10-K 1 dpl10k12312017q4.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________


Commission
File Number
 
Registrant, State of Incorporation,
Address and Telephone Number
 

I.R.S. Employer 
Identification No.
 
 
 
 
 
1-9052
 
DPL INC.
 
31-1163136
 
 
(An Ohio Corporation)
 
 
 
 
1065 Woodman Drive
Dayton, Ohio 45432
 
 
 
 
937-259-7215
 
 
 
 
 
 
 
1-2385
 
THE DAYTON POWER AND LIGHT COMPANY
 
31-0258470
 
 
(An Ohio Corporation)
 
 
 
 
1065 Woodman Drive
Dayton, Ohio 45432
 
 
 
 
937-259-7215
 
 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

DPL Inc.
Yes o
No x
The Dayton Power and Light Company
Yes o
No x

Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

DPL Inc.
Yes x
No o
The Dayton Power and Light Company
Yes x
No o


1


Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

DPL Inc.
Yes o
No x
The Dayton Power and Light Company
Yes o
No x

DPL Inc. and The Dayton Power and Light Company are voluntary filers that have filed all applicable reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

DPL Inc.
Yes x
No o
The Dayton Power and Light Company
Yes x
No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

DPL Inc.
x
The Dayton Power and Light Company
x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large
accelerated
filer
Accelerated
filer
Non-
accelerated
filer
(Do not check if a smaller reporting company)
Smaller
reporting
company
Emerging growth company
DPL Inc.
o
o
x
o
o
The Dayton Power and Light Company
o
o
x
o
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
DPL Inc.
o
The Dayton Power and Light Company
o

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

DPL Inc.
Yes o
No x
The Dayton Power and Light Company
Yes o
No x

All of the outstanding common stock of DPL Inc. is indirectly owned by The AES Corporation. All of the common stock of The Dayton Power and Light Company is owned by DPL Inc.


2


At December 31, 2017, each registrant had the following shares of common stock outstanding:

Registrant
 
Description
 
Shares Outstanding
 
 
 
 
 
DPL Inc.
 
Common Stock, no par value
 
1
 
 
 
 
 
The Dayton Power and Light Company
 
Common Stock, $0.01 par value
 
41,172,173

Documents incorporated by reference: None

This combined Form 10-K is separately filed by DPL Inc. and The Dayton Power and Light Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to a registrant other than itself.

THE REGISTRANTS MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

3


DPL Inc. and The Dayton Power and Light Company

Table of Contents
Annual Report on Form 10-K
Fiscal Year Ended December 31, 2017

Part I
 
Part II
 
 
Part III
 
Part IV
 

4


GLOSSARY OF TERMS

The following select terms, abbreviations or acronyms are used in this Form 10-K:

Abbreviation or Acronym
Definition
2017 ESP
DP&L's ESP, approved October 20, 2017, effective November 1, 2017
AEP Generation
AEP Generation Resources Inc., a subsidiary of American Electric Power Company, Inc. (“AEP”). Columbus Southern Power Company merged into the Ohio Power Company, another subsidiary of AEP, effective December 31, 2011. The Ohio Power generating assets (including jointly-owned units) were transferred into AEP Generation.
AES
The AES Corporation, a global power company, the ultimate parent company of DPL
AES Ohio Generation
AES Ohio Generation, LLC, a wholly-owned subsidiary of DPL that owns and operates generation facilities from which it makes wholesale sales
AFUDC
Allowance for Funds Used During Construction
AMI
Advanced Metering Infrastructure
AOCI
Accumulated Other Comprehensive Income
ARO
Asset Retirement Obligation
ASU
Accounting Standards Update
CAA
U.S. Clean Air Act
Capacity Market
The purpose of the capacity market is to enable PJM to obtain sufficient resources to reliably meet the needs of electric customers within the PJM footprint. PJM procures capacity, through a multi-auction structure, on behalf of the load serving entities to satisfy the load obligations. There are four auctions held for each Delivery Year (running from June 1 through May 31). The Base Residual Auction is held three years in advance of the Delivery Year and there is one Incremental Auction held in each of the subsequent three years. AES Ohio Generation's capacity is located in the “rest of” RTO area of PJM.
CCR
Coal Combustion Residuals
CO2
Carbon Dioxide
CP
The Capacity Performance "CP" program offers the potential for higher capacity revenues, combined with substantially increased penalties for non-performance or under-performance during certain periods identified as “capacity performance hours.” The AES Ohio Generation units operate under the CP construct starting June 1, 2016.
CPP
The Clean Power Plan, the USEPA's final CO2 emission rules for existing power plants under Clean Air Act Section 111(d)
CRES
Competitive Retail Electric Service
CSAPR
Cross-State Air Pollution Rule
CWA
U.S. Clean Water Act
Dark spread
A common metric used to estimate returns over fuel costs of coal-fired EGUs
D.C. Circuit Court
United States Court of Appeals for the District of Columbia Circuit
DOE
U.S. Department of Energy
DPL
DPL Inc.
DPLER
DPL Energy Resources, Inc., formerly a wholly-owned subsidiary of DPL which sold competitive electric energy and other energy services, including sales by a wholly-owned subsidiary, MC Squared, which DPLER sold on April 1, 2015. DPLER was sold on January 1, 2016 pursuant to an agreement dated December 28, 2015.
DP&L
The Dayton Power and Light Company, the principal subsidiary of DPL and a public utility which sells, transmits and distributes electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L is wholly-owned by DPL
Dths
Decatherms, unit of heat energy equal to 10 therms. One therm is equal to 100,000 British Thermal Units

5


GLOSSARY OF TERMS (cont.)
Abbreviation or Acronym
Definition
DMR
Distribution modernization rider - designed to allow DP&L to modernize and/or maintain its transmission and distribution infrastructure.
Duke Energy
Affiliates of Duke Energy with which DP&L co-owns transmission lines in Ohio (Duke Energy Ohio, Inc.)
Dynegy
Dynegy, Inc., the parent of various subsidiaries that, along with AEP Generation and AES Ohio Generation, co-owns coal-fired EGUs in Ohio
EBIT
Earnings before interest and taxes
EBITDA
Earnings before interest, taxes, depreciation and amortization
EGU
Electric generating unit
ELG
Steam Electric Power Effluent Limitations Guidelines
ERISA
The Employee Retirement Income Security Act of 1974
ESP
The Electric Security Plan is a cost-based plan that a utility may file with the PUCO to establish SSO rates pursuant to Ohio law
ESP 1
ESP approved by PUCO order dated June 24, 2009
ESP 2
ESP approved by PUCO order dated September 4, 2013. The Ohio Supreme Court ruled that it was invalid. DP&L withdrew its ESP 2 on July 27, 2016 and reinstated previously authorized rates from ESP 1
FASB
Financial Accounting Standards Board
FASC
FASB Accounting Standards Codification
FERC
Federal Energy Regulatory Commission
FGD
Flue Gas Desulfurization
First and Refunding Mortgage
DP&L’s First and Refunding Mortgage, dated October 1, 1935, as amended, with the Bank of New York Mellon as Trustee
FTR
Financial Transmission Rights
GAAP
Generally Accepted Accounting Principles in the United States of America
Generation Separation
The transfer on October 1, 2017, to AES Ohio Generation of the DP&L-owned generating facilities and related liabilities pursuant to an asset contribution agreement with a subsidiary that was then merged into AES Ohio Generation
GHG
Greenhouse gas
ISO
Independent System Operator
kV
Kilovolts, 1,000 volts
kWh
Kilowatt hour
LIBOR
London Inter-Bank Offering Rate
Master Trust
DP&L established a Master Trust to hold assets that could be used for the benefit of employees participating in employee benefit plans
MATS
Mercury and Air Toxics Standards
MC Squared
MC Squared Energy Services, LLC, a retail electricity supplier formerly wholly-owned by DPLER, sold on April 1, 2015
Merger
The merger of DPL and Dolphin Sub, Inc., a wholly-owned subsidiary of AES. On November 28, 2011, DPL became a wholly-owned subsidiary of AES.
Merger date
November 28, 2011, the date of the closing of the merger of DPL and Dolphin Sub, Inc.
MRO
Market Rate Option, a market-based plan that a utility may file with PUCO to establish SSO rates pursuant to Ohio law
MTM
Mark to Market
MVIC
Miami Valley Insurance Company, a wholly-owned insurance subsidiary of DPL that provides insurance services to DPL and its subsidiaries and, in some cases, insurance services to partner companies relative to jointly-owned facilities operated by AES Ohio Generation
MW
Megawatt
MWh
Megawatt hour
NAAQS
National Ambient Air Quality Standards
NAV
Net asset value

6


GLOSSARY OF TERMS (cont.)
Abbreviation or Acronym
Definition
NERC
North American Electric Reliability Corporation
Non-bypassable
Charges that are assessed to all customers regardless of whom the customer selects as their retail electric generation supplier
NOV
Notice of Violation
NOX
Nitrogen Oxide
NPDES
National Pollutant Discharge Elimination System
NSPS
New Source Performance Standards
NSR
New Source Review: a preconstruction permitting program regulating new or significantly modified sources of air pollution
NYMEX
New York Mercantile Exchange
OCC
Ohio Consumers’ Counsel
OCI
Other Comprehensive Income
Ohio EPA
Ohio Environmental Protection Agency
OTC
Over the counter
OVEC
Ohio Valley Electric Corporation, an electric generating company in which DP&L holds a 4.9% equity interest
Peaker assets
The generation and related assets for the 586.0 MW Tait combustion turbine and diesel generation facility, the 236.0 MW Montpelier combustion turbine generation facility, the 101.5 MW Yankee combustion turbine generation and solar facility, the 25.0 MW Hutchings combustion turbine generation facility, the 12.0 MW Monument diesel generation facility, and the 12.0 MW Sidney diesel generation facility
PJM
PJM Interconnection, LLC, an RTO
PPM
Parts per million
PRP
Potentially Responsible Party
PUCO
Public Utilities Commission of Ohio
ROE
Return on equity
RPM
The Reliability Pricing Model was PJM’s capacity construct prior to the CP program
RTO
Regional Transmission Organization
SB 221
Ohio Senate Bill 221 is an Ohio electric energy bill that requires all Ohio distribution utilities to file either an ESP or MRO. The law also contains, among other things, annual targets relating to advanced energy portfolio standards, renewable energy, demand reduction and energy efficiency standards.
SCR
Selective Catalytic Reduction
SEC
Securities and Exchange Commission
SEET
Significantly Excessive Earnings Test
Service Company
AES US Services, LLC, the shared services affiliate providing accounting, finance, and other support services to AES’ U.S. SBU businesses
SIP
A State Implementation Plan is a plan for complying with the federal CAA, administered by the USEPA. The SIP consists of narrative, rules, technical documentation and agreements that an individual state will use to clean up polluted areas.
SO2
Sulfur Dioxide
SO3
Sulfur Trioxide
SSO
Standard Service Offer represents the retail transmission, distribution and generation services offered by a utility through regulated rates, authorized by the PUCO
SSR
Service Stability Rider
T&D
DP&L’s electric transmission and distribution businesses, which distribute electricity to residential, commercial, industrial and governmental customers
TCJA
The Tax Cuts and Jobs Act of 2017, signed on December 22, 2017
TCRR-N
Transmission Cost Recovery Rider - Nonbypassable
USD
U.S. dollar
USEPA
U. S. Environmental Protection Agency

7


GLOSSARY OF TERMS (cont.)
Abbreviation or Acronym
Definition
USF
The Universal Service Fund (USF) is a statewide program which provides qualified low-income customers in Ohio with income-based bills and energy efficiency education programs
U.S. SBU
U. S. Strategic Business Unit, AES’ reporting unit covering the businesses in the United States, including DPL

8


PART I

This report includes the combined filing of DPL and DP&L. DPL is a wholly-owned subsidiary of AES, a global power company. Throughout this report, the terms “we”, “us”, “our” and “ours” are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise. Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.

FORWARD–LOOKING STATEMENTS

Certain statements contained in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements. Forward-looking statements are based on management’s beliefs, assumptions and expectations of future economic performance, considering the information currently available to management. These statements are not statements of historical fact and are typically identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will” and similar expressions. Such forward-looking statements are subject to risks and uncertainties and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond our control, including but not limited to:

growth in our service territory and changes in demand and demographic patterns;
impacts of weather on retail sales and wholesale prices;
impacts of renewable energy generation, natural gas prices and other market factors on wholesale prices;
weather-related damage to our electrical system;
fuel, commodity and other input costs;
performance of our suppliers;
transmission and distribution system reliability and capacity;
purchased power costs and availability;
regulatory action, including, but not limited to, the review of our basic rates and charges by the PUCO;
federal and state legislation and regulations;
changes in our credit ratings or the credit ratings of AES;
fluctuations in the value of pension plan assets, fluctuations in pension plan expenses and our ability to fund defined benefit pension plans;
changes in financial or regulatory accounting policies;
environmental matters, including costs of compliance with current and future environmental laws and requirements;
interest rates, inflation rates and other costs of capital;
the availability of capital;
the ability of subsidiaries to pay dividends or distributions to DPL;
level of creditworthiness of counterparties to contracts and transactions;
labor strikes or other workforce factors, including the ability to attract and retain key personnel;
facility or equipment maintenance, repairs and capital expenditures;
significant delays or unanticipated cost increases associated with large construction projects;
the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material;
local economic conditions;
catastrophic events such as fires, explosions, cyber-attacks, terrorist acts, acts of war, pandemic events, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snow storms, droughts, or other similar occurrences;
costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation;
industry restructuring, deregulation and competition;
issues related to our participation in PJM, including the cost associated with membership, allocation of costs, costs associated with transmission expansion, the recovery of costs incurred, and the risk of default of other PJM participants;
changes in tax laws and the effects of our strategies to reduce tax payments;
the use of derivative contracts;

9


product development, technology changes, and changes in prices of products and technologies; and
the risks and other factors discussed in this report and other DPL and DP&L filings with the SEC.

Forward-looking statements speak only as of the date of the document in which they are made. We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.

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.

DP&L is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation service, however transmission and distribution services are still regulated. DP&L has the exclusive right to provide such service to its approximately 521,000 customers located in West Central Ohio. DP&L is required to procure and provide retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. Since January 2016, DP&L has been sourcing 100% of the generation for its SSO customers through a competitive bid process. Through September 30, 2017, DP&L owned undivided interests in five coal-fired power stations and multiple peaking electric generating facilities as well as numerous transmission facilities. On October 1, 2017, the DP&L-owned generating facilities were transferred to AES Ohio Generation, an affiliate of DP&L and wholly-owned subsidiary of DPL, through an asset contribution agreement to a subsidiary that was merged into AES Ohio Generation. Also, Stuart Station Unit 1 was retired on October 1, 2017. Principal industries located in DP&L’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. DP&L's sales reflect the general economic conditions, seasonal weather patterns of the area and the market price of electricity. Through the date of Generation Separation, DP&L sold energy and capacity into the wholesale market.

DPL’s other significant subsidiaries include AES Ohio Generation, which owns and operates coal-fired and peaking generating facilities from which it makes wholesale sales of electricity, and MVIC, our captive insurance company that provides insurance services to us and our other subsidiaries. DPL wholly owns each of its subsidiaries.

On December 8, 2017, AES Ohio Generation completed the sale of the Miami Fort and Zimmer stations to subsidiaries of Dynegy in accordance with an asset purchase agreement dated April 21, 2017. In addition, on December 15, 2017, AES Ohio Generation entered into an asset purchase agreement for the sale of its Peaker assets to Kimura Power, LLC.

DPL also has a wholly-owned business trust, DPL Capital Trust II, formed for the purpose of issuing trust capital securities to investors.

DP&L does not have any subsidiaries.

DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs.

SEGMENTS
DPL manages its business through two reportable operating segments, the Transmission and Distribution segment and the Generation segment. See Note 14 – Business Segments of the Notes to DPL’s Consolidated Financial Statements for additional information regarding DPL’s reportable segments.


10


With the transfer of its generation assets on October 1, 2017, DP&L has only one reportable operating segment, the Transmission and Distribution segment.

