UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, June 30, 2007

 

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

 

Registrant, State of Incorporation,

I.R.S. Employer

File Number


Address and Telephone Number

 

I.R.S.
Employer
Identification
No.

 

 

 

 

 

1-9052

DPL INC.

31-1163136

 

 

(An Ohio Corporation)

1065 Woodman Drive

 

 

 

 

1065 Woodman Drive
Dayton, Ohio 45432

 

 

937-224-6000

 

 

 

 

 

 

 

1-2385

THE DAYTON POWER AND LIGHT COMPANY

31-0258470

 

 

(An Ohio Corporation)

1065 Woodman Drive

 

Dayton, Ohio 45432

 

937-224-6000

 

 

1065 Woodman Drive
Dayton, Ohio 45432

 

 

937-224-6000

 

 

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

DPL Inc.

 

Yes x

No o

The Dayton Power and Light Company

 

Yes x

No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

DPL Inc.

 

x

 

o

 

o

The Dayton Power and Light Company

 

o

 

o

 

x

 

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

DPL Inc.

 

Yes o

No x

The Dayton Power and Light Company

 

Yes o

No x

 

As of April 27,July 25, 2007, each registrant had the following shares of common stock outstanding:

Registrant

 

Description

 

Shares Outstanding

 

 

 

 

 

DPL Inc.

Common Stock, $0.01 par value

 

113,342,744113,553,444

 

 

 

The Dayton Power and Light Company

Common Stock

 

41,172,173

 

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

 




DPL Inc. and The Dayton Power and Light Company

Index

Part I Financial Information

 

Page No.

 

Item 1

Financial Statements DPL and DP&L

4

 

 

 

 

Condensed Consolidated Statement of Results of Operations – DPL

4

 

 

 

 

Condensed Consolidated Statement of Cash Flows – DPL

5

 

 

 

 

Condensed Consolidated Balance Sheet – DPL

6

 

 

 

 

Condensed Consolidated Statement of Results of Operations – DP&L

8

 

 

 

 

Condensed Consolidated Statement of Cash Flows – DP&L

9

 

 

 

 

Condensed Consolidated Balance Sheet – DP&L

10

 

 

 

 

Notes to Condensed Consolidated Financial Statements

12

 

 

 

Item 2

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

3036

 

 

 

 

Operating Statistics

4857

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

4857

 

 

 

Item 4

Controls and Procedures

4857

 

 

 

Part II Other Information

 

49

 

 

 

Item 1

Legal Proceedings

4958

 

 

 

Item 1A

Risk Factors

5059

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

5059

 

 

 

Item 3

Defaults Upon Senior Securities

5059

 

 

 

Item 4

Submission of Matters to a Vote of Security Holders

5059

 

 

 

Item 5

Other Information

5060

 

 

 

Item 6

Exhibits

5060

 

 

 

Other

 

 

 

 

 

Signatures

 

61

 

 

 

Other

Signatures

51

Certifications

 

 

 

2




DPL Inc. and The Dayton Power and Light Company file current, annual and quarterly reports, proxy statements (as to DPL Inc.) 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 we file at the SEC’s public reference room located at 100 F Street N.E., Washington, D.C. 20549, USA.  Please call the SEC at (800) SEC-0330 for further information on the public reference rooms.  Our SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.www.sec.gov.

Our public internet site is http://www.dplinc.com.www.dplinc.com.  We make available, free of charge, through our internet site, our 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 our 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 we electronically file such material with, or furnish it to, the SEC.

In addition, our public internet site includes other items related to corporate governance matters, including, among other things, our governance guidelines, charters of various committees of the Board of Directors and our 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 DPL Investor Relations, 1065 Woodman Drive, Dayton, Ohio 45432.


Part 1 Financial Information

This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L).  DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately 89%93% of DPL’s total consolidated asset base.  Throughout this report the terms we, us, our and ours are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.  Historically, DPL and DP&L have filed separate SEC filings.   Beginning with the Form 10-K for the year ended December 31, 2006 and in the future, DPL and DP&L will file combined SEC reports on an interim and annual basis.

3





Item 1 Financial Statements

DPL INC.

CONDENSED CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS

 

 

Three Months Ended

 

$ in millions except per share amounts

 

 

 

March 31,

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues

 

$

379.7

 

$

341.1

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

Fuel

 

90.3

 

84.2

 

Purchased power

 

52.2

 

25.3

 

Total cost of revenues

 

142.5

 

109.5

 

 

 

 

 

 

 

Gross margin

 

237.2

 

231.6

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Operation and maintenance

 

69.3

 

62.4

 

Depreciation and amortization

 

33.5

 

36.9

 

General taxes

 

28.0

 

28.0

 

Amortization of regulatory assets

 

2.9

 

1.1

 

Total operating expenses

 

133.7

 

128.4

 

 

 

 

 

 

 

Operating income

 

103.5

 

103.2

 

 

 

 

 

 

 

Investment income

 

3.0

 

6.4

 

Interest expense

 

(23.1

)

(26.3

)

Other income (deductions)

 

0.8

 

(0.3

)

 

 

 

 

 

 

Earnings from continuing operations before income tax

 

84.2

 

83.0

 

 

 

 

 

 

 

Income tax expense

 

33.0

 

31.7

 

 

 

 

 

 

 

Earnings from continuing operations

 

51.2

 

51.3

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

4.9

 

7.6

 

 

 

 

 

 

 

Net Income

 

$

56.1

 

$

58.9

 

 

 

 

 

 

 

Average number of common shares outstanding (millions)

 

 

 

 

 

Basic

 

107.5

 

120.2

 

Diluted

 

119.4

 

129.3

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

Basic:

 

 

 

 

 

Earnings from continuing operations

 

$

0.48

 

$

0.43

 

Earnings from discontinued operations

 

0.04

 

0.06

 

Total Basic

 

$

0.52

 

$

0.49

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Earnings from continuing operations

 

$

0.43

 

$

0.40

 

Earnings from discontinued operations

 

0.04

 

0.06

 

Total Diluted

 

$

0.47

 

$

0.46

 

 

 

 

 

 

 

Dividends paid per share of common stock

 

$

0.26

 

$

0.25

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

4




DPL INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Three Months Ended

 

$ in millions

 

 

 

March 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

56.1

 

$

58.9

 

Less: Income from discontinued operations

 

(4.9

)

(7.6

)

Income from continuing operations

 

51.2

 

51.3

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

33.5

 

36.9

 

Amortization of regulatory assets

 

2.9

 

1.1

 

Deferred income taxes

 

(1.7

)

(2.4

)

Captive insurance provision

 

1.3

 

1.2

 

Gain on sale of other investments

 

 

(1.0

)

Changes in certain assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(23.3

)

(15.9

)

Accounts payable

 

16.3

 

35.0

 

Accrued taxes payable

 

6.0

 

(9.2

)

Accrued interest payable

 

(14.5

)

(7.5

)

Prepayments

 

(1.1

)

3.2

 

Inventories

 

(0.2

)

(7.4

)

Deferred compensation assets

 

7.7

 

3.1

 

Deferred compensation obligations

 

1.6

 

(1.3

)

Other

 

17.4

 

4.5

 

Net cash provided by operating activities

 

97.1

 

91.6

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(80.5

)

(110.9

)

Purchases of short-term investments and securities

 

 

(494.8

)

Sales of short-term investments and securities

 

 

494.8

 

Net cash used for investing activities

 

(80.5

)

(110.9

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Purchase of treasury shares

 

 

(155.3

)

Exercise of stock options

 

3.9

 

0.2

 

Tax impact related to exercise of stock options

 

1.4

 

 

Registration of warrants

 

 

(0.1

)

Retirement of long-term debt

 

(225.0

)

 

Withdrawal of restricted funds held in trust

 

10.1

 

 

Dividends paid on common stock

 

(27.8

)

(30.2

)

Issuance of short-term debt, net

 

65.0

 

 

Net cash used for financing activities

 

(172.4

)

(185.4

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net change

 

(155.8

)

(204.7

)

Balance at beginning of period

 

262.2

 

595.8

 

Cash and cash equivalents at end of period

 

$

106.4

 

$

391.1

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

36.4

 

$

32.6

 

Income taxes paid, net

 

$

15.4

 

$

22.4

 

 

 

 

 

 

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

5




DPL INC.

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

$ in millions

 

 

 

2007

 

2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

106.4

 

$

262.2

 

Restricted funds held in trust

 

 

10.1

 

Accounts receivable, less provision for uncollectible accounts of $1.5 and $1.4, respectively

 

246.7

 

225.0

 

Inventories, at average cost

 

85.6

 

85.4

 

Taxes applicable to subsequent years

 

36.9

 

48.0

 

Other current assets

 

12.1

 

37.7

 

Total current assets

 

487.7

 

668.4

 

 

 

 

 

 

 

Property:

 

 

 

 

 

Held and used:

 

 

 

 

 

Property, plant and equipment

 

4,787.7

 

4,718.5

 

Less: Accumulated depreciation and amortization

 

(2,180.3

)

(2,159.2

)

Total net property held and used

 

2,607.4

 

2,559.3

 

 

 

 

 

 

 

Assets held for sale:

 

 

 

 

 

Property, plant and equipment

 

283.5

 

283.5

 

Less: Accumulated depreciation and amortization

 

(132.3

)

(132.3

)

Total net property held for sale

 

151.2

 

151.2

 

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

 

Regulatory assets

 

144.6

 

148.6

 

Other assets

 

76.7

 

84.7

 

Total other noncurrent assets

 

221.3

 

233.3

 

 

 

 

 

 

 

Total Assets

 

$

3,467.6

 

$

3,612.2

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

6




DPL INC.

CONDENSED CONSOLIDATED BALANCE SHEETSTATEMENT OF RESULTS OF OPERATIONS

$ in millions

 

 

 

 

 

 

 

At
March 31,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Current portion - long-term debt

 

 

 

 

 

$

0.9

 

$

225.9

 

Accounts payable

 

 

 

 

 

179.0

 

169.4

 

Accrued taxes

 

 

 

 

 

151.4

 

155.2

 

Accrued interest

 

 

 

 

 

20.8

 

35.2

 

Short-term debt

 

 

 

 

 

65.0

 

 

Other current liabilities

 

 

 

 

 

32.4

 

38.3

 

Total current liabilities

 

 

 

 

 

449.5

 

624.0

 

 

 

 

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

 

 

 

1,551.8

 

1,551.8

 

Deferred taxes

 

 

 

 

 

355.9

 

355.2

 

Unamortized investment tax credit

 

 

 

 

 

42.8

 

43.6

 

Insurance and claims costs

 

 

 

 

 

23.2

 

21.9

 

Other deferred credits

 

 

 

 

 

277.2

 

280.7

 

Total noncurrent liabilites

 

 

 

 

 

2,250.9

 

2,253.2

 

 

 

 

 

 

 

 

 

 

 

Cumulative preferred stock not subject to mandatory redemption

 

 

 

22.9

 

22.9

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shareholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock, at par value of $0.01 per share:

 

 

 

 

 

 

 

 

 

 

 

March 2007

 

December 2006

 

 

 

 

 

Shares authorized

 

250,000,000

 

250,000,000

 

 

 

 

 

Shares issued

 

163,724,211

 

163,724,211

 

 

 

 

 

Treasury shares

 

50,540,767

 

50,705,239

 

 

 

 

 

Shares outstanding

 

113,183,444

 

113,018,972

 

1.1

 

1.1

 

Warrants

 

 

 

 

 

50.0

 

50.0

 

Common stock held by employee plans

 

 

 

 

 

(68.5

)

(69.0

)

Accumulated other comprehensive loss

 

 

 

 

 

(8.1

)

(6.5

)

Retained earnings

 

 

 

 

 

769.8

 

736.5

 

Total common shareholders’ equity

 

 

 

 

 

744.3

 

712.1

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

 

 

 

 

$

3,467.6

 

$

3,612.2

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions except per share amounts

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

343.1

 

$

309.0

 

$

722.8

 

$

650.1

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

63.5

 

78.6

 

153.8

 

162.8

 

Purchased power

 

83.2

 

37.0

 

135.4

 

62.3

 

Total cost of revenues

 

146.7

 

115.6

 

289.2

 

225.1

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

196.4

 

193.4

 

433.6

 

425.0

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Operation and maintenance

 

61.5

 

70.6

 

130.8

 

133.0

 

Depreciation and amortization

 

35.5

 

38.2

 

69.0

 

75.1

 

General taxes

 

27.5

 

27.0

 

55.5

 

55.0

 

Amortization of regulatory assets

 

2.5

 

1.7

 

5.4

 

2.8

 

Total operating expenses

 

127.0

 

137.5

 

260.7

 

265.9

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

69.4

 

55.9

 

172.9

 

159.1

 

 

 

 

 

 

 

 

 

 

 

Other income / (expense), net

 

 

 

 

 

 

 

 

 

Net gain on settlement of executive litigation

 

31.0

 

 

31.0

 

 

Investment income

 

5.3

 

4.5

 

8.3

 

10.9

 

Interest expense

 

(19.4

)

(25.9

)

(42.5

)

(52.2

)

Other income (deductions)

 

(0.2

)

0.6

 

0.6

 

0.3

 

Total other income / (expense), net

 

16.7

 

(20.8

)

(2.6

)

(41.0

)

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before income tax

 

86.1

 

35.1

 

170.3

 

118.1

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

32.5

 

12.5

 

65.5

 

44.2

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

53.6

 

22.6

 

104.8

 

73.9

 

 

 

 

 

 

 

 

 

 

 

Earnings from discontinued operations, net of tax

 

5.1

 

 

10.0

 

7.6

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

58.7

 

$

22.6

 

$

114.8

 

$

81.5

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares outstanding (millions)

 

 

 

 

 

 

 

 

 

Basic

 

107.9

 

114.1

 

107.7

 

117.1

 

Diluted

 

119.5

 

123.4

 

119.4

 

126.3

 

 

 

 

 

 

 

 

 

 

 

Earnings per share of common stock

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.50

 

$

0.20

 

$

0.98

 

$

0.63

 

Earnings from discontinued operations

 

0.04

 

 

0.09

 

0.07

 

Total Basic

 

$

0.54

 

$

0.20

 

$

1.07

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.45

 

$

0.18

 

$

0.88

 

$

0.59

 

Earnings from discontinued operations

 

0.04

 

 

0.08

 

0.06

 

Total Diluted

 

$

0.49

 

$

0.18

 

$

0.96

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per share of common stock

 

$

0.26

 

$

0.25

 

$

0.52

 

$

0.50

 

 

See Notes to Condensed Consolidated Financial Statements.


These interim statements are unaudited.

7





THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONSDPL INC.

 

 

Three Months Ended
March 31,

 

$ in millions

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Revenues

 

$

377.5

 

$

339.1

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

Fuel

 

89.5

 

83.9

 

Purchased power

 

52.7

 

25.6

 

Total cost of revenues

 

142.2

 

109.5

 

 

 

 

 

 

 

Gross margin

 

235.3

 

229.6

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Operation and maintenance

 

59.4

 

54.2

 

Depreciation and amortization

 

30.7

 

31.3

 

General taxes

 

27.6

 

27.5

 

Amortization of regulatory assets

 

2.9

 

1.1

 

Total operating expenses

 

120.6

 

114.1

 

 

 

 

 

 

 

Operating income

 

114.7

 

115.5

 

 

 

 

 

 

 

Investment income

 

1.5

 

1.9

 

Interest expense

 

(5.4

)

(6.7

)

Other income (deductions)

 

0.8

 

(0.5

)

 

 

 

 

 

 

Earnings Before Income Tax

 

111.6

 

110.2

 

 

 

 

 

 

 

Income tax expense

 

41.8

 

43.3

 

 

 

 

 

 

 

Net Income

 

$

69.8

 

$

66.9

 

 

 

 

 

 

 

Preferred dividends

 

0.2

 

0.2

 

 

 

 

 

 

 

Earnings on common stock

 

$

69.6

 

$

66.7

 

See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.

8




THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

$ in millions

 

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

69.8

 

$

66.9

 

Adjustments:

 

 

 

 

 

Depreciation and amortization

 

30.7

 

31.3

 

Amortization of regulatory assets

 

2.9

 

1.1

 

Deferred income taxes

 

(4.7

)

(1.9

)

Changes in certain assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(23.8

)

(10.7

)

Accounts payable

 

15.2

 

38.1

 

Accrued taxes payable

 

20.5

 

14.2

 

Accrued interest payable

 

2.8

 

4.8

 

Prepayments

 

0.1

 

4.4

 

Inventories

 

(0.2

)

(7.4

)

Deferred compensation assets

 

7.9

 

4.6

 

Deferred compensation obligations

 

1.6

 

(3.5

)

Other

 

14.2

 

1.6

 

Net cash provided by operating activities

 

137.0

 

143.5

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(79.6

)

(110.5

)

Net cash used for investing activities

 

(79.6

)

(110.5

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of short-term debt, net

 

65.0

 

 

Withdrawal of restricted funds held in trust

 

10.1

 

 

Dividends paid on preferred stock

 

(0.2

)

(0.2

)

Dividends paid on common stock to parent

 

(125.0

)

 

Net cash used for financing activities

 

(50.1

)

(0.2

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net change

 

7.3

 

32.8

 

Balance at beginning of period

 

46.1

 

46.2

 

Cash and cash equivalents at end of period

 

$

53.4

 

$

79.0

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

1.8

 

$

1.2

 

Income taxes paid, net

 

$

14.1

 

$

9.3

 

See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.

9




THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET

$ in millions

 

 

 

At
March 31,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

53.4

 

$

46.1

 

Restricted funds held in trust

 

 

10.1

 

Accounts receivable, less provision for uncollectible accounts of $1.5 and $1.4, respectively

 

227.8

 

205.6

 

Inventories, at average cost

 

83.1

 

83.0

 

Taxes applicable to subsequent years

 

36.9

 

48.0

 

Other current assets

 

12.3

 

38.2

 

 

 

 

 

 

 

Total current assets

 

413.5

 

431.0

 

 

 

 

 

 

 

Property:

 

 

 

 

 

Property, plant and equipment

 

4,519.1

 

4,450.6

 

Less: Accumulated depreciation and amortization

 

(2,097.3

)

(2,079.0

)

 

 

 

 

 

 

Net property

 

2,421.8

 

2,371.6

 

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

 

Regulatory assets

 

144.6

 

148.6

 

Other assets

 

139.0

 

139.1

 

 

 

 

 

 

 

Total other noncurrent assets

 

283.6

 

287.7

 

 

 

 

 

 

 

Total Assets

 

$

3,118.9

 

$

3,090.3

 

See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.

10




THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET

$ in millions

 

 

 

At
March 31,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion - long-term debt

 

$

0.9

 

$

0.9

 

Accounts payable

 

174.5

 

166.2

 

Accrued taxes

 

169.1

 

159.6

 

Accrued interest

 

15.5

 

12.6

 

Short-term debt

 

65.0

 

 

Other current liabilities

 

29.1

 

35.4

 

Total current liabilities

 

454.1

 

374.7

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

785.1

 

785.2

 

Deferred taxes

 

357.0

 

360.2

 

Unamortized investment tax credit

 

42.9

 

43.6

 

Other deferred credits

 

277.2

 

272.5

 

Total noncurrent liabilities

 

1,462.2

 

1,461.5

 

 

 

 

 

 

 

Cumulative preferred stock not subject to mandatory redemption

 

22.9

 

22.9

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Common shareholders’ equity:

 

 

 

 

 

Common stock, at par value of $0.01 per share:

 

0.4

 

0.4

 

Other paid-in capital

 

783.6

 

783.7

 

Accumulated other comprehensive income

 

19.1

 

15.1

 

Retained earnings

 

376.6

 

432.0

 

Total common shareholders’ equity

 

1,179.7

 

1,231.2

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

3,118.9

 

$

3,090.3

 

 

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

114.8

 

$

81.5

 

Less: Income from discontinued operations

 

(10.0

)

(7.6

)

Income from continuing operations

 

104.8

 

73.9

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

69.0

 

75.1

 

Gain on settlement of executive litigation

 

(31.0

)

 

Gain on sale of aircraft

 

(6.0

)

 

Amortization of regulatory assets

 

5.4

 

2.8

 

Deferred income taxes

 

14.0

 

3.4

 

Captive insurance provision

 

0.3

 

3.5

 

Gain on sale of other investments

 

(3.1

)

(2.2

)

Changes in certain assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(42.2

)

(15.2

)

Accounts payable

 

20.4

 

63.3

 

Accrued taxes payable

 

(30.8

)

(59.1

)

Accrued interest payable

 

(6.1

)

1.3

 

Prepayments

 

(0.2

)

1.3

 

Inventories

 

(11.4

)

(16.5

)

Deferred compensation assets

 

7.7

 

3.5

 

Deferred compensation obligations

 

1.3

 

(1.4

)

Other

 

20.3

 

(0.3

)

Net cash provided by operating activities

 

112.4

 

133.4

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(171.2

)

(200.3

)

Purchases of short-term investments and securities

 

 

(856.0

)

Sales of short-term investments and securities

 

 

984.0

 

Proceeds from the sale of peaking units, net

 

151.0

 

 

Proceeds from the sale of aircraft

 

7.4

 

 

Proceeds held in trust

 

(2.2

)

 

Net cash used for investing activities

 

(15.0

)

(72.3

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Purchase of treasury shares

 

 

(348.2

)

Exercise of stock options

 

14.5

 

0.2

 

Tax impact related to exercise of stock options

 

0.5

 

 

Retirement of long-term debt

 

(225.0

)

 

Withdrawal of restricted funds held in trust

 

10.1

 

 

Dividends paid on common stock

 

(55.8

)

(59.0

)

Issuance of short-term debt, net

 

95.0

 

 

Retirement of short-term debt, net

 

(95.0

)

 

Net cash used for financing activities

 

(255.7

)

(407.0

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net change

 

(158.3

)

(345.9

)

Balance at beginning of period

 

262.2

 

595.8

 

Cash and cash equivalents at end of period

 

$

103.9

 

$

249.9

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

47.2

 

$

48.4

 

Income taxes paid, net

 

$

79.3

 

$

77.0

 

Restricted funds held in trust (see Note 7 of Notes to
Condensed Consolidated Financial Statements)

 

$

2.2

 

$

 

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.

115




DPL INC.

CONDENSED CONSOLIDATED BALANCE SHEET

$ in millions

 

At
June 30,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

103.9

 

$

262.2

 

Restricted funds held in trust

 

2.2

 

10.1

 

Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively

 

264.7

 

225.0

 

Inventories, at average cost

 

96.8

 

85.4

 

Taxes applicable to subsequent years

 

23.7

 

48.0

 

Other current assets

 

12.5

 

37.7

 

Total current assets

 

503.8

 

668.4

 

 

 

 

 

 

 

Property:

 

 

 

 

 

Held and used:

 

 

 

 

 

Property, plant and equipment

 

4,885.2

 

4,718.5

 

Less: Accumulated depreciation and amortization

 

(2,198.9

)

(2,159.2

)

Total net property held and used

 

2,686.3

 

2,559.3

 

 

 

 

 

 

 

Assets held for sale:

 

 

 

 

 

Property, plant and equipment

 

 

283.5

 

Less: Accumulated depreciation and amortization

 

 

(132.3

)

Total net property held for sale

 

 

151.2

 

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

 

Regulatory assets

 

140.4

 

148.6

 

Other assets

 

52.0

 

84.7

 

Total other noncurrent assets

 

192.4

 

233.3

 

 

 

 

 

 

 

Total Assets

 

$

3,382.5

 

$

3,612.2

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.


DPL INC.

CONDENSED CONSOLIDATED BALANCE SHEET

$ in millions

 

At
June 30,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion - long-term debt

 

$

100.8

 

$

225.9

 

Accounts payable

 

207.4

 

169.4

 

Accrued taxes

 

100.5

 

155.2

 

Accrued interest

 

29.4

 

35.2

 

Other current liabilities

 

29.3

 

38.3

 

Total current liabilities

 

467.4

 

624.0

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

1,451.7

 

1,551.8

 

Deferred taxes

 

372.7

 

355.2

 

Unamortized investment tax credit

 

42.1

 

43.6

 

Insurance and claims costs

 

22.2

 

21.9

 

Other deferred credits

 

222.0

 

280.7

 

Total noncurrent liabilites

 

2,110.7

 

2,253.2

 

 

 

 

 

 

 

Cumulative preferred stock not subject to mandatory redemption

 

22.9

 

22.9

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Common shareholders’ equity:

 

 

 

 

 

Common stock, at par value of $0.01 per share:

 

 

 

 

 

 

 

 

 

 

 

 

June 2007

 

December 2006

 

 

 

 

 

Shares authorized

 

250,000,000

 

250,000,000

 

 

 

 

 

Shares issued

 

163,724,211

 

163,724,211

 

 

 

 

 

Treasury shares

 

50,170,767

 

50,705,239

 

 

 

 

 

Shares outstanding

 

113,553,444

 

113,018,972

 

1.1

 

1.1

 

Warrants

 

50.0

 

50.0

 

Common stock held by employee plans

 

(72.3

)

(69.0

)

Accumulated other comprehensive loss

 

(9.4

)

(6.5

)

Retained earnings

 

812.1

 

736.5

 

Total common shareholders’ equity

 

781.5

 

712.1

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

3,382.5

 

$

3,612.2

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.


THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

$

341.2

 

$

306.7

 

$

718.7

 

$

645.8

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

Fuel

 

62.3

 

76.2

 

151.8

 

160.1

 

Purchased power

 

83.8

 

38.4

 

136.5

 

64.0

 

Total cost of revenues

 

146.1

 

114.6

 

288.3

 

224.1

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

195.1

 

192.1

 

430.4

 

421.7

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Operation and maintenance

 

72.4

 

59.6

 

131.8

 

113.8

 

Depreciation and amortization

 

33.1

 

32.5

 

63.8

 

63.8

 

General taxes

 

27.4

 

25.6

 

55.0

 

53.1

 

Amortization of regulatory assets

 

2.5

 

1.7

 

5.4

 

2.8

 

Total operating expenses

 

135.4

 

119.4

 

256.0

 

233.5

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

59.7

 

72.7

 

174.4

 

188.2

 

 

 

 

 

 

 

 

 

 

 

Other income / (expense), net

 

 

 

 

 

 

 

 

 

Investment income

 

4.7

 

1.3

 

6.2

 

3.2

 

Other income (deductions)

 

(0.2

)

0.8

 

0.6

 

0.3

 

Net gain on settlement of executive litigation

 

35.3

 

 

35.3

 

 

Interest expense

 

(4.8

)

(5.3

)

(10.2

)

(12.0

)

Total other income / (expense), net

 

35.0

 

(3.2

)

31.9

 

(8.5

)

 

 

 

 

 

 

 

 

 

 

Earnings Before Income Tax

 

94.7

 

69.5

 

206.3

 

179.7

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

35.6

 

25.5

 

77.4

 

68.8

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

59.1

 

$

44.0

 

$

128.9

 

$

110.9

 

 

 

 

 

 

 

 

 

 

 

Preferred dividends

 

0.2

 

0.2

 

0.4

 

0.4

 

 

 

 

 

 

 

 

 

 

 

Earnings on common stock

 

$

58.9

 

$

43.8

 

$

128.5

 

$

110.5

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.


THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

128.9

 

$

110.9

 

Adjustments:

 

 

 

 

 

Depreciation and amortization

 

63.8

 

63.8

 

Amortization of regulatory assets

 

5.4

 

2.8

 

Net gain on settlement of executive litigation

 

(35.3

)

 

Deferred income taxes

 

14.0

 

(4.0

)

Gain on sale of other investments

 

$

(3.1

)

$

 

Changes in certain assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(42.1

)

(7.5

)

Accounts payable

 

22.3

 

65.5

 

Accrued taxes payable

 

(31.9

)

(42.8

)

Accrued interest payable

 

0.2

 

1.3

 

Prepayments

 

0.7

 

1.9

 

Inventories

 

(12.4

)

(16.2

)

Deferred compensation assets

 

7.8

 

4.3

 

Deferred compensation obligations

 

1.3

 

(3.6

)

Other

 

18.3

 

(1.2

)

Net cash provided by operating activities

 

137.9

 

175.2

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(169.3

)

(199.3

)

Net cash used for investing activities

 

(169.3

)

(199.3

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of short-term debt, net

 

105.0

 

 

Withdrawal of restricted funds held in trust

 

10.1

 

 

Dividends paid on preferred stock

 

(0.4

)

(0.4

)

Dividends paid on common stock to parent

 

(125.0

)

 

Net cash used for financing activities

 

(10.3

)

(0.4

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Net change

 

(41.7

)

(24.5

)

Balance at beginning of period

 

46.1

 

46.2

 

Cash and cash equivalents at end of period

 

$

4.4

 

$

21.7

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized

 

$

9.7

 

$

9.2

 

Income taxes paid, net

 

$

78.5

 

$

91.5

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited

9




THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

At

 

At

 

 

 

June 30,

 

December 31,

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

4.4

 

$

46.1

 

Restricted funds held in trust

 

 

10.1

 

Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively

 

245.0

 

205.6

 

Inventories, at average cost

 

95.4

 

83.0

 

Taxes applicable to subsequent years

 

23.6

 

48.0

 

Other current assets

 

14.2

 

38.2

 

Total current assets

 

382.6

 

431.0

 

 

 

 

 

 

 

Property:

 

 

 

 

 

Property, plant and equipment

 

4,616.1

 

4,450.6

 

Less: Accumulated depreciation and amortization

 

(2,112.9

)

(2,079.0

)

Net property

 

2,503.2

 

2,371.6

 

 

 

 

 

 

 

Other noncurrent assets:

 

 

 

 

 

Regulatory assets

 

140.4

 

148.6

 

Other assets

 

107.9

 

139.1

 

Total other noncurrent assets

 

248.3

 

287.7

 

 

 

 

 

 

 

Total Assets

 

$

3,134.1

 

$

3,090.3

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.


THE DAYTON POWER AND LIGHT COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

 

 

At

 

At

 

 

 

June 30,

 

December 31,

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion - long-term debt

 

$

0.8

 

$

0.9

 

Accounts payable

 

205.7

 

166.2

 

Accrued taxes

 

103.1

 

159.6

 

Accrued interest

 

13.0

 

12.6

 

Short-term debt

 

105.0

 

 

Other current liabilities

 

29.3

 

35.4

 

Total current liabilities

 

456.9

 

374.7

 

 

 

 

 

 

 

Noncurrent liabilities:

 

 

 

 

 

Long-term debt

 

784.9

 

785.2

 

Deferred taxes

 

372.6

 

360.2

 

Unamortized investment tax credit

 

42.2

 

43.6

 

Other deferred credits

 

222.0

 

272.5

 

Total noncurrent liabilities

 

1,421.7

 

1,461.5

 

 

 

 

 

 

 

Cumulative preferred stock not subject to mandatory redemption

 

22.9

 

22.9

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Common shareholders’ equity:

 

 

 

 

 

Common stock, at par value of $0.01 per share:

 

0.4

 

0.4

 

Other paid-in capital

 

783.2

 

783.7

 

Accumulated other comprehensive income

 

13.5

 

15.1

 

Retained earnings

 

435.5

 

432.0

 

Total common shareholders’ equity

 

1,232.6

 

1,231.2

 

 

 

 

 

 

 

Total Liabilities and Shareholders’ Equity

 

$

3,134.1

 

$

3,090.3

 

See Notes to Condensed Consolidated Financial Statements.

These interim statements are unaudited.


Notes to Condensed Consolidated Financial Statements

1.     Basis of Presentation

Description of Business

DPL is a diversified regional energy company organized in 1985 under the laws of Ohio.  DPL’s principal subsidiary is The Dayton Power and Light Company (DP&L)DP&L is a public utility incorporated in 1911 under the laws of Ohio.  DP&L sells electricity to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio.  Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000 retail customers.  DP&L also purchases retail peak load requirements from DPL Energy LLC (DPLE, one of our wholly-owned subsidiaries).  Principal industries served include automotive, food processing, paper, plastic manufacturing, and defense.  DP&L’s sales reflect the general economic conditions and seasonal weather patterns of the area.  DP&L sells any excess energy and capacity into the wholesale market.

DPL’s other significant subsidiaries (all of which are wholly-owned) include DPLE, which engages in the operation of peaking generating facilities; DPL Energy Resources, Inc. (DPLER), which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; MVE, Inc., which was primarily responsible for the management of our financial asset portfolio; and Miami Valley Insurance Company (MVIC), our captive insurance company that provides insurance sources to us and our subsidiaries.   DP&L has one significant subsidiary, DPL Finance Company, Inc., which is wholly-owned and provides financing to DPL, DP&L and other affiliated companies.

DPL and DP&L conduct their principal business in one business segment - Electric.

Financial Statement Presentation

We prepare consolidated financial statements in accordance with Generally Accepted Accounting Principles (GAAP) in the United States of America.  The Condensed Consolidated Financial Statementscondensed consolidated financial statements include the accounts of DPL and DP&L and their majority-owned subsidiaries.  Investments that are not majority owned are accounted for using the equity method when our investment allows us the ability to exert significant influence, as defined by GAAP.  Undivided interests in jointly-owned generation facilities are consolidated on a pro rata basis.  All material intercompany accounts and transactions are eliminated in consolidation.  Interim results for the threequarter and six months ended March 31,June 30, 2007 may not be indicative of our results that will be realized for the full year ending December 31, 2007.

