Contractual Obligations, Commercial Commitments and Contingencies

3 Months Ended

Mar. 31, 2014

Contractual Obligations, Commercial Commitments And Contingencies

10. Contractual Obligations, Commercial Commitments and Contingencies

DPL Inc. – Guarantees

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

At March 31, 2014, DPL had $25.9 million of guarantees to third parties for future financial or performance assurance under such agreements: $2.0 million of guarantees on behalf of DPLER, $23.7 million of guarantees on behalf of DPLE and $0.2 million of guarantees on behalf of MC Squared. The guarantee arrangements entered into by DPL with these third parties cover select present and future obligations of DPLE, DPLER and MC Squared 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 and recorded in our Condensed Consolidated Balance Sheets was $1.7 million at March 31, 2014.

To date, DPL has not incurred any losses related to the guarantees of DPLER’s, DPLE’s or MC Squared’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.

DP&L – Equity Ownership Interest

DP&L owns a 4.9% equity ownership interest in OVEC, an electric generation company, which is recorded using the cost method of accounting under GAAP. As of March 31, 2014, DP&L could be responsible for the repayment of 4.9%, or $76.0 million, of a $1,550.2 million debt obligation that has maturities from 2018 to 2040. This would only happen if OVEC defaulted on its debt payments. At March 31, 2014, 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, 2013.

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, 2014, 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 SIPy) which require compliance, obtaining permits and reporting as to air emissions,

Litigation with federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating stations require additional permitting or pollution control technology, or whether emissions from coal-fired generating stations cause or contribute to global climate changes,

Rules and future rules issued by the USEPA and the Ohio EPA that require substantial reductions in SO₂, particulates, mercury, acid gases, NO_x, 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 and the Ohio EPA that require reporting and may require 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 is fly ash and other coal combustion by-products. The USEPA has previously determined that fly ash and other coal combustion by-products are not hazardous waste subject to the Resource Conservation and Recovery Act (RCRA), but the USEPA is reconsidering that determination and planning to propose a new rule regulating coal combustion by-products. A change in determination or other additional regulation of fly ash or other coal combustion byproducts could significantly increase the costs of disposing of such by-products.

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 these facilities in an effort to comply, or to determine compliance, with such regulations. We record liabilities for environmental losses that are probable of occurring and can be reasonably estimated. At March 31, 2014, and December 31, 2013, we had accruals of approximately $1.4 million and $1.1 million, respectively, for environmental matters and other claims. We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable or a loss cannot be reasonably estimated, which are disclosed in the paragraphs below. 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 the units and stations, especially on those that do not have SCR and FGD equipment installed to further control certain emissions. Currently, the coal-fired generation unit Beckjord Unit 6, in which DP&L has a 50% ownership interest, does not have such emission-control equipment installed. This unit is scheduled to be deactivated on June 1, 2015. DPL valued Beckjord Unit 6 at zero at the Merger date and does not believe that any additional accruals or impairment charges are needed as a result of this decision.

Environmental Matters Related to Air Quality

Clean Air Act Compliance

In 1990, the federal government amended the CAA to further regulate air pollution. Under the CAA, the USEPA sets limits on how much of a pollutant can be in the ambient air anywhere in the United States. The CAA allows individual states to have stronger pollution controls than those set under the CAA, but states are not allowed to have weaker pollution controls than those set for the whole country. The CAA has a material effect on our operations and such effects are detailed below with respect to certain programs under the CAA.

Clean Air Interstate Rule/Cross-State Air Pollution Rule

The USEPA promulgated the “Clean Air Interstate Rule” (CAIR) on March 10, 2005, which required allowance surrender for SO₂ and NO_x emissions from existing power stations located in 27 eastern states and the District of Columbia. CAIR contemplated two implementation phases. The first phase began in 2009 and 2010 for NO_x and SO₂, respectively. A second phase with additional allowance surrender obligations for both air emissions is scheduled to begin in 2015. To implement the required emission reductions for this rule, the states were to establish emission-allowance-based “cap-and-trade” programs. CAIR was subsequently challenged in federal court, and on July 11, 2008, the United States Court of Appeals for the D.C. Circuit issued an opinion striking down much of CAIR and remanding it to the USEPA.

