UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ýx QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20072008
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 | Registrant, State of Incorporation, | I.R.S. | |||
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1-9052 |
| DPL INC. |
| 31-1163136 | |
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| (An Ohio Corporation) |
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| 1065 Woodman Drive | |||
Dayton, Ohio 45432 | |||||
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| 937-224-6000 |
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1-2385 | THE DAYTON POWER AND LIGHT COMPANY |
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| 31-0258470 | |||
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| (An Ohio Corporation) | |||
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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 | No o | |
The Dayton Power and Light Company |
| Yes | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Smaller | |||||||
accelerated | Accelerated | Non-accelerated | reporting | ||||||
filer | filer | filer | company | ||||||
DPL Inc. |
| x | o | o | o | ||||
The Dayton Power and Light Company |
| o |
| o | x | o |
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 | |
The Dayton Power and Light Company |
| Yes o | No |
As of October 29, 2007,July 22, 2008, each registrant had the following shares of common stock outstanding:
Registrant |
| Description |
| Shares Outstanding |
DPL Inc. | Common Stock, $0.01 par value |
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The Dayton Power and Light Company | Common Stock, $0.01 par value |
| 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
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
DPL Inc. and The Dayton Power and Light Company file current, annual and quarterly reports, proxy statements (as to (DPL Inc.)only), 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.room. Our SEC filings are also available to the public from the SEC’s web site at http://www.sec.gov.
Our public internet site is http://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 —I – 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 93%94% of DPL’s total consolidated asset base. Throughout this report, the terms we, us, our“we,” “us,” “our,” and ours“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. DPL and DP&L now file combined SEC reports on an interim and annual basis.
3
Item 1 — – Financial Statements
DPL INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF RESULTS OF OPERATIONS
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| Three Months Ended |
| Six Months Ended |
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| June 30, |
| June 30, |
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$ in millions except per share amounts |
| Three Months Ended |
| Nine Months Ended |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Revenues |
| $ | 422.0 |
| $ | 392.4 |
| $ | 1,145.6 |
| $ | 1,042.5 |
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| $ | 378.8 |
| $ | 343.1 |
| $ | 794.9 |
| $ | 722.8 |
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Cost of revenues: |
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Fuel |
| 95.9 |
| 99.4 |
| 250.5 |
| 262.2 |
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| 68.4 |
| 63.5 |
| 130.3 |
| 153.8 |
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Purchased power |
| 82.1 |
| 61.1 |
| 217.5 |
| 123.4 |
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| 86.1 |
| 83.2 |
| 169.1 |
| 135.4 |
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Total cost of revenues |
| 178.0 |
| 160.5 |
| 468.0 |
| 385.6 |
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| 154.5 |
| 146.7 |
| 299.4 |
| 289.2 |
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Gross margin |
| 244.0 |
| 231.9 |
| 677.6 |
| 656.9 |
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| 224.3 |
| 196.4 |
| 495.5 |
| 433.6 |
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Operating expenses: |
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Operation and maintenance |
| 67.3 |
| 64.4 |
| 198.1 |
| 197.4 |
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| 69.8 |
| 61.5 |
| 132.2 |
| 130.8 |
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Depreciation and amortization |
| 33.9 |
| 39.1 |
| 102.9 |
| 114.2 |
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| 34.0 |
| 35.5 |
| 67.2 |
| 69.0 |
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General taxes |
| 29.1 |
| 27.5 |
| 84.6 |
| 82.5 |
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| 32.5 |
| 27.5 |
| 62.3 |
| 55.5 |
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Amortization of regulatory assets |
| 2.9 |
| 2.4 |
| 8.3 |
| 5.2 |
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| 2.4 |
| 2.5 |
| 5.5 |
| 5.4 |
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Total operating expenses |
| 133.2 |
| 133.4 |
| 393.9 |
| 399.3 |
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| 138.7 |
| 127.0 |
| 267.2 |
| 260.7 |
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Operating income |
| 110.8 |
| 98.5 |
| 283.7 |
| 257.6 |
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| 85.6 |
| 69.4 |
| 228.3 |
| 172.9 |
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Other income / (expense), net |
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Net gain on settlement of executive litigation |
| — |
| — |
| 31.0 |
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| 31.0 |
| — |
| 31.0 |
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Investment income |
| 1.2 |
| 3.0 |
| 9.5 |
| 13.9 |
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| 0.9 |
| 5.3 |
| 2.6 |
| 8.3 |
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Interest expense |
| (16.9 | ) | (24.9 | ) | (59.4 | ) | (77.1 | ) |
| (25.0 | ) | (19.4 | ) | (46.0 | ) | (42.5 | ) | ||||||||
Other income (deductions) |
| 2.0 |
| (0.2 | ) | 2.6 |
| 0.1 |
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| 0.2 |
| (0.2 | ) | (0.5 | ) | 0.6 |
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Total other income / (expense), net |
| (13.7 | ) | (22.1 | ) | (16.3 | ) | (63.1 | ) | |||||||||||||||||
Total other income/(expense) |
| (23.9 | ) | 16.7 |
| (43.9 | ) | (2.6 | ) | |||||||||||||||||
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Earnings from continuing operations before income tax |
| 97.1 |
| 76.4 |
| 267.4 |
| 194.5 |
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| 61.7 |
| 86.1 |
| 184.4 |
| 170.3 |
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Income tax expense |
| 36.4 |
| 29.0 |
| 101.9 |
| 73.2 |
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| 14.1 |
| 32.5 |
| 59.5 |
| 65.5 |
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Earnings from continuing operations |
| 60.7 |
| 47.4 |
| 165.5 |
| 121.3 |
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| 47.6 |
| 53.6 |
| 124.9 |
| 104.8 |
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Earnings from discontinued operations, net of tax |
| — |
| 3.4 |
| 10.0 |
| 11.0 |
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| 5.1 |
| — |
| 10.0 |
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Net income |
| $ | 60.7 |
| $ | 50.8 |
| $ | 175.5 |
| $ | 132.3 |
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Net Income |
| $ | 47.6 |
| $ | 58.7 |
| $ | 124.9 |
| $ | 114.8 |
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Average number of common shares outstanding (millions) |
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Basic |
| 108.0 |
| 107.7 |
| 107.8 |
| 113.9 |
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| 109.4 |
| 107.9 |
| 109.4 |
| 107.7 |
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Diluted |
| 115.4 |
| 117.4 |
| 118.1 |
| 123.3 |
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| 117.3 |
| 119.5 |
| 116.8 |
| 119.4 |
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Earnings per share of common stock |
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Basic: |
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Earnings from continuing operations |
| $ | 0.56 |
| $ | 0.44 |
| $ | 1.54 |
| $ | 1.06 |
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| $ | 0.43 |
| $ | 0.50 |
| $ | 1.14 |
| $ | 0.98 |
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Earnings from discontinued operations |
| — |
| 0.03 |
| 0.09 |
| 0.10 |
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| — |
| 0.04 |
| — |
| 0.09 |
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Total Basic |
| $ | 0.56 |
| $ | 0.47 |
| $ | 1.63 |
| $ | 1.16 |
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| $ | 0.43 |
| $ | 0.54 |
| $ | 1.14 |
