EDGAR 10-K Filing

Company CIK: 787250
Filing Year: 2023
Filename: 787250_10-K_2023_0000787250-23-000006.json

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ITEM 1. BUSINESS
Item 1 - Business
OVERVIEW
DPL is a regional energy company incorporated in 1985 under the laws of Ohio. All of DPL’s stock is owned by an AES subsidiary.
DPL has three primary subsidiaries: AES Ohio, MVIC and Miami Valley Lighting. AES Ohio is a public utility providing electric transmission and distribution services in West Central Ohio. For additional information on the primary subsidiaries, see Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to DPL's Consolidated Financial Statements and Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to AES Ohio's Financial Statements. All of DPL's subsidiaries are wholly-owned. DPL manages its business through one reportable operating segment, the Utility segment. See Note 12 - BUSINESS SEGMENTS of the Notes to DPL's Consolidated Financial Statements for additional information regarding DPL’s reportable segment. AES Ohio also manages its business through one reportable operating segment, the Utility segment.
MVIC is our captive insurance company that provides insurance services to AES Ohio and our other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in the Dayton region. DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders. AES Ohio also has a 4.9% interest in OVEC, an electric generating company. OVEC has two electric generating stations located in Cheshire, Ohio and Madison, Indiana with a combined generation capacity of 2,109 MW. AES Ohio’s share of this generation capacity is 103 MW. AES Ohio does not have any subsidiaries.
DPL, through its subsidiaries, once owned all or a percentage of various generation facilities, the last of which was sold in June 2020. For additional information on this event and DPL's other previously owned EGUs, see Note 14 - DISCONTINUED OPERATIONS of Notes to DPL's Consolidated Financial Statements.
HUMAN CAPITAL MANAGEMENT
DPL's employees are essential to delivering and maintaining reliable service to our customers. DPL and its subsidiaries employed 657 people (547 full-time) at December 31, 2022, all of whom were employed by AES Ohio. Approximately 58% of all DPL employees are under a collective bargaining agreement that expires on October 31, 2023.
Safety
As part of AES, safety is one of our core values. Conducting safe operations at our facilities, so that each person can return home safely, is the cornerstone of our daily activities and decisions. Safety efforts are led globally by the AES Chief Operating Officer and supported by safety committees that operate at the local site level. Hazards in the workplace are actively identified and management tracks incidents so remedial actions can be taken to improve workplace safety.
We work with the AES Safety Management System (“SMS”), a global safety standard that applies to all AES employees and employees of AES subsidiaries, as well as contractors working in AES facilities and construction projects. The SMS requires continuous safety performance monitoring, risk assessment and performance of periodic integrated environmental, health and safety audits. The SMS provides a consistent framework for all AES operational businesses and construction projects to set expectations for risk identification and reduction, measure performance and drive continuous improvements. The SMS standard is consistent with the OHSA 18001/ISO 45001 standard. Our safety performance is also measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury significant injury potential incidents. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
Talent
We believe our success depends on our ability to attract, develop and retain key personnel. The skills, experience and industry knowledge of key employees significantly benefit our operations and performance. We have a comprehensive approach to managing our talent and developing our leaders in order to ensure our people have the right skills for today and tomorrow whether that requires us to build new business models or leverage leading technologies.
We emphasize employee development and training. To empower employees, we provide a range of development programs and opportunities, skills, and resources they need to be successful by focusing on experience and exposure as well as formal programs including the AES ACE Academy for Talent Development and our Trainee Program.
We believe that our individual differences make us stronger. Our Global Diversity and Inclusion Program is led by the AES Diversity and Inclusion Officer. Governance and standards are guided by the AES Chief Human Resources Officer, with input from members of AES' Executive Leadership Team.
Compensation
Our compensation philosophy emphasizes pay-for-performance. Our incentive plans are designed to reward strong performance, with greater compensation paid when performance exceeds expectations and less compensation paid when performance falls below expectations. We invest significant time and resources to ensure our compensation programs are competitive and reward the performance of our people. Every year, our people who are not part of a collective bargaining agreement are eligible for an annual merit-based salary increase. In addition, individuals are eligible for a salary increase if they receive a significant promotion. For non-collectively bargained employees at certain levels in the organization we offer annual incentives (bonus) and long-term compensation to reinforce the alignment between employees and AES.
SERVICE COMPANY
The Service Company provides services including operations, accounting, legal, human resources, information technology and other corporate services on behalf of companies that are part of the U.S. SBU, including, among other companies, DPL and AES Ohio. The Service Company allocates the costs for these services based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including AES Ohio, are not subsidizing costs incurred for the benefit of other businesses. See Note 11 - RELATED
PARTY TRANSACTIONS of Notes to DPL's Consolidated Financial Statements and Note 10 - RELATED PARTY TRANSACTIONS of Notes to AES Ohio's Financial Statements.
SEASONALITY
The power delivery business is seasonal, and weather patterns have a material effect on energy demand. In the region we serve, demand for electricity is generally greater in the summer months associated with cooling and in the winter months associated with heating compared to other times of the year. AES Ohio's sales typically reflect the seasonal weather patterns but can also be impacted by service territory economic activity, the economic impact of the COVID-19 pandemic, and the number of retail customers we have, as well as energy efficiency programs. During 2019, the impacts of weather, energy efficiency programs and economic changes in customer demand were almost entirely eliminated by AES Ohio’s Decoupling Rider, which was in place from January 1, 2019 until December 18, 2019. AES Ohio has requested authority from the PUCO to create a regulatory asset for the ongoing revenues that would have been charged in the Decoupling Rider going back to December 18, 2019. A hearing on this request was held in May 2021 and is pending a decision by the PUCO. See Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
Storm activity can also have an adverse effect on our operating performance. Severe storms often damage transmission and distribution equipment, thereby causing power outages, which reduce revenues and increase repair costs. Partially mitigating this impact is AES Ohio’s ability to timely recover certain O&M repair costs related to severe storms.
REGULATION AND MARKET STRUCTURE
Retail rate regulation
AES Ohio's distribution service to all retail customers as well as the provisions of its SSO service are regulated by the PUCO. In addition, certain costs are considered to be non-bypassable and are therefore assessed to all AES Ohio retail customers, under the regulatory authority of the PUCO, regardless of the customer’s retail electric supplier. AES Ohio's transmission rates are subject to regulation by the FERC under the Federal Power Act.
Ohio law establishes the process for determining SSO and non-bypassable rates charged by public utilities. Regulation of retail rates encompasses the timing of applications, the effective date of rate changes, the cost basis upon which the rates are set and other service-related matters. Ohio law also established the Office of the Ohio Consumers' Counsel, which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings.
Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO's supervisory powers to a holding company system's general condition and capitalization, among other matters, to the extent that such matters relate to the costs associated with the provision of public utility service. Based on existing PUCO and FERC authorization, regulatory assets and liabilities are recorded on the balance sheets of both DPL and AES Ohio. See Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
Ohio Retail Rates
AES Ohio rates for transmission and distribution electric service currently remain the lowest among Ohio investor-owned utilities.
ESP 1 established AES Ohio's framework for providing retail service on a going-forward basis including rate structures, non-bypassable charges and other specific rate recovery true-up rider mechanisms. For more information regarding AES Ohio's ESP, see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
On September 26, 2018, the PUCO issued the DRO establishing new base distribution rates for AES Ohio, which became effective October 1, 2018. The DRO approved, without modification, a stipulation and recommendation previously filed by AES Ohio, along with various intervening parties and the PUCO staff. The DRO established a revenue requirement of $248.0 million for AES Ohio's electric service base distribution rates. The DRO also provided for a return on equity of 9.999% and a cost of long-term debt of 4.8%.
On December 14, 2022, the PUCO issued an order on AES Ohio's previously filed distribution rate case. Among other matters, the order establishes a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service, which is expected to go into effect when AES Ohio has a new electric security plan in place. AES Ohio filed ESP 4 in September 2022 and anticipates approval of ESP 4 in 2023. For more information, see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (settlement) with the staff of the PUCO and various customers, and organizations representing customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio's applications pending at the PUCO for (i) approval of AES Ohio's plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that AES Ohio passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. On June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed the final PUCO Order to the Ohio Supreme Court on December 6, 2021. An oral argument regarding this appeal was held on February 7, 2023 and a Court order is expected by Q4 2023. For more information, see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
Ohio law and the PUCO rules contain targets relating to renewable energy standards. AES Ohio is currently in full compliance with renewable energy standards. AES Ohio recovers the costs of its compliance with Ohio renewable energy standards through its Standard Offer Rate Tariff, which is reviewed and audited by the PUCO.
The costs associated with providing high voltage transmission service and wholesale electric sales and ancillary services are subject to FERC jurisdiction. AES Ohio implemented a formula-based rate for its transmission service, effective May 3, 2020. For more information, see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
As a member of PJM, AES Ohio also receives revenues from the RTO related to AES Ohio’s transmission assets and incurs costs associated with its load obligations for retail customers. Ohio law includes a provision that would allow Ohio electric utilities to seek and obtain a reconcilable rider to recover RTO-related costs and credits. AES Ohio continues to recover non-market-based transmission and ancillary costs through its non-bypassable Transmission Cost Recovery Rider.
Ohio Competition
Since January 2001, AES Ohio’s electric customers have been permitted to choose their retail electric generation supplier. The SSO generation supply is provided by third parties through a competitive bid process. AES Ohio continues to have the exclusive right to provide delivery service in its state-certified territory and the obligation to procure and provide electricity to SSO customers that do not choose an alternative supplier. The PUCO maintains jurisdiction over AES Ohio’s delivery of electricity, SSO and other retail electric services.
As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities were required to join an RTO. AES Ohio is a member of the PJM RTO. The role of the RTO is to administer a competitive wholesale market for electricity and ensure reliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power system serving more than 65 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM coordinates and directs the operation of the region’s transmission grid, administers the world’s largest competitive wholesale electricity market and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.
ENVIRONMENTAL MATTERS
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state
and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, suspension or revocation of permits and/or facility shutdowns. There can be no assurance that we have been or will be at all times in full compliance with such laws, regulations and permits.
Where no accrued liability has been recognized, it is reasonably possible that some matters could have unfavorable outcomes for us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2022.
We have taken steps to limit our exposure to environmental claims that could be raised with respect to our previously-owned and operated coal-fired generation units, but we cannot predict whether any such claims will be raised and, if they are, the extent to which they may have a material adverse effect on our results of operations, financial condition and cash flows.
From time to time, we are subject to enforcement actions for claims of noncompliance with environmental laws and regulations. DPL and AES Ohio cannot assure that they will be successful in defending against any claim of noncompliance. However, we do not believe any currently open environmental investigations will result in fines material to our results of operations, financial condition and cash flows.
Under certain environmental laws, we could be held responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to hazardous substances or for other environmental damage. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, results of operations, financial condition and cash flows. A discussion of the legislative and regulatory initiatives most likely to affect us follows.
Environmental Matters Related to Air Quality
As a result of DPL’s sale of its ownership interest in the Miami Fort and Zimmer Stations in 2017, retirement and subsequent sale of its Stuart and Killen Stations in 2019, and the retirement and sale of our interest in Conesville in 2020, thereby completing the exit of our generation business, the following environmental matters, regulations and requirements are now not expected to have a material impact on DPL:
•the CAA and the following regulations:
◦CSAPR and associated updates;
◦MATS and any associated regulatory or judicial processes;
◦NAAQS; and
◦Greenhouse gas regulations established under CAA Section 111(d) for EGUs.
Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds
As a result of DPL’s retirement and subsequent sale of its Stuart and Killen Stations, the sale of its ownership interest in the Miami Fort and Zimmer Stations and the 2020 retirement of Conesville, followed by the sale of our interest in Conesville and our exiting of our generation business, the following environmental matters, regulations and requirements are now not expected to have a material impact on DPL with respect to these generating stations (although certain other requirements related to water quality, waste disposal and ash ponds are discussed further below):
•water intake regulations, including those finalized by the EPA on May 19, 2014;
•revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the EPA on November 3, 2015 (and revised on October 13, 2020) and commonly referred to as the ELG rules; and
•Clean Water Act rules for selenium.
Notice of Potential Liability for Third Party Disposal Site
In December 2003, AES Ohio and other parties received notices that the EPA considered AES Ohio and other parties PRPs for the Tremont City Landfill site, located near Dayton, Ohio. On October 16, 2019, AES Ohio received another notice from the EPA claiming that AES Ohio is a PRP for the portion of the site known as the barrel fill. While a review by AES Ohio of its records indicates that it did not contribute hazardous materials to the site, AES Ohio is currently unable to predict the outcome of this matter. If AES Ohio were required to contribute to the clean-up of the site, it could have an adverse effect on our business, financial condition or results of operations.
Regulation of Waste Disposal
In 2002, AES Ohio and other parties received a special notice that the EPA considered AES Ohio to be a PRP for the clean-up of hazardous substances at a third-party landfill known as the South Dayton Dump (“Landfill”). Several of the parties voluntarily accepted some of the responsibility for contamination at the Landfill and, in May 2010, three of those parties, Hobart Corporation, Kelsey-Hayes Company and NCR Corporation (“PRP Group”), filed a civil complaint in Ohio federal court (the “District Court”) against AES Ohio and numerous other defendants, alleging that the defendants contributed to the contamination at the landfill and were liable for contribution to the PRP group for costs associated with the investigation and remediation of the site.
While AES Ohio was able to get the initial case dismissed, the PRP Group subsequently, in 2013, entered into an additional Administrative Settlement Agreement and Order on Consent (“ASAOC”) with the EPA relating to vapor intrusion and again filed suit against AES Ohio and other defendants. Plaintiffs also added an additional ASAOC they entered into in 2016 pertaining to the investigation and remediation of all hazardous substances present in the Landfill - potentially including undefined areas outside the original dump footprint - to the vapor intrusion trial proceeding. The 2013 vapor intrusion ASAOC settled in early 2020, but the 2016 ASAOC remains to be adjudicated after completion of the remedial investigation feasibility study. While AES Ohio is unable to predict the outcome of these matters, if AES Ohio were required to contribute to the clean-up of the site, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Regulation of CCR
On October 19, 2015, an EPA rule regulating CCR under the Resource Conservation and Recovery Act as nonhazardous solid waste became effective ("CCR Rule"). The rule established nationally applicable minimum criteria for the disposal of CCR in new and currently operating landfills and surface impoundments, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. The 2016 Water Infrastructure Improvements for the Nation Act ("WIIN Act"), includes provisions to implement the CCR Rule through a state permitting program, or if the state chooses not to participate, a possible federal permit program. The EPA has indicated that they will implement a phased approach to amending the CCR Rule, which is ongoing. On February 20, 2020, the EPA published a proposed rule to establish a federal CCR permit program that would operate in states without approved CCR permit programs. With the sale of our coal-fired generating stations, we expect that the impact of these regulations would be limited to our interest in OVEC.
On August 28, 2020, the EPA published the CCR Part A Rule that, among other amendments, required certain CCR units to cease waste receipt and initiate closure by April 11, 2021. The CCR Part A Rule also allowed for extensions of the April 11, 2021 deadline if EPA determines certain criteria are met. Facilities seeking such an extension were required to submit a demonstration to EPA by November 30, 2020. On January 11, 2022, EPA released its first in a series of proposed determinations regarding nine CCR Part A Rule demonstrations, including for OVEC’s Clifty Creek and four compliance-related letters notifying certain other facilities of their compliance obligations under the federal CCR regulations. The determinations and letters include interpretations regarding implementation of the CCR Rule. On April 8, 2022, petitions for review were filed challenging these EPA actions. The petitions are consolidated in Electric Energy, Inc. v. EPA. It is too early to determine the direct or indirect impact of these letters or any determinations that may be made.
The CCR Rule, current or proposed amendments to 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
AES Ohio and other utilities at times have applied the Nationwide Permit 12 ("NWP 12") issued by the U.S. Army Corps of Engineers (Corps) in completing transmission and distribution projects that may involve waters of the U.S. NWP 12 is the nationwide permit for Utility Line Activities, specifically those required for construction and maintenance, provided the activity does not result in the loss of greater than 1/2-acre of waters of the U.S. for each single and complete project.
On April 15, 2020, in a proceeding involving the construction of the Keystone XL pipeline, the U.S. District Court for the District of Montana (Montana District Court) vacated NWP 12 and enjoined its application. On July 6, 2020, the U.S. Supreme Court stayed the district court order, allowing the use of NWP 12 for oil and gas pipeline projects except for Keystone XL. On January 13, 2021, the U.S. Army Corps of Engineers published a final rulemaking for the reissuance and modification of NWPs, including NWP 12, relating exclusively to the construction of oil or natural
gas pipelines and the new NWP 57 for construction of electric or telecommunication utility lines. It is too early to determine whether future outcomes or decisions related to this matter could have a material adverse effect on our results of operations, financial condition and cash flows.
On April 23, 2020, the U.S. Supreme Court issued a decision in the Hawaii Wildlife Fund v. County of Maui case related to whether a Clean Water Act permit is required when pollutants originate from a point source but are conveyed to navigable waters through a nonpoint source such as groundwater. The U.S. Supreme Court held that discharges to groundwater require a permit if the addition of the pollutants through groundwater is the functional equivalent of a direct discharge from the point source into navigable waters. A number of legal cases relevant to the determination of "functional equivalent" are ongoing in various jurisdictions. It is too early to determine whether the Supreme Court decision or the result of litigation related to "functional equivalent" may have a material adverse effect on our results of operations, financial condition and cash flows.
In June 2015, the EPA and the U.S. Army Corps of Engineers ("the agencies") published a rule defining federal jurisdiction over waters of the U.S., known as the "Waters of the U.S." ("WOTUS") rule. This rule, which initially became effective in August 2015, could expand or otherwise change the number and types of waters or features subject to CWA permitting. However, after repealing the 2015 WOTUS rule on October 22, 2019, the agencies, on April 21, 2020, issued the final “Navigable Waters Protection” ("NWP") rule which again revised the definition of waters of the U.S. On August 30, 2021, the U.S. District Court for the District of Arizona issued an order vacating and remanding the NWP Rule. This vacatur of the NWP Rule applies nationwide. As such, the agencies are interpreting waters of the U.S. consistent with the pre-2015 regulatory regime until further notice. On January 18, 2023, the Agencies published a final rule to define the scope of waters regulated under the Clean Water Act. The rule restores regulations defining WOTUS that were in place prior to 2015, with updates intended to be consistent with relevant Supreme Court decisions. On January 24, 2022, the U.S. Supreme Court granted certiorari on a wetlands case (Sackett v. EPA) on the limited question of: “whether the Ninth Circuit set forth the proper test for determining whether wetlands are ‘waters of the United States’ under the Clean Water Act.” The Ninth Circuit employed Justice Kennedy’s “significant nexus” test from his concurring opinion in the 2006 Rapanos v. United States decision; the plurality opinion in Rapanos required a water body to have a “continuous surface connection” with a water of the United States in order to be considered a wetland covered by the CWA. In Sackett v. EPA, the Court may finally provide clarity on which of these two tests from the 2006 Rapanos decision controls. It is too early to determine whether any outcome of litigation or current or future revisions to rules interpreting federal jurisdiction over waters over the U.S. might have a material adverse effect on our results of operations, financial condition and cash flows.
Endangered Species Act
On November 30, 2022, the U.S. Fish and Wildlife Service published a final rule reclassifying the northern long-eared bat ("NLEB") from threatened to endangered under the Endangered Species Act. The classification is effective March 31, 2023. The NLEB is found in all or portions of 37 U.S. states in the eastern and north central United States, including Ohio. This reclassification may result in the need to obtain a permit or take other measures if the Company conducts activities in the range of the NLEB. It is too early to determine whether this rule might have a material adverse effect on our results of operations, financial condition and cash flows.
Climate Change Legislation and Regulation
Although we have exited our generation business, our continuing operations face certain risks related to existing and potential international, federal, state, regional and local GHG legislation and regulations, including risks related to increased capital expenditures or other compliance costs which could have a material adverse effect on our results of operations, financial condition and cash flows. Except as noted in the discussion below, at this time, we cannot estimate the costs of compliance with existing, proposed or potential international, federal, state or regional GHG emissions reductions legislation or initiatives due in part to the fact that many of these proposals are in earlier stages of development and any final laws or regulations, if adopted, could vary drastically from current proposals. Any international, federal, state or regional legislation adopted in the U.S. that would require the reduction of GHG emissions could have a material adverse effect on our results of operations, financial condition and cash flows.
On the international level, on December 12, 2015, 195 nations, including the U.S., finalized the text of an international climate change accord in Paris, France (the “Paris Agreement”), which agreement was signed and officially entered into on April 22, 2016. The Paris Agreement calls for countries to set their own GHG emissions targets, make these emissions targets more stringent over time and be transparent about the GHG emissions reporting and the measures each country will use to achieve its GHG emissions targets. A long-term goal of the Paris Agreement is to limit global temperature increase to well below two degrees Celsius from temperatures in the pre-industrial era. The U.S. withdrawal from the Paris Agreement became effective on November 4, 2020. However,
on January 20, 2021, President Biden signed and submitted an instrument for the U.S. to rejoin the Paris Agreement, which became effective on February 19, 2021. In November 2022, the international community gathered in Egypt at the 27th Conference to the Parties on the UN Framework Convention on Climate Change (“COP27”), during which multiple announcements were made, including the establishment of a loss and damage fund to support vulnerable countries dealing with the effects of climate change and certain pledges in the area of climate finance.
HOW TO CONTACT DPL AND AES Ohio AND SOURCES OF OTHER INFORMATION
Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 - telephone 937-259-7215. AES Ohio’s public internet site is www.aes-ohio.com. The information on this website is not incorporated by reference into this report. The SEC maintains an internet website that contains this report and other information that we file electronically with the SEC at www.sec.gov.

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ITEM 1A. RISK FACTORS
Item 1A - Risk Factors
Investors should consider carefully the following risk factors that could cause our business, operating results and financial condition to be materially adversely affected. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance. The categories of risk we have identified in this item include risks associated with our operations, governmental regulation and laws and our indebtedness and financial condition. These risk factors should be read in conjunction with the other detailed information concerning DPL set forth in the Notes to DPL's Consolidated Financial Statements and concerning AES Ohio set forth in the Notes to AES Ohio's Financial Statements in Item 8 - Financial Statements and Supplementary Data and additional information in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations herein. The risks and uncertainties described below are not the only ones that we face.
RISKS ASSOCIATED WITH OUR OPERATIONS
We may be negatively affected by a lack of growth or a decline in the number of customers.
Customer growth is affected by a number of factors outside our control, such as population changes, job and income growth, housing starts, new business formation and the overall level of economic activity. A lack of growth, or a decline, in the number of customers in our service territory could have a material adverse effect on our results of operations, financial condition and cash flows and may cause us to fail to fully realize anticipated benefits from investments and expenditures.
Our business is sensitive to weather and seasonal variations.
Weather conditions significantly affect the demand for electric power and, accordingly, our business is affected by variations in general weather conditions and unusually severe weather. As a result of these factors, our operating revenues and associated operating expenses are not generated evenly by month during the year. We forecast electric sales based on normal weather, which represents a long-term historical average. In addition, severe or unusual weather, such as floods, tornadoes and ice or snowstorms, may cause outages and property damage that may require us to incur additional costs that may not be insured or recoverable from customers. While AES Ohio is permitted to seek recovery of storm damage costs, if AES Ohio is unable to fully recover such costs in a timely manner, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our membership in a regional transmission organization presents risks that could have a material adverse effect on our results of operations, financial condition and cash flows.
On October 1, 2004, in compliance with Ohio law, AES Ohio turned over control of its transmission functions and fully integrated into PJM, a regional transmission organization.
The rules governing the various regional power markets may also change from time to time which could affect our costs and revenues and have a material adverse effect on our results of operations, financial condition and cash flows. We may be required to expand our transmission system according to decisions made by PJM rather than our internal planning process. Various proposals and proceedings before the FERC may cause transmission rates to change from time to time. In addition, PJM developed and continues to refine rules associated with the allocation
and methodology of assigning costs associated with improved transmission reliability, reduced transmission congestion and firm transmission rights that may have a financial effect on us. We also incur fees and costs to participate in PJM.
Non-market-based RTO-related charges are being recovered from all retail customers through the Transmission Rider. If in the future, however, we are unable to recover all of these costs in a timely manner this could have a material adverse effect on our results of operations, financial condition and cash flows.
As members of PJM, AES Ohio is also subject to certain additional risks including those associated with the allocation of losses caused by unreimbursed defaults of other participants in PJM markets among PJM members and those associated with complaint cases filed against PJM that may seek refunds of revenues previously earned by PJM members including AES Ohio. These amounts could be significant and have a material adverse effect on our results of operations, financial condition and cash flows.
Costs associated with new transmission projects could have a material adverse effect on our results of operations, financial condition and cash flows.
Annually, PJM performs a review of the capital additions required to provide reliable electric transmission services throughout its territory. PJM traditionally allocated the costs of constructing these facilities to those entities that benefited directly from the additions. Over the last several years, however, some of the costs of constructing large, new transmission facilities have been “socialized” across PJM without a direct relationship between the costs assigned to and benefits received by particular PJM members. To date, the additional costs charged to AES Ohio for large, new transmission approved projects have not been material. Over time, as more new transmission projects are constructed and if the allocation method is not changed, the annual costs could become material. AES Ohio is recovering the Ohio retail jurisdictional share of these allocated costs from its retail customers through the Transmission Rider. To the extent that any costs in the future are material and we are unable to recover them from our customers, such costs could have a material adverse effect on our results of operations, financial condition and cash flows.
Our transmission and distribution system is subject to operational, reliability and capacity risks.
The ongoing reliable performance of our transmission and distribution system is subject to risks due to, among other things, weather damage, intentional or unintentional damage, equipment or process failure, catastrophic events, such as fires and/or explosions, facility outages, labor disputes, accidents or injuries, operator error or inoperability of key infrastructure internal or external to us and events occurring on third party systems that interconnect to and affect our system. The failure of our transmission and distribution system to fully operate and deliver the energy demanded by customers could have a material adverse effect on our results of operations, financial condition and cash flows, and if such failures occur frequently and/or for extended periods of time, could result in adverse regulatory action. In addition, the advent and quick adoption of new products and services that require increased levels of electrical energy cannot be predicted and could result in insufficient transmission and distribution system capacity. Also, as a result of the above risks and other potential risks and hazards associated with transmission and distribution operations, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Further, any increased costs or adverse changes in the insurance markets may cause delays or inability in maintaining insurance coverage on terms similar to those presently available to us or at all. A successful claim for which we are not fully insured could have a material adverse effect on our results of operations, financial condition and cash flows.
Current and future conditions in the economy may adversely affect our customers, suppliers and other counterparties, which could materially and adversely affect our results of operations, financial condition and cash flows.
Our business, results of operations, financial condition and cash flows have been and will continue to be affected by general economic conditions. Slowing economic growth, credit market conditions, fluctuating consumer and business confidence, fluctuating commodity prices and other challenges currently affecting the general economy, have caused and may continue to cause some of our customers to experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing. As a result, existing customers may reduce their electricity consumption and may not be able to fulfill their payment obligations to us in a normal, timely fashion. In addition,
some existing commercial and industrial customers may discontinue their operations. Sustained downturns, recessions or a sluggish economy generally affect the markets in which we operate and negatively influence our energy operations. A contracting, slow or sluggish economy could reduce the demand for energy in areas in which we are doing business. For example, during economic downturns, our commercial and industrial customers may see a decrease in demand for their products, which in turn may lead to a decrease in the amount of energy they require. Furthermore, projects which may result in potential new customers may be delayed until economic conditions improve. Some of our suppliers, customers, other counterparties and others with whom we transact business experience financial difficulties, which may impact their ability to fulfill their obligations to us. For example, our counterparties on forward purchase contracts and financial institutions involved in our credit facility may become unable to fulfill their contractual obligations to us or result in their declaring bankruptcy or similar insolvency-like proceedings. We may not be able to enter into replacement agreements on terms as favorable as our existing agreements. Reduced demand for our electric services, failure by our customers to timely remit full payment owed to us and supply delays or unavailability could have a material adverse effect on our results of operations, financial condition and cash flows. In particular, the projected economic growth and total employment in AES Ohio’s service territory are important to the realization of our forecasts for annual energy sales.
Economic conditions relating to the asset performance and interest rates of our pension and postemployment benefit plans could materially and adversely impact our results of operations, financial condition and cash flows.
Pension costs are based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets, level of employer contributions, the expected life span of pension plan beneficiaries and the discount rate used to determine the present value of future pension obligations. Any of these assumptions could prove to be wrong, resulting in a shortfall of our pension and postemployment benefit plan assets compared to obligations under our pension and postemployment benefit plans. Further, the performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under our pension and postemployment benefit plans. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. A decline in the market value of the pension and postemployment benefit plan assets will increase the funding requirements under our pension and postemployment benefit plans if the actual asset returns do not recover these declines in value in the foreseeable future. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. We are responsible for funding any shortfall of our pension and postemployment benefit plans’ assets compared to obligations under the pension and postemployment benefit plans, and a significant increase in our pension liabilities could materially and adversely impact our results of operations, financial condition and cash flows. We are subject to the Pension Protection Act of 2006, which requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, our required contributions to these plans, at times, have increased and may increase in the future. In addition, our pension and postemployment benefit plan liabilities are sensitive to changes in interest rates. When interest rates decrease, the discounted liabilities increase benefit expense and funding requirements. Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements for the obligations related to the pension and other postemployment benefit plans. Declines in market values and increased funding requirements could have a material adverse effect on our results of operations, financial condition and cash flows.
Counterparties providing materials or services may fail to perform their obligations, which could materially and adversely impact our results of operations, financial condition and cash flows.
We enter into transactions with and rely on many counterparties in connection with our business, including for purchased power, for our capital improvements and additions and to provide professional services, such as actuarial calculations, payroll processing and various consulting services. If any of these counterparties fails to perform its obligations to us or becomes unavailable, our business plans may be materially disrupted, we may be forced to discontinue certain operations if a cost-effective alternative is not readily available or we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause delays. Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than relief provided by these mitigation provisions. Any of the foregoing could result in regulatory actions, cost overruns, delays or other losses, any of which (or a combination of which) could have a material adverse effect on our results of operations, financial condition and cash flows.
Further, our construction program calls for extensive expenditures for capital improvements and additions, including the installation of upgrades, improvements to transmission and distribution facilities, as well as other initiatives. As a result, we may engage contractors and enter into agreements to acquire necessary materials and/or obtain required construction related services. In addition, some contracts may provide for us to assume the risk of price escalation and availability of certain metals and key components. This could force us to enter into alternative arrangements at then-current market prices that may exceed our contractual prices or cause construction delays in a significant manner. It could also subject us to enforcement action by regulatory authorities to the extent that such a contractor failure resulted in a failure by AES Ohio to comply with requirements or expectations, particularly with regard to the cost of the project. If these events were to occur, we might incur losses or delays in completing construction.
The COVID-19 pandemic, or the future outbreak of any other highly infectious or contagious diseases, could impact our business and operations.