In response to the D.C. Circuit's opinion, on July 7, 2011, the USEPA issued the Cross-State Air Pollution Rule (CSAPR). Starting in 2012, CSAPR would have required significant reductions in SO₂ and NO_x emissions from covered sources, such as power stations in 28 eastern states. Once fully implemented in 2014, the rule would have required additional SO₂ emission reductions of 73% and additional NO_x reductions of 54% from 2005 levels. Many states, utilities and other affected parties filed petitions for review, challenging the CSAPR before the U.S. Court of Appeals for the District of Columbia. On August 21, 2012, a three-judge panel of the D.C. Circuit Court vacated CSAPR, ruling that the USEPA overstepped its regulatory authority by requiring states to make reductions beyond the levels required in the CAA and failed to provide states an initial opportunity to adopt their own measures for achieving federal compliance. As a result of this ruling, the surviving provisions of CAIR are to continue to serve as the governing program until the USEPA takes further action or the U.S. Congress intervenes. On October 5, 2012, the USEPA, several states and cities, as well as environmental and health organizations, filed petitions with the D.C. Circuit Court requesting a rehearing by all of the judges of the D.C. Circuit Court of the case pursuant to which the three-judge panel ruled that CSAPR be vacated, which were denied. On June 24, 2013, the U.S. Supreme Court agreed to review the D.C. Circuit Court’s decision to vacate CSAPR. On April 29, 2014, the U.S. Supreme Court upheld CSAPR, remanding the case back to the D.C. Circuit Court for further proceedings. At this time, it is not possible to predict the details of such a replacement transport rule or what impacts it may have on our consolidated financial condition, results of operations or cash flows.

Mercury and Other Hazardous Air Pollutants

On May 3, 2011, the USEPA published proposed Maximum Achievable Control Technology (MACT) standards for coal- and oil-fired electric generating units. The standards include new requirements for emissions of mercury and a number of other heavy metals. The USEPA Administrator signed the final rule, now called MATS, on December 16, 2011, and the rule was published in the Federal Register on February 16, 2012. Our affected EGUs must come into compliance with the new requirements by April 16, 2015, but may be granted an additional year to become compliant contingent on Ohio EPA approval. DP&L is evaluating the costs that may be incurred to comply with the new requirement; however, MATS could have a material adverse effect on our results of operations and result in material compliance costs.

On January 31, 2013, the USEPA finalized a rule regulating emissions of toxic air pollutants from new and existing industrial, commercial and institutional boilers and process heaters at major and area source facilities. This regulation affects seven auxiliary boilers used for start-up purposes at DP&L’s generation facilities. The regulation contains emissions limitations, operating limitations and other requirements. DP&L expects to be in compliance with this rule and the costs are not currently expected to be material to DP&L’s operations.

National Ambient Air Quality Standards

On January 5, 2005, the USEPA published its final non-attainment designations for the National Ambient Air Quality Standard (NAAQS) for Fine Particulate Matter 2.5 (PM 2.5). These designations included counties and partial counties in which DP&L operates and/or owns generating facilities. On December 31, 2012, the USEPA redesignated Adams County, where Stuart and Killen are located, to attainment status. On December 14, 2012, the USEPA tightened the PM 2.5 standard to 12.0 micrograms per cubic meter. This will begin a process of redesignations during 2014. We cannot predict the effect the revisions to the PM 2.5 standard will have on DP&L’s financial condition or results of operations.

The USEPA published the national ground level ozone standard on March 12, 2008, lowering the 8-hour level from 0.08 ppm to 0.075 ppm, which was upheld by the U.S. Circuit Court of Appeals in July 2013. DP&L cannot determine the effect of revisions to the ozone standard, if any, on its operations; however, no DP&L operations are located in non-attainment areas. The USEPA is required to review the ozone standard and is expected to propose a more stringent standard in 2014 or 2015. In addition, in December 2013, eight northeastern states petitioned the USEPA to add nine upwind states, including Ohio, to the Ozone Transport Region, a group of states required to impose enhanced restrictions on ozone emissions. If the petition is granted, our facilities could be subject to such enhanced requirements.

