UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004 March 31, 2005

OR

o 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  1-2385

 

THE DAYTON POWER AND LIGHT COMPANY

(Exact name of registrant as specified in its charter)

 

OHIO

31-0258470

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

incorporation or organization)

1065 Woodman Drive
Dayton, Ohio

45432

(Address of principal executive offices)

(937) 224-6000

(Zip Code)Registrant’s telephone number, including area code)

Registrant’s telephone number, including area code:  937-224-6000

 

Indicate by check mark whether the 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.

YES     ý   NO     o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES     o   NO     ý

 

Number of shares of registrant’s common stock outstanding as of October 31, 2004,April 30, 2005, all of which were held by DPL Inc., was 41,172,173.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 



 

THE DAYTON POWER AND LIGHT COMPANY

INDEX

 

 

Page No.

Part I. Financial Information

Financial Information

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Statement of Results of Operations

3

 

 

 

 

 

 

Consolidated Statement of Cash Flows

4

 

 

 

 

 

 

Consolidated Balance Sheet

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2015

 

 

 

 

 

 

Operating Statistics

3026

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

3026

 

 

 

 

 

Item 4.

Controls and Procedures

3026

 

 

 

 

Part II. Other Information

Other Information

 

 

Item 1.

Legal Proceedings

3327

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

3327

 

 

 

 

 

Item 5.

Other Information

3327

 

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

3327

 

 

 

Other

 

 

 

Signatures

34

 

 

 

 

CertificationsSignatures

 

28

Certifications

28

 

Available Information:

The Dayton Power and Light Company (DP&L or the Company) files current, annual and quarterly reports and other information required by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission (SEC).  You may read and copy any document the Company files at the SEC’s public reference room located at 450 Fifth Street, NW, Washington, DCD.C.  20549, USA.  Please call the SEC at (800) SEC-0330 for further information on the public reference rooms.  The Company’s SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.

 

The Company’s public internetweb site is http://www.dplinc.com.  The Company makes available through its internetweb site, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

 

In addition, the Company’s public internetweb site includes other items related to corporate governance matters, including, among other things, the Company’s governance guidelines, charters of various committees of the Board of Directors and the Company’s code of business conduct and ethics applicable to all employees, officers and directors.  You may obtain copies of these documents, free of charge, by sending a request, in writing, to DPLDP&L Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.

 

2



 

Part I.  Financial Information

 

Item 1.  Financial Statements

 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS

($ in millions)

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

(as restated)

 

 

 

(as restated)

 

 

Three Months Ended
March 31,

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric

 

$

310.2

 

$

323.2

 

$

893.4

 

$

890.3

 

Electric revenues

 

$

305.1

 

$

300.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

64.1

 

59.9

 

187.3

 

166.3

 

 

77.7

 

62.7

 

Purchased power

 

31.4

 

29.8

 

84.6

 

76.3

 

 

29.3

 

28.5

 

Operation and maintenance

 

51.8

 

44.6

 

152.5

 

128.6

 

 

48.8

 

46.8

 

Depreciation and amortization

 

29.6

 

30.1

 

87.3

 

88.5

 

 

30.0

 

28.3

 

Amortization of regulatory assets, net

 

0.1

 

12.5

 

0.3

 

35.3

 

 

0.5

 

0.1

 

General taxes

 

26.5

 

28.0

 

78.2

 

81.7

 

 

27.4

 

27.1

 

Total operating expenses

 

203.5

 

204.9

 

590.2

 

576.7

 

 

213.7

 

193.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

106.7

 

118.3

 

303.2

 

313.6

 

 

91.4

 

106.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

0.1

 

21.5

 

0.4

 

21.9

 

Other income (deductions)

 

(0.9

)

0.6

 

1.1

 

5.3

 

Interest expense

 

(10.6

)

(13.7

)

(32.4

)

(38.9

)

 

(11.3

)

(11.8

)

Other income

 

7.8

 

4.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes and Cumulative Effect of Accounting Change

 

95.3

 

126.7

 

272.3

 

301.9

 

Income Before Income Taxes

 

87.9

 

99.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

39.8

 

47.9

 

107.8

 

113.9

 

 

34.6

 

37.3

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of Accounting Change

 

55.5

 

78.8

 

164.5

 

188.0

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change, net of tax

 

 

 

 

17.0

 

 

 

 

 

 

 

 

 

 

Net Income

 

55.5

 

78.8

 

164.5

 

205.0

 

 

53.3

 

62.0

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

 

0.3

 

0.2

 

0.7

 

 

0.2

 

0.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings on Common Stock

 

$

55.5

 

$

78.5

 

$

164.3

 

$

204.3

 

 

$

53.1

 

$

61.8

 

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

3



 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

($ in millions)

 

 

Nine Months Ended
September 30,

 

 

2004

 

2003

 

 

Three Months Ended
March 31,

 

 

 

 

(as restated)

 

 

2005

 

2004

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

164.5

 

$

205.0

 

 

$

53.3

 

$

62.0

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

87.3

 

88.5

 

 

30.0

 

28.3

 

Amortization of regulatory assets, net

 

0.3

 

35.3

 

 

0.5

 

0.1

 

Deferred income taxes

 

(5.5

)

(2.3

)

 

11.4

 

12.4

 

Income from interest rate hedges

 

 

(21.2

)

Cumulative effect of accounting change, net of tax

 

 

(17.0

)

Changes in working capital:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

25.8

 

25.7

 

 

2.8

 

10.0

 

Accounts payable

 

(11.2

)

(4.8

)

 

2.8

 

1.7

 

Net intercompany receivable / payable

 

0.5

 

70.8

 

Accrued taxes payable

 

103.8

 

29.5

 

 

15.8

 

14.6

 

Accrued interest payable

 

5.1

 

(10.7

)

 

4.7

 

4.3

 

Prepayments

 

(2.0

)

(13.4

)

 

8.6

 

7.9

 

Inventories

 

(12.9

)

0.5

 

 

(8.0

)

(7.7

)

Deferred compensation assets

 

8.2

 

28.3

 

 

3.6

 

8.8

 

Deferred compensation obligations

 

(1.1

)

(28.9

)

 

0.7

 

(6.7

)

Other (Note 3)

 

(6.7

)

0.2

 

 

 

 

 

 

Other (Note 2)

 

(11.2

)

(15.4

)

Net cash provided by operating activities

 

356.1

 

385.5

 

 

115.0

 

120.3

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(62.7

)

(86.8

)

 

(42.7

)

(25.7

)

Settlement of interest rate hedges

 

 

51.4

 

 

 

 

 

 

Net cash used for investing activities

 

(62.7

)

(35.4

)

 

(42.7

)

(25.7

)

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement of long-term debt

 

(0.4

)

(0.4

)

Issuance of long-term debt, net of issuance costs

 

 

465.1

 

Dividends paid on common stock

 

(150.0

)

(212.7

)

 

(75.0

)

(75.0

)

Dividends paid on preferred stock

 

(0.2

)

(0.7

)

 

(0.2

)

(0.2

)

 

 

 

 

 

Net cash (used for) provided by financing activities

 

(150.6

)

251.3

 

Net cash used for financing activities

 

(75.2

)

(75.2

)

 

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change

 

142.8

 

601.4

 

 

(2.9

)

19.4

 

Balance at beginning of period

 

17.2

 

17.1

 

 

17.2

 

17.2

 

Balance at end of period

 

$

160.0

 

$

618.5

 

 

$

14.3

 

$

36.6

 

 

 

 

 

 

 

 

 

 

 

Cash Paid During the Period for:

 

 

 

 

 

 

 

 

 

 

Interest

 

$

24.2

 

$

46.3

 

 

$

5.8

 

$

6.0

 

Income taxes

 

$

2.2

 

$

81.9

 

 

$

(2.9

)

$

0.4

 

 

See Notes to Consolidated Financial Statements.Statement.

These interim statements are unaudited.

 

4



 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

 

 

At
September 30,
2004

 

At
December 31,
2003

 

 

At
March 31,
2005

 

At
December 31,
2004

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

$

3,928.9

 

$

3,875.4

 

Property, plants and equipment

 

$

3,977.6

 

$

3,944.6

 

Less: Accumulated depreciation and amortization

 

(1,842.3

)

(1,769.1

)

 

(1,890.7

)

(1,864.4

)

 

 

 

 

 

Net property, plant and equipment

 

2,086.6

 

2,106.3

 

Net property

 

2,086.9

 

2,080.2

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments (Note 3)

 

160.0

 

17.2

 

Accounts receivable, less provision for uncollectible accounts of $1.1 and $3.6, respectively

 

134.6

 

160.4

 

Inventories, at average cost (Note 3)

 

62.5

 

49.6

 

Cash and temporary cash investments

 

14.3

 

17.2

 

Accounts receivable, less provision for uncollectible accounts of $1.0 and $3.6, respectively

 

151.0

 

153.8

 

Inventories, at average cost (Note 2)

 

77.9

 

69.8

 

Prepaid taxes

 

11.6

 

46.4

 

 

34.8

 

46.4

 

Other (Note 3)

 

25.2

 

24.4

 

 

 

 

 

 

Other (Note 2)

 

17.2

 

24.8

 

Total current assets

 

393.9

 

298.0

 

 

295.2

 

312.0

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

 

 

 

Income taxes recoverable through future revenues

 

42.6

 

43.3

 

 

32.4

 

32.5

 

Other regulatory assets

 

38.6

 

36.1

 

 

50.9

 

41.5

 

Other (Note 3)

 

161.3

 

176.4

 

 

 

 

 

 

Other (Note 2)

 

169.0

 

175.2

 

Total other assets

 

242.5

 

255.8

 

 

252.3

 

249.2

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

2,723.0

 

$

2,660.1

 

 

$

2,634.4

 

$

2,641.4

 

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

5



 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

(continued)

 

 

At
September 30,
2004

 

At
December 31,
2003

 

CAPITALIZATION AND LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Capitalization

 

 

 

 

 

Common shareholders’ equity

 

 

 

 

 

Common stock

 

$

0.4

 

$

0.4

 

Other paid-in capital

 

781.0

 

780.5

 

Accumulated other comprehensive income

 

35.9

 

38.2

 

Earnings reinvested in the business

 

335.9

 

321.7

 

 

 

 

 

 

 

Total common shareholders’ equity

 

1,153.2

 

1,140.8

 

 

 

 

 

 

 

Preferred stock

 

22.9

 

22.9

 

 

 

 

 

 

 

Long-term debt

 

686.4

 

687.3

 

 

 

 

 

 

 

Total capitalization

 

1,862.5

 

1,851.0

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

78.5

 

88.9

 

Accrued taxes

 

135.4

 

66.4

 

Accrued interest

 

15.5

 

10.2

 

Other (Note 3)

 

19.1

 

24.6

 

 

 

 

 

 

 

Total current liabilities

 

248.5

 

190.1

 

 

 

 

 

 

 

Deferred Credits and Other

 

 

 

 

 

Deferred taxes

 

372.2

 

381.7

 

Unamortized investment tax credit

 

50.0

 

52.2

 

Other (Note 3)

 

189.8

 

185.1

 

 

 

 

 

 

 

Total deferred credits and other

 

612.0

 

619.0

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

2,723.0

 

$

2,660.1

 

 

 

At
March 31,
2005

 

At
December 31,
2004

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Capitalization

 

 

 

 

 

Common shareholders’ equity

 

 

 

 

 

Common stock

 

$

0.4

 

$

0.4

 

Other paid-in capital

 

782.3

 

782.9

 

Accumulated other comprehensive income

 

41.4

 

43.1

 

Earnings reinvested in the business

 

207.8

 

229.7

 

Total common shareholders’ equity

 

1,031.9

 

1,056.1

 

 

 

 

 

 

 

Preferred stock

 

22.9

 

22.9

 

 

 

 

 

 

 

Long-term debt (Note 5)

 

686.4

 

686.6

 

Total capitalization

 

1,741.2

 

1,765.6

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Accounts payable

 

103.1

 

107.8

 

Accrued taxes

 

129.1

 

124.8

 

Accrued interest

 

15.5

 

10.7

 

Other (Note 2)

 

34.3

 

22.1

 

Total current liabilities

 

282.0

 

265.4

 

 

 

 

 

 

 

Deferred Credits and Other

 

 

 

 

 

Deferred taxes

 

365.7

 

365.8

 

Unamortized investment tax credit

 

48.6

 

49.3

 

Other (Note 2)

 

196.9

 

195.3

 

Total deferred credits and other

 

611.2

 

610.4

 

 

 

 

 

 

 

Contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

2,634.4

 

$

2,641.4

 

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

6



 

Notes to Consolidated Financial Statements

 

1.              Basis of Presentation

 

Basis of Consolidation

The Dayton Power and Light Company (DP&L or the Company) prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).  The consolidated financial statements include the accounts of DP&L and its other majority-owned subsidiaries.  Investments that are not majority-ownedmajority owned are accounted for using the equity method when DP&L’s investment allows it the ability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-owned generation facilities are consolidated on a pro-ratapro rata basis.  All material intercompany accounts and transactions are eliminated in consolidation.

 

DP&L has prepared the unaudited consolidated financial statements in this report, pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in DP&L’s 20032004 Annual Report on Form 10-K.

 

Estimates, Judgments and Reclassifications

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the revenuesrevenue and expenses of the period reported.  Significant items subject to such estimates and judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; the valuation allowance for receivables and deferred income taxes; and assets and liabilities related to employee benefits.  Actual results may differ from those estimates.  Reclassifications have been made in certain prior years’ amounts to conform to the current reporting presentation.

 

Recently Issued Accounting Standards

 

Staff Position No. 106-1Stock-Based Compensation

In December 2003, the FASB issued Staff Position No. 106-1 (FSP 106-1), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act).  The Act provides for drug benefits for retirees over the age of 65 under a new Medicare Part D program.  For employers like DP&L, who currently provide retiree medical programs for certain former employees over the age of 65, there are subsidies available which are inherent in the Act.  The Act entitles these employers to a direct tax-exempt federal subsidy.  However, since the effective date of the Act was December 2003 and because most employers have not had time to consider the accounting considerations and there is no appropriate accounting guidance for the federal subsidy, the FASB issued this FSP 106-1 to allow employers a one-time election to defer recognition of the impact of the Act in the employer’s accounting until formal guidance is issued.  DP&L elected to defer recognition of the provisions of this Act until further accounting guidance is issued.