EMPLOYEES
DPL and its subsidiaries employed 1,060 people at January 31, 2018, of which 660 were employed by DP&L. Approximately 60% of all DPL employees are under a collective bargaining agreement. The current agreement, after initially being extended, expired on January 31, 2018. Under national labor law, all the terms and conditions of the expired agreement continue indefinitely, with a few exceptions. Notably, the union has the right to strike and DP&L and AES Ohio Generation each have the right to lock out employees. We are continuing to negotiate with the union to enter into a new collective bargaining agreement. Currently, we are unable to predict the eventual outcome of these negotiations and have contingency plans to continue our operations. If we are not able to reach an agreement on terms favorable to us or to effectively implement our plans in the event that agreement is not reached, our results of operations, financial position and cash flows could be adversely impacted.

SERVICE COMPANY
The Service Company provides services including accounting, legal, human resources, information technology and other services of a similar nature on behalf of companies that are part of the U.S. SBU, including, among other companies, DPL and DP&L. The Service Company allocates the costs for these services based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated businesses served, including DP&L, are not subsidizing costs incurred for the benefit of other businesses.

ELECTRIC OPERATIONS AND FUEL SUPPLY

2017 Summer Generating Capacity
(in MW)
DPL's present summer generating capacity is as follows:
Summer Generating Capacity
Coal fired
(steam generation)
(percent of total)
 
Combustion Turbines, Diesel Units and Solar
(percent of total)
 
Total
DPL
1,137

 
54%
 
988

 
46%
 
2,125


100% of DPL’s existing steam generating capacity is provided by generating units owned as tenants in common with Dynegy, Inc. and/or AEP Generation. As tenants in common, each company owns a specified share of each of these units, is entitled to its share of capacity and energy output and has a capital and operating cost responsibility proportionate to its ownership share. Additionally, DP&L, Duke Energy and Ohio Power Company own, as tenants in common, 880 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity.

In 2017, DPL generated 95% of its electric output from coal-fired units and 5% from solar, oil and natural gas-fired units.


11


The following table sets forth DPL’s generating stations and, where indicated, those stations which are owned as tenants in common:
 
 
 
 
 
 
 
 
Approximate Summer MW Rating
Station
 
Ownership (1)
 
Operating Company (2)
 
Location
 
DPL Portion (3)
 
Total
Coal-fired Units
 
 
 
 
 
 
 
 
Killen - Unit 2
 
C (4)
 
A
 
Wrightsville, OH
 
402

 
600

Stuart - Units 2 through 4
 
C (4)
 
A
 
Aberdeen, OH
 
606

 
1,731

Conesville - Unit 4
 
C.......
 
B
 
Conesville, OH
 
129

 
780

Sub-total coal-fired
 
 
 
 
 
 
 
1,137

 
3,111

Solar, Combustion Turbines (CT) or Diesel
 
 
 
 
 
 
 
 
Hutchings CT Unit 7
 
W (5)
 
A
 
Miamisburg, OH
 
25

 
25

Yankee Units 1 - 7
 
W (5)
 
A
 
Centerville, OH
 
101

 
101

Yankee Solar
 
W (5)
 
A
 
Centerville, OH
 
1

 
1

Monument Diesels
 
W (5)
 
A
 
Dayton, OH
 
12

 
12

Tait Diesels
 
W (5)
 
A
 
Dayton, OH
 
10

 
10

Sidney Diesels
 
W (5)
 
A
 
Sidney, OH
 
12

 
12

Tait CT Units 1 - 7
 
W (5)
 
A
 
Moraine, OH
 
576

 
576

Killen CT
 
C (4)
 
A
 
Wrightsville, OH
 
12

 
18

Stuart Diesels
 
C (4)
 
A
 
Aberdeen, OH
 
3

 
10

Montpelier CT Units 1 - 4
 
W (5)
 
A
 
Poneto, IN
 
236

 
236

Sub-total Solar, CT or Diesel
 
 
 
988

 
1,001

 
 
 
 
 
 
 
 


 
 
Total summer generating capacity (approximate)
 
 
 
2,125

 
4,112


(1)
W = Wholly-owned; C = Commonly-owned
(2)
A = Operated by AES Ohio Generation; B = Operated by AEP Generation
(3)
DPL portion of commonly-owned generating stations
(4)
DPL announced during 2017 that it plans on retiring the co-owned Stuart Station coal-fired and diesel-fired generating units and the co-owned Killen Station coal-fired generating unit and combustion turbine on or before June 1, 2018
(5)
On December 15, 2017, AES Ohio Generation entered into an asset purchase agreement for the sale of these generating facilities. See Note 17 – Assets and Liabilities Held-For-Sale and Dispositions of Notes to DPL's Consolidated Financial Statements.

DP&L also owns a 4.9% equity ownership interest in OVEC, an electric generating company. OVEC has two electric generating stations located in Cheshire, Ohio and Madison, Indiana with a combined generation capacity of 2,109 MW. DP&L’s share of this generation capacity is 103 MW.

We have all of the coal volume needed to meet our wholesale sales obligations for 2018 under contract. The majority of the contracted coal is purchased at fixed prices. Some contracts provide for periodic adjustments and some are priced based on market indices. Fuel costs are affected by changes in volume and price and are driven by a number of variables including weather, the wholesale market price of power, certain provisions in coal contracts related to government-imposed costs, counterparty performance and credit, scheduled/forced outages and generation station mix. Due to the installation of emission control equipment at certain commonly-owned units and barring any changes in the regulatory environment in which we operate, we expect to have balanced positions for SO2, NOx and renewable energy credits for 2018.

The gross average cost of fuel consumed per kWh was $2.09 per kWh, $2.30 per kWh and $2.48 per kWh in 2017, 2016 and 2015, respectively.

SEASONALITY

The power generation and delivery businesses are seasonal and weather patterns have a material effect on operating performance. 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. Unusually mild summers and winters could have an adverse effect on our results of operations, financial condition and cash flows.

12



MARKET STRUCTURE

Retail rate regulation
DP&L's delivery service to all retail customers as well as the provisions of its SSO service are regulated by the PUCO. In addition, certain costs are considered to be non-bypassable and are therefore assessed to all DP&L retail customers, under the regulatory authority of the PUCO, regardless of the customer’s retail electric supplier. DP&L's transmission rates and AES Ohio Generation's wholesale electric rates are subject to regulation by the FERC under the Federal Power Act.

Ohio law establishes the process for determining SSO and non-bypassable rates charged by public utilities. Regulation of retail rates encompasses the timing of applications, the effective date of rate changes, the cost basis upon which the rates are set and other service-related matters. Ohio law also established the Office of the OCC, which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings.

Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL. The legislation extends the PUCO's supervisory powers to a holding company system's general condition and capitalization, among other matters, to the extent that such matters relate to the costs associated with the provision of public utility service. Based on existing PUCO and FERC authorization, regulatory assets and liabilities are recorded on the balance sheets of both DPL and DP&L. See Note 3 – Regulatory Matters of Notes to DPL’s Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L’s Financial Statements.

COMPETITION AND REGULATION

Ohio Matters

Ohio Retail Rates
DP&L filed a settlement in its 2017 ESP case in January 2017 and filed an amended stipulation on March 13, 2017. The PUCO issued a final decision on October 20, 2017, modifying and adopting the amended stipulation and recommendation. The 2017 ESP establishes DP&L's framework for providing retail service on a going forward basis including rate structures, non-bypassable charges and other specific rate recovery true-up rider mechanisms. The signatory parties agreed to a six-year settlement that provides a framework for energy rates and defines other components.

For more information regarding DP&L's ESP, see Note 3 – Regulatory Matters of Notes to DPL’s Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L’s Financial Statements.

The costs associated with providing high voltage transmission service and wholesale electric sales and ancillary services are subject to FERC jurisdiction. While DPL has market-based rate authority for wholesale electric sales, DPL would be required to file an application at FERC under section 101 of Title 18 of the Code of Federal Regulations to change any of its cost-based transmission or ancillary service rates.

On November 30, 2015, DP&L filed a distribution rate case with the PUCO using a 12-month test year of June 1, 2015 to May 31, 2016 to measure revenue and expenses and a date certain of September 30, 2015 to measure its asset base. DP&L is seeking an increase to distribution revenues of $65.8 million per year. DP&L has asked for recovery of certain regulatory assets. DP&L has proposed a modified straight-fixed variable rate design in an effort to decouple distribution revenues from electric sales. If approved as filed, the rates are expected to have an increase of approximately 4% on a typical residential customer bill based on rates in effect at the time of the filing.

Ohio law and the PUCO rules contain targets relating to renewable energy, peak demand reduction and energy efficiency standards. If any targets are not met, compliance penalties will apply unless the PUCO makes certain findings that would excuse performance. DP&L is in full compliance with energy efficiency, peak demand reduction and renewable energy targets. DP&L is required to file an energy efficiency portfolio plan to demonstrate how it plans to meet the standards. On June 15, 2017, DP&L filed an energy efficiency portfolio plan for programs in years 2018 through 2020, which was settled and approved by the Commission on December 20, 2017. For additional information on this settlement agreement, see "Management's Discussion and Analysis of Financial Condition - Key Trends and Uncertainties - Regulatory Environment". DP&L recovers the costs of its compliance

13


with Ohio energy efficiency and renewable energy standards through separate riders which are reviewed and audited by the PUCO.

As a member of PJM, DP&L receives revenues from the RTO related to DP&L’s transmission assets and incurs costs associated with its load obligations for retail customers. Ohio law includes a provision that would allow Ohio electric utilities to seek and obtain a reconcilable rider to recover RTO-related costs and credits. DP&L continues to recover non-market-based transmission and ancillary costs through its transmission rider.

DP&L and AES Ohio Generation filed an application before the FERC to adjust their rates with respect to reactive power provided to PJM from their generation units. On March 3, 2017, DP&L, AES Ohio Generation, and certain intervening parties filed an Offer of Settlement that was approved by the FERC on May 16, 2017. The changes from current reactive power rates were not material. Additionally, the FERC has referred to the FERC’s Office of Enforcement for investigation, an issue regarding reactive power charges under the previously effective rates in light of changes in DP&L’s generation portfolio. Prior to 2017, DP&L's reactive power rates had been last reset in 1998. As of the date of this report, DP&L is unable to predict the ultimate outcome of the investigation. Several other utilities within PJM are also being investigated by FERC’s Office of Enforcement on the same issue of changes in the generation portfolio that occurred in between rate proceedings. In connection with transactions and other matters discussed above, there have been subsequent reactive power filings made, including filings to reflect: the transfer of generation from DP&L to AES Ohio Generation; the retirement of Stuart Unit 1; the sale of interests in the Miami Fort and Zimmer stations to subsidiaries of Dynegy; and a future adjustment that would be effective upon closing of the planned sale of the Peaker assets to Kimura Power, LLC.

DP&L is subject to a SEET threshold and is required to apply general rules for calculating earnings and comparing them to a comparable group to determine whether there were significantly excessive earnings during a given calendar year. In future years, the SEET could have a material effect on results of operations, financial condition and cash flows. See Note 3 – Regulatory Matters for more information.

Ohio Competition
Since January 2001, DP&L’s electric customers have been permitted to choose their retail electric generation supplier. DP&L continues to have the exclusive right to provide delivery service in its state-certified territory and the obligation to procure and provide electricity to SSO customers that do not choose an alternative supplier. The PUCO maintains jurisdiction over DP&L’s delivery of electricity, SSO and other retail electric services.

Competitive Generation
Like other electric utilities and energy marketers, AES Ohio Generation may sell or purchase electric products in the wholesale market. AES Ohio Generation competes with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity. The ability of AES Ohio Generation to sell this electricity will depend not only on the performance of our generating units, but also on how AES Ohio Generation’s prices, terms and conditions compare to those of other suppliers.

As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities were required to join an RTO. DP&L is a member of the PJM RTO. The role of the RTO is to administer a competitive wholesale market for electricity and ensure reliability of the transmission grid. PJM ensures the reliability of the high-voltage electric power system serving more than 50 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.

Capacity Auction Price
The PJM capacity base residual auction for the 2020/21 period cleared at a price of $77/MW-day for our RTO area. The prices for the periods 2019/20, 2018/19, 2017/18, and 2016/17 were $100/MW-day, $165/MW-day, $152/MW-day and $134/MW-day, respectively, based on previous auctions. As discussed below, a new CP program was approved by the FERC, which has phased in and replaced the RPM as of the 2018/19 auction. During the phase-in period, the RPM auction results were modified based on transitional auctions that were conducted in the third quarter of 2015. These estimates are discussed further within Commodity Pricing Risk in the Item 7A - Quantitative and Qualitative disclosures about Market Risk.


14


ENVIRONMENTAL MATTERS

DPL’s and DP&L's facilities and operations are subject to a wide range of federal, state and local environmental regulations and laws. The environmental issues that may affect us include:

The federal CAA and state laws and regulations (including SIPs) which require compliance, obtaining permits and reporting as to air emissions;
Litigation with federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating stations require additional permitting or pollution control technology, or whether emissions from coal-fired generating stations cause or contribute to global climate changes;
Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require substantial reductions in SO2, particulates, mercury, acid gases, NOx, and other air emissions. DPL installed emission control technology and is taking other measures to comply with required and anticipated reductions. As AES Ohio Generation is now operating these facilities, it is continuing to comply with these requirements;
Rules and future rules issued by the USEPA, the Ohio EPA or other authorities that require or will require reporting and reductions of GHGs;
Rules and future rules issued by the USEPA, the Ohio EPA or other authorities associated with the federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits; and
Solid and hazardous waste laws and regulations, which govern the management and disposal of certain waste.
In addition to imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at our facilities to comply, or to determine compliance, with such regulations. We record liabilities for loss contingencies related to environmental matters when a loss is probable of occurring and can be reasonably estimated in accordance with the provisions of GAAP. Accordingly, we have immaterial accruals for loss contingencies for environmental matters. We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable, or a loss cannot be reasonably estimated. We evaluate the potential liability related to environmental matters quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows. See Note 12 – Contractual Obligations, Commercial Commitments and Contingencies – "Environmental Matters” of Notes to DPL’s Consolidated Financial Statements and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies – "Environmental Matters" of Notes to DP&L’s Financial Statements for more information regarding environmental risks, laws and regulations and legal proceedings to which we are and may be subject to in the future.
In response to Executive Orders from the U.S. President, the USEPA is currently evaluating various existing regulations to be considered for repeal, replacement, or modification. We cannot predict at this time the likely outcome of the USEPA’s review of these or other existing regulations or what impact it may have on our business.
We have several pending environmental matters associated with our coal-fired generation units. Some of these matters could have material adverse impacts on the operation of the power stations.
Environmental Matters Related to Air Quality
Clean Air Act Compliance
In 1990, the federal government amended the CAA to further regulate air pollution. Under the CAA, the USEPA sets limits on how much of a pollutant can be in the ambient air anywhere in the United States. The CAA allows individual states to have stronger pollution controls than those set under the CAA, but states are not allowed to have weaker pollution controls than those set for the whole country. The CAA has a material effect on our operations and such effects are detailed below with respect to certain programs under the CAA.
Cross-State Air Pollution Rule
On September 7, 2016, the USEPA finalized an update to the CSAPR to address the 2008 ozone NAAQS. CSAPR addresses the "good neighbor" provision of the CAA, which prohibits sources within each state from