Effective April 12, 2010, the USEPA implemented revisions to its primary NAAQS for nitrogen dioxide. This change may affect certain emission sources in heavy traffic areas like the I-75 corridor between Cincinnati and Dayton after 2016. Several of our facilities or co-owned facilities are within this area. DP&L cannot determine the effect of this potential change, if any, on its operations.

Effective August 23, 2010, the USEPA implemented revisions to its primary NAAQS for SO₂ replacing the current 24-hour standard and annual standard with a one-hour standard. DP&L cannot determine the effect of this potential change, if any, on its operations. Initial non-attainment designations were made July 25, 2013, and Pierce Township in Clermont County, which contains DP&L’s co-owned unit Beckjord Unit 6, was the only area with DP&L operations recommended as non-attainment. Non-attainment areas will be required to meet the new standard by October 2018. DP&L cannot determine the effect of the designations on its operations; however, Beckjord is expected to cease operations prior to the attainment date.

On May 5, 2004, the USEPA issued its proposed regional haze rule, which addresses how states should determine the Best Available Retrofit Technology (BART) for sources covered under the regional haze rule. Final rules were published July 6, 2005, providing states with several options for determining whether sources in the state should be subject to BART. Numerous units owned and operated by us will be affected by BART. We cannot determine the extent of the impact until Ohio determines how BART will be implemented.

Carbon Dioxide and Other Greenhouse Gas Emissions

In response to a U.S. Supreme Court decision that the USEPA has the authority to regulate GHG emissions from motor vehicles, the USEPA made a finding that CO₂ and certain other GHGs are pollutants under the CAA. Subsequently, under the CAA, the USEPA determined that CO₂ and other GHGs from motor vehicles threaten the health and welfare of future generations by contributing to climate change. This finding became effective in January 2010. Numerous affected parties have petitioned the USEPA Administrator to reconsider this decision. On April 1, 2010, the USEPA signed the “Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards” rule. Under the USEPA’s view, this is the final action that renders CO₂ and certain other GHGs “regulated air pollutants” under the CAA.

Under USEPA regulations finalized in May 2010 (referred to as the “Tailoring Rule”), the USEPA began regulating GHG emissions from certain stationary sources in January 2011. The Tailoring Rule sets forth criteria for determining which facilities are required to obtain permits for their GHG emissions pursuant to the CAA Prevention of Significant Deterioration and Title V operating permit programs. Under the Tailoring Rule, permitting requirements are being phased in through successive steps that may expand the scope of covered sources over time. The USEPA has issued guidance on what the best available control technology entails for the control of GHGs; and individual states are required to determine what controls are required for facilities on a case-by-case basis. Various industry groups and states petitioned the U.S. Supreme Court to review the D.C. Circuit Court’s recent decision to uphold the USEPA’s endangerment finding, its April 2010 GHG rule and the Tailoring Rule. On October 15, 2013, the U.S. Supreme Court agreed to review several related cases addressing the USEPA’s authority to issue GHG Prevention of Significant Deterioration permits under Section 165 of the CAA. We cannot predict the outcome of this review. The ultimate impact of the Tailoring Rule to DP&L cannot be determined at this time, but the cost of compliance could be material.

On September 20, 2013, the USEPA proposed revised GHG New Source Performance Standards for new electric generating units (EGUs) under CAA subsection 111(b), which would require new EGUs to limit the amount of CO₂ emitted per megawatt-hour. The proposal anticipates that affected coal-fired units would need to rely upon partial implementation of carbon capture and storage or other expensive CO₂ emission control technology to meet the standard. Furthermore, President Obama directed the USEPA to propose new standards, regulations, or guidelines, as appropriate, to address GHG emissions from existing EGUs under CAA subsection 111(d) by June 1, 2014, and finalize them by June 1, 2015. These latter rules may focus on energy efficiency improvements at power stations. We cannot predict the effect of these proposed or forthcoming standards on DP&L’s operations.

