DPL INC - FORM 10-Q - May 5, 2017

DPL INC - FORM 10-Q - May 5, 2017

Attached files

Attached files

DPL INC Reports

file	filename
EX-32.D - EXHIBIT 32.D - DPL INC	dpl20170331ex32d.htm
EX-32.C - EXHIBIT 32.C - DPL INC	dpl20170331ex32c.htm
EX-32.B - EXHIBIT 32.B - DPL INC	dpl20170331ex32b.htm
EX-32.A - EXHIBIT 32.A - DPL INC	dpl20170331ex32a.htm
EX-31.D - EXHIBIT 31.D - DPL INC	dpl20170331ex31d.htm
EX-31.C - EXHIBIT 31.C - DPL INC	dpl20170331ex31c.htm
EX-31.B - EXHIBIT 31.B - DPL INC	dpl20170331ex31b.htm
EX-31.A - EXHIBIT 31.A - DPL INC	dpl20170331ex31a.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

( ) 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

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

Each of DPL Inc. and The Dayton Power and Light Company is a voluntary filer that has 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 Web site, 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 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.

As of May 5, 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

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

DPL Inc. and The Dayton Power and Light Company

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Quarterly Report on Form 10-Q

Quarter Ended March 31, 2017



		Page No.

Glossary of Terms		5

Forward-Looking Statements		7

Part I Financial Information

Item 1	Financial Statements – DPL Inc. and The Dayton Power and Light Company (Unaudited)

	DPL Inc.

	Condensed Consolidated Statements of Operations	10

	Condensed Consolidated Statements of Comprehensive Income / (Loss)	11

	Condensed Consolidated Balance Sheets	12

	Condensed Consolidated Statements of Cash Flows	13

	Notes to Condensed Consolidated Financial Statements	14

	The Dayton Power and Light Company

	Condensed Statements of Operations	39

	Condensed Statements of Comprehensive Income / (Loss)	40

	Condensed Balance Sheets	41

	Condensed Statements of Cash Flows	42

	Notes to Condensed Financial Statements	43

Item 2	Management’s Discussion and Analysis of Financial Condition and Operations	65

	Electric Sales and Customers	98

Item 3	Quantitative and Qualitative Disclosures about Market Risk	98

Item 4	Controls and Procedures	98

DPL Inc. and The Dayton Power and Light Company

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Quarterly Report on Form 10-Q

Quarter Ended March 31, 2017



		Page No.
Part II Other Information

Item 1	Legal Proceedings	99

Item 1A	Risk Factors	99

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	99

Item 3	Defaults Upon Senior Securities	99

Item 4	Mine Safety Disclosures	99

Item 5	Other Information	99

Item 6	Exhibits	100

Other

	Signatures	101

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GLOSSARY OF TERMS

The following terms are used in this Form 10-Q:



Term	Definition
AES	The AES Corporation, a global power company and the ultimate parent company of DPL
AES Ohio Generation	AES Ohio Generation, LLC, a wholly-owned subsidiary of DPL that owns and operates peaking generation facilities from which it makes wholesale sales
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. DP&L’s capacity is located in the “rest of” RTO area of PJM.
CP	In 2015, PJM adopted changes to the capacity market known as “Capacity Performance”. The 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 DP&L units operate under the CP construct effective June 1, 2016.
D.C. Circuit Court	United States Court of Appeals for the District of Columbia Circuit
DPL	DPL Inc.
DPLER	DPL Energy Resources, Inc., formerly a wholly-owned subsidiary of DPL which sold competitive electric energy and other energy services. DPLER was sold by DPL on January 1, 2016. The DPLER sale agreement was signed on December 28, 2015.
DP&L	The Dayton Power and Light Company, the principal subsidiary of DPL and a public utility that delivers electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio
Dths	Decatherms, unit of heat energy equal to 10 therms. One therm is equal to 100,000 British Thermal Units
EBITDA	Earnings before interest, taxes, depreciation and amortization. EBITDA also excludes the Fixed-asset impairment
EGU	Electric Generating Unit
ERISA	The Employee Retirement Income Security Act of 1974
ESP	The Electric Security Plan is a plan that a utility must 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 filed to reinstate previously authorized rates from ESP 1
ESP 3	ESP filed with the PUCO by DP&L on February 22, 2016 and an amended application filed on October 11, 2016
FASC	Financial Accounting Standards Board (FASB) Accounting Standards Codification
FERC	Federal Energy Regulatory Commission
Form 10-K	DPL’s and DP&L’s combined Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which was filed on February 28, 2017
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 Right
GAAP	Generally Accepted Accounting Principles in the United States of America

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GLOSSARY OF TERMS (cont.)

Term	Definition
GHG	Greenhouse Gas
kV	Kilovolt, 1,000 volts
kWh	Kilowatt-hours
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
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.
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 related to jointly owned facilities operated by DP&L
MW	Megawatt
MWh	Megawatt-hour
NERC	North American Electric Reliability Corporation
NOx	Nitrogen Oxide
NYMEX	New York Mercantile Exchange
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
PJM	PJM Interconnection, LLC, an RTO
PUCO	Public Utilities Commission of Ohio
RPM	Reliability Pricing Model. The Reliability Pricing Model was PJM’s capacity construct prior to the implementation of the CP program.
RTO	Regional Transmission Organization
SEC	Securities and Exchange Commission
SERP	Supplemental Executive Retirement Plan
Service Company	AES US Services, LLC, the shared services affiliate providing accounting, finance, and other support services to AES’ U.S. SBU businesses
SO2	Sulfur Dioxide
SSO	Standard Service Offer represents the regulated rates, authorized by the PUCO, charged to DP&L retail customers that take retail generation service from DP&L within DP&L’s service territory
TCRR-N	Transmission Cost Recovery Rider - Nonbypassable
USEPA	U.S. Environmental Protection Agency
USF	The Universal Service Fund is a statewide program which provides qualified low-income customers in Ohio with income-based bills and energy efficiency education programs
U.S. SBU	U. S. Strategic Business Unit, AES’ reporting unit covering the businesses in the United States, including DPL

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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, taking into account 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:


•	abnormal or severe weather and catastrophic weather-related damage;


•	unusual maintenance or repair requirements;


•	changes in fuel costs and purchased power, coal, environmental emission allowances, natural gas and other commodity prices;


•	volatility and changes in markets for electricity and other energy-related commodities;


•	performance of our suppliers;


•	increased competition and deregulation in the electric utility industry;


•	increased competition in the retail generation market;


•	availability and price of capacity;


•	state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, emission levels, rate structures or tax laws;


•	changes in environmental laws and regulations to which DPL and its subsidiaries are subject;


•	the development and operation of RTOs, including PJM to which DP&L has given control of its transmission functions;


•	changes in our purchasing processes, pricing, delays, contractor and supplier performance and availability;


•	significant delays associated with large construction projects;


•	growth in our service territory and changes in demand and demographic patterns;


•	changes in accounting rules and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies;


•	financial market conditions, changes in interest rates and changes in our credit ratings and availability and cost of capital;


•	changes in tax laws and the effects of our strategies to reduce tax payments;


•	the outcomes of litigation and regulatory investigations, proceedings or inquiries;


•	general economic conditions; and


•	the risks and other factors discussed in this report and other DPL and DP&L filings with the SEC.

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

All such factors are difficult to predict, contain uncertainties that may materially affect actual results and many are beyond our control. See Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the “Management’s Discussion and Analysis of Financial Condition and Results of

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Operations” section in such report and this Quarterly Report on Form 10-Q for a more detailed discussion of the foregoing and certain other factors that could cause actual results to differ materially from those reflected in such forward-looking statements and that should be considered in evaluating our outlook.

You may read and copy any document we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549, USA. Please call the SEC at (800) SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov.

COMPANY WEBSITES

DPL’s public internet site is www.dplinc.com. DP&L’s public internet site is www.dpandl.com. The information on these websites is not incorporated by reference into this report.

Part I – Financial Information

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

Item 1 – Financial Statements

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FINANCIAL STATEMENTS

DPL INC.

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DPL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
	Three months ended March 31,
$ in millions	2017			2016
Revenues	$	323.9		$	364.0

Cost of revenues:
Fuel	54.1			66.9
Purchased power	102.0			121.9
Total cost of revenues	156.1			188.8

Gross margin	167.8			175.2

Operating expenses:
Operation and maintenance	86.3			88.5
Depreciation and amortization	28.0			33.4
General taxes	24.2			21.0
Fixed-asset impairment	66.4			—
Loss on asset disposal	19.4			0.1
Other	(1.2		)	—
Total operating expenses	223.1			143.0

Operating income / (loss)	(55.3		)	32.2

Other income / (expense), net
Investment loss	—			(0.1		)
Interest expense	(26.9		)	(26.3		)
Charge for early retirement of debt	—			(2.6		)
Other deductions	(1.0		)	(0.4		)
Total other expense, net	(27.9		)	(29.4		)

Income / (loss) from continuing operations before income tax	(83.2		)	2.8

Income tax expense / (benefit) from continuing operations	(31.5		)	0.6

Net income / (loss) from continuing operations	(51.7		)	2.2

Discontinued operations (Note 13)
Loss from discontinued operations	—			(0.7		)
Gain from disposal of discontinued operations	—			49.2
Income tax expense for discontinued operations	—			18.9
Net income from discontinued operations	—			29.6

Net income / (loss)	$	(51.7	)	$	31.8

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

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DPL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
	Three months ended March 31,
$ in millions	2017			2016
Net income / (loss)	$	(51.7	)	$	31.8
Available-for-sale securities activity:
Change in fair value of available-for-sale securities, net of income tax expense of $0.0 and $(0.1) for each respective period	0.2			0.2
Reclassification to earnings, net of income tax expense of $0.0 and $0.0 for each respective period	(0.1		)	(0.1		)
Total change in fair value of available-for-sale securities	0.1			0.1
Derivative activity:
Change in derivative fair value, net of income tax (expense) / benefit of $2.8 and $(11.6) for each respective period	5.2			21.5
Reclassification to earnings, net of income tax (expense) / benefit of $(0.5) and $4.8 for each respective period	1.0			(8.2		)
Total change in fair value of derivatives	6.2			13.3
Pension and postretirement activity:
Prior service cost for the period, net of income tax benefit of $0.2 and $0.0 for each respective period	(0.3		)	—
Net loss for period, net of income tax benefit of $0.7 and $0.0 for each respective period	(1.2		)	—
Reclassification to earnings, net of income tax expense of $(0.5) and $(0.1) for each respective period	0.8			—
Total change in unfunded pension obligation	(0.7		)	—

Other comprehensive income	5.6			13.4

Net comprehensive income / (loss)	$	(46.1	)	$	45.2

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

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DPL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
	March 31,			December 31,
$ in millions	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	54.3		$	54.6
Restricted cash	8.4			29.0
Accounts receivable, net (Note 2)	101.4			135.1
Inventories (Note 2)	60.9			77.2
Taxes applicable to subsequent years	60.7			81.0
Regulatory assets, current	0.9			0.1
Other prepayments and current assets	33.7			31.8
Total current assets	320.3			408.8

Property, plant & equipment:
Property, plant & equipment	1,953.6			1,985.6
Less: Accumulated depreciation and amortization	(355.5		)	(334.8		)
	1,598.1			1,650.8
Construction work in process	102.5			116.4
Total net property, plant & equipment	1,700.6			1,767.2
Other non-current assets:
Regulatory assets, non-current	206.0			203.9
Intangible assets, net of amortization	23.0			22.7
Other deferred assets	14.3			16.6
Total other non-current assets	243.3			243.2

Total assets	$	2,264.2		$	2,419.2

LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt (Note 7)	$	29.7		$	29.7
Accounts payable	78.8			113.9
Accrued taxes	159.5			185.1
Accrued interest	33.7			17.7
Security deposits	32.8			15.2
Regulatory liabilities, current	13.7			33.7
Insurance and claims costs	6.6			5.4
Other current liabilities	40.9			50.2
Total current liabilities	395.7			450.9

Non-current liabilities:
Long-term debt (Note 7)	1,822.3			1,828.7
Deferred taxes	252.4			252.4
Taxes payable	44.3			84.6
Regulatory liabilities, non-current	131.6			130.4
Pension, retiree and other benefits	100.6			101.6
Asset retirement obligations	135.6			138.8
Other deferred credits	15.4			19.4
Total non-current liabilities	2,502.2			2,555.9

Commitments and contingencies (Note 10)

Common shareholder's deficit
Common stock:
1,500 shares authorized; 1 share issued and outstanding at March 31, 2017 and December 31, 2016	—			—
Other paid-in capital	2,233.0			2,233.0
Accumulated other comprehensive income	5.9			0.3
Accumulated deficit	(2,872.6		)	(2,820.9		)
Total common shareholder's deficit	(633.7		)	(587.6		)

Total liabilities and shareholder's deficit	$	2,264.2		$	2,419.2

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

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DPL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Three months ended March 31,
$ in millions	2017			2016
Cash flows from operating activities:
Net income / (loss)	$	(51.7	)	$	31.8
Adjustments to reconcile net income / (loss) to net cash from operating activities:
Depreciation and amortization	28.0			33.4
Deferred income taxes	(4.7		)	(9.2		)
Fixed-asset impairment	66.4			—
Gain on sale of business	—			(49.2		)
Loss on asset disposal	19.4			0.1
Changes in certain assets and liabilities:
Accounts receivable	38.1			35.8
Inventories	0.1			19.0
Prepaid taxes	—			0.2
Taxes applicable to subsequent years	20.2			21.6
Deferred regulatory costs, net	(23.8		)	4.8
Accounts payable	(30.9		)	(7.6		)
Accrued taxes payable	(66.0		)	(13.5		)
Accrued interest payable	15.9			7.3
Security deposits	17.6			4.4
Unamortized investment tax credit	(0.1		)	(0.1		)
Insurance claims costs	1.2			(0.4		)
Pension, retiree and other benefits	1.3			(4.5		)
Other	(4.5		)	9.1
Net cash provided by operating activities	26.5			83.0
Cash flows from investing activities:
Capital expenditures	(41.4		)	(37.7		)
Proceeds from sale of business	—			75.5
Insurance proceeds	1.2			—
Purchase of renewable energy credits	(0.1		)	(0.1		)
Decrease in restricted cash	20.6			1.3
Other investing activities, net	0.3			0.6
Net cash provided by / (used in) investing activities	(19.4		)	39.6
Cash flows from financing activities:
Retirement of long-term debt	(7.4		)	(75.4		)
Net cash used in financing activities	(7.4		)	(75.4		)
Cash and cash equivalents:
Net change	(0.3		)	47.2
Balance at beginning of period	54.6			32.4
Cash and cash equivalents at end of period	$	54.3		$	79.6
Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	10.4		$	19.2
Non-cash financing and investing activities:
Accruals for capital expenditures	$	10.7		$	12.5

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

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DPL Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Overview and Summary of Significant Accounting Policies

Description of Business

DPL is a diversified regional energy company organized in 1985 under the laws of Ohio. DPL has two reportable segments: the Transmission and Distribution (T&D) segment and the Generation segment. See Note 12 – Business Segments for more information relating to these reportable segments. The terms “we,” “us,” “our” and “ours” are used to refer to DPL and its subsidiaries.

DPL is an indirectly wholly-owned subsidiary of AES.

DP&L is a public utility incorporated in 1911 under the laws of Ohio. Beginning in 2001, Ohio law gave Ohio consumers the right to choose the electric generation supplier from whom they purchase retail generation service; however, distribution and transmission retail services are still regulated. DP&L has the exclusive right to provide such distribution and transmission services to approximately 520,000 customers located in West Central Ohio. Additionally, DP&L offers retail SSO electric service to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. DP&L owns multiple coal-fired and peaking electric generating facilities as well as numerous transmission facilities, all of which are included in the financial statements at amortized cost. DP&L sources 100% of the generation for its SSO customers through a competitive bid process. Principal industries located in DP&L’s service territory include automotive, food processing, paper, plastic, manufacturing and defense. DP&L's distribution sales reflect the general economic conditions, seasonal weather patterns, retail competition in our service territory and the market price of electricity. DP&L sells all of its energy and capacity into the wholesale market.

DPL’s other significant subsidiaries include AES Ohio Generation, which owns and operates peaking generating facilities from which it sells all of its energy and capacity into the wholesale market, and MVIC, our captive insurance company that provides insurance services to DPL and our subsidiaries. DPL owns all of the common stock of its subsidiaries.

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

DP&L’s electric transmission and distribution businesses are subject to rate regulation by federal and state regulators while its generation business is deemed competitive under Ohio law. 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.

DPL and its subsidiaries employed 1,153 people as of March 31, 2017, of which 1,145 were employed by DP&L. Approximately 62% of all DPL employees are under a collective bargaining agreement that expires on October 31, 2017.

Financial Statement Presentation

DPL’s Condensed Consolidated Financial Statements include the accounts of DPL and its wholly-owned subsidiaries except for DPL Capital Trust II, which is not consolidated, consistent with the provisions of GAAP. DP&L has undivided ownership interests in five coal-fired generating facilities, various peaking generating

facilities and numerous transmission facilities, all of which are included in the financial statements at amortized cost, which was adjusted to fair value at the date of the Merger for DPL. Operating revenues and expenses of these facilities are included on a pro rata basis in the corresponding lines in the Condensed Consolidated Statements of Operations.

Certain immaterial amounts from prior periods have been reclassified to conform to the current period presentation.

All material intercompany accounts and transactions are eliminated in consolidation.

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included in the annual financial statements prepared in accordance with GAAP have been omitted from this interim report. Therefore, our interim financial statements in this report should be read along with the annual financial statements included in our Form 10-K for the fiscal year ended December 31, 2016.

In the opinion of our management, the Condensed Consolidated Financial Statements presented in this report contain all adjustments necessary to fairly state our financial position as of March 31, 2017; our results of operations for the three months ended March 31, 2017 and 2016 and our cash flows for the three months ended March 31, 2017 and 2016. Unless otherwise noted, all adjustments are normal and recurring in nature. Due to various factors, including, but not limited to, seasonal weather variations, the timing of outages of EGUs, changes in economic conditions involving commodity prices and competition, and other factors, interim results for the three months ended March 31, 2017 may not be indicative of our results that will be realized for the full year ending December 31, 2017.

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the revenues and expenses of the periods reported. Actual results could differ from these estimates. Significant items subject to such estimates and judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; liabilities recorded for income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities

DP&L collects certain excise taxes levied by state or local governments from its customers. These taxes are accounted for on a net basis and not included in revenue. The amounts of such taxes collected for the three months ended March 31, 2017 and 2016 were $12.5 million and $12.9 million, respectively.

New Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could have a material impact on our consolidated financial statements:



Accounting Standard	Description	Date of Adoption	Effect on the financial statements upon adoption
New Accounting Standards Adopted
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting	The standard simplifies the following aspects of accounting for share-based payments awards: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on statement of cash flows when an employer withholds shares for tax-withholding purposes. Transition method: The recognition of excess tax benefits and tax deficiencies arising from vesting or settlement were applied retrospectively. The elimination of the requirement that excess tax benefits be realized before they are recognized was adopted on a modified retrospective basis with a cumulative adjustment to the opening balance sheet.	January 1, 2017	The primary effect of adoption was the recognition of excess tax benefits in our provision for income taxes in the period when the awards vest or are settled, rather than in paid-in-capital in the period when the excess tax benefits are realized. We will continue to estimate the number of awards that are expected to vest in our determination of the related periodic compensation cost. The adoption of this standard did not have a material impact on the consolidated financial statements.

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Accounting Standard	Description	Date of Adoption	Effect on the financial statements upon adoption
New Accounting Standards Issued But Not Yet Effective
2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities	This standard shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Transition method: modified retrospective.	January 1, 2019. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	The standard provides guidance on the presentation of net benefit cost in an employer’s income statement and on the components eligible for capitalization. It requires that an employer report the service cost component in the same line item(s) as other employee compensation costs arising from services rendered during the period, and report the other components of net benefit cost separately from the service cost component and outside a subtotal of operating income. Only the service cost component will be eligible for capitalization. Transition method: various.	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business	This standard provides guidance to assist the entities with evaluating when a set of transferred assets and activities is a business. Transition method: prospective.	January 1, 2018. Early adoption is permitted	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2016-18, Statement of Cash Flows (Topic 320): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)	This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Transition method: retrospective.	January 1, 2018. Early adoption is permitted	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory	This standard requires that an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Transition method: modified retrospective method.	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)	This standard provides specific guidance on how certain cash transactions are presented and classified in the statement of cash flows. Transition method: retrospective method	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements but do not anticipate a material impact.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	This standard updates the impairment model for financial assets measured at amortized cost to an expected loss model rather than an incurred loss model. It also allows for the presentation of credit losses on available-for-sale debt securities as an allowance rather than a write down. Transition method: various.	January 1, 2020. Early adoption is permitted only as of January 1, 2019.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.
2016-02, Leases (Topic 842)	The standard creates Topic 842, Leases which supersedes Topic 840, Leases, and introduces a lessee model that brings substantially all leases onto the balance sheet while retaining most of the principles of the existing lessor model in U.S. GAAP and aligning many of those principles with ASC 606, Revenue from Contracts with Customers. Transition method: modified retrospective approach with certain practical expedients.	January 1, 2019. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our consolidated financial statements.

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Accounting Standard	Description	Date of Adoption	Effect on the financial statements upon adoption
2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-05 Revenue from Contracts with Customers (Topic 606)	See discussion of the ASUs below.	January 1, 2018. Earlier application is permitted only as of January 1, 2017.	We will adopt the standard on January 1, 2018; see below for the evaluation of the impact of its adoption on the consolidated financial statements.

ASU 2014-09 and its subsequent corresponding updates provide the principles an entity must apply to measure and recognize revenue. The core principle is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Amendments to the standard were issued that provide further clarification of the principle and to provide certain transition expedients. The standard will replace most existing revenue recognition guidance in GAAP, including the guidance on recognizing other income upon the sale or transfer of nonfinancial assets (including in-substance real estate).

The standard requires retrospective application and allows either a full retrospective adoption in which all of the periods are presented under the new standard or a modified retrospective approach in which the cumulative effect of initially applying the guidance is recognized at the date of initial application. We are currently working towards adopting the standard using the full retrospective method. However, we will continue to assess this conclusion which is dependent on the final impact to the financial statements.

In 2016, we established a cross-functional implementation team and are in the process of evaluating changes to our business processes, systems and controls to support recognition and disclosure under the new standard.

Given the complexity and diversity of our non-regulated arrangements, we are assessing the standard on a contract by contract basis and have completed more than half of the total expected effort. Through this assessment, we have identified certain key issues that we are continuing to evaluate in order to complete our assessment of the full population of contracts and be able to assess the overall impact to the financial statements. These issues include: the application of the practical expedient for measuring progress toward satisfaction of a performance obligation, when variable quantities would be considered variable consideration versus an option to acquire additional goods and services, and how to measure progress toward completion for a performance obligation that is a bundle. We are continuing to work with various non-authoritative industry groups, and monitoring the FASB and Transition Resource Group activity, as we finalize our accounting policy on these and other industry specific interpretative issues which is expected in 2017.

