules defines the geographic reach and authority of the U.S. Army Corps of Engineers and the EPA (together, 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. This Decision standard substantially restricts the Agencies' ability to regulate certain types of wetlands and streams. Specifically, under this decision, wetlands that do not have a continuous surface connection with traditional interstate navigable water are not considered a WOTUS and therefore are not federally jurisdictional.
On September 8, 2023, the Agencies issued 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 the waters of the U.S. might have a material adverse effect on our results of operations, financial condition and cash flows.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
DPL
and AES Ohio had unrestricted cash and cash equivalents of $49.3 million and $33.0 million, respectively, as of September 30, 2023. At that date, neither DPL nor AES Ohio had short-term investments. DPL and AES Ohio had aggregate principal amounts of long-term debt outstanding of $1,652.5 million and $821.9 million, respectively.
From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions or otherwise when management believes such repurchases are favorable to make. The amounts involved in any such repurchases may be material.
We depend on timely and continued access to capital markets to manage our liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments
during times of political or economic uncertainty could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, changes in the timing of tariff increases or delays in regulatory determinations could affect the cash flows and results of operations of our businesses.
On April 13, 2023, AES Ohio issued $100.0 million of First Mortgage Bonds and used the proceeds from the offering to repay amounts outstanding under the AES Ohio Credit Agreement and for general corporate purposes. The new First Mortgage Bonds carry an interest rate of 5.19% and mature on April 13, 2033.
During the nine months ended September 30, 2023, DPL received $260.0 million in
cash contributions from AES, which DPL then made as $260.0 million in equity contributions to AES Ohio. The proceeds from these contributions allow AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity.
57
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 cash flows of DPL:
Nine
months ended September 30,
$ in millions
2023
2022
Net cash provided by operating activities
$
16.9
$
52.0
Net cash used in investing activities
(301.8)
(207.8)
Net
cash provided by financing activities
303.7
173.5
Net increase in cash, cash equivalents and restricted cash
18.8
17.7
Balance at beginning of period
30.6
26.7
Cash, cash equivalents,
and restricted cash at end of period
$
49.4
$
44.4
The following cash flow review compares the cash flows of DPL for the nine months ended September 30, 2023 to the cash flows for the nine months ended September 30, 2022.
DPL– Net cash from operating activities
Nine
months ended September 30,
$ change
$ in millions
2023
2022
2023 vs. 2022
Net income / (loss)
$
34.6
$
(4.1)
$
38.7
Depreciation
and amortization
60.9
59.6
1.3
Deferred income taxes
20.9
(10.7)
31.6
Gain on disposal of business
—
(0.6)
0.6
Net
income, adjusted for non-cash items
116.4
44.2
72.2
Net change in operating assets and liabilities
(99.5)
7.8
(107.3)
Net cash provided by operating activities
$
16.9
$
52.0
$
(35.1)
The
net change in operating assets and liabilities during the nine months ended September 30, 2023, compared to the nine months ended September 30, 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
$
(123.2)
Decrease from accounts payable primarily due to the timing of payments
(30.7)
Increase from accounts receivable primarily due to the timing of collections
24.8
Increase from accrued and other current liabilities primarily due to the timing of customer and supplier deposits
14.9
Other
6.9
Net
decrease in cash from changes in operating assets and liabilities
$
(107.3)
DPL – Net cash from investing activities
Net cash used in investing activities increased $94.0 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily driven by the following:
$
in millions
$ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects
$
(93.0)
Higher cost of removal payments
(1.3)
Other
0.3
Net change in investing activities
$
(94.0)
58
DPL
– Net cash from financing activities
Net cash provided by financing activities increased $130.2 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily driven by the following:
$ in millions
$ Change
Equity contributions from AES
$
239.0
Higher
net repayments on revolving credit facilities
(70.0)
Lower issuances of debt at AES Ohio
(40.0)
Other
1.2
Net change in financing activities
$
130.2
Cash
Flow Analysis - AES Ohio
The following table summarizes the cash flows of AES Ohio:
Nine months ended September 30,
$ in millions
2023
2022
Net cash provided by operating
activities
$
17.8
$
73.3
Net cash used in investing activities
(299.2)
(205.1)
Net cash provided by financing activities
294.7
145.0
Net
increase in cash, cash equivalents and restricted cash
13.3
13.2
Balance at beginning of period
19.8
14.5
Cash, cash equivalents, and restricted cash at end of period
$
33.1
$
27.7
The
following cash flow review compares the cash flows of AES Ohio for the nine months ended September 30, 2023 to the cash flows for the nine months ended September 30, 2022.
AES Ohio– Net cash from operating activities
Nine
months ended September 30,
$ change
$ in millions
2023
2022
2023 vs. 2022
Net income
$
52.8
$
14.1
$
38.7
Depreciation
and amortization
59.9
58.7
1.2
Deferred income taxes
11.3
(6.9)
18.2
Gain on disposal of business
—
(0.6)
0.6
Net
income, adjusted for non-cash items
124.0
65.3
58.7
Net change in operating assets and liabilities
(106.2)
8.0
(114.2)
Net cash provided by operating activities
$
17.8
$
73.3
$
(55.5)
The
net change in operating assets and liabilities during the nine months ended September 30, 2023, compared to the nine months ended September 30, 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
$
(123.2)
Decrease from accounts payable primarily due to the timing of payments
(30.5)
Increase from accounts receivable primarily due to the timing of collections
25.6
Increase from accrued and other current liabilities primarily due to the timing of customer and supplier deposits
15.1
Other
(1.2)
Net
decrease in cash from changes in operating assets and liabilities
$
(114.2)
59
AES Ohio – Net cash from investing activities
Net cash used in investing activities increased $94.1 million during the nine months ended September 30, 2023,
compared to the nine months ended September 30, 2022, primarily driven by the following:
$ in millions
$ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects
$
(92.4)
Higher cost of removal payments
(1.5)
Other
(0.2)
Net
change in investing activities
$
(94.1)
AES Ohio – Net cash from financing activities
Net cash provided by financing activities increased $149.7 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022,
primarily driven by the following:
$ in millions
$ Change
Equity contributions from DPL
$
260.0
Higher net repayments on revolving credit facilities
(55.0)
Lower issuances of debt at AES Ohio
(40.0)
Higher
distributions to DPL
(16.0)
Other
0.7
Net change in financing activities
$
149.7
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 dividends 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 2023 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 September 30, 2023, AES Ohio has access to the following revolving credit facilities:
On June 14, 2023, the DPL Credit Agreement was paid off and retired.