Approximately 99% of the energy we produce is generated by coal. DP&L’s share of CO₂ emissions at generating stations we own and co-own is approximately 14 million tons annually. Further GHG legislation or regulation implemented at a future date could have a significant effect on DP&L’s operations and costs, which could adversely affect our net income, cash flows and financial condition. However, due to the uncertainty associated with such legislation or regulation, we cannot predict the final outcome or the financial effect that such legislation or regulation may have on DP&L.

Litigation, Notices of Violation and Other Matters Related to Air Quality

Litigation Involving Co-Owned Stations

On June 20, 2011, the U.S. Supreme Court ruled that the USEPA’s regulation of GHGs under the CAA displaced any right that plaintiffs may have had to seek similar regulation through federal common law litigation in the court system. Although we are not named as a party to these lawsuits, DP&L is a co-owner of coal-fired stations with Duke Energy and AEP (or their subsidiaries) that could have been affected by the outcome of these lawsuits or similar suits that may have been filed against other electric power companies, including DP&L. Because the issue was not squarely before it, the U.S. Supreme Court did not rule against the portion of plaintiffs’ original suits that sought relief under state law.

As a result of a 2008 consent decree entered into with the Sierra Club and approved by the U.S. District Court for the Southern District of Ohio, DP&L and the other owners of the Stuart generating station are subject to certain specified emission targets related to NO_x, SO₂ and particulate matter. The consent decree also includes commitments for energy efficiency and renewable energy activities. An amendment to the consent decree was entered into and approved in 2010 to clarify how emissions would be computed during malfunctions. Continued compliance with the consent decree, as amended, is not expected to have a material effect on DP&L’s results of operations, financial condition or cash flows in the future.

Notices of Violation Involving Co-Owned Units

In November 1999, the USEPA filed civil complaints and NOVs against operators and owners of certain generation facilities for alleged violations of the CAA. Generation units operated by Duke Energy (Beckjord Unit 6) and AEP Generation (Conesville Unit 4) and co-owned by DP&L were referenced in these actions. The Conesville complaint was resolved in 2007 as part of a larger settlement with the USEPA. Conesville was required to install FGD and SCR at the unit by the end of 2010, and those retrofits have been completed. The Beckjord complaint was also resolved through litigation. There were no penalties or settlement agreements that affected Beckjord Unit 6.

In June 2000, the USEPA issued an NOV to the DP&L-operated Stuart generating station (co-owned by DP&L, Duke Energy and AEP Generation) for alleged violations of the CAA. The NOV contained allegations consistent with NOVs and complaints that the USEPA had brought against numerous other coal-fired utilities in the Midwest. The NOV indicated the USEPA may: (1) issue an order requiring compliance with the requirements of the Ohio SIP; or (2) bring a civil action seeking injunctive relief and civil penalties of up to $27,500 per day for each violation. To date, neither action has been taken. DP&L cannot predict the outcome of this matter.

In December 2007, the Ohio EPA issued an NOV to the DP&L-operated Killen generating station (co-owned by DP&L and Duke Energy) for alleged violations of the CAA. The NOV alleged deficiencies in the continuous monitoring of opacity. We submitted a compliance plan to the Ohio EPA on December 19, 2007. To date, no further actions have been taken by the Ohio EPA.

On March 13, 2008, Duke Energy, the operator of the Zimmer generating station, received an NOV and a Finding of Violation (FOV) from the USEPA alleging violations of the CAA, the Ohio State Implementation Program (SIP) and permits for the Station in areas including SO₂, opacity and increased heat input. A second NOV and FOV with similar allegations was issued on November 4, 2010. Also in 2010, the USEPA issued an NOV to Zimmer for excess emissions. DP&L is a co-owner of the Zimmer generating station and could be affected by the eventual resolution of these matters. Duke Energy is expected to act on behalf of itself and the co-owners with respect to these matters. DP&L is unable to predict the outcome of these matters.