The COVID-19 pandemic has impacted global economic activity, caused significant volatility and negative pressure in financial markets and reduced the demand for energy in our service territory. In addition to reduced revenues and lower margins resulting from decreased energy demand within our service territory, we also have incurred expenses relating to COVID-19, including expenses relating to events outside of our control. In addition to contributing to economic slowdown or a recession, COVID-19 or another pandemic could have material and adverse effects on our results of operations, financial condition and cash flows due to, among other factors:
•further decline in customer demand as a result of general decline in business activity;
•further destabilization of the markets and decline in business activity negatively impacting our customer growth or the number of customers in our service territory as well as our customers’ ability to pay for our services when due (or at all);
•delay or inability in obtaining regulatory actions and outcomes that could be material to our business, including for recovery of COVID-19 related expenses and losses such as uncollectible customer amounts and the review and approval of our applications, rates and charges by the PUCO;
•difficulty accessing the capital and credit markets on favorable terms, or at all, a disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;
•negative impacts on the health of our essential personnel, especially if a significant number of them are affected, and on our operations as a result of implementing stay-at-home, quarantine and other social distancing measures;
•a deterioration in our ability to ensure business continuity during a disruption, including increased cybersecurity attacks related to the work-from-home environment;
•delays or inability to access, transport and deliver materials to our facilities due to restrictions on business operations or other factors affecting us and our third-party suppliers;
•delays or inability to access equipment or the availability of personnel to perform planned and unplanned maintenance, which can, in turn, lead to disruption in operations;
•delays or inability in achieving our financial goals, growth strategy and digital transformation; and
•delays in the implementation of expected rules and regulations.
We will continue to review and modify our plans as conditions change. Despite our efforts to manage and remedy these impacts to us, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects.
COVID-19 continues to present material uncertainty which could materially and adversely affect our transmission and distribution systems, results of operations, financial condition and cash flows. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this ‘‘Risk Factors’’ section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
Accidental improprieties and undetected errors in our internal controls and information reporting could result in the disallowance of cost recovery, noncompliant disclosure or incorrect payment processing.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP in the United States of America, laws and regulations, taxation requirements and federal securities laws and regulations in order to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with our reporting requirements under federal securities, tax and other laws and regulations and to properly process payments. We have also implemented corporate governance, internal control and accounting policies and procedures in connection with the Sarbanes-Oxley Act of 2002. Our internal controls and policies have been and continue to be closely monitored by management and our Board of Directors. While we believe these controls, policies, practices and systems are adequate to verify data integrity, unanticipated and unauthorized actions of employees, temporary lapses in internal controls due to shortfalls in oversight or resource constraints could lead to improprieties and undetected errors that could result in the disallowance of cost recovery, noncompliant disclosure and reporting or incorrect payment processing. The consequences of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
If we are unable to maintain a qualified and properly motivated workforce, it could have a material adverse effect on our results of operations, financial condition and cash flows.
One of the challenges we face is to retain a skilled, efficient and cost-effective workforce while recruiting new talent to replace losses in knowledge and skills due to resignations, terminations or retirements. This undertaking could require us to make additional financial commitments and incur increased costs. If we are unable to successfully attract and retain an appropriately qualified workforce, it could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, we have employee compensation plans that reward the performance of our employees. We seek to ensure that our compensation plans encourage acceptable levels for risk and high performance through pay mix, performance metrics and timing. We may not be able to successfully train new personnel as current workers with significant knowledge and expertise retire. We also may be unable to staff our business with qualified personnel in the event of significant absenteeism related to a pandemic illness. Excessive risk-taking by our employees to achieve performance targets, through mitigated by policies and procedures, could result in events that have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements that could adversely affect our business, results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements with employees who are members of a union. Over half of our employees are represented by a collective bargaining agreement. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreement or at the expiration of the collective bargaining agreement before a new agreement is negotiated. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.
The use of non-derivative and derivative instruments in the normal course of business could result in losses that could materially and adversely impact our results of operations, financial position and cash flows.
From time to time, we use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage financial risks. These trades are affected by a range of factors, including fluctuations in interest rates and optimization opportunities. We have attempted to manage our risk exposure by establishing and enforcing risk limits and risk management policies. Despite our efforts, however, these risk limits and management policies may not work as planned and fluctuating prices and other events could adversely affect our results of operations, financial condition and cash flows. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these instruments can involve management’s judgment or the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of some of these contracts. We could also recognize financial losses as a result of volatility in the market values of these contracts, a counterparty failing to perform or the underlying transactions which the instruments are intended to hedge failing to materialize, which could result in a material adverse effect on our results of operations, financial condition and cash flows.
Potential security breaches (including cybersecurity breaches) and terrorism risks could materially and adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our transmission, distribution and other facilities. We also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cybersecurity attacks and other causes and also may be subject to acts of sabotage and vandalism. In particular, given the importance of energy and the electric grid, there is the possibility that our systems and facilities could be targets of terrorism or acts of war, and there has been an increased focus on the U.S. energy grid that is believed to be related to the Russia/Ukraine conflict. We have implemented measures to help prevent unauthorized access to our systems and facilities, including network and system monitoring, identification and deployment of secure technologies and certain other measures to comply with mandatory regulatory reliability standards. Pursuant to NERC requirements, we have a robust cybersecurity plan in place and are subject to regular audits by an independent auditor approved by NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks and identify areas for improvement. In addition, we provide cybersecurity training for our employees and perform exercises designed to raise employee awareness of cyberrisks on a regular basis. To date, cyberattacks on our business and operations have not had a material impact on our operations or financial results. Despite these efforts, if our systems or facilities were to be breached or disabled, we may be unable to recover them in a timely manner to fulfill critical business functions, including the supply of electric services to our customers, and we could experience decreases in revenues and increases in costs that could materially and adversely affect our results of operations, financial condition and cash flows.
In the course of our business, we also store and use customer, employee and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in liability or penalties under privacy laws, negative publicity, remediation costs and potential litigation, damages, consent orders, injunctions, fines and other relief.
To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.
RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS
We may not always be able to recover our costs to deliver electricity to our retail customers. The costs we can recover and the return on capital we are permitted to earn for the most substantial part of our business are regulated and governed by the laws of Ohio and the rules, policies and procedures of the PUCO.
In Ohio, transmission and distribution businesses are regulated. Even though rate regulation is premised on full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCO will agree that all of our costs have been prudently incurred or are recoverable. There can be no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs or permitted rates of return. Accordingly, the revenue AES Ohio receives may or may not match its expenses at any given time.
Changes in or reinterpretations of, or the unexpected application of the laws, rules, policies and procedures that set or govern electric rates, permitted rates of return, rate structures, operation of a competitive bid structure to supply retail generation service to SSO customers, reliability initiatives, capital expenditures and investments and the recovery of these and other costs on a full or timely basis through rates, power market prices and the frequency and timing of rate increases, could have a material adverse effect on our results of operations, financial condition and cash flows.
Our increased costs due to renewable energy requirements may not be fully recoverable in the future.
The renewable energy standards have increased our costs and are expected to continue to increase (and could materially increase) these costs. AES Ohio is currently entitled to recover costs associated with its renewable energy compliance. If, in the future, we are unable to timely or fully recover these costs, it could have a material
adverse effect on our results of operations, financial condition and cash flows. In addition, if we were found not to be in compliance with these standards, monetary penalties could apply. These penalties are not permitted to be recovered from customers and significant penalties could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to numerous environmental laws, rules and regulations that require capital expenditures, increase our cost of operations and may expose us to environmental liabilities.
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the remediation of retired generation and other facilities, storage, handling, use, storage, disposal and transportation of coal combustion residuals and other materials, some of which may be defined as hazardous materials, the emission and discharge of hazardous and other materials or items into the environment, such as GHGs; and the health and safety of our employees. Such laws, rules and regulations can become stricter over time, and we could also become subject to additional environmental laws, rules and regulations and other requirements in the future. Environmental laws, rules and regulations also require us to comply with inspections and obtain and comply with a wide variety of environmental licenses, permits, inspections and other governmental authorizations. These laws, rules and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and other governmental authorizations from federal, state and local agencies. If we are not able to timely comply with inspections and obtain, maintain or comply with all environmental laws, rules and regulations and all licenses, permits and other government authorizations required to operate our business, then our operations could be prevented, delayed or subject to additional costs. A violation of environmental laws, rules, regulations, licenses, permits or other requirements can result in substantial fines, penalties, other sanctions, permit revocation, facility shutdowns, the imposition of stricter environmental standards and controls or other injunctive measures affecting operating assets. In addition, any actual or alleged violation of these laws, rules or regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations. AES Ohio has an ownership interest in OVEC, which operates generating stations. We generally are responsible for our respective pro rata share of expenditures for complying with environmental laws, rules, regulations, licenses, permits and other requirements at this generating station, but have limited control over the compliance measures taken by the operator. Under certain environmental laws, we could also be held strictly, jointly and severally responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to such hazardous substances or for other environmental damage.
In particular, we are subject to potentially significant remediation expenses, enforcement initiatives, private-party lawsuits and reputational risk associated with CCR, which consists of bottom ash, fly ash, boiler slag and flue gas desulfurization materials generated from burning coal generated at our formerly owned coal-fired generation plant sites. CCR currently remains onsite at OVEC's facilities, including in CCR ponds. Compliance with the CCR rule, amendments to the federal CCR rule, or other federal, state, or foreign rules or programs addressing CCR may require us to incur substantial costs. In addition, CCR, particularly with respect to its beneficial use and regulation as nonhazardous solid waste, has been the subject of interest from environmental non-governmental organizations and the media. Any of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws, rules and regulations or other environmental requirements. We cannot assure that we will be successful in defending against any claim of noncompliance. Any actual or alleged violation of these laws, rules, regulations and other requirements may require us to expend significant resources to defend against any such actual or alleged violations and expose us to unexpected costs. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1 - Business - Environmental Matters for a more comprehensive discussion of these and other environmental matters impacting us.
Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our business.
Although we have exited our generation business, our continuing operations face risks from regulatory developments related to climate change, as well as the physical impacts of climate change. At the federal, state and regional levels, policies are under development or have been developed to regulate GHG emissions. There currently is no U.S. federal legislation imposing mandatory GHG emission reductions (including for CO2) that affects
our current operations. In addition, it is likely that there will be increased focus on climate change from a President Biden administration, which may result in additional legislation and regulations regarding GHG emissions.
In December 2015, the parties to the United Nations Framework Convention on Climate Change convened for the 21st Conference of the parties and the resulting Paris Agreement established a long-term goal of keeping the increase in global average temperature well below 2°C above pre-industrial levels. We anticipate that the Paris Agreement will continue the trend toward efforts to de-carbonize the global economy. Although the U.S. was officially able to withdraw from the Paris Agreement on November 4, 2020, on January 20, 2021, President Biden began the 30-day process of rejoining the Paris Agreement, which became effective for the U.S. on February 19, 2021. In November 2022, the international community gathered in Egypt at the 27th Conference to the Parties on the UN Framework Convention on Climate Change (COP27), during which certain countries reaffirmed commitments associated with the Paris Agreement and a fund for loss and damage associated with climate change was announced.
Any existing or future international, federal, state or regional legislation or regulation of GHG emissions, to the extent directly or indirectly applicable to our electric transmission and distribution operations, could have a material adverse impact on our financial performance.
Furthermore, according to the Intergovernmental Panel on Climate Change, physical risks from climate change could include, but are not limited to, increased runoff and earlier spring peak discharge in many glacier and snow-fed rivers, warming of lakes and rivers, an increase in sea level, changes and variability in precipitation and in the intensity and frequency of extreme weather events. Physical impacts may have the potential to significantly affect our business and operations. For example, extreme weather events could result in increased downtime and operation and maintenance costs at our electric power transmission and distribution assets and facilities. Variations in weather conditions, primarily temperature and humidity, would also be expected to affect the energy needs of customers. A decrease in energy consumption could decrease our revenues. In addition, while revenues would be expected to increase if the energy consumption of customers increased, such increase could prompt the need for additional investment in generation capacity.
If any of the foregoing risks materialize, we expect our costs to increase or revenues to decrease and there could be a material adverse effect on our business and on our consolidated results of operations, financial condition, cash flows and reputation if such changes are significant. Please see Item 1 - Business - Environmental Matters for additional information of environmental matters impacting us, including those relating to regulation of GHG emissions.
If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties.
As an owner of a bulk power transmission system, AES Ohio is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. In addition, AES Ohio is subject to Ohio reliability standards and targets. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCO will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to extensive laws and local, state and federal regulation, as well as litigation and other proceedings that affect our operations and costs.
We are subject to extensive regulation at the federal, state, and local levels. For example, at the federal level, AES Ohio is regulated by the FERC and the NERC and, at the state level, by the PUCO. The regulatory power of the PUCO over AES Ohio is both comprehensive and typical of the traditional form of regulation generally imposed by state public utility commissions. We face the risk of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Ohio. AES Ohio is subject to regulation by the PUCO as to our services and facilities, the valuation of property, the construction, purchase, or lease of electric facilities, the classification of accounts, rates of depreciation, the increase or decrease in retail rates and charges, the issuance of securities and incurrence of debt, the acquisition and sale of some public utility properties or securities and certain other matters. As a result of the
Energy Policy Act of 2005 and subsequent legislation affecting the electric utility industry, we have been required to comply with rules and regulations in areas including mandatory reliability standards, cybersecurity, transmission expansion and energy efficiency. Complying with the regulatory environment to which we are subject requires us to expend a significant amount of funds and resources. The failure to comply with this regulatory environment could subject us to substantial financial costs and penalties and changes, either forced or voluntary, in the way we operate our business that could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to litigation, regulatory proceedings, administrative proceedings, audits, settlements, investigations and claims from time to time that require us to expend significant funds to address. There can be no assurance that the outcome of these matters will not have a material adverse effect on our business, results of operations, financial condition and cash flows. Asbestos and other regulated substances are, and may continue to be, present at our facilities, and we have been named as a defendant in asbestos litigation. The continued presence of asbestos and other regulated substances at these facilities could result in additional litigation being brought against us, which could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1 - Business - Regulation And Market Structure, Item 1 - Business - Environmental Matters, and Item 3 - Legal Proceedings for a summary of significant regulatory matters and legal proceedings involving us.
Tax legislation initiatives or challenges to our tax positions could adversely affect our operations and financial condition.
We are subject to the tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative measures may be enacted that could adversely affect our overall tax positions regarding income or other taxes. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these legislative measures.
In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will be sustained if challenged by relevant tax authorities and if not sustained, there could be a material adverse effect on our results of operations, financial condition and cash flows.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION
The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility, and a material change in market interest rates could adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2022, the carrying value of DPL's debt was $1,690.9 million and the carrying value of AES Ohio's debt was $832.7 million. Of AES Ohio's indebtedness, there was $705.0 million of First Mortgage Bonds as of December 31, 2022, which are secured by the pledge of substantially all of the assets of AES Ohio under the terms of AES Ohio’s First and Refunding Mortgage. DPL's revolving credit facility is also secured by a pledge of common stock that DPL owns in AES Ohio. This level of indebtedness and related security has important consequences, including:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•limiting, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.
If AES Ohio issues additional debt in the future, we will be subject to the terms of such debt agreements and be required to obtain regulatory approvals. To the extent we increase our leverage, the risks described above would also increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flows from operations may not be sufficient to repay all of the outstanding debt as it becomes due and, in that event, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt as it becomes due. Additionally, any failure to comply with covenants in the instruments governing our debt could result in an event of default thereunder. For a further discussion of our outstanding debt
obligations, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity and Note 6 - DEBT of Notes to DPL's Consolidated Financial Statements and Note 5 - DEBT of Notes to AES Ohio's Financial Statements.
DPL and AES Ohio have variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted by interest rate fluctuations. As such, any event which impacts market interest rates could have a material effect on our results of operations, financial condition and cash flows. In addition, rating agencies issue ratings on our credit and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Credit ratings also govern the collateral provisions of certain of our contracts. If rating agencies downgrade our credit ratings further, our borrowing costs would likely further increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional collateral under select contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.
We rely on access to the financial markets. General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms, or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the ability of corporations to raise capital can be negatively affected. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. Our ability to raise capital on favorable terms, or at all, can be adversely affected by unfavorable market conditions or declines in our creditworthiness, and we may be unable to access adequate funding to refinance our debt as it becomes due or finance capital expenditures. The extent of any impact will depend on several factors, including our operating cash flows, financial condition and prospects, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing, the financial condition, performance and prospects of other companies in our industry or with similar financial circumstances and other general economic and business conditions. It may also depend on the performance of credit counterparties and financial institutions with which we do business. Access to funds under our existing financing arrangements is also dependent on the ability of our counterparties to meet their financing commitments and our satisfying conditions to borrowing. Our inability to obtain financing on reasonable terms, or at all, with creditworthy counterparties could adversely affect our results of operations, financial condition and cash flows. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which would adversely impact our profitability. See Note 6 - DEBT of Notes to DPL's Consolidated Financial Statements and Note 5 - DEBT of Notes to AES Ohio's Financial Statements for information regarding indebtedness. See also Item 7A - Quantitative and Qualitative Disclosures about Market Risk for information related to market risks.
DPL is a holding company and parent of AES Ohio and other subsidiaries. DPL’s cash flow is dependent on the cash flows of AES Ohio and its other subsidiaries and their ability to pay cash to DPL.
DPL is a holding company with no material assets other than the ownership of its subsidiaries, and accordingly all cash is generated by the activities of its subsidiaries, principally AES Ohio. As such, DPL’s cash flow is largely dependent on the cash flows of AES Ohio and its ability to pay cash to DPL. The impact of the December 2019 ESP and related regulatory proceedings on AES Ohio's revenues adversely affects DPL. In addition, there are a number of other rate proceedings pending or anticipated that we cannot predict the outcome of, which could adversely affect DPL. See Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements for descriptions of AES Ohio's ESP and other regulatory proceedings. In addition, AES Ohio is regulated by the PUCO, which possesses broad oversight powers to ensure that the needs of utility customers are being met. The PUCO could impose additional restrictions on the ability of AES Ohio to distribute, loan or advance cash to DPL pursuant to these broad powers. A significant limitation on AES Ohio’s ability to pay dividends or loan or advance funds to DPL could have a material adverse effect on DPL’s results of operations, financial condition and cash flows.
Our ownership by AES subjects us to potential risks that are beyond our control.
All of AES Ohio’s common stock is owned by DPL, and DPL is an indirectly wholly owned subsidiary of AES. Due to our relationship with AES, any adverse developments and announcements concerning AES may impair our ability to access the capital markets and to otherwise conduct business. In particular, downgrades in AES’s credit ratings could result in DPL’s or AES Ohio’s credit ratings being downgraded.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B - Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2 - Properties
Information relating to our properties is contained in Note 3 - PROPERTY, PLANT AND EQUIPMENT of Notes to DPL's Consolidated Financial Statements and Note 3 - PROPERTY, PLANT AND EQUIPMENT of Notes to AES Ohio's Financial Statements.
Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio. This facility and the remainder of our material properties are owned directly by AES Ohio. These properties include our distribution service center in Dayton, Ohio, various substations and other transmission and distribution equipment and property.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.

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ITEM 3. LEGAL PROCEEDINGS
Item 3 - Legal Proceedings
In the normal course of business, we are subject to various lawsuits, actions, claims, and other proceedings. We are also from time to time involved in other reviews, investigations and proceedings by governmental and regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. We have accrued in our Financial Statements for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters (including those matters noted below), and to comply with applicable laws and regulations will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided for in our Financial Statements, cannot be reasonably determined, but could be material. For more information, see Note 2 - REGULATORY MATTERS and Note 10 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS and Note 9 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES of Notes to AES Ohio's Financial Statements.
The following additional information is incorporated by reference into this Item: information about the legal proceedings contained in Item 1 - Business - Regulation And Market Structure and Item 1 - Business - Environmental Matters.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4 - Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All of the outstanding common stock of DPL is owned indirectly by AES and directly by a wholly-owned subsidiary of AES. As a result, DPL’s stock is not listed for trading on any stock exchange. AES Ohio’s common stock is held solely by DPL and, as a result, is not listed for trading on any stock exchange.
Dividends and return of capital
During the years ended December 31, 2022, 2021 and 2020, DPL paid no dividends to AES. AES Ohio declares and pays dividends on its common shares to its parent DPL from time to time as declared by the AES Ohio Board of Directors. Return of capital payments and dividends were declared and paid in the amount of $64.0 million in the year ended December 31, 2022, declared in the amount of $42.0 million and paid in the amount of $52.0 million in the year ended December 31, 2021 and declared in the amount of $52.7 million and paid in the amount of $42.7 million in the year ended December 31, 2020.
DPL’s Amended Articles of Incorporation and the DPL Credit Agreement contain restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency is below investment grade. As of December 31, 2022, DPL did not meet these requirements. As a result, as of December 31, 2022, DPL was prohibited under its Articles of Incorporation and Credit Agreement from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).

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ITEM 6. SELECTED FINANCIAL DATA
Item 6 - Selected Financial Data
The following table presents our selected financial data, which should be read in conjunction with DPL's audited Consolidated Financial Statements and the related Notes thereto, AES Ohio's audited Financial Statements and the related Notes thereto and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The “Results of Operations” discussion in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations addresses significant fluctuations in operating data. DPL’s common stock is wholly-owned by an indirect subsidiary of AES; therefore, DPL does not report earnings or dividends on a per-share basis. Other information that management believes is important in understanding trends in our business is also included in this table. Prior period amounts have been restated to reflect discontinued operations in all periods presented. Our historical results are not necessarily indicative of our future results.
DPL
Years ended December 31,
$ in millions except per share amounts or as indicated 2022 2021 2020 2019 2018
Total electric sales (millions of kWh) 14,416 14,330 13,918 14,628 15,728
Statements of Operations Data
Revenues $ 869.0 $ 672.7 $ 660.5 $ 743.7 $ 747.3
Operating income 49.3 85.3 89.1 154.9 142.6
Income / (loss) from continuing operations (4.7) 22.9 (6.4) 51.8 36.7
Income / (loss) from discontinued operations, net of tax (a)
- (0.8) 5.4 53.6 33.4
Net income / (loss) (4.7) 22.1 (1.0) 105.4 70.1
Capital expenditures 287.3 191.3 157.3 156.5 96.1
Balance Sheet Data (end of period):
Total assets $ 2,422.4 $ 2,171.8 $ 2,036.0 $ 1,935.8 $ 1,883.1
Total long-term debt, including current portion 1,535.9 1,395.5 1,393.6 1,363.1 1,475.9
Total common shareholder's deficit (123.7) (121.4) (283.5) (371.9) (471.7)
(a)Fixed-asset impairments of $3.5 million and $2.8 million in 2019 and 2018, respectively, have been reclassified to discontinued operations.
AES Ohio
Years ended December 31,
$ in millions except per share amounts or as indicated 2022 2021 2020 2019 2018
Total electric sales (millions of kWh) 14,416 14,330 13,918 14,628 15,194
Statements of Operations Data
Revenues $ 860.1 $ 663.7 $ 652.1 $ 735.4 $ 738.7
Operating income 42.8 79.5 83.5 150.7 135.1
Net income 18.9 47.1 51.1 124.9 86.7
Capital expenditures 283.7 189.3 153.3 155.5 85.6
Balance Sheet Data (end of period):
Total assets $ 2,405.9 $ 2,162.6 $ 2,014.7 $ 1,883.2 $ 1,819.6
Total long-term debt, including current portion 712.7 574.3 574.1 574.4 586.1
Total common shareholder's equity 741.8 782.2 616.7 473.4 445.3

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with DPL’s audited Consolidated Financial Statements and the related Notes thereto and AES Ohio’s audited Financial Statements and the related Notes thereto included in Item 8 - Financial Statements and Supplementary Data of this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. See “Forward-Looking Statements” at the beginning of this Form 10-K and Item 1A - Risk Factors. For a list of certain abbreviations or acronyms in this discussion, see Glossary of Terms at the beginning of this Form 10-K.
OVERVIEW OF 2022 RESULTS AND STRATEGIC PERFORMANCE
The most important matters on which we focus in evaluating our financial condition and operating performance and allocating our resources include: (i) recurring factors which have significant impacts on operating performance such as: regulatory action, environmental matters, weather and weather-related damage in our service area, customer growth, and the local economy; (ii) our progress on performance improvement and growth strategies designed to maintain high standards in several operating areas (including safety, customer satisfaction, operations, financial and enterprise-wide performance, talent management/people, capital allocation/sustainability and corporate social responsibility) simultaneously; and (iii) our short-term and long-term financial and operating strategies. For a discussion of how we are impacted by regulation and environmental matters, please see Note 2 - REGULATORY MATTERS of the Notes to DPL's Consolidated Financial Statements, Note 2 - REGULATORY MATTERS of the Notes to AES Ohio's Financial Statements and Item 1 - Business - Environmental Matters.
Operational Excellence
Our objective is to optimize AES Ohio’s performance in the U.S. utility industry by focusing on the following areas: safety, operations (reliability and customer satisfaction), financial and enterprise-wide performance (efficiency and cost savings, talent management/people, capital allocation/sustainability and corporate social responsibility). We set and measure these objectives carefully, balancing them in a way and to a degree necessary to ensure a sustainable high level of performance in these areas simultaneously compared to our peers. We monitor our performance in these areas, and where practical and meaningful, compare performance in some areas to peer utilities. Because some of our financial and enterprise-wide performance measures are company-specific performance goals, they are not benchmarked.
Our safety performance is measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury significant injury potential incidents. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
AES Ohio measures delivery reliability by Customer Average Interruption Duration Index ("CAIDI"), System Average Interruption Duration Index ("SAIDI") and System Average Interruption Frequency Index ("SAIFI") and benchmarks the reliability metrics against other utilities at both the state and national levels. AES Ohio also measures customer centricity on more of an individual basis by the industry metric of Customers that Experience Multiple Interruption of five or more times (“CEMI-5”). We measure customer satisfaction using Research America Utilities Market Research - Consumer Insight. Monitoring performance in the areas such as competitive rates, operational reliability and customer service supports our ongoing work to deliver reliable service to our customers.
EXECUTIVE SUMMARY
The following review of results of operations compares the results for the year ended December 31, 2022 to the results for the year ended December 31, 2021. For a discussion comparing the results of operations for the year ended December 31, 2021 to the year ended December 31, 2020, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K, filed with the SEC on February 28, 2022.
DPL
Compared with the prior year, DPL's results for the year ended December 31, 2022 reflect a decrease in income / (loss) from continuing operations before income tax of $36.7 million, or 164%, primarily due to factors including, but not limited to:
$ in millions 2022 vs. 2021
Decrease due to the recognition of previously deferred OVEC costs $ (28.9)
Decrease due to higher operation and maintenance expenses (17.0)
Decrease due to higher depreciation and amortization from additional assets placed in service (3.9)
Increase due to higher transmission revenues driven by an increase in transmission rates 13.7
Increase in retail margin primarily due to higher demand 3.5
Other (4.1)
Net change in income / (loss) from continuing operations before income tax $ (36.7)
AES Ohio
Compared with the prior year, AES Ohio's results for the year ended December 31, 2022 reflect a decrease in income from continuing operations before income tax of $37.0 million, or 70%, primarily due to factors including, but not limited to:
$ in millions 2022 vs. 2021
Decrease due to the recognition of previously deferred OVEC costs $ (28.9)
Decrease due to higher operation and maintenance expenses (17.7)
Decrease due to higher depreciation and amortization from additional assets placed in service (4.1)
Increase due to higher transmission revenues driven by an increase in transmission rates 13.7
Increase in retail margin primarily due to higher demand 3.5
Other (3.5)
Net change in income from continuing operations before income tax $ (37.0)
RESULTS OF OPERATIONS - DPL
DPL’s results of operations include the results of its subsidiaries, including the consolidated results of its principal subsidiary AES Ohio. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for AES Ohio is presented elsewhere in this report.
Statement of Operations Highlights - DPL
Years ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020
$ in millions 2022 2021 2020 $ % $ %
Revenues:
Retail $ 743.6 $ 583.3 $ 586.4 $ 160.3 27% $ (3.1) (1)%
Wholesale 40.2 18.8 10.1 21.4 114% 8.7 86%
RTO ancillary 63.7 50.0 44.0 13.7 27% 6.0 14%
Capacity revenues 4.3 5.9 4.2 (1.6) (27)% 1.7 40%
Miscellaneous revenues 17.2 14.7 15.8 2.5 17% (1.1) (7)%
Total revenues 869.0 672.7 660.5 196.3 29% 12.2 2%
Operating costs and expenses:
Net fuel cost 0.1 0.5 1.7 (0.4) (80)% (1.2) (71)%
Purchased power:
Purchased power 392.6 208.0 200.7 184.6 89% 7.3 4%
RTO charges 77.6 68.3 29.9 9.3 14% 38.4 128%
Net purchased power cost 470.2 276.3 230.6 193.9 70% 45.7 20%
Operation and maintenance 184.7 152.4 181.7 32.3 21% (29.3) (16)%
Depreciation and amortization 80.0 76.1 73.3 3.9 5% 2.8 4%
Taxes other than income taxes 85.3 82.1 79.4 3.2 4% 2.7 3%
Loss / (gain) on disposal of business (0.6) - 4.7 (0.6) -% (4.7) (100)%
Total operating costs and expenses 819.7 587.4 571.4 232.3 40% 16.0 3%
Operating income 49.3 85.3 89.1 (36.0) (42)% (3.8) (4)%
Other expense, net:
Interest expense (67.8) (62.9) (71.3) (4.9) 8% 8.4 (12)%
Loss on early extinguishment of debt (0.1) - (31.7) (0.1) -% 31.7 (100)%
Other income 4.3 - 2.0 4.3 -% (2.0) (100)%
Other expense, net (63.6) (62.9) (101.0) (0.7) 1% 38.1 (38)%
Income / (loss) from continuing operations before income tax (a) $ (14.3) $ 22.4 $ (11.9) $ (36.7) (164)% $ 34.3 (288)%
(a)For purposes of discussing operating results, we present and discuss Income / (loss) from continuing operations before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.
The following review of consolidated results of operations compares the results for the year ended December 31, 2022 to the results for the year ended December 31, 2021. For discussion comparing the results for the year ended December 31, 2021 to the results for the year ended December 31, 2020, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K, filed with the SEC on February 28, 2022.
DPL - Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Additionally, our retail revenues are affected by regulated rates and riders, including the changes to our ESP, described in Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements.
Heating and Cooling Degree-days (a)
Years ended December 31,
2022 2021 change % change
Actual
Heating degree-days (a)
5,200 4,855 345 7 %
Cooling degree-days (a)
1,197 1,300 (103) (8) %
30-year average (b)
Heating-degree days 5,423 5,434
Cooling-degree days 1,013 996
(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:
ELECTRIC SALES AND CUSTOMERS (a)
DPL and AES Ohio
Years ended December 31,
2022 2021 change % change
Retail electric sales (b)
Residential 5,433 5,401 32 0.6%
Commercial 3,601 3,562 39 1.1%
Industrial 3,634 3,675 (41) (1.1)%
Governmental 1,169 1,179 (10) (0.8)%
Other 38 20 18 90.0%
Total retail electric sales 13,875 13,837 38 0.3%
Wholesale electric sales (c)
541 493 48 9.7%
Total electric sales 14,416 14,330 86 0.6%
Billed electric customers (end of period) 536,317 534,192 2,125 0.4%
(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 4,135 million kWh and 3,721 million kWh for the years ended December 31, 2022 and 2021, respectively.
(c)Wholesale electric sales are AES Ohio's 4.9% share of the generation output of OVEC.