| $ | 1.07 |
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Diluted: |
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Earnings from continuing operations |
| $ | 0.53 |
| $ | 0.40 |
| $ | 1.40 |
| $ | 0.98 |
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| $ | 0.41 |
| $ | 0.45 |
| $ | 1.07 |
| $ | 0.88 |
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Earnings from discontinued operations |
| — |
| 0.03 |
| 0.09 |
| 0.09 |
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| — |
| 0.04 |
| — |
| 0.08 |
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Total Diluted |
| $ | 0.53 |
| $ | 0.43 |
| $ | 1.49 |
| $ | 1.07 |
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| $ | 0.41 |
| $ | 0.49 |
| $ | 1.07 |
| $ | 0.96 |
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Dividends paid per share of common stock |
| $ | 0.26 |
| $ | 0.25 |
| $ | 0.78 |
| $ | 0.75 |
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| $ | 0.275 |
| $ | 0.260 |
| $ | 0.550 |
| $ | 0.520 |
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See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
4
DPL INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
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| Six Months Ended |
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| June 30, |
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$ in millions |
| Nine Months Ended |
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| 2008 |
| 2007 |
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| 2007 |
| 2006 |
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Cash flows from operating activities: |
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Net income |
| $ | 175.5 |
| $ | 132.3 |
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| $ | 124.9 |
| $ | 114.8 |
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Less: Income from discontinued operations |
| (10.0 | ) | (11.0 | ) | |||||||||
Income from continuing operations |
| 165.5 |
| 121.3 |
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Less: Earnings from discontinued operations, net of tax |
| — |
| (10.0 | ) | |||||||||
Earnings from continuing operations |
| 124.9 |
| 104.8 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 102.9 |
| 114.2 |
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| 67.2 |
| 69.0 |
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Gain on settlement of executive litigation |
| (31.0 | ) | — |
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Net gain on settlement of executive litigation |
| — |
| (31.0 | ) | |||||||||
Gain on sale of aircraft |
| (6.0 | ) | — |
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| — |
| (6.0 | ) | ||||
Amortization of regulatory assets |
| 8.3 |
| 5.2 |
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| 5.5 |
| 5.4 |
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Deferred income taxes |
| 12.1 |
| (4.7 | ) |
| 28.5 |
| 14.0 |
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Captive insurance provision |
| 1.5 |
| — |
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| (0.5 | ) | 0.3 |
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Gain on sale of other investments |
| (3.0 | ) | (2.2 | ) | |||||||||
Changes in certain assets and liabilities: |
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Accounts receivable |
| (39.9 | ) | (32.8 | ) |
| (12.2 | ) | (42.2 | ) | ||||
Accounts payable |
| (0.8 | ) | 38.4 |
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| 36.1 |
| 28.1 |
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Accrued taxes payable |
| 5.7 |
| (11.8 | ) |
| (38.6 | ) | (30.8 | ) | ||||
Accrued interest payable |
| (11.4 | ) | (7.3 | ) |
| (0.8 | ) | (6.1 | ) | ||||
Prepayments |
| 0.4 |
| 6.0 |
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| (0.1 | ) | (0.2 | ) | ||||
Inventories |
| (18.8 | ) | (7.6 | ) |
| (0.9 | ) | (11.4 | ) | ||||
Deferred compensation assets |
| 6.9 |
| 1.3 |
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| (3.8 | ) | 4.6 |
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Deferred compensation obligations |
| 1.1 |
| (0.3 | ) |
| (6.7 | ) | 1.3 |
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Other |
| 18.3 |
| (7.3 | ) |
| 1.8 |
| 20.3 |
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Net cash provided by operating activities |
| 211.8 |
| 212.4 |
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| 200.4 |
| 120.1 |
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Cash flows from investing activities: |
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Capital expenditures |
| (250.1 | ) | (283.9 | ) |
| (118.4 | ) | (178.9 | ) | ||||
Purchases of short-term investments and securities |
| — |
| (856.0 | ) | |||||||||
Sales of short-term investments and securities |
| — |
| 984.0 |
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Proceeds from the sale of peaking units, net |
| 151.0 |
| — |
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| — |
| 151.0 |
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Proceeds from the sale of aircraft |
| 7.4 |
| — |
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| — |
| 7.4 |
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Investment funds held in trust |
| — |
| (2.2 | ) | |||||||||
Net cash used for investing activities |
| (91.7 | ) | (155.9 | ) |
| (118.4 | ) | (22.7 | ) | ||||
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Cash flows from financing activities: |
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Purchase of treasury shares |
| — |
| (400.0 | ) | |||||||||
Issuance of pollution control bonds |
| — |
| 100.0 |
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Pollution control bond proceeds held in trust |
| — |
| (100.0 | ) | |||||||||
Exercise of stock options |
| 14.5 |
| 0.2 |
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| 1.1 |
| 14.5 |
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Excess tax impact related to exercise of stock options |
| 0.5 |
| — |
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Tax impact related to exercise of stock options |
| 0.1 |
| 0.5 |
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Retirement of long-term debt |
| (225.0 | ) | — |
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| (100.0 | ) | (225.0 | ) | ||||
Withdrawal of restricted funds held in trust |
| 10.1 |
| 23.1 |
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Withdrawal of restricted funds held in trust, net |
| 20.5 |
| 10.1 |
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Dividends paid on common stock |
| (83.7 | ) | (85.7 | ) |
| (59.9 | ) | (55.8 | ) | ||||
Issuance of short-term debt, net |
| 95.0 |
| — |
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Retirement of short-term debt, net |
| (95.0 | ) | — |
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Repurchase of pollution control bonds |
| (90.0 | ) | — |
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Withdrawals from revolving credit facility |
| 90.0 |
| 95.0 |
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Repayment of borrowings from revolving credit facility |
| — |
| (95.0 | ) | |||||||||
Net cash used for financing activities |
| (283.6 | ) | (462.4 | ) |
| (138.2 | ) | (255.7 | ) | ||||
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Cash and cash equivalents: |
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Net change |
| (163.5 | ) | (405.9 | ) |
| (56.2 | ) | (158.3 | ) | ||||
Balance at beginning of period |
| 262.2 |
| 595.8 |
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| 134.9 |
| 262.2 |
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Cash and cash equivalents at end of period |
| $ | 98.7 |
| $ | 189.9 |
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| $ | 78.7 |
| $ | 103.9 |
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Supplemental cash flow information: |
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Interest paid, net of amounts capitalized |
| $ | 68.8 |
| $ | 80.4 |
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| $ | 43.4 |
| $ | 47.2 |
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Income taxes paid |
| $ | 87.6 |
| $ | 79.7 |
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Income taxes paid, net |
| $ | 70.4 |
| $ | 79.3 |
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Non-cash financing and investing activities: |
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Restricted funds held in trust |
| $ | 0.5 |
| $ | 75.5 |
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| $ | 16.5 |
| $ | 2.2 |
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Accruals for capital expenditures |
| $ | 36.2 |
| $ | 59.5 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
5
DPL INC.