15


emitting any air pollutant in an amount which will contribute significantly to any other state’s non-attainment, or interference with maintenance of, any NAAQS. The final rule found that NOx ozone season emissions in 22 states (including Ohio) affect the ability of downwind states to attain and maintain the 2008 ozone NAAQS. For these 22 states, the USEPA issued federal implementation plans that generally update existing CSAPR NOx ozone season emission budgets for electric generating units within these states and implement these budgets through modifications to the existing CSAPR NOx ozone season allowance trading program. Implementation began in the 2017 ozone season (May through September 2017). Affected facilities receive fewer ozone season NOx allowances in 2017 and later, possibly resulting in the need to purchase additional allowances. As a result of DPL’s decision to retire its Stuart and Killen generating stations, the sale of the Miami Fort and Zimmer generating stations and the agreement to sell its Peaker assets, we do not expect any impact on our remaining generating assets to be material.
Mercury and Other Hazardous Air Pollutants
On May 3, 2011, the USEPA published proposed Maximum Achievable Control Technology (MACT) standards for coal- and oil-fired EGUs. The standards include new requirements for emissions of mercury and a number of other heavy metals. The USEPA Administrator signed the final rule, now called MATS, on December 16, 2011, and the rule was published in the Federal Register on February 16, 2012, with a compliance date of April 16, 2015. All of our operating EGUs are currently achieving compliance through control technologies in place.
On January 31, 2013, the USEPA finalized a rule regulating emissions of toxic air pollutants from new and existing industrial, commercial and institutional boilers and process heaters at major and area source facilities. This regulation affects five auxiliary boilers used for start-up purposes at DPL’s generation facilities. The regulation contains emissions limitations, operating limitations and other requirements. As of the date of this report, DPL is in material compliance with this rule.
National Ambient Air Quality Standards
On January 25, 2013, the USEPA published the 2012 PM 2.5 standard of 12.0 micrograms per cubic meter. On January 15, 2015, the USEPA published its final designations for the 2012 standard. No counties containing generating facilities owned or operated by DPL have been designated as non-attainment.
On October 1, 2015, the USEPA released a final rule lowering the 8-hour ozone standard from 0.075 to 0.070 ppm. The USEPA published its final ozone attainment designations on November 16, 2017, designating all counties in Ohio as attainment/unclassifiable. No generating facilities currently owned or operated by DPL are in non-attainment areas. In December 2013, eight northeastern states petitioned the USEPA to add nine upwind states, including Ohio, to the Ozone Transport Region, a group of states required to impose enhanced restrictions on NOx emissions. On November 3, 2017, the USEPA published a final rule denying the petition. On December 26, 2017, eight northeastern states filed a petition for review challenging the final rule denying the petition. In addition, Maryland petitioned the USEPA in November 2016, asking the USEPA to determine that 36 electric generating units emit pollutants that contribute to non-attainment of the ozone standards in their state. The Killen unit was on the list of 36 units. On September 27, 2017, the State of Maryland filed a complaint against the USEPA for failing to address its November 2016 CAA petition. In light of the scheduled retirement of the Killen unit, even if this petition is granted, we do not expect any additional requirements to have a material impact on us.
Effective April 12, 2010, the USEPA implemented revisions to its primary NAAQS for nitrogen dioxide. Additionally, on August 23, 2010, the USEPA implemented its revisions to its primary NAAQS for SO2 replacing the previous 24-hour standard and annual standard with a one-hour standard. As a result of DPL’s decision to retire its Stuart and Killen generating stations, the sale of the Miami Fort and Zimmer generating stations and the agreement to sell its Peaker assets, we do not expect any impact on our remaining generation assets to be material.
On May 5, 2004, the USEPA issued its proposed regional haze rule, which addresses how states should determine the Best Available Retrofit Technology (BART) for sources covered under the regional haze rule. Final rules were published July 6, 2005, providing states with several options for determining whether sources in the state should be subject to BART. In January 2017, the USEPA revised the rules governing submission of SIPs to implement the visibility programs, postponing the due date for the next SIP revisions until July 2021. We cannot determine the extent of the impact, if any, on our remaining operations until Ohio determines how BART will be implemented.

16


Carbon Dioxide and Other Greenhouse Gas Emissions
On December 22, 2015, the USEPA's final CO2 emission rules for existing power plants, the CPP became effective. The CPP provides for interim emissions performance rates that must be achieved beginning in 2022 and final emissions performance rates that must be achieved starting in 2030. Under the CPP, states are required to meet state-wide emission rate standards or equivalent mass-based standards, with the goal being a 32% reduction in total U.S. power sector emissions from 2005 levels by 2030. The CPP would require states to submit, by 2016, implementation plans to meet the standards or a request for an extension to 2018. If a state fails to develop and submit an approvable implementation plan, the USEPA will finalize a federal plan for that state. The full impact of the CPP would depend on the following:
whether and how the states in which the Company's U.S. businesses operate respond to the CPP;
whether the states adopt an emissions trading regime and, if so, which trading regime;
how other states respond to the CPP, which will affect the size and robustness of any emissions trading market; and
how other companies may respond in the face of increased carbon costs.
Several states and industry groups challenged the NSPS for CO2 in the D.C. Circuit Court. Pursuant to a court order issued in August 2017, the litigation is being held in indefinite abeyance pending further court order.
In addition, several states and industry groups filed petitions in the D.C. Circuit Court challenging the CPP and requested a stay of the rule while the challenge was considered. The D.C. Circuit Court denied the stay and granted requests to consider the challenges on an expedited basis. On February 9, 2016, the U.S. Supreme Court issued orders staying implementation of the CPP pending resolution of challenges to the rule. On March 28, 2017, the USEPA filed a motion in the D.C. Circuit Court to hold the challenges to both the CPP and the GHG NSPS in abeyance in light of an Executive Order signed the same day. On April 28, 2017, the D.C. Circuit Court issued orders holding the challenges to both rules in abeyance for 60 days, with subsequent extensions granted by the court. The most recent extension of the CPP litigation was set to expire in January 2018 but, on January 10, 2018, the USEPA filed a status report requesting that the court continue to hold the case in abeyance pending the conclusion of further rulemaking on the CPP. On October 16, 2017, the USEPA published in the Federal Register a proposed rule that would rescind the CPP. On December 28, 2017, the USEPA published an Advance Notice of Proposed Rulemaking to solicit comments as the USEPA considers a potential rule to establish emission guidelines to replace the CPP and limit GHG emissions from existing electric generating units under Section 111(d) of the CAA. Some states and environmental groups have opposed the USEPA’s most recent request to continue to hold the CPP appeals in abeyance and the D.C. Circuit Court has not yet acted upon the USEPA’s request.
Due to the future uncertainty of the CPP, we cannot at this time determine the impact on our operations or financial results, but we believe the cost to comply with the CPP, should it be upheld and implemented in its current or a substantially similar form, could be material. The GHG NSPS remains in effect at this time, and, absent further action from the USEPA that rescinds or substantively revises the NSPS, it could impact any plans to construct and/or modify or reconstruct electric generating units in some locations, which may have a material impact on our business, financial condition or results of operations.
We will likely not know the answers to the above questions regarding the CPP until later in 2018 or potentially 2019. As the first compliance period would not end until 2025, and because we cannot predict whether the CPP will survive the legal challenges or be repealed or replaced through rulemaking, it is too soon to determine the CPP's potential impact on our business, operations or financial condition, but any such impact could be material.
During 2017, approximately 95% of the energy we produced was generated by coal. As a result of DPL’s decision to retire its Stuart and Killen generating stations, the sale of the Miami Fort and Zimmer generating stations and the agreement to sell its Peaker assets, we do not expect any impact on our remaining generating assets to be material.

17


Litigation, Notices of Violation and Other Matters Related to Air Quality
Litigation Involving Co-Owned Stations
As a result of a 2008 consent decree entered into with the Sierra Club and approved by the U.S. District Court for the Southern District of Ohio, DPL and the other owners of the Stuart generating station are subject to certain specified emission targets related to NOX, SO2 and particulate matter. The consent decree also includes commitments for energy efficiency and renewable energy activities. An amendment to the consent decree was entered into and approved in 2010 to clarify how emissions would be computed during startups. Continued compliance with the consent decree, as amended, is not expected to have a material effect on DPL’s results of operations, financial condition or cash flows in the future.
Notices of Violation Involving Co-Owned Units
In June 2000, the USEPA issued an NOV to the then DP&L-operated Stuart generating station (now co-owned by AES Ohio Generation, Dynegy and AEP Generation) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had brought against numerous other coal-fired utilities in the Midwest. The NOV indicated the USEPA may: (1) issue an order requiring compliance with the requirements of the Ohio SIP; or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. To date, neither action has been taken. DPL cannot predict the outcome of this matter.
On March 13, 2008, Duke Energy, the operator of the Zimmer generating station, received an NOV and a Finding of Violation (FOV) from the USEPA alleging violations of the CAA, the Ohio SIP and permits for the station in areas including SO2, opacity and increased heat input. A second NOV and FOV with similar allegations was issued on November 4, 2010. Also in 2010, the USEPA issued an NOV to Duke Energy for excess emissions at the Zimmer generation station. In addition, Duke Energy received an NOV from the USEPA dated December 16, 2014 alleging violations in opacity at the Zimmer generating station on two dates in 2014. DP&L was a co-owner of the Zimmer generating station at the time and could be affected by the eventual resolution of these matters. Dynegy is expected to act on behalf of itself and its co-owners, including DPL, with respect to these matters. DPL sold its interest in the Zimmer generating station to Dynegy on December 8, 2017.
In January 2015, DP&L received NOVs from the USEPA alleging violations in opacity at the Stuart and Killen generating stations in 2014. On February 15, 2017, the USEPA issued an NOV alleging violations in opacity at the Stuart generation station in 2016. We are currently unable to predict the outcome of these matters.
Notices of Violation Involving Wholly-Owned Stations
On November 18, 2009, the USEPA issued an NOV to DP&L for alleged NSR violations of the CAA at the Hutchings Station relating to capital projects performed in 2001 involving Unit 3 and Unit 6. We do not believe that the two projects described in the NOV were modifications subject to NSR. As a result of the cessation of operations of the six coal-fired units at the Hutchings Station, we believe that the USEPA is unlikely to pursue the NSR complaint.
Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds
As a result of DPL’s decision to retire its Stuart and Killen generating stations and the sale of its ownership interest in the Miami Fort and Zimmer generating stations, the following environmental matters, regulations and requirements (described in further detail below) are not expected to have a material impact on DPL with respect to these generating stations:
water intake regulations finalized by the USEPA on May 19, 2014;
the appeal of the NPDES permit governing the discharge of water from the Stuart Station;
revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the USEPA on November 3, 2015; and
water rules for Selenium published July 13, 2016.
Clean Water Act – Regulation of Water Intake
On May 19, 2014, the USEPA finalized new regulations pursuant to the CWA governing existing facilities that have cooling water intake structures. The rules require an assessment of impingement and/or entrainment of organisms as a result of cooling water withdrawal. Although we do not yet know the full impact the final rules will have on our operations, material changes to the intake structure at the Stuart Station to reduce impingement with the possibility of additional site-specific requirements for reducing entrainment could be

18


required. With DPL's decision to retire the Stuart generating station, we do not believe the final rules will have a material impact on operations at that station or any of the other DPL-operated facilities.
Clean Water Act – Regulation of Water Discharge
On January 7, 2013, the Ohio EPA issued a final NPDES permit to Stuart generating station which included a compliance schedule for performing a study to justify an alternate thermal limitation or take undefined measures to meet certain temperature limits. On February 1, 2013, DP&L appealed various aspects of the final permit to the Environmental Review Appeals Commission. As a result of DPL’s decision to retire the Stuart generating station we do not expect this to have a material impact on us.
On November 3, 2015, the USEPA published its final ELG rule to reduce toxic pollutants discharged into waterways by power plants. Under the provisions of the final rule, discharges from fly ash ponds and bottom ash ponds will eventually be prohibited and treatment will be required for water discharges associated with flue gas desulfurization equipment. Legal challenges to the ELG rule are pending before the U.S. Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) and are currently being held in abeyance during review of the rule and possible rulemaking. On September 18, 2017, the USEPA published a final rule in the Federal Register delaying certain compliance dates of the ELG and withdrew the stay issued by the Trump Administration on April 25, 2017. If we were required to fully implement the requirements of the rule based on current operations, we anticipate that we would be required to make significant capital expenditures that could have a material adverse effect on our results of operations, financial condition and cash flows. However, as a result of the decision to retire the Stuart and Killen generating stations, we do not expect the ELG rule to have a material impact on either of these two stations. We may have continuing obligations under the ELG rule at our Conesville EGU.
Clean Water Act rules for Selenium
On July 13, 2016, the USEPA published the final updated chronic aquatic life criterion for the pollutant selenium in freshwater per section 304(a) of the CWA. The rule will be implemented after state rulemaking occurs, and requirements will be incorporated into NPDES permits with compliance schedules in some cases. It is too early in the rulemaking process to determine the impact, if any, on our operations, financial position or results of operations.
Regulation of Waste Disposal
In 2002, DP&L and other parties received a special notice that the USEPA considered DP&L to be a PRP for the clean-up of hazardous substances at a third-party landfill known as the South Dayton Dump (“Landfill”). Several of the parties voluntarily accepted some of the responsibility for contamination at the Landfill and, in May 2010, three of those parties, Hobart Corporation, Kelsey-Hayes Company, and NCR Corporation (“PRP Group”), filed a civil complaint in Ohio federal court (the “District Court”) against DP&L and numerous other defendants, alleging that the defendants contributed to the contamination at the landfill and were liable for contribution to the PRP group for costs associated with the investigation and remediation of the site.
While DP&L was able to get the initial case dismissed, the PRP Group subsequently, in 2013, entered into an additional Administrative Settlement Agreement and Order on Consent (“ASAOC”) with the USEPA relating to vapor intrusion and again filed suit against DP&L and other defendants. Trial for that issue is scheduled to be held in 2019. Plaintiffs also attempted to add 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 2019 trial. The court allowed the claim to be added to the litigation but ruled that the 2016 ASAOC could not be adjudicated until after completion of the remedial investigation feasibility study, which is expected to be complete years after the 2019 vapor intrusion trial. While DP&L is unable to predict the outcome of these matters, if DP&L were required to contribute to the clean-up of the site, it could have a material adverse effect on our business, financial condition or results of operations.
In December 2003, DP&L and other parties received a special notice that the USEPA considers us to be a PRP for the clean-up of hazardous substances at the Tremont City landfill site. Information available to DP&L does not demonstrate that it contributed hazardous substances to the site. While DP&L is unable to predict the outcome of this matter, if DP&L were required to contribute to the clean-up of the site, it could have a material adverse effect on its results of operations, financial condition or cash flows.
Regulation of Ash Ponds
The USEPA's final CCR rule became effective on October 19, 2015. Generally, the rule regulates CCR as nonhazardous solid waste and establishes national minimum criteria for existing and new CCR landfills and

19


existing and new CCR surface impoundments (ash ponds), including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. In 2015, DPL increased the ARO related to ash ponds by a net $40.3 million as a result of additional information obtained in response to this rule. On September 13, 2017, the USEPA indicated that it would reconsider certain provisions of the CCR rule in response to two petitions it received to reconsider the final rule. It is too early to determine whether the CCR rule or any reconsideration of the rule may have a material impact on our business, financial condition or results of operations.
Notice of Violation Involving Co-Owned Units
On September 9, 2011, DP&L received an NOV from the USEPA with respect to its co-owned Stuart generating station based on a compliance evaluation inspection conducted by the USEPA and the Ohio EPA in 2009. The notice alleged non-compliance by DP&L with certain provisions of the RCRA, the CWA NPDES permit program and the station’s storm water pollution prevention plan. The notice requested that DP&L respond with the actions it has subsequently taken or plans to take to remedy the USEPA’s findings and ensure that further violations will not occur. Based on its review of the findings, although there can be no assurance, we believe that the notice will not result in any material effect on DPL’s results of operations, financial condition or cash flows.
In November 2016, Duke Energy announced a settlement with the U.S. Attorney's Office for the Southern District of Ohio associated with an NOV issued by the USEPA for a fuel oil spill at the Beckjord station in 2014. DP&L at that time co-owned 50% of one of the units at the station and was generally responsible for that percentage of that unit’s costs. The settlement includes a $1.0 million fine and a requirement to clean up the spill at the station. DP&L's portion of the fine and cleanup costs associated with this spill, based on its prior ownership of that one unit at the station, has not yet been determined.
Capital Expenditures for Environmental Matters
DPL’s environmental capital expenditures were approximately $0.5 million, $6.1 million and $6.5 million in 2017, 2016 and 2015, respectively. DPL has projected $0.6 million in environmental-related capital expenditures for 2018.

ELECTRIC SALES AND REVENUES

The following table sets forth DPL’s, DP&L's and DPLER's electric sales for the years ended December 31, 2017, 2016 and 2015, as well as billed electric customers as of December 31, 2017, 2016 and 2015.