Notices of Violation Involving Wholly-Owned Stations

In 2007, the Ohio EPA and the USEPA issued NOVs to DP&L for alleged violations of the CAA at the Hutchings Station. The NOVs’ alleged deficiencies relate to stack opacity and particulate emissions. On November 18, 2009, the USEPA issued an NOV to DP&L for alleged NSR violations of the CAA at the Hutchings Station relating to capital projects performed in 2001 involving Unit 3 and Unit 6. DP&L does not believe that the two projects described in the NOV were modifications subject to NSR. As a result of the cessation of operations at the Hutchings Station discussed in the next paragraph, DP&L believes that the USEPA is unlikely to pursue the NSR complaint.

As part of a settlement with the USEPA, DP&L signed a Consent Agreement and Final Order (CAFO) that was filed on September 26, 2013 and an Administrative Consent Agreement. Together, these two agreements resolved the opacity and particulate emissions NOV at the Hutchings Station and required that all six coal-fired units at Hutchings cease operating on coal by September 30, 2013, and included an immaterial penalty and the completion of a Supplemental Environmental Project of $0.2 million within one year. The units were disabled for coal operations prior to September 30, 2013.

DP&L also resolved all issues associated with the Ohio EPA NOV through a settlement signed October 4, 2013. The settlement included the payment of an immaterial penalty.

Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds

Clean Water Act – Regulation of Water Intake

On July 9, 2004, the USEPA issued final rules pursuant to the Clean Water Act governing existing facilities that have cooling water intake structures. The rules required an assessment of impingement and/or entrainment of organisms as a result of cooling water withdrawal. A number of parties appealed the rules. In April 2009, the U.S. Supreme Court ruled that the USEPA did have the authority to compare costs with benefits in determining best technology available. The USEPA released new proposed regulations on March 28, 2011, which were published in the Federal Register on April 20, 2011. We submitted comments to the proposed regulations on August 17, 2011. The USEPA was required pursuant to a settlement agreement to issue a final rule by April 17, 2014. On April 16, 2014, the agency released a letter sent to the Court indicating the final rulemaking would be completed by May 16, 2014. We do not yet know the impact the final rules will have on our operations.

Clean Water Act – Regulation of Water Discharge

In December 2006, DP&L submitted a renewal application for the Stuart Station NPDES permit that was due to expire on June 30, 2007. The Ohio EPA issued a revised draft permit that was received on November 12, 2008. In September 2010, the USEPA formally objected to the November 12, 2008 revised permit due to questions regarding the basis for the alternate thermal limitation. At DP&L’s request, a public hearing was held on March 23, 2011, where DP&L presented its position on the issue and provided written comments. In a letter to the Ohio EPA dated September 28, 2011, the USEPA reaffirmed its objection to the revised permit as previously drafted by the Ohio EPA. This reaffirmation stipulated that if the Ohio EPA did not re-draft the permit to address the USEPA’s objection, then the authority for issuing the permit would pass to the USEPA. The Ohio EPA issued another draft permit in December 2011, and a public hearing was held on February 2, 2012.

The draft permit required DP&L, over the 54 months following issuance of a final permit, to take undefined actions to lower the temperature of its discharged water to a level unachievable by the station under its current design or alternatively make other significant modifications to the cooling water system. DP&L submitted comments to the draft permit. In November 2012, the Ohio EPA issued another draft which included a compliance schedule for performing a study to justify an alternate thermal limitation and to which DP&L submitted comments. In December 2012, the USEPA formally withdrew their objection to the permit. On January 7, 2013, the Ohio EPA issued a final permit. On February 1, 2013, DP&L appealed various aspects of the final permit to the Environmental Review Appeals Commission and a hearing before the Commission on the appeal is scheduled for August 2014. The outcome of the appeal could have a material effect on DP&L’s operations.

In September 2009, the USEPA announced that it would be revising technology-based regulations governing water discharges from steam electric generating facilities. The rulemaking included the collection of information via an industry-wide questionnaire as well as targeted water sampling efforts at selected facilities. Subsequent to the information collection effort, it was anticipated that the USEPA would release a proposed rule by mid-2012 with a final regulation in place by early 2014. The proposed rule was released on June 7, 2013, with a deadline for a final rule on May 22, 2014. On December 16, 2013, the USEPA filed a status report that indicated that the agency is negotiating for an extension of time to finalize proposed revisions to the rule. On April 17, 2014, the parties entered into an agreement extending the deadline for the final regulations to September 30, 2015. At present, DP&L is unable to predict the impact this rulemaking will have on its operations.