We are currently evaluating certain contracts along with our tariff revenue, capacity agreements with PJM and wholesale agreements with PJM. We expect additional contracts to be executed during 2017 that will require assessment under the new standard.

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Note 2 – Supplemental Financial Information

Accounts receivable and Inventories are as follows at March 31, 2017 and December 31, 2016:



	March 31,			December 31,
$ in millions	2017			2016
Accounts receivable, net:
Unbilled revenue	$	14.7		$	43.0
Customer receivables	68.4			73.9
Amounts due from partners in jointly owned plants	6.6			12.7
Other	12.7			6.7
Provision for uncollectible accounts	(1.0		)	(1.2		)
Total accounts receivable, net	$	101.4		$	135.1
Inventories, at average cost:
Fuel and limestone	$	38.8		$	38.9
Plant materials and supplies	20.6			36.6
Other	1.5			1.7
Total inventories, at average cost	$	60.9		$	77.2

Accumulated Other Comprehensive Income / (Loss)

The amounts reclassified out of Accumulated Other Comprehensive Income / (Loss) by component during the three months ended March 31, 2017 and 2016 are as follows:



Details about Accumulated Other Comprehensive Income / (Loss) components	Affected line item in the Condensed Consolidated Statements of Operations	Three months ended
		March 31,
$ in millions		2017			2016
Gains and losses on Available-for-sale securities activity (Note 5):
	Other income	$	(0.1	)	$	(0.1	)
Gains and losses on cash flow hedges (Note 6):
	Interest expense	(0.3		)	(0.2		)
	Revenue	(1.5		)	(17.2		)
	Purchased power	3.3			4.4
	Total before income taxes	1.5			(13.0		)
	Tax expense / (benefit)	(0.5		)	4.8
	Net of income taxes	1.0			(8.2		)
Amortization of defined benefit pension items (Note 9):
	Operation and maintenance	1.3			0.1
	Tax benefit	(0.5		)	(0.1		)
	Net of income taxes	0.8			—

Total reclassifications for the period, net of income taxes		$	1.7		$	(8.3	)

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The changes in the components of Accumulated Other Comprehensive Income / (Loss) during the three months ended March 31, 2017 are as follows:



$ in millions	Gains / (losses) on available-for-sale securities			Gains / (losses) on cash flow hedges		Change in unfunded pension obligation			Total
Balance January 1, 2017	$	0.6		$	13.1	$	(13.4	)	$	0.3

Other comprehensive income / (loss) before reclassifications	0.2			5.2		(1.5		)	3.9
Amounts reclassified from accumulated other comprehensive income / (loss)	(0.1		)	1.0		0.8			1.7
Net current period other comprehensive income / (loss)	0.1			6.2		(0.7		)	5.6

Balance March 31, 2017	$	0.7		$	19.3	$	(14.1	)	$	5.9

Note 3 – Regulatory Matters

DP&L originally filed its ESP 3 seeking an effective date of January 1, 2017. On October 11, 2016, DP&L amended the application requesting to collect $145.0 million per year for seven years named the Distribution Modernization Rider ("DMR"). This plan established the terms and conditions for DP&L’s SSO to customers that do not choose a competitive retail electric supplier, and recommended including renewable energy attributes as part of the product that is competitively bid. DP&L sought recovery of approximately $10.5 million of regulatory assets, and proposed a new Distribution Investment Rider to allow DP&L to recover costs associated with future distribution equipment and infrastructure needs. Additionally, the plan established new riders set initially at zero, related to energy reductions from DP&L’s energy efficiency programs, and certain environmental liabilities.

On January 30, 2017, DP&L, in conjunction with various intervening parties, filed a settlement in the ESP 3 case. On March 13, 2017, DP&L, in conjunction with various intervening parties and the staff of the PUCO, filed an Amended Stipulation in the ESP 3 case, which is subject to PUCO approval. The intervening parties agreed to a six-year settlement that provides a framework for energy rates and defines components which include, but are not limited to, the following:


•	Bypassable standard offer energy rates for DP&L’s customers based on competitive bid auctions;


•	The establishment of a three-year non-bypassable DMR designed to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure. With PUCO approval, DP&L may have the option of extending the duration of the DMR for an additional two years;


•	The establishment of a non-bypassable Distribution Investment Rider, set initially at zero, to recover incremental distribution capital investments;


•	The establishment of a Smart Grid Rider, set initially at zero, to recover costs of future grid modernization;


•	A commitment by us to separate DP&L’s generation assets from its transmission and distribution assets (if approved by FERC) within 180 days after receipt of a PUCO order;


•	A commitment to commence a sale process to sell our ownership interests in the Zimmer, Miami Fort and Conesville coal-fired generation plants; and


•	Restrictions on DPL making dividend or tax sharing payments, and various other riders and competitive retail market enhancements.

A hearing was held in April 2017 and a final decision by the PUCO is expected at the end of the second quarter or early in the third quarter of 2017. There can be no assurance that the Amended ESP 3 stipulation will be approved as filed or on a timely basis, and if the Amended ESP 3 stipulation is not approved on a timely basis or if the final ESP provides for terms that are more adverse than those submitted in DP&L's Amended stipulation, our results of operations, financial condition and 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.

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In connection with any sale or closure of our generation plants as contemplated by the ESP 3 settlement or otherwise, DPL and DP&L would expect to incur certain cash and non-cash charges, some or all of which could be material to the business and financial condition of DPL and DP&L.

DP&L’s ESP 2 had been approved by the PUCO for the years 2014 - 2016, and permitted DP&L to collect a non-bypassable service stability rider equal to $110.0 million per year for each of those years and required DP&L to conduct competitive bid auctions to procure generation supply for SSO service. The Ohio Supreme Court in a June 2016 opinion stated that the PUCO’s approval of the ESP was reversed. In view of that reversal, DP&L filed a motion to withdraw its ESP 2 and implement rates consistent with those in effect prior to 2014. The PUCO approved DP&L’s withdrawal of ESP 2 and implementation plans. Those rates will be in effect until rates consistent with DP&L’s pending ESP 3 filing are approved and effective. In February 2017, several parties appealed the PUCO orders that approved both the withdrawal and the implementation plans to the Ohio Supreme Court. Those appeals are pending and the outcome and potential financial impact of those appeals cannot be determined at this time.

Note 4 – Property, Plant and Equipment

DP&L and certain other Ohio utilities have undivided ownership interests in five coal-fired electric generating facilities and numerous transmission facilities. Certain expenses, primarily fuel costs for the generating units, are allocated to the owners based on their energy usage. The remaining expenses, investments in fuel inventory, plant materials and operating supplies, and capital additions are allocated to the owners in accordance with their respective ownership interests. At March 31, 2017, DP&L had $11.0 million of construction work in process at such facilities. DP&L’s share of the operations of such facilities is included within the corresponding line in the Condensed Consolidated Statements of Operations, and DP&L’s share of the investment in the facilities is included within Total net property, plant and equipment in the Condensed Consolidated Balance Sheets. Each joint owner provides their own financing for their share of the operations and capital expenditures of the jointly-owned station.

Coal-fired facilities

DP&L’s undivided ownership interest in such facilities at March 31, 2017, is as follows:



	DP&L Share		DPL Carrying Value
	Ownership (%)	Summer Production Capacity (MW)	Gross Plant In Service ($ in millions)		Accumulated Depreciation ($ in millions)		Construction Work in Process ($ in millions)
Jointly-owned production units
Conesville - Unit 4	16.5	129	$	—	$	—	$	—
Killen - Unit 2	67.0	402	7.0		1.0		1.0
Miami Fort - Units 7 and 8	36.0	368	28.0		1.0		5.0
Stuart - Units 1 through 4	35.0	808	1.0		1.0		—
Zimmer - Unit 1	28.1	371	12.0		1.0		5.0
Transmission (at varying percentages)			43.0		11.0		—
Total		2,078	$	91.0	$	15.0	$	11.0

Each of the above generating units has SCR and FGD equipment installed.

On January 10, 2017, a high pressure feedwater heater shell failed on Unit 1 at the J.M. Stuart station. As a result, $6.4 million of net book value was written off, resulting in a $3.2 million loss on disposal, net of insurance recoveries. As the damage assessment process is currently ongoing, we cannot determine the impact to operations or capacity at this time.

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environmental. The purchase price is subject to adjustment at closing based on the amount of certain inventories, pre-paid amounts, employment benefits, insurance premiums, property taxes and other costs. The sale is subject to approval by the FERC and is expected to close in the third quarter of 2017.

AROs

We recognize AROs in accordance with GAAP which requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the related asset. Our legal obligations are associated with the retirement of our long-lived assets, consisting primarily of river intake and discharge structures, coal unloading facilities, loading docks, ice breakers and ash disposal facilities.

Estimating the amount and timing of future expenditures of this type requires significant judgment. Management routinely updates these estimates as additional information becomes available.

Changes in the Liability for Generation AROs



$ in millions
Balance January 1, 2017	$	138.8
Revisions to cash flow and timing estimates	(4.4		)
Accretion expense	1.1
Settlements	0.1
Balance March 31, 2017	$	135.6

See Note 5 – Fair Value for further discussion on ARO additions.

Note 5 – Fair Value

The fair values of our financial instruments are based on published sources for pricing when possible. We rely on valuation models only when no other methods exist. The value of our financial instruments represents our best estimates of the fair value, which may not be the value realized in the future.

The following table presents the fair value, carrying value and cost of our non-derivative instruments at March 31, 2017 and December 31, 2016. Information about the fair value of our derivative instruments can be found in Note 6 – Derivative Instruments and Hedging Activities.



	March 31, 2017				December 31, 2016
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money market funds	$	0.3	$	0.3	$	0.4	$	0.4
Equity securities	2.6		3.9		2.4		3.4
Debt securities	4.3		4.3		4.4		4.4
Hedge funds	0.1		0.1		—		0.1
Real estate	—		—		0.3		0.3
Tangible assets	0.1		0.1		0.1		0.1
Total Assets	$	7.4	$	8.7	$	7.6	$	8.7

	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Debt ^(a)	$	1,851.6	$	1,940.7	$	1,858.0	$	1,907.7


(a)	Amounts exclude immaterial capital lease obligations

These financial instruments are not subject to master netting agreements or collateral requirements and as such are presented in the Condensed Consolidated Balance Sheet at their gross fair value, except for Debt, which is presented at amortized carrying value.

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Debt

Unrealized gains or losses are not recognized in the financial statements as debt is presented at cost, net of unamortized premium or discount and deferred financing costs in the financial statements. The debt amounts include the current portion payable in the next twelve months and have maturities that range from 2019 to 2061.

Master Trust Assets

DP&L established Master Trusts to hold assets that could be used for the benefit of employees participating in employee benefit plans and these assets are not used for general operating purposes. These assets are primarily comprised of open-ended mutual funds, which are valued using the net asset value per unit. These investments are recorded at fair value within Other deferred assets on the balance sheets and classified as available-for-sale. Any unrealized gains or losses are recorded in AOCI until the securities are sold.

DPL had $1.2 million ($0.8 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2017 and $1.0 million ($0.6 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at December 31, 2016.

During the three months ended March 31, 2017, $0.7 million ($0.5 million after tax) of various investments were sold to facilitate the distribution of benefits and the unrealized gains were reversed into earnings. An immaterial amount of unrealized gains are expected to be reversed to earnings as investments are sold over the next twelve months to facilitate the distribution of benefits.

Fair Value Hierarchy

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These inputs are then categorized as:


•	Level 1 (quoted prices in active markets for identical assets or liabilities);


•	Level 2 (observable inputs such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active); or


•	Level 3 (unobservable inputs).

Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk. We include our own credit risk and our counterparty’s credit risk in our calculation of fair value using global average default rates based on an annual study conducted by a large rating agency.

We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 2017 or 2016.

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The fair value of assets and liabilities at March 31, 2017 and December 31, 2016 and the respective category within the fair value hierarchy for DPL was determined as follows:



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at March 31, 2017		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.3	$	0.3	$	—	$	—
Equity securities	3.9		—		3.9		—
Debt securities	4.3		—		4.3		—
Hedge funds	0.1		—		0.1		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	8.7		0.3		8.4		—
Derivative Assets
Forward power contracts	18.9		—		18.9		—
Interest rate hedges	1.4		—		1.4		—
Natural gas	0.3		0.3		—		—
Total Derivative assets	20.6		0.3		20.3		—

Total Assets	$	29.3	$	0.6	$	28.7	$	—

Liabilities
Derivative Liabilities
Interest rate hedges	$	0.3	$	—	$	0.3	$	—
Natural gas futures	0.5		0.5		—		—
Forward power contracts	18.1		—		17.0		1.1
Total Derivative liabilities	18.9		0.5		17.3		1.1
Debt	1,940.6		—		1,922.7		17.9

Total Liabilities	$	1,959.5	$	0.5	$	1,940.0	$	19.0

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Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at December 31, 2016		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.4	$	0.4	$	—	$	—
Equity securities	3.4		—		3.4		—
Debt securities	4.4		—		4.4		—
Hedge funds	0.1		—		0.1		—
Real estate	0.3		—		0.3		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	8.7		0.4		8.3		—
Derivative assets
Forward power contracts	19.5		—		19.5		—
Interest rate hedges	1.2		—		1.2		—
FTRs	0.1		—		—		0.1
Total Derivative assets	20.8		—		20.7		0.1

Total Assets	$	29.5	$	0.4	$	29.0	$	0.1

Liabilities
Derivative liabilities
Interest rate hedges	$	0.7	$	—	$	0.7	$	—
Forward power contracts	28.5		—		26.0		2.5
Total Derivative liabilities	29.2		—		26.7		2.5
Debt	1,907.7		—		1,889.7		18.0

Total Liabilities	$	1,936.9	$	—	$	1,916.4	$	20.5

Our financial instruments are valued using the market approach in the following categories:


•	Level 1 inputs are used for derivative contracts such as natural gas futures and for money market accounts that are considered cash equivalents. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions.


•	Level 2 inputs are used to value derivatives such as forward power contracts (which are traded on the OTC market but which are valued using prices on the NYMEX for similar contracts on the OTC market). Other Level 2 assets include open-ended mutual funds that are in the Master Trust, which are valued using observable prices based on the end of day net asset value per unit.


•	Level 3 inputs such as FTRs are considered a Level 3 input because the monthly auctions are considered inactive. Other Level 3 inputs include the credit valuation adjustment on some of the forward power contracts and forward power contracts in less active markets. Our Level 3 inputs are immaterial to our derivative balances as a whole and as such no further disclosures are presented.

Approximately 93.6% of the inputs to the fair value of our derivative instruments are from quoted market prices.

Our debt is fair valued for disclosure purposes only and most of the fair values are determined using quoted market prices in inactive markets. These fair value inputs are considered Level 2 in the fair value hierarchy. As the Wright-Patterson Air Force Base loan is not publicly traded, fair value is assumed to equal carrying value. These fair value inputs are considered Level 3 in the fair value hierarchy as there are no observable inputs. Additional Level 3 disclosures are not presented since debt is not recorded at fair value.

Non-recurring Fair Value Measurements

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approximate future disposal cost as determined by market information, historical information or other management estimates. These inputs to the fair value of the AROs would be considered Level 3 inputs under the fair value hierarchy. As a result of changes in our estimates of costs to be incurred for our AROs, we decreased our AROs by $4.4 million in the first quarter of 2017. AROs for ash ponds, asbestos, river structures and underground storage tanks decreased by a net amount of $(3.1) million and decreased by a net amount of $(0.6) million during the three months ended March 31, 2017 and 2016, respectively.

When evaluating impairment of long-lived assets, we measure fair value using the applicable fair value measurement guidance. Impairment expense is measured by comparing the fair value at the evaluation date to the carrying amount. The following table summarizes Long-lived assets measured at fair value on a non-recurring basis during the period and their level within the fair value hierarchy (there were no impairments during the three months ended March 31, 2016):



$ in millions	Three months ended March 31, 2017
	Carrying		Fair Value						Gross
	Amount ^(b)		Level 1		Level 2		Level 3		Loss
Assets
Long-lived assets ^(a)
Stuart	$	42.4	$	—	$	—	$	3.3	$	39.1
Killen	$	35.2	$	—	$	—	$	7.9	$	27.3

(a)See Note 14 – Fixed-asset Impairment for further information

(b)Carrying amount at date of valuation

The following summarizes the significant unobservable inputs used in the Level 3 measurement on a non-recurring basis during the three months ended March 31, 2017:



$ in millions	Fair value		Valuation technique	Unobservable input	Weighted average
Long-lived assets held and used:
Stuart	$	3.3	Discounted cash flow	Pre-tax operating margin (through remaining life)	10%
				Weighted-average cost of capital	7%

Killen	$	7.9	Discounted cash flow	Pre-tax operating margin (through remaining life)	22%
				Weighted-average cost of capital	7%

Note 6 – Derivative Instruments and Hedging Activities

In the normal course of business, DPL enters into various financial arrangements, including derivative financial instruments. We use derivatives principally to manage the risk of changes in market prices for commodities. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. The objective of the hedging program is to mitigate financial risks while ensuring that we have adequate resources to meet our requirements. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management

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purposes and are designated as normal purchase/normal sale, cash flow hedges or marked to market each reporting period.

At March 31, 2017, DPL had the following outstanding derivative instruments:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)			Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	0.9		—			0.9
Natural gas futures	Not designated	Dths	17,127.5		—			17,127.5
Forward power contracts	Designated	MWh	1,276.6		(6,250.9		)	(4,974.3		)
Forward power contracts	Not designated	MWh	1,727.3		(2,052.6		)	(325.3		)
Interest rate swaps	Designated	USD	$	200,000.0	$	—		$	200,000.0

(a) Refers to whether the derivative instruments have been designated as a cash flow hedge.

At December 31, 2016, DPL had the following outstanding derivative instruments:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)			Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	2.3		—			2.3
Natural gas futures	Not designated	Dths	1,590.0		—			1,590.0
Forward power contracts	Designated	MWh	342.9		(9,974.5		)	(9,631.6		)
Forward power contracts	Not designated	MWh	2,568.3		(2,020.9		)	547.4
Interest rate swaps	Designated	USD	$	200,000.0	$	—		$	200,000.0

(a) Refers to whether the derivative instruments have been designated as a cash flow hedge.

Cash Flow Hedges

As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair value of cash flow hedges is determined by observable market prices available as of the balance sheet dates and will continue to fluctuate with changes in market prices up to contract expiration. The effective portion of the hedging transaction is recognized in AOCI and transferred to earnings using specific identification of each contract when the forecasted hedged transaction takes place or when the forecasted hedged transaction is probable of not occurring. The ineffective portion of the cash flow hedge is recognized in earnings in the current period. All risk components were taken into account to determine the hedge effectiveness of the cash flow hedges.

We enter into forward power contracts to manage commodity price risk exposure related to our generation of electricity. We do not hedge all commodity price risk. We reclassify gains and losses on forward power contracts from AOCI into earnings in those periods in which the contracts settle.

In November 2016, we entered into two interest rate swaps to hedge the variable interest on our $200.0 million variable interest rate tax-exempt First Mortgage Bonds. The interest rate swaps have a combined notional amount of $200.0 million and will settle monthly based on a one month LIBOR. We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur.

We had previously entered into interest rate derivative contracts to manage interest rate exposure related to anticipated borrowings of fixed-rate debt. These interest rate derivative contracts were settled in the third quarter of 2013 and we continue to amortize amounts out of AOCI into interest expense.

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The following table provides information for DPL concerning gains or losses recognized in AOCI for the cash flow hedges for the three months ended March 31, 2017 and 2016:



	Three months ended						Three months ended
	March 31, 2017						March 31, 2016
				Interest						Interest
$ in millions (net of tax)	Power			Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	(4.3	)	$	17.4		$	9.2		$	17.5
Net gains associated with current period hedging transactions	4.9			0.3			21.5			—
Net gains / (losses) reclassified to earnings
Interest expense	—			(0.2		)	—			—
Revenues	(0.9		)	—			(11.0		)	—
Purchased power	2.1			—			2.8			—
Ending accumulated derivative gains in AOCI	$	1.8		$	17.5		$	22.5		$	17.5

Portion expected to be reclassified to earnings in the next twelve months ^(a)	$	2.0		$	(0.2	)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	17			41

(a)The actual amounts that we reclassify from AOCI to earnings related to power can differ from the estimate above due to market price changes.

Derivatives not designated as hedges

Certain derivative contracts are entered into on a regular basis as part of our risk management program but do not qualify for hedge accounting or the normal purchase and sales scope exceptions under FASC 815. Accordingly, such contracts are recorded at fair value with changes in the fair value charged or credited to the Condensed Consolidated Statements of Operations in the period in which the change occurred. This is commonly referred to as “MTM accounting.” Contracts we enter into as part of our risk management program may be settled financially, by physical delivery, or net settled with the counterparty. FTRs, natural gas futures, and certain forward power contracts are currently marked to market.

Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to MTM accounting and are recognized in the Condensed Consolidated Statements of Operations on an accrual basis.

Financial Statement Effect

The following tables present the amount and classification within the Condensed Consolidated Statements of Operations of the gains and losses on DPL’s derivatives not designated as hedging instruments for the three months ended March 31, 2017 and 2016:



For the three months ended March 31, 2017
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized loss	$	—	$	(0.1	)	$	(0.1	)	$	(0.2	)
Realized gain / (loss)	0.2		(2.6		)	(0.2		)	(2.6		)
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)
Recorded in Income Statement: gain / (loss)
Revenues	$	—	$	(6.7	)	$	—		$	(6.7	)
Purchased power	0.2		4.0			(0.3		)	3.9
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)

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For the three months ended March 31, 2016
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized gain / (loss)	$	0.1	$	(1.5	)	$	(0.2	)	$	(1.6	)
Realized gain / (loss)	0.2		(0.4		)	(0.2		)	(0.4		)
Total	$	0.3	$	(1.9	)	$	(0.4	)	$	(2.0	)
Recorded in Income Statement: gain / (loss)
Revenue	$	—	$	(1.1	)	$	—		$	(1.1	)
Purchased power	0.3		(0.8		)	(0.4		)	(0.9		)
Total	$	0.3	$	(1.9	)	$	(0.4	)	$	(2.0	)

DPL has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements.