The following graph shows the percentage changes in weather-normalized and actual retail electric sales volumes by customer class for the year ended December 31, 2022, compared to the prior year:
During the year ended December 31, 2022, Revenues increased $196.3 million to $869.0 million from $672.7 million in the same period of the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Retail
Rate
Increase in Competitive Bid Revenue Rate Rider $ 121.1
Increase due to the TCRR Rider 6.7
Increase in USF Revenue Rate Rider 5.8
Other
(0.3)
Net change in retail rate
133.3
Volume
Net increase in demand primarily due to favorable weather 27.4
Other miscellaneous (0.4)
Total retail change
160.3
Wholesale
Increase primarily due to higher rates and volumes on power sales at OVEC 21.4
RTO ancillary and capacity revenues
Increase primarily due to higher transmission formula rates 12.1
Miscellaneous revenues
Miscellaneous revenues 2.5
Net change in Revenues $ 196.3
DPL - Net Purchased Power
During the year ended December 31, 2022, Net Purchased Power increased $193.9 million compared to the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Net purchased power
Purchased power
Rate
Increase primarily due to higher prices in the competitive bid auction and recognition of previously deferred OVEC costs $ 162.4
Volume
Increase primarily due to higher retail SSO load served due to demand and increased SSO customers 22.2
Total purchased power change
184.6
RTO charges
Increase primarily due to higher TCRR rates 9.3
Net change in purchased power $ 193.9
DPL - Operation and Maintenance
During the year ended December 31, 2022, Operation and Maintenance expense increased $32.3 million compared to the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Increase in uncollectible expenses, including the SGF and low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$ 7.6
Increase in net charges from Service Company 5.0
Increase in deferred storm costs (a)
4.7
Increase in Smart Grid R&D amortization (a)
3.0
Increase in compensation and benefits expense 2.7
Increase in consulting expenses 1.3
Increase in tree trimming costs 1.2
Increase in Smart Grid stipulation amortization 0.9
Increase in provision for credit losses 0.9
Increase due to write-off of COVID-19 deferral 0.9
Increase in IT expense 0.8
Other, net 3.3
Net change in Operations and Maintenance expense $ 32.3
(a) There is corresponding revenue associated with these program costs resulting in minimal impact to Net income.
DPL - Depreciation and Amortization
During the year ended December 31, 2022, Depreciation and amortization increased $3.9 million compared to the prior year, primarily due to additional assets placed in service.
DPL - Taxes Other Than Income Taxes
During the year ended December 31, 2022, Taxes other than income taxes increased $3.2 million compared to the prior year. The increase was primarily the result of higher property taxes due to higher assessed values in the current year.
DPL - Interest Expense
During the year ended December 31, 2022, Interest expense increased $4.9 million compared to the prior year. The increase was primarily the result of the issuance of $140.0 million additional debt in the second quarter of 2022.
DPL - Other Income
During the year ended December 31, 2022, Other income increased $4.3 million compared to the prior year. The increase was primarily the result of higher allowances for equity funds used during construction due to updated rates and higher construction work in process balances and lower defined benefit plan costs due to a decrease in the amortization of net loss.
DPL - Income Tax Expense From Continuing Operations
Income tax benefit increased $9.1 million from $0.5 million in 2021 to $9.6 million in 2022. The increased benefit of $9.1 million was primarily due to a loss from continuing operations before income tax, less the reversal of excess deferred items, in the current year compared to income from continuing operations before income tax, less the reversal of excess deferred items, in the prior year.
RESULTS OF OPERATIONS BY SEGMENT - DPL
DPL manages its business through one reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segment. The Utility segment is comprised of AES Ohio, a public electric transmission and distribution utility, with all other nonutility business activities aggregated separately. See Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for further information on AES Ohio. The “Other” nonutility category primarily includes interest expense, cash and other immaterial balances. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
See Note 12 - BUSINESS SEGMENTS of Notes to DPL's Consolidated Financial Statements for additional information regarding DPL’s reportable segment.
The following table presents DPL’s Income / (loss) from continuing operations before income tax by business segment:
Years ended December 31,
$ in millions 2022 2021 2020
Utility $ 15.8 $ 52.8 $ 58.1
Other (30.1) (30.4) (70.0)
Income / (loss) from continuing operations before income tax $ (14.3) $ 22.4 $ (11.9)
Statement of Operations Highlights - DPL - Utility Segment
The results of operations of the Utility segment for DPL are identical in all material respects and for all periods presented to those of AES Ohio, which are included in Part II - (Statement of Operations Highlights - AES Ohio) of this Form 10-K.
RESULTS OF OPERATIONS - AES Ohio
Statement of Operations Highlights - AES Ohio
Years ended December 31, Change 2022 vs. 2021 Change 2021 vs. 2020
$ in millions 2022 2021 2020 $ % $ %
Revenues:
Retail $ 743.6 $ 583.3 $ 586.4 $ 160.3 27% $ (3.1) (1)%
Wholesale 41.0 19.5 11.0 21.5 110% 8.5 77%
RTO ancillary 63.6 49.9 44.0 13.7 27% 5.9 13%
Capacity revenues 4.3 5.9 4.2 (1.6) (27)% 1.7 40%
Miscellaneous revenues 7.6 5.1 6.5 2.5 49% (1.4) (22)%
Total revenues 860.1 663.7 652.1 196.4 30% 11.6 2%
Operating costs and expenses:
Net fuel cost - 0.5 1.6 (0.5) (100)% (1.1) (69)%
Purchased power:
Purchased power 392.5 208.0 200.7 184.5 89% 7.3 4%
RTO charges 76.5 67.1 28.7 9.4 14% 38.4 134%
Net purchased power cost 469.0 275.1 229.4 193.9 70% 45.7 20%
Operation and maintenance 185.1 152.1 182.0 33.0 22% (29.9) (16)%
Depreciation and amortization 78.7 74.6 71.8 4.1 5% 2.8 4%
Taxes other than income taxes 85.1 81.9 79.1 3.2 4% 2.8 4%
Loss / (gain) on disposal of business (0.6) - 4.7 (0.6) -% (4.7) (100)%
Total operating costs and expenses 817.3 584.2 568.6 233.1 40% 15.6 3%
Operating income 42.8 79.5 83.5 (36.7) (46)% (4.0) (5)%
Other expense, net:
Interest expense (28.8) (24.2) (24.3) (4.6) 19% 0.1 -%
Other income / (expense) 1.9 (2.5) (1.1) 4.4 (176)% (1.4) 127%
Other expense, net (27.0) (26.7) (25.4) (0.3) 1% (1.3) 5%
Income before income tax (a) $ 15.8 $ 52.8 $ 58.1 $ (37.0) (70)% $ (5.3) (9)%
(a)For purposes of discussing operating results, we present and discuss Income before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.
The following review of results of operations compares the results for the year ended December 31, 2022 to the results for the year ended December 31, 2021. For discussion comparing the results for the year ended December 31, 2021 to the results for the year ended December 31, 2020, see Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K, filed with the SEC on February 28, 2022.
AES Ohio - Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales demand is affected by the number of heating and cooling degree-days occurring during a year. Cooling degree-days typically have a more significant effect than heating degree-days since some residential customers do not use electricity to heat their homes. Additionally, our retail revenues are affected by regulated rates and riders, including the changes to our ESP, described in Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
During the year ended December 31, 2022, Revenues increased $196.4 million to $860.1 million from $663.7 million in the same period of the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Retail
Rate
Increase in Competitive Bid Revenue Rate Rider $ 121.1
Increase due to the TCRR Rider 6.7
Increase in USF Revenue Rate Rider 5.8
Other
(0.3)
Net change in retail rate
133.3
Volume
Net increase in demand primarily due to favorable weather 27.4
Other miscellaneous (0.4)
Total retail change
160.3
Wholesale
Increase primarily due to higher rates and volumes on power sales at OVEC 21.5
RTO ancillary and capacity revenues
Increase primarily due to higher transmission formula rates 12.1
Miscellaneous revenue
Miscellaneous revenues 2.5
Net change in Revenues $ 196.4
AES Ohio - Net Purchased Power
During the year ended December 31, 2022, Net Purchased Power increased $193.9 million compared to the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Net purchased power
Purchased power
Rate
Increase primarily due to higher prices in the competitive bid auction and recognition of previously deferred OVEC costs $ 162.3
Volume
Increase primarily due to higher retail SSO load served due to demand and increased SSO customers 22.2
Total purchased power change
184.5
RTO charges
Increase primarily due to higher TCRR rates 9.4
Net change in purchased power $ 193.9
AES Ohio - Operation and Maintenance
During the year ended December 31, 2022, Operation and Maintenance expense increased $33.0 million compared to the prior year. This increase was a result of:
$ in millions 2022 vs. 2021
Increase in uncollectible expenses, including the SGF and low-income payment program, which is funded by the USF Revenue Rate Rider (a)
$ 7.6
Increase in net charges from Service Company 5.3
Increase in compensation and benefits expense 4.8
Increase in deferred storm costs (a)
4.7
Increase in Smart Grid R&D amortization (a)
3.0
Increase in tree trimming costs 1.2
Increase in consulting expenses 1.1
Increase in Smart Grid stipulation amortization 0.9
Increase in provision for credit losses 0.9
Increase due to write-off of COVID-19 deferral 0.9
Increase in IT expense 0.8
Other, net 1.8
Net change in Operations and Maintenance expense $ 33.0
(a)There is corresponding revenue associated with these program costs resulting in minimal impact to Net income.
AES Ohio - Depreciation and Amortization
During the year ended December 31, 2022, Depreciation and amortization increased $4.1 million compared to the prior year, primarily due to additional assets placed in service.
AES Ohio - Taxes Other Than Income Taxes
During the year ended December 31, 2022, Taxes other than income taxes increased $3.2 million compared to the prior year. The increase was primarily the result of higher property taxes due to higher assessed values in the current year.
AES Ohio - Interest Expense
During the year ended December 31, 2022, Interest expense increased $4.6 million compared to the prior year. The increase was primarily the result of the issuance of $140.0 million additional debt in the second quarter of 2022.
AES Ohio - Other Income / (Expense)
During the year ended December 31, 2022, Other income / (expense) increased $4.4 million compared to the prior year. The increase was primarily the result of higher allowances for equity funds used during construction due to updated rates and higher construction work in process balances and lower defined benefit plan costs due to a decrease in the amortization of net loss.
AES Ohio - Income Tax Expense
During the year ended December 31, 2022, Income tax expense of $5.7 million in 2021 changed to benefit of $3.1 million in 2022, primarily due to a decrease in income before income tax compared to the prior year.
KEY TRENDS AND UNCERTAINTIES
During 2022 and beyond, we expect that our financial results will be driven primarily by retail demand and weather. As discussed in Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements in Item 8 - Financial Statements and Supplementary Data of this report, AES Ohio has requested PUCO approval to defer its decoupling costs consistent with the methodology approved in its distribution rate order. If approved, the deferral would be effective as of December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs and economic changes in customer demand. 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 regulations; and
•timely recovery of transmission and distribution expenditures.
Operational
COVID-19 Pandemic - The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets intermittently in the last three years. Throughout the COVID-19 pandemic we have conducted our essential operations without significant disruption. We take a variety of measures to ensure our ability to transmit, distribute and sell electric energy, to ensure the health and safety of our employees, contractors, customers and communities and to provide essential services to the communities in which we operate.
The COVID-19 pandemic primarily impacted our retail sales demand. Retail sales demand decreased in 2020 mostly from commercial and industrial customers, but it has recovered. While we continued to experience some COVID-19 impacts in 2022, such impacts have not been material nor do we expect they will be material, particularly if reduced social distancing measures and improvements in energy demand continue. The magnitude and duration of the COVID-19 pandemic is unknown at this time, however, and could have material and adverse effects on our results of operations, financial condition and cash flows in future periods. Also, see Item 1A - Risk Factors of this Annual Report on Form 10-K.
We have not had nor do we expect to have a significant impact to our access to capital or our liquidity position as a result of the COVID-19 pandemic. We also have not experienced any material credit-related impacts due to the COVID-19 pandemic but continue to monitor and manage our credit exposures in a prudent manner.
Macroeconomic and Political
U.S. Income Tax - The macroeconomic and political environments in the U.S. have changed during 2021 and 2022. 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 but do not expect to realize any benefits through our effective tax rate.
Bipartisan Infrastructure Law (Infrastructure Investment and Jobs Act) - In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act, which provides for approximately $1.2 trillion of federal spending over the next five years across the United States. The BIL’s energy-related provisions include new federal funding for power grid infrastructure and resiliency investments, new and existing energy efficiency and weatherization programs, electric vehicle infrastructure for public chargers and additional Low Income Home Energy Assistance Program funding. AES Ohio has identified potential opportunities associated with the BIL and is actively submitting concept papers and grants for those that align with our strategy going forward.
Inflation - In the markets in which we operate, there have been higher rates of inflation recently. If inflation continues to increase in our markets, 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.
Reference Rate Reform - In July 2017, the UK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In the U.S., the Alternative Reference Rate Committee at the Federal Reserve identified SOFR as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. On November 30, 2020, the ICE Benchmark Association ("IBA") announced it had begun consultation
on its intention to cease publication of two specific LIBOR rates by December 31, 2021, while extending the timeline for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates through June 30, 2023. The IBA expects to make separate announcements in this regard following the outcome of the consultation. The AES Ohio Credit Agreement has been transitioned off of LIBOR and while the DPL Credit Agreement continues to use LIBOR as the interest rate benchmark, it is expected that the DPL Credit Agreement will be retired on or before June 30, 2023.
Regulatory
For a comprehensive discussion of the market structure and regulation of DPL and AES Ohio, see Item 1 - Business - Regulation And Market Structure.
Distribution Rate Case - On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order establishes a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service, which is expected to go into effect when AES Ohio has a new electric security plan in place.
ESP 4 - On September 26, 2022, AES Ohio filed its latest ESP (ESP 4) with the PUCO. AES Ohio anticipates approval of ESP 4 in 2023.
Stipulation and Recommendation - On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio’s applications pending at the PUCO for (i) approval of AES Ohio’s plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that AES Ohio passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio’s current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. A hearing was held in January 2021 for consideration of this settlement and on June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC has appealed this decision to the Ohio Supreme Court.
For more information on the above matters, see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
As of December 31, 2022, cash, cash equivalents and restricted cash for DPL and AES Ohio was $30.6 million and $19.8 million, respectively, and available borrowing capacity at DPL and AES Ohio was $10.0 million and $130.0 million, respectively. DPL and AES Ohio had aggregate principal amounts of long-term debt outstanding of $1,552.6 million and $722.0 million, respectively, at December 31, 2022.
We depend on timely and continued access to capital markets to manage our liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty or otherwise could have material adverse effects on our financial condition and results of operations. In addition, changes in the timing of tariff increases or delays in the regulatory determinations as well as unfavorable regulatory outcomes could have a material adverse effect on our results of operations, financial condition and cash flows. See "RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS" and "RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION" in Item 1A - Risk Factors and Item 1 - Business - Regulation And Market Structure. 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.
AES Ohio must first seek approval from the PUCO to issue new stocks, bonds, notes and other evidences of indebtedness. Annually, AES Ohio must receive authority to issue and assume liability on short-term debt, not to exceed 12 months. AES Ohio received an order from the PUCO on December 14, 2022 granting authority through December 31, 2023 to, among other things, issue up to $300.0 million in aggregate principal amount of short-term indebtedness. AES Ohio must also receive authority to issue and assume liability on long-term debt, in excess of 12
months. AES Ohio last received approval in 2022 to, among other things, issue up to $140.0 million in First Mortgage Bonds. AES Ohio also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under existing debt obligations. AES Ohio does not believe such restrictions will be a limiting factor in our ability to issue debt in the ordinary course of prudent business operations.
CASH FLOWS
DPL’s financial condition, liquidity and capital requirements include the consolidated results of its principal subsidiary AES Ohio. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash Flow Analysis - DPL:
The following table summarizes the cash flows of DPL:
Years ended December 31,
$ in millions 2022 2021 2020
Net cash provided by operating activities $ 86.4 $ 116.9 $ 113.9
Net cash used in investing activities (309.9) (213.0) (185.7)
Net cash provided by financing activities 227.4 97.3 50.3
Net increase / (decrease) in cash, cash equivalents and restricted cash 3.9 1.2 (21.5)
Balance at beginning of year 26.7 25.5 47.0
Cash, cash equivalents and restricted cash at end of year $ 30.6 $ 26.7 $ 25.5
The following cash flow review compares the cash flows of DPL for the year ended December 31, 2022 to the cash flows for the year ended December 31, 2021. For discussion comparing the cash flows for the year ended December 31, 2021 to the cash flows for the year ended December 31, 2020, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K, filed with the SEC on February 28, 2022.
Fiscal year 2022 versus 2021:
DPL - Net cash from operating activities
For the years ended December 31, $ change
$ in millions 2022 2021 2022 vs. 2021
Net income / (loss) $ (4.7) $ 22.1 $ (26.8)
Depreciation and amortization 80.0 76.1 3.9
Deferred income taxes (2.0) 4.7 (6.7)
Loss on early extinguishment of debt 0.1 - 0.1
Gain on disposal and sale of business (0.6) - (0.6)
Net income / (loss), adjusted for non-cash items 72.8 102.9 (30.1)
Net change in operating assets and liabilities 13.6 14.0 (0.4)
Net cash provided by operating activities $ 86.4 $ 116.9 $ (30.5)
The net change in operating assets and liabilities for the year ended December 31, 2022 compared to the year ended December 31, 2021 was driven by the following:
$ in millions $ Change
Increase from deferred regulatory costs, net primarily due to the recognition of previously deferred OVEC costs in 2022 $ 28.1
Decrease from accounts receivable primarily due to timing of billings and collections (18.4)
Decrease from accrued taxes payable / receivable primarily due to tax payment of $17.5 million from AES in the prior year (14.8)
Other 4.7
Net change in cash from changes in operating assets and liabilities $ (0.4)
DPL - Net cash from investing activities
Net cash used in investing activities increased $96.9 million during the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by the following:
$ in millions $ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects $ (96.0)
Other (0.9)
Net change in investing activities $ (96.9)
DPL - Net cash from financing activities
Net cash provided by financing activities increased $130.1 million during the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by the following:
$ in millions $ Change
Increase due to re-issuance of tax-exempt OAQDA bonds $ 140.0
Increase due to higher net draws on revolving credit facilities 125.0
Decrease due to equity contribution from AES in the prior year (132.5)
Other (2.4)
Net change in financing activities $ 130.1
Cash Flow Analysis - AES Ohio:
Years ended December 31,
$ in millions 2022 2021 2020
Net cash provided by operating activities $ 117.6 $ 130.2 $ 91.0
Net cash used in investing activities (305.7) (205.5) (186.5)
Net cash provided by financing activities 193.4 78.0 86.0
Net increase / (decrease) in cash, cash equivalents and restricted cash 5.3 2.7 (9.5)
Balance at beginning of year 14.5 11.8 21.3
Cash, cash equivalents and restricted cash at end of year $ 19.8 $ 14.5 $ 11.8
The following cash flow review compares the cash flows of AES Ohio for the year ended December 31, 2022 to the cash flows for the year ended December 31, 2021. For discussion comparing the cash flows for the year ended December 31, 2021 to the cash flows for the year ended December 31, 2020, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2021 Annual Report on Form 10-K, filed with the SEC on February 28, 2022.
Fiscal year 2022 versus 2021:
AES Ohio - Net cash from operating activities is summarized below:
For the years ended December 31, $ change
$ in millions 2022 2021 2022 vs. 2021
Net income $ 18.9 $ 47.1 $ (28.2)
Depreciation and amortization 78.7 74.6 4.1
Deferred income taxes (2.3) 4.5 (6.8)
Loss on early extinguishment of debt 0.1 - 0.1
Gain on disposal of business (0.6) - (0.6)
Net income, adjusted for non-cash items 94.8 126.2 (31.4)
Net change in operating assets and liabilities 22.8 4.0 18.8
Net cash provided by operating activities $ 117.6 $ 130.2 $ (12.6)
The net change in operating assets and liabilities for the year ended December 31, 2022 compared to the year ended December 31, 2021 was driven by the following:
$ in millions $ Change
Increase from deferred regulatory costs, net primarily due to the recognition of previously deferred OVEC costs in 2022 $ 28.1
Decrease from accounts receivable primarily due to timing of billings and collections (18.6)
Other 9.3
Net change in cash from changes in operating assets and liabilities $ 18.8
AES Ohio - Net cash from investing activities
Net cash used in investing activities increased $100.2 million during the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by the following:
$ in millions $ Change
Higher capital expenditures due to increased spending on AES Ohio T&D projects $ (94.4)
Other (5.8)
Net change in investing activities $ (100.2)
AES Ohio - Net cash from financing activities
Net cash provided by financing activities increased $115.4 million during the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by the following:
$ in millions $ Change
Increase due to re-issuance of tax-exempt OAQDA bonds $ 140.0
Increase due to higher net draws on revolving credit facilities 140.0
Decrease due to equity contribution from DPL in the prior year (150.0)
Decrease due to higher distributions to DPL (12.0)
Other (2.6)
Net change in financing activities $ 115.4
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 December 31, 2022, DPL and AES Ohio have access to the following revolving credit agreements:
$ in millions Type Maturity Commitment Amounts available as of December 31, 2022
DPL Credit Agreement Revolving June 2023 $ 45.0 $ 10.0
AES Ohio Credit Agreement
Revolving December 2027 250.0 130.0
$ 295.0 $ 140.0
As of December 31, 2022 and 2021, DPL had $35.0 million and $65.0 million in outstanding borrowings on the agreement, respectively. For more information on the DPL Credit Agreement, see Note 6 - DEBT of Notes to DPL's Consolidated Financial Statements.
As of December 31, 2022 and 2021, AES Ohio had $120.0 million and $0.0 million in outstanding borrowings on the agreement, respectively. For more information on the AES Ohio Credit Agreement, see Note 5 - DEBT of Notes to AES Ohio's Financial Statements.
Capital Requirements
Our capital expenditure program, including development and permitting costs, for the three-year period from 2023 through 2025 is currently estimated to cost approximately $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 $ 146.0 $ 192.0 $ 201.0 $ 539.0
Transmission-related additions and improvements 156.0 192.0 140.0 488.0
Smart Grid Plan improvements and additions 75.0 66.0 51.0 192.0
Other 20.0 6.0 4.0 30.0
Total for AES Ohio 397.0 456.0 396.0 1,249.0
Other subsidiaries 5.0 3.0 2.0 10.0
Total for DPL $ 402.0 $ 459.0 $ 398.0 $ 1,259.0
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 successful regulatory outcomes in pending proceedings. See Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements for more information.
AES Ohio is subject to the mandatory reliability standards of NERC and ReliabilityFirst Corporation, one of the six NERC regions, of which AES Ohio is a member. 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.
Debt Covenants
For information regarding our long-term debt covenants, see Note 6 - DEBT of Notes to DPL's Consolidated Financial Statements and Note 5 - DEBT of Notes to AES Ohio's Financial Statements.
Credit Ratings
Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rates on DPL’s Credit Agreement and AES Ohio’s Credit Agreement (as well as the amount of certain other fees in the agreements) are dependent upon the credit ratings of DPL and AES Ohio. Downgrades in the credit ratings of AES could result in DPL's or AES Ohio’s credit ratings being downgraded. Any reduction in our debt or credit ratings may adversely affect the trading price of our outstanding debt securities. Non-investment grade companies may experience higher costs to issue new securities.
The following table presents the debt ratings and credit ratings (issuer/corporate rating) and outlook for DPL and AES Ohio.
Debt Ratings DPL AES Ohio
Outlook
Fitch Ratings BB (a)
BBB+ (b)
Stable
Moody's Investors Service, Inc. Ba1 (a)
A3 (b)
Negative
Standard & Poor's Financial Services LLC BB (a)
BBB (b)
Negative
Credit ratings DPL AES Ohio Outlook
Fitch Ratings BB BBB- Stable
Moody's Investors Service, Inc. Ba1 Baa2 Negative
Standard & Poor's Financial Services LLC BB BB Negative
(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.
Off-Balance Sheet Arrangements
AES Ohio owns a 4.9% equity ownership interest in OVEC which is recorded using the cost method of accounting under GAAP. At December 31, 2022, AES Ohio could be responsible for the repayment of 4.9%, or $53.9 million, of a $1,100.0 million debt obligation comprised of both fixed and variable rate securities with maturities between 2026 and 2040. This would only happen if OVEC defaulted on its debt payments. At December 31, 2022, we have no knowledge of such a default.
Commercial Commitments and Contractual Obligations
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2022, these include:
Payments due in:
$ in millions Total Less than
1 year 2 - 3
years 4 - 5
years More than
5 years
DPL:
Long-term debt $ 1,552.6 $ 0.2 $ 415.4 $ 140.4 $ 996.6
Interest payments 729.5 63.6 118.7 89.5 457.7
Electricity purchase commitments 599.7 420.9 178.8 - -
Purchase orders and other contractual obligations 320.2 255.0 65.2 - -
Total contractual obligations $ 3,202.0 $ 739.7 $ 778.1 $ 229.9 $ 1,454.3
Payments due in:
$ in millions Total Less than
1 year 2 - 3
years 4 - 5
years More than
5 years
AES Ohio:
Long-term debt $ 722.0 $ 0.2 $ 0.4 $ 140.4 $ 581.0
Interest payments 566.2 27.8 55.6 52.2 430.6
Electricity purchase commitments 599.7 420.9 178.8 - -
Purchase orders and other contractual obligations 315.9 250.8 65.1 - -
Total contractual obligations $ 2,203.8 $ 699.7 $ 299.9 $ 192.6 $ 1,011.6
Long-term debt:
DPL’s Long-term debt at December 31, 2022 consists of DPL’s unsecured notes and Capital Trust II securities, along with AES Ohio’s First Mortgage Bonds and the WPAFB note. These long-term debt amounts include current maturities but exclude unamortized debt discounts, premiums and fair value adjustments.
AES Ohio’s Long-term debt at December 31, 2022 consists of its First Mortgage Bonds and the WPAFB note. These long-term debt amounts include current maturities but exclude unamortized debt discounts.
See Note 6 - DEBT of the Notes to DPL's Consolidated Financial Statements and Note 5 - DEBT of the Notes to AES Ohio's Financial Statements.
Interest payments:
Interest payments are associated with the long-term debt described above. The interest payments relating to variable-rate debt are projected using the interest rates in effect at December 31, 2022.
Electricity purchase commitments:
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2022, DPL and AES Ohio had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DPL's and AES Ohio's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above. This table also does not include:
•regulatory liabilities (see Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements);
•taxes (see Note 7 - INCOME TAXES of Notes to DPL's Consolidated Financial Statements and Note 6 - INCOME TAXES of Notes to AES Ohio's Financial Statements);
•pension and other postretirement employee benefit liabilities (see Note 8 - BENEFIT PLANS of Notes to DPL's Consolidated Financial Statements and Note 7 - BENEFIT PLANS of Notes to AES Ohio's Financial Statements);
•contingencies (see Note 10 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES of Notes to DPL's Consolidated Financial Statements and Note 9 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES of Notes to AES Ohio's Financial Statements); and
•amounts due to related parties (see Note 11 - RELATED PARTY TRANSACTIONS of Notes to DPL's Consolidated Financial Statements and Note 10 - RELATED PARTY TRANSACTIONS of Notes to AES Ohio's Financial Statements).
Reserve for uncertain tax positions:
Due to the uncertainty regarding the timing of future cash outflows associated with our unrecognized tax benefits of $0.4 million at December 31, 2022, we are unable to make a reliable estimate of the periods of cash settlement with the respective tax authorities and have not included such amounts in the contractual obligations table above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
DPL’s Consolidated Financial Statements and AES Ohio’s Financial Statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, our management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on our historical experience and assumptions that we believe to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Our significant accounting policies are described in Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to DPL's Consolidated Financial Statements and Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to AES Ohio's Financial Statements.
Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Historically, however, recorded estimates have not differed materially from actual results. Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of allowances for deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
Revenue Recognition (including Unbilled Revenues)
At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenues is accrued. In making our estimates of unbilled revenues, we use complex models that consider various factors including known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. The effect on 2022 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 2022 is immaterial. For further information regarding the nature of our revenue streams and our critical accounting policies affecting revenue recognition, see Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and Note 13 - REVENUES of Notes to DPL's Consolidated Financial Statements and Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and Note 11 - REVENUES of Notes to AES Ohio's Financial Statements.
Income Taxes
We are subject to federal and state income taxes. Our income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the potential outcome of tax examinations when determining the adequacy of our income tax provisions by considering the technical merits of the filing position, case law and results of previous tax examinations. Accounting guidance for uncertainty in income taxes prescribes a more-likely-than-not
recognition threshold and measurement requirements for financial statement reporting of our income tax positions. Tax reserves have been established which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While we believe that the amount of the tax reserves is reasonable, it is possible that the ultimate outcome of current or future examinations may be materially different than the reserve amounts.
Regulatory Assets and Liabilities
Application of the provisions of GAAP relating to regulatory accounting requires us to reflect the effect of rate regulation in DPL’s Consolidated Financial Statements and AES Ohio’s Financial Statements. For regulated businesses subject to federal or state cost-of-service rate regulation, regulatory practices that assign costs to accounting periods may differ from accounting methods generally applied by non-regulated companies. When it is probable that regulators will permit the recovery of current costs through future rates charged to customers, we defer these costs as Regulatory assets that otherwise would be expensed by non-regulated companies. Likewise, we recognize Regulatory liabilities when it is probable that regulators will require customer refunds through future rates and when revenue is collected from customers for expenses that are not yet incurred. Regulatory assets are amortized into expense and Regulatory liabilities are amortized into income over the recovery period authorized by the regulator.
We evaluate our Regulatory assets to determine whether or not they are probable of recovery through future rates and make various assumptions in our analyses. The expectations of future recovery are generally based on orders issued by regulatory commissions or historical experience, as well as discussions with applicable regulatory authorities. If recovery of a regulatory asset is determined to be less than probable, it will be expensed in the period the assessment is made. We currently believe the recovery of our Regulatory assets is probable. See Note 2 - REGULATORY MATTERS of Notes to DPL's Consolidated Financial Statements and Note 2 - REGULATORY MATTERS of Notes to AES Ohio's Financial Statements.
Pension Plans
The valuation of our benefit obligation, fair value of plan assets, and net periodic benefit costs requires various estimates and assumptions, the most significant of which include the discount rate and expected return on plan assets. We review these and other assumptions, such as mortality, on an annual basis. See Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to DPL's Consolidated Financial Statements and Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to AES Ohio's Financial Statements for information on our accounting policies regarding the Pension Plans.
Contingent and Other Obligations
During the conduct of our business, we are subject to a number of federal and state laws and regulations, as well as other factors and conditions that potentially subject us to environmental, litigation, insurance and other risks. We periodically evaluate our exposure to such risks and record estimated liabilities for those matters where a loss is considered probable and reasonably estimable in accordance with GAAP. In recording such estimated liabilities, we may make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to contingent and other obligations. These assumptions and estimates are based on historical experience and assumptions and may be subject to change. We believe such estimates and assumptions are reasonable.
Recently Issued Accounting Pronouncements
A discussion of recently issued accounting pronouncements is in Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to DPL's Consolidated Financial Statements and Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES of Notes to AES Ohio's Financial Statements and such discussion is incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.
LEGAL AND OTHER MATTERS
Discussions of legal and other matters are provided in Item 1 - Business - Environmental Matters, Item 1 - Business - Regulation And Market Structure and Item 3 - Legal Proceedings. Such discussions are incorporated by reference in this Management's Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
Overview
We are subject to certain market risks including, but not limited to, changes in commodity prices for electricity and fluctuations in interest rates. We use various market risk-sensitive instruments, including derivative contracts, primarily to limit our exposure to fluctuations in interest rates. Our U.S. Risk Management Committee (U.S. RMC), comprised of members of senior management, is responsible for establishing risk management policies and the monitoring and reporting of risk exposures related to our operations. The U.S. RMC meets on a regular basis with the objective of identifying, assessing and quantifying material risk issues and developing strategies to manage these risks.