In August 2012, DP&L submitted an application for the renewal of the Killen Station NPDES permit which expired in January 2013. At present, the outcome of this proceeding is not known.

In January 2014, DP&L submitted an application for the renewal of the Hutchings Station NPDES permit which expires in July 2014. At present, the outcome of this proceeding is not known.

In April 2012, DP&L received an NOV related to the construction of the Carter Hollow landfill at the Stuart Station. The NOV indicated that construction activities caused sediment to flow into downstream creeks. In addition, the U.S. Army Corps of Engineers issued a Cease and Desist order followed by a notice suspending the previously issued Corps permit authorizing work associated with the landfill. DP&L installed sedimentation ponds as part of the runoff control measures to address this issue and worked with the various agencies to resolve their concerns. DP&L signed an Administrative Order from the USEPA on May 30, 2013. A final Consent Agreement and Final Order was executed on July 8, 2013, and the previously issued permit was reinstated by the Corps on October 29, 2013.

Regulation of Waste Disposal

In September 2002, DP&L and other parties received a special notice that the USEPA considers us to be a PRP for the clean-up of hazardous substances at the South Dayton Dump landfill site. In August 2005, DP&L and other parties received a general notice regarding the performance of a Remedial Investigation and Feasibility Study (RI/FS) under a Superfund Alternative Approach. In October 2005, DP&L received a special notice letter inviting it to enter into negotiations with the USEPA to conduct the RI/FS. No recent activity has occurred with respect to that notice or PRP status. However, on August 25, 2009, the USEPA issued an Administrative Order requiring that access to DP&L’s service center building site, which is across the street from the landfill site, be given to the USEPA and the existing PRP group to help determine the extent of the landfill site’s contamination as well as to assess whether certain chemicals used at the service center building site might have migrated through groundwater to the landfill site. DP&L granted such access and drilling of soil borings and installation of monitoring wells occurred in late 2009 and early 2010. On May 24, 2010, three members of the existing PRP group, Hobart Corporation, Kelsey-Hayes Company and NCR Corporation, filed a civil complaint in the United States District Court for the Southern District of Ohio against DP&L and numerous other defendants alleging that DP&L and the other defendants contributed to the contamination at the South Dayton Dump landfill site and seeking reimbursement of the PRP group’s costs associated with the investigation and remediation of the site. On February 10, 2011, the Court dismissed claims against DP&L that related to allegations that chemicals used by DP&L at its service center contributed to the landfill site’s contamination. The Court, however, did not dismiss claims alleging financial responsibility for remediation costs based on hazardous substances from DP&L that were allegedly directly delivered by truck to the landfill. Discovery, including depositions of past and present DP&L employees, was conducted in 2012. On February 8, 2013, the Court granted DP&L’s motion for summary judgment on statute of limitations grounds with respect to claims seeking a contribution toward the costs that are expected to be incurred by the PRP group in performing an RI/FS. That summary judgment ruling was appealed on March 4, 2013 and the appeal is pending. DP&L is unable to predict the outcome of the appeal. Additionally, the Court’s ruling does not address future litigation that may arise with respect to actual remediation costs. While DP&L is unable to predict the outcome of these matters, if DP&L were required to contribute to the clean-up of the site, it could have a material adverse effect on its operations.

