WTF is he doing underground!!! How did he get there?!?!
There are some threads discussing Vulthuryol but dragons have been in hiding, and Blackreach is a pretty good hiding place. He could probably (just about) fit in one of the elevators or theres some otherway in we don't see. Theres no info in-game on how or why he's in there though.
I think he may have been captured by the Dwemer back when they were still around (i.e. pre-Brass Tower/Numidium incident). They would have kept him locked underground, and possibly forced him to breathe fire onto a boiler to fuel their machines.
THis would lend its self to why he doesnt really fly. May be that his wings while semi functional may actually be close to atrophy.