The disclosures presented in this section are based upon a number of assumptions; actual effects may differ. The safe harbor provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 shall apply to the disclosures contained in this section. For further information regarding market risk, see Item 1A - Risk Factors. Our businesses may incur substantial costs and liabilities and be exposed to price volatility as a result of risks associated with the electricity markets, which could have a material adverse effect on our financial performance; and we may not be adequately hedged against our exposure to changes in interest rates.
Purchased power costs
AES Ohio conducts competitive bid auctions to purchase power for SSO service, as all of AES Ohio's SSO is sourced through the competitive bid auction.
As a result of DPL's exit from the majority of its coal-fired generation, changes in the prices of fuel and purchased power are not expected to have a material impact on our results of operations, financial position or cash flows. Further, AES Ohio's exposure to fluctuations in the price of power is limited because we recover our power purchased from the competitive bid auction through the Standard Offer Rate tariff.
Interest rate risk
We use long-term debt as a significant source of capital in our business, which exposes us to interest rate risk. We do not enter into market risk sensitive instruments for trading purposes. We manage our exposure to interest rate risk through the use of fixed-rate debt and by refinancing existing long-term debt at times when it is deemed economic and prudent. In regard to our fixed rate debt, the interest rate risk with respect to long-term debt primarily relates to the potential impact a change in interest rates has on the fair value of our fixed-rate debt and not on our financial condition or results of operations. Our interest rate risk on our fixed-rate debt is associated with refinancing activity. Market indexes can be affected by market demand, supply, market interest rates and other economic conditions. See Note 6 - DEBT of Notes to DPL's Consolidated Financial Statements and Note 5 - DEBT of Notes to AES Ohio's Financial Statements.
At December 31, 2022, DPL's variable rate debt totaled $155.0 million, consisting of $35.0 million under DPL's revolving credit facility and $120.0 million under AES Ohio's revolving credit facility. At December 31, 2022, a 100-basis point change in the applicable rates on our variable-rate debt would result in an approximate $1.6 million change in DPL's interest expense and an approximate $1.2 million change in AES Ohio's interest expense.
The principal amount of DPL’s long-term debt was $1,552.6 million at December 31, 2022, consisting of DPL’s unsecured notes, Capital Trust II securities along with AES Ohio’s First Mortgage Bonds and the WPAFB note. All of DPL’s existing debt was adjusted to fair value at the Merger date according to ASC 805 - Business Combinations. The fair value of this debt at December 31, 2022 was $1,393.4 million, based on current market prices or
discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DPL’s debt obligations that are subject to refinancing risk:
DPL Years ending December 31, Principal amount at December 31, Fair value at December 31,
$ in millions 2023 2024 2025 2026 2027 Thereafter 2022 2022
Long-term debt
Fixed-rate debt $ 0.2 $ 0.2 $ 415.2 $ 0.2 $ 140.2 $ 996.6 1,552.6 1,393.4
Average interest rate 4.2% 4.2% 4.1% 4.2% 4.2% 4.1%
Total $ 1,552.6 $ 1,393.4
The principal amount of AES Ohio’s long-term debt was $722.0 million at December 31, 2022, consisting of its First Mortgage Bonds and the WPAFB note. The fair value of this debt at December 31, 2022 was $627.9 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about AES Ohio’s debt obligations that are subject to refinancing risk.
AES Ohio
Years ending December 31, Principal amount at December 31, Fair value at December 31,
$ in millions 2023 2024 2025 2026 2027 Thereafter 2022 2022
Long-term debt
Fixed-rate debt $ 0.2 $ 0.2 $ 0.2 $ 0.2 $ 140.2 $ 581.0 722.0 627.9
Average interest rate 4.2% 4.2% 4.2% 4.2% 4.2% 3.8%
Total $ 722.0 $ 627.9
Equity price risk
At December 31, 2022, approximately 32% of the defined benefit pension plan assets were comprised of investments in equity securities and 68% related to investments in fixed income securities, cash and cash equivalents and alternative investments. The equity securities are carried at their market value of approximately $88.5 million at December 31, 2022. A hypothetical 10% decrease in prices quoted by stock exchanges would result in a $8.9 million reduction in fair value at December 31, 2022 and approximately a $1.2 million increase to the 2023 pension expense. See Note 8 - BENEFIT PLANS of Notes to DPL's Consolidated Financial Statements and Note 7 - BENEFIT PLANS of Notes to AES Ohio's Financial Statements for more information on our pension plans.
Credit risk
Credit risk is the risk of an obligor's failure to meet the terms of any investment contract, loan agreement or otherwise perform as agreed. Credit risk arises from all activities in which success depends on issuer, borrower or counterparty performance, whether reflected on or off the balance sheet. We limit our credit risk by assessing the creditworthiness of potential counterparties before entering into transactions with them and continue to evaluate their creditworthiness after transactions have been originated. We use the three leading corporate credit rating agencies and other current market-based qualitative and quantitative data to assess the financial strength of counterparties on an ongoing basis. We may require various forms of credit assurance from counterparties to mitigate credit risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 - Financial Statements and Supplementary Data
This report includes the combined filing of DPL and DP&L. Throughout this report, the terms “we,” “us,” “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.
FINANCIAL STATEMENTS
DPL Inc.
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of DPL Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DPL Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income / (loss), shareholder’s deficit and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Board of Directors and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Regulatory Accounting
Description of the Matter As described in Note 2 to the consolidated financial statements, the Company applies the provisions of FASB Accounting Standards Codification 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the Public Utilities Commission of Ohio and the Federal Energy Regulatory Commission. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous overcollections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple consolidated financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; revenues; and depreciation expense, and related disclosures in the Company’s consolidated financial statements.
Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the consolidated financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred through December 31, 2022, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the consolidated financial statements and related disclosures.
How We Addressed the Matter in Our Audit To evaluate the Company’s significant judgments in accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2011.
Indianapolis, Indiana
March 1, 2023
DPL INC.
Consolidated Statements of Operations
Years ended December 31,
$ in millions 2022 2021 2020
Revenues $ 869.0 $ 672.7 $ 660.5
Operating costs and expenses
Net fuel cost 0.1 0.5 1.7
Net purchased power cost 470.2 276.3 230.6
Operation and maintenance 184.7 152.4 181.7
Depreciation and amortization 80.0 76.1 73.3
Taxes other than income taxes 85.3 82.1 79.4
Loss / (gain) on disposal of business (Note 15) (0.6) - 4.7
Total operating costs and expenses 819.7 587.4 571.4
Operating income 49.3 85.3 89.1
Other income / (expense), net
Interest expense (67.8) (62.9) (71.3)
Loss on early extinguishment of debt (0.1) - (31.7)
Other income 4.3 - 2.0
Other expense, net (63.6) (62.9) (101.0)
Income / (loss) from continuing operations before income tax (14.3) 22.4 (11.9)
Income tax benefit from continuing operations (9.6) (0.5) (5.5)
Net income / (loss) from continuing operations (4.7) 22.9 (6.4)
Discontinued operations (Note 14)
Loss from discontinued operations before income tax - (1.0) (0.6)
Gain from disposal of discontinued operations - - 6.1
Income tax expense / (benefit) from discontinued operations - (0.2) 0.1
Net income / (loss) from discontinued operations - (0.8) 5.4
Net income / (loss) $ (4.7) $ 22.1 $ (1.0)
See Notes to Consolidated Financial Statements.
DPL INC.
Consolidated Statements of Comprehensive Income / (Loss)
Years ended December 31,
$ in millions 2022 2021 2020
Net income / (loss) $ (4.7) $ 22.1 $ (1.0)
Derivative activity:
Reclassification to earnings, net of income tax effect of $0.2, $0.2 and $0.2 for each respective period
(0.8) (0.8) (0.9)
Unfunded pension and other postretirement activity:
Prior service cost for the period, net of income tax effect of $0.0, $0.0 and $0.0 for each respective period
0.1 - -
Net gain / (loss) for the period, net of income tax effect of $(0.7), $(1.8) and $2.6 for each respective period
2.1 6.4 (8.8)
Reclassification to earnings, net of income tax effect of $(0.3), $(0.6) and $(0.3) for each respective period
1.0 1.9 1.0
Net change in unfunded pension and other postretirement obligations 3.2 8.3 (7.8)
Other comprehensive income / (loss) 2.4 7.5 (8.7)
Net comprehensive income / (loss) $ (2.3) $ 29.6 $ (9.7)
DPL INC.
Consolidated Balance Sheets
$ in millions December 31, 2022 December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents $ 30.5 $ 26.6
Accounts receivable, net of allowance for credit losses of $0.5 and $0.3, respectively (Note 1)
91.9 71.5
Inventories 26.8 14.4
Taxes applicable to subsequent years 94.0 83.1
Regulatory assets, current (Note 2) 39.2 24.5
Taxes receivable 10.9 2.7
Prepayments and other current assets 3.9 7.6
Total current assets 297.2 230.4
Property, plant and equipment:
Property, plant and equipment (Note 3) 2,193.6 1,990.4
Less: Accumulated depreciation and amortization (505.7) (464.0)
1,687.9 1,526.4
Construction work in process 197.1 174.4
Total net property, plant and equipment 1,885.0 1,700.8
Other non-current assets:
Regulatory assets, non-current (Note 2) 129.8 176.8
Intangible assets, net of amortization 70.1 33.7
Other non-current assets 40.3 30.1
Total other non-current assets 240.2 240.6
Total assets $ 2,422.4 $ 2,171.8
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term and current portion of long-term debt (Note 6) $ 155.2 $ 65.2
Accounts payable 129.5 111.0
Accrued taxes 88.4 85.1
Accrued interest 16.1 15.3
Customer deposits 16.7 15.0
Regulatory liabilities, current (Note 2) 40.4 14.6
Accrued and other current liabilities 20.9 17.1
Total current liabilities 467.2 323.3
Non-current liabilities:
Long-term debt (Note 6) 1,535.7 1,395.3
Deferred income taxes (Note 7) 199.0 187.9
Taxes payable 94.5 83.6
Regulatory liabilities, non-current (Note 2) 198.7 229.3
Accrued pension and other postretirement obligations (Note 8) 41.8 62.3
Other non-current liabilities 9.2 11.5
Total non-current liabilities 2,078.9 1,969.9
Commitments and contingencies (Note 10)
Common shareholder's deficit:
Common stock:
1,500 shares authorized; 1 share issued and outstanding
at December 31, 2022 and 2021 - -
Other paid-in capital 2,601.3 2,601.3
Accumulated other comprehensive loss (2.4) (4.8)
Accumulated deficit (2,722.6) (2,717.9)
Total common shareholder's deficit: (123.7) (121.4)
Total liabilities and shareholder's deficit $ 2,422.4 $ 2,171.8
See Notes to Consolidated Financial Statements.
DPL INC.
Consolidated Statements of Cash Flows
Years ended December 31,
$ in millions 2022 2021 2020
Cash flows from operating activities:
Net income / (loss) $ (4.7) $ 22.1 $ (1.0)
Adjustments to reconcile Net income / (loss) to Net cash from operating activities
Depreciation and amortization 80.0 76.1 73.6
Deferred income taxes (2.0) 4.7 39.8
Loss on early extinguishment of debt 0.1 - 31.7
Gain on disposal and sale of business, net (0.6) - (1.4)
Changes in certain assets and liabilities:
Accounts receivable, net (20.4) (2.0) 11.2
Inventories (12.5) (5.5) 4.9
Taxes applicable to subsequent years (10.9) (5.2) (0.2)
Deferred regulatory costs, net 38.4 10.3 (34.0)
Other non-current assets 5.8 (4.0) (2.3)
Accounts payable 14.0 15.7 (10.1)
Accrued taxes payable / receivable 5.8 20.6 8.0
Accrued interest 0.8 (0.7) 4.6
Accrued pension and other postretirement obligations (11.4) (12.2) (11.8)
Other 4.0 (3.0) 0.9
Net cash provided by operating activities 86.4 116.9 113.9
Cash flows from investing activities:
Capital expenditures (287.3) (191.3) (157.3)
Cost of removal payments (22.4) (17.2) (25.5)
Proceeds from disposal and sale of business interests 0.5 - 1.6
Payments on disposal and sale of business interests (0.6) (3.9) (8.9)
Proceeds from sale of property - - 5.1
Other investing activities, net (0.1) (0.6) (0.7)
Net cash used in investing activities (309.9) (213.0) (185.7)
Cash flows from financing activities:
Payments of deferred financing costs (2.6) (0.2) (7.8)
Retirement of debt - - (550.8)
Issuance of long-term debt 140.0 - 555.0
Borrowings from revolving credit facilities 255.0 120.0 185.0
Repayment of borrowings from revolving credit facilities (165.0) (155.0) (229.0)
Equity contribution from parent - 132.5 98.0
Other financing activities, net - - (0.1)
Net cash provided by financing activities 227.4 97.3 50.3
Cash, cash equivalents and restricted cash: .
Net increase / (decrease) in cash, cash equivalents and restricted cash 3.9 1.2 (21.5)
Balance at beginning of year 26.7 25.5 47.0
Cash, cash equivalents and restricted cash at end of year $ 30.6 $ 26.7 $ 25.5
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 62.0 $ 59.3 $ 67.8
Income taxes refunded, net $ - $ (17.5) $ (51.9)
Non-cash financing and investing activities:
Accruals for capital expenditures $ 47.0 $ 42.6 $ 31.7
Accruals from sale of business $ - $ - $ 2.2
See Notes to Consolidated Financial Statements.
DPL INC.
Consolidated Statements of Shareholder's Deficit
Common Stock (a)
$ in millions Outstanding Shares Amount Other
Paid-in
Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total
Year ended December 31, 2020
Beginning balance 1 $ - $ 2,370.7 $ (3.6) $ (2,739.0) $ (371.9)
Net loss (1.0) (1.0)
Other comprehensive loss (8.7) (8.7)
Equity contribution from parent 98.0 98.0
Other 0.1 0.1
Ending balance 1 - 2,468.8 (12.3) (2,740.0) (283.5)
Year ended December 31, 2021
Net income 22.1 22.1
Other comprehensive income 7.5 7.5
Equity contribution from parent 132.5 132.5
Ending balance 1 - 2,601.3 (4.8) (2,717.9) (121.4)
Year ended December 31, 2022
Net loss (4.7) (4.7)
Other comprehensive income 2.4 2.4
Ending balance 1 $ - $ 2,601.3 $ (2.4) $ (2,722.6) $ (123.7)
(a)1,500 shares authorized.
See Notes to Consolidated Financial Statements.
DPL Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2022, 2021 and 2020
1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DPL, an indirectly wholly-owned subsidiary of AES, is a diversified regional energy company organized in 1985 under the laws of Ohio. DPL owns all of the outstanding common stock of DP&L, which does business as AES Ohio. Substantially all of DPL’s business consists of transmitting, distributing and selling of electric energy conducted through its principal subsidiary, AES Ohio. The terms “we”, “us”, “our” and “ours” are used to refer to DPL and its subsidiaries.
AES Ohio is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation service; however, transmission and distribution services are still regulated. AES Ohio has the exclusive right to provide such service to its approximately 536,000 customers located in West Central Ohio. AES Ohio provides retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 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 owned interests in the retired Hutchings Coal Station until its transfer in 2020 and currently owns numerous transmission facilities. Principal industries located in AES Ohio’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. 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 also sells its proportional share of energy and capacity from its investment in OVEC into the wholesale market.
DPL’s other primary subsidiaries are MVIC and Miami Valley Lighting. MVIC is our captive insurance company that provides insurance services to AES Ohio and our other subsidiaries, and Miami Valley Lighting provides street and outdoor lighting services to customers in the Dayton region. In prior periods, AES Ohio Generation was also a primary subsidiary and sold all of its energy and capacity into the wholesale market. AES Ohio Generation retired its only remaining operating asset in May 2020 and sold it in June 2020. See Note 14 - DISCONTINUED OPERATIONS for additional information. DPL's subsidiaries are all wholly-owned.
DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders.
Financial Statement Presentation
We prepare Consolidated Financial Statements for DPL. DPL’s Consolidated Financial Statements include the accounts of DPL and its wholly-owned subsidiaries except for DPL Capital Trust II, which is not consolidated consistent with the provisions of GAAP. All material intercompany accounts and transactions are eliminated in consolidation. We have evaluated subsequent events through the date this report is issued. Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of 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 revenues 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 revenues; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents.
Restricted Cash
Restricted cash includes cash which is restricted as to withdrawal or usage. The restrictions relate to cash required for certain balance requirements.
The following table summarizes cash, cash equivalents and restricted cash amounts reported within the Consolidated Balance Sheets that reconcile to the total of such amounts as shown on the Consolidated Statements of Cash Flows:
December 31,
$ in millions 2022 2021
Cash and cash equivalents $ 30.5 $ 26.6
Restricted cash (included in Prepayments and other current assets)
0.1 0.1
Cash, Cash Equivalents and Restricted Cash, End of Period $ 30.6 $ 26.7
Accounts Receivable and Allowance for Credit Losses
The following table summarizes accounts receivable as of December 31, 2022 and 2021:
December 31,
$ in millions 2022 2021
Accounts receivable, net
Customer receivables $ 61.3 $ 42.3
Unbilled revenues 24.0 19.2
Amounts due from affiliates 3.2 3.1
Other 3.9 7.2
Allowance for credit losses (0.5) (0.3)
Total accounts receivable, net $ 91.9 $ 71.5
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the years ended December 31, 2022 and 2021:
$ in millions Beginning Allowance Balance Current Period Provision Write-offs Charged Against Allowance Recoveries Collected Ending Allowance Balance
2022 $ 0.3 $ 2.5 $ (4.1) $ 1.8 $ 0.5
2021 $ 2.8 $ (0.4) $ (3.5) $ 1.4 $ 0.3
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions are expected to impact collectability. Amounts are written off when reasonable collections efforts have been exhausted.
Inventories
Inventories are carried at average cost, net of reserves, and consist of materials and supplies used for utility operations.
Regulatory Accounting
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 revenues collected for costs that AES Ohio expects to incur in the future.
The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific orders from the PUCO or the FERC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Our regulatory assets and liabilities have been created pursuant to a specific order of the PUCO or the FERC or established regulatory practices, such as other utilities under the jurisdiction of the PUCO or the FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to approval by the PUCO or the FERC. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 2 - REGULATORY MATTERS for more information.
Property, Plant and Equipment
New property, plant and equipment additions are stated at cost. For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and AFUDC. AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $7.2 million, $3.7 million and $3.0 million in the years ended December 31, 2022, 2021 and 2020, respectively.
For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization, consistent with composite depreciation practices.
Impairment of Long-lived Assets
GAAP requires that we test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The net book value of our property, plant, and equipment was $1,885.0 million and $1,700.8 million as of December 31, 2022 and 2021, respectively. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and distribution capacity of the assets; the expected ability to recover additional expenditures in the assets; and the anticipated demand and relative pricing of retail electricity in our service territory.
Depreciation
Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For DPL’s transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates that approximated 3.3% in 2022, 3.7% in 2021 and 3.8% in 2020. Depreciation expense was $76.7 million, $72.9 million and $70.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. Depreciation and amortization expense in the Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
Intangibles
Intangibles include software and renewable energy credits. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired. Finite-lived intangible assets include capitalized software amortized over its estimated useful lives. These capitalized software intangible assets have a seven year-weighted average amortization period. The following table presents the cost and related accumulated amortization
of capitalized software, the related amortization expense is included in Depreciation and amortization in the Consolidated Statements of Operations, and the estimated future amortization:
December 31,
$ in millions 2022 2021
Capitalized software $ 105.0 $ 64.9
Accumulated amortization $ (36.1) $ (33.1)
Years ended December 31,
2022 2021 2020
Amortization expense $ 3.3 $ 3.2 $ 3.3
Estimated future amortization
Years ending December 31,
2023 $ 2.8
2024 2.8
2025 2.4
2026 2.0
2027 1.1
Total $ 11.1
Implementation Costs Related to Software as a Service
DPL has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $12.5 million and $8.0 million as of December 31, 2022 and 2021, respectively, and these are recorded within Other non-current assets on the accompanying Consolidated Balance Sheets.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and presented as a direct reduction from the face amount of that debt and amortized over the related financing period using the effective interest method. Debt issuance costs related to a line-of-credit or revolving credit facility are deferred and presented as an asset and amortized over the related financing period. Make-whole payments in connection with early debt retirements are classified as cash flows used in financing activities.
Financial Instruments
Our Master Trust investments in debt and equity financial instruments of publicly traded entities are classified as equity investments. These equity securities are carried at fair value and unrealized gains and losses on these securities are recorded in Other income. As these financial instruments are held to be used for the benefit of employees or former employees participating in employee benefit plans and are not used for general operating purposes, they are classified as non-current in Other non-current assets on the Consolidated Balance Sheets. See
Note 4 - FAIR VALUE for additional information.
Financial Derivatives
We have contracts involving the physical delivery of energy. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815 - Derivatives and Hedging, we have elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
We have, in the past, used interest rate hedges to manage the interest rate risk of our variable rate debt. We used cash flow hedge accounting when the hedge or a portion of the hedge was deemed to be highly effective, which resulted in changes in fair value being recorded within accumulated other comprehensive loss, a component of shareholder’s deficit. We elected not to offset net derivative positions in the consolidated financial statements. Accordingly, we did not offset such derivative positions against the fair value of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting agreements. See Note 5 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for additional information.
Accumulated other comprehensive loss
The amounts reclassified out of Accumulated other comprehensive loss by component during the years ended December 31, 2022, 2021 and 2020 are as follows:
Details about AOCL Components Affected line in the Consolidated Statements of Operations Years ended December 31,
$ in millions 2022 2021 2020
Gains and losses on cash flow hedges (Note 5):
Interest expense (1.0) (1.0) (1.1)
Income tax effect 0.2 0.2 0.2
Net of income taxes (0.8) (0.8) (0.9)
Amortization of unfunded pension and other postretirement obligations (Note 8):
Other expense 1.3 2.5 1.3
Income tax effect (0.3) (0.6) (0.3)
Net of income taxes 1.0 1.9 1.0
Total reclassifications for the period, net of income taxes $ 0.2 $ 1.1 $ 0.1
The changes in the components of Accumulated other comprehensive loss during the years ended December 31, 2022 and 2021 are as follows:
$ in millions Gains / (losses) on cash flow hedges Change in unfunded pension and other postretirement obligations Total
Balance at January 1, 2021 $ 13.6 $ (25.9) $ (12.3)
Other comprehensive income before reclassifications - 6.4 6.4
Amounts reclassified from accumulated other comprehensive loss to earnings (0.8) 1.9 1.1
Net current period other comprehensive income / (loss) (0.8) 8.3 7.5
Balance at December 31, 2021 12.8 (17.6) (4.8)
Other comprehensive income before reclassifications - 2.2 2.2
Amounts reclassified from accumulated other comprehensive loss to earnings (0.8) 1.0 0.2
Net current period other comprehensive income / (loss) (0.8) 3.2 2.4
Balance at December 31, 2022 $ 12.0 $ (14.4) $ (2.4)
Insurance and Claims Costs
In addition to insurance obtained from third-party providers, MVIC, a wholly-owned captive subsidiary of DPL, provides insurance coverage solely to us and our subsidiaries for workers’ compensation, general liability and property damage on an ongoing basis. Insurance and claims costs associated with MVIC include estimated liabilities of approximately $1.6 million and $2.3 million at December 31, 2022 and 2021, respectively, within Accrued and other current liabilities on the accompanying Consolidated Balance Sheets. DPL has estimated liabilities for medical, life, disability and other reserves for claims costs below certain coverage thresholds of third-party providers of approximately $7.8 million and $9.7 million at December 31, 2022 and 2021, respectively, within Accrued and other current liabilities and Other non-current liabilities on the accompanying Consolidated Balance Sheets. The estimated liabilities for workers’ compensation, medical, life and disability costs at DPL are actuarially determined using certain assumptions. There is uncertainty associated with these loss estimates, and actual results may differ from the estimates. Modification of these loss estimates based on experience and changed circumstances is reflected in the period in which the estimate is re-evaluated.
Revenue Recognition
Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Energy sales to customers are based on the reading of their meters that occurs on a systematic basis throughout the month. We recognize the revenues on our Consolidated Statements of Operations using an accrual method for retail and other energy sales that have not yet been billed, but where electricity has been consumed. This is termed “unbilled revenues” and is a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenues are determined by the estimation of unbilled energy provided to customers since the date of the last meter reading, estimated line losses, the assignment of unbilled energy provided to customer classes and the average rate per customer class. For additional information, see Note 13 - REVENUES.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
AES Ohio collects certain excise taxes levied by state or local governments from its customers. AES Ohio’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenues in the accompanying Consolidated Statements of Operations. The amounts of such taxes were as follows:
Years ended December 31,
$ in millions 2022 2021 2020
Excise taxes collected $ 49.2 $ 48.7 $ 48.1
Repairs and Maintenance
Costs associated with maintenance activities are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
Pension and Postretirement Benefits
We recognize in our Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes from actuarial gains or losses related to our regulated operations, which would otherwise be recognized in AOCL, recorded as a regulatory asset as this can be recovered through future rates. Such changes that are not related to our regulated operations are recognized in AOCL. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715 - Compensation - Retirement Benefits, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
See Note 8 - BENEFIT PLANS for more information.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of the existing assets and liabilities and their respective income tax bases. We establish an allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Our tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for consolidated financial statement reporting. Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. Our policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations.
Income taxes payable, which are includable in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2 - REGULATORY MATTERS for additional information.
DPL and its subsidiaries file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 7 - INCOME TAXES for additional information.
Related Party Transactions
In the normal course of business, DPL enters into transactions with related parties. All material intercompany accounts and transactions are eliminated in DPL’s Consolidated Financial Statements. See Note 11 - RELATED PARTY TRANSACTIONS for more information on Related Party Transactions.
In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation, which represents a full and unconditional guarantee of payments to the capital security holders of the Master Trust.
Discontinued Operations
Discontinued operations reporting occurs only when the disposal of a business or a group of assets represents a strategic shift that has (or will have) a major effect on our operations and financial results. We report financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Prior period amounts in the Consolidated Statements of Operations and Consolidated Balance Sheets are retrospectively revised to reflect the businesses determined to be discontinued operations. The cash flows of businesses that are determined to be discontinued operations are included within the relevant categories within operating, investing and financing activities on the face of the Consolidated Statements of Cash Flows.
Transactions between the businesses determined to be discontinued operations and businesses that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held-for-sale. The results of discontinued operations include any gain or loss recognized on closing or adjustment of the carrying amount to fair value. See Note 14 - DISCONTINUED OPERATIONS for further information.
New accounting pronouncements
The following table provides a brief description of recent accounting pronouncements that had an impact on our consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on our Consolidated Financial Statements.
Accounting Standard Description Date of Adoption Effect on the financial statements upon adoption
New Accounting Standards Adopted
2020-04 and 2021-01 and 2022-06 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The amendments in these updates provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform, and clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. These amendments are effective for a limited period of time (March 12, 2020 - December 31, 2024). Effective for all entities as of March 12, 2020 through December 31, 2024. We adopted this standard on a prospective basis and it did not have a material impact on the Consolidated Financial Statements.
Adoption of ASC Topic 326 -, Financial Instruments - Credit Losses
On January 1, 2020, we adopted ASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates ("ASC 326"). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement.
We applied the modified retrospective method of adoption for ASC 326. Under this transition method, we applied the transition provisions starting at the date of adoption. The CECL model primarily impacts the calculation of our expected credit losses in gross customer trade accounts receivable. The adoption of ASC 326 and the application of CECL on our trade accounts receivable did not have a material impact on our Consolidated Financial Statements.
2 - REGULATORY MATTERS
Distribution Rate Case
On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order:
•Establishes a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service.
•Provides for a return on equity of 9.999% and a cost of long-term debt of 4.4% on a distribution rate base of $783.5 million and based on a capital structure of 53.87% equity and 46.13% long-term debt.
These rates will go into effect when AES Ohio has a new electric security plan in place. AES Ohio anticipates approval of ESP 4 in 2023.
AES Ohio ESPs, SEET Proceedings and Comprehensive Settlement
AES Ohio ESP - Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, AES Ohio operated pursuant to an approved ESP plan, which was initially approved on October 20, 2017 (ESP 3). On December 18, 2019, the PUCO approved AES Ohio's Notice of Withdrawal and reversion to its prior rate plan (ESP 1). Among other items, the PUCO Order approving the ESP 1 rate plan includes reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million. The OCC has appealed to the Ohio Supreme Court, the Commission’s decision approving the reversion to ESP 1 as well as argued for a refund of the RSC revenues dating back to August 2021. A decision is pending. 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.
Comprehensive Settlement - On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio's applications pending at the PUCO for (i) approval of AES Ohio's plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. On June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed the final PUCO order to the Ohio Supreme Court on December 6, 2021. Oral arguments regarding this appeal are expected but not yet scheduled.
ESP 4 filing - 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. As part of this plan, AES Ohio intends to increase investments in the distribution infrastructure and deploy a proactive vegetation management program. The plan also includes proposals for new customer programs, including renewable options, electric vehicle programs and energy efficiency programs for residential and low-income customers. ESP 4 also seeks to recover outstanding regulatory assets not currently in rates. AES Ohio did not propose that the Rate Stabilization Charge would continue as part of ESP 4. The plan requires PUCO approval and an evidentiary hearing is scheduled for April 12, 2023.
Decoupling
On January 23, 2021, AES Ohio filed with the PUCO requesting approval to defer its decoupling costs consistent with the methodology approved in its Distribution Rate Case. An evidentiary hearing was held in May 2021. If approved, the deferral would be effective December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs and economic changes in customer demand. These amounts were also included in the ESP 4 application and proposed to be recovered in a new rider.
COVID-19
In response to the PUCO’s COVID-19 emergency orders, AES Ohio filed an Application on March 23, 2020, requesting waivers of certain rule and tariff requirements and deferral of certain costs and revenues including those related to deposits and reconnection fees, late payment fees, credit card fees; and waived or uncollected amounts associated with putting customers on payment plans. On May 20, 2020, the PUCO approved the application and
required AES Ohio to file a plan outlining the timing and steps it plans to take in an effort to return to normal operations. The authorized deferral of those certain costs and revenues must be offset by COVID-19 related savings. AES Ohio filed its plan on July 15, 2020 and was approved by the PUCO on August 12, 2020. AES Ohio had recorded a $0.9 million regulatory asset as of December 31, 2021; however, during the third quarter of 2022, AES Ohio decided it will not seek recovery in a future rate proceeding and, thus, wrote off the $0.9 million deferral, which is included in Operation and maintenance on the Consolidated Statements of Operations.
FERC Proceedings
On March 3, 2020, AES Ohio filed an application before the FERC seeking to change its existing stated transmission rates to formula transmission rates that would be updated each calendar year. This filing was approved and made effective as of May 3, 2020, subject to possible refunds if the approved rates were modified. An uncontested settlement was filed December 10, 2020 and approved April 15, 2021. Among other things, the settlement established new depreciation rates for AES Ohio’s transmission assets and an authorized return on equity of 9.85%, and started an amortization process to return excess deferred taxes created by the TCJA. Pursuant to the approved mechanisms and formula, transmission rates were adjusted, effective on January 1, 2022, to reflect projected 2022 costs, adjusted to true-up the projections of revenues and costs incurred during 2020. Adjustments to true-up 2021 revenues and costs will be reflected in 2023 formula transmission rates. At December 31, 2022, AES Ohio has recorded a liability of $18.2 million, with $12.8 million classified as current, representing credits owed to customers for the 2022 and 2021 annual true-ups.