CONDENSED CONSOLIDATED BALANCE SHEETSHEETS
|
| At |
| At |
| |||||||||
|
| June 30, |
| December 31, |
| |||||||||
$ in millions |
| At |
| At |
|
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 98.7 |
| $ | 262.2 |
|
| $ | 78.7 |
| $ | 134.9 |
|
Restricted funds held in trust |
| 0.5 |
| 10.1 |
|
| 16.5 |
| 37.0 |
| ||||
Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively |
| 262.1 |
| 225.0 |
| |||||||||
Accounts receivable, less provision for uncollectible accounts of $1.3 and $1.5, respectively |
| 248.2 |
| 241.2 |
| |||||||||
Inventories, at average cost |
| 104.2 |
| 85.4 |
|
| 105.9 |
| 105.0 |
| ||||
Taxes applicable to subsequent years |
| 11.9 |
| 48.0 |
|
| 27.4 |
| 48.0 |
| ||||
Other current assets |
| 8.4 |
| 37.7 |
|
| 18.0 |
| 11.8 |
| ||||
Total current assets |
| 485.8 |
| 668.4 |
|
| 494.7 |
| 577.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Property: |
|
|
|
|
|
|
|
|
|
| ||||
Held and used: |
|
|
|
|
| |||||||||
Property, plant and equipment |
| 4,943.6 |
| 4,718.5 |
|
| 5,113.9 |
| 5,011.6 |
| ||||
Less: Accumulated depreciation and amortization |
| (2,208.5 | ) | (2,159.2 | ) |
| (2,292.1 | ) | (2,234.6 | ) | ||||
Total net property held and used |
| 2,735.1 |
| 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 |
| |||||||||
Total net property |
| 2,821.8 |
| 2,777.0 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other noncurrent assets: |
|
|
|
|
|
|
|
|
|
| ||||
Regulatory assets |
| 137.0 |
| 148.6 |
|
| 160.4 |
| 165.2 |
| ||||
Other assets |
| 54.2 |
| 84.7 |
| |||||||||
Other deferred assets |
| 49.5 |
| 46.5 |
| |||||||||
Total other noncurrent assets |
| 191.2 |
| 233.3 |
|
| 209.9 |
| 211.7 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ | 3,412.1 |
| $ | 3,612.2 |
|
| $ | 3,526.4 |
| $ | 3,566.6 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
6
DPL INC.Table of Contents
CONDENSED CONSOLIDATED BALANCE SHEET
|
|
| At |
| At |
| ||||||||||||||||
|
|
| June 30, |
| December 31, |
| ||||||||||||||||
$ in millions | $ in millions |
| At |
| At |
| $ in millions |
| 2008 |
| 2007 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Current liabilities: | Current liabilities: |
|
|
|
|
| Current liabilities: |
|
|
|
|
| ||||||||||
Current portion - long-term debt | Current portion - long-term debt |
| $ | 100.7 |
| $ | 225.9 |
| Current portion - long-term debt |
| $ | 175.7 |
| $ | 100.7 |
| ||||||
Accounts payable | Accounts payable |
| 186.0 |
| 169.4 |
| Accounts payable |
| 189.9 |
| 163.1 |
| ||||||||||
Accrued taxes | Accrued taxes |
| 124.8 |
| 155.2 |
| Accrued taxes |
| 111.7 |
| 110.8 |
| ||||||||||
Accrued interest | Accrued interest |
| 24.2 |
| 35.2 |
| Accrued interest |
| 25.2 |
| 25.8 |
| ||||||||||
Revolving credit borrowings | Revolving credit borrowings |
| 90.0 |
| — |
| ||||||||||||||||
Other current liabilities | Other current liabilities |
| 27.4 |
| 38.3 |
| Other current liabilities |
| 27.7 |
| 27.2 |
| ||||||||||
Total current liabilities | Total current liabilities |
| 463.1 |
| 624.0 |
| Total current liabilities |
| 620.2 |
| 427.6 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Noncurrent liabilities: | Noncurrent liabilities: |
|
|
|
|
| Noncurrent liabilities: |
|
|
|
|
| ||||||||||
Long-term debt | Long-term debt |
| 1,451.6 |
| 1,551.8 |
| Long-term debt |
| 1,276.4 |
| 1,541.5 |
| ||||||||||
Deferred taxes | Deferred taxes |
| 371.1 |
| 355.2 |
| Deferred taxes |
| 403.7 |
| 374.9 |
| ||||||||||
Unamortized investment tax credit | Unamortized investment tax credit |
| 41.4 |
| 43.6 |
| Unamortized investment tax credit |
| 39.4 |
| 40.7 |
| ||||||||||
Insurance and claims costs | Insurance and claims costs |
| 23.4 |
| 21.9 |
| Insurance and claims costs |
| 19.5 |
| 20.0 |
| ||||||||||
Other deferred credits | Other deferred credits |
| 222.6 |
| 280.7 |
| Other deferred credits |
| 198.7 |
| 266.3 |
| ||||||||||
Total noncurrent liabilites | Total noncurrent liabilites |
| 2,110.1 |
| 2,253.2 |
| Total noncurrent liabilites |
| 1,937.7 |
| 2,243.4 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Cumulative preferred stock not subject to mandatory redemption | Cumulative preferred stock not subject to mandatory redemption |
| 22.9 |
| 22.9 |
| Cumulative preferred stock not subject to mandatory redemption |
| 22.9 |
| 22.9 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Commitments and contingencies (Note 9) |
| — |
| — |
| |||||||||||||||||
Commitments and contingencies (Note 10) | Commitments and contingencies (Note 10) |
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Common shareholders’ equity: | Common shareholders’ equity: |
|
|
|
|
| Common shareholders’ equity: |
|
|
|
|
| ||||||||||
Common stock, at par value of $0.01 per share: | Common stock, at par value of $0.01 per share: |
|
|
|
|
| Common stock, at par value of $0.01 per share: |
|
|
|
|
| ||||||||||
|
| September 2007 |
| December 2006 |
|
|
|
|
|
| June 2008 |
| December 2007 |
|
|
|
|
| ||||
Shares authorized |
| 250,000,000 |
| 250,000,000 |
|
|
|
|
|
| 250,000,000 |
| 250,000,000 |
|
|
|
|
| ||||
Shares issued |
| 163,724,211 |
| 163,724,211 |
|
|
|
|
|
| 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 |
|
| 113,609,122 |
| 113,558,444 |
| 1.1 |
| 1.1 |
| ||||
Warrants | Warrants |
| 50.0 |
| 50.0 |
| Warrants |
| 50.0 |
| 50.0 |
| ||||||||||
Common stock held by employee plans | Common stock held by employee plans |
| (71.1 | ) | (69.0 | ) | Common stock held by employee plans |
| (29.0 | ) | (39.7 | ) | ||||||||||
Accumulated other comprehensive loss | Accumulated other comprehensive loss |
| (9.9 | ) | (6.5 | ) | Accumulated other comprehensive loss |
| (11.9 | ) | (9.2 | ) | ||||||||||
Retained earnings | Retained earnings |
| 845.9 |
| 736.5 |
| Retained earnings |
| 935.4 |
| 870.5 |
| ||||||||||
Total common shareholders’ equity | Total common shareholders’ equity |
| 816.0 |
| 712.1 |
| Total common shareholders’ equity |
| 945.6 |
| 872.7 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Total Liabilities and Shareholders’ Equity | Total Liabilities and Shareholders’ Equity |
| $ | 3,412.1 |
| $ | 3,612.2 |
| Total Liabilities and Shareholders’ Equity |
| $ | 3,526.4 |
| $ | 3,566.6 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
7
THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF RESULTS OF OPERATIONS
|
| Three Months Ended |
| Six Months Ended |
| |||||||||||||||||||||
|
| June 30, |
| June 30, |
| |||||||||||||||||||||
$ in millions |
| Three Months Ended |
| Nine Months Ended |
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Revenues |
| $ | 419.6 |
| $ | 390.3 |
| $ | 1,139.1 |
| $ | 1,036.1 |
|
| $ | 376.4 |
| $ | 341.2 |
| $ | 790.3 |
| $ | 718.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Fuel |
| 87.6 |
| 90.9 |
| 240.2 |
| 251.0 |
|
| 65.9 |
| 62.3 |
| 126.6 |
| 151.8 |
| ||||||||
Purchased power |
| 91.7 |
| 70.7 |
| 228.2 |
| 134.7 |
|
| 87.8 |
| 83.8 |
| 171.7 |
| 136.5 |
| ||||||||
