Income Taxes

12 Months Ended

Dec. 31, 2017

DPL’s components of income tax expense on continuing operations were as follows:



	Years ended December 31,
$ in millions	2017			2016			2015
Computation of tax expense / (benefit)
Federal income tax benefit (a)	$	(42.0	)	$	(277.6	)	$	(81.0	)
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect	(0.5		)	(1.0		)	(0.1		)
Depreciation of AFUDC - Equity	0.8			2.7			(3.5		)
Investment tax credit amortized	(0.3		)	(0.4		)	(0.5		)
Section 199 - domestic production deduction	—			(4.5		)	(4.1		)
Non-deductible goodwill impairment	—			—			111.0
Accrual (settlement) for open tax years	(0.4		)	2.2			—
Other, net ^(b)	17.1			(0.2		)	(1.8		)
Tax expense / (benefit)	$	(25.3	)	$	(278.8	)	$	20.0

Components of tax expense / (benefit)
Federal - current	$	(2.9	)	$	14.7		$	30.1
State and Local - current	—			0.6			0.8
Total current	(2.9		)	15.3			30.9

Federal - deferred	(22.0		)	(290.2		)	(9.9		)
State and local - deferred	(0.4		)	(3.9		)	(1.0		)
Total deferred	(22.4		)	(294.1		)	(10.9		)
Tax expense / (benefit)	$	(25.3	)	$	(278.8	)	$	20.0


(a)	The statutory tax rate of 35% was applied to pre-tax earnings.


(b)	Includes expense / (benefit) of $3.5 million, $(0.3) million and $0.2 million in the years ended December 31, 2017, 2016, and 2015, respectively, of income tax related to adjustments from prior years. The 2017 tax year also includes a one-time remeasurement of deferred tax expense related to the recent enactment of the TCJA of $13.7 million.

Effective and Statutory Rate Reconciliation

The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to DPL's effective tax rate, as a percentage of income from continuing operations before taxes for the years ended December 31, 2017, 2016 and 2015:



	Years ended December 31,
	2017		2016		2015
Statutory Federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of Federal tax benefit	0.4	%	0.1	%	0.1	%
AFUDC - Equity	(0.7	)%	(0.3	)%	1.5	%
Amortization of investment tax credits	0.3	%	—	%	0.2	%
Section 199 - domestic production deduction	—	%	0.6	%	1.8	%
Non-deductible goodwill impairment	—	%	—	%	(48.0	)%
Other, net ^(a)	(13.9	)%	(0.3	)%	0.8	%
Effective tax rate	21.1	%	35.1	%	(8.6	)%


(a)	In 2017, this is primarily a result of the application of the TCJA.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and (b) operating loss carryforwards. These items are stated at the enacted tax rates that are expected to be in effect when taxes are actually paid or recovered. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.



Components of Deferred Tax Assets and Liabilities
	December 31,
$ in millions	2017			2016
Net non-current assets / (liabilities)
Depreciation / property basis	$	(103.6	)	$	(234.8	)
Income taxes recoverable / (payable)	11.0			(11.9		)
Regulatory assets	(23.1		)	(7.8		)
Investment tax credit	0.5			0.5
Compensation and employee benefits	11.3			5.5
Intangibles	(0.4		)	(1.5		)
Long-term debt	(0.2		)	(0.7		)
Other ^(a)	(6.7		)	(1.7		)
Net non-current liabilities	$	(111.2	)	$	(252.4	)


(a)	The Other caption includes deferred tax assets of $36.3 million in 2017 and $38.3 million in 2016 related to state and local tax net operating loss carryforwards, net of related valuation allowances of $36.3 million in 2017 and $38.3 million in 2016. These net operating loss carryforwards expire from 2018 to 2037.

U. S Tax Reform

On December 22, 2017, the U.S. enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law.

We recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of FASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, our financial statements reflect the income tax effects of U.S. tax reform for which the accounting is complete and provisional amounts for those impacts for which the accounting under FASC 740 is incomplete, but a reasonable estimate could be determined.

We have calculated our best estimate of the impact of the TCJA in our income tax provision for the year ended December 31, 2017 in accordance with our understanding of the TCJA and guidance available as of the date of this filing, and as a result recognized $13.7 million of discrete tax expense in the fourth quarter of 2017 related to non-operating and non-regulated property.

This amount results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $135.2 million was recorded as a regulatory liability, which was a non-cash adjustment. Additional time is required to finalize remeasurement effects in accordance with GAAP.

Per the terms of the order issued by the PUCO on DP&L's 2017 ESP, DPL will not make any tax-sharing payments to AES and AES will forgo collection of the payments during the term of the DMR. The agreed upon term of the DMR is three years. With commission approval, the DMR can be extended two additional years allowing for the term to potentially be five years. Both the current and non-current existing tax sharing liabilities with AES were converted into additional equity investment in DPL, per the requirements of the order. Throughout the term, further accrued tax sharing liabilities will also be converted to additional equity. All parties agreed that the initial conversion and any future conversions will not be reversed. In 2017 we converted $97.1 million to equity in accordance with this requirement.

The following table presents the tax expense / (benefit) related to pensions, postemployment benefits, cash flow hedges and financial instruments that were credited to Accumulated other comprehensive loss.