For the AES Ohio Credit Agreement, as of September 30,
2023, there were $120.0 million in borrowings under the facility, with the remaining $130.0 million available to AES Ohio. For more information on the AES Ohio Credit Agreement, see Note 5. Debt of our Form 10-K.
60
CAPITAL EXPENDITURE PROGRAM
Our capital expenditure program, including development and permitting costs, for the three-year period from 2023 through 2025 is currently estimated to cost up to $1.3 billion, and includes estimates as follows:
$
in millions
2023
2024
2025
For the three-year period from 2023 through 2025
Distribution-related additions, improvements and extensions (a)
$
146.0
$
192.0
$
201.0
$
539.0
Transmission-related
additions and improvements
156.0
192.0
140.0
488.0
Smart Grid improvements and additions
75.0
66.0
51.0
192.0
Other
41.0
21.0
4.0
66.0
Total
for AES Ohio
418.0
471.0
396.0
1,285.0
Other subsidiaries
5.0
3.0
2.0
10.0
Total
for DPL
$
423.0
$
474.0
$
398.0
$
1,295.0
(a) AES Ohio's investments in distribution-related additions, improvements and extensions are dependent on favorable regulatory outcomes.
AES Ohio's projection includes expected spending under its Smart Grid
Plan 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 outcomes in its regulatory proceedings. See more information in Note 2. Regulatory Matters of Notes to DPL's Condensed Consolidated Financial Statements and Note 2. Regulatory Matters of Notes to AES Ohio's Condensed Financial Statements.
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. AES Ohio anticipates spending approximately $39.0 million within the next five years to reinforce its transmission system to comply with mandatory NERC and
FERC Form 715 planning requirements. These anticipated costs are included in the overall capital projections above.
Long-term debt covenants
For information regarding our long-term debt covenants, see PART I, ITEM 1., Note 5. Debt of Notes to DPL's Condensed Consolidated Financial Statements and PART I, ITEM 1., Note 4. Debt of Notes to AES Ohio's Condensed Financial Statements.
Debt and Credit Ratings
The following table presents, as of the filing of this report, 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
61
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
For information on guarantees, commercial commitments, and contractual obligations, see PART I, ITEM 1., Note 9. Commitments and Contingencies of Notes to DPL's Condensed Consolidated Financial Statements and PART I, ITEM 1., Note 8. Commitments and Contingencies of Notes to AES Ohio's Condensed Financial Statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
DPL’s Condensed Consolidated Financial Statements and AES Ohio’s Condensed 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, revenue, 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.
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 insurance and claims liabilities; the valuation of allowances for credit losses and deferred income taxes; regulatory assets and liabilities; liabilities recorded for income tax exposures; litigation; contingencies; assets and liabilities related to employee benefits and intangible assets. Refer to our Form 10-K for the year ended December 31, 2022 for a complete listing of our critical accounting policies and estimates. We have reviewed and determined that these
remain as critical accounting policies as of and for the nine months ended September 30, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our quantitative and qualitative disclosure about market risk as previously disclosed in our Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
DPL and AES Ohio, under the supervision and with the participation of
its management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), evaluated the effectiveness of our “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2023, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our CEO and CFO,
as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Controls over Financial Reporting
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
62
Part II – Other Information
ITEM
1. 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 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 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.
Our Form 10-K for the fiscal year ended December 31, 2022 and Forms 10-Q for the quarters ended March 31, and June 30, 2023, and the Notes to DPL’s Consolidated Financial Statements and AES Ohio’s Financial Statements included therein, contain descriptions of certain legal proceedings in which we are or were involved. The information in or incorporated by reference into this Item 1 to Part II is limited to certain recent developments concerning our legal proceedings and new legal proceedings,
since the filing of such Forms 10-K and 10-Q, and should be read in conjunction with such Forms 10-K and 10-Q.
The following information is incorporated by reference into this Item: information about the legal proceedings contained in PART I, ITEM 2. – Management's Discussion and Analysis of Financial Condition and Results of Operations and PART I, ITEM 1., Note 2. Regulatory Matters and Note 9. Commitments and Contingencies of Notes to DPL's Condensed Consolidated Financial Statements and PART I, ITEM 1., Note 2. Regulatory Matters and Note 8. Commitments and Contingencies of Notes to AES Ohio's Condensed
Financial Statements of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A. – Risk Factors of our Form 10-K. Additional risks and uncertainties also may adversely affect our business and operations, including those discussed in Item 2. – Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None
63
ITEM
6. EXHIBITS
DPL
DP&L
Exhibit Number
Exhibit
Location
X
31(a)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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.
64
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, DPL Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities
Exchange Act of 1934, The Dayton Power and Light Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