Staff Position No. 106-2

In May 2004, the FASB issued FASB Staff PositionSFAS No.123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion No. 106-2 (FSP 106-2)25 (Opinion 25), “Accounting for Stock Issued to Employees”.  SFAS 123R will provide investors and Disclosure Requirements Relatedother users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which supersedes FSP 106-1.  FSP 106-2 provides guidanceshare-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123R establishes standards in which to account for transactions where an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or settled by issuance of equity instruments.  This statement focuses primarily on accounting for employee services paid for by share-based transactions.  SFAS 123R requires a public entity to measure the effectscost of employee services received and paid for by equity instruments to be based on the Medicare Prescription Drug, Improvementfair-value of such equity on the grant date.  This cost is recognized in results of operations over the period in which employees are required to provide service.  Liabilities initially incurred will be based on the fair-value of equity instruments and Modernization Actthen be re-measured at each subsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options and other similar instruments at the grant date will be estimated using option-pricing models and excess tax benefits will be recognized as an addition to paid-in capital.  Cash retained from the excess tax benefits will be presented in the statement of cash flows as financing cash inflows.  The provisions of this Statement shall be effective for the Company no later than January 1, 2006.  DP&L is currently accounting for such share-based transactions granted after January 1, 2003, (the Act)using SFAS 123, “Accounting for employers that sponsor postretirement health care plans that provide prescription drug benefits. It also requires certain disclosures regardingStock-Based Compensation.”  DP&L is evaluating the effect of the federal subsidy provided by the Act.  FSP 106-2 is effective for the first interim or annual period beginning after June 15, 2004.  The Company adopted FSP 106-2this new standard on July 1, 2004 and the effect was not material to the Company’s results of operations, cash flow orflows and financial position.

EITF 03-01 and EITF 02-14

In June 2004, the Emerging Issues Task Force (EITF) issued EITF 03-01 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which is applicable for periods effective beginning after June 15, 2004.  EITF 03-01 addresses the meaning of other-than-temporary impairment and its application to debt and equity securities within the scope of Statement of Financial Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), certain debt and equity securities within the scope of

 

7



 

Inventory Costs

In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 124151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (SFAS 151). The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company is evaluating the impact of the adoption of SFAS 151, but does not believe the impact will be significant to the Company’s overall results of operations, cash flows or financial position.

Exchange of Nonmonetary Assets

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29” (SFAS 153).  The guidance in APB Opinion No. 29, “Accounting for Certain Investments Held by Not-for-Profit Organizations” (SFAS 124)Nonmonetary Transactions”, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and equity securitiesreplaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.  The Company is evaluating the impact of the adoption of SFAS 153, but does not subjectbelieve the impact will be significant to the scopeCompany’s overall results of SFAS 115operations, cash flows or financial position.

The American Jobs Creation Act of 2004

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act).  On December 21, 2004, the Financial Accounting Standards Board (FASB) issued two FASB Staff Positions (FSP) regarding the accounting implications of the Act related to (1) the deduction for qualified domestic production activities (FSP FAS 109-1) and not accounted(2) the one-time tax benefit for under the equity methodrepatriation of accounting. foreign earnings (FSP FAS 109-2).  The guidance in the FSPs applies to financial statements for periods ending after the date the Act was enacted.  The Act provides a deduction up to 9 percent (when fully phased-in) of the lesser of (a) qualified production activities income, as defined by the Act, or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards).  This tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer.  The Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.   DP&L reduced its tax expense by $0.5 million in the first quarter of 2005 as a result of the deduction for qualified domestic production activities.

Discontinued Operations

In SeptemberNovember, 2004, the EITF issued EITF 02-14 “Whether an Investor Should Apply03-13, “Applying the Equity MethodConditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Investments Other Than Common Stock”, which is applicable for periods effective after June 15, 2004.  EITF 02-14, addresses: (1) whether an investor should apply the equity method of accounting to investments other than common stock, (2) if the equity methodReport Discontinued Operations.”  This guidance should be applied to investments other than common stock, howa component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004.  Operating results related to a component that is either disposed of or classified as held for sale within an enterprise’s fiscal year that includes November 30, 2004, may be classified to reflect the equity method of accounting should be applied to those investments and (3) whether investments other than common stock that have a “readily determinable fair value” under paragraph 3 of SFAS 115 should be accounted for in accordance with SFAS 115 rather than pursuant to EITF 02-14.consensus. The Company is in the process of evaluating each of these issues and hasdetermined that this issue did not determined thehave an impact toon its results of operations, statement of financial positioncondition or cash flows.

2. Restatement of Financial Statements

As part of DPL’s Audit Committee’s response to a report prepared by Taft, Stettinius & Hollister LLP and during the 2003 year-end financial closing process, the Company identified certain adjustments to prior period financial statements.  As a result, the Company has restated its consolidated financial statements for the three months and nine months ended September 30, 2003, in addition to prior periods.  These adjustments increased net income by $1.1 million to $45.4 million for the third quarter of 2003, and increased net income by $0.9 million to $126.2 million for the nine months ended September 30, 2003.  All applicable financial information contained in this Quarterly Report on Form 10-Q gives effect to these restatements.  Accordingly, the financial statements for this fiscal period described above that have been in the Company’s prior SEC filings should not be relied upon.

Certain captions in the September 30, 2003 Consolidated Balance Sheet were also adjusted due to the prior periods’ restatements. Please refer to the Company’s 2003 Annual Report on Form 10-K for a more complete description of the prior period adjustments.

The accompanying consolidated financial data set forth below presents the Company’s Consolidated Statement of Results of Operations for the three and nine months ended September 30, 2003, Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and Consolidated Balance Sheet as of September 30, 2003 on a comparative basis showing the amounts as originally reported and as restated.

Effects of Restatement on Net Income

The following table identifies the adjustments made to the consolidated financial statements for the three and nine months ended September 30, 2003:

 

 

Net Income Increase
(Decrease)

 

($ in millions)

 

2003 Third Quarter

 

2003 Year To Date

 

Description of Adjustment

 

 

 

 

 

Supplemental Executive Retirement Plan (1)

 

$

(0.3

)

$

1.2

 

Stock incentive units (2)

 

(1.4

)

(1.4

)

Accrued expenses (3)

 

(0.4

)

(0.4

)

Sub-total pre-tax impact

 

(2.1

)

(0.6

)

 

 

 

 

 

 

Income taxes (4)

 

0.9

 

0.3

 

Total Net Income Impact

 

$

(1.2

)

$

(0.3

)


(1) Reflects adjustment to record a settlement of the Company’s Supplemental Executive Retirement Plan for certain executives in 1997 and 2000 which had not been previously recorded, to include in the plan an executive who had not been previously considered a plan participant, and to record the proper treatment for Company assets previously thought to be segregated and restricted solely for purposes of funding this plan.

Consolidated Statement of Results of Operations: For the third quarter of 2003, the adjustment increased Operation and Maintenance expense by $0.3 million.  Year-to-date 2003, the adjustment decreased Operation and Maintenance expense by $1.0 million and increased Other Income by approximately $0.2 million.

Consolidated Balance Sheet: At September 30, 2003, the adjustment increased Other Assets – Other by approximately $1.2 million.

 

8



 

(2) Reflects adjustment to record outstanding stock incentive units at fair value following a change in the operation of the Management Stock Incentive Plan made as of January 1, 2002 that allowed certain retirees to diversify stock incentive awards to investments other than DPL common stock.

Consolidated Statement of Results of Operations: For the third quarter of 2003, the adjustment increased Operation and Maintenance expense by $1.4 million. 2.  Supplemental Financial InformationYear-to-date 2003, the adjustment increased Operation and Maintenance expense by $1.4 million.

Consolidated Balance Sheet: At September 30, 2003, the adjustment increased Other Paid-in Capital, net of Treasury Stock by approximately $1.0 million, and Other Deferred Credits by approximately $0.4 million.

(3) Reflects adjustment to record accrued expenses in the period in which these items were incurred.

Consolidated Statement of Results of Operations:  For the three and nine months ended September 30, 2003, the adjustment increased Operation and Maintenance expense by $0.4 million.

Consolidated Balance Sheet:  At September 30, 2003, the adjustment increased Accounts Payable by $0.2 million and decreased Current Assets - Other by $0.2 million.

(4) Reflects income taxes related to the above non-tax adjustments.

Consolidated Statement of Results of Operations: For the third quarter of 2003, the above adjustments resulted in a decrease of $0.9 million to income tax expense.  Year-to-date 2003, the adjustments decreased income tax expense by $0.3 million.

Consolidated Balance Sheet: At September 30, 2003, the above adjustments resulted in a decrease of $0.8 million to Accrued Taxes and a decrease of $0.5 million to Other Assets - Other.

 

9



 

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d   S t a t e m e n t   o f   R e s u l t s  o f   O p e r a t i o n s

(unaudited)

$ in millions

 

At
March 31,
2005

 

At
December 31,
2004

 

 

 

 

 

 

 

Inventories, at average cost

 

 

 

 

 

Plant materials and supplies

 

$

28.9

 

$

29.1

 

Fuel and emission allowances

 

49.2

 

40.7

 

Other

 

(0.2

)

 

Total inventories, at average cost

 

$

77.9

 

$

69.8

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

Prepayments

 

$

3.9

 

$

11.2

 

Deposits and other advances

 

1.9

 

1.6

 

Current deferred income taxes

 

7.6

 

6.8

 

Miscellaneous work in progress

 

5.1

 

4.5

 

Other

 

(1.3

)

0.7

 

Total other current assets

 

$

17.2

 

$

24.8

 

 

 

 

 

 

 

Other deferred assets

 

 

 

 

 

Master Trust assets

 

$

101.6

 

$

106.4

 

Prepaid pension

 

37.4

 

38.2

 

Unamortized loss on reacquired debt

 

23.3

 

23.8

 

Unamoritized debt expense

 

5.5

 

5.6

 

Other

 

1.2

 

1.2

 

Total other deferred assets

 

$

169.0

 

$

175.2

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Customer security deposits and other advances

 

$

18.4

 

$

17.3

 

Payroll taxes payable

 

(0.5

)

 

Current deferred income tax

 

12.1

 

 

Unearned revenues

 

0.2

 

0.3

 

Current portion - long-term debt

 

1.4

 

1.5

 

Other

 

2.7

 

3.0

 

Total other current liabilities

 

$

34.3

 

$

22.1

 

 

 

 

 

 

 

Other deferred credits

 

 

 

 

 

Asset retirement obligations - regulated property

 

$

79.2

 

$

77.5

 

Trust obligations

 

69.5

 

68.2

 

Retirees’ health and life benefits

 

32.1

 

32.4

 

Environmental reserves

 

0.1

 

0.1

 

Legal reserves

 

2.8

 

3.3

 

Asset retirement obligations - generation

 

5.2

 

5.1

 

Other

 

8.0

 

8.7

 

Total other deferred credits

 

$

196.9

 

$

195.3

 

 

$ in millions

 

Three Months Ended
September 30, 2003

 

Nine Months Ended
September 30, 2003

 

 

 

(as previously reported)

 

(as restated)

 

(as previously reported)

 

(as restated)

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Electric revenues

 

$

323.2

 

$

323.2

 

$

890.3

 

$

890.3

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

Fuel

 

59.9

 

59.9

 

166.3

 

166.3

 

Purchased power

 

29.8

 

29.8

 

76.3

 

76.3

 

Operation and maintenance

 

42.5

 

44.6

 

127.8

 

128.6

 

Depreciation and amortization

 

30.1

 

30.1

 

88.5

 

88.5

 

Amortization of regulatory assets, net

 

12.5

 

12.5

 

35.3

 

35.3

 

General taxes

 

28.0

 

28.0

 

81.7

 

81.7

 

Total operating expenses

 

202.8

 

204.9

 

575.9

 

576.7

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

120.4

 

118.3

 

314.4

 

313.6

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

21.5

 

21.5

 

21.7

 

21.9

 

Other income

 

0.6

 

0.6

 

5.3

 

5.3

 

Interest expense

 

(13.7

)

(13.7

)

(38.9

)

(38.9

)

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes and Cumulative Effect of Accounting Change

 

128.8

 

126.7

 

302.5

 

301.9

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

48.8

 

47.9

 

114.2

 

113.9

 

 

 

 

 

 

 

 

 

 

 

Income Before Cumulative Effect of Accounting Change

 

80.0

 

78.8

 

188.3

 

188.0

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change, net of tax

 

 

 

17.0

 

17.0

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

80.0

 

78.8

 

205.3

 

205.0

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

0.3

 

0.3

 

0.7

 

0.7

 

 

 

 

 

 

 

 

 

 

 

Earnings on Common Stock

 

$

79.7

 

$

78.5

 

$

204.6

 

$

204.3

 

 

 

Three Months Ended March 31,

 

$ in millions

 

2005

 

2004

 

Cash flows - Other

 

 

 

 

 

Payroll taxes payable

 

$

(1.4

)

$

(11.2

)

Deposits and other advances

 

0.3

 

(3.9

)

Deferred storm costs

 

(9.7

)

 

Other

 

(0.4

)

(0.3

)

Total cash flows - Other

 

$

(11.2

)

$

(15.4

)

 

 

 

 

 

 

Comprehensive Income

 

 

 

 

 

Net Income

 

$

53.3

 

$

62.0

 

Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments

 

(1.3

)

(5.6

)

Net change in deferred gains on cash flow hedges

 

(1.3

)

(0.7

)

Deferred income taxes related to unrealized gains (losses)

 

0.9

 

2.4

 

Comprehensive income

 

$

51.6

 

$

58.1

 

 

10



 

THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d   S t a t e m e n t   o f   C a s h   F l o w s

(unaudited)

$ in millions

 

Nine Months Ended September 30,
2003

 

 

 

(as previously reported)

 

(as restated)

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net income

 

$

205.3

 

$

205.0

 

Adjustments:

 

 

 

 

 

Depreciation and amortization

 

88.5

 

88.5

 

Amortization of regulatory assets, net

 

35.3

 

35.3

 

Deferred income taxes

 

(1.8

)

(2.3

)

Income from interest rate hedges

 

(21.2

)

(21.2

)

Cumulative effect of accounting change, net of tax

 

(17.0

)

(17.0

)

Changes in working capital:

 

 

 

 

 

Accounts receivable

 

25.7

 

25.7

 

Accounts payable

 

(5.0

)

(4.8

)

Net intercompany receivables and payables

 

70.8

 

70.8

 

Accrued taxes payable

 

29.3

 

29.5

 

Accrued interest payable

 

(10.7

)

(10.7

)

Prepayments

 

(12.8

)

(13.4

)

Inventories

 

0.5

 

0.5

 

Deferred compensation assets

 

28.3

 

28.3

 

Deferred compensation obligations

 

(28.9

)

(28.9

)

Other

 

(0.8

)

0.2

 

Net cash provided by operating activities

 

385.5

 

385.5

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(86.8

)

(86.8

)

Settlement of interest rate hedges

 

51.4

 

51.4

 

 

 

 

 

 

 

Net cash used for investing activities

 

(35.4

)

(35.4

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Issuance of long-term debt, net of issue costs

 

465.1

 

465.1

 

Dividends paid on preferred stock

 

(0.7

)

(0.7

)

Retirement of long-term debt

 

(0.4

)

(0.4

)

Dividends paid on common stock

 

(212.7

)

(212.7

)

 

 

 

 

 

 

Net cash used for financing activities

 

251.3

 

251.3

 

 

 

 

 

 

 

Cash and Temporary Cash Investments

 

 

 

 

 

Net change

 

601.4

 

601.4

 

Balance at beginning of period

 

17.1

 

17.1

 

 

 

 

 

 

 

Balance at end of period

 

$

618.5

 

$

618.5

 

 

 

 

 

 

 

Cash Paid During the Year For:

 

 

 

 

 

Interest

 

$

46.3

 

$

46.3

 

Income taxes

 

$

81.9

 

$

81.9

 

11



THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d   B a l a n c e   S h e e t

(unaudited)

$ in millions

 

At September 30, 2003

 

 

 

(as previously reported)

 

(as restated)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Property

 

 

 

 

 

Property, plant and equipment

 

$

3,849.1

 

$

3,849.1

 

Less: Accumulated depreciation and amortization

 

(1,750.9

)

(1,750.9

)

Net property

 

2,098.2

 

2,098.2

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and temporary cash investments

 

618.5

 

618.5

 

Accounts receivable, less provision for uncollectible accounts of $5.0 as reported and restated

 

133.7

 

133.7

 

Inventories, at average cost

 

53.6

 

53.6

 

Prepaid taxes

 

11.7

 

11.7

 

Other

 

26.0

 

25.6

 

Total current assets

 

843.5

 

843.1

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

Income taxes recoverable through future revenues

 

41.4

 

41.4

 

Other regulatory assets

 

47.3

 

47.3

 

Other

 

173.6

 

174.0

 

Total other assets

 

262.3

 

262.7

 

 

 

 

 

 

 

Total Assets

 

$

3,204.0

 

$

3,204.0

 

Note - Reflects adoption of FAS 143 in 2003.