Beginning in mid-2012, the USEPA began investigating whether explosive or other dangerous conditions exist under structures located at or near the South Dayton Dump landfill site. In October 2012, DP&L received a request from the PRP group’s consultant to conduct additional soil and groundwater sampling on DP&L’s service center property. After informal discussions with the USEPA, DP&L complied with this sampling request and the sampling was conducted in February 2013. On February 28, 2013, the plaintiffs group referenced above entered into an Administrative Settlement Agreement Consent Order (ASACO) that establishes procedures for further sub-slab testing under structures at the South Dayton Dump landfill site and remediation of vapor intrusion issues relating to trichloroethylene (TCE), perchloroethylene (PCE), and methane. On April 16, 2013, the plaintiffs group filed a new complaint in the United States District Court for the Southern District of Ohio against DP&L and 34 other defendants alleging that they share liability for these costs. DP&L has opposed the allegations that it bears any responsibility under the February 2013 ASACO and will actively oppose any attempt that the plaintiffs group may have to expand the scope of the new complaint to resurrect issues dismissed by the Court in February 2013 under the first complaint. A motion to dismiss portions of this second complaint relating to alleged migration of chemicals from DP&L property to the landfill was denied February 18, 2014, as were motions filed by DP&L and others to dismiss other portions of the complaint that were viewed by defendants as identical to the allegations dismissed in the first complaint proceeding. The Judge found that there were differences in the allegations and is permitting those allegations to proceed. Limited discovery has been permitted pending resolution of the motion including some depositions of former DP&L employees during 2013 and into 2014. DP&L cannot predict the outcome of this proceeding.

In December 2003, DP&L and other parties received a special notice that the USEPA considers us to be a PRP for the clean-up of hazardous substances at the Tremont City landfill site. Information available to DP&L does not demonstrate that it contributed hazardous substances to the site. While DP&L is unable to predict the outcome of this matter, if DP&L were required to contribute to the clean-up of the site, it could have a material adverse effect on its operations.

On April 7, 2010, the USEPA published an Advance Notice of Proposed Rulemaking announcing that it is reassessing existing regulations governing the use and distribution in commerce of polychlorinated biphenyls (PCBs). While the USEPA previously indicated that the official release date for a proposed rule was in April 2013, it has been delayed, likely until late 2014. At present, DP&L is unable to predict the impact this initiative will have on its operations.

Regulation of Ash Ponds

In March 2009, the USEPA, through a formal Information Collection Request, collected information on ash pond facilities across the country, including those at Killen and Stuart Stations. Subsequently, the USEPA collected similar information for the Hutchings Station.

In August 2010, the USEPA conducted an inspection of the Hutchings Station ash ponds. In June 2011, the USEPA issued a final report from the inspection including recommendations relative to the Hutchings Station ash ponds. DP&L is unable to predict whether there will be additional USEPA action relative to DP&L’s proposed plan or the effect on operations that might arise under a different plan.

In June 2011, the USEPA conducted an inspection of the Killen Station ash ponds. In May 2012, we received a draft report on the inspection. DP&L submitted comments on the draft report in June 2012. On March 14, 2013, DP&L received the final report on the inspection of the Killen Station ash pond inspection from the USEPA which included recommended actions. DP&L has submitted a response with its actions to the USEPA. DP&L is unable to predict the outcome this inspection will have on its operations.

There has been increasing advocacy to regulate coal combustion byproducts under the Resource Conservation Recovery Act (RCRA). On June 21, 2010, the USEPA published a proposed rule seeking comments on two options under consideration for the regulation of coal combustion byproducts including regulating the material as a hazardous waste under RCRA Subtitle C or as a solid waste under RCRA Subtitle D. Litigation has been filed by several groups seeking a court-ordered deadline for the issuance of a final rule which the USEPA has opposed. On January 29, 2014, the parties to the litigation entered into a consent decree setting forth the USEPA’s obligation to sign, by December 19, 2014, a notice for publication in the Federal Register taking action on the agency’s proposed Subtitle D option. The decree does not require Subtitle D regulation of coal combustion byproducts – it only requires the agency to decide by that date whether or not to adopt the Subtitle D option. At present, the timing for a final rule regulating coal combustion byproducts cannot be determined. DP&L is unable to predict the financial effect of this regulation, but if coal combustion byproducts are regulated as hazardous waste, it is expected to have a material adverse effect on its operations.