Total cost of revenues |
| 179.3 |
| 161.6 |
| 468.4 |
| 385.7 |
|
| 153.7 |
| 146.1 |
| 298.3 |
| 288.3 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Gross margin |
| 240.3 |
| 228.7 |
| 670.7 |
| 650.4 |
|
| 222.7 |
| 195.1 |
| 492.0 |
| 430.4 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operation and maintenance |
| 64.0 |
| 59.0 |
| 195.8 |
| 172.8 |
|
| 66.0 |
| 72.4 |
| 125.6 |
| 131.8 |
| ||||||||
Depreciation and amortization |
| 31.4 |
| 33.0 |
| 95.2 |
| 96.8 |
|
| 31.5 |
| 33.1 |
| 62.2 |
| 63.8 |
| ||||||||
General taxes |
| 28.8 |
| 27.2 |
| 83.8 |
| 80.3 |
|
| 32.3 |
| 27.4 |
| 61.8 |
| 55.0 |
| ||||||||
Amortization of regulatory assets |
| 2.9 |
| 2.4 |
| 8.3 |
| 5.2 |
|
| 2.4 |
| 2.5 |
| 5.5 |
| 5.4 |
| ||||||||
Total operating expenses |
| 127.1 |
| 121.6 |
| 383.1 |
| 355.1 |
|
| 132.2 |
| 135.4 |
| 255.1 |
| 256.0 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Operating income |
| 113.2 |
| 107.1 |
| 287.6 |
| 295.3 |
|
| 90.5 |
| 59.7 |
| 236.9 |
| 174.4 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other income / (expense), net |
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net gain on settlement of executive litigation |
| — |
| — |
| 35.3 |
| — |
|
| — |
| 35.3 |
| — |
| 35.3 |
| ||||||||
Investment income |
| 1.3 |
| 1.6 |
| 7.5 |
| 4.8 |
|
| 4.2 |
| 4.7 |
| 5.7 |
| 6.2 |
| ||||||||
Interest expense |
| (3.9 | ) | (5.5 | ) | (14.1 | ) | (17.5 | ) |
| (11.2 | ) | (4.8 | ) | (17.8 | ) | (10.2 | ) | ||||||||
Other income (deductions) |
| 2.1 |
| (0.2 | ) | 2.7 |
| 0.1 |
|
| 0.1 |
| (0.2 | ) | (0.6 | ) | 0.6 |
| ||||||||
Total other income / (expense), net |
| (0.5 | ) | (4.1 | ) | 31.4 |
| (12.6 | ) | |||||||||||||||||
Total other income/(expense) |
| (6.9 | ) | 35.0 |
| (12.7 | ) | 31.9 |
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Earnings before income tax |
| 112.7 |
| 103.0 |
| 319.0 |
| 282.7 |
|
| 83.6 |
| 94.7 |
| 224.2 |
| 206.3 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income tax expense |
| 42.1 |
| 39.0 |
| 119.5 |
| 107.8 |
|
| 20.3 |
| 35.6 |
| 71.9 |
| 77.4 |
| ||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income |
| $ | 70.6 |
| $ | 64.0 |
| $ | 199.5 |
| $ | 174.9 |
|
| 63.3 |
| 59.1 |
| 152.3 |
| 128.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Preferred dividends |
| 0.2 |
| 0.2 |
| 0.6 |
| 0.6 |
|
| 0.2 |
| 0.2 |
| 0.4 |
| 0.4 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Earnings on common stock |
| $ | 70.4 |
| $ | 63.8 |
| $ | 198.9 |
| $ | 174.3 |
|
| $ | 63.1 |
| $ | 58.9 |
| $ | 151.9 |
| $ | 128.5 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
8
THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
|
| Six Months Ended |
| |||||||||||
|
| June 30, |
| |||||||||||
$ in millions |
| Nine Months Ended |
|
| 2008 |
| 2007 |
| ||||||
|
| 2007 |
| 2006 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 199.5 |
| $ | 174.9 |
|
| $ | 152.3 |
| $ | 128.9 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
| |||||||||
Depreciation and amortization |
| 95.2 |
| 96.8 |
|
| 62.2 |
| 63.8 |
| ||||
Gain on settlement of executive litigation |
| (35.3 | ) | — |
| |||||||||
Net gain on settlement of executive litigation |
| — |
| (35.3 | ) | |||||||||
Amortization of regulatory assets |
| 8.3 |
| 5.2 |
|
| 5.5 |
| 5.4 |
| ||||
Deferred income taxes |
| 11.0 |
| (13.0 | ) |
| 27.2 |
| 14.0 |
| ||||
Gain on sale of other investments |
| (3.0 | ) | — |
| |||||||||
Changes in certain assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
| (40.0 | ) | (25.7 | ) |
| (13.7 | ) | (42.1 | ) | ||||
Accounts payable |
| (0.5 | ) | 41.2 |
|
| 34.5 |
| 30.0 |
| ||||
Net receivable / payable from / to parent |
| (0.5 | ) | (2.3 | ) | |||||||||
Accrued taxes payable |
| (3.1 | ) | 1.5 |
|
| (37.3 | ) | (31.9 | ) | ||||
Accrued interest payable |
| 2.4 |
| 4.8 |
|
| — |
| 0.2 |
| ||||
Prepayments |
| 0.7 |
| 5.4 |
|
| 0.2 |
| 0.7 |
| ||||
Inventories |
| (19.8 | ) | (7.5 | ) |
| (0.9 | ) | (12.4 | ) | ||||
Deferred compensation assets |
| 7.1 |
| 3.4 |
|
| 1.3 |
| 4.7 |
| ||||
Deferred compensation obligations |
| 1.1 |
| (2.5 | ) |
| (6.7 | ) | 1.3 |
| ||||
Other |
| 16.5 |
| (11.5 | ) |
| (11.7 | ) | 18.3 |
| ||||
Net cash provided by operating activities |
| 239.6 |
| 270.7 |
|
| 212.9 |
| 145.6 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
| (247.8 | ) | (281.7 | ) |
| (117.7 | ) | (177.0 | ) | ||||
Net cash used for investing activities |
| (247.8 | ) | (281.7 | ) |
| (117.7 | ) | (177.0 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Short-term loan from parent |
| 105.0 |
| — |
|
| — |
| 105.0 |
| ||||
Payment on short-term loan to parent |
| (15.0 | ) | — |
| |||||||||
Issuance of pollution control bonds |
| — |
| 100.0 |
| |||||||||
Pollution control bond proceeds held in trust |
| — |
| (100.0 | ) | |||||||||
Withdrawal of restricted funds held in trust |
| 10.1 |
| 23.1 |
| |||||||||
Withdrawals from revolving credit facility |
| 90.0 |
| 95.0 |
| |||||||||
Repurchase of pollution control bonds |
| (90.0 | ) | — |
| |||||||||
Repayment of borrowings from revolving credit facility |
| — |
| (95.0 | ) | |||||||||
Withdrawal of restricted funds held in trust, net |
| 20.5 |
| 10.1 |
| |||||||||
Dividends paid on preferred stock |
| (0.7 | ) | (0.6 | ) |
| (0.4 | ) | (0.4 | ) | ||||
Dividends paid on common stock to parent |
| (125.0 | ) | — |
| |||||||||
Net cash (used for)/provided by financing activities |
| (25.6 | ) | 22.5 |
| |||||||||
Repayment of short-term loan from parent |
| (20.0 | ) | — |
| |||||||||
Dividends paid on common stock held by parent |
| (80.0 | ) | (125.0 | ) | |||||||||
Net cash used for financing activities |
| (79.9 | ) | (10.3 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
| ||||
Net change |
| (33.8 | ) | 11.5 |
|
| 15.3 |
| (41.7 | ) | ||||
Balance at beginning of period |
| 46.1 |
| 46.2 |
|
| 13.2 |
| 46.1 |
| ||||
Cash and cash equivalents at end of period |
| $ | 12.3 |
| $ | 57.7 |
|
| $ | 28.5 |
| $ | 4.4 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
| ||||
Interest paid, net of amounts capitalized |
| $ | 9.6 |
| $ | 10.3 |
|
| $ | 15.2 |
| $ | 9.7 |
|
Income taxes paid |
| $ | 86.8 |
| $ | 108.3 |
| |||||||
Income taxes paid, net |
| $ | 69.9 |
| $ | 78.5 |
| |||||||
Non-cash financing and investing activities: |
|
|
|
|
| |||||||||
Restricted funds held in trust |
| $ | 0.5 |
| $ | 75.5 |
|
| $ | 16.5 |
| $ | — |
|
Accruals for capital expenditures |
| $ | 36.2 |
| $ | 59.5 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
9
THE DAYTON POWER AND LIGHT COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETSHEETS
|
| At |
| At |
|
| At |
| At |
| ||||
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
$ in millions |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 12.3 |
| $ | 46.1 |
|
| $ | 28.5 |
| $ | 13.2 |
|
Restricted funds held in trust |
| 0.5 |
| 10.1 |
|
| 16.5 |
| 37.0 |
| ||||