12



THE DAYTON POWER AND LIGHT COMPANY

C o n s o l i d a t e d   B a l a n c e   S h e e t

(unaudited)

$ in millions

 

At September 30, 2003

 

 

 

(as previously reported)

 

(as restated)

 

 

 

 

 

 

 

CAPITALIZATION AND LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

Capitalization

 

 

 

 

 

Common shareholders’ equity

 

 

 

 

 

Common stock

 

$

0.4

 

$

0.4

 

Other paid-in capital

 

771.8

 

781.3

 

Accumulated other comprehensive income

 

35.3

 

32.9

 

Earnings reinvested in the business

 

387.2

 

373.4

 

Total common shareholders’ equity

 

1,194.7

 

1,188.0

 

 

 

 

 

 

 

Preferred stock

 

22.9

 

22.9

 

 

 

 

 

 

 

Long-term debt

 

686.8

 

686.8

 

 

 

 

 

 

 

Total capitalization

 

1,904.4

 

1,897.7

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Current portion – long-term debt

 

447.1

 

447.1

 

Accounts payable

 

75.9

 

77.2

 

Net intercompany payables

 

34.4

 

34.0

 

Accrued taxes

 

90.5

 

93.2

 

Accrued interest

 

8.5

 

8.5

 

Other

 

16.3

 

16.3

 

Total current liabilities

 

672.7

 

676.3

 

 

 

 

 

 

 

Deferred Credits and Other

 

 

 

 

 

Deferred taxes

 

388.8

 

380.7

 

Unamortized investment tax credit

 

52.9

 

52.9

 

Other

 

185.2

 

196.4

 

Total deferred credits and other

 

626.9

 

630.0

 

 

 

 

 

 

 

Contingencies

 

 

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

3,204.0

 

$

3,204.0

 

Note - Reflects adoption of FAS 143 in 2003.

13



3.              Supplemental Financial Information

$ in millions

 

At
September 30,
2004

 

At
December 31,
2003

 

Cash and temporary cash investments

 

 

 

 

 

Cash and cash equivalents

 

$

160.0

 

$

17.2

 

Short-term investments

 

 

 

Total cash and temporary cash investments

 

$

160.0

 

$

17.2

 

 

 

 

 

 

 

Inventories, at average cost

 

 

 

 

 

Plant materials and supplies

 

$

27.9

 

$

29.3

 

Fuel

 

33.5

 

19.5

 

Other

 

1.1

 

0.8

 

Total inventories, at average cost

 

$

62.5

 

$

49.6

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

Prepayments

 

$

14.8

 

$

10.8

 

Deposits and other advances

 

2.6

 

5.2

 

Current deferred income taxes

 

0.9

 

4.3

 

Miscellaneous work in progress

 

4.6

 

3.1

 

Other

 

2.3

 

1.0

 

Total other current assets

 

$

25.2

 

$

24.4

 

 

 

 

 

 

 

Other deferred assets

 

 

 

 

 

Trust assets

 

$

93.9

 

$

102.9

 

Prepaid pension

 

37.6

 

39.7

 

Unamortized loss on reacquired debt

 

24.3

 

26.6

 

Unamortized debt expense

 

5.6

 

5.9

 

Other

 

(0.1

)

1.3

 

Total other deferred assets

 

$

161.3

 

$

176.4

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

Customer security deposits and other advances

 

$

14.2

 

$

10.6

 

Current deferred income taxes

 

1.5

 

 

Payroll taxes payable

 

 

10.1

 

Unearned revenues

 

0.5

 

1.2

 

Current portion - long-term debt

 

1.1

 

1.1

 

Other

 

1.8

 

1.6

 

Total other current liabilities

 

$

19.1

 

$

24.6

 

 

 

 

 

 

 

Other deferred credits

 

 

 

 

 

Asset retirement obligations – regulated property

 

$

76.4

 

$

72.0

 

Trust obligations

 

66.0

 

65.3

 

Retirees health and life benefits

 

32.5

 

33.7

 

Environmental reserves

 

0.1

 

0.2

 

Legal claims reserves

 

3.1

 

2.1

 

Asset retirement obligations-generation

 

5.2

 

4.9

 

Other

 

6.5

 

6.9

 

Total other deferred credits

 

$

189.8

 

$

185.1

 

Cash Flows

 

 

Nine Months Ended
September 30,

 

$ in millions

 

2004

 

2003

 

 

 

 

 

(as restated)

 

Cash flows – Other

 

 

 

 

 

Payroll taxes payable

 

$

(11.2

)

$

 

Customer security deposits

 

5.5

 

(1.6

)

Unamortized loss on reacquisition of debt

 

2.4

 

2.9

 

Unearned revenues

 

(0.7

)

(1.6

)

Other

 

(2.7

)

0.5

 

Total cash flows – other

 

$

(6.7

)

$

0.2

 

14



Results of Operations

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

Comprehensive income

 

 

 

 

 

 

 

 

 

Net income

 

$

55.5

 

$

78.8

 

$

164.5

 

$

205.0

 

Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments

 

3.3

 

3.8

 

(0.5

)

6.6

 

Net change in deferred gains on cash flow hedges

 

(0.7

)

29.0

 

(2.3

)

30.0

 

Deferred income taxes related to unrealized gains (losses)

 

(1.3

)

(1.1

)

0.5

 

(2.8

)

Comprehensive income

 

$

56.8

 

$

110.5

 

$

162.2

 

$

238.8

 

4.              Pension and Postretirement Benefits

 

DP&L sponsors a defined benefit plan for substantially all its employees.  For collective bargaining employees, the defined benefits are based on a specific dollar amount per year of service.  For all other employees, the defined benefit plan is based primarily on compensation and years of service. The Company funds pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA).

 

Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits.  DP&L has funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust.

 

The net periodic benefit (income) cost of the pension and postretirement benefit plans for the three months ended September 30March 31 were:

 

Net periodic benefit (income) cost

 

 

 

Pension

 

Postretirement

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(as restated)

 

 

 

 

 

Service cost

 

$

0.9

 

$

0.8

 

$

 

$

 

Interest cost

 

4.0

 

4.1

 

0.5

 

0.6

 

Expected return on assets

 

(5.4

)

(6.3

)

(0.2

)

(0.2

)

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

0.4

 

 

(0.2

)

(0.3

)

Prior service cost

 

0.7

 

0.8

 

 

 

Transition obligation

 

 

 

 

0.1

 

Net pension benefit (income) cost

 

$

0.6

 

$

(0.6

)

$

0.1

 

$

0.2

 

$ in millions

 

Pension

 

Postretirement

 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

1.0

 

$

0.9

 

$

 

$

 

Interest cost

 

3.9

 

4.0

 

0.4

 

0.5

 

Expected return on assets

 

(5.4

)

(5.4

)

(0.1

)

(0.2

)

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

0.9

 

0.5

 

(0.3

)

(0.2

)

Prior service cost

 

0.6

 

0.6

 

 

 

Transition obligation

 

 

 

0.1

 

 

Net periodic benefit cost

 

$

1.0

 

$

0.6

 

$

0.1

 

$

0.1

 

 

The net periodicfollowing estimated benefit (income) cost of the pension and postretirement benefit plans for the nine months ended September 30 were:payments, which reflect future service, are expected to be paid as follows:

15



 

Net periodic benefit (income) costEstimated Future Benefit Payments

 

 

 

Pension

 

Postretirement

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(as restated)

 

 

 

 

 

Service cost

 

$

2.8

 

$

2.5

 

$

 

$

 

Interest cost

 

12.0

 

12.2

 

1.5

 

1.7

 

Expected return on assets

 

(16.3

)

(18.8

)

(0.5

)

(0.4

)

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

1.4

 

0.1

 

(0.7

)

(0.9

)

Prior service cost

 

2.0

 

2.2

 

 

 

Transition obligation

 

 

 

0.1

 

0.2

 

Net pension benefit (income) cost

 

$

1.9

 

$

(1.8

)

$

0.4

 

$

0.6

 

$ in millions

 

Pension

 

Postretirement

 

2005

 

$

14.5

 

$

2.9

 

2006

 

$

19.3

 

$

3.5

 

2007

 

$

19.7

 

$

3.4

 

2008

 

$

19.8

 

$

3.4

 

2009

 

$

19.8

 

$

3.3

 

2010 - 2014

 

$

104.1

 

$

13.8

 

 

5.4.              Stock-Based Compensation

 

DP&L accounts for DPL Inc. stock options granted on or after January 1, 2003 under the fair value method set forth in FASB Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).  This standard requires the recognition of compensation expense for stock-based awards to reflect the fair value of the award on the date of grant.  DP&L follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Accounting Principles Board and FASB interpretations in

11



accounting for stock-based compensation granted before January 1, 2003.  If DP&L had used the fair value method of accounting for stock optionsstock-based compensation granted prior to 2003, earnings on common stock would have been reported as follows:

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

Three Months Ended March 31,

 

 

 

 

(as restated)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

 

 

2005

 

2004

 

Earnings on common stock, as reported

 

$

55.5

 

$

78.5

 

$

164.3

 

$

204.3

 

 

$

53.1

 

$

61.8

 

Add: Total stock-based compensation expense determined under APB 25, net of related tax effects

 

 

 

 

 

 

 

 

Deduct: Total stock-based compensation expense determined under FAS 123, net of related tax effects

 

(0.7

)

(0.8

)

(2.2

)

(2.0

)

 

 

(0.7

)

Pro-forma earnings on common stock

 

$

54.8

 

$

77.7

 

$

162.1

 

$

202.3

 

 

$

53.1

 

$

61.1

 

 

6.5.              Long-term Debt, Notes Payable and Compensating Balances

 

$ in millions

 

At
September 30,
2004

 

At
December 31,
2003

 

 

At March 31,
2005

 

At December 31,
2004

 

First Mortgage Bonds maturing: 2013 - 5.125%

 

$

470.0

 

$

470.0

 

Pollution control series maturing Through 2027 - 6.43% (a)

 

104.4

 

104.8

 

 

574.4

 

574.8

 

First mortgage bonds maturing:

 

 

 

 

 

2013 - 5.125%

 

$

470.0

 

$

470.0

 

Pollution control series maturing through 2027 - 6.43% (a)

 

104.4

 

104.4

 

 

 

 

 

 

 

574.4

 

574.4

 

Guarantee of Air Quality Development Obligations - 6.10% Series due 2030

 

110.0

 

110.0

 

 

110.0

 

110.0

 

Obligation for capital lease

 

3.7

 

4.3

 

Obligation for capital leases

 

3.6

 

3.8

 

Unamortized debt discount and premium (net)

 

(1.7

)

(1.8

)

 

(1.6

)

(1.6

)

Total

 

$

686.4

 

$

687.3

 

 

$

686.4

 

$

686.6

 

 


(a) Weighted average interest rates for 20042005 and 2003.2004.

 

The amounts of maturities and mandatory redemptions for First Mortgage Bonds, Guaranteed Air Quality Development Obligationsfirst mortgage bonds and the Capital Leasecapital leases are $0.2$1.2 million for the remainder of 2004, $1.1 million in 2005, $1.1$1.3 million in 2006, $9.3$9.5 million in 2007, $0.7 million in 2008 and $0.7 million in 2008.2009.  Substantially all property of DP&L is subject to the mortgage lien securing the First Mortgage Bonds.

16



first mortgage bonds.

 

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013.  The net proceeds from the sale of the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date.  The $446 million of First Mortgage Bonds were called by DP&L on September 30, 2003, for redemption on October 30, 2003.  The 5.125% Series due 2013 havewere not been registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisions requiring DP&Lthe Company to pay additional interest if (i) DP&L’s registration statement was not declared effective by the securities remain unregistered afterSEC within 180 days from issuance.  The salethe issuance of the new bonds or (ii) the exchange offer was not registeredcompleted within 210 days from the issuance of the new bonds.  The registration statement was not declared effective and the exchange offer was not timely completed and, as a result, the Company is required to pay additional interest of 0.50% until ana registration statement is declared effective at which point the additional interest shall be reduced by 0.25%.  The remaining additional interest of 0.25% will continue until the exchange offer is completed.  The exchange offer registration for these securities is registered with the SEC.

Issuance of additional amounts of First Mortgage Bonds by DP&L is limited by provisions of its mortgage; however, DP&L continues to have sufficient capacity to issue First Mortgage Bonds that the Company believes will satisfy its requirements in connection with its refinancing and construction programs through 2008.  The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.was filed April 26, 2005.

 

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution.  This agreement which expires in February 2005, supports performance assurance needs in the ordinary course of business.  The

12



Company has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating related clauses allowing the counterparties to seek additional surety under certain conditions.  On February 24, 2005, the Company entered into an amendment to extend the term of this Agreement for one year and reduce the maximum dollar volume of letters of credit to $10 million.  As of September 30, 2004,March 31, 2005, DP&L had eightthree outstanding letters of credit totaling $8.5for a total of $3.5 million.

 

In June 2004, DP&L obtained a $100 million unsecured revolving credit agreement that extended and replaced DP&L’sthe Company’s previous revolving credit agreement of $150 million.  The new agreement, which expires on May 31, 2005, provides credit support for the Company’sDP&L’s business requirements and commercial paper program during this period and may be increased to up to $150 million.  The facility contains two financial covenants including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to total interest expense.  These covenants are currently met.  DP&L currently hasThe Company had no outstanding borrowings under this credit facility.facility at March 31, 2005 or at year-end 2004.  Fees associated with this credit facility arewere approximately $0.6 million per year.  Changes in debt ratings, however, may affect the applicable interest rate for DP&L’s revolving credit agreement.  DP&L’s ability to use this revolving credit agreement is subject to the PUCO’s annual approval which expired on November 5, 2004.  DP&L has filed an application to secure the PUCO’s continued authorization and that application is pending.