Pursuant to the Securities and Exchange Commission (SEC) rules, certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with GAAP have been omitted from interim reports. Therefore, these financial statements should be read along with the annual financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.  In the opinion of our management, the condensed consolidated financial statements contain all adjustments (which are all of a normal recurring nature) necessary to fairly state our financial condition as of March 31,June 30, 2007, our results of operations for the threequarter and six months ended March 31,June 30, 2007, and our cash flows for the threesix months ended March 31,June 30, 2007 in accordance with GAAP.

Estimates, Judgments and Reclassifications

The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the revenue and expenses of the period reported.  Different estimates could have a material effect on our financial results.  Judgments and uncertainties affecting the application of these estimates may result in materially different amounts being reported under different conditions or circumstances.  Significant items subject to such estimates and judgments include the carrying value of property, plant and equipment; unbilled revenues; the valuation of derivative instruments; the valuation of insurance and claims costs; valuation allowances for receivables and deferred income taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; and assets and liabilities related to employee benefits.  Actual results may differ from those estimates.  Certain amounts from prior periods have been reclassified to conform to the current reporting presentation.


Depreciation Expense

Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful life.  For DPL’s and DP&L’s generation, transmission, and distribution assets, straight-line depreciation is applied on an average annual composite basis using group rates.  With the addition of scrubbers at certain of its generation facilities, DP&L has undertaken an evaluation of its depreciation rates which it expects to be completed during the third quarter of 2007.  Management expects depreciation rates to decrease due to the extension of depreciation lives for certain of its assets. The Public Utility Commission of Ohio would need to approve a change in depreciation rates for our regulated assets.

Recently Adopted Accounting Standards

Accounting for Uncertainty in Income Taxes

On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  OurDuring the second quarter ending June 30, 2007, we recorded an additional $0.9 million in accrued interest resulting in a total reserve for uncertain tax positions is $40.3of $41.2 million as of January 1,June 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.

We recognize interest and penalties related to unrecognized tax benefits in income taxes.

Taxes for calendar years 2004 - 2006 remain open to examination by the jurisdictions in which we are subject to taxation.

Accounting for Taxes Collected from Customers and Remitted to Governmental Authorities

WeIn January 2007, we adopted EITFEmerging Issues Task Force No. 06-036-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” in January 2007.(EITF No. 6-03).  EITF No. 06-036-03 requires a registrant to disclose how taxes collected from customers are presented in the financial statements, i.e. gross or net.  DP&L collects certain excise taxes levied by state or local governments from its customers. DP&L’s excise taxes are accounted for on a gross basis and recorded as revenues in the accompanying Condensed Consolidated Statements of Operations for the threequarter and six months ended March 31,June 30, 2007 and March 31,June 30, 2006 as follows:

Three Months
Ended
March 31, 2007

 

Three Months
Ended
March 31, 2006

 

$

14,206,437

 

$

13,461,949

 

 

 

 

 

Six Months Ended

 

 

 

Three Months Ended

 

June 30,

 

($ in millions)

 

2007

 

2006

 

2007

 

2006

 

 

$

12.1

 

$

11.7

 

$

26.4

 

$

25.2

 

Recently Issued Accounting Standards

Accounting for Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157) effective for fiscal years beginning after November 15, 2007.  SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.  SFAS 157 clarifies the principalprinciple that fair value should be based on the assumptions market participants would use when pricing the assestasset or liability.  In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those standards.  The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data.  Under SFAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy.  SFAS 157 does not expand the use of fair value in any new circumstances.  In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115” (SFAS 159) effective for fiscal years beginning after November 15, 2007.  SFAS 159 permits entities to choose to measure many financial instruments and certain warranty and insurance contracts at fair value on a contract-by-contract basis.  We are currently evaluating the impact of adopting SFAS 157 and SFAS 159, and have not yet determined the significance of these new rules to our overall results of operations, financial position or cash flows.


2.     Earnings per Share

Basic earnings per share (EPS) is based on the weighted-average number of DPL common shares outstanding during the year.  Diluted earnings per share is based on the weighted-average number of DPL common and common equivalent shares outstanding during the year, except in periods where the inclusion of such common equivalent shares is anti-dilutive.  Excluded from outstanding shares for this weighted-average computation are the unallocated shares held by DP&L’s Master Trust Plan for deferred compensation and unallocated shares held by DP&L’s Employee Stock Ownership Plan (ESOP).

As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of  Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees.  There were approximately 1.3 million RSUs and 3.6 million stock options relinquished and cancelled that were included in the dilutive share calculation through May 20, 2007.  These RSUs and stock options will no longer be included in the dilutive share calculation.

For the first quarter ofended June 30, 2007, there were no warrantsdilutive securities excluded from the computation of diluted earnings per share while for the quarter ended June 30, 2006, there were 0.4 million stock options excluded from the calculation because they were anti-dilutive.  For the six months ended June 30, 2007, there were 25 thousand restricted and stock optionsperformance shares excluded from the computation of diluted earnings per share.  For the first quarter ofsix months ended June 30, 2006, there were 0.4 million warrants and stock options excluded from the computation of diluted earnings per share because they were anti-dilutive.

The following illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income after discontinued operations:

 

Three Months Ended June 30,

 

 

2007

 

2006

 

$ in millions except per

 

Three Months Ended March 31,

 

 

Net

 

 

 

Per

 

Net

 

 

 

Per

 

share amounts

 

2007

 

2006

 

 

Income

 

Shares

 

Share

 

Income

 

Shares

 

Share

 

 

Net

 

 

 

Per

 

Net

 

 

 

Per

 

 

Income

 

Shares

 

Share

 

Income

 

Shares

 

Share

 

Basic EPS

 

$

56.1

 

107.5

 

$

0.52

 

$

58.9

 

120.2

 

$

0.49

 

 

$

 58.7

 

107.9

 

$

 0.54

 

$

22.6

 

114.1

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Incentive Units

 

 

 

1.3

 

 

 

 

 

1.3

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Units

 

 

 

0.7

 

 

 

 

 

1.3

 

 

 

Warrants

 

 

 

9.1

 

 

 

 

 

6.5

 

 

 

 

 

 

9.9

 

 

 

 

 

6.9

 

 

 

Stock options, performance and restricted shares

 

 

 

1.5

 

 

 

 

 

1.3

 

 

 

 

 

 

1.0

 

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

56.1

 

119.4

 

$

0.47

 

$

58.9

 

129.3

 

$

0.46

 

 

$

58.7

 

119.5

 

$

0.49

 

$

22.6

 

123.4

 

$

0.18

 

 


 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

$ in millions except per

 

Net

 

 

 

Per

 

Net

 

 

 

Per

 

share amounts

 

Income

 

Shares

 

Share

 

Income

 

Shares

 

Share

 

Basic EPS

 

$

114.8

 

107.7

 

$

1.07

 

$

81.5

 

117.1

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Units

 

 

 

1.0

 

 

 

 

 

1.3

 

 

 

Warrants

 

 

 

9.5

 

 

 

 

 

6.7

 

 

 

Stock options, performance and restricted shares

 

 

 

1.2

 

 

 

 

 

1.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

$

114.8

 

119.4

 

$

0.96

 

$

81.5

 

126.3

 

$

0.65

 

 

14




3.     Discontinued Operations

 

Three Months Ended

 

Six Months Ended

 

 

For Three Months Ended
March 31,

 

 

June 30,

 

June 30,

 

$ in millions

 

 

 

2007

 

2006

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income

 

$

 

$

 

Investment expenses

Investment expenses

 

(0.3

)

(0.5

)

 

$

(0.1

)

$

 

$

(0.4

)

$

(0.5

)

Income from discontinued operations

Income from discontinued operations

 

(0.3

)

(0.5

)

 

(0.1

)

 

(0.4

)

(0.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain realized from sale

Gain realized from sale

 

8.2

 

13.2

 

 

 

 

8.2

 

13.2

 

Broker fees and other expenses

 

 

 

Loss recorded

 

 

 

Net gain on sale

Net gain on sale

 

8.2

 

13.2

 

 

 

 

8.2

 

13.2

 

 

 

 

 

 

 

 

 

 

Gain on settlement of executive litigation

 

8.2

 

 

8.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings before income taxes

Earnings before income taxes

 

7.9

 

12.7

 

 

8.1

 

 

16.0

 

12.7

 

Income tax expense

Income tax expense

 

(3.0

)

(5.1

)

 

(3.0

)

 

(6.0

)

(5.1

)

Earnings from discontinued operations, net

Earnings from discontinued operations, net

 

$

4.9

 

$

7.6

 

 

$

5.1

 

$

 

$

10.0

 

$

7.6

 

 

On February 13, 2005, DPL’s subsidiaries, MVE and MVIC, entered into an agreement to sell their respective interests in forty-six private equity funds to AlpInvest/Lexington 2005, LLC, a joint venture of AlpInvest Partners and Lexington Partners, Inc.  Sales proceeds and any related gains or losses were recognized during 2005 as the sale of each fundof these funds closed.  Among other closing conditions, each fund required the transaction to be approved by the respective general partner of each fund.  During 2005, MVE and MVIC completed the sale of their interests in forty-three and a portion of  another of those private equity funds resulting in a $46.6 million pre-tax gain ($53.1 million less $6.5 million professional fees) from discontinued operations and provided approximately $796 million in net proceeds.

During 2005, MVE entered into alternative closing arrangements with AlpInvest/Lexington 2005, LLC for the remaining funds where legal title to said funds could not be transferred until a later time.  Pursuant to these arrangements, MVE transferred the economic aspects of the remaining private equity funds, consisting of two funds and a portion of one fund, to AlpInvest/Lexington 2005, LLC without a change in ownership of the interests.  The alternative arrangements resulted in a 2005 deferred gain of $27.1 million in 2005 and provided approximately $72$18.9 million in net proceeds on these funds.  We recorded an impairment loss of $5.6 million in the second quarter of 2005 to write down assets transferred pursuant to the alternative arrangements to estimated fair value.  A2006. The remaining portion of the deferred gain, was recognized in 2006 in the amount of $18.9 million with the remaining $8.2 million, beingwas recognized in the first quarter of 2007.2007 as all legal and economic considerations relating to the alternative closing arrangements were satisfied.

InAs a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, RSUs, MVE incentives, stock options and reimbursement of legal fees.  The reversal of accruals related to the performance of the financial asset portfolio were recorded in discontinued operations.  Additionally, a portion of the $25 million settlement expense was allocated to discontinued operations.  These transactions resulted in a net gain of $8.2 million on the settlement of litigation, being recorded in discontinued operations.


4.     Supplemental Financial Information

DPL Inc.

 

 

At

 

At

 

 

 

June 30,

 

December 31,

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

Accounts receivable, net:

 

 

 

 

 

Unbilled revenue

 

$

68.2

 

$

68.7

 

Retail customers

 

65.4

 

65.0

 

Partners in commonly-owned plants

 

73.8

 

51.5

 

Wholesale and subsidiary customers

 

15.8

 

15.8

 

PJM including financial transmission rights

 

23.1

 

13.1

 

Other

 

14.8

 

7.1

 

Refundable franchise tax

 

5.2

 

5.2

 

Provision for uncollectible accounts

 

(1.6

)

(1.4

)

Total accounts receivable, net

 

$

264.7

 

$

225.0

 

 

 

 

 

 

 

Inventories, at average cost:

 

 

 

 

 

Fuel and emission allowances

 

$

63.4

 

$

52.4

 

Plant materials and supplies

 

33.2

 

32.6

 

Other

 

0.2

 

0.4

 

Total inventories, at average cost

 

$

96.8

 

$

85.4

 

 

 

 

 

 

 

Other current assets:

 

 

 

 

 

Deposits and other advances

 

$

0.9

 

$

17.8

 

Prepayments

 

6.9

 

13.3

 

Derivatives

 

0.6

 

3.2

 

Current deferred income taxes

 

0.8

 

2.0

 

Other

 

3.3

 

1.4

 

Total other current assets

 

$

12.5

 

$

37.7

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Construction work in process

 

$

460.1

 

$

376.0

 

Property, plant and equipment (a)

 

4,425.1

 

4,626.0

 

Total property, plant and equipment

 

$

4,885.2

 

$

5,002.0

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Master Trust assets

 

$

8.4

 

$

39.4

 

Unamortized loss on reacquired debt

 

19.6

 

20.4

 

Unamortized debt expense

 

10.1

 

10.6

 

Commercial activities tax benefit

 

6.8

 

6.8

 

Investments

 

6.9

 

7.0

 

Other

 

0.2

 

0.5

 

Total other assets

 

$

52.0

 

$

84.7

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

Trade payables

 

$

78.3

 

$

75.7

 

Fuel accruals

 

45.4

 

37.3

 

Other

 

83.7

 

56.4

 

Total accounts payable

 

$

207.4

 

$

169.4

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

Customer security deposits

 

$

18.8

 

$

19.4

 

Pension and retiree benefits payable

 

0.8

 

5.8

 

Financial transmission rights - future proceeds

 

 

2.7

 

Payroll taxes payable

 

0.1

 

0.1

 

Other

 

9.6

 

10.3

 

Total other current liabilities

 

$

29.3

 

$

38.3

 

 

 

 

 

 

 

Other deferred credits:

 

 

 

 

 

Asset retirement obligations - regulated property

 

$

88.4

 

$

86.3

 

Trust obligations

 

21.0

 

76.2

 

Pension liabilities

 

36.4

 

37.7

 

Retiree health and life benefits

 

27.8

 

28.5

 

SECA net revenue subject to refund

 

20.6

 

18.7

 

Asset retirement obligations - generation property

 

12.0

 

11.7

 

Deferred gain on sale of portfolio

 

 

8.2

 

Claims reserves

 

4.6

 

3.4

 

Environmental reserves

 

0.1

 

0.1

 

Other

 

11.1

 

9.9

 

Total other deferred credits

 

$

222.0

 

$

280.7

 


(a) The sale of $283.5 million of assets held for sale at December 31, 2006 was completed on April 25, 2007.


DPL4.     Supplemental Financial Information (Continued) has separately disclosed the earnings from discontinued operations, net of income taxes, which in prior periods were reported with elements of continued operations.

14DP&L

 

 

At

 

At

 

 

 

June 30,

 

December 31,

 

$ in millions

 

2007

 

2006

 

Accounts receivable, net:

 

 

 

 

 

 

Retail customers

 

$

65.4

 

$

65.0

 

 

Partners in commonly-owned plants

 

73.8

 

51.5

 

 

Unbilled revenue

 

60.2

 

61.0

 

 

PJM including financial transmission rights

 

23.1

 

13.9

 

 

Wholesale and subsidiary customers

 

10.2

 

8.3

 

 

Refundable franchise tax

 

3.1

 

3.1

 

 

Other

 

10.8

 

4.2

 

 

Provision for uncollectible accounts

 

(1.6

)

(1.4

)

 

Total accounts receivable, net

 

$

245.0

 

$

205.6

 

 

 

 

 

 

 

 

 

Inventories, at average cost:

 

 

 

 

 

 

Fuel and emission allowances

 

$

63.4

 

$

52.4

 

 

Plant materials and supplies

 

31.8

 

30.2

 

 

Other

 

0.2

 

0.4

 

 

Total inventories, at average cost

 

$

95.4

 

$

83.0

 

 

 

 

 

 

 

 

 

Other current assets:

 

 

 

 

 

 

Deposits and other advances

 

$

0.7

 

$

17.0

 

 

Prepayments

 

8.6

 

15.8

 

 

Derivatives

 

0.6

 

3.2

 

 

Current deferred income taxes

 

0.9

 

0.7

 

 

Other

 

3.4

 

1.5

 

 

Total other current assets

 

$

14.2

 

$

38.2

 

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

Construction work in process

 

$

459.2

 

$

375.2

 

 

Property, plant and equipment

 

4,156.9

 

4,075.4

 

 

Total property, plant and equipment

 

$

4,616.1

 

$

4,450.6

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

Master Trust assets

 

$

78.9

 

$

109.0

 

 

Unamortized loss on reacquired debt

 

19.6

 

20.4

 

 

Unamortized debt expense

 

8.4

 

8.6

 

 

Investments

 

0.6

 

0.6

 

 

Other

 

0.4

 

0.5

 

 

Total other assets

 

$

107.9

 

$

139.1

 

 

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

 

Trade payables

 

$

78.1

 

$

74.7

 

 

Fuel accruals

 

43.3

 

36.7

 

 

Other

 

84.3

 

54.8

 

 

Total accounts payable

 

$

205.7

 

$

166.2

 

 

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

 

Customer security deposits

 

$

18.8

 

$

19.4

 

 

Financial transmission rights - future proceeds

 

 

2.7

 

 

Payroll taxes payable

 

0.1

 

0.2

 

 

Pension and retiree benefits payable

 

0.8

 

5.8

 

 

Other

 

9.6

 

7.3

 

 

Total other current liabilities

 

$

29.3

 

$

35.4

 

 

 

 

 

 

 

 

 

Other deferred credits:

 

 

 

 

 

 

Asset retirement obligations - regulated property

 

$

88.4

 

$

86.3

 

 

Trust obligations

 

21.0

 

76.2

 

 

Retiree health and life benefits

 

27.8

 

28.5

 

 

Pension liabilities

 

36.4

 

37.7

 

 

SECA net revenue subject to refund

 

20.6

 

18.7

 

 

Asset retirement obligations - generation property

 

12.0

 

11.7

 

 

Claims reserves

 

4.6

 

3.4

 

 

Environmental reserves

 

0.1

 

0.1

 

 

Other

 

11.1

 

9.9

 

 

Total other deferred credits

 

$

222.0

 

$

272.5

 

 


4.     Supplemental Financial Information (Continued)

DPL Inc.

 

 

Six Months Ended June 30,

 

$ in millions

 

2007

 

2006

 

Cash flows - other:

 

 

 

 

 

Payroll taxes payable

 

$

 

$

(1.4

)

Employee/director stock plan

 

2.2

 

1.8

 

Lump sum retirement payment

 

(4.9

)

 

Deposits and other advances

 

17.3

 

0.7

 

Other

 

5.7

 

(1.4

)

Total cash flows - other

 

$

20.3

 

$

(0.3

)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

$

58.7

 

$

22.6

 

$

114.8

 

$

81.5

 

Net change in unrealized gains (losses) on financial instruments

 

(1.9

)

0.4

 

(1.5

)

0.8

 

Net change in deferred gains (losses) on cash flow hedges

 

(0.8

)

2.2

 

(4.4

)

2.8

 

Minimum pension liability

 

0.6

 

 

1.1

 

 

Deferred income taxes related to unrealized gains and (losses)

 

0.8

 

(1.3

)

1.9

 

(3.1

)

Comprehensive income

 

$

57.4

 

$

23.9

 

$

111.9

 

$

82.0

 

DP&L

 

 

Six Months Ended June 30,

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

Cash flows - other:

 

 

 

 

 

Payroll taxes payable

 

$

 

$

(1.4

)

Deposits and other advances

 

16.7

 

(1.8

)

Lump sum retirement payment

 

(4.9

)

 

Other

 

6.5

 

2.0

 

Total cash flows - other

 

$

18.3

 

$

(1.2

)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

$

59.1

 

$

44.0

 

$

128.9

 

$

110.9

 

Net change in unrealized gains (losses) on financial instruments

 

(8.8

)

(0.2

)

(0.4

)

0.6

 

Net change in deferred gains (losses) on cash flow hedges

 

(0.8

)

2.2

 

(4.4

)

2.8

 

Minimum pension liability

 

0.5

 

 

1.1

 

 

Deferred income taxes related to unrealized gains and (losses)

 

3.5

 

(1.0

)

2.1

 

(2.4

)

Comprehensive income

 

$

53.5

 

$

45.0

 

$

127.3

 

$

111.9

 

18




4.5.     Asset Sales                 Supplemental Financial Information

Sale of Peaking Units

On April 25, 2007, DPLE completed the sale of its Darby and Greenville electric peaking generation facilities providing DPL with approximately $151 million in cash.  Darby Station was sold to Columbus Southern Power Company, a utility subsidiary of American Electric Power Company (AEP), for approximately $102 million in cash.  Greenville Station was sold to Buckeye Power, Inc.


$ in millions

 

 

 

At
March 31,
2007

 

At
December 31,
2006

 

 

 

 

 

 

 

Accounts receivable, net:

 

 

 

 

 

Unbilled revenue

 

$

63.5

 

$

68.7

 

Retail customers

 

70.4

 

65.0

 

Partners in commonly-owned plants

 

57.3

 

51.5

 

Wholesale and subsidiary customers

 

18.1

 

15.8

 

PJM including financial transmission rights

 

24.2

 

13.1

 

Other

 

9.5

 

7.1

 

Refundable franchise tax

 

5.2

 

5.2

 

Provision for uncollectible accounts

 

(1.5

)

(1.4

)

Total accounts receivable, net

 

$

246.7

 

$

225.0

 

 

 

 

 

 

 

Inventories, at average cost:

 

 

 

 

 

Fuel and emission allowances

 

$

51.8

 

$

52.4

 

Plant materials and supplies

 

33.5

 

32.6

 

Other

 

0.3

 

0.4

 

Total inventories, at average cost

 

$

85.6

 

$

85.4

 

 

 

 

 

 

 

Other current assets:

 

 

 

 

 

Deposits and other advances

 

$

0.9

 

$

17.8

 

Prepayments

 

7.2

 

13.3

 

Derivatives

 

0.2

 

3.2

 

Current deferred income taxes

 

1.7

 

2.0

 

Other

 

2.1

 

1.4

 

Total other current assets

 

$

12.1

 

$

37.7

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Construction work in process

 

$

444.9

 

$

376.0

 

Property, plant and equipment

 

4,626.3

 

4,626.0

 

Total property, plant and equipment (a)

 

$

5,071.2

 

$

5,002.0

 

 

 

 

 

 

 

Other deferred assets:

 

 

 

 

 

Master Trust assets

 

$

32.2

 

$

39.4

 

Unamortized loss on reacquired debt

 

20.0

 

20.4

 

Unamortized debt expense

 

10.3

 

10.6

 

Commercial activities tax benefit

 

6.8

 

6.8

 

Investments

 

6.9

 

7.0

 

Other

 

0.5

 

0.5

 

Total other deferred assets

 

$

76.7

 

$

84.7

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

Trade payables

 

$

63.7

 

$

75.7

 

Fuel accruals

 

44.9

 

37.3

 

Other

 

70.4

 

56.4

 

Total accounts payable

 

$

179.0

 

$

169.4

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

Customer security deposits

 

$

18.7

 

$

19.4

 

Pension and retiree benefits payable

 

0.8

 

5.8

 

Financial transmission rights - future proceeds

 

1.1

 

2.7

 

Payroll taxes payable

 

0.1

 

0.1

 

Other

 

11.7

 

10.3

 

Total other current liabilities

 

$

32.4

 

$

38.3

 

 

 

 

 

 

 

Other deferred credits:

 

 

 

 

 

Asset retirement obligations - regulated property

 

$

87.0

 

$

86.3

 

Trust obligations

 

77.9

 

76.2

 

Pension liabilities

 

37.0

 

37.7

 

Retiree health and life benefits

 

28.1

 

28.5

 

SECA net revenue subject to refund

 

21.0

 

18.7

 

Asset retirement obligations - generation property

 

12.2

 

11.7

 

Deferred gain on sale of portfolio

 

 

8.2

 

Legal reserves

 

3.3

 

3.4

 

Environmental reserves

 

0.1

 

0.1

 

Other

 

10.6

 

9.9

 

Total other deferred credits

 

$

277.2

 

$

280.7

 

for approximately $49 million in cash.

(a)   $283.5During the fourth quarter of 2006, DPL recorded a $71.0 million impairment charge that included the fair market value write-down of the peaking unit assets, accrued legal fees and other costs associated with the sale.  There were no material costs or adjustments to the $71.0 million impairment charge that would result in a reportable gain or loss on the sale realized in 2007.

Sale of Corporate Aircraft

On June 7, 2007, Miami Valley CTC, Inc. (indirect wholly-owned subsidiary of DPL), sold its corporate aircraft and associated inventory and parts for $7.4 million.  The net book value of the assets presentedwritten down and subsequently sold were approximately $1.0 million and severance and other costs of approximately $0.4 million were accrued.  Miami Valley CTC, Inc. recorded a net gain on the sale of approximately $6.0 million for the quarter and the six-month period ended June 30, 2007, which is included in DPL’s operation and maintenance expense.

In relation to this sale, Miami Valley CTC, Inc., placed in escrow approximately $2.2 million.  These funds are listed as the caption “Restricted funds held in trust” in the Condensed Consolidated Balance Sheet for DPL.  These funds were released from escrow on July 12, 2007.

6.     Pension and Postretirement Benefits

We sponsor a defined benefit plan for substantially all full-time 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. We fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended (ERISA).  In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain active and retired key executives.  Benefits under this SERP have been frozen and no additional benefits can be earned.  Wealso have unfunded liabilities related to retirement benefits for certain active, terminated and retired key executives (not related to the litigation settlement with three former executives) that include The DPL Inc. Supplemental Executive Defined Contribution Retirement Plan (SEDCRP).  These liabilities totaled approximately $0.8 million at June 30, 2007.

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


The net periodic benefit costs of the pension and postretirement benefit plans for the quarter ended June 30, 2007 and 2006 were:

Net periodic benefit cost

 

 

Pension

 

Postretirement

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

1.1

 

$

1.1

 

$

 

$

 

Interest cost

 

4.1

 

4.1

 

0.3

 

0.4

 

Expected return on assets (a)

 

(5.4

)

(5.4

)

(0.1

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

0.9

 

1.0

 

(0.3

)

(0.2

)

Prior service cost

 

0.6

 

0.6

 

 

 

Transition obligation

 

 

 

0.1

 

 

Net periodic benefit cost

 

$

1.3

 

$

1.4

 

$

 

$

0.1

 


(a)The market-related value of assets is equal to the fair value of assets at implementation with subsequent asset gains and losses recognized in the market-value systematically over a three-year period.

The net periodic benefit costs of the pension and postretirement benefit plans for the six months ended June 30, 2007 and 2006 were:

Net periodic benefit cost

 

 

Pension

 

Postretirement

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

2.2

 

$

2.2

 

$

 

$

 

Interest cost

 

8.2

 

8.2

 

0.7

 

0.8

 

Expected return on assets (a)

 

(10.9

)

(10.8

)

(0.2

)

(0.2

)

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

1.8

 

2.0

 

(0.5

)

(0.4

)

Prior service cost

 

1.2

 

1.2

 

 

 

Transition obligation

 

 

 

0.1

 

0.1

 

Net periodic benefit cost before adjustment

 

2.5

 

2.8

 

0.1

 

0.3

 

Special termination benefit cost (b)

 

 

0.3

 

 

 

Net periodic benefit cost after adjustment

 

$

2.5

 

$

3.1

 

$

0.1

 

$

0.3

 


(a)The market-related value of assets is equal to the fair value of assets at implementation with subsequentasset gains and losses recognized in the market-value systematically over a three-year period.

(b)In 2006, a special termination benefit cost was recognized as a result of 16 employees who participated in a voluntary early retirement program and retired at various dates during 2006; this program was completed as of April 1, 2006.

The following estimated benefit payments, which reflect future service, are expected to be paid as follows:

Estimated Future Benefit Payments

$ in millions

 

Pension

 

Postretirement

 

2007

 

$

9.7

 

$

1.3

 

2008

 

$

19.8

 

$

2.6

 

2009

 

$

20.2

 

$

2.6

 

2010

 

$

20.7

 

$

2.5

 

2011

 

$

20.9

 

$

2.4

 

2012 – 2016

 

$

111.9

 

$

10.0

 


7.     Share-Based Compensation

As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees.  A portion of this settlement included the forfeitures and cancellations of RSUs and stock options of 1.3 million and 3.6 million, respectively.

The following table summarizes share-based compensation expense:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Stock options

 

$

 

$

0.6

 

$

 

$

1.3

 

Restricted stock units

 

 

(0.2

)

0.1

 

1.2

 

Performance shares

 

0.4

 

0.8

 

0.8

 

0.8

 

Restricted shares

 

0.1

 

 

0.1

 

 

Non-employee directors’ restricted stock units

 

0.1

 

 

0.1

 

 

Share-based compensation included in operations and maintenance expense

 

0.6

 

1.2

 

1.1

 

3.3

 

Income tax expense

 

(0.2

)

(0.4

)

(0.4

)

(1.2

)

Total share-based compensation, net of tax

 

$

0.4

 

$

0.8

 

$

0.7

 

$

2.1

 

Share-based awards issued in DPL’s common stock will be distributed from treasury stock.  DPL believes it has sufficient treasury stock to satisfy all outstanding share-based awards.

Determining Fair Value

Valuation and Amortization Method. We estimate the fair value of stock options and RSUs using a Black-Scholes-Merton model; performance shares are heldvalued using a Monte Carlo simulation; restricted shares are valued at the market price on the day of grant and the Directors’ RSUs are valued at the market price on the day prior to the grant date.  We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Volatility. The Company’s expected volatility assumptions are based on the historical volatility of DPL’s stock. The volatility range captures the high and low volatility values for sale.each award granted based on its specific terms.

Expected Life. The expected life assumption represents the estimated period of time from grant until exercise and reflects historical employee exercise patterns.

Risk-Free Interest Rate. The risk-free interest rate for the expected term of the award is based on the corresponding yield curve in effect at the time of the valuation for U.S. Treasury bonds having the same term as the expected life of the award, i.e., a five year bond rate is used for valuing an award with a five year expected life.

Expected Dividend Yield. The expected dividend yield is based on DPL’s current dividend rate, adjusted as necessary to capture anticipated dividend changes and the 12 month average DPL Inc. stock price.

Expected Forfeitures. The forfeiture rate used to calculate compensation expense is based on the Company’s historical experience, adjusted as necessary to reflect special circumstances.


Stock Options

In 2000, DPL’s Board of Directors adopted, and DPL’s shareholders approved, The DPL Inc. Stock Option Plan.  On April 26, 2006, DPL’s shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of the EPIP, no new awards will be granted under The DPL Inc. Stock Option Plan, but shares relating to awards that are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted under the EPIP.  There are currently 10,000 unvested stock options outstanding under The DPL Inc. Stock Option Plan that will vest as of December 21, 2007.

The schedule of option activity for the six months ended June 30, 2007 was as follows:

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

Options

 

Fair Value

 

Non-vested at January 1, 2007

 

10,000

 

$

0.05

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

10,000

 

$

0.05

 

Summarized stock option activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Options:

 

 

 

 

 

Outstanding at beginning of year

 

5,091,500

 

5,486,500

 

Granted

 

 

 

Exercised

 

(520,000

)

(10,000

)

Forfeited (a)

 

(3,620,000

)

 

Outstanding at period-end

 

951,500

 

5,476,500

 

Exercisable at period-end

 

941,500

 

5,416,000

 

 

 

 

 

 

 

Weighted average option prices per share:

 

 

 

 

 

Outstanding at beginning of year

 

$

21.95

 

$

21.86

 

Granted

 

$

 

$

 

Exercised

 

$

26.83

 

$

21.00

 

Forfeited

 

$

20.38

 

$

 

Outstanding at period-end

 

$

24.08

 

$

21.90

 

Exercisable at period-end

 

$

24.07

 

$

20.98

 


(a)  As a result of the settlement of the former executive litigation on May 21, 2007, 3.6 million outstanding options shown above were forfeited in the second quarter of 2007 and another approximately one million disputed options not shown above were also forfeited.

15The following table reflects information about stock options outstanding at June 30, 2007:

 

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise
Prices

 

Outstanding

 

Weighted-
Average
Contractual
Life

 

Weighted-
Average
Exercise
Price

 

Exercisable

 

Weighted-
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$14.95 - $21.00

 

625,000

 

3.3 years

 

$

20.60

 

625,000

 

$

20.60

 

$21.01 - $29.63

 

326,500

 

4.0 years

 

$

28.83

 

316,500

 

$

28.93

 


The following table reflects information about stock option activity during the period:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of options granted during the period

 

$

 

$

 

$

 

$

 

Intrinsic value of options exercised during the period

 

$

1.6

 

$

 

$

2.3

 

$

0.1

 

Proceeds from stock options exercised during the period

 

$

10.6

 

$

 

$

14.5

 

$

0.2

 

Tax benefit from proceeds of stock options exercised

 

$

(0.9

)

$

 

$

0.5

 

$

 

Fair value of shares that vested during the period

 

$

 

$

1.0

 

$

 

$

1.0

 

Unrecognized compensation expense

 

$

 

$

0.2

 

$

 

$

0.2

 

Weighted average period to recognize compensation expense (in years)

 

0.5

 

1.0

 

0.5

 

1.0

 

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested stock options at the time of grant:

Number of Non-vested Shares

10,000

Date of Grant

December 29, 2004

Expected Volatility

26.1%

Weighted-average expected volatility

26.1%

Expected life (in years)

9.9

Expected dividends

4.7%

Weighted-average expected dividends

4.7%

Risk-free interest rate

4.3%

No options were granted during 2006 and 2007.