 
 
Year ended December 31, 2017
 
Year ended December 31, 2016
 
Year ended December 31, 2015
 
 
Electric sales (millions of kWh)
 
Billed electric customers (end of period)
 
Electric sales (millions of kWh)
 
Billed electric customers (end of period)
 
Electric sales (millions of kWh)
 
Billed electric customers (end of period)
 
 
 
 
 
 
 
 
 
 
 
 
 
DPL (a)
 
14,771

 
521,609

 
16,757

 
519,128

 
14,738

 
516,708

 
 
 
 
 
 
 
 
 
 
 
 
 
DP&L (b)
 
4,116

 
521,609

 
3,856

 
519,128

 
3,896

 
516,708

 
 
 
 
 
 
 
 
 
 
 
 
 
DPLER (c)
 

 

 

 

 
5,928

 
124,866


(a)
Electric sales exclude 1,976 million kWh relating to DPLER for the year ended December 31, 2015, and Billed electric customers excludes DPLER customers outside of the DP&L service territory of 14,147 customers for the year ended December 31, 2015.
(b)
Excluded from this line are 8,120 million KWh, 12,302 million KWh and 12,528 KWh of power relating to generation sales for the years ended December 31, 2017, 2016 and 2015, respectively, as the generation business was classified as a discontinued operation for the periods listed.
(c)
This row includes all customers and sales of DPLER, both within and outside of the DP&L service territory.

HOW TO CONTACT DPL AND DP&L
DPL is a regional energy company incorporated in 1985 under the laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 - telephone 937-259-7215. DPL’s public internet site is http://www.dplinc.com. DP&L’s public internet site is http://www.dpandl.com. The information on these websites is not incorporated by reference into this report.


20


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. These risk factors should be read in conjunction with the other detailed information concerning DPL set forth in the Notes to DPL’s audited Consolidated Financial Statements and concerning DP&L set forth in the Notes to DP&L’s audited Financial Statements in Part II – Item 8 – Financial Statements and Supplementary Data and additional information in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations herein. The risks and uncertainties described below are not the only ones that we face. As we continue to implement our plan to exit coal-fired generation, risks applicable to our generation business will continue to lessen, such as risks associated with operations of the generation plants and with greenhouse gas emission requirements.

Our electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and/or maintenance expenses, increased fuel or purchased power costs and other significant liabilities for which we may not have adequate insurance coverage.
We operate coal, oil and natural gas generating facilities, which involve certain risks that can adversely affect energy costs, output and efficiency levels. These risks include:

increased prices for fuel and fuel transportation as existing contracts expire or as such contracts are adjusted through price re-opener provisions or automatic adjustments;
unit or facility outages due to a breakdown or failure of equipment or processes;
disruptions in the availability or delivery of fuel and lack of adequate inventories;
shortages of or delays in obtaining equipment;
loss of cost-effective disposal options for solid waste generated by the facilities;
labor disputes or work stoppages by employees;
accidents and injuries;
reliability of our suppliers;
inability to comply with regulatory or permit requirements;
operational restrictions resulting from environmental permit limitations or governmental interventions;
construction delays and cost overruns;
disruptions in the delivery of electricity;
the availability of qualified personnel;
events occurring on third party systems that interconnect to and affect our system;
operator error; and
catastrophic events such as fires, explosions, cyber-attacks, terrorist acts, sabotage acts of war, pandemic events, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snow storms, droughts, or other similar occurrences affecting our generating facilities, as well as our transmission and distribution systems.

The above risks could result in unscheduled plant outages, unanticipated operation and/or maintenance expenses, increased capital expenditures and/or increased fuel and purchased power costs, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. If unexpected plant outages occur frequently and/or for extended periods of time, this could result in adverse regulatory action and/or reduced wholesale revenues.

Additionally, as a result of the above risks and other potential hazards associated with the power generation industry, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. Power generation involves hazardous activities, including acquiring, transporting and unloading fuel, operating large pieces of rotating equipment and delivering electricity to transmission and distribution systems. The control and management of these risks depend upon adequate development and training of personnel and on the existence of operational procedures, preventative maintenance plans and specific programs supported by quality control systems which reduce, but do not eliminate, the possibility of the occurrence and impact of these risks.

The hazardous activities described above can also cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment, contamination of, or damage to, the environment and suspension of operations. The occurrence of any one of these events may result in our being named as a

21


defendant in lawsuits asserting claims for substantial damages, environmental cleanup costs, personal injury and fines and/or penalties. 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. A successful claim for which we are not fully insured could hurt our financial results and materially harm our financial condition. Further, due to rising insurance costs and changes in the insurance markets, we cannot provide assurance that insurance coverage will continue to be available on terms similar to those presently available to us or at all. Any such losses not covered by insurance could have a material adverse effect on our results of operations, financial condition and cash flows.

In addition, operation of our owned and co-owned generating stations below expected capacity levels, or unplanned outages at these stations, could cause reduced energy output and efficiency levels and likely result in decreased revenues and/or increased expenses that could have a material adverse effect on our results of operations, financial condition and cash flows.

We have constructed and placed into service FGD facilities and other equipment to better monitor environmental compliance at our base-load generating stations. If there is significant operational failure of such equipment at the generating stations, we may not be able to meet emission requirements at such generating stations. These events could result in a substantial increase in our operating costs. Depending on the degree, nature, extent, or willfulness of any failure to comply with environmental requirements, including those imposed by any consent decrees, such non-compliance could result in increased operating costs, the imposition of penalties or the shutting down of the affected generating stations, which could have a material adverse effect on our results of operations, financial condition and cash flows.

We are reliant upon the performance of co-owned EGUs which are operated by our co-owners for approximately 11% of our base-load generation.
Since approximately 11% of our base-load generation is derived from co-owned EGUs operated by our co-owners, poor operational performance by our co-owners, misalignment of co-owners’ interests with our own or lack of control over costs (such as fuel costs) incurred at these stations could have an adverse effect on us. In addition, any sale of these co-owned EGUs by a co-owner to a third party could enhance the risk of a misalignment of interests, lack of cost control and other operational failures.

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 certain aspects of our business are regulated and governed by the laws of Ohio and the rules, policies and procedures of the PUCO.
In Ohio, retail generation rates are not subject to cost-based regulation, while the transmission and distribution businesses are still 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. On May 1, 2008, SB 221, an Ohio electric energy bill, was adopted that requires all Ohio distribution utilities to file either an ESP or an MRO and established a significantly excessive earnings test for Ohio public utilities that measures a utility’s earnings to determine whether there have been significantly excessive earnings during a given calendar year. There can be no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs or permitted rates of return. Accordingly, the revenue DP&L receives may or may not match its expenses at any given time. Changes in or reinterpretations of, or the unexpected application of the laws, rules, policies and procedures that set or govern electric rates, permitted rates of return, rate structures, ownership of generation assets, transition to or 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.

On November 30, 2015, DP&L filed with the PUCO a distribution rate case to establish new distribution rates. There can be no assurance that any rate case or filing we make with the PUCO, including any settlement with parties to any case, will be approved as filed or on a timely basis by the PUCO, and if approval is not made on a timely basis or if the approval provides for terms that are more adverse than those submitted for approval, our results of operations, financial condition, cash flows, and DPL's ability to meet long-term obligations, in the periods beyond twelve months from the date of this report, could be materially impacted. DP&L’s 2015 distribution rate case filing, most recent ESP filing and certain other regulatory filings and matters, are further discussed in Item 1 - Business - Competition and Regulation, as well as in Note 3 – Regulatory Matters of Notes to DPL’s Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L’s Financial Statements.

22



Our increased costs due to renewable energy and energy efficiency requirements may not be fully recoverable in the future.
Ohio law contains annual targets for energy efficiency which began in 2009 and require increasing energy reductions each year compared to a baseline energy usage, up to 22.3% by 2027. Peak demand reduction targets began in 2009 with increases in required percentages each year, up to 7.75% by 2020. The renewable energy standards have increased our costs and are expected to continue to increase (and could materially increase) these costs. DP&L is entitled to recover costs associated with its renewable energy compliance costs, as well as its energy efficiency and demand response programs. If in the future we are unable to timely or fully recover these costs, it could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, if we were found not to be in compliance with these standards, monetary penalties could apply. These penalties are not permitted to be recovered from customers and significant penalties could have a material adverse effect on our results of operations, financial condition and cash flows. The demand reduction and energy efficiency standards by design result in reduced energy and demand that could adversely affect our results of operations, financial condition and cash flows.

The availability and cost of fuel and other materials have experienced and could continue to experience significant volatility and we may not be able to hedge the entire exposure of our operations from availability and price volatility.
Our business is sensitive to changes in the price of fuel used in generation facilities. In addition, changes in the prices of steel, copper and other materials can also have a significant impact on our costs. Any changes in these costs could affect the margins.

Our approach was to hedge the fuel costs for our anticipated electric sales. However, we may not be able to hedge the entire exposure of our operations from fuel price volatility. In addition, market prices for power sales are volatile and not subject to control by any market participant. If market prices for power sales do not fully recover the costs of fuel, we would take steps to reduce our contract takes of fuel, but contractual requirements to take minimum amounts could cause adverse financial effects. If in the future we are unable to timely or fully recover our fuel and purchased power costs from the market, it could have a material adverse effect on our results of operations, financial condition and cash flows.

DPL is a co-owner of a generation facility where it is a non-operating owner. DPL does not procure or have control over the fuel and other materials for this facility but is responsible for its proportionate share of the cost of fuel procured at this facility. Co-owner operated facilities do not always have realized costs that are equal to our co-owner's projections of such costs, and we are responsible for our proportionate share of any increase in actual costs.

Wholesale power marketing activities may add volatility to earnings.
We engage in wholesale power marketing activities that primarily involve the offering of utility-owned or contracted generation into the PJM day-ahead and real-time markets.  As part of these strategies, we may also execute energy contracts that are integrated with portfolio requirements around power supply and delivery.  The earnings from our wholesale marketing activities may vary based on fluctuating prices for electricity and the amount of electric generating capacity, beyond that needed to meet firm service requirements.  In order to reduce the risk of volatility in earnings from wholesale marketing activities, we may at times enter into forward contracts to hedge such risk.  If our hedging procedures do not operate as planned we may experience losses.  In addition, the introduction of additional renewable energy, demand response or other energy supply into the PJM market could have the effect of reducing the demand for wholesale energy from other sources.  This additional generation could have the impact of reducing market prices for energy and could reduce our opportunity to sell coal-fired and gas generation into the PJM market, thereby reducing our wholesale sales.  Additionally, decreases in natural gas prices in the U.S. have the impact of reducing market prices for electricity, which can reduce our ability to sell excess generation on the wholesale market, as well as reduce our profit margin on wholesale sales.

Fluctuations in our sales of coal and excess emission allowances could cause a material adverse effect on our results of operations, financial condition and cash flows for any particular period.
DPL sells coal to other parties from time to time for reasons that include maintaining an appropriate balance between projected supply and projected use and as part of a coal price optimization program where coal under contract may be resold and replaced with other coal or power available in the market with a favorable price spread, adjusted for any quality differentials. Sales of coal are affected by a range of factors, including price volatility

23


among the different coal basins and qualities of coal, variations in power demand and the market price of power compared to the cost to produce power. These factors could cause the amount and price of coal we sell to fluctuate, which could have a material adverse effect on our results of operations, financial condition and cash flows for any particular period.

DPL may sell its excess emission allowances, including NOX and SO2 emission allowances, from time to time. Sales of any excess emission allowances are affected by a range of factors, such as general economic conditions, fluctuations in market demand, availability of excess inventory for sale and changes to the regulatory environment, including the implementation of CSAPR. These factors could cause the amount and price of excess emission allowances DPL sells to fluctuate, which could have a material adverse effect on DPL’s results of operations, financial condition and cash flows for any particular period. Although there has been overall reduced trading activity in the annual NOX and SO2 emission allowance trading markets in recent years, the adoption of regulations that regulate emissions or establish or modify emission allowance trading programs could affect the emission allowance trading markets and have a material effect on DPL’s emission allowance sales.

Regulators, politicians and non-governmental organizations have expressed concern about GHG emissions and are taking actions which, in addition to the potential physical risks associated with climate change, could have a material adverse impact on our results of operations, financial condition and cash flows.
One byproduct of burning coal and other fossil fuels is the emission of GHGs, including CO2. At the federal, state and regional levels, policies are under development or have been developed to regulate GHG emissions, including by effectively putting a cost on such emissions to create financial incentives to reduce them. In 2017, DPL emitted approximately 11 million tons of CO2 from its power plants. DPL uses CO2 emission estimation methodologies supported by “The Greenhouse Gas Protocol” reporting standard on GHG emissions. DPL’s CO2 emissions are calculated from actual fuel heat inputs and fuel type CO2 emission factors.

Any existing or future international, federal, state or regional legislation or regulation of GHG emissions could have a material adverse impact on our financial performance. The actual impact on our financial performance will depend on a number of factors including, among others, the degree and timing of GHG emissions reductions required under any such legislation or regulations, the price and availability of offsets, the extent to which market-based compliance options are available, the extent to which we would be entitled to receive GHG emissions allowances without having to purchase them in an auction or on the open market and the impact of such legislation or regulation on our ability to recover costs incurred through rate increases or otherwise. As a result of these factors, our cost of compliance could be substantial and could have a material adverse impact on our results of operations, financial condition and cash flows. Such legislation and regulations could also impair the value of our generation stations or make some of these stations uneconomical to maintain or operate and could raise uncertainty about the future viability of fossil fuels, particularly coal, as an energy source for new and existing generation stations.

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 EGUs and our support 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 by our customers could decrease our revenues. Changes in the temperature of lakes and rivers and changes in precipitation that result in drought could adversely affect the operations of our fossil-fuel fired EGUs. If any of the foregoing risks materialize, costs may increase or revenues may decrease and there could be a material adverse effect on our results of operations, financial condition and cash flows.

In addition to the rules already in effect, regulatory initiatives regarding GHG emissions may be implemented in the future, although at this time we cannot predict if, how, or to what extent such initiatives would affect us. Generally, costs to comply with any regulations implemented to reduce GHG emissions, including those already promulgated, are part of the costs of providing electricity to our customers. While we might seek recovery for such costs, there can be no assurance that the PUCO will approve such requests or that we will be able to recover such costs. Concerns over GHG emissions and their effect on the environment have led and could lead further to reduced demand for coal-fired power, which could have a material adverse effect on our results of operations, financial

24


condition and cash flows. See Item 1 - Business - Environmental Matters for addition information of environmental matters impacting us, including those relating to regulation of GHG emissions.

We are subject to numerous environmental laws and regulations that require capital expenditures, increase our cost of operations, 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 generation, storage, handling, use, disposal and transportation of ash and other materials, some of which may be defined as hazardous materials; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. We could also become subject to additional environmental laws and regulations and other requirements in the future (such as reductions in mercury and other hazardous air pollutants, SO3 and further reductions in GHG emissions as discussed in more detail in the previous risk factor) and limits on water use and discharge. Environmental laws and regulations also generally require us to obtain and comply with a wide variety of environmental licenses, permits inspections and other governmental authorizations. 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. If we are not able to timely obtain, maintain or comply with all licenses, permits, inspections 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, regulations, 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 alleged violation of these laws, regulations and other requirements may require us to expend significant resources to defend against any such alleged violations. With respect to our largest EGU, the Stuart generating station, we are also subject to continuing compliance requirements related to NOX, SO2 and particulate matter emissions under DP&L’s consent decree with the Sierra Club. Compliance with these laws, regulations and other requirements requires us to expend significant funds and resources and could at some point become prohibitively expensive or result in our shutting down (temporarily or permanently) or altering the operation of our facilities. DPL owns a non-controlling interest in one generating station operated by our co-owner. As a non-controlling owner in this generating station, DPL is responsible for its pro rata share of expenditures for complying with environmental laws, regulations and other requirements, but has limited control over the compliance measures taken by our co-owner. Under certain environmental laws, we could also 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 such hazardous substances or for other environmental damage. From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws and regulations. DPL cannot assure that it will be successful in defending against any claim of noncompliance. Any alleged violation of these laws, regulations and other requirements may require us to expend significant resources to defend against any such alleged violations. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows. For example, the amount of capital expenditures required to comply with environmental laws or regulations could be impacted by the outcome of the USEPA’s NOVs described in this Annual Report on Form 10-K. See Item 1 - Business - Environmental Matters for a more comprehensive discussion of these and other environmental matters impacting us.