 

There are no intercompanyinter-company debt collateralizations or debt guarantees between DP&L and its parent or subsidiaries.parent.  None of the debt obligations of DP&L are guaranteed or secured by its parent or affiliates, and no cross-collateralization exists between the Company and DPL or any subsidiaries.affiliate.

 

7.     Business Segment Reporting6.

DP&L is a regional energy company providing electric services to over 500,000 retail customers in West Central Ohio.  Assets and related costs associated with DP&L’s transmission, distribution, base load generation and peaking generation operations are managed and evaluated as a single operating segment captioned Electric.

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

Revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

310.2

 

$

323.2

 

$

893.4

 

$

890.3

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

 

 

Electric

 

$

117.3

 

$

128.0

 

$

330.3

 

$

336.4

 

Other (a)

 

(10.6

)

(9.7

)

(27.1

)

(22.8

)

Total operating income

 

$

106.7

 

$

118.3

 

$

303.2

 

$

313.6

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

Electric

 

$

29.6

 

$

30.1

 

$

87.3

 

$

88.5

 

 

 

 

 

 

 

 

 

 

 

Expenditures-construction additions

 

 

 

 

 

 

 

 

 

Electric

 

$

17.1

 

$

18.6

 

$

62.1

 

$

70.1

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Electric

 

$

2,592.4

 

$

3,060.1

 

$

2,592.4

 

$

3,060.1

 

Unallocated corporate assets

 

130.6

 

143.9

 

130.6

 

143.9

 

Total assets

 

$

2,723.0

 

$

3,204.0

 

$

2,723.0

 

$

3,204.0

 

17




(a) Includes unallocated corporate items.

8.              Commitments and Contingencies

 

Contingencies

In the normal course of business, DP&L is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  DP&L believes the amounts provided in its 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, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DP&L’s Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of September 30, 2004March 31, 2005 cannot be reasonably determined.

 

Environmental Matters

DP&L and its subsidiaries’&L’s facilities and operations are subject to a wide range of environmental regulations and law.  In the normal course of business, DP&Lthe Company has investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  DP&LThe Company has been identified, either by a government agency or by a private party seeking contribution to site clean-up costs, as a potentially responsible party (PRP) at a number oftwo sites pursuant to state and federal laws.  DP&LThe Company records liabilities for probable estimated loss in accordance with FASB Statement of Financial Accounting Standards No. 5, (SFAS 5), “Accounting for Contingencies.”Contingencies” (SFAS 5).  To the extent a probable loss can only be estimated by reference to a range of equally probable outcomes, and no amount within the range appears to be a better estimate than any other amount, DP&Lthe Company accrues for the low end of the range.  Because of uncertainties related to these matters, accruals are based on the best information available at the time.  DP&L evaluates the potential liability related to probable losses quarterly and may revise its estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on the Company’s results of operations and financial position.

 

Legal Matters

 

On July 9, 2004, Mr. Forster and Ms. Muhlenkamp filedDP&L is a lawsuit against the Company,wholly-owned subsidiary of DPL Inc. (DPL) and MVE, Inc. (MVE) in the Circuit Court, Fourth Judicial Circuit, in and for Duval County, Florida.  The complaint asserts that the Company, DPL and MVE (i) wrongfully terminated Mr. Forster and Ms. Muhlenkamp by undermining their authority and responsibility to manage the companies and excluding them from discussions on corporate financial issues and strategic planning after the Thobe Memorandum was distributed and (ii) breached Mr. Forster’s consulting contract and Ms. Muhlenkamp’s employment agreement by denying them compensation and benefits allegedly provided by the termsis a subsidiary of such contract and agreement upon their termination from the Company and DPL.  Mr. Forster and Ms. Muhlenkamp seek damages of an undetermined amount.  On August 9, 2004, the defendants removed the case to the U.S. District Court for the Middle District of Florida, Jacksonville Division.  On August 16, 2004, the defendants moved to dismiss the litigation based on the Florida federal court’s lack of jurisdiction over the Company, DPL and MVE, all of whom are companies based in Dayton, Ohio.  In the alternative, the defendants requested that the court transfer the case to the U.S. District Court for the Southern District of Ohio, which has jurisdiction in Dayton, Ohio.  On September 17, 2004, Mr. Forster and Ms. Muhlenkamp opposed these motions.  On November 10, 2004, the U.S. District Court for the Middle District of Florida, Jacksonville Division, granted DPL’s motion to dismiss.

 

On August 24, 2004, the Company, DPL and MVE filed a Complaint against Mr. Forster, Ms. Muhlenkamp and Mr. Koziar in the Court of Common Pleas of Montgomery County, Ohio asserting legal claims against them relating to the termination of the Valley Partners Agreements, challenging the validity of the purported amendments to the deferred compensation plans and to the employment and consulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp, and the propriety of the distributions from the plans to Messrs. Forster and Koziar and Ms. Muhlenkamp, and alleging that Messrs. Forster and Koziar and Ms. Muhlenkamp breached their fiduciary duties and breached their consulting and employment contracts.  The Company, DPL and MVE seek, among other things, damages in excess of $25,000,$25 thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp from the deferred compensation plans and a court order declaring that the Company, DPL

18



and MVE have no further obligations under the consulting and employment contracts due to those breaches.  On November 5, 2004, defendants

13



Defendants Forster, Koziar and Muhlenkamp have filed motions to dismiss the Complaint.Complaint and motions to stay discovery.  The Company continuesand DPL have filed briefs opposing those motions.  In addition, pursuant to evaluate all of these mattersapplicable statutes, regulations and is considering other claims against Mr. Forster, Mr. Koziar and/or Ms. Muhlenkamp that include, but are not limited to, breach of fiduciary duty or other claims relating to personal and Company investments, the calculation of benefits under the DP&L SERP and financial reporting with respect to such benefits, and, with respect to Mr. Koziar, the fulfillment of duties owed to the Company as its legal counsel.

On or about June 24, 2004, the SEC commenced a formal investigation into the issues raised by the Thobe Memorandum.  The Company is cooperating with the investigation.

On April 7, 2004, DPL received notice that the staff of the PUCO is conducting an investigation into the financial condition of DP&L as a result of the issues raised by the Thobe Memorandum.  On May 27, 2004, the PUCO ordered DPL to file a plan of utility financial integrity that outlines the actions DPL Inc. has taken or will take to insulate DP&L utility operations and customers from its unregulated activities.  DPL must file this plan within 120 days of the filing of its Form 10-K with the SEC.  The Company intends to comply with this order and to cooperate with the PUCO’s continuing investigation.

On May 28, 2004, the U.S. Attorney’s Office for the Southern District of Ohio, assisted by the Federal Bureau of Investigation, notifiedagreements, the Company and DPL that it has initiated an inquiry involvinghave been advancing certain of Defendants’ attorneys’ fees and expenses with respect to various matters other than the subject matters covered bylitigation between Defendants and the Company’s and DPL’s internal investigation.  The Company and DPL in Florida and Ohio, and believe that other requested advances are cooperating with this investigation.not required.  On February 7, 2005, Mr. Forster and Ms. Muhlenkamp filed a motion in DP&L’s and DPL’s Ohio litigation seeking to compel DPL, MVE and the Company to pay all attorneys’ fees and expenses that have not been advanced to them.  The Company, DPL and MVE have filed a brief opposing that motion.  All of the foregoing motions are pending.

 

Commencing on or about June 24, 2004,On March 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New York state court against the Internal Revenue Service (IRS) issued a seriespurchasers of data requeststhe DPL private equity portfolio and against outside counsel to the Company and DPL concerning purported entitlements in connection with the purchase of the portfolio.  The Company, DPL and MVE are not defendants in that case; however, they are parties to an indemnification agreement with respect to the purchaser defendants.  Those defendants have requested that the Company, DPL and MVE indemnify them in connection with that litigation, and the Company, DPL and MVE have acknowledged indemnity obligations.  On March 28, 2005, the Company, DPL and MVE filed a Motion for Preliminary Injunction in the Company’s Ohio case, requesting that the court issue a preliminary injunction against Mr. Forster and Ms. Muhlenkamp regarding the lawsuit.  Since certain key issues raised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit are identical to the issues raised in the Thobe Memorandum.  The staff of the IRS has requested thatCompany’s pending Ohio lawsuit, DPL, MVE and the Company believe that those issues should be heard and resolved in the pending Ohio lawsuit.  Mr. Forster and Ms. Muhlenkamp filed a brief opposing the preliminary injunction on April 15, 2005.  The Company, DPL provide certain documents, including but not limited to, matters concerning executive/director deferred compensation plans, management stock incentive plans and MVE financial statements.filed their reply brief on April 25, 2005.  The Companymotion is pending and DPL are cooperating with these requests.

In June 2002, a contractor’s employee received a verdict against DP&L for injuries he sustained while working at a DP&L power station.  The Court awarded the contractor’s employee compensatory damages of approximately $0.8 million and prejudgment interest of approximately $0.6 million.  On April 28, 2004, the appellate court upheld this verdict except the award for prejudgment interest.  On September 1, 2004, the Ohio Supreme Court refused to hear the case, so the matter has been remanded to the trial courtset for a re-determination of whether prejudgment interest should be awarded.  The trial court heard this matterhearing on October 15, 2004 and the decision is pending.May 6, 2005.

 

Long-TermLong-term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations.  The following table outlines DP&L’s obligations at September 30, 2004:At March 31, 2005, these include:

 

Long-term Obligations

 

 

Payment Year

 

Long Term Obligations

 

 

 

$ in millions

 

2005

 

2006 & 2007

 

2008 & 2009

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

0.4

 

$

9.0

 

$

 

$

673.8

 

$

683.2

 

Interest payments

 

32.4

 

74.9

 

74.0

 

336.4

 

517.7

 

Pension and Postretirement payments

 

17.4

 

45.9

 

46.3

 

117.9

 

227.5

 

Capital leases

 

0.8

 

1.8

 

1.4

 

0.6

 

4.6

 

Operating leases

 

0.8

 

0.9

 

 

 

1.7

 

Coal contracts (a)

 

265.3

 

575.3

 

83.7

 

85.5

 

1,009.8

 

Other long-term obligations

 

17.1

 

12.7

 

0.5

 

 

30.3

 

Total long-term obligations

 

$

334.2

 

$

720.5

 

$

205.9

 

$

1,214.2

 

$

2,474.8

 

 

 

 

Payment Year

 

($ in millions)

 

2004

 

2005 & 2006

 

2007 & 2008

 

Thereafter

 

Total

 

Long-term debt

 

$

 

$

0.8

 

$

8.6

 

$

673.6

 

$

683.0

 

Capital lease

 

0.2

 

1.4

 

1.4

 

1.5

 

4.5

 

Operating leases

 

0.8

 

0.4

 

 

 

1.2

 

Coal contracts

 

311.5

 

475.2

 

206.8

 

127.7

 

1,121.2

 

Other long-term obligations

 

12.2

 

18.1

 

0.5

 

 

30.8

 

Total long-term obligations

 

$

324.7

 

$

495.9

 

$

217.3

 

$

802.8

 

$

1,840.7

 


(a) DP&L operated units.

 

Long-term debt:

Long-term debt as of September 30, 2004March 31, 2005, consists of First Mortgage Bondsfirst mortgage bonds and Guaranteed Air Quality Development Obligations, includingguaranteed air quality development obligations and includes current maturities.maturities and unamortized debt discount.  (See Note 5 of Notes to Consolidated Financial Statements.)

Interest payments:

Interest payments associated with the Long-term debt described above.

Pension and Postretirement payments:

As of March 31, 2005, DP&L had estimated future benefit payments as outlined in Note 3 of Notes to Consolidated Financial Statements.  These estimated future benefit payments are projected through 2014.

 

Capital lease:leases:

As of September 30, 2004,March 31, 2005, the Company had onetwo capital leaseleases that expiresexpire in November 2007 and September 2010.

 

Operating leases:

As of September 30, 2004,March 31, 2005, the Company had several operating leases with various terms and expiration dates.

 

19Coal contracts:

14



 

Coal contracts:

DP&LThe Company has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants.  Contract prices are subject to periodic adjustment, in accordance with various indices, and have features that will limit price escalation in any given year.

 

Other long-term obligations:

As of September 30, 2004, DP&LMarch 31, 2005, the Company had various other long-term obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affect the liquidity of its operations.  At March 31, 2005, these include:

 

Commercial Commitments

 

Expiring Year

 

 

Expiring Year

 

($ in millions)

 

2004

 

2005 & 2006

 

2007 & 2008

 

Thereafter

 

Total

 

Commercial Commitments

 

 

 

$ in millions

 

2005

 

2006 & 2007

 

2008 & 2009

 

Thereafter

 

Total

 

Credit facilities

 

$

 

$

100.0

 

$

 

$

 

$

100.0

 

 

$

100.0

 

$

 

$

 

$

 

$

100.0

 

Guarantees

 

 

17.8

 

 

 

17.8

 

 

 

17.8

 

 

 

17.8

 

Total commercial commitments

 

$

 

$

117.8

 

$

 

$

 

$

117.8

 

 

$

100.0

 

$

17.8

 

$

 

$

 

$

117.8

 

 

Credit facilities:

DP&L had $150 million available through a revolving credit agreement with a consortium of banks that was scheduled to expire on December 10, 2004.  In June 2004, the Company replaced this facilityits previous $150 million revolving credit agreement with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005.  At September 30, 2004,March 31, 2005, there were no borrowings outstanding under this credit agreement.  The new facility may be increased to up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of September 30, 2004,March 31, 2005, DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60.0$60 million debt obligation.  Both obligations mature in 2006.

 

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

Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report which 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 the Company’s future economic performance, taking into account the information currently available to management.  These statements are not statements of historical fact.  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 the control of The Dayton Power and Light Company (DP&L or the Company), including but not limited to: abnormal or severe weather; unusual maintenance or repair requirements; changes in fuel costs; changes in electricity, coal, environmental emissions, gas and other commodity prices; increased competition; regulatory changes and decisions; changes in accounting rules; financial market conditions; and general economic conditions.

 

Forward-looking statements speak only as of the date of the document in which they are made.  The Company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which the forward-looking statement is based. (See FACTORS THAT MAY AFFECT FUTURE RESULTS.)

 

15



OTHER MATTERS

Updates on Competition and Regulation

On April 7, 2004, DPL received notice that the staff of the Public Utilities Commission of Ohio (PUCO) is conducting an investigation into the financial condition of the Company as a result of previously disclosed matters raised by a Company employee during the 2003 year-end financial closing process (the Thobe Memorandum).  On May 27, 2004, the PUCO ordered the Company to file a plan of utility financial integrity that outlines the actions DPL has taken or will take to insulate DP&L utility operations and customers from its unregulated activities.  The Company was required to file this plan by March 2, 2005.  On February 4, 2005, the Company filed its protection plan with the PUCO and will continue to cooperate with the PUCO to resolve any outstanding issues in this investigation.  On March 29, 2005, the OCC filed comments with the PUCO on the Company’s financial plan of integrity, requesting the PUCO continue the investigation and monitor the Company’s progress toward implementation of its financial plan of integrity.