Restricted Stock Units (RSUs)

RSUs were granted to certain key employees prior to 2001.  As a result of the settlement of the former executive litigation, all disputed RSUs were forfeited by the three former executives.  There were 49,998 RSUs outstanding as of June 30, 2007, of which all have not vested. The non-vested RSUs will be paid in cash upon vesting and will vest as follows:  20,097 in the second half of 2007; 14,688 in 2008; 10,205 in 2009; and 5,008 in 2010.  Non-vested RSUs are valued quarterly at fair value using the Black-Scholes-Merton model to determine the amount of compensation expense to be recognized.  Non-vested RSUs do not earn dividends.

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

RSUs

 

Fair Value

 

Non-vested at January 1, 2007

 

49,998

 

$

1.2

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

49,998

 

$

1.2

 

Summarized RSU activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

RSUs:

 

 

 

 

 

Outstanding at beginning of year

 

1,345,995

 

1,340,912

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

(1,295,997

)

 

Outstanding at period-end

 

49,998

 

1,340,912

 

Exercisable at period-end

 

 

 


Compensation expense is recognized each quarter based on the change in the market price of DPL common shares.

As of June 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $1.4 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheets.  The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 to Condensed Consolidated Financial Statements).

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested RSUs during the respective periods:

 

Three Months Ending

 

Six Months Ending

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

15.7-43.5%

 

7.3-25.4%

 

10.6-43.5%

 

7.3-28.6%

 

Weighted-average expected volatility

 

19.5%

 

19.0%

 

16.6%

 

23.5%

 

Expected life (in years)

 

0.1-3.1

 

0.1-4.1

 

0.1-3.3

 

0.1-4.3

 

Expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Weighted-average expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Risk-free interest rate

 

4.4-5.0%

 

4.7-5.2%

 

4.4-5.0%

 

4.7-5.2%

 

Performance Shares

Under the EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which DPL will award a targeted number of performance shares of common stock to executives.  Awards under the LTIP will be awarded based on a Total Shareholder Return Relative to Peers performance.  No performance shares will be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the threshold of the 40th percentile.  Further, the LTIP awards will be capped at 200% of the target number of performance shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90th percentile.  The Total Shareholder Return Relative to Peers is considered a market condition under FAS 123R.  There is a three year requisite service period for each tranche of the Performance Shares.

The schedule of non-vested performance share activity for the six months ended June 30, 2007 follows:

 

Number of

 

Weighted-Avg.

 

 

 

Performance

 

Grant Date

 

$ in millions (except share amounts)

 

Shares

 

Fair Value

 

Non-vested at January 1, 2007

 

110,723

 

$

2.7

 

Granted in first half 2007

 

74,714

 

2.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

(14,172

)

(0.5

)

Non-vested at June 30, 2007

 

171,265

 

$

4.7

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Performance Shares:

 

 

 

 

 

Outstanding at beginning of year

 

154,768

 

 

Granted

 

74,714

 

223,289

 

Exercised

 

(22,462

)

 

Expired

 

(21,583

)

 

Forfeited

 

(14,172

)

 

Outstanding at period-end

 

171,265

 

223,289

 

Exercisable at period-end

 

 

 

24




The following table reflects information about performance share activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of performance shares granted during the period

 

$

0.1

 

$

 

$

2.5

 

$

5.9

 

Intrinsic value of performance shares exercised during the period

 

$

 

$

 

$

1.3

 

$

 

Proceeds from performance shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of performance shares exercised

 

$

 

$

 

$

 

$

 

Fair value of performance shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

2.7

 

$

2.0

 

$

2.7

 

$

3.9

 

Weighted average period to recognize compensation expense (in years)

 

1.5

 

1.1

 

1.5

 

1.1

 

The following table shows the assumptions used in the Monte Carlo Simulation to calculate the fair value of the performance shares granted during the period:

 

Three Months Ending
June 30,

 

Six Months Ending
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

16.1%

 

20.3%

 

16.1-17.3%

 

20.3%

 

Weighted-average expected volatility

 

16.1%

 

20.3%

 

16.5%

 

20.3%

 

Expected life (in years)

 

3.0

 

3.0

 

3.0

 

3.0

 

Expected dividends

 

3.3%

 

3.7%

 

3.3-3.5%

 

3.7%

 

Weighted-average expected dividends

 

3.3%

 

3.7%

 

3.3%

 

3.7%

 

Risk-free interest rate

 

4.7-4.9%

 

4.7%

 

4.5-4.9%

 

4.7%

 

DP&LRestricted Shares

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

$ in millions

 

 

 

2007

 

2006

 

 

 

 

 

 

 

Accounts receivable, net:

 

 

 

 

 

Retail customers

 

$

70.4

 

$

65.0

 

Partners in commonly-owned plants

 

57.3

 

51.5

 

Unbilled revenue

 

56.2

 

61.0

 

PJM including financial transmission rights

 

24.2

 

13.9

 

Wholesale and subsidiary customers

 

12.8

 

8.3

 

Refundable franchise tax

 

3.1

 

3.1

 

Other

 

5.3

 

4.2

 

Provision for uncollectible accounts

 

(1.5

)

(1.4

)

Total accounts receivable, net

 

$

227.8

 

$

205.6

 

 

 

 

 

 

 

Inventories, at average cost:

 

 

 

 

 

Fuel and emission allowances

 

$

51.8

 

$

52.4

 

Plant materials and supplies

 

31.1

 

30.2

 

Other

 

0.2

 

0.4

 

Total inventories, at average cost

 

$

83.1

 

$

83.0

 

 

 

 

 

 

 

Other current assets:

 

 

 

 

 

Deposits and other advances

 

$

0.7

 

$

17.0

 

Prepayments

 

8.6

 

15.8

 

Derivatives

 

0.2

 

3.2

 

Current deferred income taxes

 

0.3

 

0.7

 

Other

 

2.5

 

1.5

 

Total other current assets

 

$

12.3

 

$

38.2

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Construction work in process

 

$

444.1

 

$

375.2

 

Property, plant and equipment

 

4,075.0

 

4,075.4

 

Total property, plant and equipment

 

$

4,519.1

 

$

4,450.6

 

 

 

 

 

 

 

Other deferred assets:

 

 

 

 

 

Master Trust assets

 

$

109.5

 

$

109.0

 

Unamortized loss on reacquired debt

 

20.0

 

20.4

 

Unamortized debt expense

 

8.4

 

8.6

 

Investments

 

0.6

 

0.6

 

Other

 

0.5

 

0.5

 

Total other deferred assets

 

$

139.0

 

$

139.1

 

 

 

 

 

 

 

Accounts payable:

 

 

 

 

 

Trade payables

 

$

63.3

 

$

74.7

 

Fuel accruals

 

44.8

 

36.7

 

Other

 

66.4

 

54.8

 

Total accounts payable

 

$

174.5

 

$

166.2

 

 

 

 

 

 

 

Other current liabilities:

 

 

 

 

 

Customer security deposits

 

$

18.7

 

$

19.4

 

Financial transmission rights - future proceeds

 

1.1

 

2.7

 

Payroll taxes payable

 

0.2

 

0.2

 

Pension and retiree benefits payable

 

0.8

 

5.8

 

Other

 

8.3

 

7.3

 

Total other current liabilities

 

$

29.1

 

$

35.4

 

 

 

 

 

 

 

Other deferred credits:

 

 

 

 

 

Asset retirement obligations - regulated property

 

$

87.0

 

$

86.3

 

Trust obligations

 

77.9

 

76.2

 

Retiree health and life benefits

 

28.1

 

28.5

 

Pension liabilities

 

37.0

 

37.7

 

SECA net revenue subject to refund

 

21.0

 

18.7

 

Asset retirement obligations - generation property

 

12.2

 

11.7

 

Legal reserves

 

3.3

 

3.4

 

Environmental reserves

 

0.1

 

0.1

 

Other

 

10.6

 

9.9

 

Total other deferred credits

 

$

277.2

 

$

272.5

 

Under the EPIP, the Board granted shares of DPL Restricted Shares to various executives.  The Restricted Shares are to be registered in the executive’s name, receive dividends as declared and paid on all DPL common stock and will vest after a specified service period.

During the second quarter of 2007, 11,400 restricted shares were awarded.

$ in millions (except share amounts)

 

Number of
Restricted
Shares

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

19,000

 

$

0.5

 

Granted in first half 2007

 

16,400

 

0.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

35,400

 

$

1.0

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Restricted Shares:

 

 

 

 

 

Outstanding at beginning of year

 

19,000

 

 

Granted

 

16,400

 

 

Exercised

 

 

 

Forfeited

 

 

 

Outstanding at period-end

 

35,400

 

 

Exercisable at period-end

 

 

 


The following table reflects information about restricted share activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of restricted shares granted during the period

 

$

0.4

 

$

 

$

0.5

 

$

 

Intrinsic value of restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of restricted shares exercised

 

$

 

$

 

$

 

$

 

Fair value of restricted shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

0.9

 

$

 

$

0.9

 

$

 

Weighted average period to recognize compensation
expense (in years)

 

2.7

 

 

2.7

 

 

 

16Non-Employee Director Restricted Stock Units

Under the EPIP, as part of their annual compensation for service to DPL and DP&L, each non-employee Director received a $54,000 retainer in restricted stock units (RSUs) on the date of the annual meeting.  The RSUs will become non-forfeitable on April 15 of the following year but, if the Director resigns, dies or retires prior to the April 15 vesting date, the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in the form of additional RSUs.  Upon vesting, the RSUs will become exercisable and will be distributed in DPL common shares, unless the Director chooses to defer receipt of the shares until a later date.  The RSUs are valued at the closing stock price on the day prior to the grant and the compensation expense is recognized evenly over the vesting period. 

$ in millions (except for share amounts)

 

Number of 
Director
RSUs

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

 

$

 

Granted in first half 2007

 

13,552

 

0.4

 

Dividends accrued in the first half 2007

 

99

 

 

Vested in first half 2007

 

(3,204

)

(0.1

)

Forfeited in first half 2007

 

(1,553

)

 

Non-vested at June 30, 2007

 

8,894

 

$

0.3

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Restricted Stock Units:

 

 

 

 

 

Outstanding at beginning of year

 

 

 

Granted

 

13,552

 

 

Dividends accrued

 

99

 

 

Exercised

 

(142

)

 

Forfeited

 

(1,553

)

 

Outstanding at period-end

 

11,956

 

 

Exercisable at period-end

 

 

 


The following table reflects information about non-employee Director RSU activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of Director RSUs granted during the period

 

$

0.4

 

$

 

$

0.4

 

$

 

Intrinsic value of Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of Director RSUs exercised

 

$

 

$

 

$

 

$

 

Fair value of Director RSUs that vested during the period

 

$

0.1

 

$

 

$

0.1

 

$

 

Unrecognized compensation expense

 

$

0.3

 

$

 

$

0.3

 

$

 

Weighted average period to recognize compensation expense (in years)

 

0.8

 

 

0.8

 

 




8.     Long-Term Debt and Notes Payable

DPL Inc.

 

 

Three Months Ended March 31,

 

$ in millions

 

 

 

2007

 

2006

 

Cash flows - other:

 

 

 

 

 

Payroll taxes payable

 

$

 

$

(1.1

)

Employee/director stock plan

 

1.5

 

1.9

 

Lump sum retirement payment

 

(4.9

)

 

Deposits and other advances

 

16.1

 

(2.5

)

Other

 

4.7

 

6.2

 

Total cash flows - other

 

$

17.4

 

$

4.5

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Net income

 

$

56.1

 

$

58.9

 

Net change in unrealized gains (losses) on financial instruments

 

0.4

 

0.4

 

Net change in deferred gains (losses) on cash flow hedges

 

(3.6

)

0.6

 

Minimum pension liability

 

0.6

 

 

Deferred income taxes related to unrealized gains and (losses)

 

1.1

 

(1.8

)

Comprehensive income

 

$

54.6

 

$

58.1

 

 

$ in millions 

 

 

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L -

 

First mortgage bonds maturing 2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L -

 

Pollution control series maturing 2036 - 4.80%

 

100.0

 

100.0

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

41.3

 

41.3

 

DP&L -

 

Pollution control series maturing 2028 - 4.70%

 

35.3

 

35.3

 

 

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

 

 

DPL Inc. -

 

Note to Capital Trust II 8.125% due 2031

 

195.0

 

195.0

 

DPL Inc. -

 

Senior Notes 6.875% Series due 2011

 

297.4

 

297.4

 

DPL Inc. -

 

Senior Notes 6.25% Series due 2008

 

 

100.0

 

DPL Inc. -

 

Senior Notes 8.00% Series due 2009

 

175.0

 

175.0

 

DP&L -

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount (a)

 

(1.8

)

(2.0

)

Total

 

$

1,451.7

 

$

1,551.8

 


(a)DP&L’s unamortized debt discount was $(1.2) million and $(1.2) million for June 30, 2007 and December 31, 2006, respectively.

DP&L

 

 

 

Three Months Ended March 31,

 

$ in millions

 

 

 

2007

 

2006

 

Cash flows - other:

 

 

 

 

 

Payroll taxes payable

 

$

 

$

(1.1

)

Deposits and other advances

 

15.5

 

(1.5

)

Lump sum retirement payment

 

(4.9

)

 

Other

 

3.6

 

4.2

 

Total cash flows - other

 

$

14.2

 

$

1.6

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

Net income

 

$

69.8

 

$

66.9

 

Net change in unrealized gains (losses) on financial instruments

 

8.4

 

0.8

 

Net change in deferred gains (losses) on cash flow hedges

 

(3.6

)

0.6

 

Minimum pension liability

 

0.6

 

 

Deferred income taxes related to unrealized gains and (losses)

 

(1.4

)

(1.4

)

Comprehensive income

 

$

73.8

 

$

66.9

 

$ in millions

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L First mortgage bonds maturing   2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L Pollution control series maturing   2036 - 4.80%

 

100.0

 

100.0

 

DP&L - Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L - Pollution control series maturing  2034 - 4.80%

 

41.3

 

41.3

 

DP&L - Pollution control series maturing  2028 - 4.70%

 

35.3

 

35.3

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount

 

(1.2

)

(1.2

)

Total

 

$

784.9

 

$

785.2

 

 

17At June 30, 2007, DPL’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.4 million for the remainder of 2007, $100.7 million in 2008, $175.8 million in 2009, $0.6 million in 2010 and $297.4 million in 2011.

At June 30, 2007, DP&L’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.4 million for the remainder of 2007, $0.7 million in 2008, $0.8 million in 2009, $0.6 million in 2010 and none in 2011.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. 

During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005


volume cap carryforward.  The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects.  On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036.  In turn, DP&L borrowed these funds from the OAQDA.  These funds were placed in escrow with a trustee and, as of April 3, 2007, DP&L has drawn out the entirety of the funds.  DP&L is considering issuing in conjunction with the OAQDA another series of tax-exempt bonds to finance the remaining qualifying solid waste disposal facility costs at Miami Fort, Killen and Stuart Generating Stations.

On November 21, 2006, DP&L entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility.  This new agreement has a five-year term that expires November 21, 2011 and provides DP&L with the ability to increase the size of the facility by an additional $50 million at any time.  The facility contains one financial covenant:  DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of June 30, 2007, DP&L had no borrowings outstanding under this facility.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest rate.  This revolving credit agreement also contains a $50 million letter of credit sublimit.  DP&L has certain 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.  As of June 30, 2007, DP&L had no outstanding letters of credit against the facility.

During the second quarter of 2007, DPL entered into a short-term loan to DP&L for $105 million.  There are no other inter-company debt collateralizations or debt guarantees between DPL, DP&L and their subsidiaries.  None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.




9.     Commitments and Contingencies

5.Contractual Obligations and Commercial Commitments

We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations.  At June 30, 2007, these include:

Contractual Obligations

 

 

Payment Year

 

$ in millions

 

Total

 

2007

 

2008-2009

 

2010-2011

 

2012-
Thereafter

 

DPL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,550.0

 

$

 

$

275.0

 

$

297.4

 

$

977.6

 

Interest payments

 

1,050.3

 

47.8

 

170.7

 

144.0

 

687.8

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

4,109.4

 

$

694.6

 

$

920.4

 

$

668.2

 

$

1,826.2

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

783.2

 

$

 

$

 

$

 

$

783.2

 

Interest payments

 

552.4

 

19.6

 

78.3

 

78.3

 

376.2

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

2,844.7

 

$

666.4

 

$

553.0

 

$

305.1

 

$

1,320.2

 


(a)          DP&L-operated units

Long-term debt:

DPL’s long-term debt as of June 30, 2007 consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, DPL unsecured notes and includes current maturities and unamortized debt discounts.

DP&L’s long-term debt as of June 30, 2007 consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 8 of Notes to Condensed Consolidated Financial Statements.

Interest payments:

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

Pension and postretirement payments:

As of June 30, 2007, DP&L had estimated future benefit payments as outlined in Note 6 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2016.

Capital leases:

As of June 30, 2007, DP&L had two capital leases that expire in November 2007 and September 2010.

Operating leases:

As of June 30, 2007, DPL and DP&L had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates.

Coal contracts:

DP&L 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 and have features that limit price escalation in any given year.


Limestone contracts:

DP&L has entered into a limestone contract to supply limestone for its generating facilities.

Reserve for uncertain tax positions:

On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During the second quarter ending June 30, 2007, we recorded an additional $0.9 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.2 million as of June 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.

Other contractual obligations:

As of June 30, 2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

We enter into various commercial commitments, which may affect the liquidity of our operations.  At June 30, 2007, these include:

Credit facilities:

In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five-year facility that expires on November 21, 2011.  DP&L has the ability to increase the size of the facility by an additional $50 million at any time.  At June 30, 2007, there were no outstanding borrowings under this facility.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of June 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.

In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:

$ in millions

 

2007

 

2008

 

2009

 

2010

 

Darby

 

$

30.6

 

$

23.0

 

$

15.3

 

$

7.7

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

$

14.8

 

$

11.1

 

$

7.4

 

$

3.7

 


Contingencies

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of June 30, 2007, cannot be reasonably determined.

Employees

Approximately 53% of our employees are under a collective bargaining agreement.

Environmental Matters

DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law.  In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  We have 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 two sites pursuant to state and federal laws.  We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  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, we accrue 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.  We evaluate the potential liability related to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations and financial position.

In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA) and the Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, the first set of expert reports have been filed with additional reports scheduled to be filed in September 2007.  Dispositive motions are to be filed in January 2008.  No trial date has been set yet.

In February 2007, Ohio’s Regional Air Pollution Control Agency (RAPCA), issued a Notice of Violation (NOV) to DP&L with respect to an allegedly failed performance test of one boiler in November 2006 for particulate matter at DP&L’s Hutchings Generating Station.  On June 29, 2007, the federal Environmental Protection Agency Region V, issued an NOV to DP&L with respect to the same performance test and with respect to earlier tests for particulates conducted in 1996 and 1998 for a different boiler at the same station.  Representatives from DP&L met with officials from EPA Region V and RAPCA on July 24, 2007 to discuss the referenced performance tests, subsequent performance tests, and past and planned operations at the station.  DP&L is unable to predict at this time what further actions, if any, will be taken by the US EPA or RAPCA with respect to these NOVs.

10. Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  As part of this settlement, the three former executives relinquished and dismissed all their claims including those related to certain deferred compensation, RSUs, MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, DPL had accrued obligations of approximately $64.2 million of which DP&L had accrued obligations of approximately $60.3 million.  Included in these amounts is approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled.

As a result of this settlement, DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on


the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

50.8

 

Allocated settlement expense

 

(19.8

)

Net gain from continuing operations

 

$

31.0

 

 

 

 

 

Discontinued operations:

 

 

 

Reversal of accrued obligations

 

$

13.4

 

Allocated settlement expense

 

(5.2

)

Net gain from discontinued operations

 

$

8.2

 

As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ litigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans. DP&L had no ownership of DPL’s discontinued financial asset portfolio business, therefore these liabilities were reversed and DP&L’s net pre-tax gain was recorded within continuing operations. The following table outlines the components of DP&L’s net gain:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

60.3

 

Allocated settlement expense

 

(25.0

)

Net gain from continuing operations

 

$

35.3

 

The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.  As part of this transaction, DPL and DP&L recorded a $3.2 million realized gain which is reflected in investment income.

11.  Insurance Recovery Claim

On April 30, 2007, DP&L executed a settlement agreement with one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against the three former executives for $14.5 million.  This was recorded as a reduction to operation and maintenance expense during the quarter ended June 30, 2007.

On May 16, 2007, DPL and DP&L notified one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a claim for legal fees that DPL and DP&L incurred in defending claims made by the three former executives.

12.  Regulatory Matters

We apply the provisions of SFAS 71 to our regulated operations.  This accounting standard defines regulatory assets as the deferral of costs expected to be recovered in future customer rates and regulatory liabilities as current cost recovery of expected future expenditures.


Regulatory liabilities are reflected on the Condensed Consolidated Balance Sheet under the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on the Condensed Consolidated Balance Sheet include:

 

 

 

 

 

 

At

 

At

 

 

 

Type of

 

Amortization

 

June 30,

 

December 31,

 

$ in millions

 

Recovery (a)

 

Through

 

2007

 

2006

 

Regulatory Assets:

 

 

 

 

 

 

 

 

 

Deferred recoverable income taxes

 

C/B

 

Ongoing

 

$

52.0

 

$

53.1

 

Pension and postretirement benefits

 

C

 

Ongoing

 

45.3

 

47.1

 

Electric Choice systems costs

 

F

 

2010

 

11.9

 

13.5

 

Regional transmission organization costs

 

C

 

2014

 

10.7

 

11.4

 

Deferred storm costs

 

C

 

2008

 

3.7

 

5.4

 

PJM administrative costs

 

F

 

2009

 

3.8

 

4.6

 

Power plant emission fees

 

C

 

Ongoing

 

4.3

 

4.5

 

Rate case expenses

 

F

 

2010

 

0.9

 

3.5

 

Retail settlement system costs

 

 

 

 

 

3.1

 

3.1

 

PJM integration costs

 

F

 

2015

 

1.2

 

1.4

 

Other costs

 

 

 

 

 

3.5

 

1.0

 

Total regulatory assets

 

 

 

 

 

$

140.4

 

$

148.6

 

 

 

 

 

 

 

 

 

 

 

Regulatory Liabilities:

 

 

 

 

 

 

 

 

 

Asset retirement obligations - regulated property

 

 

 

 

 

$

88.4

 

$

86.3

 

Postretirement benefits

 

 

 

 

 

7.3

 

7.6

 

SECA net revenue subject to refund

 

 

 

 

 

20.6

 

18.7

 

Total regulatory liabilities

 

 

 

 

 

$

116.3

 

$

112.6

 

 

 

 

 

 

 

 

At

 

At

 

 

 

Type of

 

Amortization

 

March 31,

 

December 31,

 

$ in millions

 

 

 

Recovery (a)

 

Through

 

2007

 

2006

 

Regulatory Assets:

 

 

 

 

 

 

 

 

 

Deferred recoverable income taxes

 

C/B

 

Ongoing

 

$

52.9

 

$

53.1

 

Pension and postretirement benefits

 

C

 

Ongoing

 

46.2

 

47.1

 

Electric Choice systems costs

 

F

 

2010

 

12.6

 

13.5

 

Regional transmission organization costs

 

C

 

2014

 

11.1

 

11.4

 

Deferred storm costs

 

C

 

2008

 

4.4

 

5.4

 

PJM administrative costs

 

F

 

2009

 

4.2

 

4.6

 

Power plant emission fees

 

C

 

Ongoing

 

4.3

 

4.5

 

Rate case expenses

 

F

 

2010

 

0.9

 

3.5

 

Retail settlement system costs

 

 

 

 

 

3.1

 

3.1

 

PJM integration costs

 

F

 

2015

 

1.3

 

1.4

 

Other costs

 

 

 

 

 

3.6

 

1.0

 

Total regulatory assets

 

 

 

 

 

$

144.6

 

$

148.6

 

 

 

 

 

 

 

 

 

 

 

Regulatory Liabilities:

 

 

 

 

 

 

 

 

 

Asset retirement obligations - regulated property

 

 

 

 

 

$

87.0

 

$

86.3

 

Postretirement benefits

 

 

 

 

 

7.5

 

7.6

 

SECA net revenue subject to refund

 

 

 

 

 

21.0

 

18.7

 

Total regulatory liabilities

 

 

 

 

 

$

115.5

 

$

112.6

 


(a)

 

F Recovery of incurred costs plus rate of return.

 

 

C Recovery of incurred costs only.

 

B Balance has an offsetting liability resulting in no impact on rate base.

 

Regulatory Assets

We evaluate our regulatory assets each period and believe recovery of these assets is probable.  We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates.

Deferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow-through items as the result of amounts previously provided to customers.  Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, deferred recoverable income taxes are amortized.

Pension and postretirement benefits represent the unfunded benefit obligation related to the transmission and distribution areas of our electric business.  We have historically recorded these costs on the accrual basis and this is how these costs have been historically recovered through rates.  This factor, combined with the historical precedents from the PUCO and the FERC, makes future rate recovery of these costs probable.

Electric Choice systems costs represent costs incurred to modify the customer billing system for unbundled rates and electric choice bills relative to other generation suppliers and information reports provided to the state administrator of the low-income electric program.  In February 2005, the PUCO approved a stipulation allowing us to recover certain costs incurred for modifications to its billing system from all customers in its service territory.  We filed a subsequent case to implement the PUCO’s order to begin charging customers for billing costs.  On March 1, 2006, the PUCO issued an order that approved our tariff as filed.  We began collecting this rider immediately, and expect to recover all costs over five years.


Regional transmission organization costs represent costs incurred to join a Regional Transmission Organization (RTO) that controls the receipts and delivery of bulk power within the service area.  These costs are being amortized over a 10-year period that commenced in October 2004.

Deferred storm costs include costs incurred by us to repair damage from December 2004 and January 2005 ice storms.  On July 12, 2006, the PUCO approved our tariff as proposed and we began recovering these deferred costs over a two-year period beginning August 1, 2006.

34




PJM administrative costs contain the administrative fees billed to us by PJM Interconnection, L.L.C. (PJM) as a member of PJM .PJM.  Pursuant to a PUCO order issued on January 25, 2006, these deferred costs will be recovered over a 3-year period from retail ratepayers beginning February 2006.

Power plant emission fees represent costs paid to the State of Ohio for environmental monitoring that are or will be recovered over various periods under a PUCO rate rider from customers.

Retail settlement system costs represent costs to implement a retail settlement system that reconciles the amount of energy a competitive retail electric service (CRES) supplier delivers to its customers and what its customers actually use.  Based on case precedent in other utilities’ cases, the cost of this system is recoverable through DP&L’sour next transmission rate case that will be filed at the FERC.  The timing of this case is uncertain at this time.

PJM integration costs include infrastructure costs and other related expenses incurred by PJM and reimbursed by DP&L to integrate us into the RTO.  Pursuant to a FERC order, the costs are being recovered over a 10-year period beginning May 2005 from wholesale customers within PJM.

Rate case expenses represent costs incurred in connection with the Rate Stabilization Surcharge that was approved by the PUCO and implemented in January 2006.  These costs are being amortized over a five-year period.

Other costs include consumer education advertising regarding electric deregulation and costs pertaining to a recent rate case and are or will be recovered over various periods.

Regulatory LiabilitiesEstimated Future Benefit Payments

$ in millions

 

Pension

 

Postretirement

 

2007

 

$

9.7

 

$

1.3

 

2008

 

$

19.8

 

$

2.6

 

2009

 

$

20.2

 

$

2.6

 

2010

 

$

20.7

 

$

2.5

 

2011

 

$

20.9

 

$

2.4

 

2012 – 2016

 

$

111.9

 

$

10.0

 


7.     Share-Based Compensation

As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees.  A portion of this settlement included the forfeitures and cancellations of RSUs and stock options of 1.3 million and 3.6 million, respectively.

The following table summarizes share-based compensation expense:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Stock options

 

$

 

$

0.6

 

$

 

$

1.3

 

Restricted stock units

 

 

(0.2

)

0.1

 

1.2

 

Performance shares

 

0.4

 

0.8

 

0.8

 

0.8

 

Restricted shares

 

0.1

 

 

0.1

 

 

Non-employee directors’ restricted stock units

 

0.1

 

 

0.1

 

 

Share-based compensation included in operations and maintenance expense

 

0.6

 

1.2

 

1.1

 

3.3

 

Income tax expense

 

(0.2

)

(0.4

)

(0.4

)

(1.2

)

Total share-based compensation, net of tax

 

$

0.4

 

$

0.8

 

$

0.7

 

$

2.1

 

Share-based awards issued in DPL’s common stock will be distributed from treasury stock.  DPL believes it has sufficient treasury stock to satisfy all outstanding share-based awards.

Determining Fair Value

Valuation and Amortization Method. We estimate the fair value of stock options and RSUs using a Black-Scholes-Merton model; performance shares are valued using a Monte Carlo simulation; restricted shares are valued at the market price on the day of grant and the Directors’ RSUs are valued at the market price on the day prior to the grant date.  We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Volatility. The Company’s expected volatility assumptions are based on the historical volatility of DPL’s stock. The volatility range captures the high and low volatility values for each award granted based on its specific terms.

Expected Life. The expected life assumption represents the estimated period of time from grant until exercise and reflects historical employee exercise patterns.

Risk-Free Interest Rate. The risk-free interest rate for the expected term of the award is based on the corresponding yield curve in effect at the time of the valuation for U.S. Treasury bonds having the same term as the expected life of the award, i.e., a five year bond rate is used for valuing an award with a five year expected life.

Expected Dividend Yield. The expected dividend yield is based on DPL’s current dividend rate, adjusted as necessary to capture anticipated dividend changes and the 12 month average DPL Inc. stock price.

Expected Forfeitures. The forfeiture rate used to calculate compensation expense is based on the Company’s historical experience, adjusted as necessary to reflect special circumstances.


Stock Options

In 2000, DPL’s Board of Directors adopted, and DPL’s shareholders approved, The DPL Inc. Stock Option Plan.  On April 26, 2006, DPL’s shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of the EPIP, no new awards will be granted under The DPL Inc. Stock Option Plan, but shares relating to awards that are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted under the EPIP.  There are currently 10,000 unvested stock options outstanding under The DPL Inc. Stock Option Plan that will vest as of December 21, 2007.

The schedule of option activity for the six months ended June 30, 2007 was as follows:

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

Options

 

Fair Value

 

Non-vested at January 1, 2007

 

10,000

 

$

0.05

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

10,000

 

$

0.05

 

Summarized stock option activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Options:

 

 

 

 

 

Outstanding at beginning of year

 

5,091,500

 

5,486,500

 

Granted

 

 

 

Exercised

 

(520,000

)

(10,000

)

Forfeited (a)

 

(3,620,000

)

 

Outstanding at period-end

 

951,500

 

5,476,500

 

Exercisable at period-end

 

941,500

 

5,416,000

 

 

 

 

 

 

 

Weighted average option prices per share:

 

 

 

 

 

Outstanding at beginning of year

 

$

21.95

 

$

21.86

 

Granted

 

$

 

$

 

Exercised

 

$

26.83

 

$

21.00

 

Forfeited

 

$

20.38

 

$

 

Outstanding at period-end

 

$

24.08

 

$

21.90

 

Exercisable at period-end

 

$

24.07

 

$

20.98

 


(a)  As a result of the settlement of the former executive litigation on May 21, 2007, 3.6 million outstanding options shown above were forfeited in the second quarter of 2007 and another approximately one million disputed options not shown above were also forfeited.

The following table reflects information about stock options outstanding at June 30, 2007:

 

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise
Prices

 

Outstanding

 

Weighted-
Average
Contractual
Life

 

Weighted-
Average
Exercise
Price

 

Exercisable

 

Weighted-
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$14.95 - $21.00

 

625,000

 

3.3 years

 

$

20.60

 

625,000

 

$

20.60

 

$21.01 - $29.63

 

326,500

 

4.0 years

 

$

28.83

 

316,500

 

$

28.93

 


The following table reflects information about stock option activity during the period:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of options granted during the period

 

$

 

$

 

$

 

$

 

Intrinsic value of options exercised during the period

 

$

1.6

 

$

 

$

2.3

 

$

0.1

 

Proceeds from stock options exercised during the period

 

$

10.6

 

$

 

$

14.5

 

$

0.2

 

Tax benefit from proceeds of stock options exercised

 

$

(0.9

)

$

 

$

0.5

 

$

 

Fair value of shares that vested during the period

 

$

 

$

1.0

 

$

 

$

1.0

 

Unrecognized compensation expense

 

$

 

$

0.2

 

$

 

$

0.2

 

Weighted average period to recognize compensation expense (in years)

 

0.5

 

1.0

 

0.5

 

1.0

 

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested stock options at the time of grant:

Number of Non-vested Shares

10,000

Date of Grant

December 29, 2004

Expected Volatility

26.1%

Weighted-average expected volatility

26.1%

Expected life (in years)

9.9

Expected dividends

4.7%

Weighted-average expected dividends

4.7%

Risk-free interest rate

4.3%

No options were granted during 2006 and 2007.