The following tables summarize the derivative positions presented in the balance sheet where a right of offset exists under these arrangements and related cash collateral received or pledged. The following table presents the fair value and balance sheet classification of DPL’s derivative instruments at March 31, 2017:



Fair Values of Derivative Instruments
at March 31, 2017
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Consolidated Balance Sheets		Financial Instruments with Same Counterparty in Offsetting Position			Cash Collateral			Net Balance Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Forward power contracts	Designated	$	12.7	$	(8.6	)	$	—		$	4.1
Forward power contracts	Not designated	6.1		(5.5		)	—			0.6
Natural gas futures	Not designated	0.3		(0.2		)	—			0.1

Long-term derivative positions (presented in Other deferred assets)
Interest rate swap	Designated	1.4		—			—			1.4
Forward power contracts	Not designated	0.1		(0.1		)	—			—
Total assets		$	20.6	$	(14.4	)	$	—		$	6.2

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Forward power contracts	Designated	$	9.7	$	(8.6	)	$	—		$	1.1
Interest rate swap	Designated	0.3		—			—			0.3
Forward power contracts	Not designated	8.1		(5.5		)	(0.1		)	2.5
Natural gas futures	Not designated	0.2		(0.2		)	—			—

Long-term derivative positions (presented in Other deferred credits)
Forward power contracts	Designated	0.1		—			(0.1		)	—
Natural gas futures	Not designated	0.3		—			(0.3		)	—
Forward power contracts	Not designated	0.2		(0.1		)	—			0.1
Total liabilities		$	18.9	$	(14.4	)	$	(0.5	)	$	4.0

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The following table presents the fair value and balance sheet classification of DPL’s derivative instruments at December 31, 2016:



Fair Values of Derivative Instruments
at December 31, 2016
				Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Consolidated Balance Sheets		Financial Instruments with Same Counterparty in Offsetting Position			Cash Collateral			Net Balance Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Forward power contracts	Designated	$	11.0	$	(10.5	)	$	—		$	0.5
Forward power contracts	Not designated	6.0		(4.7		)	—			1.3
FTRs	Not designated	0.1		—			—			0.1
Long-term derivative positions (presented in Other deferred assets)
Interest rate swaps	Designated	1.2		—			—			1.2
Forward power contracts	Designated	0.6		(0.6		)	—			—
Forward power contracts	Not designated	1.9		(1.0		)	—			0.9
Total assets		$	20.8	$	(16.8	)	$	—		$	4.0

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Interest rate swaps	Designated	$	0.7	$	—		$	—		$	0.7
Forward power contracts	Designated	16.4		(10.5		)	(5.5		)	0.4
Forward power contracts	Not designated	7.7		(4.7		)	—			3.0
Long-term derivative positions (presented in Other deferred credits)
Forward power contracts	Designated	2.4		(0.6		)	(0.8		)	1.0
Forward power contracts	Not designated	2.0		(1.0		)	—			1.0
Total liabilities		$	29.2	$	(16.8	)	$	(6.3	)	$	6.1

Credit risk-related contingent features

Certain of our OTC commodity derivative contracts are under master netting agreements that contain provisions that require us to post collateral if our credit ratings drop below certain thresholds. We have crossed that threshold with one counterparty to the derivative instruments and they could request that we post collateral of $0.9 million at this time.

The aggregate fair value of DPL’s commodity derivative instruments that were in a MTM loss position at March 31, 2017 was $18.9 million. $0.5 million of collateral was posted directly with third parties and in a broker margin account which offsets our loss positions on the forward contracts. This liability position is further offset by the asset position of counterparties with master netting agreements of $14.4 million. Since our debt is below investment grade, we could have to post collateral for the remaining $4.0 million.

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Note 7 – Debt

The following table provides a summary of DPL's outstanding debt.



	Interest		March 31,			December 31,
$ in millions	Rate	Maturity	2017			2016
Term loan - rates from 4.01% - 4.04% (a) and 4.00% - 4.01% (b)		2022	$	443.9		$	445.0
Tax-exempt First Mortgage Bonds	4.8%	2036	100.0			100.0
Tax-exempt First Mortgage Bonds - rates from 1.52% - 1.53% (a) and 1.29% - 1.42% (b)		2020	200.0			200.0
U.S. Government note	4.2%	2061	17.9			18.0
Capital leases			0.4			0.4
Unamortized deferred financing costs			(10.1		)	(10.7		)
Unamortized debt discount and premiums, net			(5.3		)	(5.5		)
Total long-term debt at consolidated subsidiary			746.8			747.2

Bank term loan - rates from 3.02% - 3.73% (a) and 2.67% - 3.02% (b)		2020	118.8			125.0
Senior unsecured notes	6.75%	2019	200.0			200.0
Senior unsecured notes	7.25%	2021	780.0			780.0
Note to DPL Capital Trust II (c)	8.125%	2031	15.6			15.6
Unamortized deferred financing costs			(8.4		)	(8.8		)
Unamortized debt discounts and premiums, net			(0.8		)	(0.6		)
Total long-term debt			1,852.0			1,858.4
Less: current portion			(29.7		)	(29.7		)
Long-term debt, net of current portion			$	1,822.3		$	1,828.7


(a)	Range of interest rates for the three months ended March 31, 2017.


(b)	Range of interest rates for the year ended December 31, 2016.


(c)	Note payable to related party. See Note 11 – Related Party Transactions for additional information.

Premiums or discounts are amortized over the remaining life of the debt using the effective interest method.

Debt covenants and restrictions

DP&L’s unsecured revolving credit agreement and Bond Purchase and Covenants Agreement have two financial covenants. The first measures Total Debt to Total Capitalization and is calculated at the end of each fiscal quarter by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. The second financial covenant ratio compares EBITDA to Interest Expense and is calculated at the end of each fiscal quarter by dividing EBITDA for the four prior fiscal quarters by the consolidated interest charges for the same period.

On February 21, 2017, DP&L and its lenders amended DP&L’s revolving credit agreement and Bond Purchase and Covenant Agreement. These amendments modified the definition of Consolidated Net Worth (which is used for measuring the Total Debt to Total Capitalization ratio under each of the agreements), to exclude, through March 31, 2018, non-cash charges related directly to impairments of coal generation assets in DP&L's fiscal quarter ending December 31, 2016 and thereafter. With this amendment, DP&L’s Total Debt to Total Capitalization ratio for the period ending March 31, 2017 is 0.53 to 1.00. The amendment also changed, for each amendment, the dates after generation separation during which compliance with the Total Capitalization ratio detailed above shall be suspended if long-term indebtedness, as determined by the PUCO, is less than or equal to $750.0 million. As noted above this time period previously was January 1, 2017 to December 31, 2017, and is now the twelve months immediately subsequent to the separation of the generation assets from DP&L.

The cost of borrowing under DP&L's unsecured revolving credit agreement and Bond Purchase and Covenants Agreement adjust under certain credit rating scenarios.

DPL’s revolving credit agreement and term loan have two financial covenants. The first financial covenant, a Total Debt to EBITDA ratio, is calculated at the end of each fiscal quarter by dividing total debt at the end of the current quarter by consolidated EBITDA for the four prior fiscal quarters. The second financial covenant, an EBITDA to

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Interest Expense ratio, is calculated, at the end of each fiscal quarter, by dividing EBITDA for the four prior fiscal quarters by the consolidated interest charges for the same period.

The cost of borrowing under DPL's revolving credit agreement and term loan adjust under certain credit rating scenarios. DPL’s revolving credit agreement, term loan, and senior unsecured notes due 2019 restrict dividend payments from DPL to AES.

As of March 31, 2017, DP&L and DPL were in compliance with all debt covenants, including the financial covenants described above.

Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage.

Note 8 – Income Taxes

The following table details the effective tax rates for the three months ended March 31, 2017 and 2016.



	Three months ended
	March 31,
	2017	2016
DPL	37.9%	21.4%

Income tax expense for the three months ended March 31, 2017 and 2016 was calculated using the estimated annual effective income tax rates for 2017 and 2016 of 37.6% and 20.6%, respectively. For the three months ended March 31, 2017 and 2016, management estimated the annual effective tax rate based on its forecast of annual pre-tax income. To the extent that actual pre-tax results for the year differ from the forecasts applied to the most recent interim period, the rates estimated could be materially different from the actual effective tax rates.

The increase in the annual effective rate compared to the same period in 2016 is primarily due to an increase of forecasted tax expense relating to flow-through depreciation and a reduction in the projected manufacturer's production deduction.

Note 9 – Benefit Plans

DP&L sponsors a defined benefit pension plan for the vast majority of its employees.

We generally fund pension plan benefits as accrued in accordance with the minimum funding requirements of ERISA and, in addition, make voluntary contributions from time to time. There were $5.0 million in employer contributions during each of the three months ended March 31, 2017 and 2016.

The amounts presented in the following tables for pension include the collective bargaining plan formula, the traditional management plan formula, the cash balance plan formula and the SERP, in the aggregate. The pension costs below have not been adjusted for amounts billed to the Service Company for former DP&L employees who are now employed by the Service Company but are still participants in the DP&L plan. See Note 11 – Related Party Transactions.

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The net periodic benefit cost of the pension benefit plans for the three months ended March 31, 2017 and 2016 was:



Net Periodic Benefit Cost	Pension
	Three months ended
	March 31,
$ in millions	2017			2016
Service cost	$	1.4		$	1.4
Interest cost	3.6			3.7
Expected return on plan assets	(5.7		)	(5.7		)
Plan curtailment ^(a)	4.1			—
Amortization of unrecognized:
Prior service cost	0.4			0.5
Actuarial loss	1.3			1.0
Net periodic benefit cost	$	5.1		$	0.9


(a)	As a result of the decision to retire certain of DP&L's coal-fired plants, we recognized a plan curtailment of $4.1 million in the first quarter of 2017. See Note 14 – Fixed-asset Impairment for more information.

In addition, DP&L provides postretirement health care and life insurance benefits to certain retired employees, their spouses and eligible dependents. We have funded a portion of the union-eligible benefits using a Voluntary Employee Beneficiary Association Trust. These postretirement health care benefits and the related unfunded obligation of $15.8 million at both March 31, 2017 and December 31, 2016 were not material to the Financial Statements in the periods covered by this report.

Benefit payments, which reflect future service, are estimated to be paid as follows:



$ in millions
Estimated to be paid during the twelve months ending March 31,	Pension
2018	$	18.8
2019	25.5
2020	26.0
2021	26.4
2022	26.7
2023 - 2027	139.6

Note 10 – Contractual Obligations, Commercial Commitments and Contingencies

Guarantees

In the normal course of business, DPL enters into various agreements with its wholly-owned subsidiary, AES Ohio Generation, providing financial or performance assurance to third parties. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to this subsidiary on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish these subsidiary's intended commercial purposes.

At March 31, 2017, DPL had $24.6 million of guarantees on behalf of AES Ohio Generation to third parties for future financial or performance assurance under such agreements. The guarantee arrangements entered into by DPL with these third parties cover select present and future obligations of AES Ohio Generation to such beneficiaries and are terminable by DPL upon written notice to the beneficiaries within a certain time. The carrying amount of obligations for commercial transactions covered by these guarantees recorded in our Condensed Consolidated Balance Sheets was $2.4 million and $2.3 million at March 31, 2017 and December 31, 2016, respectively.

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To date, DPL has not incurred any losses related to the guarantees of AES Ohio Generation’s obligations and we believe it is remote that DPL would be required to perform or incur any losses in the future associated with any of the above guarantees.

Equity Ownership Interest

DP&L owns a 4.9% equity ownership interest in OVEC, which is recorded using the cost method of accounting under GAAP. As of March 31, 2017, DP&L could be responsible for the repayment of 4.9%, or $72.5 million, of a $1,479.6 million debt obligation that has maturities from 2018 to 2040. This would happen if OVEC defaulted on debt payments. OVEC could also seek additional contributions from us to avoid a default in the event that other OVEC members defaulted on their OVEC repayment obligations. As of March 31, 2017, we have no knowledge of such a default.

Commercial Commitments and Contractual Obligations

There have been no material changes, outside the ordinary course of business, to our commercial commitments and to the information disclosed in the contractual obligations table in our Form 10-K for the fiscal year ended December 31, 2016.

Contingencies

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under various laws and regulations. We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of March 31, 2017, cannot be reasonably determined.

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 State Implementation Plans) 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 climate change;


•	Rules and future rules issued by the USEPA and the Ohio EPA that require or will require substantial reductions in SO₂, particulates, mercury, acid gases, NOx, and other air emissions. DP&L has installed emission control technology and is taking other measures to comply with required and anticipated reductions;


•	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 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. The majority of solid waste created from the combustion of coal and fossil fuels consists of fly ash and other coal combustion by-products.

Note 11 – Related Party Transactions

Service Company

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drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including DP&L, are not subsidizing costs incurred for the benefit of other businesses.

Benefit plans

DPL has an agreement with AES or one of its affiliates to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. AES or its affiliate administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments.

The following table provides a summary of these transactions:



	Three months ended
	March 31,
$ in millions	2017			2016
Transactions with the Service Company
Charges for services provided	$	13.9		$	11.6
Charges to the Service Company	$	1.0		$	1.2
Transactions with other AES affiliates:
Charges for health, welfare and benefit plans	$	4.2		$	4.1

Balances with the Service Company:	At March 31, 2017			At December 31, 2016
Net payable to the Service Company	$	—		$	(2.0	)
Net payable to other AES affiliates	$	(3.1	)	$	(2.5	)

DPL Capital Trust II

DPL has a wholly-owned business trust, DPL Capital Trust II (the "Trust"), formed for the purpose of issuing trust capital securities to third-party investors. Effective in 2003, DPL deconsolidated the Trust upon adoption of the accounting standards related to variable interest entities and currently treats the Trust as a nonconsolidated subsidiary. The Trust holds mandatorily redeemable trust capital securities. The investment in the Trust, which amounts to $0.3 million and $0.3 million at March 31, 2017 and December 31, 2016, respectively, is included in Other deferred assets within Other non-current assets. DPL also has a note payable to the Trust amounting to $15.6 million and $15.6 million at March 31, 2017 and December 31, 2016, respectively, that was established upon the Trust’s deconsolidation in 2003. See Note 7 – Debt for additional information.

In addition to the obligations under the note payable mentioned above, DPL also agreed to a security obligation which represents a full and unconditional guarantee of payments to the capital security holders of the Trust.

Income taxes

AES files federal and state income tax returns which consolidate DPL and its subsidiaries. Under a tax sharing agreement with AES, DPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. DPL had net payable balances of $70.6 million and $97.2 million at March 31, 2017 and December 31, 2016, respectively, which are recorded in Accrued taxes on the accompanying Balance Sheets on a gross basis.

Note 12 – Business Segments

During the fourth quarter of 2016, DPL's management reassessed the reportable business segments in connection with recent changes in the regulatory environment, including the pending ESP case, and in preparation for the anticipated transfer of DP&L’s generation assets to AES Ohio Generation. DPL currently manages the 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 income / (loss) from continuing operations before income tax 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

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to more than 520,000 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 our investment in OVEC and the historical results of DP&L’s Beckjord, Hutchings Coal, and East Bend generating facilities, which were either closed or sold in prior periods. As these assets will not be transferring to AES Ohio Generation when DP&L’s planned generation separation occurs, 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 DP&L’s electric generation business. 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 peaking generating facilities, and DP&L owns multiple coal-fired and peaking electric generating facilities. Both AES Ohio Generation and DP&L primarily sell their generated energy and capacity into the PJM wholesale market as DP&L sources all of the generation for its SSO customers through a competitive bid process.

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.

The following tables present financial information for each of DPL’s reportable business segments:



$ in millions	T&D		Generation			Other			Adjustments and Eliminations			DPL Consolidated
Three months ended March 31, 2017
Revenues from external customers	$	189.8	$	131.8		$	2.3		$	—		$	323.9
Intersegment revenues	0.3		—			1.4			(1.7		)	—
Total revenues	$	190.1	$	131.8		$	3.7		$	(1.7	)	$	323.9

Depreciation and amortization	$	18.1	$	7.0		$	2.9		$	—		$	28.0
Fixed-asset impairment (Note 14)	$	—	$	66.3		$	0.1		$	—		$	66.4
Interest expense	$	7.4	$	—		$	19.6		$	(0.1	)	$	26.9
Income / (loss) from continuing operations before income tax	$	25.0	$	(86.8	)	$	(21.4	)	$	—		$	(83.2	)

Cash capital expenditures	$	26.3	$	14.1		$	1.0		$	—		$	41.4

At March 31, 2017
Total assets	$	1,680.9	$	366.1		$	633.6		$	(416.4	)	$	2,264.2

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$ in millions	T&D		Generation			Other			Adjustments and Eliminations			DPL Consolidated
Three months ended March 31, 2016
Revenues from external customers	$	204.2	$	158.2		$	1.6		$	—		$	364.0
Intersegment revenues	0.3		—			1.3			(1.6		)	—
Total revenues	$	204.5	$	158.2		$	2.9		$	(1.6	)	$	364.0

Depreciation and amortization	$	17.2	$	18.6		$	(2.4	)	$	—		$	33.4
Interest expense	$	5.4	$	0.1		$	20.9		$	(0.1	)	$	26.3
Income / (loss) from continuing operations before income tax	$	34.2	$	(12.3	)	$	(19.1	)	$	—		$	2.8

Cash capital expenditures	$	24.1	$	13.0		$	0.6		$	—		$	37.7

At December 31, 2016
Total assets	$	1,710.5	$	472.3		$	673.6		$	(437.2	)	$	2,419.2

Note 13 – Discontinued Operations

On January 1, 2016, DPL closed on the sale of DPLER, its competitive retail business. The sale agreement was signed on December 28, 2015 and DPL received $75.5 million of restricted cash on December 31, 2015 for the sale. DPL recorded a gain on this transaction of $49.2 million in the first quarter of 2016. The gain includes the impact of DPLER’s liability to DP&L that transferred with the sale on January 1, 2016 but was eliminated in consolidation as of December 31, 2015.

Operating activities related to DPLER have been reclassified to "Discontinued operations" in the Condensed Consolidated Statements of Operations for the three months ended March 31, 2016.

The following table summarizes the revenues, cost of revenues, operating expenses and income tax of discontinued operations for the periods indicated:



	Three months ended March 31,
$ in millions	2016
Revenues	$	—
Cost of revenues	—
Operating expenses	(0.7		)
Loss from discontinued operations before income taxes	(0.7		)
Gain from disposal of discontinued operations	49.2
Income tax expense	18.9
Income on discontinued operations	$	29.6

Cash flows related to discontinued operations are included in our Condensed Consolidated Statements of Cash Flows. Cash flows from operating activities for discontinued operations were $(0.7) million for the three months ended March 31, 2016. Cash flows from investing activities for discontinued operations were $75.5 million for the three months ended March 31, 2016. All cash generated from discontinued operations was paid to DPL through dividends for all periods presented.

Note 14 – Fixed-asset Impairment

On March 17, 2017, the Board of Directors of DP&L approved the retirement of the 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. DP&L also reached agreement with the co-owners of the Facilities to proceed with this plan of retirement. We performed a long-lived asset impairment

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analysis and determined that the carrying amounts of the Facilities were not recoverable. The asset groups of Stuart Station and Killen Station were determined to have fair values of $3.3 million and $7.9 million, respectively, using the discounted cash flows under the income approach. As a result, we recognized an asset impairment expense of $39.1 million and $27.3 million for Stuart Station and Killen Station, respectively.

Additionally, as a result of the decision to retire the Facilities by June 1, 2018, we concluded that inventory at these Facilities is considered obsolete. As a result, we recognized a loss on disposal of $9.8 million and $6.4 million for Stuart Station and Killen Station inventories, respectively, during the first quarter of 2017, which is recorded in Loss on asset disposal in the Condensed Consolidated Statements of Operations.

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FINANCIAL STATEMENTS

The Dayton Power and Light Company

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THE DAYTON POWER AND LIGHT COMPANY
CONDENSED STATEMENTS OF OPERATIONS
	Three months ended March 31,
$ in millions	2017			2016
Revenues	$	311.1		$	349.2

Cost of revenues:
Fuel	50.1			62.9
Purchased power	100.8			121.3
Total cost of revenues	150.9			184.2

Gross margin	160.2			165.0

Operating expenses:
Operation and maintenance	82.6			86.1
Depreciation and amortization	23.5			34.3
General taxes	23.6			20.5
Gain on termination of contract	—			(27.7		)
Fixed-asset impairment	66.3			—
Loss on asset disposal	19.4			0.1
Total operating expenses	215.4			113.3

Operating income / (loss)	(55.2		)	51.7

Other income / (expense), net:
Investment loss	—			(0.1		)
Interest expense	(7.6		)	(5.3		)
Other expense, net	(0.9		)	(0.2		)
Total other expense, net	(8.5		)	(5.6		)

Income / (loss) from operations before income tax	(63.7		)	46.1

Income tax expense / (benefit)	(21.9		)	12.4

Net income / (loss)	(41.8		)	33.7

Dividends on preferred stock	—			0.2

Income / (loss) attributable to common stock	$	(41.8	)	$	33.5

See Notes to Condensed Financial Statements.

These interim statements are unaudited.

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THE DAYTON POWER AND LIGHT COMPANY
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
	Three months ended March 31,
$ in millions	2017			2016
Net income / (loss)	$	(41.8	)	$	33.7
Available-for-sale securities activity:
Change in fair value of available-for-sale securities, net of income tax expense of $0.0 and $(0.1) for each respective period	0.2			0.2
Reclassification to earnings, net of income tax expense of $0.0 and $0.0 for each respective period	(0.1		)	(0.1		)
Total change in fair value of available-for-sale securities	0.1			0.1
Derivative activity:
Change in derivative fair value, net of income tax expense of $(2.8) and $(11.6) for each respective period	5.2			21.5
Reclassification to earnings, net of income tax (expense) / benefit of $(0.5) and $4.6 for each respective period	1.0			(8.4		)
Total change in fair value of derivatives	6.2			13.1
Pension and postretirement activity:
Prior Service Costs for the period, net of income tax benefit of $0.6 and $0.0 for each respective period	(1.1		)	—
Net loss for period, net of income tax benefit of $0.3 and $0.0 for each respective period	(0.5		)	—
Reclassification to earnings, net of income tax expense of $(1.3) and $(0.8) for each respective period	2.5			0.3
Total change in unfunded pension obligation	0.9			0.3

Other comprehensive income	7.2			13.5

Net comprehensive income / (loss)	$	(34.6	)	$	47.2

See Notes to Condensed Financial Statements.

These interim statements are unaudited.