The use of non-derivative and derivative instruments in the normal course of business could result in losses that could negatively impact our results of operations, financial position and cash flows.
From time to time, we use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage commodity and financial risks. These trades are affected by a range of factors, including variations in power demand, fluctuations in market prices, market prices for alternative commodities and optimization opportunities. We have attempted to manage our commodities price 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.


25


The Dodd-Frank Act contains significant requirements related to derivatives that, among other things, could reduce the cost effectiveness of entering into derivative transactions.
In July 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed into law. The Dodd-Frank Act contains significant requirements relating to derivatives, including, among others, a requirement that certain transactions be cleared on exchanges that would necessitate the posting of cash collateral for these transactions. We are considered an end-user under the Dodd-Frank Act and therefore are exempt from most of the collateral and margining requirements. We are required to report our bilateral derivative contracts, unless our counterparty is a major swap participant or has elected to report on our behalf. Even though we qualify for an exception from these requirements, our counterparties that do not qualify for the exception may pass along any increased costs incurred by them through higher prices and reductions in unsecured credit limits or be unable to enter into certain transactions with us. The occurrence of any of these events could have an adverse effect on our results of operations, financial condition and cash flows.

Our business is sensitive to weather and seasonal variations.
Weather conditions significantly affect the demand for electric power, and accordingly, our business is affected by variations in general weather conditions and unusually severe weather. As a result of these factors, our operating revenues and associated operating expenses are not generated evenly by month during the year. We forecast electric sales on the basis of normal weather, which represents a long-term historical average. Significant variations from normal weather (such as warmer winters and cooler summers) could have a material impact on our revenue, operating income and net income and cash flows. In addition, severe or unusual weather, such as hurricanes and ice or snow storms, may cause outages and property damage that may require us to incur additional costs that may not be insured or recoverable from customers. While DP&L is permitted to seek recovery of storm damage costs, if DP&L is unable to fully recover such costs in a timely manner, it could have a material adverse effect on our results of operations, financial condition and cash flows.

Our membership in a regional transmission organization presents risks that could have a material adverse effect on our results of operations, financial condition and cash flows.
On October 1, 2004, in compliance with Ohio law, DP&L turned over control of its transmission functions and fully integrated into PJM, a regional transmission organization. The price at which we can sell our generation capacity and energy is now dependent on a number of factors, which include the overall supply and demand of generation and load, other state legislation or regulation, transmission congestion and PJM’s business rules. While we can continue to make bilateral transactions to sell our generation through a willing-buyer and willing-seller relationship, any transactions that are not pre-arranged are subject to market conditions at PJM. To the extent we sell electricity into the power markets on a contractual basis, we are not guaranteed any rate of return on our capital investments through mandated rates. The results of the PJM capacity auction are impacted by the supply and demand of generation and load and may also be impacted by congestion and PJM rules relating to bidding for Demand Response and Energy Efficiency resources and other factors. Auction prices could fluctuate substantially over relatively short periods of time and adversely affect our results of operations, financial condition and cash flows. We cannot predict the outcome of future auctions, but low auction prices could have a material adverse effect on our results of operations, financial condition and cash flows.

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 FERC may cause transmission rates to change from time to time. In addition, PJM has been developing 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.

SB 221 includes a provision that allows electric utilities to seek and obtain recovery of RTO-related charges. Therefore, non-market based costs 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, DP&L and AES Ohio Generation are also subject to certain additional risks including those associated with the allocation of losses caused by unreimbursed defaults of other participants in PJM markets among PJM members and those associated with complaint cases filed against PJM that may seek refunds of

26


revenues previously earned by PJM members including DP&L and AES Ohio Generation. These amounts could be significant and have a material adverse effect on our results of operations, financial condition and cash flows.

Costs associated with new transmission projects could have a material adverse effect on our results of operations, financial condition and cash flows.
Annually, PJM performs a review of the capital additions required to provide reliable electric transmission services throughout its territory. PJM traditionally allocated the costs of constructing these facilities to those entities that benefited directly from the additions. Over the last several years, however, some of the costs of constructing new large transmission facilities have been “socialized” across PJM without a direct relationship between the costs assigned to and benefits received by particular PJM members. To date, the additional costs charged to DP&L for new large transmission approved projects have not been material. Over time, as more new transmission projects are constructed and if the allocation method is not changed, the annual costs could become material. DP&L is recovering the Ohio retail jurisdictional share of these allocated costs from its retail customers through the transmission rider. To the extent that any costs in the future are material and we are unable to recover them from our customers, it could have a material adverse effect on our results of operation, financial condition and cash flows.

If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties.
As an owner of a bulk power transmission system, DP&L is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. In addition, DP&L is subject to Ohio reliability standards and targets. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCO will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.

We rely on access to the financial markets. General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms, or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the ability of corporations to raise capital can be negatively affected. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. It is possible that our ability to raise capital on favorable terms, or at all, could be adversely affected by future market conditions, 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, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing 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. 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 could reduce our profitability. See Note 8 – Debt of Notes to DPL’s Consolidated Financial Statements and Note 7 – Debt of Notes to DP&L’s Financial Statements for information regarding indebtedness. See also Item 7A - Quantitative and Qualitative Disclosure about Market Risk for information related to market risks.

Under the PJM Capacity Performance program, we could be subject to substantial changes in capacity income and/or penalties.
As the owner of generation that is a “capacity resource” within PJM, DPL is subject to mandatory requirements to participate in PJM markets. The Capacity Performance program offers the potential for higher capacity prices paired with higher penalties for non-performance during times of high electricity demand. Any such penalties could have a material adverse effect on our results of operations, financial condition and cash flows. See Item 1 - Business - Competition and Regulation for additional information about the PJM program.


27


Our transmission and distribution system is subject to 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, fires and/or explosions, plant outages, labor disputes, operator error or inoperability of key infrastructure internal or external to us. The failure of our transmission and distribution system to fully 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.

Current and future conditions in the economy may adversely affect our customers, suppliers and other counterparties, which may adversely affect our results of operations, financial condition and cash flows.
Our business, results of operations, financial condition and cash flows have been and will continue to be affected by general economic conditions. Slowing global 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 the 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, and other counterparties, and others with whom we transact business may also 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. 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 DP&L’s service territory are important to the realization of our forecasts for annual energy sales.

The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility, and a material change in market interest rates could adversely affect our results of operations, financial condition and cash flows.
As of December 31, 2017, the carrying value of DPL's debt was $1,705.1 million and the carrying value of DP&L's debt was $646.6 million. Of DP&L's indebtedness, there was $640.6 million of First Mortgage Bonds, tax-exempt bonds and a term loan outstanding as of December 31, 2017, which are each secured by the pledge of substantially all of the assets of DP&L under the terms of DP&L’s First & Refunding Mortgage. This level of indebtedness and related security could have important consequences, including the following:

increasing our vulnerability to general adverse economic and industry conditions;
requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
limiting, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.

If DP&L issues additional debt in the future, we will be subject to the terms of such debt agreements and be required to obtain regulatory approvals. To the extent we increase our leverage, the risks described above would also increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flows from operations may not be sufficient to repay at maturity 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. For a further discussion of our outstanding debt obligations, see Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition,

28


Liquidity and Capital Requirements and Note 8 – Debt of Notes to DPL’s Consolidated Financial Statements and Note 7 – Debt of Notes to DP&L’s Financial Statements.

DP&L has variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted by interest rate fluctuations. As such, any event which impacts market interest rates could have a material effect on our results of operations, financial condition and cash flows. In addition, rating agencies issue ratings on our credit and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Credit ratings also govern the collateral provisions of certain of our contracts. If the rating agencies were to downgrade our credit ratings further, our borrowing costs would likely further increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional collateral under selected contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.

Economic conditions relating to the asset performance and interest rates of our pension and postemployment benefit plans could materially and adversely impact our results of operations, financial condition and cash flows.
Pension costs are based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets, level of employer contributions, the expected life span of pension plan beneficiaries and the discount rate used to determine the present value of future pension obligations. Any of these assumptions could prove to be wrong, resulting in a shortfall of our pension and postemployment benefit plan assets compared to obligations under our pension and postemployment benefit plans. Further, the performance of the capital markets affects the values of the assets that are held in trust to satisfy future obligations under our pension and postemployment benefit plans. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. A decline in the market value of the pension and postemployment benefit plan assets will increase the funding requirements under our pension and postemployment benefit plans if the actual asset returns do not recover these declines in value in the foreseeable future. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. We are responsible for funding any shortfall of our pension and postemployment benefit plans’ assets compared to obligations under the pension and postemployment benefit plans, and a significant increase in our pension liabilities could materially and adversely impact our results of operations, financial condition, and cash flows. We are subject to the Pension Protection Act of 2006, which requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, our required contributions to these plans, at times, have increased and may increase in the future. In addition, our pension and postemployment benefit plan liabilities are sensitive to changes in interest rates. As 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 harm our results of operations, financial condition and cash flows.
We enter into transactions with and rely on many counterparties in connection with our business, including for purchased power, for our capital improvements and additions and to provide professional services, such as actuarial calculations, payroll processing and various consulting services. If any of these counterparties fails to perform its obligations to us or becomes unavailable, our business plans may be materially disrupted, we may be forced to discontinue certain operations if a cost-effective alternative is not readily available or we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause delays. Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than relief provided by these mitigation provisions. Any of the foregoing could result in regulatory actions, cost overruns, delays or other losses, any of which (or a combination of which) could have a material adverse effect on our results of operations, financial condition and cash flows.

Further, from time to time our construction program may call for extensive expenditures for capital improvements and additions, including the installation of environmental upgrades, improvements to generation, 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

29


may provide for us to assume the risk of price escalation and availability of certain metals and key components. This could force us to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause construction delays. It could also subject us to enforcement action by regulatory authorities to the extent that such a contractor failure resulted in a failure by DP&L to comply with requirements or expectations, particularly with regard to the cost of the project. As a result of these events, we might incur losses or delays in completing construction.

Accidental improprieties and undetected errors in our internal controls and information reporting could result in the disallowance of cost recovery, noncompliant disclosure or incorrect payment processing.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP in the United States of America, laws and regulations, taxation requirements and federal securities laws and regulations in order to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with our reporting requirements under federal securities, tax and other laws and regulations and to properly process payments. We have also implemented corporate governance, internal control and accounting policies and procedures in connection with the Sarbanes-Oxley Act of 2002. Our internal controls and policies have been and continue to be closely monitored by management and our Board of Directors. While we believe these controls, policies, practices and systems are adequate to verify data integrity, unanticipated and unauthorized actions of employees, temporary lapses in internal controls due to shortfalls in oversight or resource constraints could lead to improprieties and undetected errors that could result in the disallowance of cost recovery, noncompliant disclosure and reporting or incorrect payment processing. The consequences of these events could have a material adverse effect on our results of operations, financial condition and cash flows.

New accounting standards or changes to existing accounting standards could materially affect how we report our results of operations, financial condition and cash flows.
DPL's Consolidated Financial Statements and DP&L's Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America. The SEC, FASB or other authoritative bodies or governmental entities may issue new pronouncements or new interpretations of existing accounting standards that may require us to change our accounting policies. These changes are beyond our control, can be difficult to predict and could materially affect how we report our results of operations, financial condition and cash flows. We could be required to apply a new or revised standard retroactively, which could adversely affect our financial condition. In addition, in preparing our Financial Statements, management is required to make estimates and assumptions. Actual results could differ significantly from those estimates.

We are subject to extensive laws and local, state and federal regulation, as well as litigation and other proceedings that could affect our operations and costs.
As an electric utility, DP&L is subject to extensive regulation at both the federal and state level. For example, at the federal level, DP&L is regulated by the FERC and the NERC and, at the state level, by the PUCO. The regulatory power of the PUCO over DP&L is both comprehensive and typical of the traditional form of regulation generally imposed by state public utility commissions. We face the risk of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Ohio. DP&L is subject to regulation by the PUCO as to our services and facilities, the valuation of property, the construction, purchase, or lease of electric facilities, the classification of accounts, rates of depreciation, the increase or decrease in retail rates and charges, the issuance of securities and incurrence of debt, the acquisition and sale of some public utility properties or securities and certain other matters. As a result of the Energy Policy Act of 2005 and subsequent legislation affecting the electric utility industry, we have been required to comply with rules and regulations in areas including mandatory reliability standards, cybersecurity, transmission expansion and energy efficiency. We are currently unable to predict the long-term impact, if any, to our results of operations, financial condition and cash flows as a result of these rules and regulations. 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 may be subject to material litigation, regulatory proceedings, administrative proceedings, audits, settlements, investigations and claims from time to time which may 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. We have been named as a defendant in asbestos litigation, which at this time is not expected to be material to us. The continued presence of asbestos and other regulated substances at these

30


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 - Competition and Regulation, Item 1 - Business - Environmental Matters, and Item 3 - Legal Proceedings for a summary of significant regulatory matters and legal proceedings involving us.

Tax legislation initiatives or challenges to our tax positions could adversely affect our operations and financial condition.
We are subject to the tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative measures may be enacted that could adversely affect our overall tax positions regarding income or other taxes. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these legislative measures.

For example, the United States federal government recently enacted tax reform that, among other things, reduces U.S. federal corporate income tax rates, imposes limits on tax deductions for interest expense and changes the rules related to capital expenditure cost recovery. There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions of the newly enacted tax reform measure. Given the unpredictability of these possible changes and their potential interdependency, it remains difficult to assess the overall effect such tax changes will have on our earnings and cash flow, and the extent to which such changes could adversely impact our results of operations. As the impacts of the new law are determined, and as yet-to-be-released regulations and other guidance interpreting the new law are issued, our financial results could be materially impacted.

In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will be sustained if challenged by relevant tax authorities and if not sustained, there could be a material impact on our results of operations.

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. We also have policies and procedures in place to mitigate excessive risk-taking by employees since excessive risk-taking by our employees to achieve performance targets could result in events that could 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 that, after initially being extended, expired on January 31, 2018. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreement or at the expiration of the collective bargaining agreement before a new agreement is negotiated. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.

Potential security breaches (including cybersecurity breaches) and terrorism risks could adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our generation stations, fuel storage facilities and transmission and distribution facilities. We also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cybersecurity attacks and other causes. In particular, given the importance of energy and the electric grid, there is the possibility that our systems and facilities could be targets of terrorism or acts of war. We have implemented measures to help prevent unauthorized access

31


to our systems and facilities, including certain measures to comply with mandatory regulatory reliability standards. Pursuant to NERC requirements, we have a robust cybersecurity plan in place and are subject to regular audits by an independent auditor approved by NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks, and identify areas for improvement. In addition, we provide cybersecurity training for our employees and perform exercises designed to raise employee awareness of cyber risks on a regular basis. 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 adversely affect our results of operations, cash flows and financial condition.

In the course of our business, we also store and use customer, employee, and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in negative publicity, remediation costs and potential litigation, damages, consent orders, injunctions, fines and other relief.

To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.