Restricted Stock Units (RSUs)

 

RSUs were granted to certain key employees prior to 2001.  As a result of the settlement of the former executive litigation, all disputed RSUs were forfeited by the three former executives.  There were 49,998 RSUs outstanding as of June 30, 2007, of which all have not vested. The non-vested RSUs will be paid in cash upon vesting and will vest as follows:  20,097 in the second half of 2007; 14,688 in 2008; 10,205 in 2009; and 5,008 in 2010.  Non-vested RSUs are valued quarterly at fair value using the Black-Scholes-Merton model to determine the amount of compensation expense to be recognized.  Non-vested RSUs do not earn dividends.

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

RSUs

 

Fair Value

 

Non-vested at January 1, 2007

 

49,998

 

$

1.2

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

49,998

 

$

1.2

 

Summarized RSU activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

RSUs:

 

 

 

 

 

Outstanding at beginning of year

 

1,345,995

 

1,340,912

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

(1,295,997

)

 

Outstanding at period-end

 

49,998

 

1,340,912

 

Exercisable at period-end

 

 

 


Compensation expense is recognized each quarter based on the change in the market price of DPL common shares.

As of June 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $1.4 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheets.  The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 to Condensed Consolidated Financial Statements).

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested RSUs during the respective periods:

 

Three Months Ending

 

Six Months Ending

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

15.7-43.5%

 

7.3-25.4%

 

10.6-43.5%

 

7.3-28.6%

 

Weighted-average expected volatility

 

19.5%

 

19.0%

 

16.6%

 

23.5%

 

Expected life (in years)

 

0.1-3.1

 

0.1-4.1

 

0.1-3.3

 

0.1-4.3

 

Expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Weighted-average expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Risk-free interest rate

 

4.4-5.0%

 

4.7-5.2%

 

4.4-5.0%

 

4.7-5.2%

 

Performance Shares

Under the EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which DPL will award a targeted number of performance shares of common stock to executives.  Awards under the LTIP will be awarded based on a Total Shareholder Return Relative to Peers performance.  No performance shares will be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the threshold of the 40th percentile.  Further, the LTIP awards will be capped at 200% of the target number of performance shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90th percentile.  The Total Shareholder Return Relative to Peers is considered a market condition under FAS 123R.  There is a three year requisite service period for each tranche of the Performance Shares.

The schedule of non-vested performance share activity for the six months ended June 30, 2007 follows:

 

Number of

 

Weighted-Avg.

 

 

 

Performance

 

Grant Date

 

$ in millions (except share amounts)

 

Shares

 

Fair Value

 

Non-vested at January 1, 2007

 

110,723

 

$

2.7

 

Granted in first half 2007

 

74,714

 

2.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

(14,172

)

(0.5

)

Non-vested at June 30, 2007

 

171,265

 

$

4.7

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Performance Shares:

 

 

 

 

 

Outstanding at beginning of year

 

154,768

 

 

Granted

 

74,714

 

223,289

 

Exercised

 

(22,462

)

 

Expired

 

(21,583

)

 

Forfeited

 

(14,172

)

 

Outstanding at period-end

 

171,265

 

223,289

 

Exercisable at period-end

 

 

 

24




The following table reflects information about performance share activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of performance shares granted during the period

 

$

0.1

 

$

 

$

2.5

 

$

5.9

 

Intrinsic value of performance shares exercised during the period

 

$

 

$

 

$

1.3

 

$

 

Proceeds from performance shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of performance shares exercised

 

$

 

$

 

$

 

$

 

Fair value of performance shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

2.7

 

$

2.0

 

$

2.7

 

$

3.9

 

Weighted average period to recognize compensation expense (in years)

 

1.5

 

1.1

 

1.5

 

1.1

 

The following table shows the assumptions used in the Monte Carlo Simulation to calculate the fair value of the performance shares granted during the period:

 

Three Months Ending
June 30,

 

Six Months Ending
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

16.1%

 

20.3%

 

16.1-17.3%

 

20.3%

 

Weighted-average expected volatility

 

16.1%

 

20.3%

 

16.5%

 

20.3%

 

Expected life (in years)

 

3.0

 

3.0

 

3.0

 

3.0

 

Expected dividends

 

3.3%

 

3.7%

 

3.3-3.5%

 

3.7%

 

Weighted-average expected dividends

 

3.3%

 

3.7%

 

3.3%

 

3.7%

 

Risk-free interest rate

 

4.7-4.9%

 

4.7%

 

4.5-4.9%

 

4.7%

 

Restricted Shares

Under the EPIP, the Board granted shares of DPL Restricted Shares to various executives.  The Restricted Shares are to be registered in the executive’s name, receive dividends as declared and paid on all DPL common stock and will vest after a specified service period.

During the second quarter of 2007, 11,400 restricted shares were awarded.

$ in millions (except share amounts)

 

Number of
Restricted
Shares

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

19,000

 

$

0.5

 

Granted in first half 2007

 

16,400

 

0.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

35,400

 

$

1.0

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Restricted Shares:

 

 

 

 

 

Outstanding at beginning of year

 

19,000

 

 

Granted

 

16,400

 

 

Exercised

 

 

 

Forfeited

 

 

 

Outstanding at period-end

 

35,400

 

 

Exercisable at period-end

 

 

 


The following table reflects information about restricted share activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of restricted shares granted during the period

 

$

0.4

 

$

 

$

0.5

 

$

 

Intrinsic value of restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of restricted shares exercised

 

$

 

$

 

$

 

$

 

Fair value of restricted shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

0.9

 

$

 

$

0.9

 

$

 

Weighted average period to recognize compensation
expense (in years)

 

2.7

 

 

2.7

 

 

Non-Employee Director Restricted Stock Units

Under the EPIP, as part of their annual compensation for service to DPL and DP&L, each non-employee Director received a $54,000 retainer in restricted stock units (RSUs) on the date of the annual meeting.  The RSUs will become non-forfeitable on April 15 of the following year but, if the Director resigns, dies or retires prior to the April 15 vesting date, the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in the form of additional RSUs.  Upon vesting, the RSUs will become exercisable and will be distributed in DPL common shares, unless the Director chooses to defer receipt of the shares until a later date.  The RSUs are valued at the closing stock price on the day prior to the grant and the compensation expense is recognized evenly over the vesting period. 

$ in millions (except for share amounts)

 

Number of 
Director
RSUs

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

 

$

 

Granted in first half 2007

 

13,552

 

0.4

 

Dividends accrued in the first half 2007

 

99

 

 

Vested in first half 2007

 

(3,204

)

(0.1

)

Forfeited in first half 2007

 

(1,553

)

 

Non-vested at June 30, 2007

 

8,894

 

$

0.3

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Restricted Stock Units:

 

 

 

 

 

Outstanding at beginning of year

 

 

 

Granted

 

13,552

 

 

Dividends accrued

 

99

 

 

Exercised

 

(142

)

 

Forfeited

 

(1,553

)

 

Outstanding at period-end

 

11,956

 

 

Exercisable at period-end

 

 

 


The following table reflects information about non-employee Director RSU activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of Director RSUs granted during the period

 

$

0.4

 

$

 

$

0.4

 

$

 

Intrinsic value of Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of Director RSUs exercised

 

$

 

$

 

$

 

$

 

Fair value of Director RSUs that vested during the period

 

$

0.1

 

$

 

$

0.1

 

$

 

Unrecognized compensation expense

 

$

0.3

 

$

 

$

0.3

 

$

 

Weighted average period to recognize compensation expense (in years)

 

0.8

 

 

0.8

 

 


8.     Long-Term Debt and Notes Payable

DPL Inc.

$ in millions 

 

 

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L -

 

First mortgage bonds maturing 2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L -

 

Pollution control series maturing 2036 - 4.80%

 

100.0

 

100.0

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

41.3

 

41.3

 

DP&L -

 

Pollution control series maturing 2028 - 4.70%

 

35.3

 

35.3

 

 

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

 

 

DPL Inc. -

 

Note to Capital Trust II 8.125% due 2031

 

195.0

 

195.0

 

DPL Inc. -

 

Senior Notes 6.875% Series due 2011

 

297.4

 

297.4

 

DPL Inc. -

 

Senior Notes 6.25% Series due 2008

 

 

100.0

 

DPL Inc. -

 

Senior Notes 8.00% Series due 2009

 

175.0

 

175.0

 

DP&L -

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount (a)

 

(1.8

)

(2.0

)

Total

 

$

1,451.7

 

$

1,551.8

 


(a)DP&L’s unamortized debt discount was $(1.2) million and $(1.2) million for June 30, 2007 and December 31, 2006, respectively.

DP&L

$ in millions

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L First mortgage bonds maturing   2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L Pollution control series maturing   2036 - 4.80%

 

100.0

 

100.0

 

DP&L - Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L - Pollution control series maturing  2034 - 4.80%

 

41.3

 

41.3

 

DP&L - Pollution control series maturing  2028 - 4.70%

 

35.3

 

35.3

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount

 

(1.2

)

(1.2

)

Total

 

$

784.9

 

$

785.2

 

At June 30, 2007, DPL’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.4 million for the remainder of 2007, $100.7 million in 2008, $175.8 million in 2009, $0.6 million in 2010 and $297.4 million in 2011.

At June 30, 2007, DP&L’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.4 million for the remainder of 2007, $0.7 million in 2008, $0.8 million in 2009, $0.6 million in 2010 and none in 2011.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. 

During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005


volume cap carryforward.  The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects.  On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036.  In turn, DP&L borrowed these funds from the OAQDA.  These funds were placed in escrow with a trustee and, as of April 3, 2007, DP&L has drawn out the entirety of the funds.  DP&L is considering issuing in conjunction with the OAQDA another series of tax-exempt bonds to finance the remaining qualifying solid waste disposal facility costs at Miami Fort, Killen and Stuart Generating Stations.

On November 21, 2006, DP&L entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility.  This new agreement has a five-year term that expires November 21, 2011 and provides DP&L with the ability to increase the size of the facility by an additional $50 million at any time.  The facility contains one financial covenant:  DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of June 30, 2007, DP&L had no borrowings outstanding under this facility.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest rate.  This revolving credit agreement also contains a $50 million letter of credit sublimit.  DP&L has certain 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.  As of June 30, 2007, DP&L had no outstanding letters of credit against the facility.

During the second quarter of 2007, DPL entered into a short-term loan to DP&L for $105 million.  There are no other inter-company debt collateralizations or debt guarantees between DPL, DP&L and their subsidiaries.  None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.


9.     Commitments and Contingencies

Contractual Obligations and Commercial Commitments

We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations.  At June 30, 2007, these include:

Contractual Obligations

 

 

Payment Year

 

$ in millions

 

Total

 

2007

 

2008-2009

 

2010-2011

 

2012-
Thereafter

 

DPL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,550.0

 

$

 

$

275.0

 

$

297.4

 

$

977.6

 

Interest payments

 

1,050.3

 

47.8

 

170.7

 

144.0

 

687.8

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

4,109.4

 

$

694.6

 

$

920.4

 

$

668.2

 

$

1,826.2

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

783.2

 

$

 

$

 

$

 

$

783.2

 

Interest payments

 

552.4

 

19.6

 

78.3

 

78.3

 

376.2

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

2,844.7

 

$

666.4

 

$

553.0

 

$

305.1

 

$

1,320.2

 


(a)          DP&L-operated units

Asset retirement obligations - regulated propertyLong-term debt: reflect

DPL’s long-term debt as of June 30, 2007 consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, DPL unsecured notes and includes current maturities and unamortized debt discounts.

DP&L’s long-term debt as of June 30, 2007 consists of first mortgage bonds, tax-exempt pollution control bonds and includes an estimateunamortized debt discount.

See Note 8 of amounts recoveredNotes to Condensed Consolidated Financial Statements.

Interest payments:

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

Pension and postretirement payments:

As of June 30, 2007, DP&L had estimated future benefit payments as outlined in ratesNote 6 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2016.

Capital leases:

As of June 30, 2007, DP&L had two capital leases that expire in November 2007 and September 2010.

Operating leases:

As of June 30, 2007, DPL and DP&L had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates.

Coal contracts:

DP&L 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 and have features that limit price escalation in any given year.


Limestone contracts:

DP&L has entered into a limestone contract to supply limestone for its generating facilities.

Reserve for uncertain tax positions:

On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During the second quarter ending June 30, 2007, we recorded an additional $0.9 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.2 million as of June 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.

Other contractual obligations:

As of June 30, 2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

We enter into various commercial commitments, which may affect the liquidity of our operations.  At June 30, 2007, these include:

Credit facilities:

In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five-year facility that expires on November 21, 2011.  DP&L has the ability to increase the size of the facility by an additional $50 million at any time.  At June 30, 2007, there were no outstanding borrowings under this facility.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of June 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.

In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:

$ in millions

 

2007

 

2008

 

2009

 

2010

 

Darby

 

$

30.6

 

$

23.0

 

$

15.3

 

$

7.7

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

$

14.8

 

$

11.1

 

$

7.4

 

$

3.7

 


Contingencies

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of June 30, 2007, cannot be reasonably determined.

Employees

Approximately 53% of our employees are under a collective bargaining agreement.

Environmental Matters

DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law.  In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  We have 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 two sites pursuant to state and federal laws.  We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  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, we accrue 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.  We evaluate the potential liability related to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations and financial position.

In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA) and the Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, the first set of expert reports have been filed with additional reports scheduled to be filed in September 2007.  Dispositive motions are to be filed in January 2008.  No trial date has been set yet.

In February 2007, Ohio’s Regional Air Pollution Control Agency (RAPCA), issued a Notice of Violation (NOV) to DP&L with respect to an allegedly failed performance test of one boiler in November 2006 for particulate matter at DP&L’s Hutchings Generating Station.  On June 29, 2007, the federal Environmental Protection Agency Region V, issued an NOV to DP&L with respect to the same performance test and with respect to earlier tests for particulates conducted in 1996 and 1998 for a different boiler at the same station.  Representatives from DP&L met with officials from EPA Region V and RAPCA on July 24, 2007 to discuss the referenced performance tests, subsequent performance tests, and past and planned operations at the station.  DP&L is unable to predict at this time what further actions, if any, will be taken by the US EPA or RAPCA with respect to these NOVs.

10. Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  As part of this settlement, the three former executives relinquished and dismissed all their claims including those related to certain deferred compensation, RSUs, MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, DPL had accrued obligations of approximately $64.2 million of which DP&L had accrued obligations of approximately $60.3 million.  Included in these amounts is approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled.

As a result of this settlement, DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on


the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

50.8

 

Allocated settlement expense

 

(19.8

)

Net gain from continuing operations

 

$

31.0

 

 

 

 

 

Discontinued operations:

 

 

 

Reversal of accrued obligations

 

$

13.4

 

Allocated settlement expense

 

(5.2

)

Net gain from discontinued operations

 

$

8.2

 

As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ litigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans. DP&L had no ownership of DPL’s discontinued financial asset portfolio business, therefore these liabilities were reversed and DP&L’s net pre-tax gain was recorded within continuing operations. The following table outlines the components of DP&L’s net gain:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

60.3

 

Allocated settlement expense

 

(25.0

)

Net gain from continuing operations

 

$

35.3

 

The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.  As part of this transaction, DPL and DP&L recorded a $3.2 million realized gain which is reflected in investment income.

11.  Insurance Recovery Claim

On April 30, 2007, DP&L executed a settlement agreement with one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against the three former executives for $14.5 million.  This was recorded as a reduction to operation and maintenance expense during the quarter ended June 30, 2007.

On May 16, 2007, DPL and DP&L notified one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a claim for legal fees that DPL and DP&L incurred in defending claims made by the three former executives.

12.  Regulatory Matters

We apply the provisions of SFAS 71 to our regulated operations.  This accounting standard defines regulatory assets as the deferral of costs expected to be expended to remove existing transmissionrecovered in future customer rates and distribution property from service upon retirement.regulatory liabilities as current cost recovery of expected future expenditures.


Regulatory liabilities are reflected on the Condensed Consolidated Balance Sheet under the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on the Condensed Consolidated Balance Sheet include:

 

 

 

 

 

 

At

 

At

 

 

 

Type of

 

Amortization

 

June 30,

 

December 31,

 

$ in millions

 

Recovery (a)

 

Through

 

2007

 

2006

 

Regulatory Assets:

 

 

 

 

 

 

 

 

 

Deferred recoverable income taxes

 

C/B

 

Ongoing

 

$

52.0

 

$

53.1

 

Pension and postretirement benefits

 

C

 

Ongoing

 

45.3

 

47.1

 

Electric Choice systems costs

 

F

 

2010

 

11.9

 

13.5

 

Regional transmission organization costs

 

C

 

2014

 

10.7

 

11.4

 

Deferred storm costs

 

C

 

2008

 

3.7

 

5.4

 

PJM administrative costs

 

F

 

2009

 

3.8

 

4.6

 

Power plant emission fees

 

C

 

Ongoing

 

4.3

 

4.5

 

Rate case expenses

 

F

 

2010

 

0.9

 

3.5

 

Retail settlement system costs

 

 

 

 

 

3.1

 

3.1

 

PJM integration costs

 

F

 

2015

 

1.2

 

1.4

 

Other costs

 

 

 

 

 

3.5

 

1.0

 

Total regulatory assets

 

 

 

 

 

$

140.4

 

$

148.6

 

 

 

 

 

 

 

 

 

 

 

Regulatory Liabilities:

 

 

 

 

 

 

 

 

 

Asset retirement obligations - regulated property

 

 

 

 

 

$

88.4

 

$

86.3

 

Postretirement benefits

 

 

 

 

 

7.3

 

7.6

 

SECA net revenue subject to refund

 

 

 

 

 

20.6

 

18.7

 

Total regulatory liabilities

 

 

 

 

 

$

116.3

 

$

112.6

 


(a)

F – Recovery of incurred costs plus rate of return.

C – Recovery of incurred costs only.

B – Balance has an offsetting liability resulting in no impact on rate base.

Regulatory Assets

We evaluate our regulatory assets each period and believe recovery of these assets is probable.  We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates.

PostretirementDeferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow-through items as the result of amounts previously provided to customers.  Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, deferred recoverable income taxes are amortized.

Pension and postretirement benefits reflect a regulatory liability that was recorded forrepresent the portion of the unrealized gain on our postretirement trust assetsunfunded benefit obligation related to the transmission and distribution areas of our electric business.  The company hasWe have historically recorded these transactionscosts on the accrual basis and this is how these costs have been historically been recovered through rates.  This factor, combined with the historical precedents from the PUCO and the FERC, make it probablemakes future rate recovery of these costs probable.

Electric Choice systems costs represent costs incurred to modify the customer billing system for unbundled rates and electric choice bills relative to other generation suppliers and information reports provided to the state administrator of the low-income electric program.  In February 2005, the PUCO approved a stipulation allowing us to recover certain costs incurred for modifications to its billing system from all customers in its service territory.  We filed a subsequent case to implement the PUCO’s order to begin charging customers for billing costs.  On March 1, 2006, the PUCO issued an order that approved our tariff as filed.  We began collecting this rider immediately, and expect to recover all costs over five years.

Regional transmission organization costs represent costs incurred to join a Regional Transmission Organization (RTO) that controls the receipts and delivery of bulk power within the service area.  These costs are being amortized over a 10-year period that commenced in October 2004.

Deferred storm costs include costs incurred by us to repair damage from December 2004 and January 2005 ice storms.  On July 12, 2006, the PUCO approved our tariff as proposed and we began recovering these amountsdeferred costs over a two-year period beginning August 1, 2006.

34




PJM administrative costs contain the administrative fees billed to us by PJM Interconnection, L.L.C. (PJM) as a member of PJM.  Pursuant to a PUCO order issued on January 25, 2006, these deferred costs will be reflected in future rates.recovered over a 3-year period from retail ratepayers beginning February 2006.

SECA (Seams Elimination Charge Adjustment) net revenue subjectPower plant emission fees represent costs paid to refundthe State of Ohio for environmental monitoring that are or will be recovered over various periods under a PUCO rate rider from customers.

Retail settlement system costs represents the deferral of net SECA revenue accrued in 2005 and 2006.  SECA revenue and expenses represent FERC-ordered transitional paymentscosts to replace the through-and-out transmission ratesimplement a retail settlement system that were eliminated within the PJM/MISO region.  A hearing was held in early 2006 to determinereconciles the amount of these transitional payments.  Asenergy a competitive retail electric service (CRES) supplier delivers to its customers and what its customers actually use.  Based on case precedent in other utilities’ cases, the cost of March 31, 2007,  no ruling has been issued.  We receivedthis system is recoverable through our next transmission rate case that will be filed at the FERC.  The timing of this case is uncertain at this time.

PJM integration costs include infrastructure costs and paid these transitional payments fromother related expenses incurred by PJM and reimbursed by DP&L to integrate us into the RTO.  Pursuant to a FERC order, the costs are being recovered over a 10-year period beginning May 2005 through March 2006.from wholesale customers within PJM.

6.     Assets Held for SaleRate case expenses

Inrepresent costs incurred in connection with DPLE’s (significant subsidiary of DPL)decision to sell the Greenville StationRate Stabilization Surcharge that was approved by the PUCO and Darby Station electric peaking generation facilities, DPL recorded a $71.0 million impairment charge for the Greenville Station and Darby Station assets during the fourth quarter ofimplemented in January 2006.  Prior to the impairment charge Greenville Station had a net book value of approximately $66 million and Darby Station had a net book of approximately $156 million.  Greenville Station consists of four natural gas peaking units and Darby Station consists of six natural gas peaking units.


These assetscosts are no longer being depreciated.  The assets and liabilities held for sale March 31, 2007 and December 31, 2006 in the Condensed Consolidated Balance Sheets are as follows:

 ($ in millions)

 

 

 

 

 

 

 

Current assets:

 

 

 

Inventories

 

$

0.2

 

 

 

 

 

Property:

 

 

 

Property, plant and equipment

 

$

283.5

 

Less: Accumulated depreciation and amortization

 

(132.3

)

Net property, plant and equipment

 

$

151.2

 

 

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued expenses

 

$

0.2

 

 

 

 

 

 

 

 

 

DPLE completed the sale of these peaking units on April 25, 2007 and received approximately $151.2 million in cash. See Footnote 11 Subsequent Events.

7.     Pension and Postretirement Benefits

We sponsor a defined benefit plan for substantially all 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. We fund pension plan benefits as accrued in accordance with the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA).  In addition, we have a Supplemental Executive Retirement Plan (SERP) for certain active and retired key executives.  Benefits under this SERP have been frozen and no additional benefits can be earned.  Wealso have unfunded liabilities related to retirement benefits for certain active, terminated and retired key executives (not related to our ongoing litigation with three former executives) that include The DPL Inc. Supplemental Executive Defined Contribution Retirement Plan (SEDCRP).  These liabilities totaled approximately $0.8 million at March 31, 2007.

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

The net periodic benefit cost of the pension and postretirement benefit plans for the three months ended March 31, 2007 and 2006 was:


Net periodic benefit cost

$ in millions

 

 

 

Pension

 

Postretirement

 

 

 

2007

 

2006

 

2007

 

2006

 

Service cost

 

$

1.1

 

$

1.1

 

$

 

$

 

Interest cost

 

4.1

 

4.1

 

0.4

 

0.4

 

Expected return on assets (a)

 

(5.5

)

(5.4

)

(0.1

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

Amortization of unrecognized:

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

0.9

 

1.0

 

(0.2

)

(0.2

)

Prior service cost

 

0.6

 

0.6

 

 

 

Transition obligation

 

 

 

 

0.1

 

Net periodic benefit cost before adjustments

 

1.2

 

1.4

 

0.1

 

0.2

 

Special termination benefit cost (b)

 

 

0.3

 

 

 

Net periodic benefit cost after adjustments

 

$

1.2

 

$

1.7

 

$

0.1

 

$

0.2

 


(a) The market-related value of assets is equal to the fair value of assets at implementation with subsequent

asset gains and losses recognized in the market-value systematicallyamortized over a three-yearfive-year period.

Other costs include consumer education advertising regarding electric deregulation and costs pertaining to a recent rate case and are or will be recovered over various periods.

(b) In 2006, a special termination benefit cost was recognized as a result of 16 employees who participated in

a voluntary early retirement program and retired at various dates during 2006; this program was completed

as of April 1, 2006.

21




The following estimated benefit payments, which reflect future service, are expected to be paid as follows:

Estimated Future Benefit Payments

$ in millions

 

Pension

 

Postretirement

 

 

Pension

 

Postretirement

 

2007

 

$       14.5

 

$                  2.0

 

 

$

9.7

 

$

1.3

 

2008

 

$       19.8

 

$                  2.6

 

 

$

19.8

 

$

2.6

 

2009

 

$       20.2

 

$                  2.6

 

 

$

20.2

 

$

2.6

 

2010

 

$       20.7

 

$                  2.5

 

 

$

20.7

 

$

2.5

 

2011

 

$       20.9

 

$                  2.4

 

 

$

20.9

 

$

2.4

 

2012 — 2016

 

$     111.9

 

$                10.0

 

2012 – 2016

 

$

111.9

 

$

10.0

 

 


8.     Stock-Based7.     Share-Based Compensation

ForAs a result of the quarter ended March 31,May 21, 2007 totalsettlement of the litigation with three former executives (see Note 10 of the Notes to the Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, expense was $5.1restricted stock units (RSUs), MVE incentives, stock options and reimbursement of legal fees.  A portion of this settlement included the forfeitures and cancellations of RSUs and stock options of 1.3 million for alland 3.6 million, respectively.

The following table summarizes share-based compensation (stock options, RSUs, restricted shares and performance shares) with an associated tax benefit of $1.8 million.  Compensation expense for the year ended December 31, 2006 was $5.8 million for all share-based compensation and the tax benefit associated with these expenses was $2.1 million.expense:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Stock options

 

$

 

$

0.6

 

$

 

$

1.3

 

Restricted stock units

 

 

(0.2

)

0.1

 

1.2

 

Performance shares

 

0.4

 

0.8

 

0.8

 

0.8

 

Restricted shares

 

0.1

 

 

0.1

 

 

Non-employee directors’ restricted stock units

 

0.1

 

 

0.1

 

 

Share-based compensation included in operations and maintenance expense

 

0.6

 

1.2

 

1.1

 

3.3

 

Income tax expense

 

(0.2

)

(0.4

)

(0.4

)

(1.2

)

Total share-based compensation, net of tax

 

$

0.4

 

$

0.8

 

$

0.7

 

$

2.1

 

Share-based awards issued in DPL’s common stock will be issueddistributed from treasury stock.  DPL believes it has sufficient treasury stock to satisfy all outstanding share-based awards.

Per FAS 123R,Determining Fair Value

Valuation and Amortization Method. We estimate the fair value of stock options and RSUs are valued using a Black-Scholes-Merton model,model; performance shares are valued using a Monte Carlo simulation andsimulation; restricted shares are valued at the market price on the day of grant.grant and the Directors’ RSUs are valued at the market price on the day prior to the grant date.  We amortize the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Volatility. The Company’s expected volatility assumptions are based on the historical volatility of DPL’s stock. The volatility range captures the high and low volatility values for each award granted based on its specific terms.

Expected Life. The expected life assumption represents the estimated period of time from grant until exercise and reflects historical employee exercise patterns.

Risk-Free Interest Rate. The risk-free interest rate for the expected term of the award is based on the corresponding yield curve in effect at the time of the valuation for U.S. Treasury bonds having the same term as the expected life of the award, i.e., a five year bond rate is used for valuing an award with a five year expected life.

Expected Dividend Yield. The expected dividend yield is based on DPL’s current dividend rate, adjusted as necessary to capture anticipated dividend changes and the 12 month average DPL Inc. stock price.

Expected Forfeitures. The forfeiture rate used to calculate compensation expense is based on the Company’s historical experience, adjusted as necessary to reflect special circumstances.


Stock Options

In 2000, DPL’s Board of Directors adopted, and DPL’s shareholders approved, The DPL Inc. Stock Option Plan.  On April 26, 2006, DPL’s shareholders approved The DPL Inc. 2006 Equity and Performance Incentive Plan (EPIP).  With the approval of the EPIP, no new awards will be granted under The DPL Inc. Stock Option Plan, but shares relating to awards that are forfeited or terminated under The DPL Inc. Stock Option Plan may be granted under the EPIP.  There are currently 10,000 unvested stock options outstanding under The DPL Inc. Stock Option Plan that will vest as of December 31,21, 2007.

The schedule of option activity for the threesix months ended March 31,June 30, 2007 was as follows:

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions

 

 

 

Options

 

Fair Value

 

Non-vested at January 1, 2007

 

10,000

 

$                  0.05

 

Granted in first three months 2007

 

 

$                     —

 

Vested in first three months 2007

 

 

$                     —

 

Forfeited in first three months 2007

 

 

$                     —

 

Non-vested at March 31, 2007

 

10,000

 

$                  0.05

 


 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

Options

 

Fair Value

 

Non-vested at January 1, 2007

 

10,000

 

$

0.05

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

10,000

 

$

0.05

 

 

Summarized stock option activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Options:

 

 

 

 

 

Outstanding at beginning of year

 

5,091,500

 

5,486,500

 

Granted

 

 

 

Exercised

 

(520,000

)

(10,000

)

Forfeited (a)

 

(3,620,000

)

 

Outstanding at period-end

 

951,500

 

5,476,500

 

Exercisable at period-end

 

941,500

 

5,416,000

 

 

 

 

 

 

 

Weighted average option prices per share:

 

 

 

 

 

Outstanding at beginning of year

 

$

21.95

 

$

21.86

 

Granted

 

$

 

$

 

Exercised

 

$

26.83

 

$

21.00

 

Forfeited

 

$

20.38

 

$

 

Outstanding at period-end

 

$

24.08

 

$

21.90

 

Exercisable at period-end

 

$

24.07

 

$

20.98

 


(a)  As a result of the settlement of the former executive litigation on May 21, 2007, 3.6 million outstanding options shown above were forfeited in the second quarter of 2007 and another approximately one million disputed options not shown above were also forfeited.

The following table reflects information about stock options outstanding at June 30, 2007:

 

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise
Prices

 

Outstanding

 

Weighted-
Average
Contractual
Life

 

Weighted-
Average
Exercise
Price

 

Exercisable

 

Weighted-
Average
Exercise
Price

 

 

 

 

 

 

 

 

 

 

 

 

 

$14.95 - $21.00

 

625,000

 

3.3 years

 

$

20.60

 

625,000

 

$

20.60

 

$21.01 - $29.63

 

326,500

 

4.0 years

 

$

28.83

 

316,500

 

$

28.93

 


The following table reflects information about stock option activity during the period:

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of options granted during the period

 

$

 

$

 

$

 

$

 

Intrinsic value of options exercised during the period

 

$

1.6

 

$

 

$

2.3

 

$

0.1

 

Proceeds from stock options exercised during the period

 

$

10.6

 

$

 

$

14.5

 

$

0.2

 

Tax benefit from proceeds of stock options exercised

 

$

(0.9

)

$

 

$

0.5

 

$

 

Fair value of shares that vested during the period

 

$

 

$

1.0

 

$

 

$

1.0

 

Unrecognized compensation expense

 

$

 

$

0.2

 

$

 

$

0.2

 

Weighted average period to recognize compensation expense (in years)

 

0.5

 

1.0

 

0.5

 

1.0

 

 

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested stock options at the time of grant:

 

 

Three Months

 

Twelve Months

 

 

 

Ended

 

Ended

 

 

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

Options:

 

 

 

 

 

Outstanding at beginning of year

 

5,091,500

 

5,486,500

 

Granted

 

 

 

Exercised

 

(150,000

)

(355,000

)

Forfeited

 

 

(40,000

)

Outstanding at year-end (a)

 

4,941,500

 

5,091,500

 

Exercisable at year-end

 

4,931,500

 

5,081,500

 

 

 

 

 

 

 

Weighted average option prices per share:

 

 

 

 

 

Outstanding at beginning of year

 

$             21.95

 

$            21.86

 

Granted

 

$                   —

 

$                 —

 

Exercised

 

$             26.43

 

$            21.00

 

Forfeited

 

$                   —

 

$            15.88

 

Outstanding at year-end

 

$             21.79

 

$            21.95

 

Exercisable at year-end

 

$             21.78

 

$            21.94

 


(a)Number of Non-vested Shares

In dispute with certain former executives, among other things, are approximately 1 million forfeited options not included above and 3.6 million outstanding options that are included above.10,000

Date of Grant

December 29, 2004

Expected Volatility

26.1%

Weighted-average expected volatility

26.1%

Expected life (in years)

9.9

Expected dividends

4.7%

Weighted-average expected dividends

4.7%

Risk-free interest rate

4.3%

 

The stockNo options exercised in the first quarter of 2007 were valued at $4.5 milliongranted during 2006 and produced proceeds of $3.9 million.  The market value of options that were vested at March 31, 2007 was approximately $48.5 million.2007.