	Years ended December 31,
$ in millions	2017		2016			2015
Tax expense / (benefit)	$	0.2	$	(9.6	)	$	6.3

Uncertain Tax Positions

We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:




$ in millions
Balance at December 31, 2015	$	3.0
Calendar 2016
Tax positions taken during prior period	2.2
Lapse of Statute of Limitations	(1.5		)
Balance at December 31, 2016	3.7
Calendar 2017
Tax positions taken during prior period	—
Lapse of Statute of Limitations	(0.2		)
Balance at December 31, 2017	$	3.5

Of the December 31, 2017 balance of unrecognized tax benefits, $0.9 million is due to uncertainty in the timing of deductibility.

We recognize interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts accrued and the expense / (benefit) recorded were not material for each period presented.

Following is a summary of the tax years open to examination by major tax jurisdiction:

U.S. Federal – 2011 and forward

State and Local – 2011 and forward

None of the unrecognized tax benefits are expected to significantly increase or decrease within the next twelve months other than those subject to expiring statute of limitations.

THE DAYTON POWER AND LIGHT COMPANY [Member]

Income Taxes [Line Items]

Income Taxes

DP&L’s components of income tax expense on continuing operations were as follows:



	Years ended December 31,
$ in millions	2017			2016			2015
Computation of tax expense
Federal income tax expense (a)	$	31.0		$	50.1		$	65.8
Increases (decreases) in tax resulting from:
State income taxes, net of federal effect	0.4			0.4			0.4
Depreciation of AFUDC - Equity	1.2			3.0			(3.1		)
Investment tax credit amortized	(0.3		)	(0.4		)	(0.4		)
Accrual (settlement) for open tax years	(0.5		)	3.4			—
Other, net ^(b)	(0.7		)	(10.5		)	(3.7		)
Total tax expense	$	31.1		$	46.0		$	59.0

Components of tax expense
Federal - current	$	13.5		$	37.7		$	68.3
State and Local - current	0.2			0.5			0.9
Total current	13.7			38.2			69.2

Federal - deferred	17.0			7.7			(9.9		)
State and local - deferred	0.4			0.1			(0.3		)
Total deferred	17.4			7.8			(10.2		)
Total tax expense	$	31.1		$	46.0		$	59.0


(a)	The statutory tax rate of 35% was applied to pre-tax earnings.


(b)	Includes expense / (benefit) of $0.0 million, $(0.4) million and $0.1 million in the years ended December 31, 2017, 2016 and 2015, respectively, of income tax related to adjustments from prior years.

Effective and Statutory Rate Reconciliation

The following table summarizes a reconciliation of the U.S. statutory federal income tax rate to DP&L's effective tax rate, as a percentage of income from continuing operations before taxes for the years ended December 31, 2017, 2016 and 2015:



	Years ended December 31,
	2017		2016		2015
Statutory Federal tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of Federal tax benefit	0.4	%	0.3	%	0.2	%
AFUDC - Equity	1.4	%	2.1	%	(1.7	)%
Amortization of investment tax credits	(0.4	)%	(0.3	)%	(0.2	)%
Other - net	(1.3	)%	(5.1	)%	(2.1	)%
Effective tax rate	35.1	%	32.0	%	31.2	%

Deferred Income Taxes



Components of Deferred Tax Assets and Liabilities
	December 31,
$ in millions	2017			2016
Net non-current assets / (liabilities)
Depreciation / property basis	$	(126.5	)	$	(238.0	)
Income taxes recoverable / (payable)	11.0			(12.2		)
Regulatory assets	(23.9		)	(9.1		)
Investment tax credit	0.4			0.4
Compensation and employee benefits	17.6			(0.3		)
Other	(9.6		)	(7.7		)
Net non-current liabilities	$	(131.0	)	$	(266.9	)

U. S Tax Reform

On December 22, 2017, the U.S. enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law.

Certain deferred tax assets and liabilities were remeasured as the rates changed from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $135.2 million was recorded as a regulatory liability, which was a non-cash adjustment. Additional time is required to finalize remeasurement effects in accordance with GAAP.



	Years ended December 31,
$ in millions	2017		2016			2015
Tax expense / (benefit)	$	4.0	$	(7.0	)	$	7.5

Uncertain Tax Positions

We apply the provisions of GAAP relating to the accounting for uncertainty in income taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefits for DP&L is as follows:



$ in millions
Balance at December 31, 2015	$	3.0
Calendar 2016
Tax positions taken during prior period	3.4
Lapse of Statute of Limitations	(1.5		)
Balance at December 31, 2016	4.9
Calendar 2017
Tax positions taken during prior period	—
Lapse of Statute of Limitations	(0.1		)
Balance at December 31, 2017	$	4.8

Of the December 31, 2017 balance of unrecognized tax benefits, $0.9 million is due to uncertainty in the timing of deductibility.

We recognize interest and penalties related to unrecognized tax benefits in Income tax expense. The amounts accrued and tax expense / (benefit) recorded were not material for each period presented.

Following is a summary of the tax years open to examination by major tax jurisdiction:

U.S. Federal – 2011 and forward

State and Local – 2011 and forward

None of the unrecognized tax benefits are expected to significantly increase or decrease within the next twelve months other than those subject to expiring statute of limitations.