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THE DAYTON POWER AND LIGHT COMPANY
CONDENSED BALANCE SHEETS
	March 31,			December 31,
$ in millions	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	4.9		$	1.6
Restricted cash	8.4			29.0
Accounts receivable, net (Note 2)	110.6			134.6
Inventories (Note 2)	59.5			75.8
Taxes applicable to subsequent years	59.4			79.2
Regulatory assets, current	0.9			0.1
Other prepayments and current assets	33.4			32.4
Total current assets	277.1			352.7

Property, plant & equipment:
Property, plant & equipment	2,348.1			2,398.6
Less: Accumulated depreciation and amortization	(1,057.7		)	(1,047.9		)
	1,290.4			1,350.7
Construction work in process	80.4			89.9
Total net property, plant & equipment	1,370.8			1,440.6

Other non-current assets:
Regulatory assets, non-current	206.0			203.9
Intangible assets, net of amortization	23.2			23.0
Other deferred assets	12.8			14.9
Total other non-current assets	242.0			241.8
Total assets	$	1,889.9		$	2,035.1

LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt (Note 7)	$	4.7		$	4.7
Short-term debt (Note 12)	—			5.0
Accounts payable	81.0			110.5
Accrued taxes	62.5			75.7
Accrued interest	0.9			2.1
Security deposits	32.8			15.2
Regulatory liabilities, current	13.7			33.7
Other current liabilities	39.5			48.3
Total current liabilities	235.1			295.2

Non-current liabilities:
Long-term debt (Note 7)	744.0			744.7
Deferred taxes	152.3			146.3
Taxes payable	44.5			84.1
Regulatory liabilities, non-current	131.6			130.4
Pension, retiree and other benefits	100.6			101.6
Unamortized investment tax credit	17.2			17.7
Asset retirement obligations	132.3			135.2
Other deferred credits	13.5			17.6
Total non-current liabilities	1,336.0			1,377.6

Commitments and contingencies (Note 11)

Common shareholder's equity:
Common stock, at par value of $0.01 per share	0.4			0.4
Other paid-in capital	801.8			810.7
Accumulated other comprehensive loss	(35.3		)	(42.5		)
Accumulated deficit	(448.1		)	(406.3		)
Total common shareholder's equity	318.8			362.3
Total liabilities and shareholder's equity	$	1,889.9		$	2,035.1

See Notes to Condensed Financial Statements.

These interim statements are unaudited.

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THE DAYTON POWER AND LIGHT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
	Three months ended March 31,
$ in millions	2017			2016
Cash flows from operating activities:
Net income / (loss)	$	(41.8	)	$	33.7
Adjustments to reconcile net income / (loss) to net cash from operating activities:
Depreciation and amortization	23.5			34.3
Deferred income taxes	0.4			(1.8		)
Fixed-asset impairment	66.3			—
Loss on asset disposal	19.4			0.1
Changes in certain assets and liabilities:
Accounts receivable	28.4			2.1
Inventories	0.1			19.1
Prepaid taxes	—			2.7
Taxes applicable to subsequent years	19.8			21.1
Deferred regulatory costs, net	(23.8		)	4.8
Accounts payable	(24.6		)	(9.8		)
Accrued taxes payable	(52.7		)	(28.2		)
Accrued interest payable	(1.3		)	(3.1		)
Security deposits	17.6			4.4
Unamortized investment tax credit	(0.5		)	—
Pension, retiree and other benefits	1.3			(4.5		)
Other	(9.3		)	8.5
Net cash provided by operating activities	22.8			83.4
Cash flows from investing activities:
Capital expenditures	(34.1		)	(35.8		)
Purchase of renewable energy credits	(0.1		)	(0.1		)
Decrease in restricted cash	20.6			1.4
Insurance proceeds	—			0.2
Other investing activities, net	0.2			0.5
Net cash used in investing activities	(13.4		)	(33.8		)
Cash flows from financing activities:
Dividends paid on preferred stock	—			(0.2		)
Retirement of long-term debt	(1.1		)	—
Issuance of short-term debt - related party	30.0			5.0
Repayment of short-term debt - related party	(35.0		)	(35.0		)
Net cash used in financing activities	(6.1		)	(30.2		)

Cash and cash equivalents:
Net change	3.3			19.4
Balance at beginning of period	1.6			5.4
Cash and cash equivalents at end of period	$	4.9		$	24.8
Supplemental cash flow information:
Interest paid, net of amounts capitalized	$	7.9		$	7.1
Non-cash financing and investing activities:
Accruals for capital expenditures	$	8.7		$	12.5

See Notes to Condensed Financial Statements.

These interim statements are unaudited.

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The Dayton Power and Light Company

Notes to Condensed Financial Statements (Unaudited)

Note 1 – Overview and Summary of Significant Accounting Policies

Description of Business

DP&L has two reportable segments: the Transmission and Distribution (T&D) segment and the Generation segment. See Note 13 – Business Segments for more information relating to these reportable segments.

DP&L employed 1,145 people as of March 31, 2017. Approximately 62% of all employees are under a collective bargaining agreement which expires on October 31, 2017.

Financial Statement Presentation

DP&L does not have any subsidiaries. DP&L has undivided ownership interests in five coal-fired generating facilities, peaking electric generating facilities and numerous transmission facilities, all of which are included in the financial statements at amortized cost. Operating revenues and expenses of these facilities are included on a pro rata basis in the corresponding lines in the Condensed Statements of Operations.

Certain immaterial amounts from prior periods have been reclassified to conform to the current period presentation.

These financial statements have been prepared in accordance with GAAP for interim financial statements, the instructions of Form 10-Q and Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from this interim report. Therefore, our interim financial statements in this report should be read along with the annual financial statements included in our Form 10-K for the fiscal year ended December 31, 2016.

In the opinion of our management, the Condensed Financial Statements presented in this report contain all adjustments necessary to fairly state our financial position as of March 31, 2017; our results of operations for the three months ended March 31, 2017 and 2016 and our cash flows for the three months ended March 31, 2017 and 2016. Unless otherwise noted, all adjustments are normal and recurring in nature. Due to various factors, including, but not limited to, seasonal weather variations, the timing of outages of EGUs, changes in economic conditions involving commodity prices and competition, and other factors, interim results for the three months ended March 31, 2017 may not be indicative of our results that will be realized for the full year ending December 31, 2017.

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income tax exposures; litigation; contingencies; the valuation of AROs; and assets and liabilities related to employee benefits.

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities

New Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could have a material impact on our financial statements:



Accounting Standard	Description	Date of Adoption	Effect on the financial statements upon adoption
New Accounting Standards Adopted
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting	The standard simplifies the following aspects of accounting for share-based payments awards: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on statement of cash flows when an employer withholds shares for tax-withholding purposes. Transition method: The recognition of excess tax benefits and tax deficiencies arising from vesting or settlement were applied retrospectively. The elimination of the requirement that excess tax benefits be realized before they are recognized was adopted on a modified retrospective basis with a cumulative adjustment to the opening balance sheet.	January 1, 2017	The primary effect of adoption was the recognition of excess tax benefits in our provision for income taxes in the period when the awards vest or are settled, rather than in paid-in-capital in the period when the excess tax benefits are realized. We will continue to estimate the number of awards that are expected to vest in our determination of the related periodic compensation cost. The adoption of this standard did not have a material impact on the financial statements.
New Accounting Standards Issued But Not Yet Effective
2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities	This standard shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Transition method: modified retrospective.	January 1, 2019. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our financial statements.
2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	The standard provides guidance on the presentation of net benefit cost in an employer’s income statement and on the components eligible for capitalization. It requires that an employer report the service cost component in the same line item(s) as other employee compensation costs arising from services rendered during the period, and report the other components of net benefit cost separately from the service cost component and outside a subtotal of operating income. Only the service cost component will be eligible for capitalization. Transition method: various.	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our financial statements.
2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business	This standard provides guidance to assist the entities with evaluating when a set of transferred assets and activities is a business. Transition method: prospective.	January 1, 2018. Early adoption is permitted	We are currently evaluating the impact of adopting the standard on our financial statements.

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Accounting Standard	Description	Date of Adoption	Effect on the financial statements upon adoption
2016-18, Statement of Cash Flows (Topic 320): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)	This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Transition method: retrospective.	January 1, 2018. Early adoption is permitted	We are currently evaluating the impact of adopting the standard on our financial statements.
2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory	This standard requires that an entity recognizes the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Transition method: modified retrospective method.	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our financial statements.
2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)	This standard provides specific guidance on how certain cash transactions are presented and classified in the statement of cash flows. Transition method: retrospective method	January 1, 2018. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our financial statements but do not anticipate a material impact.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments	This standard updates the impairment model for financial assets measured at amortized cost to an expected loss model rather than an incurred loss model. It also allows for the presentation of credit losses on available-for-sale debt securities as an allowance rather than a write down. Transition method: various.	January 1, 2020. Early adoption is permitted only as of January 1, 2019.	We are currently evaluating the impact of adopting the standard on our financial statements.
2016-02, Leases (Topic 842)	The standard creates Topic 842, Leases which supersedes Topic 840, Leases, and introduces a lessee model that brings substantially all leases onto the balance sheet while retaining most of the principles of the existing lessor model in U.S. GAAP and aligning many of those principles with ASC 606, Revenue from Contracts with Customers. Transition method: modified retrospective approach with certain practical expedients.	January 1, 2019. Early adoption is permitted.	We are currently evaluating the impact of adopting the standard on our financial statements.
2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-05 Revenue from Contracts with Customers (Topic 606)	See discussion of the ASUs below.	January 1, 2018. Earlier application is permitted only as of January 1, 2017.	We will adopt the standard on January 1, 2018; see below for the evaluation of the impact of its adoption on the financial statements.

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Note 2 – Supplemental Financial Information

Accounts receivable and Inventories are as follows at March 31, 2017 and December 31, 2016:



	March 31,			December 31,
$ in millions	2017			2016
Accounts receivable, net:
Unbilled revenue	$	14.7		$	43.0
Customer receivables	65.2			71.2
Amounts due from partners in jointly owned plants	6.6			12.7
Amounts due from affiliates	14.8			2.9
Other	10.3			6.0
Provision for uncollectible accounts	(1.0		)	(1.2		)
Total accounts receivable, net	$	110.6		$	134.6

Inventories, at average cost:
Fuel and limestone	$	38.8		$	38.8
Plant materials and supplies	19.2			35.3
Other	1.5			1.7
Total inventories, at average cost	$	59.5		$	75.8

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Accumulated Other Comprehensive Income / (Loss)

The amounts reclassified out of Accumulated Other Comprehensive Income / (Loss) by component during the three months ended March 31, 2017 and 2016 are as follows:



Details about Accumulated Other Comprehensive Income / (Loss) components	Affected line item in the Condensed Statements of Operations	Three months ended
		March 31,
$ in millions		2017			2016
Gains and losses on Available-for-sale securities activity (Note 5):
	Other income	$	(0.1	)	$	(0.1	)
Gains and losses on cash flow hedges (Note 6):
	Interest expense	(0.3		)	(0.3		)
	Revenue	(1.5		)	(17.1		)
	Purchased power	3.3			4.4
	Total before income taxes	1.5			(13.0		)
	Tax expense / (benefit)	(0.5		)	4.6
	Net of income taxes	1.0			(8.4		)
Amortization of defined benefit pension items (Note 9):
	Operation and maintenance	3.8			1.1
	Tax benefit	(1.3		)	(0.8		)
	Net of income taxes	2.5			0.3

Total reclassifications for the period, net of income taxes		$	3.4		$	(8.2	)

The changes in the components of Accumulated Other Comprehensive Income / (Loss) during the three months ended March 31, 2017 are as follows:



$ in millions	Gains / (losses) on available-for-sale securities			Gains / (losses) on cash flow hedges			Change in unfunded pension obligation			Total
Balance January 1, 2017	$	0.7		$	(2.7	)	$	(40.5	)	$	(42.5	)

Other comprehensive income / (loss) before reclassifications	0.2			5.2			(1.6		)	3.8
Amounts reclassified from accumulated other comprehensive income / (loss)	(0.1		)	1.0			2.5			3.4
Net current period other comprehensive income	0.1			6.2			0.9			7.2

Balance March 31, 2017	$	0.8		$	3.5		$	(39.6	)	$	(35.3	)

Note 3 – Regulatory Matters

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six-year settlement that provides a framework for energy rates and defines components which include, but are not limited to, the following:


•	Bypassable standard offer energy rates for DP&L’s customers based on competitive bid auctions;


•	The establishment of a three-year non-bypassable DMR designed to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure. With PUCO approval, DP&L may have the option of extending the duration of the DMR for an additional two years;


•	The establishment of a non-bypassable Distribution Investment Rider, set initially at zero, to recover incremental distribution capital investments;


•	The establishment of a Smart Grid Rider, set initially at zero, to recover costs of future grid modernization;


•	A commitment by us to separate DP&L’s generation assets from its transmission and distribution assets (if approved by FERC) within 180 days after receipt of a PUCO order;


•	A commitment to commence a sale process to sell our ownership interests in the Zimmer, Miami Fort and Conesville coal-fired generation plants; and


•	Restrictions on DPL making dividend or tax sharing payments, and various other riders and competitive retail market enhancements.

Note 4 – Property, Plant and Equipment

DP&L and certain other Ohio utilities have undivided ownership interests in five coal-fired electric generating facilities and numerous transmission facilities. Certain expenses, primarily fuel costs for the generating units, are allocated to the owners based on their energy usage. The remaining expenses, investments in fuel inventory, plant materials and operating supplies, and capital additions are allocated to the owners in accordance with their respective ownership interests. At March 31, 2017, DP&L had $11.0 million of construction work in process at such facilities. DP&L’s share of the operations of such facilities is included within the corresponding line in the Condensed Statements of Operations, and DP&L’s share of the investment in the facilities is included within Total net property, plant and equipment in the Condensed Balance Sheets. Each joint owner provides their own financing for their share of the operations and capital expenditures of the jointly-owned station.

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Coal-fired facilities

DP&L’s undivided ownership interest in such facilities at March 31, 2017, is as follows:



	DP&L Share		DP&L Carrying Value
	Ownership %	Summer Production Capacity (MW)	Gross Plant In Service ($ in millions)		Accumulated Depreciation ($ in millions)		Construction Work in Process ($ in millions)
Jointly-owned production units
Conesville - Unit 4	16.5	129	$	—	$	—	$	—
Killen - Unit 2	67.0	402	7.0		1.0		1.0
Miami Fort - Units 7 and 8	36.0	368	28.0		1.0		5.0
Stuart - Units 1 through 4	35.0	808	1.0		1.0		—
Zimmer - Unit 1	28.1	371	12.0		1.0		5.0
Transmission (at varying percentages)			99.0		67.0		—
Total		2,078	$	147.0	$	71.0	$	11.0

Each of the above generating units has SCR and FGD equipment installed.

On April 21, 2017, DP&L and AES Ohio Generation entered into an agreement for the sale of DP&L’s undivided interests in Zimmer and Miami Fort, for $50.0 million in cash and the assumption of certain liabilities, including environmental. The purchase price is subject to adjustment at closing based on the amount of certain inventories, pre-paid amounts, employment benefits, insurance premiums, property taxes and other costs. The sale is subject to approval by the FERC and is expected to close in the third quarter of 2017.

AROs

Estimating the amount and timing of future expenditures of this type requires significant judgment. Management routinely updates these estimates as additional information becomes available.

Changes in the Liability for Generation AROs



$ in millions
Balance January 1, 2017	$	135.2
Revisions to cash flow and timing estimates	(4.4		)
Accretion expense	1.4
Settlements	0.1
Balance March 31, 2017	$	132.3

See Note 5 – Fair Value for further discussion on current year ARO additions.

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Note 5 – Fair Value



	March 31, 2017				December 31, 2016
$ in millions	Cost		Fair Value		Cost		Fair Value
Assets
Money market funds	$	0.3	$	0.3	$	0.4	$	0.4
Equity securities	2.6		3.9		2.4		3.4
Debt securities	4.3		4.3		4.4		4.4
Hedge funds	0.1		0.1		—		0.1
Real estate	—		—		0.3		0.3
Tangible assets	0.1		0.1		0.1		0.1
Total assets	$	7.4	$	8.7	$	7.6	$	8.7

	Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
Debt ^(a)	$	748.3	$	762.3	$	749.0	$	763.5


(a)	Amounts exclude immaterial capital lease obligations

These financial instruments are not subject to master netting agreements or collateral requirements and as such are presented in the Condensed Balance Sheet at their gross fair value, except for Debt, which is presented at amortized carrying value.

Debt

Master Trust Assets

DP&L had $1.3 million ($0.9 million after tax) of unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at March 31, 2017 and $1.1 million ($0.7 million after tax) in unrealized gains and immaterial unrealized losses on the Master Trust assets in AOCI at December 31, 2016.

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Fair Value Hierarchy


•	Level 1 (quoted prices in active markets for identical assets or liabilities);


•	Level 2 (observable inputs such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active); or


•	Level 3 (unobservable inputs).

We did not have any transfers of the fair values of our financial instruments between Level 1, Level 2 or Level 3 of the fair value hierarchy during the three months ended March 31, 2017 or 2016.

The fair value of assets and liabilities at March 31, 2017 and December 31, 2016 and the respective category within the fair value hierarchy for DP&L was determined as follows:



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at March 31, 2017		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.3	$	0.3	$	—	$	—
Equity securities	3.9		—		3.9		—
Debt securities	4.3		—		4.3		—
Hedge funds	0.1		—		0.1		—
Tangible assets	0.1		—		0.1		—
Total Master Trust assets	8.7		0.3		8.4		—

Derivative assets
Natural gas futures	0.3		0.3		—		—
Interest rate hedges	1.4		—		1.4		—
Forward power contracts	19.0		—		19.0		—
Total derivative assets	20.7		0.3		20.4		—

Total assets	$	29.4	$	0.6	$	28.8	$	—

Liabilities
Derivative liabilities
Interest rate hedges	$	0.3	$	—	$	0.3	$	—
Natural gas futures	0.5		0.5		—		—
Forward power contracts	18.1		—		17.0		1.1
Total derivative liabilities	18.9		0.5		17.3		1.1
Debt	762.3		—		744.4		17.9

Total liabilities	$	781.2	$	0.5	$	761.7	$	19.0

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Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
$ in millions	Fair value at December 31, 2016		Based on Quoted Prices in Active Markets		Other Observable Inputs		Unobservable Inputs
Assets
Master Trust assets
Money market funds	$	0.4	$	0.4	$	—	$	—
Equity securities	3.4		—		3.4		—
Debt securities	4.4		—		4.4		—
Hedge funds	0.1		—		0.1		—
Real estate	0.3		—		0.3		—
Tangible assets	0.1				0.1		—
Total Master Trust assets	8.7		0.4		8.3		—

Derivative assets
FTRs	0.1		—		—		0.1
Interest rate hedges	1.2		—		1.2		—
Forward power contracts	19.5		—		19.5		—
Total Derivative assets	20.8		—		20.7		0.1

Total assets	$	29.5	$	0.4	$	29.0	$	0.1

Liabilities
Derivative liabilities
Interest rate hedges	$	0.7	$	—	$	0.7	$	—
Forward power contracts	28.5		—		26.0		2.5
Total Derivative liabilities	29.2		—		26.7		2.5
Debt	763.5		—		745.5		18.0

Total liabilities	$	792.7	$	—	$	772.2	$	20.5

Our financial instruments are valued using the market approach in the following categories:


•	Level 1 inputs are used for derivative contracts such as natural gas futures and for money market accounts that are considered cash equivalents. The fair value is determined by reference to quoted market prices and other relevant information generated by market transactions.


•	Level 2 inputs are used to value derivatives such as forward power contracts (which are traded on the OTC market but which are valued using prices on the NYMEX for similar contracts on the OTC market). Other Level 2 assets include open-ended mutual funds that are in the Master Trust, which are valued using observable prices based on the end of day net asset value per unit.


•	Level 3 inputs such as FTRs are considered a Level 3 input because the monthly auctions are considered inactive. Other Level 3 inputs include the credit valuation adjustment on some of the forward power contracts and forward power contracts in less active markets. Our Level 3 inputs are immaterial to our derivative balances as a whole and as such no further disclosures are presented.

Approximately 93.6% of the inputs to the fair value of our derivative instruments are from quoted market prices.

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Non-recurring Fair Value Measurements

We use the cost approach to determine the fair value of our AROs, which is estimated by discounting expected cash outflows to their present value at the initial recording of the liability. Cash outflows are based on the approximate future disposal cost as determined by market information, historical information or other management estimates. These inputs to the fair value of the AROs would be considered Level 3 inputs under the fair value hierarchy. As a result of changes in our estimates of costs to be incurred for our AROs, we decreased our AROs by $4.4 million in the first quarter of 2017. AROs for ash ponds, asbestos, river structures and underground storage tanks decreased by a net amount of $(2.9) million and decreased by a net amount of $(0.6) million during the three months ended March 31, 2017 and 2016, respectively.



$ in millions	Three months ended March 31, 2017
	Carrying		Fair Value						Gross
	Amount ^(b)		Level 1		Level 2		Level 3		Loss
Assets
Long-lived assets ^(a)
Stuart	$	42.3	$	—	$	—	$	3.3	$	39.0
Killen	$	35.2	$	—	$	—	$	7.9	$	27.3

(a)See Note 14 – Fixed-asset Impairment for further information

(b)Carrying amount at date of valuation

The following summarizes the significant unobservable inputs used in the Level 3 measurement on a non-recurring basis during the three months ended March 31, 2017:



$ in millions	Fair value		Valuation technique	Unobservable input	Weighted average
Long-lived assets held and used:
Stuart	$	3.3	Discounted cash flow	Pre-tax operating margin (through remaining life)	10	%
				Weighted-average cost of capital	7%

Killen	$	7.9	Discounted cash flow	Pre-tax operating margin (through remaining life)	22	%
				Weighted-average cost of capital	7%

Note 6 – Derivative Instruments and Hedging Activities

In the normal course of business, DP&L enters into various financial arrangements, including derivative financial instruments. We use derivatives principally to manage the risk of changes in market prices for commodities. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. The objective of the hedging program is to mitigate financial risks while ensuring that we have adequate resources to meet our requirements. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for

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pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as normal purchase/normal sale, cash flow hedges or marked to market each reporting period.

At March 31, 2017, DP&L had the following outstanding derivative instruments:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)			Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	0.9		—			0.9
Natural gas futures	Not designated	Dths	17,127.5		—			17,127.5
Forward power contracts	Designated	MWh	1,276.6		(6,250.9		)	(4,974.3		)
Forward power contracts	Not designated	MWh	1,727.3		(2,057.9		)	(330.6		)
Interest rate swaps	Designated	USD	$	200,000.0	$	—		$	200,000.0

(a) Refers to whether the derivative instruments have been designated as a cash flow hedge.

At December 31, 2016, DP&L had the following outstanding derivative instruments:



Commodity	Accounting Treatment ^(a)	Unit	Purchases (in thousands)		Sales (in thousands)			Net Purchases/ (Sales) (in thousands)
FTRs	Not designated	MWh	2.3		—			2.3
Natural gas futures	Not designated	Dths	1,590.0		—			1,590.0
Forward power contracts	Designated	MWh	342.9		(9,974.5		)	(9,631.6		)
Forward power contracts	Not designated	MWh	2,568.3		(2,037.5		)	530.8
Interest rate swaps	Designated	USD	$	200,000.0	$	—		$	200,000.0

(a) Refers to whether the derivative instruments have been designated as a cash flow hedge.