Accounts receivable, less provision for uncollectible accounts of $1.6 and $1.4, respectively |
| 243.0 |
| 205.6 |
| |||||||||
Accounts receivable, less provision for uncollectible accounts of $1.3 and $1.5, respectively |
| 232.5 |
| 221.8 |
| |||||||||
Inventories, at average cost |
| 102.8 |
| 83.0 |
|
| 104.5 |
| 103.6 |
| ||||
Taxes applicable to subsequent years |
| 11.8 |
| 48.0 |
|
| 27.3 |
| 48.0 |
| ||||
Other current assets |
| 10.8 |
| 38.2 |
|
| 19.5 |
| 13.4 |
| ||||
Total current assets |
| 381.2 |
| 431.0 |
|
| 428.8 |
| 437.0 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Property: |
|
|
|
|
|
|
|
|
|
| ||||
Property, plant and equipment |
| 4,688.3 |
| 4,450.6 |
|
| 4,858.8 |
| 4,757.0 |
| ||||
Less: Accumulated depreciation and amortization |
| (2,134.3 | ) | (2,079.0 | ) |
| (2,211.8 | ) | (2,159.1 | ) | ||||
Total net property |
| 2,554.0 |
| 2,371.6 |
|
| 2,647.0 |
| 2,597.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Other noncurrent assets: |
|
|
|
|
|
|
|
|
|
| ||||
Regulatory assets |
| 137.0 |
| 148.6 |
|
| 160.4 |
| 165.2 |
| ||||
Other assets |
| 103.0 |
| 139.1 |
| |||||||||
Other deferred assets |
| 65.2 |
| 76.6 |
| |||||||||
Total other noncurrent assets |
| 240.0 |
| 287.7 |
|
| 225.6 |
| 241.8 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total Assets |
| $ | 3,175.2 |
| $ | 3,090.3 |
|
| $ | 3,301.4 |
| $ | 3,276.7 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
10
THE DAYTON POWER AND LIGHT COMPANYTable of Contents
CONDENSED CONSOLIDATED BALANCE SHEET
|
| At |
| At |
|
| At |
| At |
| ||||
|
| September 30, |
| December 31, |
|
| June 30, |
| December 31, |
| ||||
$ in millions |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND SHAREHOLDER’S EQUITY |
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Current portion - long-term debt |
| $ | 0.7 |
| $ | 0.9 |
|
| $ | 0.7 |
| $ | 0.7 |
|
Accounts payable |
| 182.7 |
| 166.2 |
|
| 187.1 |
| 161.9 |
| ||||
Accrued taxes |
| 120.1 |
| 159.6 |
|
| 116.8 |
| 112.7 |
| ||||
Accrued interest |
| 15.3 |
| 12.6 |
|
| 13.1 |
| 12.9 |
| ||||
Revolving credit borrowings |
| 90.0 |
| — |
| |||||||||
Short-term debt owed to parent |
| 90.0 |
| — |
|
| — |
| 20.9 |
| ||||
Other current liabilities |
| 27.4 |
| 35.4 |
|
| 27.7 |
| 26.9 |
| ||||
Total current liabilities |
| 436.2 |
| 374.7 |
|
| 435.4 |
| 336.0 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Long-term debt |
| 784.8 |
| 785.2 |
|
| 784.3 |
| 874.6 |
| ||||
Deferred taxes |
| 367.9 |
| 360.2 |
|
| 390.5 |
| 367.0 |
| ||||
Unamortized investment tax credit |
| 41.4 |
| 43.6 |
|
| 39.4 |
| 40.7 |
| ||||
Other deferred credits |
| 222.6 |
| 272.5 |
|
| 198.5 |
| 266.2 |
| ||||
Total noncurrent liabilities |
| 1,416.7 |
| 1,461.5 |
|
| 1,412.7 |
| 1,548.5 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cumulative preferred stock not subject to mandatory redemption |
| 22.9 |
| 22.9 |
|
| 22.9 |
| 22.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Commitments and contingencies (Note 9) |
| — |
| — |
| |||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Common shareholder’s equity: |
|
|
|
|
|
|
|
|
|
| ||||
Common stock, at par value of $0.01 per share |
| 0.4 |
| 0.4 |
|
| 0.4 |
| 0.4 |
| ||||
Other paid-in capital |
| 783.4 |
| 783.7 |
|
| 782.6 |
| 784.8 |
| ||||
Accumulated other comprehensive income |
| 9.8 |
| 15.1 |
| |||||||||
Accumulated other comprehensive (loss) income |
| (2.0 | ) | 6.5 |
| |||||||||
Retained earnings |
| 505.8 |
| 432.0 |
|
| 649.4 |
| 577.6 |
| ||||
Total common shareholder’s equity |
| 1,299.4 |
| 1,231.2 |
|
| 1,430.4 |
| 1,369.3 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total Liabilities and Shareholder’s Equity |
| $ | 3,175.2 |
| $ | 3,090.3 |
|
| $ | 3,301.4 |
| $ | 3,276.7 |
|
See Notes to Condensed Consolidated Financial Statements.
These interim statements are unaudited.
11
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
Description of Business
DPL Inc. (DPL) is a diversified regional energy company organized in 1985 under the laws of Ohio. Our executive offices are located at 1065 Woodman Drive, Dayton, Ohio 45432 – telephone (937) 224-6000.
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. DP&L also sells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy the electric requirements of their retail customers. Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 500,000514,000 retail customers. DP&L also purchases retail peak load requirements from DPL Energy LLC (DPLE), one of our wholly-ownedDPL’s 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)wholly owned) include DPLE, which engages in the operation of peaking generating facilities; DPL Energy Resources, Inc. (DPLER),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&Lhas one significant subsidiary, DPL Finance Company, Inc., which is wholly-ownedwholly 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 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-ownedjointly owned generation facilities are consolidated on a pro rata basis. All material intercompany accounts and transactions are eliminated in consolidation. Interim results for the three months and ninesix months ended SeptemberJune 30, 20072008 may not be indicative of our results that will be realized for the full year ending December 31, 2007.2008.
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, theseour interim financial statements in this report should be read along with the annual financial statements included in our Annual Report onof Form 10-K for the fiscal year ended December 31, 2006.2007. In the opinion of our management, the condensed consolidated financial statements in this report contain all adjustments (which are all of a normal recurring nature) necessary to fairly state our financial condition as of SeptemberJune 30, 2007,2008; our results of operations for the three months and ninesix months ended SeptemberJune 30, 20072008; and our cash flows for the ninesix months ended SeptemberJune 30, 20072008 in accordance with GAAP. Certain amounts from prior periods have been reclassified to conform to the current reporting presentation.
Estimates Judgments, Contingencies and ReclassificationsJudgments
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 periodperiods reported. We record liabilities for probable estimated losslosses 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.
12
Judgments and uncertainties affecting the application of these estimates may result in materially different amounts being reported under different conditions or circumstances that may affect our financial position and results of operations. 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; the valuation of allowances for receivables and deferred income
12
Notes to Condensed Consolidated Financial Statements (continued)
taxes; regulatory assets and liabilities; reserves recorded for income tax exposures; litigation; contingenciescontingencies; and assets and liabilities related to employee benefits.