Notice of Violation Involving Co-Owned Units

On September 9, 2011, DP&L received an NOV from the USEPA with respect to its co-owned Stuart generating station based on a compliance evaluation inspection conducted by the USEPA and Ohio EPA in 2009. The notice alleged non-compliance by DP&L with certain provisions of the RCRA, the Clean Water Act NPDES permit program and the station’s storm water pollution prevention plan. The notice requested that DP&L respond with the actions it has subsequently taken or plans to take to remedy the USEPA’s findings and ensure that further violations will not occur which was done in October 2011. Based on its review of the findings, although there can be no assurance, we believe that the notice will not result in any material effect on DP&L’s results of operations, financial condition or cash flows.

DP&L [Member]

Contractual Obligations, Commercial Commitments And Contingencies

11. Contractual Obligations, Commercial Commitments and Contingencies

DP&L – Equity Ownership Interest

DP&L owns a 4.9% equity ownership interest in OVEC, an electric generation company, which is recorded using the cost method of accounting under GAAP. As of March 31, 2014, DP&L could be responsible for the repayment of 4.9%, or $76.0 million, of a $1,550.2 million debt obligation that has maturities from 2018 to 2040. This would only happen if OVEC defaulted on its debt payments. As of March 31, 2014, we have no knowledge of such a default.

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 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, 2014, cannot be reasonably determined.

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 SIP) which require compliance, obtaining permits and reporting as to air emissions,

Rules and future rules issued by the USEPA and the Ohio EPA that require reporting and may require reductions of GHGs,

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 in an effort to comply, or to determine compliance, with such regulations. We record liabilities for environmental losses that are probable of occurring and can be reasonably estimated At March 31, 2014, and December 31, 2013, we had accruals of approximately $1.4 million and $1.1 million, respectively, for environmental matters and other claims. We also have a number of environmental matters for which we have not accrued loss contingencies because the risk of loss is not probable or a loss cannot be reasonably estimated, which are disclosed in the paragraphs below. We evaluate the potential liability related to environmental matters quarterly and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our results of operations, financial condition or cash flows.

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 the power stations; especially on those that do not have SCR and FGD equipment installed to further control certain emissions. Currently, the coal-fired generation unit Beckjord Unit 6, in which DP&L has a 50% ownership interest, does not have such emission-control equipment installed. This unit is scheduled to be deactivated on June 1, 2015. DP&L is depreciating Beckjord Unit 6 through December 2014 and does not believe that any additional accruals or impairment charges are needed as a result of this decision.

Environmental Matters Related to Air Quality

Clean Air Act Compliance

Clean Air Interstate Rule/Cross-State Air Pollution Rule

Mercury and Other Hazardous Air Pollutants

National Ambient Air Quality Standards

Effective August 23, 2010, the USEPA implemented revisions to its primary NAAQS for SO₂ replacing the current 24-hour standard and annual standard with a one-hour standard. DP&L cannot determine the effect of this potential change, if any, on its operations. Initial non-attainment designations were made July 25, 2013, and Pierce Township in Clermont County, which contains DP&L’s co-owned unit Beckjord 6, was the only area with DP&L operations recommended as non-attainment. Non-attainment areas will be required to meet the new standard by October 2018. DP&L cannot determine the effect of the designations on its operations; however, Beckjord is expected to cease operations prior to the attainment date.

Carbon Dioxide and Other Greenhouse Gas Emissions

Litigation, Notices of Violation and Other Matters Related to Air Quality

Litigation Involving Co-Owned Stations

Notices of Violation Involving Co-Owned Units

Notices of Violation Involving Wholly-Owned Stations

DP&L also resolved all issues associated with the Ohio EPA NOV through a settlement signed October 4, 2013. The settlement included the payment of an immaterial penalty.

Environmental Matters Related to Water Quality, Waste Disposal and Ash Ponds

Clean Water Act – Regulation of Water Intake

Clean Water Act – Regulation of Water Discharge

In August 2012, DP&L submitted an application for the renewal of the Killen Station NPDES permit which expired in January 2013. At present, the outcome of this proceeding is not known.

In January 2014, DP&L submitted an application for the renewal of the Hutchings Station NPDES permit which expires in July 2014. At present, the outcome of this proceeding is not known.

Regulation of Waste Disposal

Regulation of Ash Ponds

Notice of Violation Involving Co-Owned Units

- Definition

The entire disclosure for commitments and contingencies.

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