Cash Flow Hedges

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The following table provides information for DP&L concerning gains or losses recognized in AOCI for the cash flow hedges for the three months ended March 31, 2017 and 2016:



	Three months ended						Three months ended
	March 31, 2017						March 31, 2016
				Interest						Interest
$ in millions (net of tax)	Power			Rate Hedge			Power			Rate Hedge
Beginning accumulated derivative gains / (losses) in AOCI	$	(4.3	)	$	1.6		$	9.2		$	2.0
Net gains associated with current period hedging transactions	4.9			0.3			21.5			—
Net gains / (losses) reclassified to earnings
Interest expense	—			(0.2		)	—			(0.2		)
Revenues	(0.9		)	—			(11.0		)	—
Purchased power	2.1			—			2.8			—
Ending accumulated derivative gains in AOCI	$	1.8		$	1.7		$	22.5		$	1.8

Portion expected to be reclassified to earnings in the next twelve months ^(a)	$	2.0		$	(0.2	)

Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	17			41


(a)	The actual amounts that we reclassify from AOCI to earnings related to power can differ from the estimate above due to market price changes.

Derivatives not designated as hedges

Certain derivative contracts are entered into on a regular basis as part of our risk management program but do not qualify for hedge accounting or the normal purchase and sales scope exceptions under FASC 815. Accordingly, such contracts are recorded at fair value with changes in the fair value charged or credited to the Condensed Statements of Operations in the period in which the change occurred. This is commonly referred to as “MTM accounting.” Contracts we enter into as part of our risk management program may be settled financially, by physical delivery, or net settled with the counterparty. FTRs, natural gas futures, and certain forward power contracts are currently marked to market.

Financial Statement Effect

The following tables present the amount and classification within the Condensed Statements of Operations of the gains and losses on DP&L's derivatives not designated as hedging instruments for the three months ended March 31, 2017 and 2016:



For the three months ended March 31, 2017
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized loss	$	—	$	(0.1	)	$	(0.1	)	$	(0.2	)
Realized gain / (loss)	0.2		(2.6		)	(0.2		)	(2.6		)
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)
Recorded in Income Statement: gain / (loss)
Revenues	$	—	$	(6.7	)	$	—		$	(6.7	)
Purchased power	0.2		4.0			(0.3		)	3.9
Total	$	0.2	$	(2.7	)	$	(0.3	)	$	(2.8	)

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For the three months ended March 31, 2016
$ in millions	FTRs		Power			Natural Gas			Total
Change in unrealized gain / (loss)	$	0.1	$	(1.9	)	(0.2		)	$	(2.0	)
Realized gain / (loss)	0.2		(0.3		)	(0.2		)	(0.3		)
Total	$	0.3	$	(2.2	)	$	(0.4	)	$	(2.3	)
Recorded in Income Statement: gain / (loss)
Revenues	—		(1.4		)	—			(1.4		)
Purchased power	0.3		(0.8		)	(0.4		)	(0.9		)
Total	$	0.3	$	(2.2	)	$	(0.4	)	$	(2.3	)

DP&L has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements.



Fair Values of Derivative Instruments
at March 31, 2017
				Gross Amounts Not Offset in the Condensed Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Balance Sheets		Financial Instruments with Same Counterparty in Offsetting Position			Cash Collateral			Net Balance Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Forward power contracts	Designated	$	12.7	$	(8.6	)	$	—		$	4.1
Forward power contracts	Not designated	6.2		(5.5		)	—			0.7
Natural gas futures	Not designated	0.3		(0.2		)	—			0.1

Long-term derivative positions (presented in Other deferred assets)
Interest rate swaps	Designated	1.4		—			—			1.4
Forward power contracts	Not designated	0.1		(0.1		)	—			—
Total assets		$	20.7	$	(14.4	)	$	—		$	6.3

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Forward power contracts	Designated	$	9.7	$	(8.6	)	$	—		$	1.1
Interest rate swaps	Designated	0.3		—			—			0.3
Forward power contracts	Not designated	8.1		(5.5		)	(0.1		)	2.5
Natural gas futures	Not designated	0.2		(0.2		)	—			—

Long-term derivative positions (presented in Other deferred credits)
Forward power contracts	Designated	0.1		—			(0.1		)	—
Natural gas futures	Not designated	0.3		—			(0.3		)	—
Forward power contracts	Not designated	0.2		(0.1		)	—			0.1
Total liabilities		$	18.9	$	(14.4	)	$	(0.5	)	$	4.0

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The following table presents the fair value and balance sheet classification of DP&L’s derivative instruments at December 31, 2016:



Fair Values of Derivative Instruments
at December 31, 2016
				Gross Amounts Not Offset in the Condensed Balance Sheets
$ in millions	Hedging Designation	Gross Fair Value as presented in the Condensed Balance Sheets		Financial Instruments with Same Counterparty in Offsetting Position			Cash Collateral			Net Balance Fair Value
Assets
Short-term derivative positions (presented in Other prepayments and current assets)
Forward power contracts	Designated	$	11.0	$	(10.5	)	$	—		$	0.5
Forward power contracts	Not designated	6.0		(4.7		)	—			1.3
FTRs	Not designated	0.1		—			—			0.1

Long-term derivative positions (presented in Other deferred assets)
Interest rate swaps	Designated	1.2		—			—			1.2
Forward power contracts	Designated	0.6		(0.6		)	—			—
Forward power contracts	Not designated	1.9		(1.0		)	—			0.9
Total assets		$	20.8	$	(16.8	)	$	—		$	4.0

Liabilities
Short-term derivative positions (presented in Other current liabilities)
Forward power contracts	Designated	$	16.4	$	(10.5	)	$	(5.5	)	$	0.4
Interest rate swaps	Designated	0.7		—			—			0.7
Forward power contracts	Not designated	7.7		(4.7		)	—			3.0

Long-term derivative positions (presented in Other deferred credits)
Forward power contracts	Designated	2.4		(0.6		)	(0.8		)	1.0
Forward power contracts	Not designated	2.0		(1.0		)	—			1.0
Total liabilities		$	29.2	$	(16.8	)	$	(6.3	)	$	6.1

Credit risk-related contingent features

The aggregate fair value of DP&L’s commodity derivative instruments that were in a MTM loss position at March 31, 2017 was $18.9 million. $0.5 million of collateral was posted directly with third parties and in a broker margin account which offsets our loss positions on the forward contracts. This liability position is further offset by the asset position of counterparties with master netting agreements of $14.4 million. Since our debt is below investment grade, we could have to post collateral for the remaining $4.0 million.

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Note 7 – Debt

The following table provides a summary of DP&L's outstanding debt.



	Interest		March 31,			December 31,
$ in millions	Rate	Maturity	2017			2016
Term loan - rates from 4.01% - 4.04% (a) and 4.00% - 4.01% (b)		2022	$	443.9		$	445.0
Tax-exempt First Mortgage Bonds	4.8%	2036	100.0			100.0
Tax-exempt First Mortgage Bonds - rates from 1.52% - 1.53% (a) and 1.29% - 1.42% (b)		2020	200.0			200.0
U.S. Government note	4.2%	2061	17.9			18.0
Capital leases			0.4			0.4
Unamortized deferred financing costs			(11.5		)	(11.8		)
Unamortized debt discount			(2.0		)	(2.2		)
Total long-term debt			748.7			749.4
Less: current portion			(4.7		)	(4.7		)
Long-term debt, net of current portion			$	744.0		$	744.7

(a)Range of interest rates for the three months ended March 31, 2017.

(b)Range of interest rates for the year ended December 31, 2016.

Premiums or discounts are amortized over the remaining life of the debt using the effective interest method.

Debt covenants and restrictions

DP&L’s unsecured revolving credit agreement and Bond Purchase and Covenants Agreement have two financial covenants. The first measures Total Debt to Total Capitalization and is calculated, at the end of each fiscal quarter, by dividing total debt at the end of the quarter by total capitalization at the end of the quarter. The second financial covenant measures EBITDA to Interest Expense and is calculated at the end of each fiscal quarter by dividing EBITDA for the four prior fiscal quarters by the consolidated interest charges for the same period.

As of March 31, 2017, DP&L was in compliance with all debt covenants, including the financial covenants described above.

The cost of borrowing under DP&L's unsecured revolving credit agreement and Bond Purchase and Covenants Agreement adjusts under certain credit rating scenarios.

Substantially all property, plant & equipment of DP&L is subject to the lien of the mortgage securing DP&L’s First and Refunding Mortgage.

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Note 8 – Income Taxes

The following table details the effective tax rates for the three months ended March 31, 2017 and 2016.



	Three months ended
	March 31,
	2017	2016
DP&L	34.4%	26.9%

Income tax expense for the three months ended March 31, 2017 and 2016 was calculated using the estimated annual effective income tax rates for 2017 and 2016 of 33.8% and 27.0%, respectively. For the three months ended March 31, 2017 and 2016 management estimated the annual effective tax rate based on its forecast of annual pre-tax income. To the extent that actual pre-tax results for the year differ from the forecasts applied to the most recent interim period, the rates estimated could be materially different from the actual effective tax rates.

Note 9 – Benefit Plans

DP&L sponsors a defined benefit pension plan for the vast majority of its employees.

The net periodic benefit cost of the pension benefit plans for the three months ended March 31, 2017 and 2016 was:



Net Periodic Benefit Cost	Pension
	Three months ended
	March 31,
$ in millions	2017			2016
Service cost	$	1.4		$	1.4
Interest cost	3.6			3.7
Expected return on plan assets	(5.7		)	(5.7		)
Plan curtailment ^(a)	5.6			—
Amortization of unrecognized:
Prior service cost	0.5			0.8
Actuarial loss	2.2			1.8
Net periodic benefit cost	$	7.6		$	2.0


(a)	As a result of the decision to retire certain of DP&L's coal-fired plants, we recognized a plan curtailment of $5.6 million in the first quarter of 2017. See Note 14 – Fixed-asset Impairment for more information.

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Benefit payments, which reflect future service, are estimated to be paid as follows:



$ in millions
Estimated to be paid during the twelve months ending March 31,	Pension
2018	$	18.8
2019	25.5
2020	26.0
2021	26.4
2022	26.7
2023 - 2027	139.6

Note 10 – Shareholder’s Equity

DP&L has 250,000,000 authorized $0.01 par value common shares, of which 41,172,173 are outstanding at March 31, 2017. All common shares are held by DP&L’s parent, DPL.

As part of the PUCO’s approval of the Merger, DP&L agreed to maintain a capital structure that includes an equity ratio, calculated as total equity divided by total capitalization, of at least 50 percent and not to have a negative retained earnings balance. After the fixed-asset impairments recorded in 2017 and 2016 and as of March 31, 2017, DP&L's equity ratio was 30% and retained earnings balance was negative. It is unknown what impact, if any, this will have on DP&L. In the generation separation order dated September 17, 2014, the PUCO permitted DP&L to temporarily maintain long-term debt of $750.0 million or 75% of its rate base, whichever is greater, until January 1, 2018.

Note 11 – Contractual Obligations, Commercial Commitments and Contingencies

Equity Ownership Interest

Commercial Commitments and Contractual Obligations

Contingencies

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under various laws and regulations. We believe the amounts provided in our Condensed Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided as of March 31, 2017, cannot be reasonably determined.

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Environmental Matters

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 State Implementation Plans) 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 climate change;


•	Rules and future rules issued by the USEPA and the Ohio EPA that require or will require substantial reductions in SO₂, particulates, mercury, acid gases, NOx, and other air emissions. DP&L has installed emission control technology and is taking other measures to comply with required and anticipated reductions;


•	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 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. The majority of solid waste created from the combustion of coal and fossil fuels consists of fly ash and other coal combustion by-products.

Note 12 – Related Party Transactions

Service Company

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

Benefit plans

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The following table provides a summary of these transactions:



	Three months ended
	March 31,
$ in millions	2017			2016
DP&L Operation & Maintenance Expenses:
Premiums paid for insurance services provided by MVIC ^(a)	$	(0.8	)	$	(0.9	)
Transactions with the Service Company:
Charges for services provided	$	13.0		$	8.9
Charges to the Service Company	$	1.0		$	1.2
Transactions with other AES affiliates:
Charges for health, welfare and benefit plans	$	4.1		$	4.1


Balances with related parties:	At March 31, 2017			At December 31, 2016
Net payable to the Service Company	$	—		$	(2.0	)
Short-term loan with DPL ^(b)	$	—		$	5.0
Net prepayment with / (payable to) other AES affiliates	$	5.0		$	(2.5	)

(a)

MVIC, a wholly-owned captive insurance subsidiary of DPL, provides insurance coverage to DP&L and other DPL subsidiaries for workers’ compensation, general liability, property damages and directors’ and officers’ liability. These amounts represent insurance premiums paid by DP&L to MVIC. DP&L received insurance proceeds from MVIC of $0.0 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively.


(b)	On December 31, 2016, DPL loaned $5.0 million to DP&L through an intercompany short-term loan at 3.02%.

Income taxes

AES files federal and state income tax returns which consolidate DPL and its subsidiaries, including DP&L. Under a tax sharing agreement with DPL, DP&L is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. DP&L had net receivable balances of $23.7 million and $9.5 million at March 31, 2017 and December 31, 2016, respectively, which are recorded in Accounts receivable, net on the accompanying Balance Sheets on a gross basis.

Gain on termination of contract

On January 1, 2016, DPL closed on the sale of DPLER. Also on January 1, 2016, DP&L terminated the contract it had with DPLER for the supply of electricity. The agreement terminating the contract was signed on December 28, 2015 and DP&L received $27.7 million of restricted cash on December 31, 2015 for the early termination of the contract. For the three months ended March 31, 2016, this amount was recorded in Gain on termination of contract in the Condensed Statements of Operations and the cash received was included in Cash flows from operating activities in the Condensed Statements of Cash Flows.

Note 13 – Business Segments

During the fourth quarter of 2016, DP&L’s management reassessed the separate reportable business segments in connection with recent changes in the regulatory environment, including the pending ESP case, and in preparation for the anticipated transfer of DP&L’s generation assets to AES Ohio Generation. DP&L currently manages the business through two reportable operating segments, the T&D segment and the Generation segment. The primary segment performance measure is income / (loss) from operations before income tax as management has concluded that income / (loss) from operations before income tax best reflects the underlying business performance of DP&L and is the most relevant measure considered in DP&L’s internal evaluation of the financial performance of its segments. The segments are discussed further below:

Transmission and Distribution Segment

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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 our investment in OVEC and the historical results of DP&L’s Beckjord, Hutchings Coal, and East Bend generating facilities, which were either closed or sold in prior periods. As these assets will not be transferring to AES Ohio Generation when DP&L’s planned generation separation occurs, 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 DP&L’s electric generation business. Beginning in 2001, Ohio law gave consumers the right to choose the electric generation supplier from whom they purchase retail generation services. DP&L's generation segment owns multiple coal-fired and peaking electric generating facilities. DP&L's generation segment sells its generated energy and capacity into the wholesale market as DP&L sources all of the generation for its SSO customers through a competitive bid process.

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.

The following tables present financial information for each of DP&L’s reportable business segments:



$ in millions	T&D		Generation			Adjustments and Eliminations		DP&L Total
Three months ended March 31, 2017
Revenues from external customers	$	190.1	$	121.0		$	—	$	311.1
Intersegment revenues	—		—			—		—
Total revenues	$	190.1	$	121.0		$	—	$	311.1

Depreciation and amortization	$	18.1	$	5.4		$	—	$	23.5
Fixed-asset impairment (Note 14)	$	—	$	66.3		$	—	$	66.3
Interest expense	$	7.4	$	0.2		$	—	$	7.6
Income / (loss) from operations before income tax	$	25.0	$	(88.7	)	$	—	$	(63.7	)

Cash capital expenditures	$	26.3	$	7.8		$	—	$	34.1

At March 31, 2017
Total assets	$	1,680.9	$	209.0		$	—	$	1,889.9



$ in millions	T&D		Generation		Adjustments and Eliminations		DP&L Total
Three months ended March 31, 2016
Revenues from external customers	$	204.5	$	144.7	$	—	$	349.2
Intersegment revenues	—		—		—		—
Total revenues	$	204.5	$	144.7	$	—	$	349.2

Depreciation and amortization	$	17.2	$	17.1	$	—	$	34.3
Interest expense	$	5.2	$	0.1	$	—	$	5.3
Income from operations before income tax	$	34.4	$	11.7	$	—	$	46.1

Cash capital expenditures	$	24.1	$	11.7	$	—	$	35.8

At December 31, 2016
Total assets	$	1,710.5	$	324.6	$	—	$	2,035.1

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Note 14 – Fixed-asset Impairment

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Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

This report includes the combined filing of DPL and DP&L. On November 28, 2011, DPL became 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.

The following discussion contains forward-looking statements and should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related footnotes of DPL and the Condensed Financial Statements and related footnotes of DP&L included in Part I – Financial Information, the risk factors in Item 1A to Part I of our Form 10-K for the fiscal year ended December 31, 2016 and in Item 1A to Part II of this Quarterly Report on Form 10-Q, and our “Forward-Looking Statements” section of this Form 10-Q. For a list of certain abbreviations or acronyms in this discussion, see the Glossary at the beginning of this Form 10-Q.

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


▪	DP&L - T&D Segment


▪	DP&L - Generation Segment


•	Key Trends and Uncertainties


•	Capital Resources and Liquidity


•	Critical Accounting Estimates

REGULATORY ENVIRONMENT

DPL’s, DP&L’s and our subsidiaries’ facilities and operations are subject to a wide range of regulations and laws by federal, state and local authorities. As well as imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at these facilities and operations in an effort to comply, or to determine compliance, with such regulations. We record liabilities for losses that are probable and can be reasonably estimated. See Note 10 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL’s Condensed Consolidated Financial Statements and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DP&L’s Condensed Financial Statements. In addition to matters discussed or updated herein, our Form 10-K previously filed with the SEC during 2017 describes other regulatory matters which have not materially changed since that filing.

ENVIRONMENTAL MATTERS

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 and operations 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 as of March 31, 2017. We have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable or cannot be reasonably estimated. Of these, those that we believe are most likely to have a material effect are disclosed in our 2016 10-K. We evaluate the potential liability related to environmental matters quarterly and may revise our accruals. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows.

We have several pending environmental matters associated with our EGUs and stations. Some of these matters could have material adverse effects on the operation of such EGUs and stations or our financial condition.

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As a result of DP&L’s decision to retire its Stuart and Killen Generating stations in 2018, the following environmental regulations and requirements are not expected to have a material impact on either of the two 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; and


•	revised technology-based regulations governing water discharges from steam electric generating facilities, finalized by the USEPA on November 3, 2015.

PJM PRICING

Capacity Auction Price

The PJM capacity base residual auction for the 2019/20 period cleared at a per megawatt price of $100/MW-day for our RTO area. The per megawatt prices for the periods 2018/19, 2017/18, 2016/17 and 2015/16 were $165/MW-day, $152/MW-day, $134/MW-day and $136/MW-day, respectively, based on previous auctions. As discussed in our Form 10-K, a new CP program has been approved by the FERC, which will phase out RPM as of the 2018/19 period. We cannot predict the outcome of future auctions but based on actual results attained, we estimate that a hypothetical increase or decrease of $10/MW-day in the capacity auction price would result in an annual impact to net income of approximately $5.5 million and $4.7 million for DPL and DP&L, respectively. These estimates do not, however, take into consideration the other factors that may affect the impact of capacity revenues and costs on net income such as our generation capacity and the levels of wholesale revenues. These estimates are discussed further within Commodity Pricing Risk under the Market Risk section of this Management Discussion & Analysis.

OHIO COMPETITION AND REGULATORY PROCEEDINGS

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 provide retail generation service to customers that do not choose an alternative supplier; however, the supply of electricity for DP&L’s SSO customers is all sourced through competitive bid as of January 2016. The PUCO maintains jurisdiction over DP&L’s delivery of electricity, SSO and other retail electric services.

On November 30, 2015, DP&L filed a distribution rate case 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 $65.0 million per year. DP&L has asked for recovery of certain regulatory assets as well as two new riders that would allow DP&L to recover certain costs on an ongoing basis. It has proposed a modified rate design, which would increase the monthly customer charge, in an effort to decouple distribution revenues from electric sales. If approved as filed, the rates are expected to have an effect of approximately 4% on a typical residential customer bill based on rates in effect at the time of the filing.

Ohio law requires that all Ohio distribution utilities file either an ESP or MRO to establish rates for SSO service.

For a discussion of the current status of DP&L's ESPs, please see Note 3 – Regulatory Matters of Notes to DPL's Condensed Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Condensed Financial Statements.

Ohio law and 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 targets. In 2016, DP&L filed a new energy efficiency portfolio plan for the years 2017 through 2019. Ultimately, DP&L entered into a settlement agreement (which is subject to PUCO approval), under which it has agreed to an extension of its current plan with slight changes through 2017 and has agreed to file a plan by June 2017 for programs in years 2018 through 2020.

DP&L and AES Ohio Generation have 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. At this time we are unable to predict if the Settlement will be approved or what the final approved rates will be, although we do not expect the changes from current reactive power rates to be material. Additionally, the FERC has referred to FERC’s Office of Enforcement for investigation of an issue regarding reactive power charges under the previously effective rates in light of changes in DP&L’s generation portfolio. DP&L's reactive power rates were 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

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investigated by FERC’s Office of Enforcement on the same issue of changes in the generation portfolio that occurred in between rate proceedings.

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RESULTS OF OPERATIONS – DPL

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.

Income Statement Highlights – DPL



	Three months ended March 31,
$ in millions	2017			2016
Revenues:
Retail	$	171.9		$	187.2
Wholesale	103.1			122.4
RTO revenues	14.0			15.6
RTO capacity revenues	32.1			36.5
Other revenues	2.8			2.3
Total revenues	323.9			364.0
Cost of revenues:
Fuel costs	54.4			68.6
Gains from the sale of coal	(0.3		)	(1.7		)
Total fuel	54.1			66.9

Purchased power	77.4			91.2
RTO charges	21.1			20.8
RTO capacity charges	3.2			8.4
Mark-to-market losses	0.3			1.5
Total purchased power	102.0			121.9

Total cost of revenues	156.1			188.8

Gross margin	167.8			175.2

Operating expenses:
Operation and maintenance	86.3			88.5
Depreciation and amortization	28.0			33.4
General taxes	24.2			21.0
Fixed asset impairment	66.4			—
Loss on asset disposal	19.4			0.1
Other	(1.2		)	—
Total operating expenses	223.1			143.0

Operating income / (loss)	(55.3		)	32.2
Other income / (expense), net:
Investment income / (loss)	—			(0.1		)
Interest expense	(26.9		)	(26.3		)
Charge for early retirement of debt	—			(2.6		)
Other deductions	(1.0		)	(0.4		)
Total other expense, net	(27.9		)	(29.4		)

Income / (loss) from continuing operations before income tax (a)	$	(83.2	)	$	2.8


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

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DPL – Revenues

Retail customers, especially residential and commercial customers, consume more electricity during warmer and colder weather than they do during mild temperatures. Therefore, our retail sales volume is impacted by the number of heating and cooling degree days occurring during a year. Cooling degree days typically have a more significant impact than heating degree days since some residential customers do not use electricity to heat their homes.