Certain amountsReclassifications
During the quarter ended December 31, 2007, we identified immaterial changes in certain accounts payable balances that had not been correctly presented in our prior period cash flow statements. Changes in accounts payable balances representing capital expenditures had previously been classified with cash flows from prioroperating activities and should have been classified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statements of Cash Flows for all periods presented have been reclassified to conform to the current reporting presentation.
Depreciation Expense and Study Update
Depreciation expense is calculated using the straight-line method, which depreciates the cost As a result 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. In July 2007,these reclassifications, cash provided by operating activities for DPL completed a depreciation rate studyincreased by $7.7 million from $112.4 million to $120.1 million for non-regulated generation property based on its property, plant and equipment balances as of December 31, 2005, with adjustments for subsequent scrubber additions. The results of the depreciation study concluded that DPL’s depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives. DPL adjusted the depreciation rates for its non-regulated generation property, effective August 1, 2007, reducing depreciation expense. For the threesix months ended SeptemberJune 30, 2007,2007. This same adjustment also increased cash used for capital expenditures to $178.9 million from $171.2 million for the reduction in depreciation expensesix months ended June 30, 2007. Cash provided by operating activities for DP&L increased by $7.7 million from $137.9 million to $145.6 million for the six months ended June 30, 2007. This same adjustment also increased cash used for capital expenditures to $177.0 million from $169.3 million for the six months ended June 30, 2007. The reclassifications did not impact operating income from continuing operations by $3.8 million, increasedor net income, by approximately $2.4 million and increasedworking capital, any earnings per share (EPS) by approximately $0.02 per share. For the period from August 1, 2007 to December 31, 2007, the reductionmeasures, or net change in depreciation expense will increase income from continuing operations of approximately $9.5 million, increase net income by approximately $5.9 millioncash and increase EPS by approximately $0.06 per share.cash equivalents as previously reported.
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. During 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007. None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.
We recognize interest and penalties related to unrecognized tax benefits in income taxes.
Our tax returns for calendar years 2004 through 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
In January 2007, we adopted Emerging Issues Task Force (EITF) No. 6-03 “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (EITF No. 6-03). EITF No. 6-03 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 StatementStatements of Results of Operations for the three months and ninesix months ended SeptemberJune 30, 2008 and 2007, and September 30, 2006respectively, as follows:
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| September 30, |
| September 30, |
| ||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
State/Local excise taxes |
| $14.6 |
| $14.3 |
| $40.9 |
| $39.5 |
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
$ in millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
State/local excise taxes |
| $ | 11.7 |
| $ | 12.2 |
| $ | 26.1 |
| $ | 26.4 |
|
Recently IssuedAdopted Accounting Standards
Accounting for Fair Value Measurements
In September 2006, the FASB issued
We adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,”Measurements” (SFAS 157) effective for fiscal years beginning after November 15, 2007., on January 1, 2008. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset 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,
13
Notes to Condensed Consolidated Financial Statements (continued)
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. SFAS 157 did not have a material effect on our overall results of operations, financial position, or cash flows. See Note 8 of Notes to Condensed Consolidated Financial Statements.
Amendment of FASB Interpretation No. 39 “Offsetting of Amounts Related to Certain Contracts”
We adopted Staff Position FIN 39-1, “Amendment of FASB Interpretation 39” (FSP FIN 39-1), on January 1, 2008. FSP FIN 39-1 amends paragraph 10 of FIN 39 to “permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with that paragraph.” We do not have receivables or payables in relation to cash collateral. All collateral either posted or received is in the form of a letter of credit or parental guarantee. FSP FIN 39-1 did not have a material effect on our overall results of operations, financial position, or cash flows.
13
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
We adopted EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11), on January 1, 2008. The FASB ratified the EITF consensus that a realized income tax benefit from dividends that are charged to retained earnings, and are paid to employees for equity classified non-vested equity shares, should be recognized as an increase in additional paid-in capital and should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 did not have a material effect on our overall results of operations, financial position, or cash flows.
Recently Issued Accounting Standards
Business Combinations
In FebruaryDecember 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option141R, “Business Combinations” (SFAS 141R), effective for fiscal years beginning after December 15, 2008. Under SFAS 141R, an acquiring entity in a business combination is required to recognize all assets acquired and liabilities assumed in the transaction. The revised standard also establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed. The rule requires an acquirer to disclose all of the information users may need to evaluate and understand the nature and financial effect of the business combination. We have evaluated the impact of adopting SFAS 141R and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Non-controlling Interests in Consolidated Financial Assets andStatements
In December 2007, the FASB issued Statement of Financial Liabilities — IncludingAccounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (SFAS 160), effective for fiscal years beginning after December 15, 2008. SFAS 160 requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and non-controlling interests. We have evaluated the impact of adopting SFAS 160 and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment to FASB Statement No. 115”133” (SFAS 159)161), effective for fiscal years beginning after November 15, 2007.2008. SFAS 159 permits entities161 requires an entity to choose to measure many financialprovide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and certain warrantyrelated hedged items are accounted for under SFAS 133 and insurance contracts at fair valueits related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. We are currently evaluating SFAS 161 and do not expect these new rules to have a material impact on our overall results of operations, financial position, or cash flows.
GAAP Hierarchy
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), effective for fiscal years beginning after December 15, 2008. SFAS 162 identifies a contract-by-contract basis.consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. We have evaluated the impact of adopting SFAS 162 and have determined it will not have a material impact on our overall results of operations, financial position, or cash flows.
Participating Securities and Earnings per Share (EPS)
In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1), effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 clarifies that unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the computation of EPS pursuant to the two-class method. We are currently evaluating the impact of adopting SFAS 157 and SFAS 159FSP EITF 03-6-1 and have not yet determined the significance of these new rules on our overall results of operations, financial position, or cash flows.
2. Earnings per Share
Basic EPS is based on the weighted-average number of DPL common shares outstanding during the year. Diluted EPS 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).
The following table represents common equivalent shares excluded from the calculation of diluted EPS because they were anti-dilutive. These shares may be dilutive in the future.
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| September 30, |
| September 30, |
| ||||
In millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares |
| 0.3 |
| 0.4 |
| 0.1 |
| 0.4 |
|
As 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, 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 are no longer included in the dilutive share calculation.
The following illustrates the reconciliation of the numerators and denominators of the basic and diluted EPS computations for net income (including discontinued operations):
|
| Three Months Ended September 30, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||
$ in millions except per share amounts |
| Net |
| Shares |
| Per |
| Net |
| Shares |
| Per |
| ||||
Basic EPS |
| $ | 60.7 |
| 108.0 |
| $ | 0.56 |
| $ | 50.8 |
| 107.7 |
| $ | 0.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of Dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted stock units |
|
|
| — |
|
|
|
|
| 1.2 |
|
|
| ||||
Warrants |
|
|
| 7.1 |
|
|
|
|
| 7.3 |
|
|
| ||||
Stock options, performance and restricted shares |
|
|
| 0.3 |
|
|
|
|
| 1.2 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
| $ | 60.7 |
| 115.4 |
| $ | 0.53 |
| $ | 50.8 |
| 117.4 |
| $ | 0.43 |
|
14
Notes to Condensed Consolidated2. Supplemental Financial StatementsInformation
DPL Inc.