As of March 31, 2005 four unaffiliated marketers were registered as competitive retail electric service (CRES) providers in the Company’s service territory; to date, there has been no significant activity from these suppliers.  DPL Energy Resources, Inc. (DPLER), an affiliated company, is also a registered CRES provider and accounted for nearly all load served by CRES providers within the Company’s service territory in 2004.  In addition, several communities in the Company’s service area have passed ordinances allowing the communities to become government aggregators for the purpose of offering alternative electric generation supplies to their citizens.  To date none of these communities have aggregated.

There was a complaint filed on January 21, 2004 at the PUCO concerning the pricing of the Company’s billing services.  Additionally, on December 16, 2003, a complaint was filed at the PUCO alleging that the Company has established improper barriers to competition.  On October 13, 2004, the parties reached a settlement on the pricing of the Company’s billing services that the Company will charge CRES providers.  Additionally, on October 19, 2004, the Company entered into a settlement with Dominion Retail, Green Mountain Energy, and the Staff of the PUCO that resolves all matters in the competition barrier complaint.  This settlement provides that the Company will modify the manner in which customer partial payments are applied to billing charges and the Company will no longer offer to purchase the receivables of CRES providers who operate in the Company’s certified territory.  On February 2, 2005, the PUCO issued an Order approving both settlements with minor modifications.  This Order gives the Company the right to defer costs of approximately $18 million and later file for recovery over a five year period to begin January 1, 2006, subject to PUCO approval.  On March 4, 2005, the OCC filed a Motion for Rehearing with the PUCO.  On March 23, 2005 the PUCO denied the OCC Motion for Rehearing.

On April 4, 2005, the Company filed a request at the PUCO to implement a rate stabilization surcharge effective January 1, 2006.  The proposed rate surcharge request supports over $100 million in increased costs and is designed to partially reimburse the Company for certain costs of providing electric service related to fuel, environmental compliance, taxes, regulatory changes and security measures.  The surcharge is capped at 11% of the generation portion of the Company’s rates.  The surcharge, if approved, would result in approximately $76 million in additional revenue in 2006.

Update on Environmental Considerations

Air and Water Quality

On December 17, 2003, the USEPA proposed the Interstate Air Quality Rule (IAQR) designed to reduce and permanently cap sulfur dioxide (SO2) and NOx emissions from electric utilities.  The proposed IAQR focused on states, including Ohio, whose power plant emissions are believed to be significantly contributing to fine particle and ozone pollution in other downwind states in the eastern United States.  On June 10, 2004, the USEPA issued a supplemental proposal to the IAQR, now renamed as the Clean Air Interstate Rule (CAIR).  The final rules were signed on March 10, 2005.  Although not yet published, CAIR will have a material effect on the Company’s operations.  The Company anticipates that Phase I of CAIR will require the installation of flue gas desulfurization (FGD) equipment and annual operation of the currently-installed SCR.

On January 30, 2004, the USEPA published its proposal to restrict mercury and other air toxics from coal-fired and oil-fired utility plants.  The final Clean Air Mercury Rule (CAM-R) was signed March 15, 2005.  Although not yet published, the final rules will have a material effect on the Company’s operations.  The Company anticipates that the FGD being planned to meet the requirements of CAIR may be adequate to meet the Phase I requirements of CAM-R.  The Company expects that additional controls will be needed to meet the Phase II requirements of CAM-R that go into effect January 1, 2018.  On March 29, 2005, nine states sued USEPA, opposing the regulatory approach taken by USEPA.  On March 31, 2005, various groups requested that USEPA stay implementation of CAM-R. 

Under the CAIR and CAM-R cap and trade programs for SO2, NOx and mercury, the Company estimates it will spend more than $500 million from 2005 through 2008 to install the necessary pollution controls.  If CAM-R litigation results in plant specific mercury controls, the Company’s costs may be higher.  Due to the ongoing uncertainties associated with the litigation of the CAM-R, the Company cannot project the final costs at this time.

16



OVERVIEW AND FUTURE EXPECTATIONS

 

As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities are required to join a Regional Transmission Organization (RTO), whose role is to administer an electric marketplace and insure reliability.  In October 2004, the Company successfully integrated its 1,000 miles of high-voltage transmission into the PJM Interconnection, L.L.C. (PJM) RTO.  PJM ensures the reliability of the high-voltage electric power system serving 44 million people in all or parts of Delaware, Indiana, Kentucky, Maryland, Michigan, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation of the region’s transmission grid; administers a competitive wholesale electricity market, the world’s largest; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.

In the thirdfirst quarter of 2004,2005, DP&L’s operating income decreased $11.6$15.5 million or 14% from the thirdfirst quarter of 2003.  Electric2004.  Total revenues of $310.2$305.1 million decreased fromin the prior yearfirst quarter of 2005 exceeded total revenues for the first quarter of 2004 by $13.0$4.7 million primarily resulting from decreased retailan increase in average market rates and wholesale revenues.ancillary revenues associated with the Company’s participation in PJM.  These increases were largely offset by a decline in electric sales volume.  Operating expenses of $203.5$213.7 million in the thirdfirst quarter of 2004 were less than2005 increased by $20.2 million or 10% compared to the third quartersame period in the prior year. This increase was primarily the result of 2003 by $1.4 million.higher fuel and purchased power costs.  DP&L’s earnings on common stock of $55.5$53.1 million in the thirdfirst quarter of 20042005 decreased $23.0$8.7 million from the third quarter of 2003.

20



For the nine months ended September 30, 2004, DP&L’s operating income of $303.2 million decreased $10.4 million fromcompared to the same period ofin the prior year.  Electric revenues of $893.4 million exceeded the same period of the prior year by $3.1 million primarily resulting from an increase in wholesale revenues, partially offset by lower retail revenues.  Operating expenses of $590.2 million for the nine months ended September 30, 2004 were greater than the nine months ended September 30, 2003 by $13.5 million or 2% primarily relating to increases in fuel and purchased power costs and corporate expenses.  DP&L’s reported earnings on common stock of $164.3 million for the nine months ended September 30, 2004 decreased $40.0 million from the nine months ended September 30, 2003.

The increases in fuel and purchase power costs and corporate expenses are expected to continue to have a negative impact on operating income for the balance of 2004.

 

RESULTS OF OPERATIONS

 

Income Statement Highlights

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

$ in millions

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

(as restated)

 

 

 

(as restated)

 

 

 

 

 

 

 

 

 

 

 

Electric revenues

 

$

310.2

 

$

323.2

 

$

893.4

 

$

890.3

 

Less:

 

 

 

 

 

 

 

 

 

Fuel

 

64.1

 

59.9

 

187.3

 

166.3

 

Purchased power

 

31.4

 

29.8

 

84.6

 

76.3

 

Net electric margin (a)

 

$

214.7

 

$

233.5

 

$

621.5

 

$

647.7

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

106.7

 

$

118.3

 

$

303.2

 

$

313.6

 


 

 

Three Months Ended March 31, 

 

$ in millions

 

2005

 

2004

 

 

 

 

 

 

 

Electric revenues

 

$

305.1

 

$

300.4

 

Less: Fuel

 

77.7

 

62.7

 

Purchased power

 

29.3

 

28.5

 

Net electric margin (a)

 

$

198.1

 

$

209.2

 

 

 

 

 

 

 

Net electric margin as a percentage of Electric revenues

 

64.9

%

69.6

%

 

 

 

 

 

 

Operating income

 

$

91.4

 

$

106.9

 

(a)          For purposes of discussing operating results, DP&L presents and discusses net electric margin.  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 decisionsdecisioins regarding the Company’s financial performance.

 

Electric Revenues

Electric revenues decreased $13.0 million or 4%increased to $310.2$305.1 million in the thirdfirst quarter of 2005 from $300.4 million in the first quarter of 2004 compared to $323.2 million for the third quarter of 2003 primarily reflecting lower retail and wholesale revenues.  Retail revenues declined primarily resulting from lower residential and industrial revenues.  Residential revenue decreased by $3.7 million related to lower sales volume and industrial revenue decreased $7.2 million primarily resulting from lower average rates.  Wholesale revenues decreased $3.4 million resulting from lower sales volume for wholesale sales, partially offset by higher average rates for wholesale sales.  Wholesaleand retail revenues and ancillary revenues associated with participation in PJM.  These increases were offset by lower wholesale and retail sales volumes.

Retail revenues decreased $2.7 million in the first quarter of 2005 compared to the retail revenues in the first quarter of 2004, primarily resulting from a 31%$3.9 million in decreased sales volume, partially offset by $1.2 million related to higher average rates.  The decrease in wholesale sales volumeprimarily reflects warmer than normal

17



weather as opportunitiesheating degree-days were down 2% to sell energy and capacity in excess2,897 for the first quarter of existing retail sales with positive margin were not as readily available when2005 compared to the same period of the prior year.

For the nine months ended September 30, 2004, electric revenues increased $3.1 million to $893.4 million compared to $890.3 million2,949 for the same period in 2004.  The higher average rates were primarily the result of a difference in the prior year.  Retailbalance of sales among the various categories of customers.  Wholesale revenue decreased $8.1 million, primarily related to a $23.5 million decline in sales volume that was partially offset by a $15.4 million increase related to higher average market rates.  During the first quarter of 2005, ancillary revenues decreased $20.8 million while wholesale revenues increased $23.9 millionfrom PJM were $15.5 million.  The Company did not participate in PJM for the nine months ended September 30, 2004 compared to the same period in the prior year.  Retailfor 2004.  PJM ancillary revenues declined primarily resulting from lower Industrial and Commercial revenues relating to lower average rates.  These decreases were partially offset by an increase in Residential revenues relating to higher sales volume.  Wholesale revenues increased $23.9 millionconsist of compensation for the nine months ended September 30, 2004 over the same period in 2003 resulting from higher average market rates for wholesale sales, partially offset by lower sales volume for wholesale sales.  Wholesale average market rates increased approximately 30% for the nine months ended September 30, 2004 compared to the same perioduse of the prior year, while wholesale sales volume decreased by approximately 12% when compared to the prior year.Company’s transmission assets, reactive supply and regulation services.

 

Operating ExpensesElectric Margins, Fuel and Purchased Power

Net electric margin of $214.7$198.1 million in the thirdfirst quarter of 20042005 decreased by $18.8$11.1 million from $233.5when compared to net electric margin of $209.2 million in the thirdfirst quarter of 2003.2004.  As a percentage of total electric revenues, net electric margin decreased by 3.04.7 percentage points to 69.2%64.9% from 72.2%.  This decline is primarily the result of lower retail and wholesale revenues and increased fuel and purchased power costs.  Fuel costs increased by $4.2 million or 7% in the three months ended September 30, 2004 compared to the same period in 2003 primarily resulting from higher average fuel costs for retail sales.  Purchased power costs increased by $1.6 million or 5% in the third quarter of 2004 compared to the

21



same period in 2003 primarily resulting from a higher volume of purchased power for retail sales and higher average market prices for wholesale sales, partially offset by a lower volume of purchased power for wholesale sales.

For the nine months ended September 30, 2004, net electric margin of $621.5 million decreased by $26.2 million or 4% from $647.7 million for the nine months ended September 30, 2003.  As a percentage of total electric revenues, net electric margins decreased by 3.2 percentage points to 69.6% from 72.8%.  This decline is primarily the result of increased fuel and purchased power costs.costs, partially offset by a moderate increase in electric revenues.  Fuel costs increased by $21.0$15.0 million or 13%24% for the ninethree months ended September 30, 2004March 31, 2005 compared to the same period in 20032004 primarily resulting from higher average fuel costs for both retail and wholesale sales.costs.  Purchased power costs increased by $8.3$0.8 million or 11% for3% in the nine months ended September 30, 2004first quarter of 2005 compared to the same period in 20032004 primarily resulting from $13.4 million of charges associated with moving power across PJM and $1.8 million related to higher average market rates for power purchases partially offset by a higher$14.4 million decrease reflecting a lower volume of purchased power for retail salespower.

Operation and higher average market prices for wholesale sales.

Maintenance

Operation and maintenance expense increased $7.2experienced a slight increase of $2.0 million or 16% to $51.8 million4% for the three months ended September 30, 2004 compared to $44.6 million for the same period in 2003 as a result of higher corporate costs and increased electric production expenses.  Corporate costs increased reflecting deferred compensation of $2.9 million, Director’s fees of $1.2 million, pension expense of $1.2 million and $0.8 million in Sarbanes-Oxley project costs.  Electric production expenses were $1.4 million higher primarily for scheduled outages and ash disposal.

For the nine months ended September 30, 2004, operation and maintenance expenses increased $23.9 million or 19% to $152.5 million compared to $128.6 million for the same period in 2003 as a result of higher corporate costs and increased electric production costs.  Corporate costs increased primarily resulting from higher insurance premiums for Directors and Officers’ liability insurance of $4.8 million, pension expense of $3.7 million, Sarbanes-Oxley project costs of $2.3 million, deferred compensation of $1.4 million and Director’s fees of $1.2 million.  Electric production expenses increased $6.3 million for the nine months ended September 30, 2004 over the same period in the prior year primarily related to maintenance and repair expenses incurred for scheduled outages and ash disposal.

Amortization of regulatory assets decreased $12.4 million in the third quarter of 2004 and decreased $35.0 million for the nine months ended September 30, 2004 compared to the third quarter of 2003 and the nine months ended September 30, 2003 reflecting the conclusion of the three-year transition period for cost recovery related to deregulation granted by the Public Utilities Commission of Ohio in 2000 and ended DecemberMarch 31, 2003.

For the nine months ended September 30, 2004, general taxes decreased $3.5 million compared to the same period of the prior year primarily resulting from a 2003 excise tax expense of $4.0 million that did not occur in 2004.

Other income (deductions)

Other income (deductions) decreased in the third quarter of 2004 by $1.5 million compared to the third quarter of 2003 primarily as a result of $3.2 million of deferred compensation expense incurred in 2004 as well as reduced dividends and interest income on trust assets of $1.0 million, partially offset by $2.8 million in gains realized from the disposition of pollution control emission allowances.  For the nine months ended September 30, 2004, other income (deductions) decreased $4.2 million primarily resulting from $6.5 million of deferred compensation expense in 2004, $2.1 million of reduced dividends and interest income on trust assets compared to 2003, $1.7 million of 2004 revolving credit facility fees and $1.6 million of non-operating income received in 2003, partially offset by $7.9 million of gains realized from the disposition of pollution control emission allowances.