(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 difference of the average actual daily temperature 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. In a similar manner, cooling degrees in a day are the difference of the average actual daily temperature in excess of 65 degrees Fahrenheit.

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; and weather conditions across the multi-state region. Our goal is to make wholesale sales when it is profitable to do so.

The following table provides a summary of changes in revenues compared to the same period in the prior year:



	Three months ended
	March 31,
$ in millions	2017 v 2016
Retail
Rate	$	(4.7	)
Volume	(14.0		)
Other miscellaneous	3.4
Total retail change	(15.3		)

Wholesale
Rate	(11.3		)
Volume	(8.0		)
Total wholesale change	(19.3		)

RTO revenues and RTO capacity revenues
RTO revenues and RTO capacity revenues	(6.0		)

Other
Other revenues	0.5

Total revenues change	$	(40.1	)

During the three months ended March 31, 2017, Revenues decreased $40.1 million to $323.9 million from $364.0 million in the same period of the prior year. This decrease was primarily the result of lower average retail and wholesale rates, lower retail and wholesale volumes, and lower RTO revenues and RTO capacity revenues. The changes in the components of revenue are discussed below:


•	Retail revenues decreased $15.3 million primarily due to lower DP&L retail volumes and lower average DP&L retail rates. The decrease in retail volume was primarily driven by warmer weather in 2017 as heating degree days decreased by 284 degree days. The decrease in average retail rates was primarily

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driven by the reversion back to ESP 1 rates in September of 2016, collections on the remaining 2015 deferred fuel balance in the first quarter of 2016, and a decrease in the USF revenue rate rider, partially offset by increased revenue associated with energy efficiency programs recorded in 2017. The aforementioned impacts resulted in an unfavorable $14.0 million retail volume variance and an unfavorable $4.7 million retail price variance. In addition, there was a favorable other miscellaneous variance of $3.4 million.

•

Wholesale revenues decreased $19.3 million primarily as a result of an unfavorable $11.3 million wholesale price variance and an unfavorable $8.0 million wholesale volume variance. Despite year over year increases in PJM market prices, our average wholesale rates decreased due to higher rates on contracted sales to serve the load of other parties in 2016 as well as hedged transactions in both years. The decrease in wholesale volumes of $8.0 million was primarily driven by a decrease in the load served of other parties through their competitive bid process and a 2% decrease in internal generation at DPL's plants in 2017.

•

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 capacity payments under the RPM construct, decreased $6.0 million compared to same period in the prior year. This decrease was the result of a $4.4 million decrease in revenue realized from the PJM capacity auction in 2017 primarily due to 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 of 2015. There was also a $1.6 million decrease in RTO transmission and congestion revenue, as 2017 congestion revenue charges were lower due to milder winter weather in 2017 than 2016.

DPL – Cost of Revenues

During the three months ended March 31, 2017, Cost of revenues decreased $32.7 million compared to the same period in the prior year:

•

Net fuel costs, which include coal, gas, oil and emission allowance costs, decreased $12.8 million compared to the same period in the prior year primarily due to a 19% decrease in average fuel cost per MWh and a 2% decrease in internal generation. In addition, there were fuel costs deferred in 2015, which were expensed in 2016 because they were collected in 2016. There were no fuel costs deferred or collected in the first quarter of 2017.


•	Net purchased power decreased $19.9 million compared to the same period in the prior year. This decrease was driven by the following factors:


◦	Purchased power decreased $13.8 million primarily due to a $13.9 million volume decrease 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.

◦

RTO charges increased $0.3 million compared to the same period in the prior year. 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 $5.2 million compared to the same period in 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 in the revenue section above, RTO capacity prices are set by an annual auction.


◦	Mark-to-market losses decreased $1.2 million due to less significant changes in power prices in 2017.

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DPL – Operation and Maintenance

During the three months ended March 31, 2017, Operation and Maintenance expense decreased $2.2 million compared to the prior year. This decrease was a result of:



	Three months ended
	March 31,
$ in millions	2017 v 2016
Decrease in uncollectible expenses for the low-income payment program, which is funded by the USF revenue rate rider ^(a)	$	(7.1	)
Increase in retirement benefits costs, primarily due to pension curtailment charges associated with announced plant closures	4.7
Other, net	0.2
Net change in operation and maintenance expense	$	(2.2	)


(a)	There is a corresponding offset in Revenues associated with these programs.

DPL – Depreciation and Amortization

During the three months ended March 31, 2017, Depreciation and amortization expense decreased $5.4 million compared to the same period in 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.

DPL – General Taxes

During the three months ended March 31, 2017, General taxes increased $3.2 million compared to the same period in the prior year. The increase was primarily the result of lower expense in 2016 due to a $1.6 million true-up of the 2015 Ohio property tax accrual to reflect actual payments made in 2016 and an adjustment to the 2016 accrual to reflect a lower estimated 2016 liability.

DPL – Fixed-asset Impairment

During the three months ended March 31, 2017, DPL recorded an impairment of fixed assets of $66.4 million. DPL recognized asset impairment expense of $39.1 million and $27.3 million for Stuart Station and Killen Station, respectively. For more information, see Note 14 – Fixed-asset Impairment of Notes to DPL's Condensed Consolidated Financial Statements.

DPL – Loss on Asset Disposal

During the three months ended March 31, 2017, DPL recorded a loss on asset disposal of $19.4 million primarily due to a $16.2 million write-off of plant materials and supplies inventory at the Stuart and Killen plants and a $3.2 million net loss recorded on the disposal of assets related to the high pressure feedwater heater shell failure on Unit 1 at Stuart station.

DPL – Other

During the three months ended March 31, 2017, DPL recorded $1.2 million of insurance proceeds in Other.

DPL – Charge for Early Redemption of Debt

During the three months ended March 31, 2017, Charge for early redemption of debt decreased $2.6 million primarily due to the February 2016 make-whole premium associated with the early retirement of $73.0 million of the 6.5% Senior Notes due in 2016.

DPL – Income Tax Expense

During the three months ended March 31, 2017, Income tax expense decreased $32.1 million compared to the same period in the prior year primarily due to a pre-tax loss in the current year.

RESULTS OF OPERATIONS BY SEGMENT – DPL Inc.

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performance measure is income / (loss) from continuing operations before income tax as management has concluded that income / (loss) from continuing operations before income tax 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 520,000 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 our investment in OVEC and the historical results of DP&L’s Beckjord, Hutchings Coal, and East Bend generating facilities, which were either closed or sold in prior periods. As these assets will not be transferring to AES Ohio Generation when DP&L’s planned generation separation occurs, 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

Management evaluates segment performance based on income / (loss) from continuing operations before income tax. See Note 12 – Business Segments of Notes to DPL’s Condensed Consolidated Financial Statements for additional information regarding DPL’s reportable segments.

The following table presents DPL’s Income / (loss) from continuing operations before income tax by business segment:



	Three months ended March 31,
$ in millions	2017			2016
T&D	$	25.0		$	34.2
Generation	(86.8		)	(12.3		)
Other	(21.4		)	(19.1		)
Income / (loss) from continuing operations before income tax	$	(83.2	)	$	2.8

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Statement of Operations Highlights – DPL Inc. – T&D Segment



	Three months ended March 31,
$ in millions	2017			2016
Revenues:
Retail	$	172.2		$	187.5
Wholesale	5.1			3.6
RTO revenues	11.5			11.3
RTO capacity revenues	1.3			2.1
Total revenues	190.1			204.5

Cost of revenues:

Net fuel cost	—			5.3

Purchased power:
Purchased power	66.7			65.9
RTO charges	14.4			15.0
RTO capacity charges	—			(0.7		)
Total purchased power	81.1			80.2

Total cost of revenues	81.1			85.5

Gross margin	109.0			119.0

Operating expenses:
Operation and maintenance	38.8			46.3
Depreciation and amortization	18.1			17.2
General taxes	18.9			15.6
Loss on asset disposal	—			0.1
Total operating expenses	75.8			79.2

Operating income	33.2			39.8

Other expense, net
Interest expense	(7.4		)	(5.4		)
Other expense	(0.8		)	(0.2		)
Total other expense, net	(8.2		)	(5.6		)

Income from continuing operations before income tax (a)	$	25.0		$	34.2


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

T&D Segment – Revenues

During the three months ended March 31, 2017, the segment’s revenues decreased $14.4 million to $190.1 million from $204.5 million in the same period of the prior year. This decrease was primarily the result of lower retail volumes, lower average retail rates, and lower RTO capacity and other revenues, partially offset by higher wholesale revenues.

•

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deferred fuel balance in the first quarter of 2016, and a decrease in the USF revenue rate rider, partially offset by increased revenue associated with energy efficiency programs recorded in 2017. The aforementioned impacts resulted in an unfavorable $14.0 million retail volume variance and an unfavorable $4.7 million retail price variance. In addition, there was a favorable other miscellaneous variance of $3.4 million.


•	Wholesale revenues increased $1.5 million. These revenues, included in the T&D segment, consist of our 4.9% share of the generation output of OVEC, which is sold into PJM at market prices. As such, the increase in wholesale revenue is due to increased OVEC revenue.


•	RTO capacity and other revenues decreased $0.6 million compared to the same period in the prior year.

T&D Segment – Cost of Revenues

During the three months ended March 31, 2017, Total cost of revenues decreased $4.4 million compared to the prior year. This decrease was a result of:


•	Net fuel costs, which include expense recognition or deferral coinciding with the collection of fuel costs through the regulatory fuel deferral, decreased $5.3 million compared to the prior year primarily due to fuel costs deferred in 2015, being collected in 2016. There were no fuel costs deferred or collected in the first quarter of 2017.


•	Net purchased power increased $0.9 million compared to the prior year. This was driven by the following factors:


◦	Purchased power increased $0.8 million compared to the same period in the prior year primarily due to an unfavorable price variance, partially offset by lower volumes due to the decrease in DP&L retail demand in 2017.


◦	RTO capacity and other charges increased $0.1 million compared to the same period in the prior year.

T&D Segment – Operating Expenses

Operating expenses decreased $3.4 million during the three months ended March 31, 2017 compared to the same period in the prior year. The main drivers of these changes are in the following table:



	Three months ended March 31,
$ in millions	2017 v 2016
Decrease in uncollectible expenses for the low-income payment program, which is funded by the USF revenue rate rider ^(a)	$	(7.5	)
Increase in General taxes	3.3
Increase in retirement benefits costs	1.4
Increase in Depreciation and amortization	0.9
Other, net	(1.5		)
Net change in operating expenses	$	(3.4	)


(a)	There is corresponding revenue associated with this program resulting in no impact to Net income.

T&D Segment – Interest Expense

During the three months ended March 31, 2017, Interest expense increased $2.0 million compared to the same period in the prior year primarily driven by higher interest rates on the $445.0 million variable rate Term Loan B maturing on August 24, 2022 compared to the interest rate on the 1.875% First Mortgage Bonds Due 2016.

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Statement of Operations Highlights – DPL Inc. – Generation Segment



	Three months ended March 31,
$ in millions	2017			2016
Revenues:
Wholesale	$	98.5		$	119.4
RTO revenues	2.5			4.3
RTO capacity revenues	30.8			34.4
Other mark-to-market gains	—			0.1
Total revenues	131.8			158.2

Cost of revenues:
Cost of fuel:
Fuel costs	54.4			63.0
Gains from the sale of coal	(0.3		)	(1.4		)
Net fuel costs	54.1			61.6

Purchased power:
Purchased power	10.7			25.9
RTO charges	6.7			5.8
RTO capacity charges	3.2			9.1
Mark-to-market losses	0.3			1.6
Net purchased power	20.9			42.4

Total cost of revenues	75.0			104.0

Gross margin	56.8			54.2

Operating expenses:
Operation and maintenance	46.9			42.4
Depreciation and amortization	7.0			18.6
General taxes	5.2			5.4
Fixed asset impairment	66.3			—
Loss on asset disposal	19.4			—
Other	(1.2		)	—
Total operating expenses	143.6			66.4

Operating loss	(86.8		)	(12.2		)

Other expense, net
Interest expense	—			(0.1		)
Total other expense, net	—			(0.1		)

Loss from continuing operations before income tax (a)	$	(86.8	)	$	(12.3	)


(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.

Generation Segment – Revenues

During the three months ended March 31, 2017, the segment’s revenues decreased $26.4 million to $131.8 million from $158.2 million in the same period of the prior year. This decrease was primarily the result of lower wholesale volumes and rates and lower RTO capacity and other revenues.

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•

Wholesale revenues decreased $20.9 million primarily as a result of an unfavorable wholesale volume variance of $12.4 million and an unfavorable wholesale price variance of $8.5 million. The decrease in wholesale volumes was primarily driven by a decrease in the load served of other parties through their competitive bid process and by a 2% decrease in internal generation at DPL's plants in 2017 compared to the prior year. The decrease in wholesale rates, despite year over year increases in PJM market prices, was due to higher rates on contracted sales to serve the load of other parties in 2016 as well as hedged transactions in both years.

•

RTO capacity and other revenues, consisting primarily of PJM capacity revenues, regulation services, reactive supply and operating reserves, decreased $5.4 million compared to the same period in the prior year. Revenues realized from the PJM capacity auction in 2017 decreased $3.6 million primarily due to 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 of 2015. There was also a $1.8 million decrease in other RTO revenues.

Generation Segment – Cost of Revenues

During the three months ended March 31, 2017, Total cost of revenues decreased $29.0 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 $7.5 million compared to the same period in the prior year primarily due to a 19% decrease in average fuel cost per MWh and a 2% decrease in internal generation.


•	Net purchased power decreased $21.5 million compared to the prior year. This decrease was driven by the following factors:

◦

Purchased power decreased $15.2 million primarily due to a favorable volume variance of $16.6 million, partially offset by an unfavorable price variance of $1.4 million. The decrease in volume was driven by a lower load served of other parties through their competitive bid process in 2016. 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 increased $0.9 million compared to the same period in the prior year.

◦

RTO capacity charges decreased $5.9 million compared to the same period in 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 in the revenue section above, RTO capacity prices are set by an annual auction.


◦	Mark-to-market losses decreased $1.3 million due to less significant changes in power prices in 2017 causing less significant losses on derivative forward power purchase contracts.

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Generation Segment – Operating Expenses

Operating expenses increased $77.2 million during the three months ended March 31, 2017 compared to the same period in the prior year. The main drivers of these changes are in the following table:



	Three months ended March 31,
$ in millions	2017 v 2016
Fixed-asset impairment in 2017 ^(a)	$	66.3
Loss on asset disposal due to the write-off of plant materials and supplies inventory at the Stuart and Killen plants and the net loss recorded on the disposal of assets related to the high pressure feedwater heater shell failure on Unit 1 at Stuart station	19.4
Increase in retirement benefits costs, primarily due to pension curtailment charges associated with announced plant closures	5.8
Decrease in Depreciation and amortization expense as 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	(11.6		)
Insurance proceeds related to plant outage	(1.2		)
Other, net	(1.5		)
Net change in operating expenses	$	77.2


(a)	During the three months ended March 31, 2017, the Generation segment recorded an impairment of fixed assets of $66.3 million. The Generation segment recognized asset impairment expense of $39.0 million and $27.3 million for Stuart Station and Killen Station, respectively. For more information, see Note 14 – Fixed-asset Impairment of Notes to DPL's Condensed Consolidated Financial Statements.

Generation Segment – Interest Expense

During the three months ended March 31, 2017, Interest expense decreased $0.1 million compared to the same period in the prior year.

In the generation separation order dated September 17, 2014, the PUCO permitted DP&L, upon transfer of the generation assets to AES Ohio Generation, to temporarily maintain long-term debt of $750.0 million or 75% of its rate base, whichever is greater, until January 1, 2018. For segment purposes, $750.0 million of debt and the pro rata interest expense associated with that debt has been allocated to the T&D segment. All remaining debt and interest expense has been included in the Generation segment.

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RESULTS OF OPERATIONS – DP&L

Income Statement Highlights – DP&L



	Three months ended March 31,
$ in millions	2017			2016
Revenues:
Retail	$	172.2		$	187.5
Wholesale	98.5			117.4
RTO revenues	13.3			14.5
RTO capacity revenues	27.1			29.7
Other mark-to-market gains	—			0.1
Total revenues	311.1			349.2
Cost of revenues:
Fuel costs	50.4			64.6
Gains from the sale of coal	(0.3		)	(1.7		)
Total fuel	50.1			62.9

Purchased power	77.0			91.4
RTO charges	20.6			20.3
RTO capacity charges	2.9			8.1
Mark-to-market losses	0.3			1.5
Total purchased power	100.8			121.3

Total cost of revenues	150.9			184.2

Gross margin	160.2			165.0

Operating expenses:
Operation and maintenance	82.6			86.1
Depreciation and amortization	23.5			34.3
General taxes	23.6			20.5
Gain on termination of contract	—			(27.7		)
Fixed-asset impairment	66.3			—
Loss on asset disposal	19.4			0.1
Total operating expenses	215.4			113.3

Operating income	(55.2		)	51.7

Other expense, net
Investment loss	—			(0.1		)
Interest expense	(7.6		)	(5.3		)
Other expense	(0.9		)	(0.2		)
Total other expense, net	(8.5		)	(5.6		)

Income / (loss) from operations before income tax (a)	$	(63.7	)	$	46.1


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

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DP&L – Revenues

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DP&L’s wholesale sales volume each hour throughout the year include: wholesale market prices, retail demand throughout the entire wholesale market area, DP&L and non-DP&L plants’ availability to sell into the wholesale market and weather conditions across the multi-state region. DP&L’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities.

The following table provides a summary of changes in revenues compared to the same period in the prior year:



	Three months ended
	March 31,
$ in millions	2017 v 2016
Retail
Rate	$	(4.7	)
Volume	(14.0		)
Other miscellaneous	3.4
Total retail change	(15.3		)

Wholesale
Rate	(12.6		)
Volume	(6.3		)
Total wholesale change	(18.9		)

RTO revenues and RTO capacity revenues
RTO revenues and RTO capacity revenues	(3.8		)

Other
Unrealized MTM	(0.1		)

Total revenues change	$	(38.1	)

During the three months ended March 31, 2017, Revenues decreased $38.1 million to $311.1 million from $349.2 million in the same period in the prior year. This decrease was primarily the result of lower average retail and wholesale rates, lower retail and wholesale volumes, and lower RTO revenues and RTO capacity revenues. The changes in the components of revenue are discussed below:

•

Retail revenues decreased $15.3 million primarily due to lower DP&L retail volumes and lower average DP&L retail rates. The decrease in retail volume was primarily driven by warmer weather in 2017 as heating degree days decreased by 284 degree days. The decrease in average retail rates was primarily driven by the reversion back to ESP 1 rates in September of 2016, collections on the remaining 2015 deferred fuel balance in the first quarter of 2016, and a decrease in the USF revenue rate rider, partially offset by increased revenue associated with energy efficiency programs recorded in 2017. The aforementioned impacts resulted in an unfavorable $14.0 million retail volume variance and an unfavorable $4.7 million retail price variance. In addition, there was a favorable other miscellaneous variance of $3.4 million.

•

Wholesale revenues decreased $18.9 million primarily as a result of an unfavorable $12.6 million wholesale price variance and an unfavorable $6.3 million wholesale volume variance. The decrease in wholesale rates of $12.6 million was primarily driven by lower contracted rates in 2017 and higher rates on sales to serve the load of other parties through their competitive bid process in 2016. The decrease in wholesale

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volumes of $6.3 million was primarily driven by a decrease in the load served of other parties through their competitive bid process in 2017.

•

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 capacity payments under the RPM construct, decreased $3.8 million. This decrease was the result of a $1.2 million decrease in RTO transmission and congestion revenue, as 2016 congestion revenue charges were higher due to milder winter weather in 2017 than 2016. There was also a $2.6 million decrease in revenue realized from the PJM capacity auction in 2017 primarily due to 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 of 2015.

DP&L – Cost of Revenues

During the three months ended March 31, 2017, Cost of revenues decreased $33.3 million compared to the same period in the prior year:


•	Net fuel costs, which include coal, gas, oil and emission allowance costs, decreased $12.8 million, compared to the same period in the prior year primarily due to a 21% decrease in average fuel cost per MWh and due to fuel costs deferred in 2015, being collected in 2016. There were no fuel costs deferred or collected in the first quarter of 2017.


•	Net purchased power decreased $20.5 million compared to the prior year. This decrease was driven by the following factors:


◦	Purchased power decreased $14.4 million primarily due to a $13.9 million volume decrease driven by the decrease in DP&L retail demand in 2017 and a lower load served of other parties through their competitive bid process in 2016. In addition, there was a favorable price variance of $0.5 million due to lower prices in the competitive bid process.

◦


◦	Mark-to-market losses decreased $1.2 million compared to the same period in the prior year due to less significant changes in power prices in 2017.

DP&L – Operation and Maintenance

During the three months ended March 31, 2017, Operation and Maintenance expense decreased $3.5 million compared to the prior year. This decrease was a result of:



	Three months ended
	March 31,
$ in millions	2017 v 2016
Decrease in uncollectible expenses for the low-income payment program, which is funded by the USF revenue rate rider ^(a)	$	(7.1	)
Increase in retirement benefits costs, primarily due to pension curtailment charges associated with announced plant closures	6.3
Other, net	(2.7		)
Net change in operation and maintenance expense	$	(3.5	)


(a)	There is a corresponding offset in Revenues associated with these programs.

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DP&L – Depreciation and Amortization

During the three months ended March 31, 2017, Depreciation and amortization expense decreased $10.8 million compared to the same period in 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.

DP&L – General Taxes

During the three months ended March 31, 2017, General taxes increased $3.1 million compared to the same period in the prior year. The increase was primarily the result of lower expense in 2016 due to a $1.6 million true-up of the 2015 Ohio property tax accrual to reflect actual payments made in 2016 and an adjustment to the 2016 accrual to reflect a lower estimated 2016 liability.

DP&L – Gain on Termination of Contract

During the three months ended March 31, 2016, DP&L recorded $27.7 million related to the termination of a contract DP&L had with DPLER for the supply of electricity.

DP&L – Fixed-asset Impairment

During the three months ended March 31, 2017, DP&L recorded an impairment of fixed assets of $66.3 million. DP&L recognized asset impairment expense of $39.0 million and $27.3 million for Stuart Station and Killen Station, respectively. For more information, see Note 14 – Fixed-asset Impairment of Notes to DP&L's Condensed Financial Statements.