|
| At |
| At |
| ||
|
| June 30, |
| December 31, |
| ||
$ in millions |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
Accounts receivable, net: |
|
|
|
|
| ||
Retail customers |
| $ | 63.0 |
| $ | 71.7 |
|
Unbilled revenue |
| 74.0 |
| 68.4 |
| ||
Partners in commonly-owned plants |
| 60.1 |
| 56.7 |
| ||
PJM including financial transmission rights |
| 23.1 |
| 23.2 |
| ||
Wholesale customers |
| 9.3 |
| 12.7 |
| ||
Refundable franchise tax |
| — |
| 5.2 |
| ||
Other |
| 20.0 |
| 4.8 |
| ||
Provision for uncollectible accounts |
| (1.3 | ) | (1.5 | ) | ||
Total accounts receivable, net |
| $ | 248.2 |
| $ | 241.2 |
|
|
|
|
|
|
| ||
Inventories, at average cost: |
|
|
|
|
| ||
Fuel and emission allowances |
| $ | 70.3 |
| $ | 70.5 |
|
Plant materials and supplies |
| 35.4 |
| 34.1 |
| ||
Other |
| 0.2 |
| 0.4 |
| ||
Total inventories, at average cost |
| $ | 105.9 |
| $ | 105.0 |
|
|
|
|
|
|
| ||
Other current assets: |
|
|
|
|
| ||
Prepayments |
| $ | 6.1 |
| $ | 5.9 |
|
Current deferred income taxes |
| 3.0 |
| 2.1 |
| ||
Deposits and other advances |
| 1.6 |
| 1.1 |
| ||
Other |
| 7.3 |
| 2.7 |
| ||
Total other current assets |
| $ | 18.0 |
| $ | 11.8 |
|
|
|
|
|
|
| ||
Property, plant and equipment: |
|
|
|
|
| ||
Construction work in process |
| $ | 208.7 |
| $ | 364.5 |
|
Property, plant and equipment |
| 4,905.2 |
| 4,647.1 |
| ||
Total property, plant and equipment |
| $ | 5,113.9 |
| $ | 5,011.6 |
|
|
|
|
|
|
| ||
Other deferred assets: |
|
|
|
|
| ||
Master Trust assets |
| $ | 13.0 |
| $ | 9.6 |
|
Prepaid pension |
| 12.2 |
| 9.9 |
| ||
Unamortized debt expense |
| 8.7 |
| 10.9 |
| ||
Investments |
| 8.4 |
| 8.8 |
| ||
Commercial activities tax benefit |
| 6.8 |
| 6.8 |
| ||
Other |
| 0.4 |
| 0.5 |
| ||
Total other deferred assets |
| $ | 49.5 |
| $ | 46.5 |
|
|
|
|
|
|
| ||
Accounts payable: |
|
|
|
|
| ||
Trade payables |
| $ | 75.6 |
| $ | 65.6 |
|
Fuel accruals |
| 59.0 |
| 34.4 |
| ||
Other |
| 55.3 |
| 63.1 |
| ||
Total accounts payable |
| $ | 189.9 |
| $ | 163.1 |
|
|
|
|
|
|
| ||
Other current liabilities: |
|
|
|
|
| ||
Customer security deposits |
| $ | 19.6 |
| $ | 19.2 |
|
Low income service plan |
| 2.3 |
| 2.2 |
| ||
Pension and retiree benefits payable |
| 0.8 |
| 0.8 |
| ||
Other |
| 5.0 |
| 5.0 |
| ||
Total other current liabilities |
| $ | 27.7 |
| $ | 27.2 |
|
|
|
|
|
|
| ||
Other deferred credits: |
|
|
|
|
| ||
Asset retirement obligations - regulated property |
| $ | 94.2 |
| $ | 91.5 |
|
Pension and retiree benefits |
| 39.4 |
| 40.6 |
| ||
SECA net revenue subject to refund |
| 20.1 |
| 20.1 |
| ||
Deferred compensation obligations |
| 16.0 |
| 20.4 |
| ||
Asset retirement obligations - generation property |
| 12.6 |
| 12.5 |
| ||
Litigation and claims reserve |
| 4.8 |
| 4.3 |
| ||
Employee benefit reserves |
| 4.3 |
| 4.3 |
| ||
Customer advances in aid of construction |
| 3.4 |
| 3.5 |
| ||
Taxes payable |
| — |
| 65.3 |
| ||
Other |
| 3.9 |
| 3.8 |
| ||
Total other deferred credits |
| $ | 198.7 |
| $ | 266.3 |
|
15
2. Supplemental Financial Information (continued)
DP&L
|
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||
$ in millions except per share amounts |
| Net |
| Shares |
| Per |
| Net |
| Shares |
| Per |
| ||||
Basic EPS |
| $ | 175.5 |
| 107.8 |
| $ | 1.63 |
| $ | 132.3 |
| 113.9 |
| $ | 1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of Dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted stock units |
|
|
| 0.7 |
|
|
|
|
| 1.3 |
|
|
| ||||
Warrants |
|
|
| 8.7 |
|
|
|
|
| 6.9 |
|
|
| ||||
Stock options, performance and restricted shares |
|
|
| 0.9 |
|
|
|
|
| 1.2 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
| $ | 175.5 |
| 118.1 |
| $ | 1.49 |
| $ | 132.3 |
| 123.3 |
| $ | 1.07 |
|
|
| At |
| At |
| ||
|
| June 30, |
| December 31, |
| ||
$ in millions |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
Accounts receivable, net: |
|
|
|
|
| ||
Retail customers |
| $ | 65.7 |
| $ | 71.8 |
|
Unbilled revenue |
| 63.0 |
| 60.5 |
| ||
Partners in commonly-owned plants |
| 60.1 |
| 56.7 |
| ||
PJM including financial transmission rights |
| 23.1 |
| 23.1 |
| ||
Wholesale customers |
| 1.9 |
| 3.5 |
| ||
Refundable franchise tax |
| — |
| 3.1 |
| ||
Other |
| 20.0 |
| 4.6 |
| ||
Provision for uncollectible accounts |
| (1.3 | ) | (1.5 | ) | ||
Total accounts receivable, net |
| $ | 232.5 |
| $ | 221.8 |
|
|
|
|
|
|
| ||
Inventories, at average cost: |
|
|
|
|
| ||
Fuel and emission allowances |
| $ | 70.3 |
| $ | 70.5 |
|
Plant materials and supplies |
| 34.0 |
| 32.7 |
| ||
Other |
| 0.2 |
| 0.4 |
| ||
Total inventories, at average cost |
| $ | 104.5 |
| $ | 103.6 |
|
|
|
|
|
|
| ||
Other current assets: |
|
|
|
|
| ||
Prepayments |
| $ | 7.4 |
| $ | 7.5 |
|
Current deferred income taxes |
| 3.0 |
| 2.1 |
| ||
Deposits and other advances |
| 1.6 |
| 0.9 |
| ||
Other |
| 7.5 |
| 2.9 |
| ||
Total other current assets |
| $ | 19.5 |
| $ | 13.4 |
|
|
|
|
|
|
| ||
Property, plant and equipment: |
|
|
|
|
| ||
Construction work in process |
| $ | 208.3 |
| $ | 363.8 |
|
Property, plant and equipment |
| 4,650.5 |
| 4,393.2 |
| ||
Total property, plant and equipment |
| $ | 4,858.8 |
| $ | 4,757.0 |
|
|
|
|
|
|
| ||
Other deferred assets: |
|
|
|
|
| ||
Master Trust assets |
| $ | 44.4 |
| $ | 56.0 |
|
Prepaid pension |
| 12.2 |
| 9.9 |
| ||
Unamortized debt expense |
| 7.7 |
| 9.6 |
| ||
Other |
| 0.9 |
| 1.1 |
| ||
Total other deferred assets |
| $ | 65.2 |
| $ | 76.6 |
|
|
|
|
|
|
| ||
Accounts payable: |
|
|
|
|
| ||
Trade payables |
| $ | 75.6 |
| $ | 64.8 |
|
Fuel accruals |
| 56.5 |
| 34.1 |
| ||
Other |
| 55.0 |
| 63.0 |
| ||
Total accounts payable |
| $ | 187.1 |
| $ | 161.9 |
|
|
|
|
|
|
| ||
Other current liabilities: |
|
|
|
|
| ||
Customer security deposits |
| $ | 19.6 |
| $ | 19.2 |
|
Low income service plan |
| 2.3 |
| 2.2 |
| ||
Pension and retiree benefits payable |
| 0.8 |
| 0.8 |
| ||
Other |
| 5.0 |
| 4.7 |
| ||
Total other current liabilities |
| $ | 27.7 |
| $ | 26.9 |
|
|
|
|
|
|
| ||
Other deferred credits: |
|
|
|
|
| ||
Asset retirement obligations - regulated property |
| $ | 94.2 |
| $ | 91.5 |
|
Pension and retiree benefits |
| 39.3 |
| 40.5 |
| ||
SECA net revenue subject to refund |
| 20.1 |
| 20.1 |
| ||
Deferred compensation obligations |
| 16.0 |
| 20.4 |
| ||
Asset retirement obligations - generation property |
| 12.6 |
| 12.5 |
| ||
Litigation and claims reserve |
| 4.8 |
| 4.3 |
| ||
Employee benefit reserves |
| 4.3 |
| 4.3 |
| ||
Customer advances in aid of construction |
| 3.4 |
| 3.5 |
| ||
Taxes payable |
| — |
| 65.3 |
| ||
Other |
| 3.8 |
| 3.8 |
| ||
Total other deferred credits |
| $ | 198.5 |
| $ | 266.2 |
|
16
2. Supplemental Financial Information (continued)
DPL Inc.