DPL is a holding company and parent of DP&L and other subsidiaries. DPL’s cash flow is dependent on the operating cash flows of DP&L and its other subsidiaries and their ability to pay cash to DPL.
DPL is a holding company with no material assets other than the ownership of its subsidiaries, and accordingly all cash is generated by the operating activities of its subsidiaries, principally DP&L and AES Ohio Generation. As such, DPL’s cash flow is largely dependent on the operating cash flows of DP&L and its ability to pay cash to DPL. See Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity for a discussion of these restrictions. See Note 8 – Debt of Notes to DPL’s Consolidated Financial Statements and Note 7 – Debt of Notes to DP&L’s Financial Statements for information regarding indebtedness. In addition, DP&L is regulated by the PUCO, which possesses broad oversight powers to ensure that the needs of utility customers are being met. The PUCO could impose additional restrictions on the ability of DP&L to distribute, loan or advance cash to DPL pursuant to these broad powers. See Note 3 – Regulatory Matters of Notes to DPL’s Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L’s Financial Statements for more information the regulatory environment. As part of the PUCO’s approval of the Merger, DP&L agreed to maintain a capital structure that includes an equity ratio of at least 50 percent and not to have a negative retained earnings balance. See Note 11 – Equity of Notes to DPL's Consolidated Financial Statements and Note 10 – Equity of Notes to DP&L's Financial Statements for information related to restrictions on DP&L's equity and its ability to declare and pay dividends to DPL. After the fixed-asset impairments recorded during the first quarter of 2017 and the second and fourth quarters of 2016 and as of December 31, 2017, DP&L's equity ratio was 33% and its retained earnings balance was negative. While we do not expect any of the foregoing to significantly affect DP&L’s ability to pay funds to DPL in the near future, a significant limitation on DP&L’s ability to pay dividends or loan or advance funds to DPL could have a material adverse effect on DPL’s results of operations, financial condition and cash flows. In addition, as a result of any non-compliance with PUCO requirements, the PUCO could impose additional restrictions on DP&L operations that could have a material adverse effect in DPL's and DP&L'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 DP&L’s common stock is owned by DPL, and DPL is an indirectly wholly owned subsidiary of AES. Due to our relationship with AES, any adverse developments and announcements concerning AES may impair our ability to access the capital markets and to otherwise conduct business. In particular, downgrades in AES’s credit ratings could result in DPL’s or DP&L’s credit ratings being downgraded.

Impairment of long-lived assets would negatively affect our consolidated results of operations and net worth.
Long-lived assets are amortized or depreciated over their estimated useful lives. Long-lived assets are evaluated for impairment only when impairment indicators are present. The recoverability assessment of long-lived assets requires making estimates and assumptions to determine fair value, as described above. See Note 15 – Fixed-asset Impairments of Notes to DPL’s Consolidated Financial Statements for more information on the impairment of fixed assets.


32


Item 1B – Unresolved Staff Comments
None.

Item 2 – Properties
Information relating to our properties is contained in Item 1 – Business – Electric Operations and Fuel Supply and Note 4 – Property, Plant and Equipment of Notes to DPL's Consolidated Financial Statements and Note 4 – Property, Plant and Equipment of Notes to DP&L's Financial Statements.

Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio. This facility and the remainder of our material properties are owned directly by DP&L or AES Ohio Generation. We also own a distribution service center in Dayton, Ohio.

Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage. All generation assets were released from the lien of DP&L's first and refunding mortgage in connection with the completion of Generation Separation on October 1, 2017.

Item 3 – Legal Proceedings

DPL and DP&L are involved in certain claims, suits and legal proceedings in the normal course of business. DPL and DP&L have accrued for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. DPL and DP&L believe, based upon information they currently possess and considering established reserves for estimated liabilities and insurance coverage, that the ultimate outcome of these proceedings and actions is unlikely to have a material adverse effect on their financial statements. It is reasonably possible, however, that some matters could be decided unfavorably and could require DPL or DP&L to pay damages or make expenditures in amounts that could be material but cannot be estimated as of December 31, 2017.

The following additional information is incorporated by reference into this Item: information about the legal proceedings contained in Item 1 - Business - Competition and Regulation and Item 1 - Business - Environmental Matters.

Item 4 – Mine Safety Disclosures
Not applicable.


33


PART II
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, our stock is not listed for trading on any stock exchange. DP&L’s common stock is held solely by DPL and, as a result, is not listed for trading on any stock exchange.

Dividends
During the years ended December 31, 2017, 2016 and 2015, DPL paid no dividends to AES. DP&L declares and pays dividends on its common shares to its parent DPL from time to time as declared by the DP&L board. Dividends on common shares in the amount of $39.0 million, $70.0 million and $50.0 million were declared and paid in the years ended December 31, 2017, 2016 and 2015, respectively. DP&L declared and paid dividends on preferred shares of $0.7 million in the year ended December 31, 2016 and $0.9 million in the year ended December 31, 2015.

DPL’s Amended Articles of Incorporation contain restrictions on DPL’s ability to make dividends, distributions and affiliate loans (other than to its subsidiaries), including restrictions of 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, 2017, DPL’s leverage ratio was at 1.50 to 1.00 and DPL’s senior long-term debt rating from all three major credit rating agencies was below investment grade. As a result, as of December 31, 2017, DPL was prohibited under its Articles of Incorporation from making a distribution to its shareholder or making a loan to any of its affiliates (other than its subsidiaries).

DP&L's 2017 ESP also contains restrictions on dividend or tax sharing payments from DPL to AES. See Note 11 – Equity for more information and Note 9 – Income Taxes for more information about the tax sharing payment restrictions.

On October 13, 2016 (the "Redemption Date"), DPL's subsidiary, DP&L redeemed all of its issued and outstanding preferred stock. See Note 11 – Equity of Notes to DPL's Consolidated Financial Statements for more information and Note 10 – Equity of Notes to DP&L's Financial Statements.

34


Item 6 – Selected Financial Data
The following table presents our selected financial data which should be read in conjunction with DPL's audited Consolidated Financial Statements and the related Notes thereto, DP&L's audited Financial Statements and the related Notes thereto and Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. The “Results of Operations” discussion in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses significant fluctuations in operating data. DPL’s common stock is wholly-owned by an indirect subsidiary of AES and therefore DPL does not report earnings or dividends on a per-share basis. Other information that management believes is important in understanding trends in our business is also included in this table. The Statements of Operations Data for DP&L for 2013 and 2014 and the Balance Sheet Data for DP&L for 2013 - 2015 are not comparable to the Statements of Operations Data for 2015 - 2017 and the Balance Sheet Data for 2016 and 2017, respectively, as these periods have not been adjusted to reflect the Generation Separation and its reclassification as a discontinued operation.
DPL
 
 
Years ended December 31,
$ in millions except per share amounts or as indicated
 
2017
 
2016
 
2015
 
2014
 
2013
Total electric sales (millions of kWh)
 
14,771

 
16,757

 
14,738

 
14,695

 
15,702

Statements of Operations Data
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,236.9

 
$
1,427.3

 
$
1,612.8

 
$
1,716.5

 
$
1,579.0

Goodwill impairment (a)
 
$

 
$

 
$
317.0

 
$

 
$
306.3

Fixed-asset impairment (b)
 
$
175.8

 
$
859.0

 
$

 
$
11.5

 
$
26.2

Operating income / (loss)
 
$
(6.0
)
 
$
(683.9
)
 
$
(109.9
)
 
$
230.7

 
$
(77.4
)
Income / (loss) from continuing operations
 
$
(94.6
)
 
$
(514.5
)
 
$
(251.4
)
 
$
57.2

 
$
(225.6
)
Income / (loss) from discontinued operations, net of tax
 
$

 
$
29.3

 
$
12.4

 
$
(131.8
)
 
$
3.6

Net loss
 
$
(94.6
)
 
$
(485.2
)
 
$
(239.0
)
 
$
(74.6
)
 
$
(222.0
)
Construction additions
 
$
108.0

 
$
140.0

 
$
132.0

 
$
116.0

 
$
114.0

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (end of period):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
2,049.2

 
$
2,419.2

 
$
3,324.7

 
$
3,559.1

 
$
3,699.3

Long-term debt (c)
 
$
1,700.4

 
$
1,828.7

 
$
1,420.5

 
$
2,120.9

 
$
2,262.0

Redeemable preferred stock of subsidiary
 
$

 
$

 
$
18.4

 
$
18.4

 
$
18.4

Total common shareholder's equity / (deficit)
 
$
(584.3
)
 
$
(587.6
)
 
$
(80.6
)
 
$
148.2

 
$
239.5


(a)
Goodwill impairments of $317.0 million and $306.3 million recorded in 2015 and 2013, respectively. The goodwill impairment of $135.8 million in 2014 related to DPLER has been reclassified to discontinued operations.
(b)
Fixed-asset impairments of $175.8 million ($114.3 million net of tax), $859.0 million ($558.3 million net of tax), $11.5 million ($7.5 million net of tax) and $26.2 million ($17.0 million net of tax) were recorded in 2017, 2016, 2014 and 2013, respectively.
(c)
Excluded from this line are the current maturities of long-term debt.

35


DP&L
 
 
Years ended December 31,
$ in millions except per share amounts or as indicated
 
2017
 
2016
 
2015
 
2014
 
2013
Total electric sales (millions of kWh) (a)
 
4,116

 
3,856

 
3,896

 
18,613

 
19,423

Statements of Operations Data
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
720.0

 
$
808.0

 
$
857.0

 
$
1,668.3

 
$
1,551.5

Fixed-asset impairment (b)
 
$

 
$

 
$

 
$

 
$
86.0

Operating income
 
$
120.6

 
$
168.1

 
$
222.2

 
$
188.8

 
$
139.9

Income from continuing operations
 
$
57.4

 
$
97.6

 
$
130.0

 
$
114.1

 
$
82.7

Loss from discontinued operations, net of tax
 
$
(40.4
)
 
$
(870.3
)
 
$
(23.6
)
 
$

 
$

Net income / (loss) attributable to common stock
 
$
17.0

 
$
(773.4
)
 
$
105.5

 
$
114.1

 
$
82.7

Construction additions (c)
 
$
83.0

 
$
88.0

 
$
91.0

 
$
112.0

 
$
111.0

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (end of period):
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
1,689.4

 
$
2,035.1

 
$
3,359.6

 
$
3,328.8

 
$
3,300.4

Long-term debt (d)
 
$
642.0

 
$
731.5

 
$
313.6

 
$
868.2

 
$
865.3

Redeemable preferred stock
 
$

 
$

 
$
22.9

 
$
22.9

 
$
22.9

Total common shareholder's equity
 
$
330.7

 
$
362.3

 
$
1,212.7

 
$
1,143.4

 
$
1,204.0

 
 
 
 
 
 
 
 
 
 
 
Number of shareholders - preferred stock
 

 

 
180

 
186

 
186


(a)
Excluded from this line are 8,120 million KWh, 12,302 million KWh and 12,528 KWh of power relating to generation sales for the years ended December 31, 2017, 2016 and 2015, respectively, as the generation business was classified as a discontinued operation for these periods.
(b)
Fixed-asset impairment of $86.0 million ($55.9 million net of tax) was recorded in 2013. Fixed-asset impairment of $1,353.5 million ($879.8 million net of tax) in 2016 was reclassified to discontinued operations.
(c)
Excluded from this line are $5.0 million, $31.0 million and $33.0 million of construction additions relating to the generation business for the years ended December 31, 2017, 2016 and 2015, respectively, as the generation business was classified as a discontinued operation for these periods.
(d)
Excluded from this line are the current maturities of long-term debt.


Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with DPL’s audited Consolidated Financial Statements and the related Notes thereto and DP&L’s audited Financial Statements and the related Notes thereto included in Item 8 – Financial Statements and Supplementary Data of this Form 10-K. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. See “Forward-Looking Statements” at the beginning of this Form 10-K and Item 1A – Risk Factors. For a list of certain abbreviations or acronyms in this discussion, see Glossary of Terms at the beginning of this Form 10-K.

Key topics in Management's Discussion and Analysis

Our discussion covers the following:
Review of Results of Operations
DPL
DPL - T&D Segment
DPL - Generation Segment
DP&L
Key Trends and Uncertainties
Capital Resources and Liquidity
Critical Accounting Estimates


36


RESULTS OF OPERATIONS – DPL Inc.

DPL’s results of operations include the results of its subsidiaries, including the consolidated results of its principal subsidiary DP&L. All material intercompany accounts and transactions have been eliminated in consolidation. A separate specific discussion of the results of operations for DP&L is presented elsewhere in this report.

Statement of Operations Highlights – DPL
 
 
Years ended December 31,
$ in millions
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
 
Retail
 
$
641.7

 
$
738.7

 
$
785.2

Wholesale
 
382.3

 
477.7

 
598.2

RTO revenue
 
58.0

 
62.4

 
70.1

RTO capacity revenues
 
143.9

 
137.4

 
150.4

Other revenues
 
11.0

 
11.1

 
8.8

Mark-to-market gains
 

 

 
0.1

Total revenues
 
1,236.9

 
1,427.3

 
1,612.8

Cost of revenues:
 
 
 
 
 
 
Fuel cost:
 
 
 
 
 
 
Fuel
 
211.6

 
275.4

 
263.1

Gains from sale of coal
 
(1.3
)
 
(6.6
)
 
(3.0
)
Mark-to-market gains
 

 

 
(0.3
)
Net fuel cost
 
210.3

 
268.8

 
259.8

Purchased power:
 
 
 
 
 
 
Purchased power
 
255.5

 
322.0

 
336.1

RTO charges
 
70.7

 
78.4

 
97.9

RTO capacity charges
 
14.7

 
21.3

 
122.5

Mark-to-market losses / (gains)
 
(1.7
)
 
(4.3
)
 
6.1

Net purchased power cost
 
339.2

 
417.4

 
562.6

 
 
 
 
 
 
 
Total cost of revenues
 
549.5

 
686.2

 
822.4

 
 
 
 
 
 
 
Gross margin
 
687.4

 
741.1

 
790.4

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Operation and maintenance
 
327.6

 
348.1

 
361.3

Depreciation and amortization
 
106.9

 
132.3

 
134.6

General taxes
 
89.7

 
85.7

 
87.0

Goodwill impairment (Note 7)
 

 

 
317.0

Fixed-asset impairment (Note 15)
 
175.8

 
859.0

 

Other, net
 
(6.6
)
 
(0.1
)
 
0.4

Total operating expenses
 
693.4

 
1,425.0

 
900.3

 
 
 
 
 
 
 
Operating loss
 
(6.0
)
 
(683.9
)
 
(109.9
)
 
 
 
 
 
 
 
Other expense, net
 
 
 
 
 
 
Investment income
 
0.3

 
0.4

 
0.2

Interest expense
 
(110.1
)
 
(107.7
)
 
(119.8
)
Charge for early redemption of debt
 
(3.3
)
 
(3.1
)
 
(2.1
)
Other income / (expense)
 
(0.8
)
 
1.0

 
0.2

Other expense, net
 
(113.9
)
 
(109.4
)
 
(121.5
)
 
 
 
 
 
 
 
Loss from continuing operations before income tax (a)
 
$
(119.9
)
 
$
(793.3
)
 
$
(231.4
)

(a)
For purposes of discussing operating results, we present and discuss 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.


37


DPL – Revenues
Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, our retail sales volume 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.

Degree-days
 
 
Years ended December 31,

 
2017
 
2016
 
2015
Heating degree-days (a)
 
4,805
 
5,034
 
5,163
Cooling degree-days (a)
 
890
 
1,213
 
1,060

(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.

Since we have historically utilized our internal generating capacity to supply the needs of our retail customers within the DP&L service territory first, increases in on-system retail demand may have decreased the volume of internal generation available to be sold in the wholesale market and vice versa. Beginning in 2016, DP&L retail demand is entirely sourced through a competitive auction. We sell generation into the wholesale market, which covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting our wholesale sales volume each hour of the year include: wholesale market prices; retail demand throughout the entire wholesale market area; availability of our generating plants and non-affiliated generating plants to sell into the wholesale market; contracted wholesale sales and our variable generation costs. Our goal is to make wholesale sales when it is profitable to do so.