Interest Expense

Interest expense decreased by $3.1 million or 23% in the third quarter of 20042005 compared to the same period in 20032004 primarily resulting from $1.8 million of PJM administrative fees incurred in the first quarter of 2005 but not in the same period for 2004.

Depreciation and Amortization

Depreciation expense increased $1.7 million or 6% in the first quarter of 2005 compared to the first quarter of 2004 primarily resulting from a higher plant base related to pollution control facilities.

Other Income

Other income for the first three months ended March 31, 2005 rose $3.6 million compared to the first three months ended March 31, 2004.  This increase primarily resulted from $12.3 million in realized gains from the sale of pollution control emission allowances in the first quarter of 2005 compared to $5.5 million in the first quarter of 2004.

Income Tax Expense

Income tax expense decreased $2.7 million or 7% in the first quarter of 2005 compared to the first quarter of 2004 primarily resulting from lower interest related to the issuance of the $470 million First Mortgage Bonds 5.125% Series due 2013 that have a lower interest rate than the retired debt.  This decrease was offset by lower capitalized interest reflecting the completion of capital projects in 2003.

For the nine months ended September 30, 2004, interest expense declined $6.5 million or 17% compared to the nine months ended September 30, 2003, primarily reflecting lower interest related to the $470 million First Mortgage Bonds issuance.  This decrease was offset by lower capitalized interest expense as a result of capital projects completed in 2003.

Income Tax Expense

Income tax expense decreased $8.1 million or 17% in the third quarter of 2004 and decreased $6.1 million or 5% for the nine months ended September 30, 2004 compared to the third quarter of 2003 and the nine months ended September 30, 2003 primarily resulting from lower income experienced in each of the respective periods.  In

22



addition, during the third quarter of 2004, the Company increased its tax expense by approximately $3.1 million to reflect a state determination denying certain credits claimed on prior tax returns.  The Company intends to appeal this determination.

Cumulative Effect of Accounting Change

The cumulative effect of accounting change of $17.0 million for the nine months ended September 30, 2003 reflects the adoption of the provisions of FASB Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143).income.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AND REQUIREMENTS

 

DP&L’s cash and temporary cash investments totaled $160.0$14.3 million at September 30, 2004March 31, 2005 compared to $618.5$36.6 million at September 30, 2003.March 31, 2004.  This decrease was primarily attributed to lower profitability relating to higher fuel costs.  DP&L’s cash and temporary cash investments totaled $17.2 million at December 31, 2003.2004.

 

The Company generated net cash from operating activities of $356.1$115.1 million forin the nine months ended September 30, 2004first quarter of 2005 compared to $385.5$120.3 million forin the nine months ended September 30, 2003.first quarter of 2004.  The net cash from operating activities for the ninethree months ended September 30,March 31, 2005 and 2004 was primarily the result of operating profitability and working capital.  The decline in operating cash generated from working capital, specifically relatedflow of $5.2 million in the first quarter of 2005 compared to cash generated from receivables and the timingfirst quarter of tax payments.  This increase in working capital was partially offset by cash used2004 is primarily the result of lower operating profitability relating to purchase coal inventory.  Operating profitability and increases in working capital, specifically related to cash generated from receivables and the timing of tax payments, primarily drove net cash provided from operating activities for the nine months ended September 30, 2003.higher fuel costs.  The tariff-based revenue from DP&L’s business continues to be the principal source of cash from operating activities.  Management believes that the diversified retail customer mix of residential, commercial, and industrial classes provides DP&L with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities were $62.7was $42.7 million forin the nine months ended September 30,first quarter of 2005 and $25.7 million in the first quarter of 2004 and $35.5 million for the same period of the prior year.  The net cash used in both periods was primarilyto provide funding for capital expenditures.  For the nine months ended September 30, 2003, net cash used for investing activities was partially offset by cash provided by the settlement of interest rate hedges of $51.4 million.

 

Net cash flows used for financing activities were $150.6was $75.2 million forin the nine months ended September 30, 2004 compared to net cash flows provided by financing activitiesfirst quarter of $251.32005 and $75.2 million forin the nine months ended September 30, 2003.first quarter of 2004.  Net cash flows used for financing activities for the nine months ended September 30, 2004 and 2003 relatedeach of these periods were to the payment ofpay dividends on common stock retirement of long-term debt,to the parent company and for dividends paid on preferred stock.  For the nine months ended September 30, 2003, the

18



The Company has obligations to make future payments for capital expenditures, debt agreements, lease agreements, and other long-term purchase obligations, and has certain contingent commitments such as guarantees.  The Company believes its cash flows usedfrom operations, the credit facilities (existing or future arrangements), and other short- and long-term debt financing will be sufficient to satisfy its future working capital, capital expenditures and other financing requirements for financing activities were offset bythe foreseeable future.  DP&L’s ability to generate positive cash flows provided byfrom operations is dependent on general economic conditions, competitive pressures, and other business and risk factors described in “Factors That May Affect Future Results.”  If the issuanceCompany is unable to generate sufficient cash flows from operations, or otherwise comply with the terms of long-termits credit facilities, the Company may be required to refinance all or a portion of its existing debt or seek additional financing alternatives.  A discussion of $465.1 million.each of DP&L’s critical liquidity commitments is outlined below.

 

Capital Requirements

Construction additions were $62.1$35.2 million and $22.9 million for the nine months ended September 30,first quarter of 2005 and 2004, respectively, and are expected to approximate $88$193 million for the year compared to $70.1 million for the nine months ended September 30, 2003 and $98 million for the year ended 2003.  in 2005.

Planned construction additions for 20042005 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system,system.  During the last three years, capital expenditures have been utilized to meet the Company’s state and information systems.federal standards for Nitrogen Oxide (NOx) emissions from power plants and to make power plant improvements.

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 standards, among other factors.  Over the next four years, DP&L is projecting to spend $800an estimated $850 million in capital projects, approximately half60% of which is to meet changing environmental standards.  DP&L’sThe Company’s ability to complete its capital projects and the reliability of future service will be affected by its financial condition, the availability of internal and external funds at reasonable cost, and adequate and timely return on these capital investments.  DP&L expects to finance its construction additions over the next few yearsin 2005 with internally generatedinternally-generated funds.

 

Debt Obligations and MaturitiesDebt Covenants

TheAt March 31, 2005, the Company’s scheduled maturities and mandatory redemptions for First Mortgage Bonds, Guaranteed Air Quality Development Obligations, andof long-term debt, including capital lease obligations, over the Capital Leasenext five years are $0.2$1.2 million for the remainder of 2004, $1.1 million in 2005, $1.1$1.3 million in 2006, $9.3$9.5 million in 2007, $0.7 million in 2008, and $0.7 million in 2008.2009.  Substantially all property of DP&L is subject to the mortgage lien securing the First Mortgage Bonds.first mortgage bonds.  Debt maturities in 2005 are expected to be financed with internal funds.  Certain debt agreements contain reporting and financial covenants for which the Company is in compliance as of March 31, 2005 and expects to be in compliance the near term.

 

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013.  The net proceeds from the sale of the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226 million principal

23



amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date.  The $446 million of First Mortgage Bonds were called by DP&L on September 30, 2003, for redemption on October 30, 2003.  The 5.125% Series due 2013 havewere not been registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisions requiring DP&Lthe Company to pay additional interest if (i) DP&L’s registration statement was not declared effective by the securities remain unregistered afterSEC within 180 days from issuance.  The salethe issuance of the new bonds or (ii) the exchange offer was not registeredcompleted within 210 days from the issuance of the new bonds.  The registration statement was not declared effective and the exchange offer was not timely completed and, as a result, the Company is required to pay additional interest of 0.50% until ana registration statement is declared effective at which point the additional interest shall be reduced by 0.25%.  The remaining additional interest of 0.25% will continue until the exchange offer is completed.  The exchange offer registration for these securities is registered with the SEC.was filed April 26, 2005.

 

Issuance of additional amounts of First Mortgage Bondsfirst mortgage bonds by DP&L is limited by the provisions of its mortgage; however, management believes that DP&L continues to have sufficient capacity to issue First Mortgage Bondsfirst mortgage bonds to satisfy its requirements in connection with its current refinancing and construction programs through 2008.programs.  The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.

 

In December 2003, DP&L had $150 million available through a revolving credit agreement with a consortium of banks.  The agreement, which was scheduled to expire on December 10, 2004, was terminated on June 1, 2004.  The facility was to be used to support the Company’s business requirements and commercial paper program.  The facility contained two financial covenants, including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to interest coverage.  Fees associated with this credit facility were approximately $0.8 million per year, but a two-step increase in DP&L’s credit rating would have reduced the facility’s interest rate by 0.38%.  A lower credit rating would not have increased the applicable interest rate.  DP&L had no outstanding borrowings under the revolving credit facility and no outstanding commercial paper balances at September 30, 2004 and 2003.

In February 2004, DP&L entered into a $20 million Master Letter of Credit Agreement with a financial lending institution.  This agreement, which expires in February 2005, supports performance assurance needs in the ordinary course of business.  DP&L has certain contractual agreements for the sale and purchase of power, fuel and related energy services that contain credit rating clauses allowing the counterparties to seek additional surety under certain conditions. As of September 30, 2004, DP&L had eight outstanding letters of credit totaling $8.5 million.

In June 2004, DP&Lthe Company obtained a $100 million unsecured revolving credit agreement that extended and replaced DP&L’sits previous revolving credit agreement of $150 million.  The new agreement, which expires on May 31,

19



2005, provides credit support for the Company’sDP&L’s business requirements and commercial paper program during this period and may be increased to up to $150 million.  The facility contains two financial covenants including maximum debt to total capitalization, and minimum earnings before interest and taxes (EBIT) to total interest expense.  These covenants are currently met.  DP&L currently hasThe Company had no outstanding borrowings under this credit facility.facility at March 31, 2005 or at year-end 2004.  Fees associated with this credit facility are approximately $0.6 million per year.  Changes in debt ratings, however, may affect the applicable interest rate for DP&L’sthe Company’s revolving credit agreement.  A one-step increase in DP&L’s credit rating reduces the facility’s interest rate by 0.38%0.25% and a one-step decrease in credit rating increases the facility’s interest rate by 0.38%0.25%.  DP&L’s ability to use this revolving credit

In February 2004, the Company entered into a $20 million Master Letter of Credit Agreement with a financial lending institution.  This agreement is subject tosupports performance assurance needs in the PUCO’s annual approval which expired on November 5, 2004.ordinary course of business.  DP&L has filedcertain contractual agreements for the sale and purchase of power, fuel, and related energy services that contain credit rating related clauses allowing the counter parties to seek additional surety under certain conditions.  On February 24, 2005, DP&L entered into an applicationamendment to secureextend the PUCO’s continued authorizationterm of this Agreement for one year and that application is pending.reduce the maximum dollar volume of letters of credit to $10 million.  As of March 31, 2005, the Company had three outstanding letters of credit for a total of $3.5 million.

 

TheThere are no inter-company debt collateralizations or debt guarantees between DP&L and its parent.  None of the debt obligations of DP&L are guaranteed or secured by its parent or affiliates, and no cross-collateralization exists between the Company has received multiple credit rating downgrades since December 31, 2003.  and DPL or any affiliate.

Credit Ratings

Currently, DP&L’s senior secured debt credit ratings are as follows:

 

 

 

Rating

 

Outlook

 

Effective

Fitch Ratings

 

BBB

 

PositiveRating watch positive

 

November 2004February 2005

 

Moody’s Investors Service

 

Baa3Baa2

 

Under review for possible upgrade

 

November 2004February 2005

 

Standard & Poor’s Corp.

 

BBB-

 

NegativePositive

 

March 2004

April 2005

 

As reflected above, DP&L’s secured debt credit ratings are considered investment grade.

24



 

Off-Balance Sheet Arrangements

DP&L does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on DP&L’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that areis material to investors.

 

Long-TermLong-term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations.  The following table outlines DP&L’s obligations at September 30, 2004:At March 31, 2005, these include:

 

Long-term Obligations20



 

 

Payment Year

 

 

Payment Year

 

($ in millions)

 

2004

 

2005 & 2006

 

2007 & 2008

 

Thereafter

 

Total

 

Long Term Obligations

 

 

 

$ in millions

 

2005

 

2006 & 2007

 

2008 & 2009

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

 

$

0.8

 

$

8.6

 

$

673.6

 

$

683.0

 

 

$

0.4

 

$

9.0

 

$

 

$

673.8

 

$

683.2

 

Capital lease

 

0.2

 

1.4

 

1.4

 

1.5

 

4.5

 

Interest payments

 

32.4

 

74.9

 

74.0

 

336.4

 

517.7

 

Pension and Postretirement payments

 

17.4

 

45.9

 

46.3

 

117.9

 

227.5

 

Capital leases

 

0.8

 

1.8

 

1.4

 

0.6

 

4.6

 

Operating leases

 

0.8

 

0.4

 

 

 

1.2

 

 

0.8

 

0.9

 

 

 

1.7

 

Coal contracts

 

311.5

 

475.2

 

206.8

 

127.7

 

1,121.2

 

Coal contracts (a)

 

265.3

 

575.3

 

83.7

 

85.5

 

1,009.8

 

Other long-term obligations

 

12.2

 

18.1

 

0.5

 

 

30.8

 

 

17.1

 

12.7

 

0.5

 

 

30.3

 

Total long-term obligations

 

$

324.7

 

$

495.9

 

$

217.3

 

$

802.8

 

$

1,840.7

 

 

$

334.2

 

$

720.5

 

$

205.9

 

$

1,214.2

 

$

2,474.8

 


(a) DP&L operated units.

 

Long-term debt:

Long-term debt as of September 30, 2004March 31, 2005, consists of First Mortgage Bondsfirst mortgage bonds and Guaranteed Air Quality Development Obligations, includingguaranteed air quality development obligations and includes current maturities.maturities and unamortized debt discount.  (See Note 5 of Notes to Consolidated Financial Statements.)

Interest payments:

Interest payments associated with the Long-term debt described above.

Pension and Postretirement payments:

As of March 31, 2005, DP&L had estimated future benefit payments as outlined in Note 3 of Notes to Consolidated Financial Statements.  These estimated future benefit payments are projected through 2014.

 

Capital lease:leases:

As of September 30, 2004,March 31, 2005, the Company had onetwo capital leaseleases that expiresexpire in November 2007 and September 2010.

 

Operating leases:

As of September 30, 2004,March 31, 2005, the Company had several operating leases with various terms and expiration dates.

 

Coal contracts:

DP&LThe Company has entered into various long-term coal contracts to supply portions of its coal requirements for its generating plants.  Contract prices are subject to periodic adjustment, in accordance with various indices, and have features that will limit price escalation in any given year.