DP&L – Loss on Asset Disposal

During the three months ended March 31, 2017, DP&L recorded a loss on asset disposal of $19.4 million primarily due to a $16.2 million write-off of plant materials and supplies inventory at the Stuart and Killen plants and a $3.2 million net loss recorded on the disposal of assets related to the high pressure feedwater heater shell failure on Unit 1 at Stuart station.

DP&L – Interest Expense

During the three months ended March 31, 2017, Interest expense increased $2.3 million compared to the same period in the prior year primarily driven by higher interest rates on the $445.0 million variable rate Term Loan B maturing on August 24, 2022 compared to the interest rate on the 1.875% First Mortgage Bonds Due 2016.

DP&L – Income Tax Expense

During the three months ended March 31, 2017, Income tax expense decreased $34.3 million compared to the same period in the prior year primarily due to a pre-tax loss in the current year.

RESULTS OF OPERATIONS BY SEGMENT – DP&L

Transmission and Distribution Segment

The segment description and the results of operations of the T&D segment for DP&L are identical in all material respects and for all periods presented to those of the T&D segment for DPL, which are included above in this Form 10-Q. We do not believe that additional discussions of the results of operations of DP&L’s T&D segment would enhance an understanding of this business since these discussions are already included under the DPL discussions above.

Generation Segment

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DP&L's generation segment owns multiple coal-fired and peaking electric generating facilities. DP&L's generation segment sells its generated energy and capacity into the wholesale market as DP&L sources all of the generation for its SSO customers through a competitive bid process.

Management evaluates segment performance based on income / (loss) from operations before income tax. See Note 13 – Business Segments of Notes to DP&L’s Condensed Financial Statements for additional information regarding DP&L’s reportable segments.

The following table presents DP&L’s Income / (loss) from operations before income tax by business segment:



	Three months ended March 31,
$ in millions	2017			2016
T&D	$	25.0		$	34.4
Generation	(88.7		)	11.7
Income / (loss) from operations before income tax	$	(63.7	)	$	46.1

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Statement of Operations Highlights – DP&L – Generation Segment



	Three months ended March 31,
$ in millions	2017			2016
Revenues:
Wholesale	93.4			113.8
RTO revenues	1.8			3.2
RTO capacity revenues	25.8			27.6
Other mark-to-market gains	—			0.1
Total revenues	121.0			144.7

Cost of revenues:
Cost of fuel:
Fuel costs	50.4			59.0
Gains from the sale of coal	(0.3		)	(1.4		)
Net fuel costs	50.1			57.6

Purchased power:
Purchased power	10.3			25.5
RTO charges	6.2			5.3
RTO capacity charges	2.9			8.8
Mark-to-market losses	0.3			1.5
Net purchased power	19.7			41.1

Total cost of revenues	69.8			98.7

Gross margin	51.2			46.0

Operating expenses:
Operation and maintenance	43.8			39.8
Depreciation and amortization	5.4			17.1
General taxes	4.7			4.9
Gain on termination of contract	—			(27.7		)
Fixed asset impairment	66.3			—
Loss on asset disposal	19.4			—
Total operating expenses	139.6			34.1

Operating income	(88.4		)	11.9

Other expense, net
Investment loss	—			(0.1		)
Interest expense	(0.2		)	(0.1		)
Other expense	(0.1		)	—
Total other expense, net	(0.3		)	(0.2		)

income / (loss) from continuing operations before income tax (a)	$	(88.7	)	$	11.7


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

Generation Segment – Revenues

During the three months ended March 31, 2017, the segment’s revenues decreased $23.7 million to $121.0 million from $144.7 million in the same period of the prior year. This decrease was primarily the result of lower wholesale volumes and rates and lower RTO capacity and other revenues.

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•

Wholesale revenues decreased $20.4 million primarily as a result of an unfavorable wholesale volume variance of $10.7 million and an unfavorable wholesale price variance of $9.7 million. The decrease in wholesale volumes was primarily driven by a decrease in the load served of other parties through their competitive bid process in 2017 compared to the prior year. The decrease in wholesale rates, despite year over year increases in PJM market prices, was due to higher rates on contracted sales to serve the load of other parties in 2016 as well as hedged transactions in both years.

•

RTO capacity and other revenues decreased $3.2 million compared to same period in the prior year. This decrease was the result of a $1.8 million decrease in revenue realized from the PJM capacity auction in 2017 due to 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 of 2015. There was also a $1.4 million decrease in other RTO revenues.

Generation Segment – Cost of Revenues

During the three months ended March 31, 2017, Total cost of revenues decreased $28.9 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 $7.5 million compared to the same period in the prior year primarily due to a 21% decrease in average fuel cost per MWh.


•	Net purchased power decreased $21.4 million compared to the prior year. This decrease was driven by the following factors:

◦

Purchased power decreased $15.2 million primarily due to a favorable volume variance of $16.9 million, partially offset by an unfavorable price variance of $1.7 million. The decrease in volume was driven by a lower load served of other parties through their competitive bid process in 2016. 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 increased $0.9 million compared to the same period in the prior year.

◦


◦	Mark-to-market losses decreased $1.2 million due to less significant changes in power prices in 2017 causing less significant losses on derivative forward power purchase contracts.

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Generation Segment – Operating Expenses

Operating expenses increased $105.5 million during the three months ended March 31, 2017, compared to the same period in the prior year. The main drivers of these changes are in the following table:



	Three months ended March 31,
$ in millions	2017 v 2016
Fixed-asset impairment in 2017 ^(a)	$	66.3
Gain on termination of contract in 2016	27.7
Loss on asset disposal due to the write-off of plant materials and supplies inventory at the Stuart and Killen plants and the net loss recorded on the disposal of assets related to the high pressure feedwater heater shell failure on Unit 1 at Stuart station	19.4
Increase in retirement benefits costs, primarily due to pension curtailment charges associated with announced plant closures	5.9
Decrease in Depreciation and amortization expense as 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	(11.7		)
Other, net	(2.1		)
Net change in operating expenses	$	105.5


(a)	During the three months ended March 31, 2017, the Generation segment recorded an impairment of fixed assets of $66.3 million. The Generation segment recognized an asset impairment expense of $39.0 million and $27.3 million for Stuart Station and Killen Station, respectively. For more information, see Note 14 – Fixed-asset Impairment of Notes to DP&L's Condensed Financial Statements.

Generation Segment – Interest Expense

During the three months ended March 31, 2017, Interest expense increased $0.1 million compared to the same period in the prior year.

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KEY TRENDS AND UNCERTAINTIES

During the remainder of 2017 and beyond, we expect that our financial results will be driven primarily by retail demand, weather, energy efficiency and wholesale prices on financial results. In addition, DPL's and DP&L's financial results are likely to be driven by many factors including, but not limited to:


•	PJM capacity prices;


•	Outcome of DP&L's pending ESP 3 case, including the amount of non-bypassable revenue;


•	Outcome of DP&L's pending distribution rate case;


•	Operational performance of generation facilities;


•	Recovery in the power market, particularly as it relates to an expansion in dark spreads;


•	Sale or transfer of DP&L generation assets; and


•	DPL's ability to reduce its cost structure.

Operational

On March 17, 2017, the Board of Directors of DP&L approved the retirement of the 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 on or before June 1, 2018, and DP&L agreed with the co-owners of these facilities to proceed with this plan of retirement. In the first quarter of 2017, DPL incurred an impairment charge of $66.4 million and DP&L incurred an impairment charge of $66.3 million related to this planned retirement. See Note 14 – Fixed-asset Impairment of Notes to DPL's Condensed Consolidated Financial Statements and Note 14 – Fixed-asset Impairment of Notes to DP&L's Condensed Financial Statements for more information. DPL and DP&L also recorded inventory write off charges of $16.2 million and pension curtailment charges of $4.1 million and $5.6 million, respectively, in Q1 2017 associated with the planned retirement.

In addition to the charges noted above, DPL and DP&L estimate to incur $7.0 million to $11.0 million in severance and benefit related costs during 2017 and 2018 and approximately $10.0 million to $30.0 million in plant shutdown costs, the timing of which is uncertain as of the date of this report. In addition, DPL also estimates future cash expenditures of approximately $130.0 million for asset retirement obligations beginning in June 2018 and through 2023.

For additional information on DP&L's coal fired facilities see Note 4 – Property, Plant and Equipment of Notes to DPL's Condensed Consolidated Financial Statements and Note 4 – Property, Plant and Equipment of Notes to DP&L's Condensed Financial Statements.

Regulatory Environment

For a comprehensive discussion of the market structure and regulation of DPL and DP&L, see Part I, Item 2 - Ohio Competition and Regulatory Proceedings.


•	Bypassable standard offer energy rates for DP&L’s customers based on competitive bid auctions;

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•	The establishment of a three-year non-bypassable DMR designed to collect $105.0 million in revenue per year to pay debt obligations at DPL and DP&L and position DP&L to modernize and/or maintain its transmission and distribution infrastructure. With PUCO approval, DP&L may have the option of extending the duration of the DMR for an additional two years;


•	The establishment of a non-bypassable Distribution Investment Rider, set initially at zero, to recover incremental distribution capital investments;


•	The establishment of a Smart Grid Rider, set initially at zero, to recover costs of future grid modernization;


•	A commitment by us to separate DP&L’s generation assets from its transmission and distribution assets (if approved by FERC) within 180 days after receipt of a PUCO order;


•	A commitment to commence a sale process to sell our ownership interests in the Zimmer, Miami Fort and Conesville coal-fired generation plants; and


•	Restrictions on DPL making dividend or tax sharing payments, and various other riders and competitive retail market enhancements.

On April 21, 2017, DP&L and AES Ohio Generation entered into an agreement for the sale of DP&L’s undivided interests in Zimmer and Miami Fort, for $50 million in cash and the assumption of certain liabilities, including environmental. The purchase price is subject to adjustment at closing based on the amount of certain inventories, pre-paid amounts, employment benefits, insurance premiums, property taxes and other costs. The sale is subject to approval by the FERC and is expected to close in the third quarter of 2017.

Environmental

We refer to the discussion in “Item 1. Business - Environmental Matters - Climate Change Legislation and Regulation” in our 2016 Form 10-K for a discussion of the USEPA’s CO₂ emissions rules for new electric generating units, or GHG NSPS, as well as the CO₂ emissions rules for existing power plants, called the CPP. Both the GHG NSPS and the CPP are being challenged by several states and industry groups in the D.C. Circuit Court. The challenges to the CPP have been fully briefed and argued but oral argument has not yet taken place on the GHG NSPS. 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 hold the challenges to both rules in abeyance for 60 days. The Executive Order instructs the USEPA Administrator to review the GHG NSPS and CPP and “if appropriate ... as soon as practicable ... publish for notice and comment proposed rules suspending, revising, or rescinding those rules.” On April 4, 2017, the USEPA published a notice in the Federal Register to announce that it is initiating administrative reviews of both the CPP and the GHG NSPS as a result of the Executive Order.

We cannot predict at this time the likely outcome of the USEPA’s review of either the CPP or the GHG NSPS. By order of the U.S. Supreme Court, the CPP has been stayed pending resolution of the challenges to the rule. Due to the future uncertainty of the CPP, we cannot at this time determine the impact on our operations or consolidated

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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 our plans to construct and/or modify or reconstruct electric generating units in some locations.

CAPITAL RESOURCES AND LIQUIDITY

DPL and DP&L had cash and cash equivalents of $54.3 million and $4.9 million, respectively, at March 31, 2017. At that date, neither DPL nor DP&L had short-term investments. DPL and DP&L had aggregate principal amounts of debt outstanding of $1,876.2 million and $761.8 million, respectively.

Approximately $29.7 million of DPL's debt and $4.7 million of DP&L's debt matures within the next twelve months, which we expect to repay using a combination of cash on hand, net cash provided by operating activities and/or net proceeds from the issuance of new debt.

We depend on timely and continued access to capital markets to manage our liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on our financial condition and results of operations. In addition, changes in the timing of tariff increases or delays in regulatory determinations could affect the cash flows and results of operations of our businesses.

Our discussion of DPL’s financial condition, liquidity and capital requirements include the results of its principal subsidiary DP&L. All material intercompany accounts and transactions have been eliminated in consolidation.

CASH FLOWS - DPL

DPL’s financial condition, liquidity and capital requirements include the consolidated results of its principal subsidiary DP&L. All material intercompany accounts and transactions have been eliminated in consolidation. The following table summarizes the cash flows of DPL:



DPL	Three months ended March 31,
$ in millions	2017			2016
Net cash provided by operating activities	$	26.5		$	83.0
Net cash provided by / (used in) investing activities	(19.4		)	39.6
Net cash used in financing activities	(7.4		)	(75.4		)

Net change	(0.3		)	47.2
Balance at beginning of period	54.6			32.4
Cash and cash equivalents at end of period	$	54.3		$	79.6

DPL - Cash flows from operating activities



	Three months ended March 31,						$ change
$ in millions	2017			2016			2017 v 2016
Net income / (loss)	(51.7		)	31.8			$	(83.5	)
Depreciation and amortization	28.0			33.4			(5.4		)
Impairment expenses	66.4			—			66.4
Gain on sale of business	—			(49.2		)	49.2
Other adjustments to Net income / (loss)	14.7			(9.1		)	23.8
Net income / (loss), adjusted for non-cash items	57.4			6.9			50.5
Net change in operating assets and liabilities	(30.9		)	76.1			(107.0		)
Net cash provided by operating activities	$	26.5		$	83.0		$	(56.5	)

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The net change in operating assets and liabilities during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was driven by the following:



$ in millions	$ Change
Decrease from inventory primarily due to lower coal purchases in 2016	$	(18.9	)
Decrease from accrued taxes payable primarily due to an income tax benefit from the current year loss	(52.5		)
Decrease from accounts payable due to timing of spending	(23.3		)
Other	(12.3		)
Total decrease in cash from changes in operating assets and liabilities	$	(107.0	)

DPL - Cash flows from investing activities

Capital expenditures, primarily related to transmission and distribution, continue to be our principal use of cash related to investing activities. Net cash from investing activities decreased $59.0 million to $(19.4) million in the three months ended March 31, 2017 from $39.6 million provided during the three months ended March 31, 2016, primarily driven by a decrease in proceeds from sale of business of $75.5 million, related to the $75.5 million in proceeds from the sale of DPLER in January 2016, which was partially offset by a decrease in restricted cash of $19.3 million, related to a decrease in collateral requirements on derivatives.

DPL - Cash flows from financing activities

Net cash used in financing activities was $(7.4) million during the three months ended March 31, 2017 compared to $(75.4) million from financing activities for the three months ended March 31, 2016. This was due to first quarter 2017 term loan repayments of $6.3 million and $1.1 million; while in the first quarter of 2016, there was a redemption of $73.0 million of DPL's $130.0 million 6.5% Senior Unsecured Notes Due 2016, along with the related make-whole payment of $2.4 million.

CASH FLOWS - DP&L

The following table summarizes the cash flows of DP&L:



DP&L	Three months ended March 31,
$ in millions	2017			2016
Net cash provided by operating activities	$	22.8		$	83.4
Net cash used in investing activities	(13.4		)	(33.8		)
Net cash used in financing activities	(6.1		)	(30.2		)

Net change	3.3			19.4
Balance at beginning of period	1.6			5.4
Cash and cash equivalents at end of period	$	4.9		$	24.8

DP&L - Cash flows from operating activities



	Three months ended March 31,						$ change
$ in millions	2017			2016			2017 v 2016
Net income / (loss)	(41.8		)	33.7			$	(75.5	)
Depreciation and amortization	23.5			34.3			(10.8		)
Impairment expenses	66.3			—			66.3
Other adjustments to Net income / (loss)	19.8			(1.7		)	21.5
Net income / (loss), adjusted for non-cash items	67.8			66.3			1.5
Net change in operating assets and liabilities	(45.0		)	17.1			(62.1		)
Net cash provided by operating activities	$	22.8		$	83.4		$	(60.6	)

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The net change in operating assets and liabilities during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was driven by the following:



$ in millions	$ Change
Decrease from inventory primarily due to lower coal purchases in 2016	$	(19.0	)
Decrease from accrued taxes payable, due to income tax benefit incurred on current year loss	(24.5		)
Decrease from accounts payable due to timing of spending	(14.8		)
Other	(3.8		)
Total decrease in cash from changes in operating assets and liabilities	$	(62.1	)

DP&L - Cash flows from investing activities

Net cash from investing activities increased $20.4 million to $(13.4) million in the three months ended March 31, 2017 from $(33.8) million during the three months ended March 31, 2016, primarily due to a $19.2 million decrease in restricted cash, due to a change in the collateral requirements on derivatives.

DP&L - Cash flows from financing activities

Net cash used in financing activities was $(6.1) million during the three months ended March 31, 2017 compared to $(30.2) million in the three months ended March 31, 2016 primarily due to higher related party borrowings in the current year.

LIQUIDITY

We expect our existing sources of liquidity to remain sufficient to meet our anticipated operating needs. Our business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and carrying costs, potential margin requirements related to energy hedges and dividend payments. In 2017 and subsequent years, we expect to satisfy these requirements with a combination of cash from operations and funds from debt financing as internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under bank credit facilities will continue to be available to us to manage working capital requirements during these periods.

At March 31, 2017, DP&L and DPL have access to the following revolving credit facilities:



$ in millions	Type	Maturity	Commitment		Amounts available as of March 31, 2017
DP&L	Revolving	July 2020	$	175.0	$	173.6
DPL	Revolving	July 2020	205.0		202.0
			$	380.0	$	375.6

DP&L has an unsecured revolving credit agreement with a syndicated bank group with a borrowing limit of $175.0 million and a $50.0 million letter of credit sublimit, as well as a feature that provides DP&L the ability to increase the size of the facility by an additional $100.0 million. This facility expires in July 2020. At March 31, 2017, there were two letters of credit in the aggregate amount of $1.4 million outstanding under this facility, with the remaining $173.6 million available to DP&L. Fees associated with this letter of credit facility were not material during the three months ended March 31, 2017 or 2016.

DPL has a revolving credit facility of $205.0 million, with a $200.0 million letter of credit sublimit and a feature that provides DPL the ability to increase the size of the facility by an additional $95.0 million. This facility is secured by a pledge of common stock that DPL owns in DP&L, limited to the amount permitted to be pledged under certain Indentures dated October 3, 2011 and October 6, 2014 between DPL and Wells Fargo Bank, NA and U.S. Bank National Association, respectively, as Trustee and a limited recourse guarantee by AES Ohio Generation secured by assets of AES Ohio Generation. DPL further secured the credit facility through a leasehold mortgage on additional assets of AES Ohio Generation. The facility expires in July 2020; however, DPL's credit facility has a springing maturity feature providing that if, before July 1, 2019, DPL has not refinanced its senior unsecured bonds due October 2019 to have a maturity date that is at least six months later than July 31, 2020, then the maturity of this facility shall be July 1, 2019. At March 31, 2017, there were three letters of credit in the aggregate amount of $3.0 million outstanding under this facility, with the remaining $202.0 million available to DPL. Fees associated with this facility were not material during the three months ended March 31, 2017 or 2016.

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Cash and cash equivalents for DPL and DP&L amounted to $54.3 million and $4.9 million, respectively, at March 31, 2017. At that date, neither DPL nor DP&L had any short-term investments that were not included in cash and cash equivalents.

Capital Requirements

Planned construction additions for 2017 relate primarily to new investments in and upgrades to DP&L’s power plant equipment and transmission and distribution system. Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental requirements, among other factors.

DPL is projecting to spend an estimated $351.0 million in capital projects for the period 2017 through 2019, of which $291.0 million is projected to be spent by DP&L. DP&L is subject to the mandatory reliability standards of NERC and Reliability First Corporation (RFC), one of the eight NERC regions of which DP&L is a member. DP&L anticipates spending approximately $11.3 million within the next five years to reinforce its 138 kV system to comply with NERC standards. Our ability to complete capital projects and the reliability of future service will be affected by our financial condition, the availability of internal funds and the reasonable cost of external funds. We expect to finance our construction additions with a combination of cash on hand, short-term financing, long-term debt and cash flows from operations.

Debt Covenants

The DPL revolving credit facility and the DPL term loan agreement have a Total Debt to EBITDA covenant that will be calculated, at the end of each fiscal quarter, by dividing total debt at the end of the current quarter by consolidated EBITDA for the four prior fiscal quarters. The ratio in the agreements is not to exceed 7.25 to 1.00 for any fiscal quarter ending September 30, 2015 through December 31, 2018; it then steps down not to exceed 6.25 to 1.00 for any fiscal quarter ending March 31, 2019 through December 31, 2019; and it then steps down not to exceed 5.75 to 1.00 for any fiscal quarter ending March 31, 2020 through July 31, 2020. As of March 31, 2017, the financial covenant was met with a ratio of 6.58 to 1.00.

The DPL revolving credit facility and the DPL term loan agreement also have an EBITDA to Interest Expense covenant that is calculated at the end of each fiscal quarter by dividing consolidated EBITDA for the four prior fiscal quarters by the consolidated interest charges for the same period. The ratio, per the agreements, is to be not less than 2.10 to 1.00 for any fiscal quarter ending September 30, 2015 through December 31, 2018; it then steps up to be not less than 2.25 to 1.00 for any fiscal quarter ending March 31, 2019 through July 31, 2020. As of March 31, 2017, this financial covenant was met with a ratio of 2.62 to 1.00.

DP&L’s revolving credit facility and Bond Purchase and Covenants Agreement have two financial covenants. Prior to the date of completion of the separation of DP&L’s generation assets from its transmission and distribution assets, DP&L’s Total Debt to Total Capitalization ratio may not be greater than 0.65 to 1.00 at any time; and, on and after the date of completion of the separation of DP&L’s generation assets from its transmission and distribution assets, DP&L’s Total debt to Total Capitalization ratio may not be greater than 0.75 to 1.00 at any time, except that (a) prior to the amendment below, this covenant would have been suspended between January 1, 2017 and December 31, 2017, if during this same time DP&L’s long-term indebtedness (as determined by the PUCO) is less than or equal to $750.0 million or (b) this financial covenant shall be suspended at any time DP&L maintains a rating of BBB- (or in the case of Moody’s Baa3) or higher with a stable outlook from at least one of Fitch Investors Service Inc., Standard & Poor’s Ratings Services or Moody’s Investors Service, Inc., as determined in accordance with the terms of the revolving credit facility. This covenant is calculated as the sum of DP&L’s current and long-term portion of debt, divided by the total of DP&L’s shareholder’s equity and total debt.