The following table provides a summary of changes in revenues from prior periods:
$ in millions
 
2017 vs. 2016
 
2016 vs. 2015
Retail
 
 
 
 
Rate
 
$
(69.2
)
 
$
(68.7
)
Volume
 
(28.4
)
 
21.0

Other
 
0.6

 
1.2

Total retail change
 
(97.0
)
 
(46.5
)
Wholesale
 
 
 
 
Rate
 
(27.6
)
 
(124.4
)
Volume
 
(67.8
)
 
3.9

Total wholesale change
 
(95.4
)
 
(120.5
)
RTO revenues and RTO capacity revenues
 
 
 
 
RTO revenues and RTO capacity revenues
 
2.1

 
(20.7
)
Other
 
 
 
 
Other
 
(0.1
)
 
2.2

Total revenue changes
 
$
(190.4
)
 
$
(185.5
)

During the year ended December 31, 2017, Revenues decreased $190.4 million to $1,236.9 million from $1,427.3 million in the same period of the prior year. This decrease was primarily the result of lower average retail and wholesale rates and volumes, slightly offset by higher RTO and RTO capacity revenues.
Retail revenues decreased $97.0 million primarily due to an unfavorable $69.2 million retail rate variance and an unfavorable $28.4 million retail volume variance. The decrease in average retail rates was primarily driven by reverting to ESP 1 rates in September of 2016. In addition, there were decreased collections on the USF, competitive bid, and energy efficiency revenue rate riders, as well as a decrease due to the collection of the remaining 2015 deferred fuel balance in the first quarter of 2016. These were partially offset by the implementation of the DMR in November 2017. The decrease in retail volume was primarily driven by more mild weather in 2017, as heating degree-days decreased by 229 degree-days and cooling degree-days decreased by 323 degree-days.

38


Wholesale revenues decreased $95.4 million primarily as a result of an unfavorable $67.8 million wholesale volume variance and an unfavorable $27.6 million wholesale rate variance. Despite increases in PJM market prices, the unfavorable price variance was due to lower realized gains on derivatives in 2017. The decrease in wholesale volumes of $67.8 million was primarily driven by a 13% decrease in internal generation at DPL's plants in 2017 and a decrease in the load served of other parties through their competitive bid process.
RTO capacity and other revenues, consisting primarily of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and PJM capacity payments, increased $2.1 million compared to the prior year. This increase was the result of a $6.5 million increase in revenue realized from the PJM capacity auction in 2017 primarily due to higher average prices in the CP auction. The capacity price that became effective in June of 2017 was $152/MW-day, compared to $59/MW-day under the base RPM auction and $134/MW-day for the transitional CP auction in June of 2016, and $136/MW-day in June of 2015. This increase was partially offset by a $4.4 million decrease in RTO revenues due to lower rates and availability related to compensation for DPL's reactive supply and operating reserves.

During the year ended December 31, 2016, Revenues decreased $185.5 million to $1,427.3 million from $1,612.8 million in the same period of the prior year. This decrease was primarily the result of lower average retail and wholesale rates and lower RTO and RTO capacity revenues, partially offset by higher retail and wholesale volumes.
Retail revenues decreased $46.5 million primarily due to an unfavorable $68.7 million retail rate variance and a favorable $21.0 million retail volume variance. The unfavorable rate variance was due to lower average DP&L retail rates, primarily driven by decreased retail revenue from SSO customers as the competitive auction rate, which represents 100% of DP&L SSO load in 2016 compared to 60% in 2015, was lower than the non-auction SSO rate. The decrease was also due to the recovery of deferred storm costs in 2015 and the reversion back to ESP 1 rates in September of 2016, partially offset by $20.1 million of revenue associated with energy efficiency programs recorded in 2016. This decrease in rate was partially offset by a volume increase due to warmer summer weather in 2016 as cooling degree-days increased by 153 along with increased sales to commercial and industrial customers, partially offset by milder winter weather in the first quarter of 2016 as heating degree-days-decreased by 129.
Wholesale revenues decreased $120.5 million as a result of an unfavorable $124.4 million wholesale rate variance and a favorable $3.9 million wholesale volume variance. The unfavorable price variance of $124.4 million was primarily due to lower market prices in 2016 and higher average prices on sales to DPLER in 2015, as DP&L previously had full requirements sales to DPLER in 2015. This price decrease was partially offset by a favorable wholesale volume variance as DP&L had excess generation available to be sold in the wholesale market in 2016 resulting from 100% of its SSO load being served through the competitive bid process compared to 60% during 2015. In addition, there was a 4.5% increase in internal generation from DP&L's co-owned and operated plants in 2016 compared to the prior year, partially offset by a decrease in volume due to the contract termination with DPLER. As noted above, DP&L previously had full requirements sales to DPLER in 2015. These sales were previously eliminated in consolidation prior to DPLER being accounted for as a discontinued operation.
RTO capacity and other revenues, consisting primarily of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and PJM capacity payments, decreased $20.7 million compared to the prior year. This decrease was the result of a $7.7 million decrease in RTO transmission and congestion revenue, as 2015 congestion revenue charges were higher due to milder winter weather in 2016 than 2015. There was also a $13.0 million decrease in revenue realized from the PJM capacity auction in 2016 due to lower capacity cleared and lower prices in both the CP and RPM auctions. The capacity price that became effective in June of 2016 was $134/MW-day, compared to $136/MW-day in June 2015.

DPL – Cost of Revenues
During the year ended December 31, 2017, Total cost of revenues decreased $136.7 million compared to the prior year. This decrease was a result of:
Net fuel costs, which include coal, gas, oil and emission allowance costs, decreased $58.5 million compared to the same period in the prior year primarily due to a 11% decrease in average fuel cost per MWh and a 13% decrease in internal generation. There were fuel costs deferred in 2015 which were expensed in 2016 because they were collected in 2016, which contributed to the price decrease. The

39


decrease in internal generation was primarily due to plant outages, mostly resulting from the January 10, 2017 high pressure feedwater heater shell failure on Unit 1 at the J.M. Stuart station.
Net purchased power decreased $78.2 million compared to the prior year. This decrease was driven by the following factors:
Purchased power decreased $66.5 million primarily due to a $32.4 million volume decrease and a $34.1 million price decrease compared to the same period in the prior year. The volume decrease was primarily driven by a lower load served through the competitive bid process of other parties compared to 2016, as well as the decrease in DP&L retail demand in 2017. The price decrease was primarily driven by lower rates in the competitive bid process in 2017 compared to 2016.
RTO charges decreased $7.7 million compared to the prior year primarily due to lower transmission and congestion charges. RTO charges are incurred by DP&L as a member of PJM and primarily include transmission charges within our network, which are incurred and charged to customers in the transmission rider, transmission and congestion losses incurred on DP&L's wholesale revenues, and costs associated with load obligations for retail customers.
RTO capacity charges decreased $6.6 million compared to the prior year primarily due to a lower retail load served in 2017, as well as a $1.7 million PJM penalty incurred in March 2016 associated with low plant availability. Retail load served relates to the load of other parties through their competitive bid process. As noted above, RTO capacity prices are set by an annual auction.
Mark-to-market gains decreased $2.6 million due to changes in power prices in 2017 and 2016.

During the year ended December 31, 2016, Total cost of revenues decreased $136.2 million compared to the prior year. This decrease was a result of:
Net fuel costs increased $9.0 million compared to the prior year primarily due to a 7.2% increase in internal generation, partially offset by a 2.4% decrease in average fuel cost per MWh.
Net purchased power decreased $145.2 million compared to the prior year. This decrease was driven by the following factors:
Purchased power decreased $14.1 million primarily due to a $55.4 million volume decrease as DP&L no longer purchased power to source DPLER customers due to the sale of DPLER on January 1, 2016. This volume decrease was partially offset by increased purchases as DP&L sourced 100% of SSO load through the competitive bid process in 2016 as opposed to 60% in 2015. DPL purchases power for the SSO load sourced through the competitive bid process and to serve auction load requirements in service territories other than DP&L's. The decrease in volume was also offset by an unfavorable price variance of $41.3 million driven by higher prices in the competitive bid process.
RTO charges decreased $19.5 million primarily as a result of no longer having a DP&L retail load obligation as a result of 100% SSO sales being sourced through the competitive auction. RTO charges are incurred by DP&L as a member of PJM and primarily include transmission charges within our network which are incurred and charged to customers in the TCRR-N rider, transmission and congestion losses incurred on DP&L's wholesale revenues, and costs associated with load obligations for retail customers.
RTO capacity charges decreased $101.2 million primarily due to DP&L no longer having a retail load requirement in 2016, resulting from the SSO load being 100% sourced through competitive bid in 2016 as opposed to 60% in 2015 and, additionally, from the fact that DP&L did not provide power to DPLER in 2016. The remaining charges primarily relate to serving the load of other parties through their competitive bid process. As noted in the revenue section above, RTO capacity prices are set by an annual auction.
Mark-to-market losses decreased $10.4 million due to less significant decreases in power prices in 2016, resulting in gains on derivative forward power purchase contracts.


40


DPL - Operation and Maintenance
During the year ended December 31, 2017, Operation and Maintenance expense decreased $20.5 million compared to the prior year. This decrease was a result of:
$ in millions
 
2017 vs. 2016
Decrease in uncollectible expenses for the low-income payment program, which is funded by the USF revenue rate rider (a)
 
$
(23.4
)
Decrease in generating facilities operating and maintenance expenses
 
(9.5
)
Decrease in alternative energy and energy efficiency programs (a)
 
(8.4
)
Increase in group insurance expense associated with participation in the AES self-insurance plan
 
8.6

Increase in severance costs due to announced plant closures and restructuring
 
6.8

Increase in legal and other consulting costs
 
3.5

Increase in retirement benefits costs
 
3.3

Other, net
 
(1.4
)
Net change in Operations and Maintenance expense
 
$
(20.5
)

(a)
There is corresponding revenue associated with this program resulting in minimal impact to Net income.

During the year ended December 31, 2016, Operation and Maintenance expense decreased $13.2 million compared to the prior year. This decrease was a result of:
$ in millions
 
2016 vs. 2015
Decrease in deferred storm costs as they were recognized in 2015 due to their recovery through customer rates (a)
 
$
(17.5
)
Decrease in generating facilities operating and maintenance expenses
 
(13.0
)
Decrease in expenses due to the reversal of the Economic Development Fund, resulting from the withdrawal of ESP 2
 
(3.0
)
Decrease in group insurance, associated with the participation in the AES self-insurance plan, and long-term disability expenses
 
(2.5
)
Increase in alternative energy and energy efficiency programs (a)
 
13.2

Increase in uncollectible expenses for the low-income payment program, which is funded by the USF revenue rate rider (a)
 
6.2

Increase in retirement benefits costs
 
1.8

Increase in property insurance
 
1.5

Other, net
 
0.1

Net change in Operation and Maintenance expense
 
$
(13.2
)

(a)
There is corresponding revenue associated with this program resulting in minimal impact to Net income.

DPL – Depreciation and Amortization
During the year ended December 31, 2017, Depreciation and amortization expense decreased $25.4 million compared to the prior year. The decrease was primarily a result of the fixed-asset impairments in the second and fourth quarters of 2016, and the first quarter of 2017, which reduced depreciation expense due to the lower asset values. In addition, the decrease was attributable to the discontinuation of Miami Fort and Zimmer depreciation expense due to the sale of these two plants.

During the year ended December 31, 2016, Depreciation and amortization expense decreased $2.3 million compared to the prior year. The decrease was primarily a result of the fixed asset impairment in Q2 of 2016, which reduced depreciation expense due to the lower asset values.

DPL – General Taxes
During the year ended December 31, 2017, General taxes increased $4.0 million compared to the prior year due to a $1.6 million favorable true-up of the 2015 Ohio property tax accrual recorded in 2016 to reflect actual payments made in 2016, combined with an unfavorable true-up of $1.2 million recorded in 2017 for the 2016 Ohio property tax accrual to reflect actual payments made in 2017 and a $0.7 million reserve recorded in 2017 for a potential property tax settlement.

During the year ended December 31, 2016, General taxes decreased $1.3 million compared to the prior year.

41


DPL – Goodwill Impairment
During the year ended December 31, 2015, DPL recorded an impairment of goodwill of $317.0 million, which was a full impairment of the remaining goodwill balance. The goodwill impairment test indicated that the fair value of the DP&L Reporting Unit was less than its carrying amount, primarily due to a decrease in dark spreads that were driven by decreases in forward power prices, and lower revenues from the new CP product. See Note 7 – Goodwill of Notes to DPL’s Consolidated Financial Statements.

DPL – Fixed-asset Impairments
During the year ended December 31, 2017, DPL recorded impairments of fixed assets totaling $175.8 million. In the first quarter of 2017, the Board of Directors of DP&L approved the retirement of the then DP&L operated and co-owned Stuart Station coal-fired and diesel-fired generating units and the Killen Station coal-fired generating unit and combustion turbine (collectively, the “Facilities”) on or before June 1, 2018. The co-owners of these facilities agreed with DP&L to proceed with this plan of retirement. DPL performed a long-lived asset impairment analysis and determined that the carrying amounts of the Facilities were not recoverable. As a result, DPL recognized asset impairment expense of $66.4 million in the first quarter of 2017. In the fourth quarter of 2017, DPL signed an agreement with Kimura Power, LLC for the sale of its Peaker assets. Because the Peaker assets met the criteria to be classified as held-for-sale and the carrying value of the Peaker assets exceeded the fair value less cost to sell as of December 31, 2017, DPL recognized asset impairment expense of $109.4 million in fourth quarter of 2017.

During the year ended December 31, 2016, DPL recorded impairments of fixed assets totaling $859.0 million. In the second quarter of 2016, DPL recorded a $235.5 million fixed-asset impairment as DP&L performed a long-lived asset impairment test and determined that the carrying amounts of the asset groups of Killen and certain DP&L peaking generating facilities were not recoverable. In the fourth quarter of 2016, DPL recorded an additional $623.5 million fixed asset impairment as DP&L performed a long-lived asset impairment analysis for the Killen, Stuart, Miami Fort, Zimmer and Conesville coal-fired facility asset groups, as well as the Hutchings gas-fired peaking plant asset group and determined that their carrying amounts were not recoverable.

During the year ended December 31, 2015, DPL did not record any impairments of fixed assets.

For more information on these impairments, see Note 15 – Fixed-asset Impairments of Notes to DPL's Consolidated Financial Statements.

DPL – Interest Expense
During the year ended December 31, 2017, Interest expense increased $2.4 million compared to the prior year primarily due to higher interest rates. On August 24, 2016, DP&L refinanced its 1.875% First Mortgage Bonds Due 2016, with a variable rate Term Loan B of $445.0 million maturing on August 24, 2022. The variable rate on the loan is calculated based on LIBOR plus a spread of 3.25%, with a LIBOR floor of 0.75%.

During the year ended December 31, 2016, Interest expense decreased $12.1 million compared to the prior year primarily due to debt repayments at DPL and DP&L, as well as a $3.8 million decrease in carrying costs primarily related to the recovery of deferred storm costs in 2015.

DPL – Charge for Early Redemption of Debt
During the year ended December 31, 2017, DPL recorded a charge for early redemption of debt of $3.3 million primarily due to the early redemption of the 4.8% Tax-exempt First Mortgage Bonds due 2036 and associated write-off of deferred financing costs.

During the year ended December 31, 2016, DPL recorded a charge for early redemption of debt
$3.1 million primarily due to the February 2016 make-whole premium of $2.4 million associated with the early retirement of $73.0 million of the 6.5% Senior Notes due in 2016.

During the year ended December 31, 2015, DPL recorded a charge for early redemption of debt of $2.1 million primarily due to the write off of deferred financing costs associated with the refinancing of its revolving credit facility and its term loan.

DPL – Other
During the year ended December 31, 2017, DPL recorded Other operating income of $6.6 million primarily consisting of the $14.0 million gain on sale of the Miami Fort and Zimmer plants and $8.7 million of insurance

42


recoveries, partially offset by the $16.2 million write-off of plant materials and supplies inventory at the Stuart and Killen plants.

During the year ended December 31, 2016, DPL recorded Other operating income of $0.1 million.

During the year ended December 31, 2015, DPL recorded Other operating expense of $0.4 million.

DPL – Income Tax Expense
During the year ended December 31, 2017, Income tax benefit decreased $253.5 million compared to the prior year primarily due to lower pre-tax loss in the current year compared to the prior year and the one-time re-measurement of deferred tax expense related to the recent enactment of the TCJA.

During the year ended December 31, 2016, Income tax benefit increased $298.8 million compared to the prior year primarily due to a pre-tax loss in the current year and the recording of a goodwill impairment, which is not deductible for income tax purposes, in 2015 that did not occur in 2016. This was partially offset by an increase to income tax expense due to non-taxable depreciation of AFUDC equity.