 

Other long-term obligations:

As of September 30, 2004, DP&LMarch 31, 2005, the Company had various other long-term obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

 

DP&L enters into various commercial commitments, which may affect the liquidity of its operations.  At March 31, 2005 these include:

 

Commercial Commitments21



 

 

Expiring Year

 

 

Expiring Year

 

($ in millions)

��

2004

 

2005 & 2006

 

2007 & 2008

 

Thereafter

 

Total

 

Commercial Commitments

 

 

 

$ in millions

 

2005

 

2006 & 2007

 

2008 & 2009

 

Thereafter

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

Credit facilities

 

$

 

$

100.0

 

$

 

$

 

$

100.0

 

 

$

100.0

 

$

 

$

 

$

 

$

100.0

 

Guarantees

 

 

17.8

 

 

 

17.8

 

 

 

17.8

 

 

 

17.8

 

Total commercial commitments

 

$

 

$

117.8

 

$

 

$

 

$

117.8

 

 

$

100.0

 

$

17.8

 

$

 

$

 

$

117.8

 

 

Credit facilities:

DP&L had $150 million available through a revolving credit agreement with a consortium of banks that was scheduled to expire on December 10, 2004.  In June 2004, the Company replaced this facilityits previous $150 million revolving credit agreement with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005.  At September 30, 2004,March 31, 2005, there were no borrowings outstanding under this credit agreement.  The new facility may be increased to up to $150 million.

 

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of September 30, 2004,March 31, 2005, DP&L could be responsible for the repayment of 4.9%, or $14.9 million, of a $305 million debt obligation and also 4.9%, or $2.9 million, of a separate $60.0$60 million debt obligation.  Both obligations mature in 2006.

 

25



MARKET RISK

 

As a result of its operating, investing and financing activities, DP&L’s financial results are&L is subject to certain market risks, including changes in commodity prices for electricity, coal, environmental emissions gas and other commodity prices;gas; and fluctuations in interest rates.  Commodity pricing exposure includes the effectimpacts of weather, market demand, potential coal supplier contract breaches or defaults, increased competition and other economic conditionsconditions.  For purposes of potential risk analysis, DP&L uses sensitivity analysis to quantify potential impacts of market rate changes on the results of operations.  The sensitivity analysis represents hypothetical changes in market values that may or may not occur in the sales area on retail sales volume; and adverse economic conditions.future.

 

Commodity Pricing Risk

Approximately 2218 percent of DP&L’s third quarter 2004 revenues were from sales of energy and capacity in the wholesale market.  Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market when DP&L can identify opportunities with positive margins.  In the third quarter of 2004, sales of excess wholesale energy and capacity contributed $5.0 million in net2005 electric margins.  This compares to net electric margins from wholesale energy and capacity sales of $6.6 million in 2003.  This decrease in net electric margin resulted from 8% fewer wholesale sales, increased average market prices for fuel and purchased power and lower capacity valuation.  Wholesale sales in the third quarter of 2004 and 2003 were 817 Mwh and 891 Mwh, respectively.  Wholesale fuel costs per megawatt hour for the third quarter of 2004 and 2003 were $14.90 and $13.18, respectively and wholesale purchased power costs per megawatt hour for the third quarter of 2004 and 2003 were $41.91 and $32.72, respectively.

For the nine months ended September 30, 2004, approximately 22 percent of DP&L’s revenues were from sales of excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs of existing retail customers is sold in the wholesale market when DP&L can identify opportunities with positive margins.  For the nine months ended September 30, 2004, salesAs of excessMarch 31, 2005, a hypothetical increase or decrease of 10% in annual wholesale energy and capacity contributed $17.4revenues, excluding PJM services, would result in approximately a $13.3 million increase or decrease to earnings on common stock, assuming no increase in net electric margin.  This compares to net electric margin from wholesale energy and capacity sales of $23.8 million in 2003.  This decrease in net electric margin resulted from increased average market prices for fuel and purchased power. Wholesale fuel costs per megawatt hour year-to-date 2004 and 2003 were $16.43 and $13.02, respectively and wholesale purchased power costs per megawatt hour year-to-date 2004 and 2003 were $38.07 and $31.53, respectively.costs.

 

Fuel (including emission allowances) and purchased power costs represented 47% and 46%as a percent of total operating costs in the thirdfirst quarter of 2005 and 2004 were 51% and for the nine months ended September 30, 2004,47%, respectively.  As of March 31, 2005, DP&L has contracted for substantially all of its projected coal needsrequirements for 2004, at an estimated cost per Btu increase of approximately 15% over average 2003 levels.2005 with any incremental purchases made in the spot market.  The prices to be paid by the Company under its long-term coal contracts are either fixed or subject to periodic adjustment.  Each contract has features that will limit price of spot coal has increased nearly 60% over the last twelve months.escalations in any given year.  DP&L has term (short, mediumalso covered all of its estimated 2005 emission allowance requirements.  The Company expects its 2005 annual fuel costs to exceed its 2004 annual fuel costs by approximately 15%, which is higher than anticipated.  This increase is primarily the result of increased emissions allowance costs and long) contracts executed prior to and during the last twelve months that are priced below present spot prices.  If spota slight increase in coal prices continue to increase, the probability of counter party non-performance may increase.  In the event that any coal supplier does not meet their contract obligations, the Company may be exposed to supply chain risks in a high priced market resulting in potential increased fuel costs.  Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of its generating capacity.  DP&L will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below the Company’s internal production costs.  As of March 31, 2005, a hypothetical increase or decrease of 10% in annual fuel and purchased power costs, excluding PJM services, would result in approximately a $22.7 million increase or decrease to earnings on common stock.

Interest Rate Risk

As a result of DP&L’s normal borrowing and leasing activities, the Company’s results are exposed to fluctuations in interest rates, which the Company manages through its regular financing activities.  DP&L maintains a limited amount of cash on deposit or investments in cash equivalents that may be affected by adverse interest rate

22



fluctuations.  The Company’s long-term debt represents publicly held secured and unsecured instruments with fixed interest rates.  At March 31, 2005, DP&L had no short-term borrowings.

 

The carrying value of DP&L’sthe Company’s debt was $687.5$687.8 million at September 30, 2004,March 31, 2005, consisting of DP&L’s First Mortgage Bonds, Guaranteed Air Quality Development Obligationsfirst mortgage bonds, guaranteed air quality development obligations and the Capital Lease.capital leases.  The fair value of this debt was $683.5$672.1 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities.  The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed ratefixed-rate debt at September 30, 2004March 31, 2005, are as follows:

 

 

 

Long-term Debt

 

Expected Maturity
Date

 

Amount

 

Average Rate

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

2004

 

$

0.2

 

 

3.3%

 

 

2005

 

1.1

 

 

4.4%

 

 

2006

 

1.1

 

 

4.4%

 

 

2007

 

9.3

 

 

6.1%

 

 

2008

 

0.7

 

 

3.3%

 

 

Thereafter

 

675.1

 

 

5.8%

 

 

Total

 

$

687.5

 

 

5.8%

 

 

 

 

 

 

 

 

 

Fair Value

 

$

683.5

 

 

 

 

26



 

 

Long-term Debt

 

Expected Maturity Date

 

Amount
($ in millions)

 

Average Rate

 

 

 

 

 

 

 

2005

 

$

1.2

 

4.7

%

2006

 

1.3

 

4.8

%

2007

 

9.5

 

6.1

%

2008

 

0.7

 

4.3

%

2009

 

0.7

 

4.3

%

Thereafter

 

674.4

 

5.5

%

Total

 

$

687.8

 

5.8

%

 

 

 

 

 

 

Fair Value

 

$

672.1

 

 

 

 

Debt maturities remaining in 20042005 are expected to be financed with internal funds.  The fair value of financial instruments held was $94.6 million and $103.5 million at September 30, 2004 and December 31, 2003, respectively.  The market risk related to these financial instruments was estimated as the potential increase/decrease in fair value of approximately $9 million at September 30, 2004, resulting from a hypothetical 10% increase/decrease in the value of the underlying securities.

 

FACTORS THAT MAY AFFECT FUTURE RESULTS

 

This quarterly report and other documents that DP&L files with the Securities and Exchange Commission (SEC) and other regulatory agencies, as well as other oral or written statements the Company may make from time to time, contain information based on management’s beliefs and include forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve a number of known and unknown risks, uncertainties and assumptions. These forward-looking statements are not guarantees of future performance, and there are a number of factors including, but not limited to, those listed below, which could cause actual outcomes and results to differ materially from the results contemplated by such forward-looking statements. DP&L does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are identified by terms and phrases such as “anticipate”, “believe”, “intend”, “estimate”, “expect”, “continue”, “should”, “could”, “may”, “plan”, “project”, “predict”, “will”, and similar expressions.

 

Regulation/Competition

DP&L operates in a rapidly changing industry with evolving industry standards and regulations. In recent years, a number of federal and state developments aimed at promoting competition triggered industry restructuring.  Regulatory factors, such as changes in the policies or procedures that set rates; changes in tax laws, tax rates, and environmental laws and regulations; changes in DP&L’s ability to recover expenditures for environmental compliance, fuel costs,and purchased power costs and investments made under traditional regulation through rates; and changes to the frequency and timing of rate increases, can affect the Company’s results of operations and financial condition.  Additionally, financial or regulatory accounting principles or policies imposed by governing bodies can increase DP&L’s operational and monitoring costs affecting its results of operations and financial condition.

 

In September 2003, the PUCO approved a Stipulation that provides the following: DP&L’s market development period will continue through December 31, 2005; retail generation rates will remain frozen at present levels; a credit issued to customers who elect competitive retail generation service will increase over two years; and a rate stabilization period from January 1, 2006 through December 31, 2008, during which DP&L’s retail generation rates in effect on January 1, 2004 will serve as market-based rates.  The Stipulation also provides that beginning January 1, 2006, rates may be modified by up to 11% of generation rates, estimated at $75 million, to reflect increased costs associated with fuel, environmental compliance, taxes, regulatory changes, and security measures.

Changes in DP&L’s customer base, including municipal customer aggregation, has ledcould lead to the entrance of competitors in the Company’s marketplace and may affectaffecting its results of operations and financial condition. A new program began November 1, 2004 that is designed to assist DP&L residential customers to actively choose a new generation supplier.  Customer participation in this program and its financial impact cannot be determined at this time.

23



 

Economic Conditions

Economic pressures, as well as changing market conditions and other factors related to physical energy and financial trading activities, which include price, basis, credit, liquidity, volatility, capacity, transmission, and interest rates can have a significant effect on DP&L’s operations and the operations of its retail, industrial and commercial customers.

During the past few years, the merchant energy industry in many parts of the United States has suffered from oversupply of merchant generation and a decline in trading and marketing activity.  These market conditions are expected to continue for several years.  As a result of these market conditions, the Company continues to evaluate the carrying values of certain long-lived generation assets.

 

Reliance on Third Parties

DP&L relies on many suppliers for the purchase and delivery of inventory and components to operate its energy production, transmission and distribution functions.  Unanticipated changes in DP&L’sthe Company’s purchase processes may affect the Company’s business and operating results. In addition, the Company relies on others to provide professional services, such as, but not limited to investment management, actuarial calculations, internal audit services, payroll processing and various consulting services.

 

Operating Results Fluctuations

Future operating results could be affected and are subject to fluctuations based on a variety of factors, including but not limited to: unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages; unusual maintenance or repairs; changes in coal costs, gas supply costs, or availability constraints; environmental compliance, including costs of compliance with existing and future environmental requirements; and electric transmission system constraints.

 

Employees

A majority of the Company’s employees are under a collective bargaining agreement.agreement expiring at the end of October 2005.  If the Company is unable to negotiate this or future collective bargaining agreements, the Company could experience work stoppages, which may affect its business and operating results.

27



 

Regulatory Uncertainties and Litigation

In the normal course of business, the Company is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  Additionally, the Company is subject to diverse and complex laws and regulations, including those relating to corporate governance, public disclosure and reporting and taxation, which are rapidly changing and subject to additional changes in the future. As further described underin Part II, Item 31 – Legal Proceedings, in the Company’s Form 10-K for the year ended December 31, 2003, the Company is also currently involved in various litigationslitigation in which the outcome is uncertain.  Compliance with these rapid changes may substantially increase costs to DP&L’s organizations and could affect its future operating results.

 

Internal Controls

As described under Item 1 – Business - Recent Developments,DP&L’s internal controls, accounting policies and practices, and internal information systems are intended to enable the Company to capture and process transactions in a timely and accurate manner in compliance with accounting principles generally accepted in the United States of America, laws and regulations, taxation requirements, and federal securities laws and regulations.  DP&L implemented corporate governance, internal control and accounting rules issued in connection with the Sarbanes-Oxley Act of 2002.  The Company’s Form 10-K for the year ended December 31, 2003, a reviewinternal controls and policies are being closely monitored by independent counsel to DP&L’s Audit Committee ofmanagement, as well as the Board of Directors, of the Company has identified recommendations for improvement relating to some of the concerns raised by the Company’s Controller including, among other things, internal controls.  In addition, as further described under Item 9A - Controls and Procedures, during their year-end review, the Company’s independent auditors identified and reported to management and the Audit Committee of the Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB).  The material weaknesses include conditions related to (1) the Company’s process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) with respect to executive deferred compensation distributions made during 2003 and (2) lack of effective communication in internal reporting of certain investment income that may lead to improper accounting of such transactions in accordance with generally accepted accounting principles.

The reportable conditions that are not believed to be a material weakness include conditions related to payroll processing, the quality and change control process for the preparation of SEC filings, management’s assessment of the Company’s internal controls, executive travel and entertainment expense reporting, the lack of a comprehensive controller function and segregation of duties for certain accounting transactions and activities.

The Company’s failure to timely improve any deficiencies in its internal controls and procedures could result in errors in its consolidated financial statements, adversely affect its ability to operate its business and hamper management’s ability to report on the effectiveness of its internal controls.  The Company has taken steps to correct the internal control deficiencies identified and will further develop and enhance the Company’s internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements.  The Company cannot assure that any new policies or procedures that the Company implements to remedy the material weaknesses and/or reportable conditions will be successful in the near term.

The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation forcontinued compliance with the requirements under Section 404 of the Sarbanes-Oxley ActAct.  While DP&L believes these controls, policies, practices and systems are adequate to ensure data integrity, unanticipated and unauthorized actions of 2002employees, temporary lapses in internal controls due to shortfalls in oversight, or resource constraints, could lead to improprieties and undetected errors that could impact the Company’s financial condition or results of operations.