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The DP&L revolving credit facility and Bond Purchase and Covenants Agreement also have an EBITDA to Interest Expense financial covenant that is calculated at the end of each fiscal quarter, by dividing EBITDA for the four prior fiscal quarters by the interest charges for the same period. Both prior to and after completion of the separation of DP&L’s generation assets from its transmission and distribution assets, DP&L’s EBITDA to Interest Expense cannot be less than 2.50 to 1.00. As of March 31, 2017, this covenant was met with a ratio of 9.20 to 1.00.

Debt and Credit Ratings

The following table presents, as of the filing of this report, the debt ratings and outlook for DPL and DP&L, along with the effective or affirmed date of each rating.



	DPL	DP&L	Outlook	Effective or Affirmed
Fitch Ratings	BB^(a) / BB-^(b)	BBB^(c)	Negative	July 2016
Moody's Investors Service, Inc.	Ba3^(b)	Baa2^(c)	Negative	August 2016
Standard & Poor's Financial Services LLC	B+^(b)	BBB-^(c)	Negative	March 2017


(a)	Rating relates to DPL’s Senior secured debt.


(b)	Rating relates to DPL's Senior unsecured debt.


(c)	Rating relates to DP&L’s Senior secured debt.

The following table presents, as of the filing of this report, the credit ratings (issuer/corporate rating) and outlook for DPL and DP&L, along with the effective or affirmed date of each rating.



	DPL	DP&L	Outlook	Effective or Affirmed
Fitch Ratings	B+	BB+	Negative	July 2016
Moody's Investors Service, Inc.	Ba3	Baa3	Negative	August 2016
Standard & Poor's Financial Services LLC	BB-	BB-	Negative	March 2017

If the rating agencies were to reduce our debt or credit ratings, our borrowing costs may increase, our potential pool of investors and funding resources may be reduced, and we may be required to post additional collateral under selected contracts. These events may have an adverse effect on our results of operations, financial condition and cash flows. In addition, any such reduction in our debt or credit ratings may adversely affect the trading price of our outstanding debt securities.

Off-Balance Sheet Arrangements

For information on guarantees, commercial commitments, and contractual obligations, see Note 10 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DPL’s Condensed Consolidated Financial Statements and Note 11 – Contractual Obligations, Commercial Commitments and Contingencies of Notes to DP&L’s Condensed Financial Statements.

MARKET RISK

We are subject to certain market risks including, but not limited to, changes in commodity prices for electricity, coal, environmental emissions and gas, changes in capacity prices and fluctuations in interest rates. We use various market risk sensitive instruments, including derivative contracts, primarily to limit our exposure to fluctuations in commodity pricing. Our Commodity Risk Management Committee (CRMC), comprised of members of senior management, is responsible for establishing risk management policies and the monitoring and reporting of risk exposures relating to our generation units. The CRMC meets on a regular basis with the objective of identifying, assessing and quantifying material risk issues and developing strategies to manage these risks.

Commodity Pricing Risk

Commodity pricing risk exposure includes the impacts of weather, market demand, increased competition and other economic conditions. To manage the volatility relating to these exposures at our DP&L-operated generation units, we use a variety of non-derivative and derivative instruments including forward contracts and futures contracts. These instruments are used principally for economic hedging purposes and none are held for trading purposes. Derivatives that fall within the scope of derivative accounting under GAAP must be recorded at their fair value and marked to market unless they qualify for cash flow hedge accounting. MTM gains and losses on derivative instruments that qualify for cash flow hedge accounting are deferred in AOCI until the forecasted transactions occur. We adjust the derivative instruments that do not qualify for cash flow hedging to fair value on a monthly basis through the Statement of Operations or, where applicable, we recognize a corresponding Regulatory asset for

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above-market costs or a Regulatory liability for below-market costs in accordance with regulatory accounting under GAAP.

The coal market has increasingly been influenced by both international and domestic supply and consumption, making the price of coal more volatile than in the past, and while we have substantially all of the total expected coal volume needed to meet our retail and firm wholesale sales requirements for 2017 under contract; sales requirements may change. The majority of the contracted coal is purchased at fixed prices. Some contracts provide for periodic adjustments. 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 outages and generation plant mix.

For purposes of potential risk analysis, we use a sensitivity analysis to quantify potential impacts of market rate changes on the statements of results of operations. The sensitivity analysis represents hypothetical changes in market values that may or may not occur in the future.

Commodity Derivatives

To minimize the risk of fluctuations in the market price of commodities, such as coal, power, natural gas and heating oil, we may enter into commodity-forward and futures contracts to effectively hedge the cost/revenues of the commodity. Maturity dates of the contracts are scheduled to coincide with market purchases/sales of the commodity. Cash proceeds or payments between the counter-party and us at maturity of the contracts are recognized as an adjustment to the cost of the commodity purchased or sold. We generally do not enter into forward contracts beyond thirty-six months.

A 10% increase or decrease in the market price of our FTRs at March 31, 2017 would be immaterial.

At March 31, 2017, a 10% increase or decrease in the market price of our net forward power contracts and net natural gas contracts would result in a net impact on unrealized gains/losses of $(0.6) million and $5.7 million, respectively.

Wholesale Revenues

Energy in excess of contracted obligations is sold in the wholesale spot market when we can identify opportunities with positive margins. The following table presents the percentages of DPL’s and DP&L’s electric revenue derived from wholesale sales.



DPL	Three months ended
	March 31,
	2017		2016
Percent of electric revenues from wholesale market	32	%	34	%

DP&L	Three months ended
	March 31,
	2017		2016
Percent of electric revenues from wholesale market	32	%	34	%

The closure of Stuart and Killen on or before June 1, 2018 and the agreement to sell DP&L's ownership interest in Zimmer and Miami Fort will limit market exposure to wholesale power prices in future years. See Note 4 – Property, Plant and Equipment of Notes to DPL's Condensed Consolidated Financial Statements and Note 4 – Property, Plant and Equipment of Notes to DP&L's Condensed Financial Statements.

The following table presents the effect on annual Net income (net of estimated income taxes at 35%) as of March 31, 2017, of a hypothetical increase or decrease of 10% in the price per MWh of wholesale power:



$ in millions	DPL		DP&L
Effect of 10% change in price per MWh	$	29.8	$	28.3

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Capacity Revenues and Costs

As a member of PJM, DP&L receives revenues from the RTO related to its transmission and generation assets and incurs costs associated with its load obligations for retail customers. PJM, which has a delivery year that runs from June 1 to May 31, has conducted auctions for capacity through the delivery year. The clearing prices for capacity during the PJM delivery periods from 2015/16 through 2019/20 are as follows:



	PJM Delivery Year
($/MW-day)	2015/16		2016/17		2017/18		2018/19		2019/20
Capacity clearing price	$	136	$	134	$	152	$	165	$	100

Our computed average capacity prices by calendar year are reflected in the following table:



	Calendar Year
($/MW-day)	2015		2016		2017		2018		2019
Computed average capacity price	$	132	$	135	$	145	$	159	$	127

The above tables reflect the capacity prices after the transitional auctions discussed earlier. Substantially all of DP&L's capacity cleared in the CP auction. The results of these auctions could have a significant effect on DP&L's revenues in the future.

Future RPM auction results are 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 RPM business rules. The volatility in the RPM capacity auction pricing has had and will continue to have a significant impact on DPL’s capacity revenues and costs.

The following table provides estimates of the effect on annual Net income (net of estimated income taxes at 35%) as of March 31, 2017 of a hypothetical increase or decrease of $10/MW-day in the RPM auction price. The table shows the impact resulting from capacity revenue changes. We did not include the impact of a change in the RPM capacity costs since these costs will be recovered through the development of our overall energy pricing for customers.



$ in millions	DPL		DP&L
Effect of $10/MW-day change in capacity auction pricing	$	5.5	$	4.7

Capacity revenues and costs are also impacted by, among other factors, our generation capacity, the levels of wholesale revenues and our retail customer load. In determining the capacity price sensitivity above, we did not consider the impact that may arise from the variability of these other factors.

Fuel and Purchased Power Costs

DPL’s and DP&L’s fuel (including coal, gas, oil and emission allowances) and purchased power costs as a percentage of total operating costs in the three months ended March 31, 2017 were 35% and 35%, respectively. We have a significant portion of projected 2017 fuel needs under contract. The majority of our contracted coal is purchased at fixed prices although some contracts provide for periodic pricing adjustments. We may purchase SO₂ allowances for 2017, however, the exact consumption of SO₂ allowances will depend on market prices for power, availability of our generation units and the actual sulfur content of the coal burned. We may purchase some NOx allowances for 2017 depending on NOx emissions. Fuel costs are affected by changes in volume and price and are driven by a number of variables including weather, reliability of coal deliveries, scheduled outages and generation plant mix.

Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of our generating capacity. We will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below our internal generation costs.

The following table provides the effect on annual Net income (net of estimated income taxes at 35%) as of March 31, 2017 of a hypothetical increase or decrease of 10% in the prices of fuel and purchased power:



$ in millions	DPL		DP&L
Effect of 10% change in fuel and purchased power	$	37.1	$	35.6

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Interest Rate Risk

As a result of our normal investing and borrowing activities, our financial results are exposed to fluctuations in interest rates which we manage through our regular financing activities. We maintain both cash on deposit and investments in cash equivalents that may be affected by adverse interest rate fluctuations. DPL and DP&L have both fixed-rate and variable-rate long-term debt. DPL’s variable-rate debt consists of a $125.0 million term loan with a syndicated bank group. The term loan interest rate fluctuates with changes in an underlying interest rate index, typically LIBOR. DP&L’s variable-rate debt is comprised of bank held pollution control bonds and a variable rate term loan B. The variable-rate bonds and term loan B bear interest based on an underlying interest rate index, typically LIBOR. Market indexes can be affected by market demand, supply, market interest rates and other economic conditions. See Note 7 – Debt of Notes to DPL’s Condensed Consolidated Financial Statements and Note 7 – Debt of Notes to DP&L’s Condensed Financial Statements.

Principal Payments and Interest Rate Detail by Contractual Maturity Date

The principal value of DPL’s debt was $1,876.2 million at March 31, 2017, consisting of DPL’s unsecured notes and unsecured term loan, along with DP&L’s first mortgage bonds, tax-exempt pollution control bonds and the Wright-Patterson Air Force Base note. All of DPL’s debt was adjusted to fair value at the date of the Merger. The fair value of this debt at March 31, 2017 was $1,940.7 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DPL’s debt obligations that are sensitive to interest rate changes:



DPL
	Principal payments due												At March 31, 2017
	during the twelve months ending												At March 31, 2017
	March 31,												Principal		Fair
$ in millions	2018		2019		2020		2021		2022		Thereafter		Amount		Value
Long-term debt ^(a)
Variable-rate debt	$	29.5	$	29.5	$	29.5	$	48.2	$	4.5	$	421.5	$	562.7	$	562.7
Average interest rate ^(b)	3.8%		3.8%		3.8%		3.8%		4.0%		4.0%
Fixed-rate debt ^(c)	$	0.1	$	0.2	$	200.2	$	200.2	$	780.2	$	132.6	1,313.5		1,378.0
Average interest rate	4.2%		4.2%		6.7%		2.0%		7.2%		5.1%
Total													$	1,876.2	$	1,940.7


(a)	Amounts exclude immaterial capital lease obligations


(b)	Based on rates in effect at March 31, 2017


(c)	Fixed-rate debt includes $200.0 million DP&L Tax-exempt First Mortgage Bonds, which are variable rate, that have been hedged, per discussion above. See Note 6 – Derivative Instruments and Hedging Activities of Notes to DPL's Condensed Consolidated Financial Statements

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The principal value of DP&L’s debt was $761.8 million at March 31, 2017, consisting of its first mortgage bonds, tax-exempt pollution control bonds and the Wright-Patterson Air Force Base note. The fair value of this debt was $762.3 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The following table provides information about DP&L’s debt obligations that are sensitive to interest rate changes. DP&L’s debt was not revalued as a result of the Merger.



DP&L
	Principal payments due												At March 31, 2017
	during the twelve months ending												At March 31, 2017
	March 31,												Principal		Fair
$ in millions	2018		2019		2020		2021		2022		Thereafter		Amount		Value
Long-term debt ^(a)
Variable-rate debt	$	4.5	$	4.5	$	4.5	$	4.5	$	4.5	$	421.4	$	443.9	$	443.9
Average interest rate ^(b)	4.0%		4.0%		4.0%		4.0%		4.0%		4.0%
Fixed-rate debt ^(c)	$	0.1	$	0.2	$	0.2	$	200.2	$	0.2	$	117.0	317.9		318.4
Average interest rate	4.2%		4.2%		4.2%		2.0%		4.2%		4.7%
Total													$	761.8	$	762.3


(a)	Amounts exclude immaterial capital lease obligations


(b)	Based on rates in effect at March 31, 2017


(c)	Fixed-rate debt includes $200.0 million DP&L Tax-exempt First Mortgage Bonds, which are variable rate, that have been hedged, per discussion above. See Note 6 – Derivative Instruments and Hedging Activities of Notes to DP&L's Condensed Financial Statements

Debt maturities and repayments occurring in 2017 are discussed under "FINANCIAL CONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS".

Long-term Debt Interest Rate Risk Sensitivity Analysis

Our estimate of market risk exposure is presented for our fixed-rate and variable-rate debt at March 31, 2017 for which an immediate adverse market movement causes a potential material impact on our financial condition, results of operations or the fair value of the debt. We believe that the adverse market movement represents the hypothetical loss to future earnings and does not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. As of March 31, 2017, we did not hold any market risk sensitive instruments that were entered into for trading purposes.

The following tables present the carrying value and fair value of our debt, along with the impact of a change of one percent in interest rates:



DPL	At March 31, 2017				One percent
	Principal		Fair		interest rate
$ in millions	Amount		Value		risk
Long-term debt ^(a)
Variable-rate debt	$	562.7	$	562.7	$	5.6

Fixed-rate debt ^(b)	1,313.5		$	1,378.0	13.8

Total	$	1,876.2	$	1,940.7	$	19.4


(a)	Amounts exclude immaterial capital lease obligations


(b)	Fixed-rate debt includes $200.0 million DP&L Tax-exempt First Mortgage Bonds, which are variable rate, that have been hedged, per discussion above. See Note 6 – Derivative Instruments and Hedging Activities of Notes to DPL's Condensed Consolidated Financial Statements

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DP&L	At March 31, 2017				One percent
	Principal		Fair		interest rate
$ in millions	Amount		Value		risk
Long-term debt ^(a)
Variable-rate debt	$	443.9	$	443.9	$	4.4

Fixed-rate debt ^(b)	317.9		318.4		3.2

Total	$	761.8	$	762.3	$	7.6


(a)	Amounts exclude immaterial capital lease obligations


(b)	Fixed-rate debt includes $200.0 million DP&L Tax-exempt First Mortgage Bonds, which are variable rate, that have been hedged, per discussion above. See Note 6 – Derivative Instruments and Hedging Activities of Notes to DP&L's Condensed Financial Statements

DPL’s debt is comprised of both fixed-rate debt and variable-rate debt. In regard to fixed-rate debt, the interest rate risk with respect to DPL’s long-term debt primarily relates to the potential impact a decrease of one percentage point in interest rates has on the fair value of DPL’s $1,378.0 million of fixed-rate debt and not on DPL’s financial condition or results of operations. On the variable-rate debt, the interest rate risk with respect to DPL’s long-term debt represents the potential impact an increase of one percentage point in the interest rate has on DPL’s results of operations related to DPL’s $562.7 million variable-rate long-term debt outstanding as of March 31, 2017.

DP&L’s interest rate risk with respect to DP&L’s long-term debt primarily relates to the potential impact a decrease in interest rates of one percentage point has on the fair value of DP&L’s $318.4 million of fixed-rate debt and not on DP&L’s financial condition or DP&L’s results of operations. On the variable-rate debt, the interest rate risk with respect to DP&L’s long-term debt represents the potential impact an increase of one percentage point in the interest rate has on DP&L’s results of operations related to DP&L’s $443.9 million variable-rate long-term debt outstanding as of March 31, 2017.

Credit Risk

Credit risk is the risk of an obligor's failure to meet the terms of any investment contract, loan agreement or otherwise perform as agreed. Credit risk arises from all activities in which success depends on issuer, borrower or counterparty performance, whether reflected on or off the balance sheet. We limit our credit risk by assessing the creditworthiness of potential counterparties before entering into transactions with them and continue to evaluate their creditworthiness after transactions have been originated. We use the three leading corporate credit rating agencies and other current market-based qualitative and quantitative data to assess the financial strength of our counterparties on an ongoing basis. We may require various forms of credit assurance from our counterparties in order to mitigate credit risk.

Critical Accounting Estimates

DPL’s Condensed Consolidated Financial Statements and DP&L’s Condensed Financial Statements are prepared in accordance with GAAP. In connection with the preparation of these financial statements, our management is required to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and the related disclosure of contingent liabilities. These assumptions, estimates and judgments are based on our historical experience and assumptions that we believe to be reasonable at the time. However, because future events and their effects cannot be determined with certainty, the determination of estimates requires the exercise of judgment. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain.

Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances. Historically, however, recorded estimates have not differed materially from actual results. Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims liabilities; the valuation of allowances for receivables and deferred income taxes; regulatory assets and liabilities; liabilities recorded for income tax exposures; litigation; contingencies; the valuation of AROs; assets and liabilities related to employee benefits and intangible assets. Refer to our Form 10-K for the year ended December 31, 2016 for a complete listing of our critical accounting policies and estimates. There have been no material changes to these critical accounting policies and estimates.

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	ELECTRIC SALES AND CUSTOMERS (a)
	DPL		DP&L
	Three months ended		Three months ended
	March 31,		March 31,
	2017	2016	2017	2016
Electric Sales (millions of kWh)	3,825	4,092	3,731	3,953

Billed electric customers (end of period)	520,265	517,558	520,265	517,558


(a)	This table contains wholesale sales in the PJM market and to other utilities.

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

See the “MARKET RISK” section in Item 2 of this Part I, which is incorporated by reference into this item.

Item 4 – Controls and Procedures

Disclosure Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that material information relating to us and our subsidiaries is communicated to the CEO and CFO. We evaluated these disclosure controls and procedures as of the end of the period covered by this report with the participation of our CEO and CFO. Based on this evaluation, our CEO and CFO concluded that, as of March 31, 2017, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

Changes in Internal Controls over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2017. In making this assessment, management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations (“COSO”) in 2013. There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management and our Board of Directors are committed to the continued improvement of DPL's overall system of internal control over financial reporting.

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Part II – Other Information

Item 1 – Legal Proceedings

In the normal course of business, we are subject to various lawsuits, actions, claims, and other proceedings. We are also, from time to time, involved in other reviews, investigations and proceedings by governmental and regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. We have accrued in our Financial Statements for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters (including those matters noted below), and to comply with applicable laws and regulations will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided for in our Financial Statements, cannot be reasonably determined, but could be material.

Our Form 10-K for the fiscal year ended December 31, 2016 and the Notes to DPL’s Consolidated Financial Statements and DP&L’s Financial Statements included therein contain descriptions of certain legal proceedings in which we are or were involved. The information in or incorporated by reference into this Item 1 to Part II is limited to certain recent developments concerning our legal proceedings and new legal proceedings, since the filing of such Form 10-K, and should be read in conjunction with such Form 10-K.

The following information is incorporated by reference into this Item: information about the legal proceedings contained in Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3 – Regulatory Matters of Notes to DPL's Condensed Consolidated Financial Statements and Note 3 – Regulatory Matters of Notes to DP&L's Condensed Financial Statements of this Quarterly Report on Form 10-Q.

Item 1A – Risk Factors

A listing of the risk factors that we consider to be the most significant to a decision to invest in our securities is provided in our Form 10-K for the fiscal year ended December 31, 2016. As of March 31, 2017, there have been no material changes with respect to the risk factors disclosed in our Form 10-K. If any of the events described in our risk factors occur, it could have a material effect on our results of operations, financial condition and cash flows.

The risks and uncertainties described in our risk factors are not the only ones we face. In addition, 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. Our risk factors should be read in conjunction with the other detailed information concerning DPL and DP&L set forth in the Notes to DPL’s and DP&L’s Financial Statements and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included in our filings.

Item 2 – Unregistered Sale of Equity Securities and Use of Proceeds

None

Item 3 – Defaults Upon Senior Securities

None

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None

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Item 6 – Exhibits



DPL Inc.	DP&L	Exhibit Number	Exhibit	Location

X	X	2.1	Asset Purchase Agreement dated April 21, 2017, by and among Dynegy Zimmer, LLC, Dynegy Miami Fort, LLC, AES Ohio Generation, LLC and The Dayton Power and Light Company	Exhibit 2.1 to Report on Form 8-K filed on April 24, 2017 (File No. 1-09052)
X	X	10.1	Amended Stipulation and Recommendation dated March 13, 2017	Exhibit 10.1 to Report on Form 8-K filed on March 14, 2017 (File No. 1-02385)
X		31(a)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(a)
X		31(b)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(b)
	X	31(c)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(c)
	X	31(d)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 31(d)
X		32(a)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(a)
X		32(b)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(b)
	X	32(c)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(c)
	X	32(d)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith as Exhibit 32(d)
X	X	101.INS	XBRL Instance	Filed herewith as Exhibit 101.INS
X	X	101.SCH	XBRL Taxonomy Extension Schema	Filed herewith as Exhibit 101.SCH
X	X	101.CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed herewith as Exhibit 101.CAL
X	X	101.DEF	XBRL Taxonomy Extension Definition Linkbase	Filed herewith as Exhibit 101.DEF
X	X	101.LAB	XBRL Taxonomy Extension Label Linkbase	Filed herewith as Exhibit 101.LAB
X	X	101.PRE	XBRL Taxonomy Extension Presentation Linkbase	Filed herewith as Exhibit 101.PRE

Exhibits referencing File No. 1-9052 have been filed by DPL Inc. and those referencing File No. 1-2385 have been filed by The Dayton Power and Light Company.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, DPL Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		DPL Inc.
		(Registrant)

Date:	May 5, 2017	/s/ Kenneth J. Zagzebski
		Kenneth J. Zagzebski
		President and Chief Executive Officer
		(principal executive officer)

	May 5, 2017	/s/ Craig L. Jackson
		Craig L. Jackson
		Chief Financial Officer
		(principal financial officer)

	May 5, 2017	/s/ Kurt A. Tornquist
		Kurt A. Tornquist
		Controller
		(principal accounting officer)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, The Dayton Power and Light Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		The Dayton Power and Light Company
		(Registrant)

Date:	May 5, 2017	/s/ Thomas A. Raga
		Thomas A. Raga
		President and Chief Executive Officer
		(principal executive officer)

	May 5, 2017	/s/ Craig L. Jackson
		Craig L. Jackson
		Chief Financial Officer
		(principal financial officer)

	May 5, 2017	/s/ Kurt A. Tornquist
		Kurt A. Tornquist
		Controller
		(principal accounting officer)

102

Three months ended March 31,

Heating degree days ^(a)

Cooling degree days ^(a)