Regulatory Assets and Liabilities
In accordance with ASC 980 - Regulated Operations ("ASC 980"), we have recognized total regulatory assets of $169.0 million and $201.3 million at December 31, 2022 and 2021, respectively, and total regulatory liabilities of $239.1 million and $243.9 million at December 31, 2022 and 2021, respectively. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for accounting policies regarding Regulatory Assets and Liabilities.
The following table presents DPL’s Regulatory assets and liabilities:
Type of Recovery Amortization Through December 31,
$ in millions 2022 2021
Regulatory assets, current:
Undercollections to be collected through rate riders A/B 2023 $ 38.7 $ 23.9
Rate case expenses being recovered in base rates B 2023 0.5 0.6
Total regulatory assets, current 39.2 24.5
Regulatory assets, non-current:
Pension benefits B Ongoing 64.2 76.2
Unrecovered OVEC charges C - 28.9
Regulatory compliance costs B Undetermined 6.4 6.3
Smart grid and AMI costs B 2025 2.3 5.2
Unamortized loss on reacquired debt B Various 2.0 4.3
Deferred storm costs A Undetermined 8.7 15.2
Deferred rate case costs B Undetermined 1.9 1.8
Deferred vegetation management and other A/B Undetermined 23.0 18.7
Decoupling deferral C Undetermined 13.8 13.8
Uncollectible deferral C Undetermined 7.5 6.4
Total regulatory assets, non-current 129.8 176.8
Total regulatory assets $ 169.0 $ 201.3
Regulatory liabilities, current:
Overcollection of costs to be refunded through rate riders A/B 2023 $ 27.6 $ 14.2
Transmission formula rate credits A 2023 12.8 0.4
Total regulatory liabilities, current 40.4 14.6
Regulatory liabilities, non-current:
Estimated costs of removal - regulated property Not Applicable 136.8 145.2
Deferred income taxes payable through rates Various 45.2 57.5
TCJA regulatory liability B Ongoing 4.5 6.5
Transmission formula rate credits A 2024 5.4 12.2
PJM transmission enhancement settlement A 2025 3.5 5.1
Postretirement benefits B Ongoing 3.3 2.8
Total regulatory liabilities, non-current 198.7 229.3
Total regulatory liabilities $ 239.1 $ 243.9
A - Recovery of incurred costs plus rate of return.
B - Recovery of incurred costs without a rate of return.
C - Recovery not yet determined, but recovery is probable of occurring in future rate proceedings.
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate orders; recovery for the remaining costs is probable, but not certain. These costs include: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Competitive Bidding Rider and (iv) the Transmission Cost Recovery Rider. Also included are the current portion of rate case expense costs, storm costs, Smart Grid O&M, Smart Grid Depreciation, the Infrastructure Investment Rider and Smart Grid R&D, which do not earn a return and are described in greater detail below. Current regulatory liabilities include the overcollection of alternative energy costs, legacy generation costs and certain transmission related costs, including the current portion of the PJM transmission enhancement settlement, the transmission rate true-up (including an anticipated refund as a result of a FERC audit) and the TCJA regulatory liability.
AES Ohio is earning a return on $3.5 million of the net undercollections / (overcollections) to be collected / (refunded) through rate riders including: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Competitive Bidding Rider and (iv) the Transmission Cost Recovery Rider, partially offset by the overcollection of economic development costs and legacy generation costs.
Pension benefits represent the qualifying ASC 715 costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability for a plan’s
underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI. As per PUCO and FERC precedents, these costs are probable of future rate recovery.
Unrecovered OVEC charges includes the portion of charges from OVEC that were not recovered through AES Ohio’s Fuel Rider from October 2014 through October 2017. Additionally, it includes net OVEC costs from December 19, 2019 through December 31, 2019. Beginning on November 1, 2017, through December 18, 2019, current OVEC costs were being recovered through AES Ohio’s reconciliation rider which was authorized as part of the ESP 3. AES Ohio has requested recovery of these costs through a proposed rider in ESP 4. During the third quarter of 2022, AES Ohio recorded a $28.9 million reduction to this regulatory asset as a charge to Net purchased power cost in the Condensed Consolidated Statements of Operations in accordance with the provisions of ASC 980.
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff and (vi) Supplier Consolidated Billing. All of these costs except for Generation Separation earn a return. These costs were being recovered over a three-year period that began November 1, 2017 through a rider approved in the ESP 3. That rider was eliminated with the approval of the ESP 1 rate plan, so the balance as of December 18, 2019 remains a regulatory asset for future recovery. AES Ohio has requested recovery of the remaining balance through a proposed rider in ESP 4.
Rate case expenses represents costs associated with preparing distribution rate cases. AES Ohio was granted recovery of these costs for the 2015 case which do not earn a return, as part of the DRO. Recovery of costs for the 2020 case were included in the 2020 rate case filing.
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. In a PUCO order on January 5, 2011, the PUCO indicated that it expects AES Ohio to continue to monitor other utilities’ Smart Grid and AMI programs and to explore the potential benefits of investing in the Smart Grid Plan and AMI programs and that AES Ohio will, when appropriate, file new Smart Grid and/or AMI business cases in the future. These costs are included in the October 23, 2020 settlement described above.
Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the PUCO.
Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during 2021 and 2022. AES Ohio files annual petitions seeking recovery of storm costs. Recovery of these costs is probable, but not certain.
Vegetation management costs represents costs incurred from outside contractors for tree trimming and other vegetation management services. Calculation terms were agreed to in the stipulation approved in the DRO. The terms were an annual baseline of $10.7 million in 2018 and $15.7 million thereafter. Amounts over the baseline will be deferred subject to an annual deferral maximum of $4.6 million. Annual spending less than the vegetation management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability. These costs are included in AES Ohio's 2020 distribution rate case application.
Decoupling deferral represents the change in the revenue requirement based on a per customer methodology in the stipulation approved in the DRO and includes deferrals through December 18, 2019. These costs were previously recovered through a Decoupling Rider; however, AES Ohio withdrew its application in the ESP 3 and in doing so, the PUCO ordered on December 18, 2019 in the ESP 1 order, that AES Ohio no longer has a Decoupling Rider. As described above, AES Ohio filed a petition seeking authority to record a regulatory asset to accrue revenues that would have otherwise been collected through the Decoupling Rider; these amounts were also included in the ESP 4 application and proposed to be recovered in a new rider.
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenues associated with the bypassable uncollectible portion of the standard offer rate. The DRO established that these costs would be recovered in a rider outside of base rates, thus no uncollectible expense is included in base rates. These costs are included in the 2020 distribution rate case.
Estimated costs of removal - regulated property reflect an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.
Deferred income taxes payable through rates represent deferred income tax liabilities recognized from the normalization of flow-through items as the result of taxes previously charged to customers. A deferred income tax asset or liability is created from a difference in income recognition between tax laws and accounting methods. As a regulated utility, AES Ohio includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes AES Ohio expects to return to customers in future periods.
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess Accumulated Deferred Income Taxes ("ADIT") for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, AES Ohio agreed that savings from the TCJA attributable to distribution facilities, including the excess ADIT and the regulatory liability, constitute amounts that will be returned to customers. As a result of the TCJA and subsequent DRO, AES Ohio entered into a stipulation to resolve all remaining TCJA items related to its distribution rates, including a proposal to return no less than $4.0 million per year for the first five years unless fully returned in the first five years via a tax savings cost rider for the distribution portion of the balance. On September 26, 2019, an order approved the stipulation in its entirety.
Transmission Formula Rate Credits liability represents the amounts due to customers as a result of the implementation of transmission formula rates, which are adjusted each year based on actual revenue and costs from a previous year, as described above under "FERC Proceedings".
PJM Transmission Enhancement Settlement liability represents the Transmission Enhancement Settlement charges for which AES Ohio is due a refund per FERC Order EL05-121-009 issued on May 31, 2018. The Order states that customers are due a refund for part of these charges which will be received starting August 2018 through 2025. Refunds received will be returned to customers via the transmission cost rider.
Postretirement benefits represent the qualifying ASC 715 gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.
3 - PROPERTY, PLANT AND EQUIPMENT
The following is a summary of DPL’s Property, plant and equipment with corresponding composite depreciation rates at December 31, 2022 and 2021:
December 31, 2022 December 31, 2021
$ in millions Composite Rate Composite Rate
Regulated:
Transmission 399.2 2.4% $ 306.9 3.1%
Distribution 1,658.9 3.7% 1,547.0 4.0%
General 20.7 5.2% 34.1 3.2%
Non-depreciable 79.4 N/A 71.2 N/A
Total regulated 2,158.2 1,959.2
Unregulated:
Other $ 30.6 3.7% 26.5 4.2%
Non-depreciable 4.8 N/A 4.7 N/A
Total unregulated 35.4 31.2
Total property, plant and equipment in service $ 2,193.6 3.3% $ 1,990.4 3.7%
Asset Removal Costs
We continue to record costs of removal for our regulated transmission and distribution assets through our depreciation rates and recover those amounts in rates charged to our customers. There are no known legal AROs associated with these assets. We have recorded $136.8 million and $145.2 million in estimated costs of removal at December 31, 2022 and 2021, respectively, as regulatory liabilities for our transmission and distribution property. These amounts represent the excess of the cumulative removal costs recorded through depreciation rates less the cumulative removal costs actually incurred. See Note 2 - REGULATORY MATTERS for additional information.
The following is a summary of the changes in the regulatory liability for T&D asset removal costs:
2022 2021
Balance as of January 1 $ 145.2 $ 138.8
Additions 17.6 17.0
Settlements (26.0) (10.6)
Balance as of December 31 $ 136.8 $ 145.2
4 - FAIR VALUE
The fair value of our financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of our assets and liabilities have been determined using available market information. Because these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are categorized using the market approach as follows for DPL:
•Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market. This includes inputs used for money market accounts that are considered cash equivalents, open-ended mutual funds and exchange-traded funds in the Master Trust. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions;
•Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets. This includes the common collective trust pension plan assets valued using the net asset value method. See Note 8 - BENEFIT PLANS for more information; and
•Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. These inputs are used for certain debt balances because the notes are not publicly traded. The fair value reflects management’s own assumptions about the inputs used in pricing the liability. Our long-term debt is fair valued for disclosure purposes only.
The fair values of our financial instruments are based on published sources for pricing when possible. We rely on valuation models only when no other method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future. Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency.
We did not have any transfers of the fair values of our financial instruments among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2022 and 2021.
These financial instruments are not subject to master netting agreements or collateral requirements and, as such, are presented in the Consolidated Balance Sheets at their gross fair value.
Financial Assets
AES Ohio established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans and these assets are not used for general operating purposes. These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit. These investments are recorded at fair value within Other non-current assets on the Consolidated Balance Sheets and classified as equity securities. Gains / (losses) on these assets were $(1.7) million, $0.7 million and $0.6 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Recurring Fair Value Measurements
The fair value of assets at December 31, 2022 and 2021 and the respective category within the fair value hierarchy for DPL was determined as follows:
$ in millions Fair Value at December 31, 2022 Fair Value at December 31, 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets
Master trust assets
Money market funds $ 0.5 $ - $ - $ 0.5 $ 0.4 $ - $ - $ 0.4
Mutual funds 7.0 - - 7.0 - 9.0 - 9.0
Total assets $ 7.5 $ - $ - $ 7.5 $ 0.4 $ 9.0 $ - $ 9.4
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Our long-term debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets. These fair value inputs are considered Level 2 in the fair value hierarchy. As the Wright-Patterson Air Force Base note is not publicly traded, the fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs. Unrealized gains or losses are not recognized in the financial statements as long-term debt is presented at carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2025 to 2061. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair value.
The following table presents the carrying amount, fair value, and fair value hierarchy of our financial liabilities that are not measured at fair value in the Consolidated Balance Sheets as of the periods indicated, but for which fair value is disclosed:
Carrying Amount Fair value as of December 31, 2022 Carrying Amount Fair value as of December 31, 2021
$ in millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Liabilities
Long-term debt $ 1,535.9 $ - $ 1,376.4 $ 17.0 $ 1,393.4 $ 1,395.5 $ - $ 1,502.5 $ 17.2 $ 1,519.7
5 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DPL previously used derivative financial instruments primarily to manage the interest rate risk associated with our long-term debt. The derivative instruments were used for risk management purposes and were designated as cash flow hedges if they qualified under FASC 815 for accounting purposes.
In August 2020, the two interest rate swaps to hedge the variable interest on the $140.0 million variable interest rate tax-exempt First Mortgage Bonds expired, as the associated debt reached maturity. The interest rate swaps had a combined notional amount of $140.0 million and settled monthly based on a one-month LIBOR. The AOCL associated with the swaps was amortized out of AOCL into interest expense over the life of the underlying debt.
We also had previously entered into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. These interest rate derivative contracts were settled in 2013 and we continue to amortize amounts out of AOCL into interest expense.
The following tables provide information on gains or losses recognized in AOCL for the cash flow hedges for the periods indicated:
Years ended December 31,
2022 2021 2020
$ in millions (net of tax) Interest Rate
Hedge Interest Rate
Hedge Interest Rate
Hedge
Beginning accumulated derivative gain in AOCL $ 12.8 $ 13.6 $ 14.5
Net gains reclassified to earnings:
Interest expense (0.8) (0.8) (0.9)
Ending accumulated derivative gain in AOCL $ 12.0 $ 12.8 $ 13.6
Portion expected to be reclassified to earnings in the next twelve months $ (0.8)
6 - DEBT
Long-term debt is as follows:
$ in millions Interest Rate Maturity December 31, 2022 December 31, 2021
AES Ohio debt
First Mortgage Bonds 3.95% 2049 $ 425.0 $ 425.0
First Mortgage Bonds 3.20% 2040 140.0 140.0
Tax-exempt First Mortgage Bonds (a)
4.25% 2027 100.0 -
Tax-exempt First Mortgage Bonds (b)
4.00% 2027 40.0 -
U.S. Government note 4.20% 2061 17.0 17.2
Unamortized deferred financing costs (6.9) (5.4)
Unamortized debt discounts and premiums, net (2.4) (2.5)
Total long-term debt at AES Ohio 712.7 574.3
Senior unsecured bonds 4.125% 2025 415.0 415.0
Senior unsecured bonds 4.35% 2029 400.0 400.0
Note to DPL Capital Trust II (c)
8.125% 2031 15.6 15.6
Unamortized deferred financing costs (6.7) (8.6)
Unamortized debt discounts and premiums, net (0.7) (0.8)
Total long-term debt 1,535.9 1,395.5
Less: current portion (0.2) (0.2)
Long-term debt, net of current portion $ 1,535.7 $ 1,395.3
(a)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of November 1, 2040 but are subject to a mandatory put in June 2027.
(b)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of January 1, 2034 but are subject to a mandatory put in June 2027.
(c) Note payable to related party. See Note 11 - RELATED PARTY TRANSACTIONS for additional information.
Revolving Credit Agreements
The DPL Credit Agreement is a committed line of credit secured by a pledge of common stock that DPL owns in AES Ohio and is used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2023, and bears interest at variable rates as described in the agreement. It includes an uncommitted $50.0 million accordion feature to provide DPL with an option to request an increase in the size of the facility, subject to approval by the lenders. At December 31, 2022 and 2021, the DPL Credit Agreement had outstanding borrowings of $35.0 million and $65.0 million, respectively.
AES Ohio entered into a second amendment and restatement of the AES Ohio Credit Agreement on December 22, 2022 with a syndication of bank lenders. The AES Ohio Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on December 22, 2027, and bears interest at variable rates as described in the agreement. It includes an uncommitted $100.0 million accordion feature to provide AES Ohio with an option to request an increase in the size of the facility, subject to approval by the lenders.
The AES Ohio Credit Agreement also includes two one-year extension options, allowing AES Ohio to extend the maturity date subject to approval by the lenders. At December 31, 2022 and 2021, the AES Ohio Credit Agreement had outstanding borrowings of $120.0 million and $0.0 million, respectively.
Debt Maturities
At December 31, 2022, maturities of long-term debt are summarized as follows:
Due during the years ending December 31,
$ in millions
2023 $ 0.2
2024 0.2
2025 415.2
2026 0.2
2027 140.2
Thereafter 996.6
1,552.6
Unamortized discounts (3.1)
Deferred financing costs, net (13.6)
Total long-term debt $ 1,535.9
Significant Transactions
On June 1, 2022, AES Ohio re-issued $140.0 million of tax-exempt OAQDA Collateralized Pollution Revenue Refunding Bonds that had been held in trust, Series 2015A&B. AES Ohio re-issued $140.0 million aggregate principal amount of first mortgage bonds to the OAQDA in two series: $100.0 million Series 2015A bonds at an interest rate of 4.25% and $40.0 million Series 2015B at an interest rate of 4.00% to secure the loan of proceeds from these bonds issued by the OAQDA. These bonds are subject to a mandatory put date of June 1, 2027.
Debt Covenants and Restrictions
The DPL Credit Agreement has two financial covenants. The first financial covenant, minimum EBITDA of $150.0 million, is calculated at the end of each fiscal quarter for the four prior fiscal quarters. As of December 31, 2022, DPL was in compliance with this financial covenant.
The second financial covenant is an EBITDA to Interest Expense ratio that is calculated, at the end of each fiscal quarter, by dividing EBITDA for the four prior fiscal quarters by the consolidated interest charges for the same period. The ratio, per the agreement, is to be not less than 2.00 to 1.00. As of December 31, 2022, DPL was in compliance with this financial covenant.
The DPL Credit Agreement also restricts dividend payments from DPL to AES, such that DPL cannot make dividend payments unless at the time of, and/or as a result of the distribution, (i) DPL’s leverage ratio does not exceed 0.67 to 1.00 and DPL’s interest coverage ratio is not less than 2.50 to 1.00 or, if such ratios are not within the parameters, (ii) DPL’s senior long-term debt rating from two of the three major credit rating agencies is at least investment grade. As a result, as of December 31, 2022, DPL was prohibited from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
Starting with the quarter ended September 30, 2021, the borrowing limit on the DPL Credit Agreement will be reduced by $5.0 million per quarter should the Total Debt to EBITDA ratio for the period of four consecutive quarters exceed 7.00 to 1.00. As of December 31, 2022, DPL exceeded this ratio and the borrowing limit was reduced from $50.0 million to $45.0 million.
The AES Ohio Credit Agreement and Bond Purchase Agreement (financing document entered into in connection with the issuance of AES Ohio's First Mortgage Bonds, on July 31, 2020) has one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt by total capitalization. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than 0.67 to 1.00. As of December 31, 2022 AES Ohio was in compliance with this financial covenant.
AES Ohio does not have any meaningful restrictions in its debt financing documents prohibiting dividends to its parent, DPL. As of December 31, 2022, AES Ohio and DPL were in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.
7 - INCOME TAXES
DPL’s components of income tax expense for both continuing and discontinued operations were as follows:
Years ended December 31,
$ in millions 2022 2021 2020
Components of tax benefit
Federal - current $ (7.6) $ (5.5) $ (45.1)
State and Local - current - - (0.1)
Total current (7.6) (5.5) (45.2)
Federal - deferred (2.1) 4.4 38.7
State and local - deferred 0.1 0.4 1.1
Total deferred (2.0) 4.8 39.8
Total tax benefit $ (9.6) $ (0.7) $ (5.4)
Effective and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to the effective tax rate, as a percentage of total income before taxes:
Years ended December 31,
2022 2021 2020
Statutory Federal tax rate 21.0 % 21.0 % 21.0 %
State taxes, net of Federal tax benefit (1.6) % 2.8 % (13.1) %
AFUDC - equity 2.5 % 3.3 % (23.6) %
Depreciation of flow-through differences 43.8 % (29.0) % 94.8 %
Amortization of investment tax credits 0.1 % (0.6) % 4.1 %
Other, net 1.3 % (0.8) % 1.2 %
Effective tax rate 67.1 % (3.3) % 84.4 %
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
December 31,
$ in millions 2022 2021
Net non-current assets / (liabilities)
Depreciation / property basis $ (185.5) $ (166.4)
Income taxes recoverable 9.2 13.6
Regulatory assets (22.8) (20.6)
Investment tax credit 0.1 0.6
Compensation and employee benefits (2.8) (3.4)
Intangibles - (0.4)
Long-term debt 5.1 (1.5)
Other (a)
(2.3) (9.8)
Net non-current liabilities $ (199.0) $ (187.9)
(a) The Other caption includes deferred tax assets of $36.6 million in 2022 and $37.1 million in 2021 related to state and local tax net operating loss carryforwards, with related valuation allowances of $36.6 million in 2022 and $37.1 million in 2021. These net operating loss carryforwards expire from 2020 to 2037.
During the year ended December 31, 2021, DPL received a payment from AES of $17.5 million against its tax receivable balance as part of a $150.0 million contribution from AES. During the year ended December 31, 2020, DPL received a payment from AES of $52.0 million against its tax receivable balance as part of a $150.0 million contribution from AES. See Note 9 - SHAREHOLDER'S DEFICIT for additional information.
The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss:
Years ended December 31,
$ in millions 2022 2021 2020
Tax expense / (benefit) $ 0.8 $ 2.2 $ (2.6)
Uncertain Tax Positions
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits did not change in 2022 and was $0.4 million at December 31, 2022 and 2021.
The amount anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 2022 is estimated to be $0.0 million.
The following table presents the changes to our uncertain tax positions:
$ in millions 2022 2021 2020
Unrecognized tax benefits at January 1 $ 0.4 $ 1.4 $ 3.5
Gross increases - current period tax positions - - -
Gross decreases - prior period tax positions - (1.0) (2.1)
Unrecognized tax benefits at December 31 $ 0.4 $ 0.4 $ 1.4
Tax years subsequent to 2012 remain open to examination by taxing authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe we have appropriately accrued for our uncertain tax positions. However, audit outcomes and the timing of audit settlements and future events that would impact our previously recorded unrecognized tax benefits are subject to significant uncertainty. It is possible that the ultimate outcome of future examinations may exceed our provision for current unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in Income tax benefit. The amounts accrued and the tax expense / (benefit) recorded were not material for each period presented.
DPL is no longer subject to U.S. federal income tax examinations for tax years through 2012, but is open for all subsequent periods. DPL is no longer subject to state income tax examinations for tax years through 2017 but is open for all subsequent periods.
8 - BENEFIT PLANS
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $7.0 million and $8.9 million at December 31, 2022 and 2021, respectively, were not material to the Consolidated Financial Statements in the periods covered by this report.
Defined Contribution Plans
The 401(k) Plans are qualified under Section 401 of the Internal Revenue Code.
Participants may elect to contribute up to 85% of eligible compensation to their plan. Non-union participant contributions are matched 100% on the first 1% of eligible compensation and 50% on the next 5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant
contributions are matched 150% but are capped at $2,700 for 2022 and they are fully vested in their employer contributions after 3 years of service. Certain non-union and union employees become eligible to participate in their respective plan upon date of hire. All participants are fully vested in their own contributions.
We contributed $3.3 million, $3.3 million and $3.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. AES Ohio matching contributions are paid bi-weekly, in arrears. The contributions by year may include the bi-weekly matching contribution that is paid in the following year in addition to employer matching true-up contributions. AES Ohio also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
Defined Benefit Plans
AES Ohio sponsors a traditional defined benefit pension plan for most of the employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is 100% vested in all amounts credited to their account upon the completion of five vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from AES Ohio to the Service Company maintain their previous eligibility to participate in the AES Ohio pension plan.
Almost all management employees beginning employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become 100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan ("SERP") for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCL. We have historically recorded these costs on the accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
The following tables set forth the changes in the Pension Plans' obligations and assets recorded on the Consolidated Balance Sheets at December 31, 2022 and 2021. The amounts presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $1.7 million, $1.7 million and $1.4 million of costs billed to the Service Company for the years ended December 31, 2022, 2021 and 2020, respectively.
$ in millions Years ended December 31,
Change in benefit obligation 2022 2021
Benefit obligation at January 1 $ 416.2 $ 449.5
Service cost 4.9 4.5
Interest cost 9.6 8.2
Plan amendments - 2.3
Actuarial gain (98.0) (12.7)
Benefits paid (23.7) (35.6)
Benefit obligation at December 31 309.0 416.2
Change in plan assets
Fair value of plan assets at January 1 363.5 365.1
Actual return / (loss) on plan assets (73.1) 24.0
Employer contributions 7.7 10.0
Benefits paid (23.7) (35.6)
Fair value of plan assets at December 31 274.4 363.5
Unfunded status of plan $ (34.6) $ (52.7)
December 31,
Amounts recognized in the Consolidated Balance Sheets 2022 2021
Current liabilities $ (0.2) $ (0.2)
Non-current liabilities (34.4) (52.5)
Net liability at end of year $ (34.6) $ (52.7)
Amounts recognized in Accumulated other comprehensive loss, Regulatory assets, non-current, pre-tax
Components:
Prior service cost $ 7.3 $ 8.3
Net actuarial loss 78.6 93.3
Accumulated other comprehensive loss, Regulatory assets, pre-tax
$ 85.9 $ 101.6
Recorded in:
Regulatory asset, non-current $ 62.0 $ 74.1
Accumulated other comprehensive loss 23.9 27.5
Accumulated other comprehensive loss, Regulatory assets, pre-tax
$ 85.9 $ 101.6
The accumulated benefit obligation for our Pension Plans was $301.3 million and $400.7 million at December 31, 2022 and 2021, respectively.
The net periodic benefit cost of the Pension Plans was:
Years ended December 31,
$ in millions 2022 2021 2020
Service cost $ 4.9 $ 4.5 $ 3.7
Interest cost 9.6 8.2 11.8
Expected return on assets (15.8) (15.0) (18.6)
Amortization of unrecognized:
Actuarial loss 5.5 9.0 1.0
Prior service cost 1.1 0.9 6.1
Net periodic benefit cost $ 5.3 $ 7.6 $ 4.0
Rates relevant to each year's expense calculations
Discount rate 2.83 % 2.44 % 3.33 %
Expected return on plan assets 4.60 % 4.55 % 5.60 %
The components of net periodic (benefit) / cost other than service cost are included in Other expense, net in the Consolidated Statements of Operations.
The following table presents other changes in Pension Plan assets and benefit obligations recognized in Accumulated other comprehensive loss, Regulatory assets, non-current and Regulatory liabilities, non-current:
Years ended December 31,
$ in millions 2022 2021 2020
Net actuarial loss / (gain) $ (9.1) $ (21.7) $ 25.8
Plan amendments - 2.3 -
Reversal of amortization item:
Net actuarial loss (5.5) (9.0) (1.0)
Prior service cost (1.1) (0.9) (6.1)
Total recognized in Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$ (15.7) $ (29.3) $ 18.7
Total recognized in net periodic benefit cost and Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$ (10.4) $ (21.7) $ 22.7
Significant Gains and Losses Related to Changes in the Benefit Obligation
The actuarial gain of $98.0 million decreased the benefit obligation for the year ended December 31, 2022 and an actuarial gain of $12.7 million decreased the benefit obligation for the year ended December 31, 2021. The actuarial gain in 2022 and 2021 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and appropriateness.
At December 31, 2022, we are increasing our long-term rate of return assumption to 5.40% for pension plan assets. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2022, we have increased our assumed discount rate to 5.41% from 2.83% for pension expense to reflect current duration-based yield curve discount rates. A one percent increase in the rate of return assumption for pension would result in a decrease in 2023 pension expense of approximately $3.3 million. A one percent decrease in the rate of return assumption for pension would result in an increase in 2023 pension expense of approximately $3.3 million. A 0.25-percentage point increase in the discount rate for pension would result in a decrease of approximately $0.3 million to 2023 pension expense. A 0.25-percentage point decrease in the discount rate for pension would result in an increase of approximately $0.4 million to 2023 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2022. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The
expected benefit payments for each year are then discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
The weighted average assumptions used to determine benefit obligations were:
Benefit Obligation Assumptions Pension
2022 2021 2020
Discount rate for obligations 5.41% 2.83% 2.44%
Rate of compensation increases 3.21% 3.21% 3.21%
Pension Plan Assets
Pension Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Pension Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Pension Plan's funded status improve. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Pension Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Pension Plans' liabilities.
Strategic asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are 30% - 40% for return seeking assets and 60% - 70% for liability hedging assets. Return seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield bond funds and emerging market debt funds.
The investment approach is to move the Pension Plans to a more de-risked position, if and when the overall funded status of the Pension Plans improve, by periodically rebalancing the allocation of the Pension Plans' investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Pension Plans' ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 2022 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
The following table summarizes our target pension plan allocation for 2022:
Long-Term
Mid-Point
Target
Allocation Percentage of plan assets as of December 31,
Asset category 2022 2021
Equity Securities 35% 32% 42%
Debt Securities 65% 67% 57%
Cash and Cash Equivalents -% 1% 1%
The fair values of our Pension Plans' assets at December 31, 2022 by asset category are as follows:
$ in millions Market Value at December 31, 2022 Quoted prices
in active
markets for
identical assets Significant
observable
inputs Significant
unobservable
inputs
Asset category (Level 1) (Level 2) (Level 3)
Common collective trusts
Equities (a)
$ 88.5 $ - $ 88.5 $ -
Debt securities (b)
125.7 - 125.7 -
Government debt securities (c)
58.3 - 58.3 -
Total common collective trusts 272.5 - 272.5 -
Cash and cash equivalents (d)
1.9 1.9 - -
Total pension plan assets $ 274.4 $ 1.9 $ 272.5 $ -
(a) This category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our Pension Plans' assets at December 31, 2021 by asset category are as follows:
$ in millions Market Value at December 31, 2021 Quoted prices
in active
markets for
identical assets Significant
observable
inputs Significant
unobservable
inputs
Asset category (Level 1) (Level 2) (Level 3)
Common collective trusts
Equities (a)
$ 151.8 $ - $ 151.8 $ -
Debt securities (b)
144.0 - 144.0 -
Government debt securities (c)
65.8 - 65.8 -
Total common collective trusts 361.6 - 361.6 -
Cash and cash equivalents (d)
1.9 1.9 - -
Total pension plan assets $ 363.5 $ 1.9 $ 361.6 $ -
(a) This category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and, in addition, make voluntary contributions from time to time. We contributed $7.5 million, $9.8 million and $7.5 million to the pension plan in the years ended December 31, 2022, 2021 and 2020.
We expect to make contributions of $0.2 million to our SERP in 2023 to cover benefit payments. We also expect to make contributions of $7.5 million to our pension plan during 2023.
Funding for the Pension Plans is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, AES Ohio’s funded target liability percentage was estimated to be 100%. In addition, AES Ohio must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $5.5 million in 2023, which includes $1.9 million for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over seven years. AES Ohio’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments, which reflect future service, are expected to be paid as follows:
Estimated future benefit payments
$ in millions due within the following years: Pension
2023 $ 24.5
2024 $ 24.4
2025 $ 23.9
2026 $ 23.8
2027 $ 23.5
2028 - 2032 $ 113.8
9 - SHAREHOLDER'S DEFICIT
Dividend Restrictions
DPL’s Amended Articles of Incorporation (the Articles) and the DPL Credit Agreement contain provisions which state that DPL may not make a distribution to its shareholder or make a loan to any of its affiliates (other than its subsidiaries), unless: (a) there exists no Event of Default (as defined in the Articles) and no such Event of Default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, DPL’s leverage ratio does not exceed 0.67 to 1.00 and DPL’s interest coverage ratio is not less than 2.50 to 1.00 or, (b)(ii) if such ratios are not within the parameters, DPL’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. Further, the restrictions on the payment of distributions to a shareholder and the making of loans to its affiliates (other than subsidiaries) cease to be in effect if the three major credit rating agencies confirm that a lowering of DPL’s senior long-term debt rating below investment grade by the credit rating agencies would not occur without these restrictions.