Restricted Stock Units (RSUs)

 

In addition, RSUs were granted to certain key employees prior to 2001.  As a result of the settlement of the former executive litigation, all disputed RSUs were forfeited by the three former executives.  There were 1.3 million49,998 RSUs outstanding as of March 31,June 30, 2007, of which only $0.1 millionall have not vested. Substantially all of the vested RSUs are in dispute as part of our ongoing litigation with Peter H. Forster, formerly DPL’s Chairman; Caroline E. Muhlenkamp, formerly DPL’s Group Vice President and Interim Chief Financial Officer; and Stephen F. Koziar, Jr., formerly DPL’s Chief Executive Officer and President.  The remaining 0.1 million non-vested RSUs will be paid in cash upon vesting and will vest as follows:  20,097 in the second half of 2007; 14,688 in 2008; 10,205 in 2009; and 5,008 in 2010.  Vested RSUs are marked to market each quarter and any adjustment to compensation expense is recognized at that time.  Non-vested RSUs are valued quarterly at fair value using the Black-Scholes-Merton model to determine the amount of compensation expense to be recognized.  Non-vested RSUs do not earn dividends.

 

 

 

Weighted-Avg.

 

 

 

Number of

 

Grant Date

 

$ in millions (except share amounts)

 

RSUs

 

Fair Value

 

Non-vested at January 1, 2007

 

49,998

 

$

1.2

 

Granted in first half 2007

 

 

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

49,998

 

$

1.2

 

Summarized RSU activity was as follows:

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

RSUs:

 

 

 

 

 

Outstanding at beginning of year

 

1,345,995

 

1,340,912

 

Granted

 

 

 

Exercised

 

 

 

Forfeited

 

(1,295,997

)

 

Outstanding at period-end

 

49,998

 

1,340,912

 

Exercisable at period-end

 

 

 


Compensation expense is recognized each quarter based on the change in the market price of DPL common shares.

As of June 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $1.4 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheets.  The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 to Condensed Consolidated Financial Statements).

The following table shows the assumptions used in the Black-Scholes-Merton model to calculate the fair value of the non-vested RSUs during the respective periods:

 

Three Months Ending

 

Six Months Ending

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

15.7-43.5%

 

7.3-25.4%

 

10.6-43.5%

 

7.3-28.6%

 

Weighted-average expected volatility

 

19.5%

 

19.0%

 

16.6%

 

23.5%

 

Expected life (in years)

 

0.1-3.1

 

0.1-4.1

 

0.1-3.3

 

0.1-4.3

 

Expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Weighted-average expected dividends

 

3.5%

 

3.8%

 

3.5%

 

3.8%

 

Risk-free interest rate

 

4.4-5.0%

 

4.7-5.2%

 

4.4-5.0%

 

4.7-5.2%

 

Performance Shares

 

Under the EPIP, the Board adopted a Long-Term Incentive Plan (LTIP) under which DPL will award a targeted number of performance shares of common stock to executives.  Awards under the LTIP will be awarded based on a Total Shareholder Return Relative to Peers performance.  No performance shares will be earned in a performance period if the three-year Total Shareholder Return Relative to Peers is below the threshold of the 40th percentile.  Further, the LTIP awards will be capped at 200% of the target number of performance shares, if the Total Shareholder Return Relative to Peers is at or above the threshold of the 90th percentile.  The Total Shareholder Return Relative to Peers is considered a market condition under FAS 123R.  There is a three year requisite service period for each tranche of the Performance Shares.


 

The schedule of non-vested performance share activity for the threesix months ended March 31,June 30, 2007 follows:

 

Number of

 

Weighted-Avg.

 

 

 

Performance

 

Grant Date

 

$ in millions (except share amounts)

 

Shares

 

Fair Value

 

Non-vested at January 1, 2007

 

110,723

 

$

2.7

 

Granted in first half 2007

 

74,714

 

2.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

(14,172

)

(0.5

)

Non-vested at June 30, 2007

 

171,265

 

$

4.7

 

 

 

 

Number of

 

Weighted-Avg.

 

 

 

Performance

 

Grant Date

 

$ in millions

 

 

 

Shares

 

Fair Value

 

Non-vested at January 1, 2007

 

110,723

 

$                   2.7

 

Granted in first three months 2007

 

69,184

 

$                   2.4

 

Vested in first three months 2007

 

 

$                    —

 

Forfeited in first three months 2007

 

(14,172

)

$                  (0.5

)

Non-vested at March 31, 2007

 

165,735

 

$                   4.6

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2007

 

2006

 

Performance Shares:

 

 

 

 

 

Outstanding at beginning of year

 

154,768

 

 

Granted

 

74,714

 

223,289

 

Exercised

 

(22,462

)

 

Expired

 

(21,583

)

 

Forfeited

 

(14,172

)

 

Outstanding at period-end

 

171,265

 

223,289

 

Exercisable at period-end

 

 

 

 

 

 

Three Months

 

Twelve Months

 

 

 

Ended

 

Ended

 

 

 

March 31, 2007

 

December 31, 2006

 

Performance Shares:

 

 

 

 

 

Outstanding at beginning of year

 

154,768

 

 

Granted

 

69,184

 

244,423

 

Exercised

 

(22,462

)

 

Expired

 

(21,583

)

 

Forfeited

 

(14,172

)

(89,655

)

Outstanding at end of period

 

165,735

 

154,768

 

Exercisable at end of period

 

 

44,045

 

24




The following table reflects information about performance share activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of performance shares granted during the period

 

$

0.1

 

$

 

$

2.5

 

$

5.9

 

Intrinsic value of performance shares exercised during the period

 

$

 

$

 

$

1.3

 

$

 

Proceeds from performance shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of performance shares exercised

 

$

 

$

 

$

 

$

 

Fair value of performance shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

2.7

 

$

2.0

 

$

2.7

 

$

3.9

 

Weighted average period to recognize compensation expense (in years)

 

1.5

 

1.1

 

1.5

 

1.1

 

 

The performance shares exercisedfollowing table shows the assumptions used in the first quarterMonte Carlo Simulation to calculate the fair value of 2007 were valued at $1.3 million, however, there were no proceeds because performance shares do not have an exercise price.

As of March 31, 2007, there was $3.1 million of total unrecognized compensation cost related to non-vestedthe performance shares granted underduring the LTIP.  We expect to recognize $1.3 million of this cost in 2007, $1.1 million in 2008 and $0.7 million in 2009.  A forfeiture rate of 20% was estimated in calculating the compensation expense.period:

 

Three Months Ending
June 30,

 

Six Months Ending
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Expected Volatility

 

16.1%

 

20.3%

 

16.1-17.3%

 

20.3%

 

Weighted-average expected volatility

 

16.1%

 

20.3%

 

16.5%

 

20.3%

 

Expected life (in years)

 

3.0

 

3.0

 

3.0

 

3.0

 

Expected dividends

 

3.3%

 

3.7%

 

3.3-3.5%

 

3.7%

 

Weighted-average expected dividends

 

3.3%

 

3.7%

 

3.3%

 

3.7%

 

Risk-free interest rate

 

4.7-4.9%

 

4.7%

 

4.5-4.9%

 

4.7%

 

Restricted Shares

 

Under the EPIP, the Board granted shares of DPL Inc. Restricted Shares to various executives.  The Restricted Shares are to be registered in the executive’s name, receive dividends as declared and paid on all DPL common stock and will vest after a specified service period.

During the firstsecond quarter of 2007, 5,00011,400 restricted shares were awarded to two of our executive officers.awarded.

$ in millions (except share amounts)

 

Number of
Restricted
Shares

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

19,000

 

$

0.5

 

Granted in first half 2007

 

16,400

 

0.5

 

Vested in first half 2007

 

 

 

Forfeited in first half 2007

 

 

 

Non-vested at June 30, 2007

 

35,400

 

$

1.0

 

 

 

 

Number of

 

Weighted-Avg.

 

 

 

Performance

 

Grant Date

 

$ in millions

 

 

 

Shares

 

Fair Value

 

Non-vested at January 1, 2007

 

19,000

 

$                 0.5

 

Granted in first three months 2007

 

5,000

 

0.1

 

Vested in first three months 2007

 

 

 

Forfeited in first three months 2007

 

 

 

Non-vested at March 31, 2007

 

24,000

 

$                 0.6

 

 

Three Months

 

Twelve Months

 

 

Ended

 

Ended

 

 

Six Months Ended
June 30,

 

 

March 31, 2007

 

December 31, 2006

 

 

2007

 

2006

 

Restricted Shares:

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of year

 

19,000

 

 

 

19,000

 

 

Granted

 

5,000

 

19,000

 

 

16,400

 

 

Exercised

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Outstanding at end of period

 

24,000

 

19,000

 

Exercisable at end of period

 

 

 

Outstanding at period-end

 

35,400

 

 

Exercisable at period-end

 

 

 

 


Restricted shares do not have an exercise price.

As of March 31, 2007, there was $0.6 million of total unrecognized compensation cost related to non-vestedThe following table reflects information about restricted shares granted under the EPIP.  We expect to recognize $0.1 million of this cost in 2007, $0.2 million in 2008 and $0.3 millionshare activity during the period from 2009 - - 2011.period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of restricted shares granted during the period

 

$

0.4

 

$

 

$

0.5

 

$

 

Intrinsic value of restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from restricted shares exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of restricted shares exercised

 

$

 

$

 

$

 

$

 

Fair value of restricted shares that vested during the period

 

$

 

$

 

$

 

$

 

Unrecognized compensation expense

 

$

0.9

 

$

 

$

0.9

 

$

 

Weighted average period to recognize compensation
expense (in years)

 

2.7

 

 

2.7

 

 

9.     Long-term DebtNon-Employee Director Restricted Stock Units

Under the EPIP, as part of their annual compensation for service to DPL and DP&L, each non-employee Director received a $54,000 retainer in restricted stock units (RSUs) on the date of the annual meeting.  The RSUs will become non-forfeitable on April 15 of the following year but, if the Director resigns, dies or retires prior to the April 15 vesting date, the vested shares will be distributed on a pro rata basis.  The RSUs accrue quarterly dividends in the form of additional RSUs.  Upon vesting, the RSUs will become exercisable and will be distributed in DPL common shares, unless the Director chooses to defer receipt of the shares until a later date.  The RSUs are valued at the closing stock price on the day prior to the grant and the compensation expense is recognized evenly over the vesting period. 

$ in millions (except for share amounts)

 

Number of 
Director
RSUs

 

Weighted-Avg.
Grant Date
Fair Value

 

Non-vested at January 1, 2007

 

 

$

 

Granted in first half 2007

 

13,552

 

0.4

 

Dividends accrued in the first half 2007

 

99

 

 

Vested in first half 2007

 

(3,204

)

(0.1

)

Forfeited in first half 2007

 

(1,553

)

 

Non-vested at June 30, 2007

 

8,894

 

$

0.3

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

Restricted Stock Units:

 

 

 

 

 

Outstanding at beginning of year

 

 

 

Granted

 

13,552

 

 

Dividends accrued

 

99

 

 

Exercised

 

(142

)

 

Forfeited

 

(1,553

)

 

Outstanding at period-end

 

11,956

 

 

Exercisable at period-end

 

 

 


The following table reflects information about non-employee Director RSU activity during the period:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

Weighted average grant date fair value of Director RSUs granted during the period

 

$

0.4

 

$

 

$

0.4

 

$

 

Intrinsic value of Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Proceeds from Director RSUs exercised during the period

 

$

 

$

 

$

 

$

 

Tax benefit from proceeds of Director RSUs exercised

 

$

 

$

 

$

 

$

 

Fair value of Director RSUs that vested during the period

 

$

0.1

 

$

 

$

0.1

 

$

 

Unrecognized compensation expense

 

$

0.3

 

$

 

$

0.3

 

$

 

Weighted average period to recognize compensation expense (in years)

 

0.8

 

 

0.8

 

 


8.     Long-Term Debt and Notes Payable

DPL Inc.

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

$ in millions

 

 

 

2007

 

2006

 

DP&L -

 

First mortgage bonds maturing

 

 

 

 

 

 

2013 - 5.125%

 

$             470.0

 

$            470.0

 

DP&L -

 

Pollution control series maturing

 

 

 

 

 

 

 

2036 - 4.80%

 

100.0

 

100.0

 

DP&L -

 

Pollution control series maturing

 

 

 

 

 

 

through 2034 - 4.78% (a)

 

214.4

 

214.4

 

 

 

 

 

784.4

 

784.4

 

DPL Inc. -

 

Note to Capital Trust II 8.125% due 2031

 

195.0

 

195.0

 

DPL Inc. -

 

Senior Notes 6.875% Series due 2011

 

297.4

 

297.4

 

DPL Inc. -

 

Senior Notes 6.25% Series due 2008

 

100.0

 

100.0

 

DPL Inc. -

 

Senior Notes 8.00% Series due 2009

 

175.0

 

175.0

 

DP&L -

 

Obligations for capital leases

 

1.9

 

2.0

 

Unamortized debt discount (b)

 

(1.9

)

(2.0

)

Total

 

$         1,551.8

 

$         1,551.8

 

$ in millions 

 

 

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L -

 

First mortgage bonds maturing 2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L -

 

Pollution control series maturing 2036 - 4.80%

 

100.0

 

100.0

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L -

 

Pollution control series maturing 2034 - 4.80%

 

41.3

 

41.3

 

DP&L -

 

Pollution control series maturing 2028 - 4.70%

 

35.3

 

35.3

 

 

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

 

 

DPL Inc. -

 

Note to Capital Trust II 8.125% due 2031

 

195.0

 

195.0

 

DPL Inc. -

 

Senior Notes 6.875% Series due 2011

 

297.4

 

297.4

 

DPL Inc. -

 

Senior Notes 6.25% Series due 2008

 

 

100.0

 

DPL Inc. -

 

Senior Notes 8.00% Series due 2009

 

175.0

 

175.0

 

DP&L -

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount (a)

 

(1.8

)

(2.0

)

Total

 

$

1,451.7

 

$

1,551.8

 


(a)

Weighted average interest rate for 2007 and 2006.

(b)

DP&L’s unamortized debt discount was $(1.2) million and $(1.2) million for

March 31,

(a)DP&L’s unamortized debt discount was $(1.2) million and $(1.2) million for June 30, 2007 and December 31, 2006, respectively.

DP&L

 

At

 

At

 

 

 

March 31,

 

December 31,

 

$ in millions

 

 

 

2007

 

2006

 

First mortgage bonds maturing

 

 

 

 

 

2013 - 5.125%

 

$             470.0

 

$            470.0

 

Pollution control series maturing

 

 

 

 

 

2036 - 4.80%

 

100.0

 

100.0

 

Pollution control series maturing

 

 

 

 

 

through 2034 - 4.78% (a)

 

214.4

 

214.4

 

 

 

784.4

 

784.4

 

Obligations for capital leases

 

1.9

 

2.0

 

Unamortized debt discount

 

(1.2

)

(1.2

)

Total

 

$             785.1

 

$            785.2

 


(a)

Weighted average interest rate for quarter ended March 31, 2007 and 2006.

$ in millions

 

At
June 30,
2007

 

At
December 31,
2006

 

DP&L First mortgage bonds maturing   2013 - 5.125%

 

$

470.0

 

$

470.0

 

DP&L Pollution control series maturing   2036 - 4.80%

 

100.0

 

100.0

 

DP&L - Pollution control series maturing 2034 - 4.80%

 

137.8

 

137.8

 

DP&L - Pollution control series maturing  2034 - 4.80%

 

41.3

 

41.3

 

DP&L - Pollution control series maturing  2028 - 4.70%

 

35.3

 

35.3

 

 

 

784.4

 

784.4

 

 

 

 

 

 

 

Obligations for capital leases

 

1.7

 

2.0

 

Unamortized debt discount

 

(1.2

)

(1.2

)

Total

 

$

784.9

 

$

785.2

 

At March 31,June 30, 2007, DPL’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.7$0.4 million for the remainder of 2007, $100.7 million in 2008, $175.8 million in 2009, $0.6 million in 2010 and $297.4 million in 2011.


At March 31,June 30, 2007, DP&L’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.7$0.4 million for the remainder of 2007, $0.7 million in 2008, $0.8 million in 2009, $0.6 million in 2010 and none in 2011.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. 

On August 29, 2005, DPL redeemed $200 million of its 8.25% Senior Notes due 2007.  The remaining $225 million of these notes were retired March 1, 2007, their maturity date.

During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005


volume cap carryforward.  The financing is to be used to partially fund the ongoing flue gas desulfurization (FGD) capital projects.  On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue Bonds 2006 Series A due September 1, 2036.  All funds from this borrowing have been drawn as of April 3, 2007.  In turn, DP&L borrowed these funds from the OAQDA.  These funds were placed in escrow with a trustee and, as of April 3, 2007, DP&L has drawn out the entirety of the funds.

DP&L expects to use the remaining $100 million of volume cap carryforward prior to the end of 2008.  DP&L is planning to issueconsidering issuing in conjunction with the OAQDA another $100 millionseries of tax-exempt bonds to finance the remaining qualifying solid waste disposal facilitiesfacility costs at Miami Fort, Killen Stuart and ConesvilleStuart Generating Stations.

On November 21, 2006, DP&L entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility.  This new agreement has a five-year term that expires November 21, 2011 and provides DP&L with the ability to increase the size of the facility by an additional $50 million at any time.  The facility contains one financial covenant:  DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of March 31,June 30, 2007, DP&L has borrowed $65 million fromhad no borrowings outstanding under this facility for ninety-two days at 5.63%.facility.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest rate.  This revolving credit agreement also contains a $50 million letter of credit sublimit.  DP&L has certain 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.  As of March 31,June 30, 2007, DP&L had no outstanding letters of credit against the facility.

On February 24, 2005,During the second quarter of 2007, DP&L DPLentered into an amendmenta short-term loan to extend the term of its Master Letter of Credit Agreement with a financial lending institution for one year and to reduce the maximum dollar volume of letters of credit to $10 million.  On February 17, 2006, DP&L renewed its $10 million agreement for one year.  In February 2007, DP&L opted not to renew this agreement.

$105 million.  There are no other inter-company debt collateralizations or debt guarantees between DPL, DP&L and their subsidiaries.  None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.


10.9.     Commitments and Contingencies

Contractual Obligations and Commercial Commitments

We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations.  At March 31,June 30, 2007, these include:


Contractual Obligations

 

 

 

 

Payment Year

 

 

 

 

 

Less Than

 

2 - 3

 

4 - 5

 

More Than

 

$ in millions

 

 

 

Total

 

1 Year

 

Years

 

Years

 

5 Years

 

DPL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$     1,549.9

 

$               —

 

$        275.0

 

$          297.4

 

$     977.5

 

Interest payments

 

1,074.3

 

71.8

 

170.7

 

144.0

 

687.8

 

Pension and postretirement payments

 

230.1

 

16.5

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.8

 

0.7

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

467.8

 

246.5

 

110.5

 

110.8

 

 

Limestone contracts

 

58.4

 

1.5

 

9.4

 

10.8

 

36.7

 

Other contractual obligations

 

436.7

 

370.0

 

57.1

 

9.6

 

 

Total contractual obligations

 

$     3,820.7

 

$          707.3

 

$        669.7

 

$          619.8

 

$  1,823.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$        783.2

 

$               —

 

$            —

 

$               —

 

$     783.2

 

Interest payments

 

562.2

 

29.4

 

78.3

 

78.3

 

376.2

 

Pension and postretirement payments

 

230.1

 

16.5

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.8

 

0.7

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

467.8

 

246.5

 

110.5

 

110.8

 

 

Limestone contracts

 

58.4

 

1.5

 

9.4

 

10.8

 

36.7

 

Other contractual obligations

 

436.7

 

370.0

 

57.1

 

9.6

 

 

Total contractual obligations

 

$     2,541.9

 

$          664.9

 

$        302.3

 

$          256.7

 

$  1,318.0

 

 

 

Payment Year

 

$ in millions

 

Total

 

2007

 

2008-2009

 

2010-2011

 

2012-
Thereafter

 

DPL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,550.0

 

$

 

$

275.0

 

$

297.4

 

$

977.6

 

Interest payments

 

1,050.3

 

47.8

 

170.7

 

144.0

 

687.8

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

4,109.4

 

$

694.6

 

$

920.4

 

$

668.2

 

$

1,826.2

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

783.2

 

$

 

$

 

$

 

$

783.2

 

Interest payments

 

552.4

 

19.6

 

78.3

 

78.3

 

376.2

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts(a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

2,844.7

 

$

666.4

 

$

553.0

 

$

305.1

 

$

1,320.2

 


(a)DP&L-operated units

Long-term debt:

DPL’s long-term debt as of March 31,June 30, 2007 consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, DPL unsecured notes and includes current maturities and unamortized debt discounts.

DP&L’s long-term debt as of March 31,June 30, 2007 consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 98 of Notes to Condensed Consolidated Financial Statements.

Interest payments:

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

Pension and postretirement payments:

As of March 31,June 30, 2007, DP&L had estimated future benefit payments as outlined in Note 76 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2015.2016.

Capital leases:

As of March 31,June 30, 2007, DP&L had two capital leases that expire in November 2007 and September 2010.

Operating leases:

As of March 31,June 30, 2007, DPL and DP&L had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88,000 per year related to right-of-way agreements that are assumed to have no definite expiration dates.

Coal contracts:

DP&L 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 and have features that limit price escalation in any given year.


Limestone contracts:

DP&L has entered into variousa limestone contractscontract to supply limestone for its generating facilities.


Reserve for uncertain tax positions:

On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During the second quarter ending June 30, 2007, we recorded an additional $0.9 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.2 million as of June 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.

 

Other contractual obligations:

As of March 31,June 30, 2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

We enter into various commercial commitments, which may affect the liquidity of our operations.  At March 31,June 30, 2007, these include:

Credit facilities:

In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five-year facility that expires on November 21, 2011.  DP&L has the ability to increase the size of the facility by an additional $50 million at any time.  At March 31,June 30, 2007, there was $65 millionwere no outstanding borrowings under this credit agreement due on May 29, 2007 at 5.63% interest.facility.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of March 31,June 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.

In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the pending sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:

$ in millions

 

2007

 

2008

 

2009

 

2010

 

Darby

 

$

30.6

 

$

23.0

 

$

15.3

 

$

7.7

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

$

14.8

 

$

11.1

 

$

7.4

 

$

3.7

 

 

 

2007

 

2008

 

2009

 

2010

 

Darby

 

$         30.6

 

$     23.0

 

$       15.3

 

$         7.7

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

$         14.8

 

$     11.1

 

$         7.4

 

$         3.7

 

 

 

 

 

 

 

 

 

 

 


Contingencies

 

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, tax examinations and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of March 31,June 30, 2007, cannot be reasonably determined.

Employees

Approximately 53% of our employees are under a collective bargaining agreement.

Environmental Matters

 

DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law.  In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  We have 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 two sites pursuant to state and federal laws.  We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  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, we accrue 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.  We evaluate the potential liability related to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations and financial position.

Former Executive Litigation

Cumulatively through March 31, 2007, we have accrued for accounting purposes, obligations of approximately $61 million to reflect claims regarding deferred compensation, estimated MVE incentives and/or legal fees that certain former executives assert are payable per contracts.  We dispute the former executives’ entitlement to any of those sums and are pursuing litigation against them contesting all such claims.


Environmental

In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the Clean Air Act (CAA) and the Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, andthe first set of expert reports arehave been filed with additional reports scheduled to be filed at various times from May throughin September 2007.  Dispositive motions are to be filed in January 2008.  No trial date has been set yet.

On April 2,In February 2007, the U.S. Supreme Court unanimously overturned the rulingsOhio’s Regional Air Pollution Control Agency (RAPCA), issued a Notice of two lower courts and concluded that the CAA’s New Source Review (NSR) requirements are triggered when a major physical or operational change at a facility results in an increase in the facility’s annual emissions (Environmental Defense et al, v. Duke Energy Corp. et al.).  The outcome of this case is significantViolation (NOV) to DP&L because it eliminateswith respect to an allegedly failed performance test of one boiler in November 2006 for particulate matter at DP&L’s Hutchings Generating Station.  On June 29, 2007, the federal Environmental Protection Agency Region V, issued an NOV to DP&L with respect to the same performance test and with respect to earlier tests for particulates conducted in 1996 and 1998 for a different boiler at the same station.  Representatives from DP&L met with officials from EPA Region V and RAPCA on July 24, 2007 to discuss the referenced performance tests, subsequent performance tests, and past and planned operations at the station.  DP&L is unable to predict at this time what further actions, if any, will be taken by the US EPA or RAPCA with respect to these NOVs.

10. Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  As part of this settlement, the three former executives relinquished and dismissed all their claims including those related to certain deferred compensation, RSUs, MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, DPL had accrued obligations of approximately $64.2 million of which DP&L had accrued obligations of approximately $60.3 million.  Included in these amounts is approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled.

As a result of this settlement, DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on


the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

50.8

 

Allocated settlement expense

 

(19.8

)

Net gain from continuing operations

 

$

31.0

 

 

 

 

 

Discontinued operations:

 

 

 

Reversal of accrued obligations

 

$

13.4

 

Allocated settlement expense

 

(5.2

)

Net gain from discontinued operations

 

$

8.2

 

As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ litigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans. DP&L had no ownership of DPL’s discontinued financial asset portfolio business, therefore these liabilities were reversed and DP&L’s net pre-tax gain was recorded within continuing operations. The following table outlines the components of DP&L’s major argumentsnet gain:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

60.3

 

Allocated settlement expense

 

(25.0

)

Net gain from continuing operations

 

$

35.3

 

The $25 million settlement was funded from the sale of financial assets held in the lawsuit filed against it by the Sierra Club .  The Court decided that an annual rateDP&L’s Master Trust Plan for deferred compensation.  As part of emissions could be used to determine if major modifications have been made to a plant as opposed to an hourly emission rate as Duke had argued.  Using the annual rate makes it more likely that most plant modifications will be found to be “major” modifications, thus requiring EPA permits.this transaction, DPL and DP&L can still defend against the allegations of NSR violations if it can establish that the activities at issue did not cause total annual emissions to increase or that the projects that resultedrecorded a $3.2 million realized gain which is reflected in increased emissions were undertaken for routine maintenance, repair and replacement activities.investment income.

11.  Subsequent Events

Sale of Peaking UnitsInsurance Recovery Claim

On April 25,30, 2007, DPL Energy, LLC, completed the sale of its Darby and Greenville electric peaking generation facilities providing DPLDP&L with approximately $151.2 million in cash.  Darby Station was sold to Columbus Southern Power,executed a utility subsidiary of American Electric Power (AEP), for approximately $102 million in cash. Greenville Station was sold to Buckeye Power, Inc. for approximately $49.2 million in cash.

The sale proceeds will be used to pay down short-term borrowings and fund DP&L's major construction projects.

Darby station has a summer capacity of 450 megawatts and is located 20 miles southwest of Columbus, Ohio and Greenville station has a summer capacity of 200 megawatts and is located in Greenville, Ohio. With the closing of these sales, DPL owns approximately 950 megawatts of peaking generation and 2,800 megawatts of coal-fired generation.

Insurance Recovery Claim

On January 13, 2006, we filed a claim againstsettlement agreement with one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against the three former executives for $14.5 million.  This was recorded as a reduction to operation and maintenance expense during the quarter ended June 30, 2007.

On May 16, 2007, DPL and DP&L notified one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a claim for legal fees that DPL and DP&L incurred in defending claims made by the three former executives.

12.  Regulatory Matters

We apply the provisions of SFAS 71 to our regulated operations.  This accounting standard defines regulatory assets as the deferral of costs expected to be recovered in future customer rates and regulatory liabilities as current cost recovery of expected future expenditures.


Regulatory liabilities are reflected on the Condensed Consolidated Balance Sheet under the caption entitled “Other Deferred Credits”.  Regulatory assets and liabilities on the Condensed Consolidated Balance Sheet include:

 

 

 

 

 

 

At

 

At

 

 

 

Type of

 

Amortization

 

June 30,

 

December 31,

 

$ in millions

 

Recovery (a)

 

Through

 

2007

 

2006

 

Regulatory Assets:

 

 

 

 

 

 

 

 

 

Deferred recoverable income taxes

 

C/B

 

Ongoing

 

$

52.0

 

$

53.1

 

Pension and postretirement benefits

 

C

 

Ongoing

 

45.3

 

47.1

 

Electric Choice systems costs

 

F

 

2010

 

11.9

 

13.5

 

Regional transmission organization costs

 

C

 

2014

 

10.7

 

11.4

 

Deferred storm costs

 

C

 

2008

 

3.7

 

5.4

 

PJM administrative costs

 

F

 

2009

 

3.8

 

4.6

 

Power plant emission fees

 

C

 

Ongoing

 

4.3

 

4.5

 

Rate case expenses

 

F

 

2010

 

0.9

 

3.5

 

Retail settlement system costs

 

 

 

 

 

3.1

 

3.1

 

PJM integration costs

 

F

 

2015

 

1.2

 

1.4

 

Other costs

 

 

 

 

 

3.5

 

1.0

 

Total regulatory assets

 

 

 

 

 

$

140.4

 

$

148.6

 

 

 

 

 

 

 

 

 

 

 

Regulatory Liabilities:

 

 

 

 

 

 

 

 

 

Asset retirement obligations - regulated property

 

 

 

 

 

$

88.4

 

$

86.3

 

Postretirement benefits

 

 

 

 

 

7.3

 

7.6

 

SECA net revenue subject to refund

 

 

 

 

 

20.6

 

18.7

 

Total regulatory liabilities

 

 

 

 

 

$

116.3

 

$

112.6

 


(a)

F – Recovery of incurred costs plus rate of return.

C – Recovery of incurred costs only.

B – Balance has an offsetting liability resulting in no impact on rate base.

Regulatory Assets

We evaluate our regulatory assets each period and believe recovery of these assets is probable.  We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates.

Deferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow-through items as the result of amounts previously provided to customers.  Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, deferred recoverable income taxes are amortized.

Pension and postretirement benefits represent the unfunded benefit obligation related to the transmission and distribution areas of our electric business.  We have historically recorded these costs on the accrual basis and this is how these costs have been historically recovered through rates.  This factor, combined with the historical precedents from the PUCO and the FERC, makes future rate recovery of these costs probable.

Electric Choice systems costs represent costs incurred to modify the customer billing system for unbundled rates and electric choice bills relative to other generation suppliers and information reports provided to the state administrator of the low-income electric program.  In February 2005, the PUCO approved a stipulation allowing us to recover certain costs incurred for modifications to its billing system from all customers in its service territory.  We filed a subsequent case to implement the PUCO’s order to begin charging customers for billing costs.  On April 17-18,March 1, 2006, the PUCO issued an order that approved our tariff as filed.  We began collecting this rider immediately, and expect to recover all costs over five years.

Regional transmission organization costs represent costs incurred to join a Regional Transmission Organization (RTO) that controls the receipts and delivery of bulk power within the service area.  These costs are being amortized over a 10-year period that commenced in October 2004.

Deferred storm costs include costs incurred by us to repair damage from December 2004 and January 2005 ice storms.  On July 12, 2006, the PUCO approved our tariff as proposed and we began recovering these deferred costs over a two-year period beginning August 1, 2006.

34




PJM administrative costs contain the administrative fees billed to us by PJM Interconnection, L.L.C. (PJM) as a member of PJM.  Pursuant to a PUCO order issued on January 25, 2006, these deferred costs will be recovered over a 3-year period from retail ratepayers beginning February 2006.

Power plant emission fees represent costs paid to the State of Ohio for environmental monitoring that are or will be recovered over various periods under a PUCO rate rider from customers.

Retail settlement system costs represent costs to implement a retail settlement system that reconciles the amount of energy a competitive retail electric service (CRES) supplier delivers to its customers and what its customers actually use.  Based on case precedent in other utilities’ cases, the cost of this system is recoverable through our next transmission rate case that will be filed at the FERC.  The timing of this case is uncertain at this time.

PJM integration costs include infrastructure costs and other related expenses incurred by PJM and reimbursed by DP&L to integrate us into the RTO.  Pursuant to a FERC order, the costs are being recovered over a 10-year period beginning May 2005 from wholesale customers within PJM.

Rate case expenses represent costs incurred in connection with the Rate Stabilization Surcharge that was approved by the PUCO and implemented in January 2006.  These costs are being amortized over a five-year period.

Other costs include consumer education advertising regarding electric deregulation and costs pertaining to a recent rate case and are or will be recovered over various periods.

Regulatory Liabilities

Asset retirement obligations - regulated property reflect an estimate of amounts recovered in rates that are expected to be expended to remove existing transmission and distribution property from service upon retirement.

Postretirement benefits reflect a regulatory liability that was recorded for the portion of the unrealized gain on our postretirement trust assets related to the transmission and distribution areas of our electric business.  We have historically recorded these transactions on the accrual basis and this is how these costs have historically been recovered through rates.  This factor, combined with the historical precedents from the PUCO and the FERC, make it probable that these amounts will be reflected in future rates.