Environmental Compliance

The Company’s generating facilities (both wholly-owned and co-owned with others) are subject to continuing federal and state environmental laws and regulations.  Management believes the Company is using this reviewcurrently complies with all existing federal and state environmental laws and regulations.  The Company owns a non-controlling, minority interest in several generating stations operated by The Cincinnati Gas & Electric Company (CG&E) and Columbus Southern Power Company (CSP).  Either or both of these parties are likely to further assisttake steps to ensure that these stations remain in identifyingcompliance with applicable environmental laws and correcting any control deficiencies.regulations.  As expected, this review has revealed some control weaknesses, whichnon-controlling owners in these generating stations, the Company has reported tocannot predict the Audit Committee. The Company has since taken steps to strengthen its internal controls inlikely cost or timing for environmental compliance initiatives undertaken at these areas, including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions.  These actions have been successful in eliminating a large percentagestations.  However, regardless of the deficiencies noted, but additional remediation activities continue.  Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review.  At this time, the Company has not completed its review of the existing controls and their effectiveness.  Unless the material weaknesses described above, or any identified during this review, are remedied, there can be no assurances thatchoice for compliance, the Company will be able to assert thatresponsible for its internal control over financial reporting is effective, pursuant topro rata share of these expenses based upon the rules adopted by the SEC under Section 404, when those rules take effect.Company’s ownership interest.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

DP&L’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP). In connection with the preparation of these financial statements, DP&L’s 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 management’s historical experience and assumptions that are believed to be reasonable at

28



the time. However, because future events and their effects cannot be determined with certainty, the determination of

24



estimates requires the exercise of judgment. DP&L’s critical accounting policies are those which require assumptions to be made about matters that are highly uncertain.

 

Different estimates could have a material effect on its 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.  Significant items subject to such judgments include the carrying value of property, plant and equipment; the valuation of derivative instruments; the valuation allowance for receivables and deferred income taxes; the valuation of reserves related to current litigation; and assets and liabilities related to employee benefits.

 

There have been no significant changes to the critical accounting policies as disclosed in DP&L’s Form 10-K as of December 31, 2003.2004.

 

Recently Issued Accounting Pronouncements

A discussion of recently issued accounting pronouncements is described in Note 21 of Notes to Consolidated Financial Statements and such discussion is incorporated by reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and made a part hereof.

 

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THE DAYTON POWER AND LIGHT COMPANY

OPERATING STATISTICS

 

Three Months Ended
March 31,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2004

 

2003

 

2004

 

2003

 

 

2005

 

2004

 

Electric

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales (millions of kWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

1,300

 

1,356

 

3,921

 

3,851

 

 

1,535

 

1,531

 

Commercial

 

1,016

 

1,016

 

2,856

 

2,804

 

 

885

 

904

 

Industrial

 

1,161

 

1,140

 

3,338

 

3,281

 

 

1,010

 

1,038

 

Other retail

 

367

 

355

 

1,057

 

1,042

 

 

331

 

333

 

Other miscellaneous revenues

 

 

 

Total retail

 

3,844

 

3,867

 

11,172

 

10,978

 

 

3,761

 

3,806

 

 

 

 

 

 

Wholesale

 

956

 

1,390

 

2,977

 

3,400

 

 

617

 

982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

4,800

 

5,257

 

14,149

 

14,378

 

Total sales

 

4,378

 

4,788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues ($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

117,277

 

$

120,972

 

$

341,856

 

$

335,192

 

 

$

125,932

 

$

125,992

 

Commercial

 

62,133

 

62,721

 

179,396

 

182,912

 

 

57,174

 

57,597

 

Industrial

 

33,429

 

40,598

 

97,145

 

124,501

 

 

29,784

 

30,830

 

Other retail

 

25,355

 

23,455

 

73,019

 

69,638

 

 

18,884

 

18,933

 

Other miscellaneous revenues

 

2,782

 

3,875

 

Total retail

 

238,194

 

247,746

 

691,416

 

712,243

 

 

234,556

 

237,227

 

 

 

 

 

 

Wholesale

 

72,046

 

75,429

 

202,006

 

178,051

 

 

55,062

 

63,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

310,240

 

$

323,175

 

$

893,422

 

$

890,294

 

PJM ancillary revenues

 

15,501

 

 

 

 

 

 

 

Total revenues

 

$

305,119

 

$

300,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric customers at end of period

 

507,669

 

505,462

 

507,669

 

505,462

 

 

511,180

 

507,659

 

 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

See the ��Market“Market Risk” section of Item 2.

 

Item 4.  Controls and Procedures

For the period covered by this report, the Company carried out an evaluation, under the supervision andThe Company’s management evaluated, with the participation of the Company’s management, including the Company’s Chief Executive Officer and interim Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the interim Chief Financial Officer have concluded that the Company’s disclosure controls and procedures arewere effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures.  Even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Attached as Exhibits 31.1 and 31.2 to this annual report are certifications of the Chief Executive Officer and the interim Chief Financial Officer required in accordance with Rule 13a-14end of the Exchange Act.  This portion of the Company’s annual report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Except as described below there wereperiod covered by this report.  There has been no changeschange in the Company’s internal control over financial reporting that occurred during the last quarter covered by this report that havehas materially affected, or areis reasonably likely to materially affect, the Company’s internal control over financial reporting.  During their year-end review, KPMG LLP (KPMG), the Company’s independent accountants, identified and reported to management and the Audit Committee of DPL’s Board of Directors two material weaknesses and certain other matters involving internal control deficiencies considered to be reportable conditions under standards established by the Public Company Accounting Oversight Board (PCAOB).  Reportable conditions are matters coming to the attention of the auditors that, in their judgment, relate to significant deficiencies in the design or operation of internal control and could adversely affect the organization’s ability to record, process, summarize and report financial data consistent with the assertions of

 

30



management in the financial statements.  A material weakness is a reportable condition in which the design or operation of one or more internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

The two material weaknesses identified are:

(1)                                  An ineffective process for recognizing an adjustment to the Company’s income tax provision to reflect a deductibility limitation under Section 162(m) for executive deferred compensation distributions made during 2003, including, without limitation, insufficient supporting documentation submitted to the Company’s tax department for purposes of calculating the income tax provision and the lack of effective communication between and among senior management, counsel and the Company’s tax and compensation experts.  Absent review of specific deferred compensation records by the Company’s outside auditors, income tax balances for 2003 may have been improperly stated at December 31, 2003.  Management concurred with KPMG’s observations relating to income tax reporting of executive compensation.  The Company further evaluated its internal processes relating to executive compensation and has implemented internal control improvements in this area; and

(2)                                  A complex and manual process for accounting and reporting transactions in DPL’s financial asset portfolio, including, (i) separate reporting structures for MVE accounting and corporate accounting that do not allow for a review of the entire process, (ii) the lack of a complete accounting manual for financial asset portfolio accounting that contemplates all investment transactions that occur on a regular basis and (iii) ineffective communication between the MVE and corporate accounting groups that does not ensure that all investment portfolio transactions are identified, accumulated and reported in accordance with generally accepted accounting principles.  Specifically, in 2003 private equity fund distributions in the form of stock of underlying investments were initially accounted for by management entirely as return of capital transactions.  A large element of each distribution should have been accounted for as income rather than a return of capital.  As a result, results for the third quarter 2003 were required to be revised.  Similar transactions in prior years were also accounted for inappropriately and were revised.  Management concurred with KPMG’s observations relating to investment portfolio accounting and acknowledged the need for improvement.  DPL further evaluated its accounting processes relating to its investment portfolio and has implemented internal control improvements in this area.

The reportable conditions that are not believed to be material weaknesses are conditions related to:  (i) payroll processing and the fact that the Company has two separate payroll processes, one for the majority of personnel and one for the Company’s senior executives, (ii) the lack of a quality and change control process for the preparation and submission of SEC filings on Form 10-K and Form 10-Q, (iii) the lack of significant progress made by management in assessing the Company’s internal controls in preparation for Sarbanes-Oxley Section 404 implementation and KMPG’s belief that the Company will identify control weaknesses requiring remediation, (iv) the Company’s process for executive travel and entertainment expense reporting and reimbursement and the lack of sufficient supporting documentation for reported business expenses of certain executives to support deductibility for tax purposes, (v) the lack of a comprehensive controller function to monitor the accounting function in the Company and (vi) inadequate segregation of duties for certain accounting transactions and activities processed at the executive level, including payroll, benefit plans, other compensation plans, time and expense reporting by senior management and preparation and submission of SEC filings.

The material weaknesses and reportable conditions identified above, if unaddressed, could result in errors in the Company’s consolidated financial statements.

Management concurred with KPMG’s observations relating to payroll processing (particularly those relating to executive compensation), external reporting processes, and executive travel and entertainment expense reporting.  The Company further evaluated these areas and implemented appropriate internal control improvements.

Management acknowledged KPMG’s observations relating to Sarbanes-Oxley Section 404 implementation and increased resources dedicated to this effort.  Additionally, the Company has improved its communications both within the organization and with KPMG regarding the status of the implementation process, project scope, preliminary results and remediation efforts.  Management also acknowledged the need for a more comprehensive controller function.  The Company reviewed the accounting processes performed outside the corporate controller’s area and reassigned responsibility for these processes as deemed appropriate for improved internal controls.  Finally, management concurred with KPMG’s observations regarding segregation of duties related to specific activities performed by the prior interim chief financial officer and acknowledged that improvements were needed in

31



this area.  The Company plans to use the Sarbanes-Oxley Section 404 implementation process to further assist in identifying and reassigning responsibility for activities that require additional segregation of duties.

The Company will continue to evaluate the material weaknesses and reportable conditions and will take all necessary action to correct the internal control deficiencies identified. The Company will also further develop and enhance its internal control policies, procedures, systems and staff to allow it to mitigate the risk that material accounting errors might go undetected and be included in its consolidated financial statements.  The Company is currently undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the Company is using this review to further assist in identifying and correcting any control deficiencies.  As expected, this review has revealed control weaknesses, which the Company has reported to the Audit Committee.  The Company has since taken steps to strengthen its internal controls in these areas, including increasing segregation of duties, writing policies where necessary, adding checks at key decision points and increasing supervisor review of transactions.  These actions have been successful in eliminating a large percentage of the deficiencies noted, but additional remediation activities continue.  Corrected control deficiencies are being retested by management to assure that remediation efforts were successful, and the Company’s auditors will perform independent testing of the Company’s internal controls as part of their year-end review.  At this time, the Company has not completed its review of the existing controls and their effectiveness.  Unless the material weaknesses described above, and any identified during this review, are remedied, there can be no assurances that the Company will be able to assert that its internal control over financial reporting is effective in the management report to be included in the Annual Report for the year ended December 31, 2004, pursuant to the rules adopted by the SEC under Section 404.

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Part II.  Other Information

 

Item 1.  Legal Proceedings

 

Except as set forth hereinOn August 24, 2004, the Company, DPL and MVE filed a Complaint against Mr. Forster, Ms. Muhlenkamp and Mr. Koziar in Notes to Consolidated Financial Statements, there were no significant changesthe Court of Common Pleas of Montgomery County, Ohio asserting legal claims against them relating to the Legal Proceedings reportedtermination of the Valley Partners Agreements, challenging the validity of the purported amendments to the deferred compensation plans and to the employment and consulting agreements with Messrs. Forster and Koziar and Ms. Muhlenkamp, and the propriety of the distributions from the plans to Messrs. Forster and Koziar and Ms. Muhlenkamp, and alleging that Messrs. Forster and Koziar and Ms. Muhlenkamp breached their fiduciary duties and breached their consulting and employment contracts.  The Company, DPL and MVE seek, among other things, damages in excess of $25 thousand, disgorgement of all amounts improperly withdrawn by Messrs. Forster and Koziar and Ms. Muhlenkamp from the deferred compensation plans and a court order declaring that the Company, DPL and MVE have no further obligations under the consulting and employment contracts due to those breaches.

Defendants Forster, Koziar and Muhlenkamp have filed motions to dismiss the Complaint and motions to stay discovery.  The Company and DPL have filed briefs opposing those motions.  In addition, pursuant to applicable statutes, regulations and agreements, the Company and DPL have been advancing certain of Defendants’ attorneys’ fees and expenses with respect to various matters other than the litigation between Defendants and the Company and DPL in Florida and Ohio, and believe that other requested advances are not required.  On February 7, 2005, Mr. Forster and Ms. Muhlenkamp filed a motion in DP&L’s Form 10-K asand DPL’s Ohio litigation seeking to compel DPL, MVE and the Company to pay all attorneys’ fees and expenses that have not been advanced to them.  The Company, DPL and MVE have filed a brief opposing that motion.  All of December 31, 2003.  A discussionthe foregoing motions are pending. 

On March 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New York state court against the purchasers of legal proceedingsthe DPL private equity portfolio and against outside counsel to the Company and DPL concerning purported entitlements in connection with the purchase of the portfolio.  The Company, DPL and MVE are not defendants in that case; however, they are parties to an indemnification agreement with respect to the purchaser defendants.  Those defendants have requested that the Company, DPL and MVE indemnify them in connection with that litigation, and the Company, DPL and MVE have acknowledged indemnify obligations.  On March 28, 2005, the Company, DPL and MVE filed a Motion for Preliminary Injunction in the Company’s Ohio case, requesting that the court issue a preliminary injunction against Mr. Forster and Ms. Muhlenkamp regarding the lawsuit.  Since certain key issues raised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit are identical to the issues raised in the Company’s pending Ohio lawsuit, DPL, MVE and the Company believe that those issues should be heard and resolved in the pending Ohio lawsuit.  Mr. Forster and Ms. Muhlenkamp filed a brief opposing the preliminary injunction on April 15, 2005.  The Company, DPL and MVE filed their reply brief on April 25, 2005.  The motion is described in Item 3-Legal Proceedingspending and Note 16 of Notes to Consolidated Financial Statements of DP&L’s Form 10-Khas been set for the year ended December 31, 2003 and such discussions are incorporated by reference and made a part hereof.hearing on May 6, 2005.

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

There were no submissions to the security holders in the thirdfirst quarter.

 

Item 5.  Other Information

 

There were no significant changes to the Recent Developments reported in Item 1-Business or to the Subsequent Events discussed in Note 18 of Notes to Consolidated Financial Statements in DP&L’s Form 10-K as of December 31, 2003 and such discussions are incorporated by reference and made a part hereof.None

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)                                  The following exhibit isexhibits are filed herewith:

 

Exhibits 31.1 and 31.2 – Officer’s Certifications pursuant to Section 302 of the Sarbanes-OxleySarbanes Oxley Act of 2002

 

Exhibit 32 – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)Reports on Form 8-K.

On September 1, 2004, The Dayton Power and Light Company (DP&L or the Company) filed a Form 8-K reporting, under Item 8.01, that DP&L and DPL Inc. sent a letter to the common shareholders of DPL Inc. and the preferred shareholders of DP&L that provided, among other things, an update to the efforts to finalize audited financial statements for 2003 and the intent to resume the declaration and payment of quarterly dividends once all SEC reports are filed and the Board declares the dividend and sets a payment date.  The Company also reported its liquidity to meet near-term operating requirements.

3327



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant 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:

November 15, 2004May 5, 2005

/s/ James V. Mahoney

 

 

 

James V. Mahoney
President and Chief Executive Officer
(principal executive officer)

 

 

 

 

 

 

 

November 15, 2004

/s/ Pamela Holdren

John J. Gillen

 

 

Pamela Holdren

John J. Gillen
TreasurerSenior Vice President and interim Chief Financial Officer
(principal (principal financial and principal accounting
officer)

 

 

 

 

 

 

 

November 15, 2004

/s/ Daniel L. Thobe

 

 

 

Daniel L. Thobe
Corporate Controller

 

Corporate Controller

 

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