RESULTS OF OPERATIONS BY SEGMENT DPL Inc.

DPL currently manages its business through two reportable operating segments, the T&D segment and the Generation segment. The primary segment performance measure is income / (loss) from continuing operations before income tax as management has concluded that this measure best reflects the underlying business performance of DPL and is the most relevant measure considered in DPL’s internal evaluation of the financial performance of its segments. The segments are discussed further below:

Transmission and Distribution Segment
The T&D segment is comprised primarily of DP&L’s electric transmission and distribution businesses, which distribute electricity to residential, commercial, industrial and governmental customers. DP&L distributes electricity to more than 521,000 retail customers who are located in a 6,000 square mile area of West Central Ohio. DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators. Accordingly, DP&L applies the accounting standards for regulated operations to its electric transmission and distribution businesses and records regulatory assets when incurred costs are expected to be recovered in future customer rates, and regulatory liabilities when current cost recoveries in customer rates relate to expected future costs. The T&D segment includes revenues and costs associated with DP&L's investment in OVEC and the historical results of DP&L’s Beckjord and Hutchings Coal generating facilities, which were either closed or sold in prior periods. As these assets were not transferred to AES Ohio Generation, they are grouped with the T&D assets for segment reporting purposes. In addition, regulatory deferrals and collections, which include fuel deferrals in historical periods, are included in the T&D segment.

Generation Segment
The Generation segment is comprised of AES Ohio Generation and the historical results of DP&L's electric generation business prior to Generation Separation. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation services. AES Ohio Generation owns and operates coal-fired and peaking generating facilities and sells its generated energy and capacity into the PJM wholesale market. The 2015 Generation segment results also include sales to DPLER and to the T&D segment for SSO customers.

Included within the “Other” column are other businesses that do not meet the GAAP requirements for disclosure as reportable segments as well as certain corporate costs, which include interest expense on DPL’s debt and adjustments related to purchase accounting from the Merger. The accounting policies of the reportable segments are the same as those described in Note 1 – Overview and Summary of Significant Accounting Policies. Intersegment sales and profits are eliminated in consolidation. Certain shared and corporate costs are allocated among reporting segments.

See Note 14 – Business Segments of Notes to DPL’s Consolidated Financial Statements for additional information regarding DPL’s reportable segments.


43


The following table presents DPL’s Loss from continuing operations before income tax by business segment:
 
 
Years ended December 31,
$ in millions
 
2017
 
2016
 
2015
T&D
 
$
88.5

 
$
143.0

 
$
188.1

Generation
 
(18.5
)
 
(1,353.9
)
 
(28.7
)
Other
 
(189.9
)
 
417.6

 
(390.8
)
Loss from continuing operations before income tax
 
$
(119.9
)
 
$
(793.3
)
 
$
(231.4
)

Statement of Operations Highlights - DPL T&D Segment

The results of operations of the T&D segment for DPL are identical in all material respects and for all periods presented to those of DP&L results from continuing operations, which are included in Part II - Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations (Statement of Operations Highlights - DP&L) of this Form 10-K.


44


Statement of Operations Highlights - DPL Generation Segment
 
 
Years ended December 31,
$ in millions
 
2017
 
2016
 
2015
Revenues:
 
 
 
 
 
 
Retail
 
$
0.3

 
$
0.3

 
$
0.4

Wholesale
 
359.5

 
463.6

 
786.8

RTO revenue
 
10.8

 
16.7

 
24.8

RTO capacity revenues
 
137.3

 
131.0

 
144.8

Mark-to-market gains / (losses)
 

 
(0.1
)
 
0.1

Total revenues
 
507.9

 
611.5

 
956.9

 
 
 
 
 
 
 
Cost of revenues:
 
 
 
 
 
 
Fuel cost:
 
 
 
 
 
 
Fuel
 
211.1

 
269.8

 
272.1

Gains from sale of coal
 
(1.3
)
 
(6.3
)
 
(3.0
)
Mark-to-market gains
 

 

 
(0.3
)
Net fuel cost
 
209.8

 
263.5

 
268.8

 
 
 
 
 
 
 
Purchased power:
 
 
 
 
 
 
Purchased power
 
24.1

 
63.7

 
303.8

RTO charges
 
13.5

 
19.8

 
40.3

RTO capacity charges
 
12.7

 
21.5

 
103.3

Mark-to-market losses / (gains)
 
(1.7
)
 
(4.4
)
 
6.1

Net purchased power cost
 
48.6

 
100.6

 
453.5

 
 
 
 
 
 
 
Total cost of revenues
 
258.4

 
364.1

 
722.3

 
 
 
 
 
 
 
Gross margin
 
249.5

 
247.4

 
234.6

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Operation and maintenance
 
172.5

 
174.7

 
171.3

Depreciation and amortization
 
20.9

 
55.4

 
72.6

General taxes
 
13.2

 
17.6

 
16.0

Fixed-asset impairment
 
66.3

 
1,353.5

 

Other, net
 
(5.0
)
 
0.3

 
0.3

Total operating expenses
 
267.9

 
1,601.5

 
260.2

 
 
 
 
 
 
 
Operating loss
 
(18.4
)
 
(1,354.1
)
 
(25.6
)
 
 
 
 
 
 
 
Other income / (expense), net
 
 
 
 
 
 
Interest expense
 
(0.1
)
 
(0.4
)
 
(2.9
)
Charge for early redemption of debt
 

 

 
(0.2
)
Other income
 

 
0.6

 

Total other income / (expense), net
 
(0.1
)
 
0.2

 
(3.1
)
 
 
 
 
 
 
 
Loss from continuing operations before income tax (a)
 
$
(18.5
)
 
$
(1,353.9
)
 
$
(28.7
)

(a)
For purposes of discussing operating results, we present and discuss Loss from continuing operations before income tax. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.

DPL Generation Segment – Revenues
During the year ended December 31, 2017, the segment’s revenues decreased $103.6 million to $507.9 million from $611.5 million in the prior year. This decrease was primarily the result of lower average wholesale rates, lower wholesale volumes, and lower RTO revenues, partially offset by increased RTO capacity revenues.
Wholesale revenues decreased $104.1 million primarily as a result of an unfavorable wholesale volume variance of $81.3 million and an unfavorable wholesale price variance of $22.8 million. Despite increases in PJM market prices, the unfavorable price variance was due to lower realized gains on derivatives in

45


2017. The decrease in wholesale volumes was primarily driven by a 13% decrease in internal generation at DPL's plants in 2017 and a decrease in the load served of other parties through their competitive bid process.
RTO capacity and other revenues, consisting primarily of PJM capacity revenues, regulation services, reactive supply and operating reserves, increased $0.4 million compared to the prior year primarily due to a $6.3 million increase in revenue realized from the PJM capacity auction in 2017 primarily due to higher average prices in the CP auction. The capacity price that became effective in June of 2017 was $152/MW-day, compared to $59/MW-day under the base RPM auction and $134/MW-day for the transitional CP auction in June of 2016, and $136/MW-day in June of 2015. This increase was partially offset by a $5.9 million decrease in RTO revenues due to lower rates and availability related to compensation for DPL's reactive supply and operating reserves.
During the year ended December 31, 2016, the segment’s revenues decreased $345.4 million to $611.5 million from $956.9 million in the prior year. This decrease was primarily the result of lower average wholesale rates, the sale of DPLER in 2016, and lower RTO capacity and other revenues, partially offset by increased wholesale volume.
Wholesale revenues decreased $323.2 million primarily as a result of the 2016 sale of DPLER, which accounted for $304.8 million of wholesale sales in 2015. DP&L had full requirements sales to DPLER in 2015 until the competitive retail business was sold on January 1, 2016. The remaining decrease of $18.4 million was primarily due to lower market prices in 2016, partially offset by a 4.5% increase in internal generation from DP&L's co-owned and operated plants in 2016 compared to the prior year.
RTO capacity and other revenues, consisting primarily of PJM capacity revenues, regulation services, reactive supply and operating reserves, decreased $21.9 million compared to the prior year. RTO transmission and congestion revenue decreased $8.1 million as 2015 congestion revenue charges were higher due to milder winter weather in 2016 than 2015. In addition, revenue realized from the PJM capacity auction decreased $13.8 million in 2016 due to lower capacity cleared and lower price in both the CP and RPM auctions. The capacity price that became effective in June 2016 was $134/MW-day compared to $136/MW-day in June 2015.
DPL Generation Segment – Cost of Revenues
During the year ended December 31, 2017, Total cost of revenues decreased $105.7 million compared to the prior year. This decrease was a result of:
Net fuel costs, which include coal, gas, oil and emission allowance costs, decreased $53.7 million compared to the prior year primarily due to a 11% decrease in average fuel cost per MWh and a 13% decrease in internal generation.
Net purchased power decreased $52.0 million compared to the prior year. This decrease was driven by the following factors:
Purchased power decreased $39.6 million primarily due to a favorable volume variance of $28.7 million and a favorable price variance of $10.9 million. The decrease in volume was driven by a lower load served of other parties through their competitive bid process in 2017. Despite increases in PJM market prices, the favorable price variance was due to lower realized losses on derivatives in 2017. The generation segment purchases power to source retail load in other service territories and to meet contracted Wholesale requirements when generating facilities are not available due to planned and unplanned outages or when market prices are below the marginal costs associated with our generating facilities.
RTO charges decreased $6.3 million compared to the prior year primarily due to lower transmission and congestion charges.
RTO capacity charges decreased $8.8 million compared to the prior year primarily due to a lower retail load served in 2017, as well as a $1.7 million PJM penalty incurred in March 2016 associated with low plant availability. Retail load served relates to the load of other parties through their competitive bid process. As noted above, RTO capacity prices are set by an annual auction.
Mark-to-market gains decreased $2.7 million due to changes in power prices in 2017 and 2016.

46


During the year ended December 31, 2016, Total cost of revenues decreased $358.2 million compared to the prior year. This decrease was a result of:
Net fuel costs, which include coal, gas, oil and emission allowance costs, decreased $5.3 million compared to the prior year primarily due to a 7.5% decrease in average fuel cost per MWh and a $3.3 million decrease in gains on the sale of coal, partially offset by a 7.2% increase in internal generation.
Net purchased power decreased $352.9 million compared to the prior year. This decrease was driven by the following factors:
Purchased power decreased $240.1 million primarily due to decreased power purchased to source DPLER customers, as DP&L previously had full requirements sales to DPLER in 2015. We purchase power to source retail load in other service territories and to source DPLER customers in 2015. The generation segment also purchases power to meet contracted Wholesale requirements when generating facilities are not available due to planned and unplanned outages or when market prices are below the marginal costs associated with our generating facilities.
RTO charges decreased $20.5 million primarily as a result of no longer having load obligations on sales to DPLER. RTO charges are incurred as a member of PJM and include costs associated with the segment's load obligations and transmission and congestion losses incurred on the segments wholesale revenues.
RTO capacity charges decreased $81.8 million primarily due to the segment no longer providing power to DPLER in 2016. The remaining charges primarily relate to serving the load of other parties through their competitive bid process. As noted in the revenue section above, RTO capacity prices are set by an annual auction.
Mark-to-market gains increased $10.5 million due to less significant decreases in power prices in 2016 causing gains on derivative forward power purchase contracts.

DPL Generation Segment – Operation and Maintenance
During the year ended December 31, 2017, Operation and Maintenance expense decreased $2.2 million compared to the prior year. This decrease was a result of:
$ in millions
 
2017 vs. 2016
Decrease in generating facilities operating and maintenance expenses
 
(9.6
)
Decrease in insurance and claims reserve
 
(2.5
)
Increase in severance costs due to announced plant closures and restructuring
 
6.8

Increase in group insurance expense associated with participation in the AES self-insurance plan
 
4.5

Other, net
 
(1.4
)
Net change in Operations and Maintenance expense
 
$
(2.2
)

During the year ended December 31, 2016, Operation and Maintenance expense increased $3.4 million compared to the prior year. This increase was a result of:
$ in millions
 
2016 vs. 2015
Increase in insurance and claims reserve due to insurance proceeds received from MVIC in 2015
 
6.5

Increase in retirement benefits costs
 
4.3

Increase in legal and other consulting fees
 
2.4

Decrease in generating facilities operating and maintenance expenses
 
(12.0
)
Other, net
 
2.2

Net change in Operation and Maintenance expense
 
$
3.4


DPL Generation Segment – Depreciation and Amortization
During the year ended December 31, 2017, Depreciation and amortization expense decreased $34.5 million compared to the prior year. The decrease was primarily a result of the fixed-asset impairments in the second and fourth quarters of 2016, and the first quarter of 2017, which reduced depreciation expense due to the lower asset values. In addition, the decrease was attributable to the discontinuation of Miami Fort and Zimmer depreciation expense due to the sale of these two plants.


47


During the year ended December 31, 2016, Depreciation and amortization expense decreased $17.2 million compared to the prior year. The decrease was primarily a result of the fixed-asset impairment in the second quarter of 2016, which reduced depreciation expense due to the lower asset values.

DPL Generation Segment – General Taxes
During the year ended December 31, 2017, General taxes decreased $4.4 million compared to the prior year. The decrease was primarily the result of a $3.0 million reduction in 2017 expense due to a true-up of the year to date 2017 Ohio property tax accrual to reflect final assessments for 2017 taxes and an unfavorable $0.9 million true-up of the 2015 Ohio property tax accrual to reflect actual payments made in 2016.

During the year ended December 31, 2016, General taxes increased $1.6 million compared to the prior year.

DPL Generation Segment – Fixed-asset Impairments
During the year ended December 31, 2017, the Generation segment recorded fixed-asset impairments, without the effect of the purchase accounting adjustments included in the Other column of segments, of $66.3 million. In the first quarter of 2017, the Board of Directors of DP&L approved the retirement of the then DP&L-operated and co-owned Stuart Station coal-fired and diesel-fired generating units and the Killen Station coal-fired generating unit and combustion turbine (collectively, the “Facilities”) on or before June 1, 2018. The co-owners of these facilities agreed with DP&L to proceed with this plan of retirement. DPL performed a long-lived asset impairment analysis and determined that the carrying amounts of the Facilities were not recoverable. As a result, DPL's Generation segment recognized asset impairment expense of $66.3 million in the first quarter of 2017. Because the Peaker asset impairment expense was included with purchase accounting adjustments in the Other column of segments, DPL's Generation segment did not record a fixed-asset impairment related to the Peaker assets in 2017.

During the year ended December 31, 2016, DPL's Generation segment recorded fixed-asset impairments, without the effect of the purchase accounting adjustments included in the Other column of segments, of $1,353.5 million. In the second quarter of 2016, the Generation segment recorded an $857.1 million fixed-asset impairment, as DP&L performed a long-lived asset impairment test and determined that the carrying amounts of the asset groups of then DP&L-operated Killen and certain peaking generating facilities were not recoverable. In the fourth quarter of 2016, the Generation segment recorded an additional $496.4 million fixed-asset impairment as DP&L performed a long-lived asset impairment analysis for the then DP&L-operated Killen, Stuart, Miami Fort, Zimmer and Conesville coal-fired facility asset groups, as well as the Hutchings gas-fired peaking plant asset group and determined that their carrying amounts were not recoverable.

For more information on these impairments, see Note 15 – Fixed-asset Impairments of Notes to DPL's Consolidated Financial Statements.

DPL Generation Segment – Interest Expense
During the year ended December 31, 2017, Interest expense decreased $0.3 million.

The PUCO authorized DP&L to maintain long-term debt of $750 million or 75% of its rate base, whichever is greater, until January 1, 2018, or to file an application to explain why it would not achieve those metrics. Prior to Generation Separation on October 1, 2017, for segment purposes, $750.0 million of debt and the pro rata interest expense associated with that debt were allocated to the T&D segment. All remaining debt and interest expense were included in the Generation segment.

During the year ended December 31, 2016, Interest expense decreased $2.5 million compared to the prior year due primarily to a reduction of debt.


48


RESULTS OF OPERATIONS – DP&L

Statement of Operations Highlights – DP&L
 
 
Years ended December 31,
$ in millions
 
2017