SECA (Seams Elimination Charge Adjustment) net revenue subject to refund represents the deferral of net SECA revenue accrued in 2005 and 2006.  SECA revenue and expenses represent FERC-ordered transitional payments to replace the through-and-out transmission rates that were eliminated within the PJM/MISO region.  A hearing was held in early 2006 to determine the amount of these transitional payments.  As of June 30, 2007, no ruling has been issued.  We received and paid these transitional payments from May 2005 through March 2006.

13.         Ownership of Facilities

DP&L and other Ohio utilities have undivided ownership interests in seven electric generating facilities and numerous transmission facilities.  Certain expenses, primarily fuel costs for the generating units, are allocated to the owners based on their energy usage.  The remaining expenses, as well as investments in fuel inventory, plant materials and operating supplies, and capital additions, are allocated to the owners in accordance with their respective ownership interests.  As of June 30, 2007, DP&L and AEGIS mediated the issue and reached a settlementhad $425.0 million of construction in which AEGIS agreed to payprogress at such facilities.


DP&L’s undivided ownership interest in such jointly owned facilities at June 30, 2007 is as follows:

 

 

DP&L Share

 

DP&L Investment

 

 

 

Ownership

 

Production
Capacity

 

Gross Plant
in Service

 

Accumulated
Depreciation

 

Construction Work
in Progress

 

 

 

(%)

 

(MW)

 

($ in millions)

 

($ in millions)

 

($ in millions)

 

Production Units:

 

 

 

 

 

 

 

 

 

 

 

Beckjord Unit 6

 

50.0

 

207

 

63

 

53

 

3

 

Conesville Unit 4

 

16.5

 

129

 

34

 

27

 

21

 

East Bend Station

 

31.0

 

186

 

197

 

127

 

1

 

Killen Station

 

67.0

 

424

 

419

 

246

 

150

 

Miami Fort Units 7&8

 

36.0

 

360

 

264

 

101

 

55

 

Stuart Station

 

35.0

 

839

 

383

 

204

 

189

 

Zimmer Station

 

28.1

 

365

 

1,050

 

562

 

6

 

Transmission (at varying percentages)

 

 

 

 

 

90

 

49

 

0

 

DPL’s and DP&L $14.5 million for legal fees incurred by DP&Lshares of operating costs associated with the jointly-owned generating facilities are included within the corresponding line on the Condensed Consolidated Statements of Results of Operations and our litigation against three former executives. The settlement agreement was signed and executed on April 30, 2007.

29




share of the investment in facilities is included in the Condensed Consolidated Balance Sheets.

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

Certain statements contained in this discussionreport are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report that relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements.  Forward-looking statements are based on management’s beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to management.  These statements are not statements of historical fact.fact and are typically identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions.  Such forward-looking statements are subject to risks and uncertainties, and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond ourDPL’s control, including but not limited to: abnormal or severe weather;weather and catastrophic weather-related damage; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, gas and other commodity prices; volatility and changes in markets for electricity and other energy-related commodities; increased competition;competition and deregulation in the electric utility industry; increased competition in the retail generation market; changes in interest rates; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, emission levels, rate structures or tax laws; changes in federal and/or state environmental laws and decisions;regulations to which DPL and its subsidiaries are subject; the development of Regional Transmission Organizations, including the PJM to which DPL’s operating subsidiary has given control of its transmission functions; changes in DPL’s purchasing processes, pricing, delays, contractor and supplier performance and availability; significant delays associated with large construction projects; growth in DPL’s service territory and changes in demand and demographic patterns; changes in accounting rules;rules and the effect of accounting pronouncements issued periodically by accounting standard-setting bodies; financial market conditions; the outcomes of litigation and regulatory investigations, proceedings or inquiries; general economic conditions.conditions; and the risks and other factors discussed in DPL’s filings with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date of the document in which they are made.  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.  We disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking statement to reflect any change in our expectations or any change in events, conditions or circumstances on which the forward-looking statement is based.

The following discussion should be read in conjunction with the accompanying financials and related footnotes included in Part 1 — Financial Information.


BUSINESS OVERVIEW

This report includes the combined filing of DPL Inc. (DPL) and The Dayton Power and Light Company (DP&L).  DP&L is the principal subsidiary of DPL providing approximately 99% of DPL’s total consolidated revenue and approximately 89%93% of DPL’s total consolidated asset base.  Throughout this report the terms we, us, our and ours are used to refer to both DPL and DP&L, respectively and altogether, unless the context indicates otherwise.  Discussions or areas of this report that apply only to DPL or DP&L will clearly be noted in the section.  Historically, DPL and DP&L have filed separate SEC filings.  Beginning with the 2006 Form 10-K and in the future, DPL and DP&L will file combined SEC reports on an interim and annual basis.

DPL is a regional electric energy and utility company and through its principal subsidiary, DP&L, is primarily engaged in the generation, transmission and distribution of electricity in West Central Ohio. DPL and DP&L strive to achieve disciplined growth in energy margins while limiting volatility in both cash flows and earnings, and to achieve stable, long-term growth through efficient operations and strong customer and regulatory relations. More specifically, DPL and DP&L’s strategy is to match energy supply with load or customer demand,demand; maximize profits while effectively managing exposure to movements in energy and fuel pricesprices; and utilize the transmission and distribution assets that transfer electricity at the most efficient cost, while maintaining the highest level of customer service and reliability.

We operate and manage generation assets and are exposed to a number of risks through this management.process. These risks include, but are not limited to, electricity wholesale price risk, fuel supply and price risk and power plant performance.  We attempt to manage these risks through various means. For instance, we operate a portfolio of wholly-owned and jointly-owned generation assets that is diversified as to fuel source, cost structure and operating characteristics. We are focused on the operating efficiency of these power plants and maintaining their availability.

Like other electric utilities and energy marketers, DP&L and DPL Energy, LLC (DPLE, one of our wholly-owned subsidiaries) may sell or purchase electric products on the wholesale market.  DP&L and DPLE compete with other generators, power marketers, privately and municipally-owned electric utilities and rural electric cooperatives when selling electricity.  The ability of DP&L and DPLE to sell this electricity will depend on how DP&L’s and DPLE’s price, terms and conditions compare to those of other suppliers.

We operate and manage transmission and distribution assets in a rate-regulated environment. Accordingly, this subjects us to regulatory risk in terms of the costs that we may recover and the investment returns that we may


collect in customer rates. We are focused on delivering electricity and maintaining high standards of customer service and reliability in a cost-effective manner.

We operate in a regulated and deregulated environment.  The electric utility industry has historically operated in a regulated environment.  However, in recent years, there have been a number of federal and state regulatory and legislative decisions aimed at promoting competition and providing customer choice.  Market participants have therefore created new business models to exploit opportunities.  The marketplace is now comprised of independent power producers, energy marketers and traders, energy merchants, transmission and distribution providers and retail energy suppliers.  There have also been new market entrants and activity among the traditional participants, such as mergers, acquisitions, asset sales and spin-offs of lines of business.  In addition, transmission systems are being operated by Regional Transmission Organizations (RTOs).

As part of Ohio’s electric deregulation law, all of the state’s investor-owned utilities are required to join a RTO.  The role of the RTO is to administer an electric marketplace and ensure reliability of the transmission grid.  In October 2004, DP&L successfully integrated its 1,000 miles of high-voltage transmission into the PJM Interconnection, L.L.C. (PJM) RTO.  The role of the RTO is to administer an electric marketplace and ensure reliability of the transmission grid.  PJM ensures the reliability of the high-voltage electric power system serving 51 million people in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.  PJM coordinates and directs the operation of the region’s transmission grid,grid; administers the world’s largest competitive wholesale electricity marketmarket; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.

As a member of PJM, DP&L is subject to charges and costs associated with PJM operations as approved by the FERC.Federal Energy Regulatory Commission (FERC).  As discussed below, in connection with the recovery of such costs in retail rates, DP&L incurs significant administrative charges.  Additionally, PJM’s role in administering the regional transmission grid and planning regional transmission expansion improvements results in periodic proposals by PJM and other stakeholder members of PJM to the FERC to allocate and charge costs


associated with the transmission system to various entities operating within PJMPJM’s members, including DP&LDP&L and other interested parties have the right to intervene and offer counter-proposals.

UPDATES / OTHER MATTERS

Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  As part of this settlement, the three former executives relinquished and dismissed all their claims including those related to certain deferred compensation, RSUs, MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, DPL had accrued obligations of approximately $64.2 million of which DP&L had accrued obligations of approximately $60.3 million.  Included in these amounts is approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled.

As a result of this settlement, DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to the discontinued operations were associated with the management of DPL’s financial asset portfolio, which was conducted in our MVE subsidiary.  The MVE operations were discontinued in 2005 with the sale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

50.8

 

Allocated settlement expense

 

(19.8

)

Net gain from continuing operations

 

$

31.0

 

 

 

 

 

Discontinued operations:

 

 

 

Reversal of accrued obligations

 

$

13.4

 

Allocated settlement expense

 

(5.2

)

Net gain from discontinued operations

 

$

8.2

 

As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ litigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans. DP&L had no ownership of DPL’s discontinued financial asset portfolio business, therefore these liabilities were reversed and DP&L’s net pre-tax gain was recorded within continuing operations. The following table outlines the components of DP&L’s net gain:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

60.3

 

Allocated settlement expense

 

(25.0

)

Net gain from continuing operations

 

$

35.3

 

The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.  As part of this transaction, DPL and DP&L recorded a $3.2 million realized gain which is reflected in investment income.

Sale of Corporate Aircraft

On June 7, 2007, Miami Valley CTC, Inc. (indirect wholly-owned subsidiary of DPL), sold its corporate aircraft and associated inventory and parts for $7.4 million.  The net book value of the assets being written down and subsequently sold were approximately $1.0 million and severance and other costs of approximately $0.4 million were accrued.  Miami Valley CTC, Inc. recorded a net gain on the sale of approximately $6.0 million for the quarter and the six-month period ended June 30, 2007, which is included in DPL’s operation and maintenance expense.


In relation to this sale, Miami Valley CTC, Inc., placed in escrow approximately $2.2 million. These funds are listed as the caption “Restricted funds held in trust” in the Condensed Consolidated Balance Sheet for DPL.  These funds were released from escrow on July 12, 2007.

Sale of Peaking Units

On April 25, 2007, DPL Energy, LLC, completed the sale of its Darby and Greenville electric peaking generation facilities providing DPL with approximately $151.2$151 million in cash.  Darby Station was sold to Columbus Southern Power Company, a utility subsidiary of American Electric Power Company (AEP), for approximately $102 million in cash. Greenville Station was sold to Buckeye Power, Inc. for approximately $49.2$49 million in cash.

The sale proceeds will be used See Note 5 of the Notes to pay down short-term borrowings and fund DP&L's major construction projects.Condensed Consolidated Financial Statements.

Darby station has a summer capacity of 450 megawatts and is located 20 miles southwest of Columbus, Ohio and Greenville station has a summer capacity of 200 megawatts and is located in Greenville, Ohio. With the closing of these sales, DPL owns approximately 950 megawatts of peaking generation and 2,800 megawatts of coal-fired generation.

Insurance Recovery Claim

On January 13, 2006, we filedApril 30, 2007, DP&L executed a claim againstsettlement agreement with one of our insurers, Associated Electric & Gas Insurance Services (AEGIS), under a fiduciary liability policy to recoup a portion of legal fees associated with our litigation against three former executives.  executives for $14.5 million.  This was recorded as a reduction to operation and maintenance expense during the second quarter ended June 30, 2007.

On April 17-18,May 16, 2007,DPL and DP&L and AEGIS mediated the issue and reachednoticed one of our insurers, Energy Insurance Mutual Limited, under an umbrella fiduciary liability policy, of our intent to pursue a settlement in which AEGIS agreed to payclaim for legal fees that DPL and DP&L $14.5 million for legal fees incurred in defending claims made by the three former executives.

Depreciation Study

Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful life.  For DPL’s and DP&L’s generation, transmission, and distribution assets, straight-line depreciation is applied on an average annual composite basis using group rates. With the addition of scrubbers at certain of its generation facilities, DP&L associated withhas undertaken an evaluation of its depreciation rates which it expects to be completed during the third quarter of 2007. Management expects depreciation rates to decrease due to the extension of depreciation lives for certain of its assets. The Public Utility Commission of Ohio would need to approve a change in depreciation rates for our litigation against three former executives. The settlement agreement was signed and executed on April 30, 2007.regulated assets.

Updates on Competition and Regulation

Ohio Matters

Since January 2001, DP&L’s electric customers have been permitted to choose their retail electric generation supplier.  DP&L continues to have the exclusive right to provide delivery service in its state certified territory.  The Public Utilities Commission of Ohio (PUCO) maintains jurisdiction over DP&L’s delivery of electricity, the standard offer supply service that customers receive if they do not choose an alternative retail electricity supplier, and other rates and charges associated with the provision of retail electric service.

On April 4, 2005, DP&L filed a request with the PUCO to implement a new Rate Stabilization Surcharge (RSS) effective January 1, 2006 to recover cost increases associated with environmental capital, related operations and maintenance costs and fuel expenses.  DP&L entered into a settlement agreement that extended DP&L’s rate stabilization period through December 31, 2010.  During this time, DP&L will continue to provide retail


electric service at fixed rates with the ability to recover increased fuel and environmental costs through surcharges and riders.  Specifically, the agreement provides for:

·                  A rate stabilization surcharge equal to 11% of generation rates beginning January 1, 2006 and continuing through December 2010.  Based on 2004 sales, this rider is expected to result in approximately $65 million in net revenues per year.

·                  A new environmental investment rider beginning January 1, 2007 equal to 5.4% of generation rates, with incremental increases equal to 5.4% each year through 2010.  Based on 2004 sales, this rider is expected to result in approximately $35 million in annual net revenues beginning January 2007, growing to approximately $140 million by 2010.

·                  An increase to the residential generation discount from January 1, 2006 through December 31, 2008, which is expected to result in a revenue decrease of approximately $7 million per year for three years, based on 2004 sales.  The residential discount is accounted for in the $65 million net revenue stated above and will expire on December 31, 2008.

On December 28, 2005, the PUCO adopted the settlement with certain modifications (RSS Stipulation).  The PUCO ruled that the environmental rider will be bypassable by all customers who take service from alternate generation suppliers.  Thus, future additional revenues are dependent upon actual sales and levels of customer switching.  Applications for rehearing were denied and the case was appealed to the Ohio Supreme Court by the Ohio Consumers’ Counsel.  Oral argument was heard by the Supreme Court on April 17, 2007.  The Company cannot predict whether the Ohio Supreme Court will affirm the PUCO’s approval of the RSS Stipulation, affirm it in part subject to modifications, or reject it.  The decision of the Ohio Supreme Court is pending.

As of March 31,June 30, 2007, four unaffiliated marketers were registered as Competitive Retail Electric ServicesService (CRES) providers in DP&L’s service territory.  While there has been some customer switching to date, it represented less than 0.15 percent of sales in 2006.  DPL Energy Resources, Inc. (DPLER), an affiliated company, is also a registered CRES provider and accounted for nearly all of the total kWh supplied by CRES providers within DP&L’s service territory in 2006.  In addition, several communities in DP&L’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 their generation load.

DP&L agreed to implement a Voluntary Enrollment Program (VEP) that would provide customers with an option to choose a competitive supplier to provide their retail generation service should switching not reach 20% in each customer class.  The 20% threshold has never been reached.  Customers who elected to participate in the program have been grouped together and collectively bid out to CRES providers.  The firstsecond of four rounds of bidding for the 2007 program was conducted in AprilJune resulting in no bids being received.  To date, the VEP process has resulted in zerono customer switching.  Future period effects cannot be determined at this time.

On August 28, 2006, the Staff of the PUCO issued a report relating to compliance with the Federal Energy Policy of 2005.  In that report the Staff made recommendations to the Commission to implement new rules and procedures relating to net metering, customer generator interconnection, stand by power, time-of-use rates and renewable energy portfolio standards.  DP&L, among others, filed comments and reply comments.  On March 28, 2007, the PUCO issued a Finding and Order that established new requirements for Ohio investor owned utilities related to distribution interconnection standards and net metering programs.  It initiates further discussions at the Commission on topics such as renewable energy standards, fuel source requirements, automated meter infrastructure and time differentiated rate options for customers.  DP&L cannot predict the potential cost that may be associated with any new regulations that may be adopted as a result of these proceedings.

On April 3, 2007, the PUCO issued proposed revisions to the Commission’s minimum electric service and safety standards.  These rules govern a variety of utility operations such as maintenance programs, new construction, meter reading and distribution circuit performance.  The proposed changes impact customer service requirements, reliability reporting and distribution inspection and maintenance programs, as well as increase the penalty the Commission may invoke if a utility is found to be in violation of these rules.  DP&L may experience an increase in distribution operation and maintenance expense associated with the new rules.  However, the  amount of said increase is unknown at this time.  The Company and other stakeholders will have an opportunity to offer comments and reply comments prior to finalization of the new rules.


Federal Matters

On April 19, 2007, the FERC issued an Order with regard to the allocation of costs associated with new planned transmission facilities.  FERC ordered that the cost of new, high-voltage facilities be socialized across the PJM region and the costs of new facilities at lower voltages be assigned to the load centers that benefit from the new facilities.  The methodology for identifying beneficiaries has been set for hearing.  Also onOn April 19, 2007, the FERC issued an Order relating to the allocation of costs associated with existing transmission facilities, upholding the existing PJM rate design.  These Orders are subject to rehearing and the appeal process.  DP&L is currently evaluating the potentialThe financial impactsimpact of the Orders.order to socialize new, high-voltage facilities will be passed on as costs are incurred by utilities


constructing such projects and will be reflected in PJM charges to DP&L.  Over time, this order is likely to increase PJM charges to DP&L.  Although the impact of cost allocation could be material, management believes these costs should be recoverable through retail rates.

As a member of PJM, the value of DPL’sDP&L’s generation capacity will be affected by changes in and the clearing results of the PJM capacity construct.  The new construct introduces a new Reliability Pricing Model (RPM) that will changechanges the way generation capacity is priced and planned for by PJM. DP&L, along with most of the parties relating to the case, entered into a settlement agreement that generally retains the RPM concept as proposed by PJM, with certain modifications.  The settlement was approved by the FERC on December 21, 2006.  PJM held its first RPM auction induring April 2007 for the 2007/2008 planning year and held its second RPM auction during July 2007 for the 2008/2009 planning year.  DP&L does not expect anya material changes in forecastedimpact on its results of operations, financial resultsposition or cash flows due to the outcome of this auction.  Additional auctionsthese auctions.  An additional auction will be held during 2007 for the 2008/2009 and 2009/2010 planning years.year.  The financial results and impact of these auctionsthis auction is unknown and will depend on a number of factors including projections made by PJM as well as market participant bidding behavior.


DP&L provides transmission and wholesale electric service to thirteen municipal customers in its service territory.  Municipalities, in turn, distribute electricity principally within their incorporated limits.  Approximately 1% of total electricity sales in 2006 represented sales to these municipalities.

ENVIRONMENTAL CONSIDERATIONS

DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and laws.  In the normal course of business, we have investigatory and remedial activities underway at these facilities to comply, or to determine compliance, with such regulations.  We record liabilities for probable estimated loss in accordance with Statement of Financial Accounting Standards No. 5 (SFAS 5), “Accounting for Contingencies.”  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, we accrue 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. DPL,, through its captive insurance subsidiary, MVIC, has an actuarial calculated reserve for environmental matters.   We evaluate the potential liability related to probable losses quarterly and may revise our estimates.  Such revisions in the estimates of the potential liabilities could have a material effect on our results of operations, financial position or cash flows.

DP&L’s coal-fired units are subject to the acid rain provisions of the Clean Air Act and the NOx and Ozone Transport rule.   All of the SO2 and NOx emissions data submitted to the United States Environmental Protection Agency (USEPA), pursuant to these provisions, for 2005 and the first quarter of 2006 were recorded and reported in compliance with USEPA regulations.  Subsequently, DP&L detected a malfunction with its emission monitoring system at one of its generation stations and ultimately determined its SO2 and NOx emissions data were under reported.  DP&L has petitioned the USEPA to accept an alternative methodology for calculating actual emissions for 2005 and the first quarter of 2006.  DP&L has sufficient allowances in its general account to cover the understatement and is working with the USEPA to resolve the matter.  Management does not believe the ultimate resolution of this matter will have a material impact on operating results or financial position.

Environmental Regulation and Litigation Related to Air Quality

Regulation Proceedings – Air

On July 15, 2003, the Ohio EPA submitted to the USEPA its recommendations for eight-hour ozone non-attainment boundaries for the metropolitan areas within Ohio.  On April 15, 2004, the USEPA issued its list of ozone non-attainment designations.  DP&L owns and/or operates a number of facilities in counties designated as non-attainment with the ozone national ambient air quality standard.  DP&L does not know at this time what future regulations may be imposed on its facilities and will closely monitor the regulatory process.  Ohio EPA will develop regulations to attain and maintain compliance with the eight-hour ozone national ambient air quality


standard.  Numerous parties have filed petitions for review.  DP&L cannot predict the outcome of USEPA’s reconsideration petitions.

In February 2007, the Ohio EPA, Regional Air Pollution Control Agency, issued a Notice of Violation (NOV) to DP&L with respect to an allegedly failed performance test in November 2006 for particulate matter at DP&L’s Hutchings Station.  The EPA requested additional data, proposed that a retest be made of two boilers at Hutchings Station and noted that any decision to seek penalties would be made at another time.  DP&L has responded to the NOV noting that a retest taken in December 2006 demonstrated that the November results were not representative of normal operations and proposing that all boilers at Hutchings Station be tested again in June 2007. We believed any penalties assessed related to this matter will be immaterial to our results of operations, financial position or cash flows.

Environmental Regulation and Litigation Related to Water Quality

On July 9, 2004, the USEPA issued final rules pursuant to the Clean Water Act governing existing facilities that have cooling water intake structures.  The rules require an assessment of impingement and/or entrainment of organisms as a result of cooling water withdrawal.  A number of parties appealed the rules to the Federal Court of Appeals for the Second Circuit in New York and the Court issued an opinion on January 25, 2007 remanding several aspects of the rule to USEPA for reconsideration.  On March 20, 2007, USEPA issued a memorandum regarding the agency’s implementation of this opinion stating that, because so many provisions of the rules had been remedied, the rule should be suspended.  We are undertaking studies at two facilities but cannot predict the impact such studies may have on future operations, the outcome of the remanded rulemaking or how Ohio EPA will implement the USEPA memorandum.

FINANCIAL OVERVIEW

As more fully discussed in later sections of this Form 10-Q, the following were the significant themes and events for the first quarter ofand six months ended June 30, 2007:

·                  DPL’s revenues for the threequarter and six months ended March 31,June 30, 2007 increased 11% and 11%, respectively, over the same periodperiods in 2006 mainlyprimarily due to colder weather driven retail sales volume, the rate stabilization surcharge and other regulated asset recovery riders, which began in the first quarter of 2006, improving gross margin and profitability.riders.  DPL’s fuel, purchased power costs for the quarter and operation and maintenancesix months ended June 30, 2007 increased $46.2 million and $73.1 million, respectively, over the first quarter of 2006 by $6.1 million, $26.9 million and $6.9 million, respectively.same periods in 2006.  The increase in purchasepurchased power volume was primarily the result of higher sales volume and DPL and partner operated generating facilities being unavailableless available than the same period of the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.

·                  DPL’s cash flows from operations for the threesix months ended March 31,June 30, 2007 of $97.1$112.4 million was 6% higherwere 16% lower than the cash flows from operations of $91.6$133.4 million for the same period of 2006.2006 primarily due to changes in working capital.

·DPL realized a net (pre-tax) gain in both continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively, resulting from the $25.0 million settlement of the litigation with the three former executives.  See note 10 of the Notes to Condensed Consolidated Financial Statements.

·                  DP&L’s revenues for the first quarter ofand six months ended June 30, 2007 increased 11% overand 11%, respectively, compared to the first quarter ofsame periods in 2006 resulting from the colder weather driven sales volume, rate stabilization surcharge and other regulated asset recovery riders which began in the first quarter of 2006 improving gross margin and profitability.riders.  DP&L’s fuel, purchased power costs for the quarter and operationsix months ended June 30, 2007, increased $45.4 million and maintenance increased$72.5 million, respectively, over the first quarter of 2006 by $5.6 million, $27.1 million and $5.2 million, respectively.same periods in 2006.  The increase in purchasepurchased power volume was primarily the result of higher sales volume and DP&L and Partnerpartner operated generating facilities being unavailableless available than the same period of the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.

·                  DP&L’s cash flows from operations for the threesix months ended March 31,June 30, 2007 of $137.0$137.9 million was 5%were 21% lower than the cash flows from operations of $143.5$175.2 million for the same period in 2006.2006 primarily due to changes in working capital.

·                  On February 26, 2007, DP&L borrowed $65realized a net (pre-tax) gain of approximately $35.3 million resulting from the settlement of the litigation with the three former executives.  See Note 10 of the Notes to Condensed Consolidated Financial Statements.

·DP&L had borrowings against the $220 million unsecuredrevolving line of credit facility of $65 million from February 26, 2007 through May 28, 2007 and of $30 million from April 12, 2007 through May 13, 2007.  At June 30, 2007, there were no outstanding borrowings against the revolving credit facility.

34





RESULTS OF OPERATIONS – DPL Inc.

DPL’s results of operations include the results of its subsidiaries, including the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries.  DP&L provides approximately 99% of the total revenues of DPL.  All material intercompany accounts and transactions have been eliminated in consolidation.  A separate specific discussion of the results of operations for DP&L is presented elsewhere in this report.

Financial Highlights - DPL

 

Three Months Ended

 

 

March 31,

 

 

Three Months Ended
June 30, 

 

Six Months Ended
June 30,

 

$ in millions

 

 

 

2007

 

2006

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

Retail

 

$

304.5

 

$

283.3

 

 

$

284.2

 

$

258.2

 

$

588.7

 

$

541.5

 

Wholesale

Wholesale

 

56.7

 

37.4

 

 

30.4

 

30.5

 

87.1

 

67.9

 

RTO ancillary

RTO ancillary

 

15.7

 

17.7

 

 

25.8

 

17.4

 

41.5

 

35.1

 

Other revenues, net of fuel costs

Other revenues, net of fuel costs

 

2.8

 

2.7

 

 

2.7

 

2.9

 

5.5

 

5.6

 

Total revenues

Total revenues

 

$

379.7

 

$

341.1

 

 

$

343.1

 

$

309.0

 

$

722.8

 

$

650.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: Fuel

Less: Fuel

 

$

90.3

 

$

84.2

 

 

$

63.5

 

$

78.6

 

$

153.8

 

$

162.8

 

Purchased power (a)

Purchased power (a)

 

52.2

 

25.3

 

 

83.2

 

37.0

 

135.4

 

62.3

 

Gross margins (b)

Gross margins (b)

 

$

237.2

 

$

231.6

 

 

$

196.4

 

$

193.4

 

$

433.6

 

$

425.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margins as a percentage of

 

 

 

 

 

revenues

 

62.5

%

67.9

%

Gross margins as a percentage of revenues

 

57.2

%

62.6

%

60.0

%

65.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

Operating income

 

$

103.5

 

$

103.2

 

 

$

69.4

 

$

55.9

 

$

172.9

 

$

159.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic Earnings per share:

 

 

 

 

 

 

 

 

 

Continuing operations

Continuing operations

 

$

0.48

 

$

0.43

 

 

$

0.50

 

$

0.20

 

$

0.98

 

$

0.63

 

Discontinued operations

Discontinued operations

 

0.04

 

0.06

 

 

0.04

 

 

0.09

 

0.07

 

Net income

Net income

 

$

0.52

 

$

0.49

 

 

$

0.54

 

$

0.20

 

$

1.07

 

$

0.70

 


(a)

Purchased power includes RTO ancillary charges of $17.0 million and $12.1 million for the quarter ended June 30, 2007 and 2006, respectively. Purchased power includes RTO ancillary charges of $29.4 million and $24.3 million for the six months ended June 30, 2007 and 2006, respectively.

(b)

For purposes of discussing operating results, we present and discuss gross margins. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.

(a)Purchased power includes RTO ancillary charges of $12.4 million and $12.2 million for the three months ended 2007 and 2006, respectively.

(b)For purposes of discussing operating results, we present and discuss gross margins. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.


DPL Inc. – Revenues

Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, DPL’s retail sales volume is impacted by the number of heating and cooling degree days occurring during a year.  Since DPL plans to utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa.

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DPL’s wholesale sales volume each hour of the year include wholesale market prices, DPL’s retail demand, retail demand elsewhere throughout the entire wholesale market area, DPL and non-DPL plants’ availability to sell into the wholesale market and weather conditions across the multi-state region. DPL’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities not being utilized to meet its retail demand.


 

 

Three Months Ended

 

 

March 31,

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

$ in millions

 

 

 

2007 vs. 2006

 

 

2007 vs. 2006

 

2007 vs. 2006

 

 

 

 

 

 

 

 

 

Retail

 

 

 

 

 

 

 

 

Rate

Rate

 

$

6.2

 

 

$

11.5

 

$

17.8

 

Volume

Volume

 

15.1

 

 

15.4

 

30.5

 

Other miscellaneous

Other miscellaneous

 

(0.1

)

 

(0.9

)

(1.1

)

Total retail change

Total retail change

 

$

21.2

 

 

$

26.0

 

$

47.2

 

 

 

 

 

 

 

 

 

Wholesale

Wholesale

 

 

 

 

 

 

 

 

Rate

Rate

 

$

5.5

 

 

$

5.4

 

$

11.1

 

Volume

Volume

 

13.8

 

 

(5.5

)

8.1

 

Total wholesale change

Total wholesale change

 

$

19.3

 

 

$

(0.1

)

$

19.2

 

 

 

 

 

 

 

 

 

RTO ancillary & other

 

 

 

Other

 

 

 

 

 

RTO services

RTO services

 

$

(2.0

)

 

$

8.4

 

$

6.4

 

Other

Other

 

0.1

 

 

(0.2

)

(0.1

)

Total other revenues change

 

$

8.2

 

$

6.3

 

 

 

 

 

 

Total revenues change

Total revenues change

 

$

(1.9

)

 

$

34.1

 

$

72.7

 

 

 

 

Total revenues

 

$

38.6

 

 

For the quarter ended March 31,June 30, 2007, revenues increased $38.6$34.1 million, or 11% to $379.7$343.1 million from $341.1$309.0 million for the same period in the prior year.  This increase was primarily the result of higher average rates for retail and wholesale, higher retail sales volume and an increase in RTO ancillary revenue.  Retail revenues increased $26.0 million, or 10%, resulting from a 6% increase in weather driven sales volume as total degree days increased 18% and a 4% increase in average retail rates related to the Rate Stabilization Plan surcharge and other regulated asset recovery riders.  These increases resulted in a $15.4 million sales volume variance and a $11.5 million price variance.  Wholesale revenue remained flat for the second quarter of 2007 compared to the same period of the prior year resulting from lower wholesale sales volume, partially offset by higher average market rates.  The decrease in wholesale sales volume of 123 GWh resulted in an unfavorable sales volume variance of $5.5 million which was partially offset by a 22% increase in average market rates resulting in $5.4 million price variance.  For the second quarter of 2007, the RTO ancillary revenues increased $8.4 million compared to the second quarter of 2006 primarily resulting from $4.3 million realized from the PJM capacity auction, $1.8 million of PJM transmission congestion credits and $1.0 million from the sale of financial transmission rights (FTRs). RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves.  These revenues are substantially offset by RTO ancillary charges included in purchased power costs.

For the six months ended June 30, 2007, revenues increased $72.7 million, or 11% to $722.8 million from $650.1 million for the same period in the prior year.  This increase was primarily the result of higher average rates and sales volume for both retail and wholesale.  Retail revenues increased $21.2$47.2 million resulting from a 5%6% increase in weather driven sales volume driven by colder weatheras total degree days increased 16% and a 2%3% increase in average retail rates related to the Rate Stabilization Plan surcharge and other regulated asset recovery riders.  These increases resulted in a $15.1$30.5 million sales volume variance and a $6.2$17.8 million price variance for retail revenues.  Wholesalevariance.  For the six months ended June 30, 2007, wholesale revenue increased $19.3$19.2 million forover the first quartersame period of 2007the prior year primarily as a result of a 37%12% increase in sales volume (301(178 GWh) and an 11%a 15% increase in wholesale average rates.  These increases resulted in a $13.8an $11.1 million sales volume variance and a $5.5an $8.1 million price volume variance for wholesale revenues.  For the first quarter ofsix months ended June 30, 2007, the RTO ancillary revenues decreased $2.0 million, or 11%, to $15.7increased $6.4 million compared to the first quartersame period in 2006 primarily resulting from $4.3 million realized from the PJM capacity auction, $1.8 million of 2006.PJM transmission congestion credits and $2.4 million from the sale of financial transmission rights (FTRs), partially offset by an adjustment of $2.8 million for Seams Elimination Cost Adjustment (SECA).  RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves.  These revenues are substantially offset by RTO ancillary charges included in purchased power costs.