As described above, DPL’s Amended Articles of Incorporation and the DPL Credit Agreement contain restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions on making such dividends, distributions and loans if certain financial ratios exceed specified levels and DPL’s senior long-term debt rating from a rating agency is below investment grade. As of December 31, 2022, DPL did not meet these requirements. As a result, as of December 31, 2022, DPL was prohibited under its Articles of Incorporation and Credit Agreement from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).
Common Stock
Effective on the Merger date, DPL's Amended Articles of Incorporation provided for 1,500 authorized common shares, of which one share is outstanding at December 31, 2022.
AES Ohio has 50,000,000 authorized common shares, of which 41,172,173 are outstanding at December 31, 2022. All common shares are held by AES Ohio’s parent, DPL.
Capital Contributions from AES
During each of the years ended December 31, 2021 and 2020, DPL received a $150.0 million cash contribution from AES, which DPL then used to make a $150.0 million equity contribution to AES Ohio. The cash contributions at DPL represented equity contributions of $132.5 million and $98.0 million in 2021 and 2020, respectively; and payments of $17.5 million and $52.0 million against its tax receivable in 2021 and 2020, respectively. The proceeds from the equity contributions at AES Ohio have enabled AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity.
10 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2022, these include:
Payments due in:
$ in millions Total Less than
1 year 2 - 3
years 4 - 5
years More than
5 years
Electricity purchase commitments $ 599.7 $ 420.9 $ 178.8 $ - $ -
Purchase orders and other contractual obligations $ 320.2 $ 255.0 $ 65.2 $ - $ -
Electricity purchase commitments:
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2022, DPL had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and DPL's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above.
Contingencies
Legal Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Consolidated Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2022, cannot be reasonably determined.
Environmental Matters
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
Where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2022.
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.
Accruals for legal loss and environmental contingencies were not material as of December 31, 2022 and December 31, 2021.
Equity Ownership Interest
AES Ohio has a 4.9% equity ownership interest in OVEC, which is recorded using the cost method of accounting under GAAP. AES Ohio, along with several non-affiliated energy companies party to an OVEC arrangement, receive and pay for OVEC capacity and energy and are responsible for OVEC debt obligations and other fixed costs in proportion to their power participation ratios under the arrangement, which, for AES Ohio, is the same as its equity ownership interest. As of December 31, 2022, AES Ohio could be responsible for the repayment of 4.9%, or $53.9 million, of $1.1 billion OVEC debt obligations if they came due, comprised of both fixed and variable rate securities with maturities from 2026 to 2040. OVEC could also seek additional contributions from AES Ohio to avoid a default in the event that other OVEC members defaulted on their respective OVEC obligations.
11 - RELATED PARTY TRANSACTIONS
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including AES Ohio, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
Long-term Compensation Plan
During 2022, 2021 and 2020, some of DPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2022, 2021 and 2020 was $0.1 million, $0.0 million and $0.1 million, respectively, and was included in Operation and maintenance on DPL’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder included in Other paid-in capital on DPL’s Consolidated Balance Sheets in accordance with ASC 718 - Compensation - Stock Compensation.
The following table provides a summary of our related party transactions:
Years ended December 31,
$ in millions 2022 2021 2020
The following transactions are included in Operation and Maintenance on the Consolidated Statements of Operations:
Net charges from the Service Company $ 39.9 $ 34.9 $ 33.2
Services provided by AES and other AES affiliates $ 16.5 $ 15.5 $ 12.5
Services provided by other related parties $ 2.5 $ 1.6 $ 1.5
Balances with related parties (included in Accounts Receivable, net and Accounts Payable):
At December 31, 2022 At December 31, 2021
Net payable to the Service Company $ (9.8) $ (24.7)
Net receivable from AES and other AES affiliates $ 0.3 $ 1.6
Net payable to other related parties $ - $ (0.8)
DPL Capital Trust II
DPL has a wholly-owned business trust, DPL Capital Trust II (the Trust), formed for the purpose of issuing trust capital securities to third-party investors. Effective in 2003, DPL deconsolidated the Trust upon adoption of the accounting standards related to variable interest entities and currently treats the Trust as a nonconsolidated subsidiary. The Trust holds mandatorily redeemable trust capital securities. The investment in the Trust, which amounted to $0.2 million and $0.2 million at December 31, 2022 and 2021, respectively, is included in Other non-
current assets on the Consolidated Balance Sheets. DPL also has a note payable to the Trust amounting to $15.6 million and $15.6 million at December 31, 2022 and 2021, respectively, that was established upon the Trust’s deconsolidation in 2003. This note payable is included in Long-term debt on the Consolidated Balance Sheets.
In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation which represents a full and unconditional guarantee of payments to the capital security holders of the Trust.
Income Taxes
AES files federal and state income tax returns which consolidate DPL and its subsidiaries. Under a tax sharing agreement with AES, DPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method.
12 - BUSINESS SEGMENTS
DPL manages its business through one reportable operating segment, the Utility segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segment. The Utility segment is comprised of AES Ohio, a public electric transmission and distribution utility, with all other nonutility business activities aggregated separately. See Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for further information on AES Ohio. The “Other” nonutility category primarily includes interest expense, cash and other immaterial balances. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
The following tables present financial information for DPL’s reportable business segment:
$ in millions Utility Other Adjustments and Eliminations DPL Consolidated
Year ended December 31, 2022
Revenues from external customers $ 859.3 $ 9.7 $ - $ 869.0
Intersegment revenues 0.8 3.6 (4.4) -
Total revenues $ 860.1 $ 13.3 $ (4.4) $ 869.0
Depreciation and amortization $ 78.7 $ 1.3 $ - $ 80.0
Interest expense $ 28.8 $ 39.0 $ - $ 67.8
Income / (loss) from continuing operations before income tax $ 15.8 $ (30.1) $ - $ (14.3)
Cash capital expenditures $ 283.7 $ 3.6 $ - $ 287.3
$ in millions Utility Other Adjustments and Eliminations DPL Consolidated
Year ended December 31, 2021
Revenues from external customers $ 663.0 $ 9.7 $ - $ 672.7
Intersegment revenues 0.7 3.5 (4.2) -
Total revenues $ 663.7 $ 13.2 $ (4.2) $ 672.7
Depreciation and amortization $ 74.6 $ 1.5 $ - $ 76.1
Interest expense $ 24.2 $ 38.7 $ - $ 62.9
Income / (loss) from continuing operations before income tax $ 52.8 $ (30.4) $ - $ 22.4
Cash capital expenditures $ 189.3 $ 2.0 $ - $ 191.3
$ in millions Utility Other Adjustments and Eliminations DPL Consolidated
Year ended December 31, 2020
Revenues from external customers $ 651.2 $ 9.3 $ - $ 660.5
Intersegment revenues 0.9 3.6 (4.5) -
Total revenues $ 652.1 $ 12.9 $ (4.5) $ 660.5
Depreciation and amortization $ 71.8 $ 1.5 $ - $ 73.3
Interest expense $ 24.3 $ 47.0 $ - $ 71.3
Loss on early extinguishment of debt $ - $ 31.7 $ - $ 31.7
Income / (loss) from continuing operations before income tax $ 58.1 $ (70.0) $ - $ (11.9)
Cash capital expenditures $ 153.3 $ 4.0 $ - $ 157.3
Total Assets December 31, 2022 December 31, 2021 December 31, 2020
Utility $ 2,405.9 $ 2,162.6 $ 2,014.7
All Other (a)
16.5 9.2 21.3
DPL Consolidated $ 2,422.4 $ 2,171.8 $ 2,036.0
(a) "All Other" includes Eliminations for all periods presented.
13 - REVENUES
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue
AES Ohio energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. AES Ohio sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenues are satisfied over time as energy is delivered and the same method is used to measure progress, and thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right to sell or distribute electricity in our service area, AES Ohio is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that AES Ohio is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that AES Ohio has the right to bill corresponds directly with the value to the customer of AES Ohio's performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and AES Ohio only serves as a billing agent if requested by the CRES provider. As such, AES Ohio recognizes the consolidated billing arrangement with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue
AES Ohio's share of the power produced at OVEC is sold to PJM and these revenues are classified as Wholesale revenues.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity market and the two products can be transacted independently of one another. Therefore, wholesale revenues are a
separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
RTO ancillary revenue
Compensation for use of AES Ohio’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenues. As AES Ohio owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. AES Ohio) and recognized as transmission revenues.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that AES Ohio, as the transmission operator, has the right to bill (received as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue
AES Ohio records its share of OVEC capacity revenues as Capacity revenues. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and performance of the OVEC units, there may be additional performance bonuses or penalties, which would be recognized only if it becomes probable that such bonus or penalties will be incurred.
RTO capacity revenues have a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
DPL's revenue from contracts with customers was $861.4 million, $667.6 million and $645.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. The following table presents our revenue from contracts with customers and other revenue by segment for the years ended December 31, 2022, 2021 and 2020:
$ in millions Utility Other Adjustments and Eliminations Total
Year ended December 31, 2022
Retail revenue
Retail revenue from contracts with customers
Residential revenue $ 467.3 $ - $ - $ 467.3
Commercial revenue 166.0 - - 166.0
Industrial revenue 74.3 - - 74.3
Governmental revenue 24.1 - - 24.1
Other (a) 11.9 - - 11.9
Total retail revenue from contracts with customers 743.6 - - 743.6
Wholesale revenue
Wholesale revenue from contracts with customers 41.0 - (0.8) 40.2
RTO ancillary revenue 63.6 0.1 - 63.7
Capacity revenue 4.3 - - 4.3
Miscellaneous revenue
Miscellaneous revenue from contracts with customers (c) - 9.6 - 9.6
Miscellaneous revenue 7.6 3.6 (3.6) 7.6
Total revenues $ 860.1 $ 13.3 $ (4.4) $ 869.0
$ in millions Utility Other Adjustments and Eliminations Total
Year ended December 31, 2021
Retail revenue
Retail revenue from contracts with customers
Residential revenue $ 364.9 $ - $ - $ 364.9
Commercial revenue 122.6 - - 122.6
Industrial revenue 57.5 - - 57.5
Governmental revenue 26.1 - - 26.1
Other (a) 12.2 - - 12.2
Total retail revenue from contracts with customers 583.3 - - 583.3
Wholesale revenue
Wholesale revenue from contracts with customers 19.5 - (0.7) 18.8
RTO ancillary revenue 49.9 0.1 - 50.0
Capacity revenue 5.9 - - 5.9
Miscellaneous revenue
Miscellaneous revenue from contracts with customers (c) - 9.6 - 9.6
Miscellaneous revenue 5.1 3.5 (3.5) 5.1
Total revenues $ 663.7 $ 13.2 $ (4.2) $ 672.7
$ in millions Utility Other Adjustments and Eliminations Total
Year ended December 31, 2020
Retail revenue
Retail revenue from contracts with customers
Residential revenue $ 362.3 $ - $ - $ 362.3
Commercial revenue 114.6 - - 114.6
Industrial revenue 51.2 - - 51.2
Governmental revenue 36.6 - - 36.6
Other (a) 12.7 - - 12.7
Total retail revenue from contracts with customers 577.4 - - 577.4
Other retail revenue (b) 9.0 - - 9.0
Wholesale revenue
Wholesale revenue from contracts with customers 11.0 - (0.9) 10.1
RTO ancillary revenue 44.0 - - 44.0
Capacity revenue 4.2 - - 4.2
Miscellaneous revenue
Miscellaneous revenue from contracts with customers (c) - 9.3 - 9.3
Miscellaneous revenue 6.5 3.6 (3.6) 6.5
Total revenues $ 652.1 $ 12.9 $ (4.5) $ 660.5
(a) "Other" primarily includes operation and maintenance service revenues, billing service fees from CRES providers and other miscellaneous retail revenues from contracts with customers.
(b) Other retail revenue primarily includes alternative revenue programs not accounted for under ASC 606 - Revenue Recognition ("ASC 606").
(c) Miscellaneous revenue from contracts with customers primarily includes revenues for various services provided by Miami Valley Lighting.
The balances of receivables from contracts with customers were $85.3 million and $61.5 million as of December 31, 2022 and 2021, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under ASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for DPL.
14 - DISCONTINUED OPERATIONS
In May 2020, AEP, the operator of the formerly co-owned Conesville EGU, retired Conesville Unit 4 as planned. On June 5, 2020, DPL and AES Ohio Generation, together with AEP, completed the transfer of their interests in the retired Unit 4, including the associated environmental liabilities, to an unaffiliated third-party purchaser. As a result, DPL recognized a gain on the transfer of $4.5 million for the year ended December 31, 2020. For the transaction, DPL made quarterly cash expenditures, totaling $4.0 million, through June 2022. The transfer of Conesville Unit 4 was the last step in DPL's plan to exit its AES Ohio Generation business operations.
DPL determined that the transfer of Conesville and the previous transfers and sales of other AES Ohio Generation assets constitute the disposal of a group of components, which, as a whole, represent a strategic shift to exit its AES Ohio Generation business. As such, the disposal of this group of components qualifies to be presented as discontinued operations. Therefore, the results of operations of this group of components were reported as such in the Consolidated Statements of Operations for all periods presented.
The following table summarizes the revenues, operating costs, other expenses and income tax of discontinued operations for the periods indicated:
$ in millions 2021 2020
Revenues $ 1.4 $ 24.2
Operating costs and other expenses (2.4) (24.8)
Loss from discontinued operations (1.0) (0.6)
Gain from disposal of discontinued operations - 6.1
Income tax expense / (benefit) from discontinued operations (0.2) 0.1
Net income / (loss) from discontinued operations $ (0.8) $ 5.4
Cash flows related to discontinued operations are included in our Consolidated Statements of Cash Flows. Cash flows from operating activities for discontinued operations were $(0.8) million and $3.2 million for the years ended December 31, 2021 and 2020, respectively. Cash flows from investing activities for discontinued operations were $(1.6) million and $4.9 million for the years ended December 31, 2021 and 2020, respectively.
15 - DISPOSITIONS
On December 3, 2020, AES Ohio transferred its interests in the retired Hutchings Coal Station to a third party, including its obligations to remediate the Station and its site, and the transfer occurred on that same date. As a result, DPL recognized a loss on the transfer of $4.7 million and made cash expenditures of $7.0 million, inclusive of cash expenditures for the transfer charges. DPL paid an additional $2.3 million on December 1, 2021 for the transfer. The Hutchings Coal Station was retired in 2013, and, as such, the income / (loss) from continuing operations before income tax related to the Hutchings Coal Station was immaterial for the year ended December 31, 2020, excluding the loss on transfer noted above. Prior to the transfer, the Hutchings Coal Station was included in the Utility segment.
16 - RISKS AND UNCERTAINTIES
COVID-19 Pandemic
The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets. We continue to take a variety of measures in response to the spread of COVID-19 to ensure our ability to transmit, distribute and sell electric energy, ensure the health and safety of our employees, contractors, customers and communities and provide essential services to the communities in which we operate. The magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.
FINANCIAL STATEMENTS
AES Ohio
Report of Independent Registered Public Accounting Firm
To the Shareholder and the Board of Directors of The Dayton Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying balance sheets of The Dayton Power & Light Company, d/b/a AES Ohio (the Company), as of December 31, 2022 and 2021, the related statements of operations, comprehensive income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively, referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the Board of Directors and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Regulatory Accounting
Description of the Matter As described in Note 2 to the financial statements, the Company applies the provisions of FASB Accounting Standards Codification 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the Public Utilities Commission of Ohio and the Federal Energy Regulatory Commission. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous overcollections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; revenues; and depreciation expense, and related disclosures in the Company’s financial statements.
Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred through December 31, 2022, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the financial statements and related disclosures.
How We Addressed the Matter in Our Audit To evaluate the Company’s significant judgments in accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
Indianapolis, Indiana
March 1, 2023
AES Ohio
Statements of Operations
Years ended December 31,
$ in millions 2022 2021 2020
Revenues $ 860.1 $ 663.7 $ 652.1
Operating costs and expenses
Net fuel costs - 0.5 1.6
Net purchased power cost 469.0 275.1 229.4
Operation and maintenance 185.1 152.1 182.0
Depreciation and amortization 78.7 74.6 71.8
Taxes other than income taxes 85.1 81.9 79.1
Loss / (gain) on disposal of business (Note 12) (0.6) - 4.7
Total operating costs and expenses 817.3 584.2 568.6
Operating income 42.8 79.5 83.5
Other income / (expense), net
Interest expense (28.8) (24.2) (24.3)
Other income / (expense) 1.9 (2.5) (1.1)
Other expense, net (27.0) (26.7) (25.4)
Income before income tax 15.8 52.8 58.1
Income tax expense / (benefit) (3.1) 5.7 7.0
Net income $ 18.9 $ 47.1 $ 51.1
See Notes to Financial Statements.
AES Ohio
Statements of Comprehensive Income
Years ended December 31,
$ in millions 2022 2021 2020
Net income $ 18.9 $ 47.1 $ 51.1
Derivative activity:
Change in derivative fair value, net of income tax effect of $0.0, $0.0 and $(0.2) for each respective period
- - (0.2)
Reclassification to earnings, net of income tax effect of $0.0, $0.0 and $0.8 for each respective period
- - 0.6
Net change in fair value of derivatives - - 0.4
Unfunded pension and other postretirement activity:
Prior service cost for the period, net of income tax effect of $0.0, $0.0 and $0.0 for each respective period
0.1 - -
Net gain / (loss) for the period, net of income tax effect of $(0.6), $(1.8) and $2.6 for each respective period
2.2 6.4 (8.7)
Reclassification to earnings, net of income tax effect of $(0.9), $(1.1) and $(0.9) for each respective period
2.7 3.9 3.1
Net change in unfunded pension and other postretirement obligations 5.0 10.3 (5.6)
Other comprehensive income / (loss) 5.0 10.3 (5.2)
Net comprehensive income $ 23.9 $ 57.4 $ 45.9
See Notes to Financial Statements.
AES Ohio
Balance Sheets
$ in millions December 31, 2022 December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents $ 19.7 $ 14.4
Accounts receivable, net of allowance for credit losses of $0.5 and $0.3, respectively (Note 1)
92.3 71.9
Inventories 26.8 14.4
Taxes applicable to subsequent years 93.9 83.0
Regulatory assets, current (Note 2) 39.2 24.5
Taxes receivable 29.6 28.1
Prepayments and other current assets 4.2 8.0
Total current assets 305.7 244.3
Property, plant and equipment:
Property, plant and equipment (Note 3) 2,752.7 2,571.3
Less: Accumulated depreciation and amortization (1,086.5) (1,062.6)
1,666.2 1,508.7
Construction work in process 195.3 170.5
Total net property, plant and equipment 1,861.5 1,679.2
Other non-current assets:
Regulatory assets, non-current (Note 2) 129.8 176.8
Intangible assets, net of amortization 68.5 32.4
Other non-current assets 40.4 29.9
Total other non-current assets 238.7 239.1
Total assets $ 2,405.9 $ 2,162.6
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term and current portion of long-term debt (Note 5) $ 120.2 $ 0.2
Accounts payable 129.5 111.5
Accrued taxes 88.3 85.1
Accrued interest 3.4 2.6
Customer deposits 16.3 14.9
Regulatory liabilities, current (Note 2) 40.4 14.6
Accrued and other current liabilities 18.7 13.0
Total current liabilities 416.8 241.9
Non-current liabilities:
Long-term debt (Note 5) 712.5 574.1
Deferred income taxes (Note 6) 194.9 183.4
Taxes payable 94.3 83.5
Regulatory liabilities, non-current (Note 2) 198.7 229.3
Accrued pension and other postretirement obligations (Note 7) 41.8 62.3
Other non-current liabilities 5.1 5.9
Total non-current liabilities 1,247.3 1,138.5
Commitments and contingencies (Note 9)
Common shareholder's equity:
Common stock, par value of $0.01 per share
0.4 0.4
50,000,000 shares authorized, 41,172,173 shares issued and outstanding
Other paid-in capital 773.6 822.5
Accumulated other comprehensive loss (26.8) (31.8)
Accumulated deficit (5.4) (8.9)
Total common shareholder's equity 741.8 782.2
Total liabilities and shareholder's equity $ 2,405.9 $ 2,162.6
See Notes to Financial Statements.
AES Ohio
Statements of Cash Flows
Years ended December 31,
$ in millions 2022 2021 2020
Cash flows from operating activities:
Net income $ 18.9 $ 47.1 $ 51.1
Adjustments to reconcile Net income to Net cash from operating activities
Depreciation and amortization 78.7 74.6 71.8
Deferred income taxes (2.3) 4.5 3.4
Loss on early extinguishment of debt 0.1 - -
Loss / (gain) on disposal of business, net (0.6) - 4.7
Changes in certain assets and liabilities:
Accounts receivable, net (20.5) (1.9) 0.7
Inventories (12.5) (5.5) 1.4
Taxes applicable to subsequent years (10.9) (5.4) (0.2)
Deferred regulatory costs, net 38.4 10.3 (34.0)
Other non-current assets 5.6 (4.9) (3.9)
Accounts payable 13.6 15.1 (4.0)
Accrued taxes payable / receivable 12.5 10.0 4.5
Accrued interest 0.8 - 1.3
Accrued pension and other postretirement obligations (11.4) (12.2) (11.8)
Other 7.2 (1.5) 6.0
Net cash provided by operating activities 117.6 130.2 91.0
Cash flows from investing activities:
Capital expenditures (283.7) (189.3) (153.3)
Cost of removal payments (22.4) (17.1) (25.5)
Payments on disposal and sale of business interests - - (7.0)
Other investing activities, net 0.4 0.9 (0.7)
Net cash used in investing activities (305.7) (205.5) (186.5)
Cash flows from financing activities
Returns of capital paid to parent (64.0) (52.0) (42.7)
Equity contribution from parent - 150.0 150.0
Retirement of long-term debt - - (140.0)
Issuance of long-term debt 140.0 - 140.0
Payments of deferred financing costs (2.6) - (1.2)
Borrowings from revolving credit facilities 255.0 120.0 95.0
Repayment of borrowings from revolving credit facilities (135.0) (140.0) (115.0)
Other financing activities, net - - (0.1)
Net cash provided by financing activities 193.4 78.0 86.0
Cash, cash equivalents and restricted cash: .
Net increase / (decrease) in cash, cash equivalents and restricted cash 5.3 2.7 (9.5)
Balance at beginning of year 14.5 11.8 21.3
Cash, cash equivalents and restricted cash at end of year $ 19.8 $ 14.5 $ 11.8
Supplemental cash flow information:
Interest paid, net of amounts capitalized $ 15.9 $ 21.2 $ 19.3
Income taxes paid, net $ - $ - $ 0.1
Non-cash financing and investing activities:
Accruals for capital expenditures $ 47.0 $ 42.5 $ 31.6
See Notes to Financial Statements.
AES Ohio
Statements of Shareholder's Equity
Common Stock (a)
$ in millions Outstanding Shares Amount Other Paid-in Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total
Year ended December 31, 2020
Beginning balance 41,172,173 $ 0.4 $ 617.0 $ (36.9) $ (107.1) $ 473.4
Net income 51.1 51.1
Other comprehensive loss (5.2) (5.2)
Distributions to parent (52.7) (52.7)
Equity contribution from parent 150.0 150.0
Other 0.1 0.1
Ending balance 41,172,173 0.4 714.4 (42.1) (56.0) 616.7
Year ended December 31, 2021
Net income 47.1 47.1
Other comprehensive income 10.3 10.3
Distributions to parent (42.0) (42.0)
Equity contribution from parent 150.0 150.0
Other 0.1 0.1
Ending balance 41,172,173 0.4 822.5 (31.8) (8.9) 782.2
Year ended December 31, 2022
Net income 18.9 18.9
Other comprehensive income 5.0 5.0
Distributions to parent (49.0) (15.0) (64.0)
Other 0.1 (0.4) (0.3)
Ending balance 41,172,173 $ 0.4 $ 773.6 $ (26.8) $ (5.4) $ 741.8
(a)$0.01 par value, 50,000,000 shares authorized.
See Notes to Financial Statements.
AES Ohio
Notes to Financial Statements
For the years ended December 31, 2022, 2021 and 2020
1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 consumers the right to choose the electric generation supplier from whom they purchase retail generation service; however, transmission and distribution services are still regulated. AES Ohio has the exclusive right to provide such service to its approximately 536,000 customers located in West Central Ohio. AES Ohio provides retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 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 owned interests in the retired Hutchings Coal Station until its transfer in 2020 and currently owns numerous transmission facilities. Principal industries located in AES Ohio’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. 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 also sells its proportional share of energy and capacity from its investment in OVEC into the wholesale market. AES Ohio has only one reportable segment, the Utility segment. In addition to AES Ohio's electric transmission and distribution businesses, the Utility segment includes revenues and costs associated with AES Ohio's investment in OVEC and the historical results of AES Ohio’s retired Hutchings Coal Station, which was sold in 2020. The terms “we,” “us,” “our” and “ours” are used to refer to AES Ohio.
AES Ohio’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, AES Ohio applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs or overcollections of riders.
Financial Statement Presentation
AES Ohio does not have any subsidiaries. We have evaluated subsequent events through the date this report is issued.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the revenues and expenses of the periods reported. Actual results could differ from these estimates and assumptions. Significant items subject to such estimates and assumptions include: the carrying value of Property, plant and equipment; unbilled revenues; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingencies; and assets and liabilities related to employee benefits.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents.
Restricted Cash
Restricted cash includes cash which is restricted as to withdrawal or usage. The restrictions relate to cash required for certain balance requirements.
The following table summarizes cash, cash equivalents and restricted cash amounts reported within the Balance Sheets that reconcile to the total of such amounts as shown on the Statements of Cash Flows:
December 31,
$ in millions 2022 2021
Cash and cash equivalents $ 19.7 $ 14.4
Restricted cash (included in Prepayments and other current assets)
0.1 0.1
Cash, Cash Equivalents and Restricted Cash, End of Period $ 19.8 $ 14.5
Accounts Receivable and Allowance for Credit Losses
The following table summarizes accounts receivable as of December 31, 2022 and 2021:
December 31,
$ in millions 2021 2020
Accounts receivable, net
Customer receivables $ 60.6 $ 41.6
Unbilled revenues 24.0 19.2
Amounts due from affiliates 4.4 4.4
Other 3.8 7.0
Allowance for credit losses (0.5) (0.3)
Total accounts receivable, net $ 92.3 $ 71.9
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the years ended December 31, 2022 and 2021:
$ in millions Beginning Allowance Balance Current Period Provision Write-offs Charged Against Allowance Recoveries Collected Ending Allowance Balance
2022 $ 0.3 $ 2.5 $ (4.1) $ 1.8 $ 0.5
2021 $ 2.8 $ (0.4) $ (3.5) $ 1.4 $ 0.3
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions are expected to impact collectability. Amounts are written off when reasonable collections efforts have been exhausted.
Inventories
Inventories are carried at average cost, net of reserves, and include materials and supplies used for utility operations.
Regulatory Accounting
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 revenues collected for costs that AES Ohio expects to incur in the future.
The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific orders from the PUCO or the FERC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Our regulatory assets and liabilities have been created pursuant to a specific order of the PUCO or the FERC or established regulatory practices, such as other utilities under the jurisdiction of the PUCO or the FERC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to approval by the
PUCO or the FERC. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 2 - REGULATORY MATTERS for more information.
Property, Plant and Equipment
New property, plant and equipment additions are stated at cost. For regulated transmission and distribution property, cost includes direct labor and material, allocable overhead expenses and AFUDC. AFUDC represents the cost of borrowed funds and equity used to finance regulated construction projects. Capitalization of AFUDC and interest ceases at either project completion or at the date specified by regulators. AFUDC and capitalized interest was $7.0 million, $3.7 million and $3.0 million in the years ended December 31, 2022, 2021 and 2020, respectively.
For substantially all depreciable property, when a unit of property is retired, the original cost of that property less any salvage value is charged to Accumulated depreciation and amortization, consistent with composite depreciation practices.
Impairment of Long-lived Assets
GAAP requires that we test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The net book value of our property, plant, and equipment was $1,861.5 million and $1,679.2 million as of December 31, 2022 and 2021, respectively. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and distribution capacity of the assets; the expected ability to recover additional expenditures in the assets; and the anticipated demand and relative pricing of retail electricity in our service territory.
Depreciation
Depreciation expense is calculated using the straight-line method, which allocates the cost of property over its estimated useful life. For AES Ohio’s transmission and distribution assets, straight-line depreciation is applied monthly on an average composite basis using group rates that approximated 2.8% in 2022, 2.8% in 2021 and 2.8% in 2020. Depreciation expense was $75.6 million, $71.6 million and $68.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Intangibles
Intangibles include software and renewable energy credits. Renewable energy credits are carried on a weighted average cost basis and amortized as they are used or retired. Finite-lived intangible assets include capitalized software amortized over its estimated useful lives. These capitalized software intangible assets have a seven year-weighted average amortization period. The following table presents the cost and related accumulated amortization of capitalized software, the related amortization expense is included in Depreciation and amortization in the Statements of Operations, and the estimated future amortization:
December 31,
$ in millions 2022 2021
Capitalized software $ 101.5 $ 61.6
Accumulated amortization $ (34.3) $ (31.1)
Years ended December 31,
2022 2021 2020
Amortization expense $ 3.1 $ 3.0 $ 3.2
Estimated future amortization
Years ending December 31,
2023 $ 2.8
2024 2.8
2025 2.4
2026 2.0
2027 1.1
Total $ 11.1
Implementation Costs Related to Software as a Service
AES Ohio has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $12.5 million and $8.0 million as of December 31, 2022 and 2021, respectively, and these are recorded within Other non-current assets on the accompanying Balance Sheets.
Debt Issuance Costs
Costs incurred in connection with the issuance of long-term debt are deferred and presented as a direct reduction from the face amount of that debt and amortized over the related financing period using the effective interest method. Debt issuance costs related to a line-of-credit or revolving credit facility are deferred and presented as an asset and amortized over the related financing period. Make-whole payments in connection with early debt retirements are classified as cash flows used in financing activities.
Financial Instruments
Our Master Trust investments in debt and equity financial instruments of publicly traded entities are classified as equity investments. These equity securities are carried at fair value and unrealized gains and losses on these securities are recorded in Other income. As these financial instruments are held to be used for the benefit of employees or former employees participating in employee benefit plans and are not used for general operating purposes, they are classified as non-current in Other non-current assets on the Balance Sheets. See Note 4 - FAIR VALUE for additional information.
Financial Derivatives
We have contracts involving the physical delivery of energy. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815 - Derivatives and Hedging, we have elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
Accumulated other comprehensive loss
The amounts reclassified out of Accumulated other comprehensive loss by component during the years ended December 31, 2022, 2021 and 2020 are as follows:
Details about AOCL Components Affected line in the Statements of Operations Years ended December 31,
$ in millions 2022 2021 2020
Gains and losses on cash flow hedges:
Interest expense $ - $ - $ (0.2)
Income tax effect - - 0.8
Net of income taxes - - 0.6
Amortization of unfunded pension and other postretirement obligations (Note 7):
Other expense 3.6 5.0 4.0
Income tax effect (0.9) (1.1) (0.9)
Net of income taxes 2.7 3.9 3.1
Total reclassifications for the period, net of income taxes $ 2.7 $ 3.9 $ 3.7
The changes in the components of Accumulated other comprehensive loss during the years ended December 31, 2022 and 2021 are as follows:
$ in millions Change in Accumulated other comprehensive loss
Balance at January 1, 2021 $ (42.1)
Other comprehensive income before reclassifications 6.4
Amounts reclassified from accumulated other comprehensive loss to earnings 3.9
Net current period other comprehensive income 10.3
Balance at December 31, 2021 (31.8)
Other comprehensive income before reclassifications 2.3
Amounts reclassified from accumulated other comprehensive loss to earnings 2.7
Net current period other comprehensive income 5.0
Balance at December 31, 2022 $ (26.8)
Insurance and Claims Costs
In addition to insurance obtained from third-party providers, MVIC, a wholly-owned captive subsidiary of DPL, provides insurance coverage solely to us and other DPL subsidiaries for workers’ compensation, general liability and property damage on an ongoing basis. AES Ohio is responsible for claims costs below certain coverage thresholds of MVIC and third-party insurers for the insurance coverage noted above. AES Ohio has estimated liabilities for medical, life, disability and other reserves for claims costs below certain coverage thresholds of third-party providers of approximately $3.2 million and $3.4 million at December 31, 2022 and 2021, respectively, within Accrued and other current liabilities and Other non-current liabilities on the accompanying Balance Sheets. The estimated liabilities for workers’ compensation, medical, life and disability costs at AES Ohio are actuarially determined using certain assumptions. There is uncertainty associated with these loss estimates, and actual results may differ from the estimates. Modification of these loss estimates based on experience and changed circumstances is reflected in the period in which the estimate is re-evaluated.
Revenue Recognition
Revenues are recognized from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Energy sales to customers are based on the reading of their meters that occurs on a systematic basis throughout the month. We recognize the revenues on our Statements of Operations using an accrual method for retail and other energy sales that have not yet been billed, but where electricity has been consumed. This is termed “unbilled revenues” and is a widely recognized and accepted practice for utilities. At the end of each month, unbilled revenues are determined by the estimation of unbilled energy provided to customers since the date of the last meter reading, estimated line losses, the assignment of unbilled energy provided to customer classes and the average rate per customer class. For additional information, see Note 11 - REVENUES.
Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities
AES Ohio collects certain excise taxes levied by state or local governments from its customers. AES Ohio’s excise taxes and certain other taxes are accounted for on a net basis and recorded as a reduction in revenues in the accompanying Statements of Operations. The amounts of such taxes were as follows:
Years ended December 31,
$ in millions 2022 2021 2020
Excise taxes collected $ 49.2 $ 48.7 $ 48.1
Repairs and Maintenance
Costs associated with maintenance activities are recognized at the time the work is performed. These costs, which include labor, materials and supplies and outside services required to maintain equipment and facilities, are capitalized or expensed based on defined units of property.
Pension and Postretirement Benefits
We recognize in our Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes from actuarial gains or losses related to our regulated operations, which would otherwise be recognized in AOCL, recorded as a regulatory asset as this can be recovered through future rates. Such changes that are not related to our regulated operations are recognized in AOCL. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715 - Compensation - Retirement Benefits, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
See Note 7 - BENEFIT PLANS for more information.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities and their respective income tax bases. We establish an allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Our tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting. Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. Our policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Statements of Operations.
Income taxes payable, which are includable in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2 - REGULATORY MATTERS for additional information.
AES Ohio files U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 6 - INCOME TAXES for additional information.
Related Party Transactions
In the normal course of business, AES Ohio enters into transactions with other subsidiaries of DPL or AES. See Note 10 - RELATED PARTY TRANSACTIONS for more information on Related Party Transactions.
New accounting pronouncements
The following table provides a brief description of recent accounting pronouncements that had an impact on our financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on our Financial Statements.
Accounting Standard Description Date of Adoption Effect on the financial statements upon adoption
New Accounting Standards Adopted
2020-04 and 2021-01 and 2022-06 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting The amendments in these updates provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform, and clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. These amendments are effective for a limited period of time (March 12, 2020 - December 31, 2024). Effective for all entities as of March 12, 2020 through December 31, 2024. We adopted this standard on a prospective basis and it did not have a material impact on the Financial Statements.
Adoption of ASC Topic 326 -, Financial Instruments - Credit Losses
On January 1, 2020, we adopted ASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates ("ASC 326"). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement.
We applied the modified retrospective method of adoption for ASC 326. Under this transition method, we applied the transition provisions starting at the date of adoption. The CECL model primarily impacts the calculation of our expected credit losses in gross customer trade accounts receivable. The adoption of ASC 326 and the application of CECL on our trade accounts receivable did not have a material impact on our Financial Statements.
2 - REGULATORY MATTERS
Distribution Rate Case
On November 30, 2020, AES Ohio filed a new distribution rate case application with the PUCO to increase AES Ohio’s base rates for electric distribution service to address, in part, increased costs of materials and labor and substantial investments to improve distribution structures. On December 14, 2022, the PUCO issued an order on the application. Among other matters, the order:
•Establishes a revenue increase of $75.6 million for AES Ohio’s base rates for electric distribution service.
•Provides for a return on equity of 9.999% and a cost of long-term debt of 4.4% on a distribution rate base of $783.5 million and based on a capital structure of 53.87% equity and 46.13% long-term debt.
These rates will go into effect when AES Ohio has a new electric security plan in place. AES Ohio anticipates approval of ESP 4 in 2023.
AES Ohio ESPs, SEET Proceedings and Comprehensive Settlement
AES Ohio ESP - Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, AES Ohio operated pursuant to an approved ESP plan, which was initially approved on October 20, 2017 (ESP 3). On December 18, 2019, the PUCO approved AES Ohio's Notice of Withdrawal and reversion to its prior rate plan (ESP 1). Among other items, the PUCO Order approving the ESP 1 rate plan includes reinstating the non-bypassable RSC Rider, which provides annual revenues of approximately $79.0 million. The OCC has appealed to the Ohio Supreme Court, the Commission’s decision approving the reversion to ESP 1 as well as argued for a refund of the RSC revenues dating back to August 2021. A decision is pending. 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.
Comprehensive Settlement - On October 23, 2020, AES Ohio entered into a Stipulation and Recommendation (the Settlement) with the staff of the PUCO and various customers, and organizations representing customers of AES Ohio and certain other parties with respect to, among other matters, AES Ohio's applications pending at the PUCO for (i) approval of AES Ohio's plan to modernize its distribution grid (the Smart Grid Plan), (ii) findings that DP&L passed the SEET for 2018 and 2019, and (iii) findings that AES Ohio's current ESP 1 satisfies the SEET and the more favorable in the aggregate (MFA) regulatory test. On June 16, 2021, the PUCO issued their opinion and order accepting the stipulation as filed. The OCC appealed the final PUCO order to the Ohio Supreme Court on December 6, 2021. Oral arguments regarding this appeal are expected but not yet scheduled.
ESP 4 filing - 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. As part of this plan, AES Ohio intends to increase investments in the distribution infrastructure and deploy a proactive vegetation management program. The plan also includes proposals for new customer programs, including renewable options, electric vehicle programs and energy efficiency programs for residential and low-income customers. ESP 4 also seeks to recover outstanding
regulatory assets not currently in rates. AES Ohio did not propose that the Rate Stabilization Charge would continue as part of ESP 4. The plan requires PUCO approval and an evidentiary hearing is scheduled for April 12, 2023.
Decoupling
On January 23, 2021, AES Ohio filed with the PUCO requesting approval to defer its decoupling costs consistent with the methodology approved in its Distribution Rate Case. An evidentiary hearing was held in May 2021. If approved, the deferral would be effective December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs and economic changes in customer demand. These amounts were also included in the ESP 4 application and proposed to be recovered in a new rider.
COVID-19
In response to the PUCO’s COVID-19 emergency orders, AES Ohio filed an Application on March 23, 2020, requesting waivers of certain rule and tariff requirements and deferral of certain costs and revenues including those related to deposits and reconnection fees, late payment fees, credit card fees; and waived or uncollected amounts associated with putting customers on payment plans. On May 20, 2020, the PUCO approved the application and required AES Ohio to file a plan outlining the timing and steps it plans to take in an effort to return to normal operations. The authorized deferral of those certain costs and revenues must be offset by COVID-19 related savings. AES Ohio filed its plan on July 15, 2020 and was approved by the PUCO on August 12, 2020. AES Ohio had recorded a $0.9 million regulatory asset as of December 31, 2021; however, during the third quarter of 2022, AES Ohio decided it will not seek recovery in a future rate proceeding and, thus, wrote off the $0.9 million deferral, which is included in Operation and maintenance on the Statements of Operations.
FERC Proceedings
On March 3, 2020, AES Ohio filed an application before the FERC seeking to change its existing stated transmission rates to formula transmission rates that would be updated each calendar year. This filing was approved and made effective as of May 3, 2020, subject to possible refunds if the approved rates were modified. An uncontested settlement was filed December 10, 2020 and approved April 15, 2021. Among other things, the settlement established new depreciation rates for AES Ohio’s transmission assets and an authorized return on equity of 9.85%, and started an amortization process to return excess deferred taxes created by the TCJA. Pursuant to the approved mechanisms and formula, transmission rates were adjusted, effective on January 1, 2022, to reflect projected 2022 costs, adjusted to true-up the projections of revenues and costs incurred during 2020. Adjustments to true-up 2021 revenues and costs will be reflected in 2023 formula transmission rates. At December 31, 2022, AES Ohio has recorded a liability of $18.2 million, with $12.8 million classified as current, representing credits owed to customers for the 2022 and 2021 annual true-ups.
Regulatory Assets and Liabilities
In accordance with ASC 980 - Regulated Operations ("ASC 980"), we have recognized total regulatory assets of $169.0 million and $201.3 million at December 31, 2022 and 2021, respectively, and total regulatory liabilities of $239.1 million and $243.9 million at December 31, 2022 and 2021, respectively. Regulatory assets and liabilities are classified as current or non-current based on the term in which recovery is expected. See Note 1 - OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for accounting policies regarding Regulatory Assets and Liabilities.
The following table presents AES Ohio’s Regulatory assets and liabilities:
Type of Recovery Amortization Through December 31,
$ in millions 2022 2021
Regulatory assets, current:
Undercollections to be collected through rate riders A/B 2023 $ 38.7 $ 23.9
Rate case expenses being recovered in base rates B 2023 0.5 0.6
Total regulatory assets, current 39.2 24.5
Regulatory assets, non-current:
Pension benefits B Ongoing 64.2 76.2
Unrecovered OVEC charges C - 28.9
Regulatory compliance costs B Undetermined 6.4 6.3
Smart grid and AMI costs B 2025 2.3 5.2
Unamortized loss on reacquired debt B Various 2.0 4.3
Deferred storm costs A Undetermined 8.7 15.2
Deferred rate case costs B Undetermined 1.9 1.8
Deferred vegetation management and other A/B Undetermined 23.0 18.7
Decoupling deferral C Undetermined 13.8 13.8
Uncollectible deferral C Undetermined 7.5 6.4
Total regulatory assets, non-current 129.8 176.8
Total regulatory assets $ 169.0 $ 201.3
Regulatory liabilities, current:
Overcollection of costs to be refunded through rate riders A/B 2023 $ 27.6 $ 14.2
Transmission formula rate credits A 2023 12.8 0.4
Total regulatory liabilities, current 40.4 14.6
Regulatory liabilities, non-current:
Estimated costs of removal - regulated property Not Applicable 136.8 145.2
Deferred income taxes payable through rates Various 45.2 57.5
TCJA regulatory liability B Ongoing 4.5 6.5
Transmission formula rate credits A 2024 5.4 12.2
PJM transmission enhancement settlement A 2025 3.5 5.1
Postretirement benefits B Ongoing 3.3 2.8
Total regulatory liabilities, non-current 198.7 229.3
Total regulatory liabilities $ 239.1 $ 243.9
A - Recovery of incurred costs plus rate of return.
B - Recovery of incurred costs without a rate of return.
C - Recovery not yet determined, but recovery is probable of occurring in future rate proceedings.
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate orders; recovery for the remaining costs is probable, but not certain. These costs include: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Competitive Bidding Rider and (iv) the Transmission Cost Recovery Rider. Also included are the current portion of rate case expense costs, storm costs, Smart Grid O&M, Smart Grid Depreciation, the Infrastructure Investment Rider and Smart Grid R&D, which do not earn a return and are described in greater detail below. Current regulatory liabilities include the overcollection of alternative energy costs, legacy generation costs and certain transmission related costs, including the current portion of the PJM transmission enhancement settlement, the transmission rate true-up (including an anticipated refund as a result of a FERC audit) and the TCJA regulatory liability.
AES Ohio is earning a return on $3.5 million of the net undercollections / (overcollections) to be collected / (refunded) through rate riders including: (i) the Energy Efficiency Rider, (ii) the Economic Development Rider, (iii) the Competitive Bidding Rider and (iv) the Transmission Cost Recovery Rider, partially offset by the overcollection of economic development costs and legacy generation costs.
Pension benefits represent the qualifying ASC 715 costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI. As per PUCO and FERC precedents, these costs are probable of future rate recovery.
Unrecovered OVEC charges includes the portion of charges from OVEC that were not recovered through AES Ohio’s Fuel Rider from October 2014 through October 2017. Additionally, it includes net OVEC costs from December 19, 2019 through December 31, 2019. Beginning on November 1, 2017, through December 18, 2019, current OVEC costs were being recovered through AES Ohio’s reconciliation rider which was authorized as part of the ESP 3. AES Ohio has requested recovery of these costs through a proposed rider in ESP 4. During the third quarter of 2022, AES Ohio recorded a $28.9 million reduction to this regulatory asset as a charge to Net purchased power cost in the Condensed Consolidated Statements of Operations in accordance with the provisions of ASC 980.
Regulatory compliance costs represent the long-term portion of the regulatory compliance costs which include the following costs: (i) Consumer Education Campaign, (ii) Retail Settlement System, (iii) Generation Separation, (iv) Bill Format Redesign, (v) Green Pricing Tariff and (vi) Supplier Consolidated Billing. All of these costs except for Generation Separation earn a return. These costs were being recovered over a three-year period that began November 1, 2017 through a rider approved in the ESP 3. That rider was eliminated with the approval of the ESP 1 rate plan, so the balance as of December 18, 2019 remains a regulatory asset for future recovery. AES Ohio has requested recovery of the remaining balance through a proposed rider in ESP 4.
Rate case expenses represents costs associated with preparing distribution rate cases. AES Ohio was granted recovery of these costs for the 2015 case which do not earn a return, as part of the DRO. Recovery of costs for the 2020 case were included in the 2020 rate case filing.
Smart Grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. In a PUCO order on January 5, 2011, the PUCO indicated that it expects AES Ohio to continue to monitor other utilities’ Smart Grid and AMI programs and to explore the potential benefits of investing in the Smart Grid Plan and AMI programs and that AES Ohio will, when appropriate, file new Smart Grid and/or AMI business cases in the future. These costs are included in the October 23, 2020 settlement described above.
Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the PUCO.
Deferred storm costs represent the long-term portion of deferred costs for major storms which occurred during 2021 and 2022. AES Ohio files annual petitions seeking recovery of storm costs. Recovery of these costs is probable, but not certain.
Vegetation management costs represents costs incurred from outside contractors for tree trimming and other vegetation management services. Calculation terms were agreed to in the stipulation approved in the DRO. The terms were an annual baseline of $10.7 million in 2018 and $15.7 million thereafter. Amounts over the baseline will be deferred subject to an annual deferral maximum of $4.6 million. Annual spending less than the vegetation management baseline amount will result in a reduction to the regulatory asset or creation of a regulatory liability. These costs are included in AES Ohio's 2020 distribution rate case application.
Decoupling deferral represents the change in the revenue requirement based on a per customer methodology in the stipulation approved in the DRO and includes deferrals through December 18, 2019. These costs were previously recovered through a Decoupling Rider; however, AES Ohio withdrew its application in the ESP 3 and in doing so, the PUCO ordered on December 18, 2019 in the ESP 1 order, that AES Ohio no longer has a Decoupling Rider. As described above, AES Ohio filed a petition seeking authority to record a regulatory asset to accrue revenues that would have otherwise been collected through the Decoupling Rider; these amounts were also included in the ESP 4 application and proposed to be recovered in a new rider.
Uncollectible deferral represents deferred uncollectible expense associated with the nonpayment of electric service, less the revenues associated with the bypassable uncollectible portion of the standard offer rate. The DRO established that these costs would be recovered in a rider outside of base rates, thus no uncollectible expense is included in base rates. These costs are included in the 2020 distribution rate case.
Estimated costs of removal - regulated property reflect an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.
Deferred income taxes payable through rates represent deferred income tax liabilities recognized from the normalization of flow-through items as the result of taxes previously charged to customers. A deferred income tax asset or liability is created from a difference in income recognition between tax laws and accounting methods. As a regulated utility, AES Ohio includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets. Accordingly, this liability reflects the estimated deferred taxes AES Ohio expects to return to customers in future periods.
TCJA regulatory liability represents the long-term portion of both protected and unprotected excess Accumulated Deferred Income Taxes ("ADIT") for both transmission and distribution portions, grossed up to reflect the revenue requirement. As a part of the DRO, AES Ohio agreed that savings from the TCJA attributable to distribution facilities, including the excess ADIT and the regulatory liability, constitute amounts that will be returned to customers. As a result of the TCJA and subsequent DRO, AES Ohio entered into a stipulation to resolve all remaining TCJA items related to its distribution rates, including a proposal to return no less than $4.0 million per year for the first five years unless fully returned in the first five years via a tax savings cost rider for the distribution portion of the balance. On September 26, 2019, an order approved the stipulation in its entirety.
Transmission Formula Rate Credits liability represents the amounts due to customers as a result of the implementation of transmission formula rates, which are adjusted each year based on actual revenue and costs from a previous year, as described above under "FERC Proceedings".
PJM Transmission Enhancement Settlement liability represents the Transmission Enhancement Settlement charges for which AES Ohio is due a refund per FERC Order EL05-121-009 issued on May 31, 2018. The Order states that customers are due a refund for part of these charges which will be received starting August 2018 through 2025. Refunds received will be returned to customers via the transmission cost rider.
Postretirement benefits represent the qualifying ASC 715 gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.
3 - PROPERTY, PLANT AND EQUIPMENT
The following is a summary of AES Ohio’s Property, plant and equipment with corresponding composite depreciation rates at December 31, 2022 and 2021:
December 31, 2022 December 31, 2021
$ in millions Composite Rate Composite Rate
Regulated:
Transmission $ 545.3 2.0% $ 456.5 2.1%
Distribution 2,093.8 3.1% 1,996.6 3.1%
General 34.2 4.0% 48.0 2.3%
Non-depreciable 79.4 N/A 70.2 N/A
Total property, plant and equipment in service $ 2,752.7 2.8% $ 2,571.3 2.8%
Asset Removal Costs
We continue to record costs of removal for our regulated transmission and distribution assets through our depreciation rates and recover those amounts in rates charged to our customers. There are no known legal AROs
associated with these assets. We have recorded $136.8 million and $145.2 million in estimated costs of removal at December 31, 2022 and 2021, respectively, as regulatory liabilities for our transmission and distribution property. These amounts represent the excess of the cumulative removal costs recorded through depreciation rates less the cumulative removal costs actually incurred. See Note 2 - REGULATORY MATTERS for additional information.
The following is a summary of the changes in the regulatory liability for T&D asset removal costs:
2022 2021
Balance at beginning of year $ 145.2 $ 138.8
Additions 17.6 17.0
Settlements (26.0) (10.6)
Balance at end of year $ 136.8 $ 145.2
4 - FAIR VALUE
The fair value of our financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of our assets and liabilities have been determined using available market information. Because these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are categorized using the market approach as follows for AES Ohio:
•Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market. This includes inputs used for money market accounts that are considered cash equivalents, open-ended mutual funds and exchange-traded funds in the Master Trust. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions;
•Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets. This includes the common collective trust pension plan assets valued using the net asset value method. See Note 7 - BENEFIT PLANS for more information; and
•Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability. These inputs are used for certain debt balances because the notes are not publicly traded. The fair value reflects management’s own assumptions about the inputs used in pricing the liability. Our long-term debt is fair valued for disclosure purposes only.
The fair values of our financial instruments are based on published sources for pricing when possible. We rely on valuation models only when no other method is available to us. The fair value of our financial instruments represents estimates of possible value that may or may not be realized in the future. Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency.
We did not have any transfers of the fair values of our financial instruments among Level 1, Level 2 or Level 3 of the fair value hierarchy during the years ended December 31, 2022 and 2021
These financial instruments are not subject to master netting agreements or collateral requirements and, as such, are presented in the Balance Sheets at their gross fair value.
Financial Assets
AES Ohio established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans and these assets are not used for general operating purposes. These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit. These investments are recorded at fair value within Other non-current assets on the Balance Sheets and classified as equity securities.
Gains / (losses) on these assets were $(1.7) million, $0.7 million and $0.6 million during the years ended December 31, 2022, 2021 and 2020, respectively.
Recurring Fair Value Measurements
The fair value of assets at December 31, 2022 and 2021 and the respective category within the fair value hierarchy for AES Ohio was determined as follows:
$ in millions Fair Value at December 31, 2022 Fair Value at December 31, 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Assets
Money market funds $ 0.5 $ - $ - $ 0.5 $ 0.4 $ - $ - $ 0.4
Mutual funds 7.0 - - 7.0 - 9.0 - 9.0
Total assets $ 7.5 $ - $ - $ 7.5 $ 0.4 $ 9.0 $ - $ 9.4
Financial Instruments not Measured at Fair Value in the Balance Sheets
Our long-term debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets. These fair value inputs are considered Level 2 in the fair value hierarchy. As the Wright-Patterson Air Force Base note is not publicly traded, the fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs. Unrealized gains or losses are not recognized in the financial statements as long-term debt is presented at carrying value, net of unamortized premium or discount and unamortized deferred financing costs in the financial statements. The long-term debt amounts include the current portion payable in the next twelve months and have maturities that range from 2027 to 2061. Additional Level 3 disclosures are not presented since our long-term debt is not recorded at fair value.
The following table presents the carrying amount, fair value, and fair value hierarchy of our financial liabilities that are not measured at fair value in the Balance Sheets as of the periods indicated, but for which fair value is disclosed:
Carrying Amount Fair value as of December 31, 2022 Carrying Amount Fair value as of December 31, 2021
$ in millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Liabilities
Long-term debt $ 712.7 $ - $ 610.9 $ 17.0 $ 627.9 $ 574.3 $ - $ 625.4 $ 17.2 $ 642.6
5 - DEBT
Long-term debt is as follows:
$ in millions Interest Rate Maturity December 31, 2022 December 31, 2021
First Mortgage Bonds 3.95% 2049 $ 425.0 $ 425.0
First Mortgage Bonds 3.20% 2040 140.0 140.0
Tax-exempt First Mortgage Bonds (a)
4.25% 2027 100.0 -
Tax-exempt First Mortgage Bonds (b)
4.00% 2027 40.0 -
U.S. Government note 4.20% 2061 17.0 17.2
Unamortized deferred financing costs (6.9) (5.4)
Unamortized debt discount (2.4) (2.5)
Total long-term debt 712.7 574.3
Less: current portion (0.2) (0.2)
Long-term debt, net of current portion $ 712.5 $ 574.1
(a)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of November 1, 2040 but are subject to a mandatory put in June 2027.
(b)First mortgage bonds issued to the OAQDA, to secure the loan of proceeds from tax-exempt bonds issued by the OAQDA. The bonds have a final maturity date of January 1, 2034 but are subject to a mandatory put in June 2027.
Revolving Credit Agreement
AES Ohio entered into a second amendment and restatement of the AES Ohio Credit Agreement on December 22, 2022 with a syndication of bank lenders. The AES Ohio Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on December 22, 2027, and bears interest
at variable rates as described in the agreement. It includes an uncommitted $100.0 million accordion feature to provide AES Ohio with an option to request an increase in the size of the facility, subject to approval by the lenders. The AES Ohio Credit Agreement also includes two one-year extension options, allowing AES Ohio to extend the maturity date subject to approval by the lenders. At December 31, 2022 and 2021 the AES Ohio Credit Agreement had outstanding borrowings of $120.0 million and $0.0 million, respectively.
Debt Maturities
At December 31, 2022, maturities of long-term debt are summarized as follows:
Due during the years ending December 31,
$ in millions
2023 $ 0.2
2024 0.2
2025 0.2
2026 0.2
2027 140.2
Thereafter 581.0
722.0
Unamortized discounts (6.9)
Deferred financing costs, net (2.4)
Total long-term debt $ 712.7
Significant Transactions
On June 1, 2022, AES Ohio re-issued $140.0 million of tax-exempt OAQDA Collateralized Pollution Revenue Refunding Bonds that had been held in trust, Series 2015A&B. AES Ohio re-issued $140.0 million aggregate principal amount of first mortgage bonds to the OAQDA in two series: $100.0 million Series 2015A bonds at an interest rate of 4.25% and $40.0 million Series 2015B at an interest rate of 4.00% to secure the loan of proceeds from these bonds issued by the OAQDA. These bonds are subject to a mandatory put date of June 1, 2027.
Debt Covenants and Restrictions
The AES Ohio Credit Agreement and Bond Purchase Agreement (financing document entered into in connection with the issuance of AES Ohio's First Mortgage Bonds, on July 31, 2020) has one financial covenant. The covenant measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt by total capitalization. AES Ohio’s Total Debt to Total Capitalization ratio shall not be greater than 0.67 to 1.00. As of December 31, 2022 AES Ohio was in compliance with this financial covenant.
AES Ohio does not have any meaningful restrictions in its debt financing documents prohibiting dividends to its parent, DPL. As of December 31, 2022, AES Ohio was in compliance with all debt covenants, including the financial covenants described above.
Substantially all property, plant & equipment of AES Ohio is subject to the lien of the mortgage securing AES Ohio’s First and Refunding Mortgage.
6 - INCOME TAXES
AES Ohio’s components of income tax expense were as follows:
Years ended December 31,
$ in millions 2022 2021 2020
Components of tax expense / (benefit)
Federal - current $ (0.8) $ 1.1 $ 3.5
State and Local - current - 0.1 0.1
Total current (0.8) 1.2 3.6
Federal - deferred (2.4) 4.1 2.4
State and local - deferred 0.1 0.4 1.0
Total deferred (2.3) 4.5 3.4
Tax expense / (benefit) $ (3.1) $ 5.7 $ 7.0
Effective and Statutory Rate Reconciliation
The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to the effective tax rate, as a percentage of total income before taxes:
Years ended December 31,
2022 2021 2020
Statutory Federal tax rate 21.0 % 21.0 % 21.0 %
State taxes, net of Federal tax benefit 1.4 % 1.1 % 1.5 %
AFUDC - Equity (2.2) % 1.3 % 2.6 %
Amortization of investment tax credits (0.1) % (0.2) % (0.5) %
Depreciation of flow-through differences (39.4) % (11.7) % (10.6) %
Change in tax reserves - % (0.1) % (6.1) %
Other - net (0.3) % (0.6) % 4.1 %
Effective tax rate (19.6) % 10.8 % 12.0 %
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
The components of our deferred taxes are as follows:
December 31,
$ in millions 2022 2021
Net non-current assets / (liabilities)
Depreciation / property basis $ (181.3) $ (167.7)
Income taxes recoverable 9.2 13.6
Regulatory assets (22.8) (21.4)
Investment tax credit 0.1 0.5
Compensation and employee benefits (3.1) (3.4)
Other 3.0 (5.0)
Net non-current liabilities $ (194.9) $ (183.4)
The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.
Years ended December 31,
$ in millions 2022 2021 2020
Tax expense / (benefit) $ 1.5 $ 2.9 $ (2.3)
Uncertain Tax Positions
We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. The balance of unrecognized tax benefits did not change in 2022 and was $0.4 million at December 31, 2022 and December 31, 2021.
The amount anticipated to result in a net decrease to unrecognized tax benefits within 12 months of December 31, 2022 is estimated to be $0.0 million.
The following table presents the changes to our uncertain tax positions:
$ in millions 2022 2021 2020
Unrecognized tax benefits at January 1 $ 0.4 $ 1.4 $ 4.8
Gross increases - current period tax positions - - -
Gross decreases - prior period tax positions - (1.0) (3.4)
Unrecognized tax benefits at December 31 $ 0.4 $ 0.4 $ 1.4
Tax years subsequent to 2012 remain open to examination by taxing authorities. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe we have appropriately accrued for our uncertain tax positions. However, audit outcomes and the timing of audit settlements and future events that would impact our previously recorded unrecognized tax benefits are subject to significant uncertainty. It is possible that the ultimate outcome of future examinations may exceed our provision for current unrecognized tax benefits.
We recognize interest and penalties related to unrecognized tax benefits in Income tax benefit. The amounts accrued and the tax expense / (benefit) recorded were not material for each period presented.
AES Ohio is no longer subject to U.S. federal income tax examinations for tax years through 2012, but is open for all subsequent periods. AES Ohio is no longer subject to state income tax examinations for tax years through 2017, but is open for all subsequent periods.
7 - BENEFIT PLANS
Postretirement Benefits
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits until their death, while qualified employees who retired after 1987 are eligible for life insurance benefits and partially subsidized health care. The partially subsidized health care is at the election of the employee, who pays most of the cost, and is available only from their retirement until they are covered by Medicare. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $7.0 million and $8.9 million at December 31, 2022 and 2021, respectively, were not material to the Financial Statements in the periods covered by this report.
Defined Contribution Plans
The 401(k) Plans are qualified under Section 401 of the Internal Revenue Code.
Participants may elect to contribute up to 85% of eligible compensation to their plan. Non-union participant contributions are matched 100% on the first 1% of eligible compensation and 50% on the next 5% of eligible compensation and they are fully vested in their employer contributions after 2 years of service. Union participant contributions are matched 150% but are capped at $2,700 for 2022 and they are fully vested in their employer contributions after 3 years of service. Certain non-union and union employees become eligible to participate in their respective plan upon date of hire. All participants are fully vested in their own contributions.
We contributed $3.3 million, $3.3 million and $3.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. AES Ohio matching contributions are paid bi-weekly, in arrears. The contributions by year may include the bi-weekly matching contribution that is paid in the following year in addition to employer matching true-up contributions. AES Ohio also contributes an annual bonus to the accounts of its union participants. This payment is typically made in January of the following year.
AES Ohio sponsors a traditional defined benefit pension plan for most of the employees of DPL and its subsidiaries. For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service. For all other employees (management employees), the traditional defined benefit pension plan is based primarily on compensation and years of service. As of December 31, 2010, this traditional pension plan formula was closed to new management employees. A participant is 100% vested in all amounts credited to their account upon the completion of five vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Employees that transferred from AES Ohio to the Service Company maintain their previous eligibility to participate in the AES Ohio pension plan.
Almost all management employees beginning employment on or after January 1, 2011 participate in a cash balance pension plan formula. Similar to the traditional pension plan for management employees, the cash balance benefits are based on compensation and years of service. A participant shall become 100% vested in all amounts credited to his or her account upon the completion of three vesting years, as defined in The Dayton Power and Light Company Retirement Income Plan, or the participant’s death or disability. If a participant’s employment is terminated, other
than by death or disability, prior to such participant becoming 100% vested in his or her account, the account shall be forfeited as of the date of termination. Vested benefits in the cash balance plan are fully portable upon termination of employment.
In addition, we have a Supplemental Executive Retirement Plan ("SERP") for certain retired key executives. The SERP has an immaterial unfunded liability related to agreements for retirement benefits of certain terminated and retired key executives.
We recognize an asset for a plan’s overfunded status and a liability for a plan’s underfunded status and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. For the transmission and distribution areas of our electric business, these amounts are recorded as regulatory assets and liabilities which represent the regulated portion that would otherwise be charged or credited to AOCL. We have historically recorded these costs on the accrual basis, and this is how these costs have been historically recovered through customer rates. This factor, combined with the historical precedents from the PUCO and FERC, make these costs probable of future rate recovery.