DPL Inc. – Margins, Fuel and Purchased Power

For the firstsecond quarter of 2007, gross margin of $237.2$196.4 million increased $5.6$3.0 million, or 2%, from $231.6$193.4 million in the firstsecond quarter of 2006.  As a percentage of total revenues, gross margin decreased to 62.5%57.2% in


the second quarter of 2007 compared to 67.9%62.6% in the second quarter of 2006.  This result reflects the favorable impact of the rate stabilization plan onincrease in retail revenues and lower fuel costs, offset by increased fuel and purchasepurchased power costs.  Fuel costs, which include coal, gas, oil and emission allowance costs, increaseddecreased by $6.1$15.1 million, or 7%19%, in the firstsecond quarter of 2007 compared to the same period in 2006 primarily due to increasedlower average fuel prices and highera 16% (629 GWh) decrease in generation output.  Purchased power increased $26.9$46.2 million in the firstsecond quarter of 2007 compared to the same period in 2006 primarily resulting from increased charges of $22.3$34.5 million relating to higher purchased power volume (685 GWh) and $4.4$6.9 million increase due to higher average market rates.  The increase in purchasepurchased power volume was primarily the result of DPLincreased sales volume and partner operated generating facilities being unavailableless available compared to the same period of the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.


For the six months ended June 30, 2007, gross margin of $433.6 million increased $8.6 million, or 2%, from $425.0 million compared to the same period in 2006.  As a percentage of total revenues, gross margin decreased to 60.0% in 2007 compared to 65.4% in 2006.  This result reflects the favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs.  Fuel costs, which include coal, gas, oil and emission allowance costs, decreased by $9.0 million, or 6%, for the six months ended June 30, 2007 compared to the same period in 2006 primarily due to a 7% decrease in generation output (580 GWh), partially offset by an increase in average fuel prices.  Purchased power increased $73.1 million for the six months ended June 30, 2007 compared to the same period in 2006 primarily resulting from increased charges of $56.9 million relating to higher purchased power volume (1,148 GWh) and $11.1 million increase due to higher average market rates.  The increase in purchased power volume was primarily the result of increased sales volume and partner operated generating facilities being less available compared to the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.

DPL Inc. - - Operation and Maintenance

 

Three Months Ended

 

 

Three Months Ended

 

Six Months Ended

 

 

March 31,

 

 

June 30,

 

June 30,

 

$ in millions

 

 

 

2007 vs. 2006

 

 

2007 vs. 2006

 

2007 vs. 2006

 

Legal costs

Legal costs

 

$

4.0

 

 

$

0.3

 

$

4.3

 

Mark-to-market adjustments of restricted stock units (RSUs)

Mark-to-market adjustments of restricted stock units (RSUs)

 

2.8

 

 

(0.5

)

2.3

 

Power production costs

Power production costs

 

2.4

 

 

12.0

 

14.2

 

Service operations

Service operations

 

1.9

 

 

1.3

 

1.9

 

Low-Income Assistance Program costs

 

0.4

 

Long-term and other incentive compensation

Long-term and other incentive compensation

 

(2.5

)

 

 

(2.5

)

Expenses for injuries and damages

 

(1.3

)

Pension and benefits

 

(0.9

)

RTO administrative fees

 

(0.8

)

MVIC reserve adjustment

 

(2.0

)

(2.0

)

Insurance settlement

 

(14.5

)

(14.5

)

Gain on sale of corporate aircraft

 

(6.0

)

(6.0

)

Other, net

Other, net

 

0.9

 

 

0.3

 

0.1

 

Total operation and maintenance expense

Total operation and maintenance expense

 

$

6.9

 

 

$

(9.1

)

$

(2.2

)

 

For the three monthsquarter ended March 31,June 30, 2007, operation and maintenance expense increased $6.9decreased $9.1 million, or 11%13%, compared to the same period in 2006 primarily resulting from a $4.0$14.5 million increase ininsurance settlement reimbursing us for legal fees relating to the litigation with the three former executives, the gain on the sale of the corporate aircraft of $6.0 million and an actuarial adjustment reducing our MVIC reserve by $2.0 million, partially offset by increased power production costs largely related to boiler maintenance of $6.6 million and other power production maintenance costs of $5.4 million.

For the six months ended June 30, 2007, operation and maintenance expense decreased $2.2 million, or 2%, compared to the same period in 2006 primarily resulting from a $14.5 million insurance settlement reimbursing us for legal fees relating to the litigation with the three former executives, the gain on sale of the corporate aircraft of $6.0 million and an actuarial adjustment of $2.0 million, partially offset by increased power production costs largely related to boiler maintenance of $7.1 million and other power production maintenance costs of $7.1 million and increased legal costs of $4.3 million related to the litigation with the three former executives; a $2.8 million increase in mark-to-market adjustments of restricted stock units; a $2.4 million increase in power production costs primarily reflecting higher boiler maintenance and plant operating expenses; a $1.9 million increase in service operation costs resulting primarily from two major ice storms in February 2007; and Low-Income Assistance Program costs of $0.4 million.  These increases were partially offset by a $2.5 million decrease in long-term and other incentive compensation; a $1.3 million decrease in expenses for injuries and damages; a $0.9 million decrease in pension and benefits expenses; and a $0.8 million decrease in RTO administrative fees.executives.

DPL Inc. – Depreciation and Amortization

For the first quarter ofand six months ended June 30, 2007, depreciation and amortization expense decreased $3.4$2.7 million and $6.1 million, respectively, compared to the first quarter ofsame periods in 2006 primarily reflecting the absence of depreciation on the peaking units, the corporate aircraft becoming fully depreciated and the impact of asset retirements.  These decreases were partially offset by increased depreciation relating to the increased plant balances.


DPL Inc. Amortization of Regulatory Assets

For the first quarter ofand six months ended June 30, 2007, amortization of regulatory assets increased $1.8$0.8 million to $2.9and $2.6 million, respectively, compared to the same period in 2006.  The increase reflectsThese increases reflect the amortization of costs incurred to accommodate unbundled rates and electric choice bills in the customer billing system; the amortization of PJM administrative fees deferred for the period October 2004 through January 2006; and the amortization of incremental 2004/2005 severe storm costs.

DPL Inc. Investment Income

For the quarter ended June 30, 2007, investment income increased $0.8 million to $5.3 million from $4.5 million for the same period in 2006.  This increase was primarily the result of $3.2 million realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for the settlement payment to the three former executives, partially offset by lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006.

For the six months ended March 31,June 30, 2007, investment income decreased $3.4$2.6 million to $3.0$8.3 million from $6.4$10.9 million for the same period in 2006.  This decrease was primarily the result of lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006.2006, partially offset by $3.2 million realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for the settlement payment to the three former executives.

DPL Inc. – Interest ExpenseNet Gain on Settlement of Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  In exchange for a payment of $25 million, the three former executives relinquished and dismissed all of their claims including those related to deferred compensation, RSUs, MVE incentives, stock options and legal fees.  As a result of this settlement, DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $39.2 million.  See Note 10 of Notes to Condensed Consolidated Financial Statements.

DPL Inc. Interest Expense

For the quarter ended June 30, 2007, interest expense for the first quarter of 2007 decreased $3.2$6.5 million or 12%,25% compared to the same period in 2006 resultingprimarily from lower interest of $4.6 million associated with the redemption of DPL $225debt ($225 million 8.25% Senior Notes, the eliminationNote) and $2.9 million of the interest penalty on the DPL $175 million 8% Senior Notes resulting from the delayed exchange offer registration of those securities and a highergreater capitalized interest of $2.8 million inthan the first quarter of 2007 comparedprior year mostly relating to 2006 associated with our major construction projects.increased pollution control capital expenditures.  These decreases were partially offset by $1.2 million of interest expense associated with DP&L’s new $100 million 4.8% Series pollution control bonds issued September 13, 2006.

For the six months ended June 30, 2007, interest expense decreased $9.7 million or 19% compared to 2006 primarily from $5.7 million of greater capitalized interest than the prior year mostly relating to increased pollution control capital expenditures; and lower interest of $6.2 million from redemption of DPL debt ($225 million 8.25% Senior Note).  These decreases were partially offset by $2.4 million of interest expense associated with DP&L’snew $100 million 4.8% Series pollution control bonds issued September 13, 2006 and the $65$1.1 million of short-term borrowing againstinterest expense associated with DP&L’s $220short-term borrowing of $95 million from its unsecured revolving credit facility.agreement of $220 million.


DPL Inc. Other Income (deductions)(Deductions)

For the threequarter ended June 30, 2007, other deductions of $0.2 million changed from $0.6 million of other income in 2006 primarily resulting from a refund of tax penalties in 2006.

For the six months ended March 31,June 30, 2007, other income (deductions) was $1.1of $0.6 million higher than the same periodincreased from $0.3 million of other income in 2006 primarily due to gains of $0.7 million realized in the first quarter of 2007resulting from the sale of NOx allowances.  There were no sales of pollution control emission allowances duringand gains realized on the expiration of forward contracts partially offset by a refund of tax penalties in 2006.

DPL Inc. – Income Tax Expense

For the firstsecond quarter ofand six months ended June 30, 2007, income taxes increased $1.3$20.0 million or 4%,and $21.3 million, respectively, compared to the same periodperiods in 2006, primarily reflecting an increase in pre-tax book income.

DPL Inc. – Discontinued Operations

For the quarter ended June 30, 2007, discontinued operations increased $5.1 million compared to the same period in 2006, primarily resulting from the net (pre-tax) gain of $8.2 million realized from the settlement of the litigation with the three former executives less associated income and antaxes.


For the six months ended June 30, 2007, discontinued operations increased $2.4 million compared to the same period in 2006 primarily resulting from the net (pre-tax) gain of $8.2 million realized from the settlement of the litigation with the three former executives less associated income taxes.  This increase in the accrual for open tax years,was partially offset by a decrease in the effective tax rate resulting fromdeferred gains of $5.0 million relating to the phase-outfinancial asset portfolio realized during 2007 compared to the same period of the Ohio Franchise Tax.prior year less associated income taxes.

See Note 3 and Note 10 of the Notes to Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS – The Dayton Power and Light Company (DP&L)

Income Statement Highlights – DP&L

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Retail

 

$

246.3

 

$

225.7

 

$

518.1

 

$

476.7

 

Wholesale

 

69.0

 

63.7

 

159.0

 

134.1

 

RTO ancillary

 

25.9

 

17.3

 

41.6

 

35.0

 

Total revenues

 

$

341.2

 

$

306.7

 

$

718.7

 

$

645.8

 

 

 

 

 

 

 

 

 

 

 

Less: Fuel

 

$

62.3

 

$

76.2

 

$

151.8

 

$

160.1

 

Purchased power (a)

 

83.8

 

38.4

 

136.5

 

64.0

 

Gross margins (b)

 

$

195.1

 

$

192.1

 

$

430.4

 

$

421.7

 

 

 

 

 

 

 

 

 

 

 

Gross margins as a percentage of revenues

 

57.2

%

62.6

%

59.9

%

65.3

%

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

59.7

 

$

72.7

 

$

174.4

 

$

188.2

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

$ in millions

 

 

 

 

2007

 

2006

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

Retail

 

 

$

271.8

 

$

251.0

 

Wholesale

 

 

90.0

 

70.4

 

RTO ancillary

 

 

15.7

 

17.7

 

Total revenues

 

 

$

377.5

 

$

339.1

 

 

 

 

 

 

 

 

Less:

Fuel

 

 

$

89.5

 

$

83.9

 

 

Purchased power (a)

 

 

52.7

 

25.6

 

Gross margins (b)

 

 

$

235.3

 

$

229.6

 

 

 

 

 

 

 

 

Gross margins as a percentage of

 

 

 

 

 

 

revenues

 

 

62.3

%

67.7

%

 

 

 

 

 

 

 

Operating income

 

 

$

114.7

 

$

115.5

 


(a)

Purchased power includes RTO ancillary charges of $17.0 million and $12.1 million for the quarter ended June 30, 2007 and 2006, respectively. Purchased power includes RTO ancillary charges of $29.4 million and $24.3 million for the six months ended June 30, 2007 and 2006, respectively.

(b)

For purposes of discussing operating results, we present and discuss gross margins. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance

(a).Purchased power includes RTO ancillary charges of $12.4 million and $12.2 million for the three months ended March 31, 2007 and 2006, respectively.

(b)For purposes of discussing operating results, we present and discuss gross margins. This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisions regarding our financial performance.


DP&L – Revenues

 

Three Months Ended

 

 

 

March 31,

 

$ in millions

 

 

 

2007 vs. 2006

 

 

 

 

 

Retail

 

 

 

Rate

 

$

7.5

 

Volume

 

13.4

 

Other miscellaneous

 

(0.1

)

Total retail change

 

$

20.8

 

 

 

 

 

Wholesale

 

 

 

Rate

 

$

(6.3

)

Volume

 

25.9

 

Total wholesale change

 

$

19.6

 

 

 

 

 

RTO ancillary & other

 

 

 

RTO services

 

$

(2.0

)

 

 

 

 

Total revenues

 

$

38.4

 

Retail customers, especially residential and commercial customers, consume more electricity on warmer and colder days. Therefore, DP&L’s retail sales volume is impacted by the number of heating and cooling degree days occurring during a year.  Since DP&L plans to utilize its internal generating capacity to supply its retail customers’ needs first, increases in retail demand will decrease the volume of internal generation available to be sold in the wholesale market and vice versa.

The wholesale market covers a multi-state area and settles on an hourly basis throughout the year. Factors impacting DP&L’s wholesale sales volume each hour of the year include wholesale market prices, DP&L’s retail demand, retail demand elsewhere throughout the entire wholesale market area, DP&L and non-DP&L plants’ availability to sell into the wholesale market and weather conditions across the multi-state region. DP&L’s plan is to make wholesale sales when market prices allow for the economic operation of its generation facilities not being utilized to meet its retail demand.


 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007 vs. 2006

 

2007 vs. 2006

 

 

 

 

 

 

 

Retail

 

 

 

 

 

Rate

 

$

8.1

 

$

15.7

 

Volume

 

13.4

 

26.8

 

Other miscellaneous

 

(0.9

)

(1.1

)

Total retail change

 

$

20.6

 

$

41.4

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

Rate

 

$

16.8

 

$

9.0

 

Volume

 

(11.5

)

15.9

 

Total wholesale change

 

$

5.3

 

$

24.9

 

 

 

 

 

 

 

RTO ancillary

 

 

 

 

 

RTO services

 

$

8.6

 

$

6.6

 

 

 

 

 

 

 

Total revenues change

 

$

34.5

 

$

72.9

 

 

For the first quarter ofended June 30, 2007, revenues increased $34.5 million, or 11%, to $377.5$341.2 million compared to $339.1from $306.7 million for the same period in the first quarter of 2006, reflecting an increase of $38.4 million.prior year.  This increase was primarily the result of increased sales volumehigher average rates for both retail and wholesale sales, higher retail sales volume and higher average retail rates, partially offset by lower average wholesale rates andan increase in RTO ancillary revenues associated with participation in a RTO.revenue.  Retail revenues increased $20.8$20.6 million, or 9%, resulting from a 5%6% increase in weather driven sales volume driven by colder weatheras total degree days increased 18% and a 3% increase in average retail rates related to the Rate Stabilization Plan surcharge and other regulated asset recovery riders.  These increases resulted in a $13.4 million sales volume variance and a $7.5$8.1 million price variance.  Wholesale revenue increased $5.3 million for the second quarter of 2007 compared to the same period of the prior year resulting from higher average market rates, partially offset by lower wholesale sales volume.  The increase in average market rates of 32% resulted in a $16.8 million price variance, for retail revenues.  Wholesale revenues increased $19.6 million forpartially offset by a decrease in wholesale sales volume of 123 GWh resulting in an unfavorable sales volume variance of $11.5 million.  For the firstsecond quarter of 2007, primarily due to a 37% increase in sales volume (301 GWh) and a 7% decrease in wholesale average rates.  This resulted in a $25.9 million sales volume variance an offsetting $6.3 million price volume variance for wholesale revenues.the RTO ancillary revenues decreased $2.0 million, or 11%, for the first quarter of 2007 to $15.7increased $8.6 million compared to the firstsecond quarter of 2006.2006 primarily resulting from $4.3 million realized from the PJM capacity auction, $1.8 million of PJM transmission congestion credits and $1.0 million from the sale of financial transmission rights (FTRs). RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves.  These revenues are substantially offset by RTO ancillary charges included in purchased power costs.

For the six months ended June 30, 2007, revenues increased $72.9 million, or 11%, to $718.7 million from $645.8 million for the same period in the prior year.  This increase was primarily the result of higher average rates and greater sales volumes for both retail and wholesale customers.  Retail revenues increased $41.4 million resulting from a 6% increase in weather driven sales volume as total degree days increased 16% and a 3% increase in average retail rates related to the Rate Stabilization Plan surcharge and other regulated asset recovery riders.  These increases resulted in a $26.8 million sales volume variance and a $15.7 million price variance.  For the six months ended June 30, 2007, wholesale revenue increased $24.9 million over the same period of the prior year primarily as a result of a 12% increase in sales volume (178 GWh) and an 6% increase in wholesale average rates.  These increases resulted in a $15.9 million sales volume variance and a $9.0 million price volume variance for wholesale revenues.  For the six months ended June 30, 2007, the RTO ancillary revenues increased $6.6 million compared to the same period in 2006 primarily resulting from $4.3 million realized from the PJM capacity auction, $1.8 million of PJM transmission congestion credits and $2.4 million from the sale of financial transmission rights (FTRs), partially offset by an adjustment of $2.8 million for Seams Elimination Cost Adjustment (SECA).  RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves.  These revenues are substantially offset by RTO ancillary charges included in purchased power costs.

DP&L - Margins, Fuel and Purchased Power

For the firstsecond quarter of 2007, gross margin of $235.3$195.1 million increased $5.7$3.0 million, or 2%, from $229.6$192.1 million in the firstsecond quarter of 2006.  As a percentage of total revenues, gross margin decreased to 62.3%57.2% in the second quarter of 2007 compared to 67.7%62.6% in the second quarter of 2006.  This result reflects the increasingfavorable impact of the increase in revenues and lower fuel costs, of fuel andoffset by increased purchased power despite the favorable impact on revenues of the Rate Stabilization Plan surcharge.costs.  Fuel costs, which include coal, gas, oil and emission allowance costs, increaseddecreased by $5.6$13.9 million, or 7%18%, in the firstsecond quarter of 2007 compared to the same period in 2006 primarily due to increasedlower average fuel prices and highera 16% (629 GWh) decrease in generation output.  Purchased power increased $27.1$45.4 million in the firstsecond quarter of 2007


compared to the same period in 2006 primarily resulting from increased charges of $22.5$39.6 million relating to higher purchased power volumesvolume (685 GWh) and a price variance of $4.4$5.8 million reflectingincrease due to higher average market rates.  The increase in purchasepurchased power volume was primarily the result of DP&Lincreased sales volume and partner operated generating facilities being unavailableless available compared to the same period of the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs associated with our higher cost generating facilities.


DP&L – Operation and Maintenance

 

 

Three Months Ended

 

 

 

March 31,

 

$ in millions

 

 

 

2007 vs. 2006

 

Mark-to-market adjustments of restricted stock units (RSUs)

 

$

2.6

 

Power production costs

 

2.4

 

Service operations

 

1.9

 

Legal fees

 

0.9

 

Low-Income Assistance Program costs

 

0.7

 

Long-term and other incentive compensation

 

(2.3

)

Expenses for injures and damages

 

(1.3

)

Pension and benefits

 

(0.8

)

RTO administrative fees

 

(0.8

)

Other, net

 

1.9

 

Total operation and maintenance expense

 

$

5.2

 

For the threesix months ended March 31,June 30, 2007, operation and maintenance expensegross margin of $430.4 million increased $5.2$8.7 million, or 10%2%, from $421.7 million compared to the same period in 2006.  As a percentage of total revenues, gross margin decreased to 59.9% in 2007 compared to 65.3% in 2006.  This result reflects the favorable impact of both retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs.  Fuel costs, which include coal, gas, oil and emission allowance costs, decreased by $8.3 million, or 5%, for the six months ended June 30, 2007 compared to the same period in 2006 primarily due to a 7% decrease in generation output (580 GWh), partially offset by an increase in average fuel prices.  Purchased power increased $72.5 million for the six months ended June 30, 2007 compared to the same period in 2006 primarily resulting from a $2.6increased charges of $62.2 million relating to higher purchased power volume (1,148 GWh) and $10.3 million increase in mark-to-market adjustments of restricted stock units; a $2.4 milliondue to higher average market rates.  The increase in purchased power productionvolume was primarily the result of increased sales volume and partner operated generating facilities being less available compared to the prior year due to planned and unplanned outages.  In addition, we purchase power when market prices are below the marginal costs primarily reflectingassociated with our higher boiler maintenance and plant operating expenses; a $1.9 million increase in service operation costs resulting primarily from two major ice storms in February 2007; a $0.9 million increase in legal fees and Low-Income Assistance Program costs of $0.7 million.  These increases were partially offset by a $2.3 million decrease in long-term and other incentive compensation; a $1.3 million decrease in expenses for injuries and damages a $0.8 million decrease in pension and benefits expenses; and a $0.8 million decrease in RTO administrative fees.cost generating facilities.

DP&L Depreciation Operation and AmortizationMaintenance

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

$ in millions

 

2007 vs. 2006

 

2007 vs. 2006

 

Mark-to-market adjustments of restricted stock units (RSUs)

 

$

(0.5

)

$

2.1

 

Power production costs

 

12.0

 

14.2

 

Low income payment program

 

0.8

 

1.5

 

Service operations

 

1.3

 

1.9

 

Long-term and other incentive compensation

 

 

(2.4

)

Legal fees

 

(2.3

)

(1.4

)

Other, net

 

1.5

 

2.1

 

Total operation and maintenance expense

 

$

12.8

 

$

18.0

 

Depreciation

For the quarter ended June 30, 2007, operation and amortization decreased $0.6maintenance expense increased $12.8 million, in the first quarter of 2007,or 21%, compared to the same period in 2006 primarily reflectingresulting from increased power production costs largely related to boiler maintenance of $6.6 million and other power production maintenance expense of $5.4 million.

For the impactsix months ended June 30, 2007, operation and maintenance expense increased $18.0 million, or 16%, compared to the same period in 2006 primarily resulting from increased power production costs largely related to boiler maintenance of asset retirements.$7.1 million and other power production maintenance of $7.1 million.  In addition, we had increased mark-to-market adjustments relating to RSUs and increased expense in service operation’s costs relating to overhead line maintenance.

DP&L Amortization of Regulatory Assets

For the threequarter and six months ended March 31,June 30, 2007, amortization of regulatory assets increased $1.8$0.8 million to $2.9and $2.6 million, respectively, compared to the same period in 2006.  The increase reflectsThese increases reflect the amortization of costs incurred to accommodate unbundled rates and electric choice bills in the customer billing system; the amortization of PJM administrative fees deferred for the period October 2004 through January 2006; and the amortization of incremental 2004/2005 severe storm costs.

DP&L – Investment Income

For the quarter ended June 30, 2007, investment income increased $3.4 million to $4.7 million from $1.3 million for the same period in 2006.  This increase was primarily the result of $3.2 million realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for the settlement payment to the three former executives.

For the six months ended June 30, 2007, investment income increased $3.0 million to $6.2 million from $3.2 million for the same period in 2006.  This increase was primarily the result of $3.2 million realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for the settlement payment to the three former executives, partially offset by lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006.


DP&L – Interest ExpenseNet Gain on Settlement of Executive Litigation

On May 21, 2007, we settled the litigation with the three former executives.  In exchange for a payment of $25 million, the three former executives relinquished and dismissed all of their claims including those related to deferred compensation, RSUs, MVE incentives, stock options and legal fees.  As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  See Note 10 of Notes to Condensed Consolidated Financial Statements.

DP&L Interest Expense

For the quarter ended June 30, 2007, interest expense decreased $1.3$0.5 million or 19% in the three months ended March 31, 2007, compared to the same period of 2006, primarily relating to $2.8$2.9 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $1.2 million related to the $100 million 4.8% Series pollution control bonds issued in September 2006 and $0.3$0.7 million of interest related to the $65$95 million draw on our revolving credit facilityfacility.

For the six months ended June 30, 2007, interest expense decreased $1.8 million compared to the same periods of 2006, primarily relating to $5.7 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $2.4 million related to the $100 million 4.8% Series pollution control bonds issued in February 2007.September 2006 and $1.1 million of interest related to the $95 million draw on our revolving credit facility.

DP&L Other Income (deductions)(Deductions)

For the threequarter ended June 30, 2007, other deductions of $0.2 million changed from $0.8 million of other income in 2006 primarily resulting from a refund of tax penalties in 2006.

For the six months ended March 31,June 30, 2007, other income (deductions) was $1.3of $0.6 million higher than the same periodincreased from $0.3 million of other income in 2006 primarily due to gains of $0.7 million realized in the first quarter of 2007resulting from the sale of NOxemission allowances and $0.3 million of greater gains realized in 2007 compared to 2006 related to derivative activity.  There were no saleson the expiration of pollution control emission allowances duringforward contracts partially offset by a refund of tax penalties in 2006.

DP&L – Income Tax Expense

For the firstsecond quarter ofand six months ended June 30, 2007, income taxes decreased $1.5increased $10.1 million or 3%,and $8.6 million compared to the same periodperiods in 2006, primarily reflecting a decrease in the effective tax rate resulting from the phase-out of the Ohio Franchise Tax that was partially offset by an increase in pre-tax book income and an increase in the accrual for open tax years.income.

40




0FINANCIALFINANCIAL CONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS

DPL’s financial condition, liquidity and capital requirements, includes the consolidated results of DP&L and all of DP&L’s consolidated subsidiaries.  All material intercompany accounts and transactions have been eliminated in consolidation.

DPL’s Cash Position

DPL’s cash and cash equivalents totaled $106.4$103.9 million at March 31,June 30, 2007, compared to $262.2 million at December 31, 2006, a decrease of $155.8$158.3 million.  In addition, DPL had no restricted funds held in trust at March 31,June 30, 2007 of $2.2 million in comparison to $10.1 million at December 31, 2006 related to the issuance of the $100 million pollution control bonds.2006.  The decrease in cash and cash equivalents was primarily attributed to the retirement of the $225.0 million DPL 8.25% Senior Notes, $80.5$171.2 million in capital expenditures and $27.8$55.8 million in dividends paid on common stock.  The decrease caused by such payments was partially offset by $97.1$158.4 million in proceeds realized from the sale of property ($151.0 million for two peaking units and $7.4 million for an aircraft); $112.4 million in cash generated from operating activities, $65.0activities; $15.0 million from the exercise of short-term debt issued against the $220.0 million unsecured revolving credit agreement,stock options, including tax effects; and $10.1 million of restricted funds drawn to fund pollution control capital expenditures.

DP&L’s Cash Position

DP&L’s cash and cash equivalents totaled $53.4$4.4 million at March 31,June 30, 2007, compared to $46.1 million at December 31, 2006, an increasea decrease of $7.3$41.7 million.  The increasedecrease in cash and cash equivalents was primarily attributed to $137.0$169.3 million in capital expenditures and $125.0 million in dividends paid on common stock to our parent DPL.  These cash outflows were largely offset by $137.9 million in cash generated from operating activities, $65.0$105.0 million in a draw onshort-term debt owed to our revolving credit facilityparent DPL, and $10.1 million in restricted fund draws to finance pollution control capital expenditures at our generating plants, partially offset by $125.0 million in dividends paid on common stock to our parent DPL and $79.6 million in capital expenditures.plants.

49




Operating Activities

For the quarterssix months ended March 31,June 30, 2007 and 2006, cash flows from operations were as follows:

Net Cash provided by Operating Activities

Net Cash provided by Operating Activities

 

 

Quarters Ended
March 31,

 

 

2007

 

2006

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

DPL

 

$

97.1

 

$

91.6

 

 

$

112.4

 

$

133.4

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

$

137.0

 

$

143.5

 

 

$

137.9

 

$

175.2

 

 

The tariff-based revenue from our energy 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 coupled with the rate relief approved by the PUCO for 2006 and beyond provides us with a reasonably predictable gross cash flow from operations.

DPL’s Cash provided by Operating Activities

DPL generated net cash from operating activities of $97.1$112.4 million and $91.6$133.4 million infor the first quarter ofsix months ended June 30, 2007 and 2006, respectively.  The net cash provided by operating activities infor the first quarter ofsix months ended June 30, 2007 was primarily the result of operating profitability, partially offset by an increase in cash used for working capital, specifically payments for interest.receivables, taxes and inventories.  The net cash provided by operating activities for the six months ended June 30, 2006 was primarily the result of operating profitability, partially offset by cash used for working capital, specifically taxes and inventories.taxes.

DP&L’s Cash provided by Operating Activities

DP&L generated net cash from operating activities of $137.0$137.9 million and $143.5$175.2 million in the first quarter ofsix months ended June 30, 2007 and 2006, respectively.  The net cash provided by operating activities for both yearsthe six months ended June 30, 2007 was primarily the result of operating profitability, as well aspartially offset by an increase in cash generated fromused for working capital, specifically from accounts payablereceivables, taxes and accrued taxes.inventories.  The net cash provided by operating activities for the six months ended June 30, 2006 was primarily the result of operating profitability.

Investing Activities

For the quarterssix months ended March 31,June 30, 2007 and 2006, cash flows from investing activities were as follows:


Net Cash used for Investing Activities

Net Cash used for Investing Activities

 

 

Quarters Ended
March 31,

 

 

2007

 

2006

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

DPL

 

$

(80.5

)

$

(110.9

)

 

$

(15.0

)

$

(72.3

)

 

 

 

 

 

 

 

 

 

 

DP&L

 

$

(79.6

)

$

(110.5

)

 

$

(169.3

)

$

(199.3

)

 

DPL’s Cash used for Investing Activities

DPL’s net cash used for investing activities was $80.5$15.0 million and $110.9$72.3 million infor the first quarter ofsix months ended June 30, 2007 and 2006, respectively.  Net cash flows used for investing activities infor the first quarter ofsix months ended June 30, 2007 were related to capital expenditures.expenditures that were largely offset by proceeds from the sale of two peaking units and an aircraft.  Net cash flows used for investing activities for the quartersix months ended March 31,June 30, 2006 were related to capital expenditures;expenditures, partially offset by the net sale of short-term investments and purchases of investments had no effect on investing activities for the quarter.securities.

DP&L’s Cash used for Investing Activities

DP&L’s net cash flows used for investing activities were $79.6$169.3 million and $110.5$199.3 million infor the first quarter ofsix months ended June 30, 2007 and 2006, respectively.  Net cash flows used for investing activities for both years were related to capital expenditures.


Financing Activities

For the quarterssix months ended March 31,June 30, 2007 and 2006, cash flows from financing activities were as follows:

Net Cash used for Financing Activities

Net Cash used for Financing Activities

 

 

Quarters Ended
March 31,

 

 

2007

 

2006

 

$ in millions

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

DPL

 

$

(172.4

)

$

(185.4

)

 

$

(255.7

)

$

(407.0

)

 

 

 

 

 

 

 

 

 

 

DP&L

 

$

(50.1

)

$

(0.2

)

 

$

(10.3

)

$

(0.4

)

 

DPL’s Cash used for Financing Activities

DPL’s net cash flows used for financing activities for the first quarter ofsix months ended June 30, 2007 were $172.4$255.7 million compared to the first quartersame period of 2006 of $185.4$407.0 million.  Net cash flows used for financing activities infor the first quarter ofsix months ended June 30, 2007 were the result of cash used to redeem the $225 million 8.25% Senior Notes on March 1, 2007 and to pay dividends to stockholders of $27.8$55.8 million, partially offset by cash received from borrowing $65.0the exercise of stock options, including tax effects, of $15.0 million against the $220 million unsecured revolving credit facility and the $10.1 million of restricted funds held in trust.  Net cash flows used for financing activities infor the first quarter ofsix months ended June 30, 2006 were the result of cash used to repurchase $155.3$348.2 million of common stock and pay dividends to common stockholdersshareholders of $30.2$59.0 million.

DP&L’s Cash used for Financing Activities

DP&L’s net cash flows used for financing activities were $50.1$10.3 million and $0.2$0.4 million infor the first quarters ofsix months ended June 30, 2007 and 2006, respectively.  Net cash flows used for financing activities for 2007 were the result of cash used to pay common stock dividends to our parent DPL of $125.0 million and preferred dividends to third parties of $0.2$0.4 million, partially offset by $65.0$105.0 million from a draw onshort-term borrowings from our revolving credit facilityparent DPL and $10.1 million of withdrawals from the trust set up as a result of issuing the $100 million 4.8% Series pollution control bonds in September 2006.  Net cash flows used for financing activities in 2006 were for the payment of preferred dividends.dividends to third parties.