The following tables set forth the changes in the Pension Plans' obligations and assets recorded on the Balance Sheets at December 31, 2022 and 2021. The amounts presented in the following tables for pension obligations include the collective bargaining plan formula, traditional management plan formula and cash balance plan formula and the SERP in the aggregate and have not been adjusted for $1.7 million, $1.7 million and $1.4 million of costs billed to the Service Company for the years ended December 31, 2022, 2021 and 2020, respectively, or $0.9 million, $1.9 million and $1.4 million of costs billed to AES Ohio Generation for the years ended December 31, 2022, 2021 and 2020, respectively.
$ in millions Years ended December 31,
Change in benefit obligation 2022 2021
Benefit obligation at January 1 $ 416.2 $ 449.5
Service cost 4.9 4.5
Interest cost 9.6 8.2
Plan amendments - 2.3
Actuarial gain (98.0) (12.7)
Benefits paid (23.7) (35.6)
Benefit obligation at December 31 309.0 416.2
Change in plan assets
Fair value of plan assets at January 1 363.5 365.1
Actual return / (loss) on plan assets (73.1) 24.0
Employer contributions 7.7 10.0
Benefits paid (23.7) (35.6)
Fair value of plan assets at December 31 274.4 363.5
Unfunded status of plan $ (34.6) $ (52.7)
December 31,
Amounts recognized in the Balance Sheets 2022 2021
Current liabilities $ (0.2) $ (0.2)
Non-current liabilities (34.4) (52.5)
Net liability at end of year $ (34.6) $ (52.7)
Amounts recognized in Accumulated other comprehensive loss, Regulatory assets, non-current, pre-tax
Components:
Prior service cost $ 7.3 $ 8.5
Net actuarial loss 102.7 119.5
Accumulated other comprehensive loss, Regulatory assets, pre-tax
$ 110.0 $ 128.0
Recorded in:
Regulatory assets, non-current $ 62.0 $ 74.0
Accumulated other comprehensive loss 48.0 54.0
Accumulated other comprehensive loss, Regulatory assets, pre-tax
$ 110.0 $ 128.0
The accumulated benefit obligation for our Pension Plans was $301.3 million and $400.7 million at December 31, 2022 and 2021, respectively.
The net periodic benefit cost of the Pension Plans was:
Years ended December 31,
$ in millions 2022 2021 2020
Service cost $ 4.9 $ 4.5 $ 3.7
Interest cost 9.6 8.2 11.8
Expected return on assets (15.8) (15.0) (18.6)
Amortization of unrecognized:
Actuarial loss 7.7 11.4 8.7
Prior service cost 1.2 1.1 1.3
Net periodic benefit cost $ 7.6 $ 10.2 $ 6.9
Rates relevant to each year's expense calculations
Discount rate 2.83 % 2.44 % 3.33 %
Expected return on plan assets 4.60 % 4.55 % 5.60 %
The following table presents other changes in plan assets and benefit obligations recognized in Accumulated other comprehensive loss, Regulatory assets, non-current and Regulatory liabilities, non-current:
Years ended December 31,
$ in millions 2022 2021 2020
Net actuarial loss / (gain) $ (9.1) $ (21.7) $ 25.8
Plan amendments - 2.3 -
Reversal of amortization item:
Net actuarial loss (7.7) (11.4) (8.7)
Prior service cost (1.2) (1.1) (1.3)
Total recognized in Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$ (18.0) $ (31.9) $ 15.8
Total recognized in net periodic benefit cost and Accumulated other comprehensive loss, Regulatory assets and Regulatory liabilities
$ (10.4) $ (21.7) $ 22.7
Significant Gains and Losses Related to Changes in the Benefit Obligation
The actuarial gain of $98.0 million decreased the benefit obligation for the year ended December 31, 2022 and an actuarial gain of $12.7 million decreased the benefit obligation for the year ended December 31, 2021. The actuarial gain in 2022 and 2021 was primarily due to an increase in the discount rate.
Assumptions
Our expected return on plan asset assumptions, used to determine benefit obligations, are based on historical long-term rates of return on investments, which use the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, as well as asset diversification and portfolio rebalancing, are evaluated when long-term capital market assumptions are determined. Peer data and historical returns are reviewed to verify reasonableness and appropriateness.
At December 31, 2022, we are increasing our long-term rate of return assumption to 5.40% for pension plan assets. The rate of return represents our long-term assumptions based on our long-term portfolio mix. Also, at December 31, 2022, we have increased our assumed discount rate to 5.41% from 2.83% for pension expense to reflect current duration-based yield curve discount rates. A one percent increase in the rate of return assumption for pension would result in a decrease in 2023 pension expense of approximately $3.3 million. A one percent decrease in the rate of return assumption for pension would result in an increase in 2023 pension expense of approximately $3.3 million. A 0.25-percentage point increase in the discount rate for pension would result in a decrease of approximately $0.3 million to 2023 pension expense. A 0.25-percentage point decrease in the discount rate for pension would result in an increase of approximately $0.4 million to 2023 pension expense.
In determining the discount rate to use for valuing liabilities, we used a market yield curve on high-quality fixed income investments as of December 31, 2022. We project the expected benefit payments under the plan based on
participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are then discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
In future periods, differences in the actual return on pension plan assets and assumed return, or changes in the discount rate, will affect the timing of contributions, if any, to the plans.
The weighted average assumptions used to determine benefit obligations were:
Benefit Obligation Assumptions Pension
2022 2021 2020
Discount rate for obligations 5.41% 2.83% 2.44%
Rate of compensation increases 3.21% 3.21% 3.21%
Pension Plan Assets
Pension Plan assets are invested in multiple asset classes using a de-risking framework designed to manage the Pension Plan's funded status volatility and minimize future cash contributions. Investment strategies and asset allocations are intended to allocate additional assets to the fixed income asset class should the Pension Plan's funded status improve. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Pension Plan assets are managed in a balanced portfolio comprised of two major components: return seeking assets and liability hedging assets. The expected role of plan return seeking assets is to provide additional return with associated higher levels of risk, while the role of liability hedging assets is to correlate the interest rate of the fixed income investments with that of the Pension Plans' liabilities.
Strategic asset allocation guidelines are determined by a Risk/Advisory Committee and approved by a Fiduciary Committee. These allocations consider the plan’s long-term objectives. The long-term target allocations for plan assets are 30% - 40% for return seeking assets and 60% - 70% for liability hedging assets. Return seeking assets include U.S. and international equity, while liability hedging assets include long-duration and high-yield bond funds and emerging market debt funds.
The investment approach is to move the Pension Plans to a more de-risked position, if and when the overall funded status of the Pension Plans improve, by periodically rebalancing the allocation of the Pension Plans' investments in growth assets and liability hedging assets in accordance with the committee's glide path. This strategy requires the daily monitoring of the Pension Plans' ratio of assets to liabilities in order to determine whether approved trigger points have been met, requiring the rebalancing of the assets.
All plan assets at December 31, 2022 are common collective trusts. With the exception of the cash and cash equivalents, the collective trusts are valued using the net asset value method and are categorized as Level 2 in the fair value hierarchy. The underlying investments are mutual funds, common stock. or debt securities, in alignment with the target asset allocation.
The following table summarizes our target pension plan allocation for 2022:
Long-Term
Mid-Point
Target
Allocation Percentage of plan assets as of December 31,
Asset category 2022 2021
Equity Securities 35% 32% 42%
Debt Securities 65% 67% 57%
Cash and Cash Equivalents -% 1% 1%
The fair values of our Pension Plans' assets at December 31, 2022 by asset category are as follows:
$ in millions Market Value at December 31, 2022 Quoted prices
in active
markets for
identical assets Significant
observable
inputs Significant
unobservable
inputs
Asset category (Level 1) (Level 2) (Level 3)
Common collective trusts
Equities (a)
$ 88.5 $ - $ 88.5 $ -
Debt securities (b)
125.7 - 125.7 -
Government debt securities (c)
58.3 - 58.3 -
Total common collective trusts 272.5 - 272.5 -
Cash and cash equivalents (d)
1.9 1.9 - -
Total pension plan assets $ 274.4 $ 1.9 $ 272.5 $ -
(a) This category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
The fair values of our pension plan assets at December 31, 2021 by asset category are as follows:
$ in millions Market Value at December 31, 2021 Quoted prices
in active
markets for
identical assets Significant
observable
inputs Significant
unobservable
inputs
Asset category (Level 1) (Level 2) (Level 3)
Common collective trusts
Equities (a)
$ 151.8 $ - $ 151.8 $ -
Debt securities (b)
144.0 - 144.0 -
Government debt securities (c)
65.8 - 65.8 -
Total common collective trusts 361.6 - 361.6 -
Cash and cash equivalents (d)
1.9 1.9 - -
Total pension plan assets $ 363.5 $ 1.9 $ 361.6 $ -
(a) This category represents investments that invest in equity securities of U.S. companies of any market capitalization and other investments (i.e.: futures, swaps, currency forwards) of foreign, emerging markets and seeks to provide long-term total return, which includes capital appreciation and income. The funds are valued using the net asset value method.
(b) This category represents investments that invest in high quality issues within the U.S. corporate bond markets and global high yield bonds and emerging markets debt denominated in local currency. The funds seek to provide current income and long-term capital preservation along with access to higher yielding, relatively liquid fixed income securities. The funds are valued using the net asset value method.
(c) This category represents investments that invest in U.S. treasury strips, U.S. government agency obligations, and U.S. treasury obligations. The funds seek investment returns over the long term and are valued using the net asset value method.
(d) This category represents an investment that seeks to maximize current income on cash reserves to the extent consistent with principal preservation and maintenance of liquidity from a portfolio of obligations of the U.S. Government, its agencies or municipalities, and related money market instruments. Principal preservation is a primary objective. The fund is valued at cost.
Pension Funding
We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA") and, in addition, make voluntary contributions from time to time. We contributed $7.5 million, $9.8 million and $7.5 million to the pension plan in the years ended December 31, 2022, 2021 and 2020.
We expect to make contributions of $0.2 million to our SERP in 2023 to cover benefit payments. We also expect to make contributions of $7.5 million to our pension plan during 2023.
Funding for the Pension Plans is based upon actuarially determined contributions that consider the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, AES Ohio’s funded target liability percentage was estimated to be 100%. In addition, AES Ohio must also contribute the normal service cost earned by active participants during the plan year. The funding of normal cost is expected to be approximately $5.5 million in 2023, which includes $1.9 million for plan expenses. Each year thereafter, if the plan’s underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over seven years. AES Ohio’s funding policy for the pension plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments, which reflect future service, are expected to be paid as follows:
Estimated future benefit payments
$ in millions due within the following years: Pension
2023 $ 24.5
2024 $ 24.4
2025 $ 23.9
2026 $ 23.8
2027 $ 23.5
2028 - 2032 $ 113.8
8 - SHAREHOLDER'S EQUITY
Common Stock
AES Ohio has 50,000,000 authorized common shares, of which 41,172,173 are outstanding at December 31, 2022. All common shares are held by AES Ohio’s parent, DPL.
Capital Contribution and Returns of Capital
During each of the years ended December 31, 2021 and 2020, DPL made capital contributions of $150.0 million to AES Ohio. The proceeds have enabled AES Ohio to seek to improve its infrastructure and modernize its grid while maintaining liquidity.
Return of capital payments and dividends were declared and paid in the amount of $64.0 million in the year ended December 31, 2022, declared in the amount of $42.0 million and paid in the amount of $52.0 million in the year ended December 31, 2021 and declared in the amount of $52.7 million and paid in the amount of $42.7 million in the year ended December 31, 2020.
9 - CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At December 31, 2022, these include:
Payments due in:
$ in millions Total Less than
1 year 2 - 3
years 4 - 5
years More than
5 years
Electricity purchase commitments $ 599.7 $ 420.9 $ 178.8 $ - $ -
Purchase orders and other contractual obligations $ 315.9 $ 250.8 $ 65.1 $ - $ -
Electricity purchase commitments:
AES Ohio enters into long-term contracts for the purchase of electricity through the SSO competitive bid auctions. In general, these contracts are subject to variable quantities and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2022, AES Ohio had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future
obligations to the Service Company, and AES Ohio's ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above.
Contingencies
Legal Matters
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in our Consolidated Financial Statements, as prescribed by GAAP, are adequate considering the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters, including the matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of December 31, 2022, cannot be reasonably determined.
Environmental Matters
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials, including GHGs, into the environment; climate change; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
Where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the us and could require us to pay damages or make expenditures in amounts that could be material but could not be estimated as of December 31, 2022.
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.
Accruals for legal loss and environmental contingencies were not material as of December 31, 2022 and December 31, 2021.
Equity Ownership Interest
AES Ohio has a 4.9% equity ownership interest in OVEC, which is recorded using the cost method of accounting under GAAP. AES Ohio, along with several non-affiliated energy companies party to an OVEC arrangement, receive and pay for OVEC capacity and energy and are responsible for OVEC debt obligations and other fixed costs in proportion to their power participation ratios under the arrangement, which, for AES Ohio, is the same as its equity ownership interest. As of December 31, 2022, AES Ohio could be responsible for the repayment of 4.9%, or $53.9 million, of $1.1 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 - RELATED PARTY TRANSACTIONS
Service Company
The Service Company allocates the costs for services provided based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including AES Ohio, are not subsidizing costs incurred for the benefit of other businesses.
Benefit Plans
DPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.
Long-term Compensation Plan
During 2022, 2021 and 2020, many of AES Ohio’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2022, 2021 and 2020 was $0.1 million, $0.0 million and $0.1 million, respectively, and was included in Operation and maintenance on AES Ohio’s Statements of Operations. The value of these benefits is being recognized over the 36-month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder included in Other paid-in capital on AES Ohio’s Balance Sheets in accordance with ASC 718 - Compensation - Stock Compensation.
The following table provides a summary of our related party transactions:
Years ended December 31,
$ in millions 2022 2021 2020
The following transactions are included in Operation and Maintenance on the Statements of Operations:
Net charges from the Service Company $ 39.2 $ 33.9 $ 32.1
Services provided by AES and other AES affiliates $ 28.1 $ 21.9 $ 21.2
Services provided by other related parties $ 2.5 $ 1.6 $ 1.5
Balances with related parties (include in Accounts Receivable, net and Accounts Payable):
At December 31, 2022 At December 31, 2021
Net payable to the Service Company $ (9.8) $ (24.7)
Net payable to AES and other AES affiliates $ 1.2 $ 1.8
Net payable to other related parties $ - $ (0.8)
Income Taxes
AES files federal and state income tax returns which consolidate DPL and its subsidiaries, including AES Ohio. Under a tax sharing agreement with DPL, AES Ohio is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. Under this agreement, AES Ohio had a net receivable balance of $29.6 million and $28.1 million at December 31, 2022 and 2021, respectively, which are recorded in Taxes receivable on the accompanying Balance Sheets. During 2022, 2021 and 2020, AES Ohio made no payments to DPL for its share of income taxes.
11 - REVENUES
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenue
AES Ohio energy sales to utility customers are based on the reading of meters at the customer's location that occurs on a systematic basis throughout the month. AES Ohio sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Performance obligations for retail revenues are satisfied over time as energy is delivered and the same method is used to measure progress, and thus the performance obligation meets the criteria to be considered a series. This includes both the promise to transfer energy and other distribution and/or transmission services.
In exchange for the exclusive right to sell or distribute electricity in our service area, AES Ohio is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that AES Ohio is allowed to charge customers for electricity. Since tariffs are approved by the regulator, the price that AES Ohio has the right to bill corresponds directly with the value to the customer of AES Ohio's performance completed in
each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff.
In cases where a customer chooses to receive generation services from a CRES provider, the price for generation services is negotiated between the customer and the CRES provider, and AES Ohio only serves as a billing agent if requested by the CRES provider. As such, AES Ohio recognizes the consolidated billing arrangement with the CRES provider on a net basis, thereby recording no revenue for the generation component. Retail revenue from these customers would only be related to transmission and distribution charges.
Wholesale revenue
AES Ohio's share of the power produced at OVEC is sold to PJM and these revenues are classified as Wholesale revenues.
In PJM, the promise to sell energy as wholesale revenue is separately identifiable from participation in the capacity market and the two products can be transacted independently of one another. Therefore, wholesale revenues are a separate contract with a single performance obligation. Revenue is recorded based on the quantities (MWh) delivered in each hour during each month at the spot price, making the contract effectively “month-to-month”.
RTO ancillary revenue
Compensation for use of AES Ohio’s transmission assets and compensation for various ancillary services are classified as RTO ancillary revenues. As AES Ohio owns and operates transmission lines in southwest Ohio within PJM, demand charges collected from network customers by PJM are then allocated to the appropriate transmission owners (i.e. AES Ohio) and recognized as transmission revenues.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that AES Ohio, as the transmission operator, has the right to bill (received as a credit from PJM) corresponds directly with the value to the customer of performance completed in each period, as the price paid is the allocation of the tariff rate (as approved by the regulator) charged to network participants.
Capacity revenue
AES Ohio records its share of OVEC capacity revenues as Capacity revenues. The capacity price is set through a competitive auction process established by PJM. Depending on the availability and performance of the OVEC units, there may be additional performance bonuses or penalties, which would be recognized only if it becomes probable that such bonus or penalties will be incurred.
RTO capacity revenues have a single performance obligation, as capacity is a distinct good. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The capacity price is set through a competitive auction process established by PJM.
AES Ohio's revenue from contracts with customers was $852.5 million, $658.6 million and $636.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. The following table presents our revenue from contracts with customers and other revenue for the years ended December 31, 2022, 2021 and 2020:
Years ended December 31,
$ in millions 2022 2021 2020
Retail revenue
Retail revenue from contracts with customers
Residential revenue $ 467.3 $ 364.9 $ 362.3
Commercial revenue 166.0 122.6 114.6
Industrial revenue 74.3 57.5 51.2
Governmental revenue 24.1 26.1 36.6
Other (a) 11.9 12.2 12.7
Total retail revenue from contracts with customers 743.6 583.3 577.4
Other retail revenue (b) - - 9.0
Wholesale revenue
Wholesale revenue from contracts with customers 41.0 19.5 11.0
RTO ancillary revenue 63.6 49.9 44.0
Capacity revenue 4.3 5.9 4.2
Miscellaneous revenue 7.6 5.1 6.5
Total revenues $ 860.1 $ 663.7 $ 652.1
(a) "Other" primarily includes operation and maintenance service revenues, billing service fees from CRES providers and other miscellaneous retail revenues from contracts with customers.
(b) Other retail revenue primarily includes alternative revenue programs not accounted for under ASC 606 - Revenue Recognition ("ASC 606").
The balances of receivables from contracts with customers were $84.6 million and $60.8 million as of December 31, 2022 and 2021, respectively. Payment terms for all receivables from contracts with customers are typically within 30 days.
We have elected to apply the optional disclosure exemptions under ASC 606. Therefore, we have no disclosures pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled for AES Ohio.
12 - DISPOSITIONS
On December 3, 2020, AES Ohio agreed to transfer its interests in the retired Hutchings Coal Station to a third party, including its obligations to remediate the Station and its site, and the transfer occurred on that same date. As a result, AES Ohio recognized a loss on the transfer of $4.7 million and made cash expenditures of $7.0 million, inclusive of cash expenditures for the transfer charges. AES Ohio paid an additional $2.3 million on December 1, 2021 for the transfer. The Hutchings Coal Station was retired in 2013, and, as such, the income / (loss) from continuing operations before income tax related to the Hutchings Coal Station was immaterial for the year ended December 31, 2020, excluding the loss on transfer noted above.
13 - RISKS AND UNCERTAINTIES
COVID-19 Pandemic
The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility in financial markets. We continue to take a variety of measures in response to the spread of COVID-19 to ensure our ability to transmit, distribute and sell electric energy, ensure the health and safety of our employees, contractors, customers and communities and provide essential services to the communities in which we operate. The magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A - Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
We carried out the evaluation required by Rules 13a-15(b) and 15d-15(b), under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, our CEO and CFO concluded that as of December 31, 2022, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•provide reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements are prevented or detected timely.
Management, including our CEO and CFO, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on this assessment, management believes that we maintained effective internal control over financial reporting as of December 31, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes that occurred during the quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B - Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 - Directors, Executive Officers and Corporate Governance
Not applicable pursuant to General Instruction I of the Form 10-K.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11 - Executive Compensation
Not applicable pursuant to General Instruction I of the Form 10-K.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Not applicable pursuant to General Instruction I of the Form 10-K.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Not applicable pursuant to General Instruction I of the Form 10-K.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14 - Principal Accountant Fees and Services
The Financial Audit Committee of AES pre-approves the audit and non-audit services provided by the independent auditors for itself and its subsidiaries, including DPL and its subsidiaries and AES Ohio. The AES Financial Audit Committee maintained its policy established in 2002 within which to judge if the independent auditor may be eligible to provide certain services outside of its main role as outside auditor. Services within the established framework include audit and related services and certain tax services. Services outside of the framework require AES Financial Audit Committee approval prior to the performance of the service. The Sarbanes-Oxley Act of 2002 addresses auditor independence and this framework is consistent with the provisions of the Act. No services performed by the independent auditor with respect to DPL and AES Ohio and its subsidiaries were approved after the fact by the AES Financial Audit Committee other than those that were considered to be de minimis and approved in accordance with Regulation 2-01(c)(7)(i)(C) to Regulation S-X of the Exchange Act.
In addition to the pre-approval policies of the AES Financial Audit Committee, the DPL and AES Ohio Boards of Directors will specifically approve the annual audit services and fees of the independent auditor and the taking of other related actions, such as entering into the terms of the engagement letter.
Audit fees are fees billed or expected to be billed by our principal accountant for professional services for the audit of the Financial Statements, included in DPL's and AES Ohio's annual report on Form 10-K and review of financial statements included in DPL's and AES Ohio's quarterly reports on Form 10-Q, services that are normally provided by our principal accountants in connection with statutory, regulatory or other filings or engagements or any other service performed to comply with generally accepted auditing standards and include comfort and consent letters in connection with SEC filings and financing transactions.
The following table presents the aggregate fees billed for professional services rendered to DPL and AES Ohio by Ernst & Young LLP during the years ended December 31, 2022 and 2021. Other than as set forth below, no professional services were rendered, or fees billed by Ernst & Young LLP during the years ended December 31, 2022 and 2021.
Fees billed
Years ended December 31,
2022 2021
Audit Fees $ 1,038,201 $ 987,098
Audit-related Fees
Fees for the audit of AES Ohio's employee benefit plans 111,034 93,180
Assurance services for debt offering documents 50,000 48,000
Other 37,800 35,000
Total $ 1,237,035 $ 1,163,278
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15 - Exhibits, Financial Statements and Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
DPL - Report of Independent Registered Public Accounting Firms (PCAOB ID: 42)
DPL - Consolidated Statements of Operations for each of the three years in the period ended December 31, 2022 53
DPL - Consolidated Statements of Comprehensive Income / (Loss) for each of the three years in the period ended December 31, 2022 54
DPL - Consolidated Balance Sheets at December 31, 2022 and 2021 55
DPL - Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2022 56
DPL - Consolidated Statements of Shareholder’s Deficit for each of the three years in the period ended December 31, 2022 57
DPL - Notes to Consolidated Financial Statements 58
AES Ohio- Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)
AES Ohio - Statements of Operations for each of the three years in the period ended December 31, 2022 92
AES Ohio - Statements of Comprehensive Income for each of the three years in the period ended December 31, 2022 93
AES Ohio - Balance Sheets at December 31, 2022 and 2021 94
AES Ohio - Statements of Cash Flows for each of the three years in the period ended December 31, 2022 95
AES Ohio - Statements of Shareholder’s Equity for each of the three years in the period ended December 31, 2022 96
AES Ohio - Notes to Financial Statements 97
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 2022 131
The information required to be submitted in Schedules I, III, IV and V is omitted as not applicable or not required under rules of Regulation S-X.
Exhibits
DPL and DP&L exhibits are incorporated by reference as described unless otherwise filed as set forth herein.
The exhibits filed as part of DPL’s and DP&L’s Annual Report on Form 10-K, respectively, are:
DPL DP&L Exhibit
Number Exhibit Location
X 2(a) Asset Purchase Agreement dated April 21, 2017, by and among Dynegy Zimmer, LLC, Dynegy Miami Fort, LLC, AES Ohio Exhibit 2.1 to Report on Form 8-K filed April 24, 2017 (File No. 1-2385)
X 2(b) Asset Purchase Agreement, dated as of December 15, 2017, by and among AES Ohio Generation, LLC, DPL Inc., Kimura Power, LLC and Rockland Power Partners III, LP Exhibit 2(e) to Report on Form 10-K filed February 26, 2018 (File No. 1-9052)
X 3(a) Amended Articles of Incorporation of DPL Inc., as amended through January 6, 2012 Exhibit 3(a) to Report on Form 10-K for the year ended December 31, 2011 (File No. 1-9052)
X 3(b) Amended Regulations of DPL Inc., as amended through November 28, 2011 Exhibit 3.2 to Report on Form 8-K filed November 28, 2011 (File No. 1-9052)
X 3(c) Amended Articles of Incorporation of The Dayton Power and Light Company, as of January 4, 1991 Exhibit 3(c) to Report on Form 10-K filed on February 26, 2018 (File No. 1-9052)
X 3(d) Regulations of The Dayton Power and Light Company, as of April 9, 1981 Exhibit 3(a) to Report on Form 8-K filed on May 3, 2004 (File No. 1-2385)
X X 4(a) Composite Indenture dated as of October 1, 1935, between The Dayton Power and Light Company and Irving Trust Company, Trustee with all amendments through the Twenty-Ninth Supplemental Indenture Exhibit 4.1 to Registration Statement No. 333-183556
X X 4(b) Forty-First Supplemental Indenture dated as of February 1, 1999, between The Dayton Power and Light Company and The Bank of New York, Trustee Exhibit 4.4 to Registration Statement No. 333-183556
X X 4(c) Forty-Third Supplemental Indenture dated as of August 1, 2005, between The Dayton Power and Light Company and The Bank of New York, Trustee Exhibit 4.4 to Report on Form 8-K filed August 24, 2005 (File No. 1-2385)
X 4(d) Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of New York, Trustee Exhibit 4(a) to Registration Statement No. 333-74630
X 4(e) First Supplemental Indenture dated as of August 31, 2001 between DPL Inc. and The Bank of New York, as Trustee Exhibit 4(b) to Registration Statement No. 333-74630
X 4(f) Amended and Restated Trust Agreement dated as of August 31, 2001 among DPL Inc., The Bank of New York, The Bank of New York (Delaware), the administrative trustees named therein and several Holders as defined therein Exhibit 4(c) to Registration Statement No. 333-74630
X X 4(g) Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series B bonds Exhibit 4.1 to Report on Form 8-K filed August 6, 2015 (File No. 1-2385)
X X 4(h) Loan Agreement dated August 1, 2015, between the Ohio Air Quality Development Authority and The Dayton Power and Light Company, relating to the 2015 Series B bonds Exhibit 4.2 to Report on Form 8-K filed August 6, 2015 (File No. 1-2385)
X X 4(i) Forty-Eighth Supplemental Indenture dated as of August 1, 2015 between The Bank of New York Mellon, Trustee and The Dayton Power and Light Company Exhibit 4.3 to Report on Form 8-K filed August 6, 2015 (File No. 1-2385)
X X 4(j) Forty-Ninth Supplemental Indenture dated as of August 1, 2015 between The Bank of New York Mellon, Trustee and The Dayton Power and Light Company Exhibit 4.4 to Report on Form 8-K filed August 6, 2015 (File No. 1-2385)
X X 4(k) Fifty-First Supplemental Indenture between The Bank of New York Mellon, as Trustee, and The Dayton Power and Light Company Exhibit 4.1 to Report on Form 8-K filed October 2, 2017 (File No. 1-2385)
X 4(l) Indenture dated April 17, 2019 between DPL Inc. and U.S. Bank National Association, as Trustee Exhibit 4.1 to Report on Form 8-K filed April 17, 2019 (File No. 1-9052)
X X 4(m) Fifty-Second Supplemental Indenture between The Bank of New York Mellon, as Trustee, and The Dayton Power and Light Company Exhibit 4.1 to Report on Form 8-K filed June 6, 2019 (File No. 1-2385)
X 4(n) Indenture, dated June 19, 2020, by and between DPL Inc. and U.S. Bank National Association. Exhibit 4.1 to Report on Form 8-K filed June 19, 2020 (File No. 1-9052)
X X 4(o) 53rd Supplemental Indenture, dated July 1, 2020, between The Dayton Power and Light Company and The Bank of New York Mellon. Exhibit 4.1 to Report on Form 8-K filed August 5, 2020 (File No. 1-2385)
X X 4(p) Bond Purchase and Covenants Agreement dated as of July 31, 2020 among The Dayton Power and Light Company, The Prudential Insurance Company of America and the several Purchasers party thereto.
Exhibit 4(p) to Report on Form 10-K filed February 28, 2022 (File No. 1-2385)
DPL DP&L Exhibit
Number Exhibit Location
X 10(a) Amended and Restated Credit Agreement, dated as of June 19, 2019, among DPL Inc., each lender from time to time party thereto, U.S. Bank National Association, as Administrative Agent, Collateral Agent, Swing Line Lender and an L/C Issuer, PNC Bank, National Association, as Syndication Agent and an L/C Issuer, and Fifth Third Bank, BMO Harris Bank, N.A., SunTrust Bank and The Huntington National Bank, as Documentation Agents. Exhibit 10.1 to Report on Form 8-K filed June 21, 2019 (File No. 1-9052)
X 10(b) Amended and Restated Pledge Agreement, dated as of June 19, 2019, between DPL Inc. and U.S. Bank National Association, as Collateral Agent. Exhibit 10.2 to Report on Form 8-K filed June 21, 2019 (File No. 1-9052)
X X 10(c) Amended and Restated Credit Agreement, dated as of December 22, 2022, among The Dayton Power and Light Company, each lender from time to time party thereto, PNC Bank, National Association, as administrative agent, swing loan lender and an issuing lender, PNC Capital Markets LLC, as joint bookrunner and joint lead arranger, and US Bank, National Association, as an issuing lender. Exhibit 10.1 to Report on Form 8-K filed June 22, 2022 (File No. 1-9052)
X 10(d) Amendment to the Amended and Restated Credit Agreement, dated as of June 1, 2020, among DPL, U.S. Bank, National Association, as administrative agent, and each of the lenders party thereto. Exhibit 10.1 to Report on Form 8-K filed June 5, 2020 (File No. 1-9052)
X X 10(e) Stipulation and Recommendation dated October 23, 2020. Exhibit 10.1 to Report on Form 8-K filed October 23, 2020 (File No. 1-2385)
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 Filed herewith as Exhibit 31(a)
X 31(b) Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31(b)
X 31(c) Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31(c)
X 31(d) Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31(d)
X 32(a) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 32(a)
X 32(b) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 32(b)
X 32(c) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 32(c)
X 32(d) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 32(d)
X X 101.INS XBRL Instance Furnished herewith as Exhibit 101.INS
X X 101.SCH XBRL Taxonomy Extension Schema Furnished herewith as Exhibit 101.SCH
X X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Furnished herewith as Exhibit 101.CAL
X X 101.DEF XBRL Taxonomy Extension Definition Linkbase Furnished herewith as Exhibit 101.DEF
X X 101.LAB XBRL Taxonomy Extension Label Linkbase Furnished herewith as Exhibit 101.LAB
X X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Furnished herewith as Exhibit 101.PRE
Exhibits referencing File No. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385 have been filed by The Dayton Power and Light Company.
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, we may not file as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of us and our subsidiaries on a consolidated basis, but we hereby agree to furnish to the SEC on request any such instruments.