DPL and DP&L have obligations to make future payments for capital expenditures, debt agreements, lease agreements and other long-term purchase obligations, and have certain contingent commitments such as guarantees.  We believe our cash flows from operations, the credit facilities (existing or future arrangements), the senior notes and other short- and long-term debt financing, will be sufficient to satisfy our future working capital, capital expenditures and other financing requirements for the foreseeable future.  Our ability to generate positive cash flows from operations is dependent on general economic conditions, competitive pressures and


other business and risk factors described in Item 1a of our fiscal 2006 Form 10-K and Part II, Item 1a of this Form 10-Q.  If we are unable to generate sufficient cash flows from operations, or otherwise comply with the terms of our credit facilities, the senior notes and other long-term debt, we may be required to refinance all or a portion of our existing debt or seek additional financing alternatives.  A discussion of each of our critical liquidity commitments is outlined below.

Capital Requirements

DPL’s construction additions were $78.9$193.5 million and $94.8$184.2 million infor the first quartersix months of 2007 and 2006, respectively.

DP&L’s construction additions were $192.0 million and $183.1 million for the first six months of 2007 and 2006, respectively, and are expected to approximate $345$308 million in 2007.

DP&L’s construction additions were $78.0 million and $94.4 million in the first quarter of 2007 and 2006, respectively, and are expected to approximate $345 million in 2007.  Planned construction additions for 2007 relate to DP&L’s environmental compliance program, power plant equipment and its transmission and distribution system.

Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors.  Over the next three years, DPL, through its subsidiary DP&L, is projecting to spend an estimated $645$675 million in capital projects, approximately 40% of which is to meet changing environmental standards.  In our Form 10-K10-Q as of DecemberMarch 31, 2006,2007, we reported our estimated capital spending to be approximately $605$645 million.  This increase is due primarily to increases in the flue gas desulfurizationcapital projects at both DPL-operated and partner-operated generating plants.  Our ability to complete capital projects and the reliability of future service will be affected by


our financial condition, the availability of internal funds and the reasonable cost of external funds.  We expect to finance our construction additions in 2007 with a combination of cash on hand, short-term financing, tax-exempt debt and cash flows from operations.

Debt and Debt Covenants

On August 29, 2005, DPL redeemed $200 million of its 8.25% Senior Notes due 2007.  The remaining $225 million of these notes were retired March 1, 2007, the maturity date.

During the first quarter of 2006, the Ohio Department of Development (ODOD) awarded DP&L the ability to issue over the next three years up to $200 million of qualified tax-exempt financing from the ODOD’s 2005 volume cap carryforward.   On September 13, 2006, the Ohio Air Quality Development Authority (OAQDA) issued $100 million of 4.80% fixed interest rate OAQDA Revenue bonds 2006 Series A due September 1, 2036.  In turn, DP&L borrowed these funds from the OAQDA.  These funds were placed in escrow with a trustee and, as of April 3, 2007, DP&L has drawn out the entirety of the funds.

DP&L expects to use the remaining $100 million of volume cap carryforward prior to the end of 2008.  DP&Lis planning to issueconsidering issuing in conjunction with the OAQDA this $100 millionanother series of tax-exempt bonds to finance the remaining solid waste disposal facilitiesfacility costs at Miami Fort, Killen Stuart and ConesvilleStuart Generating Stations.

On November 21, 2006, DP&L entered into a new $220 million unsecured revolving credit agreement replacing its $100 million facility.  This new agreement has a five year term that expires on November 21, 2011 and that provides DP&L with the ability to increase the size of the facility by an additional $50 million at any time.  The facility contains one financial covenant:  DP&L’s total debt to total capitalization ratio is not to exceed 0.65 to 1.00.  This covenant is currently met.  As of March 31,June 30, 2007, DP&L has borrowed $65 million fromhad no borrowings outstanding under this facility for ninety-two days at 5.63%.facility.  Fees associated with this credit facility are approximately $0.2 million per year.  Changes in credit ratings, however, may affect fees and the applicable interest.interest rate.  This revolving credit agreement also contains a $50 million letter of credit sublimit.  DP&L has certain 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.  As of March 31,June 30, 2007, DP&L had no outstanding letters of credit against the facility.

On February 24, 2005, DP&L entered into an amendment to extend the term of its Master Letter of Credit Agreement with a financial lending institution for one year and to reduce the maximum dollar volume of letters of credit to $10 million.  On February 17, 2006, DP&L renewed its $10 million agreement for one year.  This agreement supports performance assurance needs in the ordinary course of business.  In February 2007, DP&L opted not to renew this agreement.

Issuance of additional amounts of first 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 bonds to


satisfy its requirements in connection with its current refinancing and construction programs.  The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans.

During the second quarter of 2007, DPL entered into a short-term loan to DP&L for $105 million.  This short-term loan does not affect our debt covenants.  There are no other inter-company debt collateralizations or debt guarantees between DPL, DP&L and itstheir subsidiaries.  None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.

There was no change to our debt covenants as described in our Form 10-K as of December 31, 2006.

Credit Ratings

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

 

DPL Inc.

 

DP&L

 

Outlook

 

Effective

 

 

 

 

 

 

 

 

 

Fitch Ratings

 

BBB+

 

A+

 

Stable

 

March 2007

Moody’s Investors Service

 

Baa3

 

A3

 

Positive

 

June 2006

Standard & Poor’s Corp.

 

BBB-

 

BBB+

 

Stable

 

February 2007

 

Off-Balance Sheet Arrangements

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


Contractual Obligations and Commercial Commitments

We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations.  At March 31,June 30, 2007, these include:

Contractual Obligations

 

 

 

 

Payment Year

 

 

 

 

 

 

Less Than

 

2 - 3

 

4 - 5

 

More Than

 

 

$ in millions

 

 

 

Total

 

1 Year

 

Years

 

Years

 

5 Years

 

DPL Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,549.9

 

$

 

$

275.0

 

$

297.4

 

$

977.5

 

 

Interest payments

 

1,074.3

 

71.8

 

170.7

 

144.0

 

687.8

 

 

Pension and postretirement payments

 

230.1

 

16.5

 

45.2

 

46.5

 

121.9

 

 

Capital leases

 

2.8

 

0.7

 

1.5

 

0.6

 

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

 

Coal contracts (a)

 

467.8

 

246.5

 

110.5

 

110.8

 

 

 

Limestone contracts

 

58.4

 

1.5

 

9.4

 

10.8

 

36.7

 

 

Other contractual obligations

 

436.7

 

370.0

 

57.1

 

9.6

 

 

 

Total contractual obligations

 

$

3,820.7

 

$

707.3

 

$

669.7

 

$

619.8

 

$

1,823.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

783.2

 

$

 

$

 

$

 

$

783.2

 

 

Interest payments

 

562.2

 

29.4

 

78.3

 

78.3

 

376.2

 

 

Pension and postretirement payments

 

230.1

 

16.5

 

45.2

 

46.5

 

121.9

 

 

Capital leases

 

2.8

 

0.7

 

1.5

 

0.6

 

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

 

Coal contracts (a)

 

467.8

 

246.5

 

110.5

 

110.8

 

 

 

Limestone contracts

 

58.4

 

1.5

 

9.4

 

10.8

 

36.7

 

 

Other contractual obligations

 

436.7

 

370.0

 

57.1

 

9.6

 

 

 

Total contractual obligations

 

$

2,541.9

 

$

664.9

 

$

302.3

 

$

256.7

 

$

1,318.0

 

 


 

 

Payment Year

 

 

 

 

 

 

 

2008-

 

2010-

 

2012 &

 

$ in millions

 

Total

 

2007

 

2009

 

2011

 

Thereafter

 

DPL Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

1,550.0

 

$

 

$

275.0

 

$

297.4

 

$

977.6

 

Interest payments

 

1,050.3

 

47.8

 

170.7

 

144.0

 

687.8

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts (a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

4,109.4

 

$

694.6

 

$

920.4

 

$

668.2

 

$

1,826.2

 

(a)DP&L-operated

DP&L

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

783.2

 

$

 

$

 

$

 

$

783.2

 

Interest payments

 

552.4

 

19.6

 

78.3

 

78.3

 

376.2

 

Pension and postretirement payments

 

224.6

 

11.0

 

45.2

 

46.5

 

121.9

 

Capital leases

 

2.5

 

0.4

 

1.5

 

0.6

 

 

Operating leases

 

0.7

 

0.3

 

0.3

 

0.1

 

 

Coal contracts (a)

 

716.4

 

195.9

 

362.8

 

157.7

 

 

Limestone contracts (a)

 

58.1

 

1.0

 

9.5

 

10.9

 

36.7

 

Reserve for uncertain tax provisions

 

41.2

 

41.2

 

 

 

 

Other contractual obligations

 

465.6

 

397.0

 

55.4

 

11.0

 

2.2

 

Total contractual obligations

 

$

2,844.7

 

$

666.4

 

$

553.0

 

$

305.1

 

$

1,320.2

 

(a)     DP&L operated units

Long-term debt:

DPL’s long-term debt as of March 31,June 30, 2007, consists of DP&L’s first mortgage bonds and tax-exempt pollution control bonds, DPL unsecured notes and includes current maturities and unamortized debt discounts.


DP&L’s long-term debt as of March 31,June 30, 2007, consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.

See Note 98 of Notes to Condensed Consolidated Financial Statements.

Interest payments:

Interest payments associated with the long-term debt is described above.

Pension and postretirement payments:

As of March 31,June 30, 2007, DP&L had estimated future benefit payments as outlined in Note 76 of Notes to Condensed Consolidated Financial Statements.  These estimated future benefit payments are projected through 2016.

Capital leases:

As of March 31,June 30, 2007, DP&L had two capital leases that expire in November 2007 and September 2010.

Operating leases:

As of March 31,June 30, 2007, DPL and DP&L had several operating leases with various terms and expiration dates.  Not included in this total is approximately $88,000 per year related to right of wayright-of-way agreements that are assumed to have no definite expiration dates.

Coal contracts:

DP&L 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 and have features that limit price escalation in any given year.


Limestone contracts:

DP&L has entered into variousa limestone contractscontract to supply limestone for its generating facilities.

Reserve for uncertain tax positions:

On January 1, 2007, we adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  There was no significant impact to our overall results of operations, cash flows or financial position.  The total amount of unrecognized tax benefits as of the date of adoption was $36.8 million and we have recorded $3.5 million (net of tax) of accrued interest.  During the second quarter ending June 30, 2007, we recorded an additional $0.9 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.2 million as of June 30, 2007.  None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.

Other Contractual Obligation:contractual obligations:

As of March 31,June 30, 2007, DPL and DP&L had various other contractual obligations including non-cancelable contracts to purchase goods and services with various terms and expiration dates.

We enter into various commercial commitments, which may affect the liquidity of our operations.  At March 31,June 30, 2007, these include:

Credit facilities:

In November 2006, DP&L replaced its previous $100 million revolving credit agreement with a $220 million five yearfive-year facility that expires on November 21, 2011.  DP&L has the ability to increase the size of the facility by an additional $50 million at any time.  At March 31,June 30, 2007, there was $65 millionwere no outstanding borrowings under this credit agreement due May 29, 2007 at 5.63% interest.facility.

Guarantees:

DP&L owns a 4.9% equity ownership interest in an electric generation company.  As of March 31,June 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $21.8 million, of a $445 million debt obligation that matures in 2026.

In two separate transactions in November and December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, DPL Energy, LLC (DPLE) regarding the pending sale of the Darby Electric Peaking Station to American Electric Power and the sale of the Greenville Electric Peaking Station to Buckeye Electric Power, Inc.  In both cases, DPL has agreed to guarantee the obligations of DPLE over a multiple year period as follows:

 

2007

 

2008

 

2009

 

2010

 

$ in millions

 

2007

 

2008

 

2009

 

2010

 

Darby

 

$

30.6

 

$

23.0

 

$

15.3

 

$

7.7

 

 

$

30.6

 

$

23.0

 

$

15.3

 

$

7.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greenville

 

$

14.8

 

$

11.1

 

$

7.4

 

$

3.7

 

 

$

14.8

 

$

11.1

 

$

7.4

 

$

3.7

 

 

 

 

 

 

 

 

 

 

 


MARKET RISK

As a result of itsour operating, investing and financing activities, we are subject to certain market risks including changes in commodity prices for electricity, coal, environmental emissions and gas andas well as fluctuations in interest rates.  Commodity pricing exposure includes the impacts of weather, market demand, increased competition and other economic conditions.  For purposes of potential risk analysis, we use 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 future.

Commodity Pricing Risk

Approximately 15%12% of DPL’s and 24%22% of DP&L’s first quarter of 2007 electric revenues for the six months ended June 30, 2007 were from sales of excess energy and capacity in the wholesale market.  Energy and capacity in excess of the needs of existing retail customers are sold on the wholesale market when we can identify opportunities with positive margins.  As of March 31,June 30, 2007, a hypothetical increase or decrease of 10% in DPL’s annual wholesale revenues could result in approximately a $14.0an $11 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs.  As of March 31,June 30, 2007, a hypothetical increase or decrease of 10% in DP&L’s annual wholesale revenues could result in approximately a $23.0$20 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs.


DPL’s fuel (including coal, gas, oil and emission allowances) and purchased power costs as a percent of total operating costs in the first quarter ofsix months ended June 30, 2007 and 2006, respectively, were 52% and 46%, respectively.  DP&L’s fuel (including coal, gas, oil and emission allowances) and purchased power costs as a percent of total operating costs was 54%were 53% and 49% in the first quarter ofsix months ended June 30, 2007 and 2006, respectively.  We have substantially all of the total expected coal volume needed to meet our retail and firm wholesale sales requirements for 2007 under contract.  The majority of our contracted coal is purchased at fixed prices.  Some contracts provide for periodic adjustment and some are priced based on market indices.  Substantially all contracts have features that limit price escalations in any given year.  Our consumption of SO2 allowances should decline in 2007 due to planned emission control upgrades.  We do not expect to purchase SO2 allowances for 2007.  The exact consumption of SO2 allowances will depend on market prices for power, availability of our generation units, the timing of emission control equipment upgrade completion and the actual sulfur content of the coal burned.  DP&L does not plan to purchase NOx allowances for 2007.  Fuel costs are impacted by changes in volume and price and are driven by a number of variables including weather, reliability of coal deliveries, scheduled outages and generation plant mix.  Based on weather normalized sales and our co-owners’ projections, fuelFuel costs are forecasted to be flat in 2007 compared to 2006.

Purchased power costs depend, in part, upon the timing and extent of planned and unplanned outages of our generating capacity.  We will purchase power on a discretionary basis when wholesale market conditions provide opportunities to obtain power at a cost below our internal production costs.  As of March 31,June 30, 2007, a hypothetical increase or decrease of 10% in DPL’s annual fuel and purchased power costs could result in approximately a $33.0$32 million increasedecrease or decreaseincrease to annual net income, assuming no increasedecreases or decreasesincreases in salesales revenues.  As of March 31,June 30, 2007, a hypothetical increase or decrease of 10% in DP&L’s annual fuel and purchased power costs could result in approximately a $34.0$32 million increase or decrease to annual net income, assuming no increasedecreases or decreasesincreases in salesales revenues.

Interest Rate Risk

As a result of our normal borrowing and leasing activities, our results are exposed to fluctuations in interest rates, which we manage through our regular financing activities.  We maintain both cash on deposit and investments in cash equivalents that may be affected by adverse interest rate fluctuations.  Our long-term debt represents publicly and privately held secured and unsecured notes and debentures with fixed interest rates.  At March 31,June 30, 2007, we had $65 million in short-termno outstanding borrowings at 5.63% against the $220 million unsecuredunder our revolving credit agreement.facility.

The carrying value of DPL’s debt was $1,552.7$1,552.5 million at March 31,June 30, 2007, consisting of DP&L’s first mortgage bonds, DP&L’s tax-exempt pollution control bonds, our unsecured notes and DP&L’s capital leases.  The fair value of this debt was $1,592.1$1,566.8 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-rate debt at March 31,June 30, 2007, are as follows:


Expected Maturity

 

DPL’s Long-term Debt

 

Date

 

Amount

 

Average Rate

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

2007

 

$

0.4

 

6.3

%

2008

 

100.7

 

6.3

%

2009

 

175.8

 

8.0

%

2010

 

0.6

 

6.9

%

2011

 

297.4

 

6.9

%

2012

 

 

 

Thereafter

 

977.6

 

5.6

%

Total

 

$

1,552.5

 

6.2

%

 

 

 

 

 

 

Fair Value

 

$

1,566.8

 

 

 

 

 

DPL’s Long-term Debt

 

Expected Maturity

 

 

 

Amount

 

 

 

Date

 

 

 

($ in millions)

 

Average Rate

 

2007

 

$

0.7

 

6.2

%

2008

 

100.7

 

6.3

%

2009

 

175.7

 

8.0

%

2010

 

0.6

 

6.9

%

2011

 

297.4

 

6.9

%

2012

 

 

 

Thereafter

 

977.6

 

5.6

%

Total

 

$

1,552.7

 

6.2

%

 

 

 

 

 

 

Fair Value

 

$

1,592.1

 

 

 


The carrying value of DP&L’s debt was $786.0$785.7 million at March 31,June 30, 2007, consisting of our first mortgage bonds, our tax-exempt pollution control bonds and our capital leases.  The fair value of this debt was $786.2$767.3 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-rate debt at March 31,June 30, 2007, are as follows:

 

DP&L’s Long-term Debt

 

Expected Maturity

Expected Maturity

 

Amount

 

 

 

 

DP&L’s Long-term Debt

 

Date

 

 

 

($ in millions)

 

Average Rate

 

 

Amount

 

Average Rate

 

 

($ in millions)

 

 

 

 

 

 

 

 

2007

2007

 

$

0.7

 

6.2

%

 

$

0.4

 

6.3

%

2008

2008

 

0.7

 

6.9

%

 

0.7

 

6.9

%

2009

2009

 

0.7

 

6.9

%

 

0.8

 

6.9

%

2010

2010

 

0.6

 

6.9

%

 

0.6

 

6.9

%

2011

2011

 

 

 

 

 

 

2012

2012

 

 

 

 

 

 

Thereafter

Thereafter

 

783.3

 

5.0

%

 

783.2

 

5.0

%

Total

Total

 

$

786.0

 

5.0

%

 

$

785.7

 

5.0

%

 

 

 

 

 

 

 

 

 

 

Fair Value

Fair Value

 

$

786.2

 

 

 

 

$

767.3

 

 

 

 

Debt maturities for DPL and DP&L in 2007 are expected to be financed with a combination of short-term borrowings, tax-exempt pollution control bonds and internal funds.

CRITICAL ACCOUNTING ESTIMATES

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

Different estimates could have a material effect on our financial results. Judgments and uncertainties affecting the application of these policies and estimates may result in materially different amounts being reported under different conditions or circumstances.  Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; the valuation of insurance and claims costs; valuation allowances for receivables and deferred income taxes; the valuation of reserves related to current litigation; and assets and liabilities related to employee benefits. Actual results may differ from those estimates.  Refer to our 2006 Annual Report filed on Form 10-K for a complete listing of our critical accounting policies and estimates.

47




Recently Issued Accounting Pronouncements

A discussion of recently issued accounting pronouncements is described in Note 1 of Notes to Condensed 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.


OPERATING STATISTICS

 

DPL Inc.

 

DP&L (a)

 

 

DPL Inc.

 

DP&L (a)

 

 

Three Months Ended
March 31,

 

Three Months Ended
March 31,

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

2007

 

2006

 

2007

 

2006

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Electric sales (millions in kWh)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

1,638

 

1,468

 

1,638

 

1,468

 

 

1,133

 

1,039

 

2,771

 

2,507

 

1,133

 

1,039

 

2,771

 

2,507

 

Commercial

 

932

 

893

 

932

 

893

 

 

1,005

 

938

 

1,937

 

1,831

 

1,005

 

938

 

1,937

 

1,831

 

Industrial

 

977

 

988

 

977

 

988

 

 

1,117

 

1,097

 

2,094

 

2,085

 

1,117

 

1,097

 

2,094

 

2,085

 

Other retail

 

338

 

338

 

338

 

338

 

 

376

 

351

 

714

 

689

 

376

 

351

 

714

 

689

 

Total retail

 

3,885

 

3,687

 

3,885

 

3,687

 

 

3,631

 

3,425

 

7,516

 

7,112

 

3,631

 

3,425

 

7,516

 

7,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

1,120

 

819

 

1,120

 

819

 

 

558

 

681

 

1,678

 

1,500

 

558

 

681

 

1,678

 

1,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

5,005

 

4,506

 

5,005

 

4,506

 

 

4,189

 

4,106

 

9,194

 

8,612

 

4,189

 

4,106

 

9,194

 

8,612

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues ($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

147,977

 

$

130,631

 

$

147,977

 

$

130,631

 

 

$

114,340

 

$

101,464

 

$

262,317

 

$

232,095

 

$

114,340

 

$

101,464

 

$

262,317

 

$

232,095

 

Commercial

 

74,698

 

71,299

 

70,987

 

65,890

 

 

81,064

 

73,000

 

155,762

 

144,299

 

75,888

 

67,630

 

146,875

 

133,520

 

Industrial

 

57,496

 

57,805

 

31,619

 

30,835

 

 

62,993

 

59,687

 

120,489

 

117,492

 

34,905

 

32,537

 

66,524

 

63,372

 

Other retail

 

21,526

 

20,607

 

18,408

 

20,669

 

 

24,304

 

21,627

 

45,830

 

42,234

 

19,659

 

21,626

 

38,067

 

42,295

 

Other miscellaneous revenues

 

2,850

 

2,979

 

2,864

 

2,984

 

 

1,433

 

2,414

 

4,283

 

5,393

 

1,453

 

2,427

 

4,317

 

5,411

 

Total retail

 

$

304,547

 

$

283,321

 

$

271,855

 

$

251,009

 

 

$

284,134

 

$

258,192

 

$

588,681

 

$

541,513

 

$

246,245

 

$

225,684

 

$

518,100

 

$

476,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

56,685

 

37,420

 

90,032

 

70,360

 

 

30,418

 

30,522

 

87,103

 

67,942

 

68,975

 

63,671

 

159,007

 

134,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RTO ancillary revenues

 

15,662

 

17,704

 

15,662

 

17,704

 

 

25,894

 

17,339

 

41,556

 

35,043

 

25,894

 

17,339

 

41,556

 

35,043

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenues, net of fuel costs

 

2,799

 

2,698

 

 

 

 

2,694

 

2,925

 

5,493

 

5,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

379,693

 

$

341,143

 

$

377,549

 

$

339,073

 

 

$

343,140

 

$

308,978

 

$

722,833

 

$

650,121

 

$

341,114

 

$

306,694

 

$

718,663

 

$

645,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electric customers at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

457,754

 

457,248

 

457,754

 

457,248

 

 

456,098

 

456,654

 

456,098

 

456,654

 

456,098

 

456,654

 

456,098

 

456,654

 

Commercial

 

49,373

 

48,977

 

49,373

 

48,977

 

 

49,450

 

49,134

 

49,450

 

49,134

 

49,450

 

49,134

 

49,450

 

49,134

 

Industrial

 

1,817

 

1,840

 

1,817

 

1,840

 

 

1,818

 

1,839

 

1,818

 

1,839

 

1,818

 

1,839

 

1,818

 

1,839

 

Other

 

6,350

 

6,315

 

6,350

 

6,315

 

 

6,377

 

6,338

 

6,377

 

6,338

 

6,377

 

6,338

 

6,377

 

6,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

515,294

 

514,380

 

515,294

 

514,380

 

 

513,743

 

513,965

 

513,743

 

513,965

 

513,743

 

513,965

 

513,743

 

513,965

 


(a)   DP&L sells power to DPLER (a subsidiary of DPL).  These sales are classified as wholesale on DP&L’s financial statements and retail sales for DPL.  The kWh volumes contain all volumes distributed on the DP&L system which include the retail sales by DPLER.  The sales for resale volumes are omitted to avoid duplicate reporting.reporting


Item 3.  Quantitative and Qualitative Disclosures about Market Risk

See the “Market Risk” section of Item 2.


Item 4.  Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are responsible for establishing and maintaining our disclosure controls and procedures.  These controls and procedures were designed to ensure that material information relating to us and our subsidiaries is communicated to the CEO and CFO.  We evaluated these disclosure controls and procedures as of the end of the period covered by this report with the participation of our CEO and CFO.  Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective: (i) to ensure that information required to be disclosed by us in the reports that


we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the most recently completed quarter ended March 31,June 30, 2007 that has materially affected, or is reasonably likely to materially affect, internal control over reporting.


PART II


Item 1 - Legal Proceedings

In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  We believe the amounts provided in our Condensed Consolidated Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, and other matters discussed below, and to comply with applicable laws and regulations will not exceed the amounts reflected in our Condensed Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of March 31,June 30, 2007, cannot be reasonably determined.

Certain legal proceedings in which we are involved are discussed in Part I, Item 1-Environmental1—Environmental Considerations, Item 1-Competition1—Competition and Regulation, Item 3 and Note 15 to the Consolidated Financial Statements included therein of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.  The following discussion is limited to recent developments concerning our legal proceedings and should be read in conjunction with this earlier report.

Former Executive Litigation

Cumulatively through March 31,On May 21, 2007, we havesettled the litigation with the three former executives.  As part of this settlement, the three former executives relinquished and dismissed all their claims including those related to certain deferred compensation, restricted stock units (RSUs), MVE incentives, stock options and legal fees. The RSUs and stock options relinquished and forfeited were 1.3 million and 3.6 million, respectively.  Prior to the settlement date, DPL had accrued for accounting purposes, obligations of approximately $61$64.2 million of which DP&L had accrued obligations of approximately $60.3 million. Included in these amounts is approximately $3.1 million associated with the forfeiture of stock options.  In exchange for our payment of $25 million, all of these claims were settled.

As a result of this settlement DPL realized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2 million, respectively.  The net gain is comprised of the reversal of the $64.2 million of accrued obligations less the $25 million settlement.  The obligations related to reflect claims made by three former executives regarding deferred compensation, estimatedthe discontinued operations were associated with the management of DPL’s financial asset portfolio which was conducted in our MVE incentives and/or legal fees thatsubsidiary.  The MVE operations were discontinued in 2005 with the former executives assert are payable per contracts.  We disputesale of the financial asset portfolio.  The $25 million settlement expense was allocated between continuing and discontinued operations based on the proportionate share of continuing and discontinued obligations.  The following table outlines the components of DPL’s net pre-tax gain for continuing and discontinued operations:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

50.8

 

Allocated settlement expense

 

(19.8

)

Net gain from continuing operations

 

$

31.0

 

 

 

 

 

Discontinued operations:

 

 

 

Reversal of accrued obligations

 

$

13.4

 

Allocated settlement expense

 

(5.2

)

Net gain from discontinued operations

 

$

8.2

 

 

 

 

 


As a result of this settlement, DP&L realized a net pre-tax gain in continuing operations of approximately $35.3 million.  Accrued obligations associated with the former executives’ entitlement to anylitigation were recorded by DP&L since the obligations were associated with our non-qualified benefit plans. DP&L had no ownership of those sumsDPL’s financial asset portfolio business which was discontinued, therefore these liabilities were reversed and any other sumsDP&L net pre-tax gain was recorded within continuing operations. The following table outlines the former executives assert are due to themcomponents of DP&L’s net gain:

Continuing operations:

 

 

 

Reversal of accrued obligations

 

$

60.3

 

Allocated settlement expense

 

(25.0

)

Net gain

 

$

35.3

 

The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.  As part of this transaction, DPL and as noted above, we are pursuing litigation against them contesting all such claims.DP&L recorded a $3.2 million realized gain which is reflected in investment income.

Environmental

In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Station in the United States District Court for the Southern District of Ohio for alleged violations of the CAA and the Station’s operating permit.  DP&L, on behalf of all co-owners, is leading the defense of this matter.  A sizable amount of discovery has taken place, andthe first set of expert reports arehave been filed with additional report scheduled to be filed at various times from May throughin September 2007.  Dispositive motions are to be filed in January 2008.  No trial date has been set yet.

On April 2, 2007, the U.S. Supreme Court unanimously overturned the rulings of two lower courts and concluded that the Clean Air Act’s (CAA) New Source Review (NSR) requirements are triggered when a major physical or operational change at a facility results in an increase in the facility’s annual emissions (Environmental Defense et al, v. Duke Energy Corp. et al.).  The outcome of this case is significant to DP&L


because it eliminates one of DP&L’s major arguments in the lawsuit filed against it by the Sierra Club.  The Court decided that an annual rate of emissions could be used to determine if major modifications have been made to a plant as opposed to an hourly emission rate as Duke had argued.  Using the annual rate makes it more likely that most plant modifications will be found to be “major” modifications, thus requiring EPA permits.  DP&L can still defend against the allegations of NSR violations if it can establish that the activities at issue did not cause total annual emissions to increase or that the projects that resulted in increased emissions were undertaken for routine maintenance, repair and replacement activities.


Item 1a – Risk Factors

A comprehensive listing of risk factors that we consider to be the most significant to your decision to invest in our stock is provided in our most recent Annual Report on Form 10-K and is incorporated herein by reference.  The Form 10-K may be obtained as discussed on Page 4, ‘Website Access to Reports.’  If any of these events occur, our business, financial position or results of operation could be materially affected.  The following risk factors included in our 2006 Form 10-K for year ended December 31, 2006 has been updated as follows:


Reliance on Third Parties

We rely on many third party suppliers and contractors in our energy production, transmission and distribution functions, including the purchase and delivery of coal and other inventory, the construction of capital assets, and waste disposal management associated with our production processes (such as bottom ash, fly ash, gypsum).  Unanticipated changes in our purchasing processes, supplier availability, supplier performance and pricing may affect our business and operating results.  In addition, we rely on others to provide professional services, such as, but not limited to, actuarial calculations, internal audit services, payroll processing and various consulting services.

Employees

Approximately 53% our employees are under a collective bargaining agreement.  If we are unable to negotiate future collective bargaining agreements, we could experience work stoppages which may affect its business and operating results.

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

None


Item 3 – Defaults Upon Senior Securities

None


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

NoneDPL held its Annual Meeting of Shareholders on April 27, 2007 at which security holders elected three directors nominated for three-year terms expiring 2010.  The results of the voting were as follows:

 

 

FOR

 

WITHHELD

 

BROKER NO-VOTE

 

Robert D. Biggs

 

96,810,176

 

1,798,891

 

 

W August Hillenbrand

 

96,824,955

 

1,784,112

 

 

Ned J. Sifferlen

 

97,139,872

 

1,469,195

 

 

The other directors whose terms of office continued after the Annual Meeting are Paul M. Barbas, Barbara S. Graham and Glenn E. Harder (each in the Class of 2008) and Paul R. Bishop, Ernie Green and General Lester L. Lyles (Ret.) (each of the class of 2009).  On May 29, 2007, Ernie Green retired from the Board of Directors of DPL Inc.



Shareholders also voted on an amendment to the Regulations of DPL Inc. to provide a majority vote alternative for the election of directors.  The results of the voting were as follows:

FOR

 

AGAINST

 

ABSTAIN

 

BROKER NO-VOTE

 

74,499,396

 

3,374,009

 

1,104,999

 

19,630,663

 

Shareholders also voted on two shareholder proposals.  The first shareholder proposal covered a recommendation on executive bonuses.  The results of the voting were as follows:

FOR

 

AGAINST

 

ABSTAIN

 

BROKER NO-VOTE

 

15,607,538

 

61,329,703

 

2,041,164

 

19,630,662

 

The second shareholder proposal covered majority vote reincorporation.  The results of the voting were as follows:

FOR

 

AGAINST

 

ABSTAIN

 

BROKER NO-VOTE

 

25,101,148

 

51,864,501

 

2,012,756

 

19,630,662

 

Shareholders also voted to ratify the selection of KPMG LLP as the Company’s independent auditor for 2007.  The results of the voting were as follows:

FOR

 

AGAINST

 

ABSTAIN

 

BROKER NO-VOTE

 

96,680,131

 

1,055,580

 

873,354

 

 

Item 5 – Other Information

None


Item 6 – Exhibits

DPL Inc.

 

DP&L

 

Exhibit
Number

 

Exhibit

 

Location

X

 

X

 

31(a)

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith as Exhibit 31(a)

 

 

 

 

 

 

 

 

 

X

 

X

 

31(b)

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith as Exhibit 31(b)

 

 

 

 

 

 

 

 

 

X

 

X

 

32(a)

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith as Exhibit 32(a)

 

 

 

 

 

 

 

 

 

X

 

X

 

32(b)

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith as Exhibit 32(b)

 

50





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, DPL Inc. and The Dayton Power and Light Company has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.

 

DPL INC.

 

 

The Dayton Power and Light Company

 

 

(Registrants)

 

Date:

 

April 30, July 26, 2007

 

/s/ Paul M. Barbas

 

 

 

 

Paul M. Barbas

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(principal executive officer)

 

 

 

 

 

 

 

April 30,

July 26, 2007

 

/s/ John J. Gillen

 

 

 

 

John J. Gillen

 

 

 

 

Senior Vice President and Chief Financial Officer

 

 

 

 

(principal financial officer)

 

 

 

 

 

 

 

April 30,

July 26, 2007

 

/s/ Frederick J. Boyle

 

 

 

 

Frederick J. Boyle

 

 

 

 

Controller and Chief Accounting Officer

 

 

 

 

(principal accounting officer)

 

5161