|
| Six Months Ended June 30, |
| ||||
$ in millions |
| 2008 |
| 2007 |
| ||
Cash flows - other: |
|
|
|
|
| ||
Deposits and other advances |
| $ | 0.2 |
| $ | 17.0 |
|
Other |
| 1.6 |
| 3.3 |
| ||
Total cash flows - other |
| $ | 1.8 |
| $ | 20.3 |
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 47.6 |
| $ | 58.7 |
| $ | 124.9 |
| $ | 114.8 |
|
Net change in unrealized gains (losses) on financial instruments |
| (0.2 | ) | (1.9 | ) | (0.4 | ) | (1.5 | ) | ||||
Net change in deferred gains (losses) on cash flow hedges |
| (1.3 | ) | (0.8 | ) | (4.7 | ) | (4.4 | ) | ||||
Net change in unrealized gains (losses) on pension and postretirement benefits |
| 0.6 |
| 0.6 |
| 1.0 |
| 1.1 |
| ||||
Deferred income taxes related to unrealized gains and (losses) |
| 0.3 |
| 0.8 |
| 1.4 |
| 1.9 |
| ||||
Comprehensive income |
| $ | 47.0 |
| $ | 57.4 |
| $ | 122.2 |
| $ | 111.9 |
|
DP&L
|
| Six Months Ended June 30, |
| ||||
$ in millions |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
Cash flows - other: |
|
|
|
|
| ||
Deposits and other advances |
| $ | — |
| $ | 16.4 |
|
Other |
| (11.7 | ) | 1.9 |
| ||
Total cash flows - other |
| $ | (11.7 | ) | $ | 18.3 |
|
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 63.3 |
| $ | 59.1 |
| $ | 152.3 |
| $ | 128.9 |
|
Net change in unrealized gains (losses) on financial instruments |
| (2.1 | ) | (8.8 | ) | (10.3 | ) | (0.4 | ) | ||||
Net change in deferred gains (losses) on cash flow hedges |
| (1.3 | ) | (0.8 | ) | (4.7 | ) | (4.4 | ) | ||||
Net change in unrealized gains (losses) on pension and postretirement benefits |
| 0.5 |
| 0.5 |
| 1.0 |
| 1.1 |
| ||||
Deferred income taxes related to unrealized gains and (losses) |
| 1.0 |
| 3.5 |
| 5.5 |
| 2.1 |
| ||||
Comprehensive income |
| $ | 61.4 |
| $ | 53.5 |
| $ | 143.8 |
| $ | 127.3 |
|
3. Discontinued Operations
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Investment expenses |
| $ | — |
| $ | (0.3 | ) | $ | (0.4 | ) | $ | (0.8 | ) |
Income from discontinued operations |
| — |
| (0.3 | ) | (0.4 | ) | (0.8 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain realized from sale |
| — |
| 5.7 |
| 8.2 |
| 18.9 |
| ||||
Net gain on sale |
| — |
| 5.7 |
| 8.2 |
| 18.9 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Gain on settlement of executive litigation |
| — |
| — |
| 8.2 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings before income taxes |
| — |
| 5.4 |
| 16.0 |
| 18.1 |
| ||||
Income tax expense |
| — |
| (2.0 | ) | (6.0 | ) | (7.1 | ) | ||||
Earnings from discontinued operations, net |
| $ | — |
| $ | 3.4 |
| $ | 10.0 |
| $ | 11.0 |
|
On February 13, 2005, DPL’s subsidiaries, MVE, Inc. (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 proceedsDuring 2005, MVE and any related gains or losses were recognized during 2005 asMVIC completed the sale of eachtheir interests in forty-three funds and a portion of these funds closed.
another of those private equity funds. 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 resultedownership interest in a 2005 deferred gain of $27.1 million. DPL recognized $18.9 million of the deferred gainthese funds was transferred in 2006 and 2007, at which time DPL recognized previously deferred gains. During the remaining portion of the gain, $8.2 million, was recognized in the first quarterthree months ended March 31, 2007, as all legal and economic considerationsthe remaining $7.9 million ($4.9 million after tax) of deferred gains (net of associated expenses) relating to the alternative closing arrangementsthis transaction were satisfied. Legal title to the final fund subject to the alternative arrangement was transferredrecorded in the third quarter ended September 30, 2007.discontinued operations.
17
As a result of the May 21, 2007 settlement of the litigation with three former executives (see Note 1011 of the Notes to Condensed Consolidated Financial Statements), the three former executives relinquished all of their rights to certain deferred compensation, RSUs,restricted stock units, MVE incentives, stock options, and reimbursement of legal fees. The reversal of accruals related to the performance of the financial asset portfolio werewas 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$8.1 million, net of associated expenses ($5.1 million after tax), on the settlement of litigation being recorded in discontinued operations related toduring the settlement of the executive litigation in the second quarter endingthree months ended June 30, 2007.
15
Notes to Condensed Consolidated Financial Statements (continued)
4. Supplemental Financial Information
DPL Inc. |
| At |
| At |
| ||
|
|
|
|
|
| ||
Accounts receivable, net: |
|
|
|
|
| ||
Retail customers |
| $ | 81.8 |
| $ | 65.0 |
|
Partners in commonly-owned plants |
| 68.9 |
| 51.5 |
| ||
Unbilled revenue |
| 64.8 |
| 68.7 |
| ||
PJM |
| 23.1 |
| 13.1 |
| ||
Wholesale and subsidiary customers |
| 10.4 |
| 15.8 |
| ||
Other |
| 9.5 |
| 7.1 |
| ||
Refundable franchise tax |
| 5.2 |
| 5.2 |
| ||
Provision for uncollectible accounts |
| (1.6 | ) | (1.4 | ) | ||
Total accounts receivable, net |
| $ | 262.1 |
| $ | 225.0 |
|
|
|
|
|
|
| ||
Inventories, at average cost: |
|
|
|
|
| ||
Fuel and emission allowances |
| $ | 69.5 |
| $ | 52.4 |
|
Plant materials and supplies |
| 34.6 |
| 32.6 |
| ||
Other |
| 0.1 |
| 0.4 |
| ||
Total inventories, at average cost |
| $ | 104.2 |
| $ | 85.4 |
|
|
|
|
|
|
| ||
Other current assets: |
|
|
|
|
| ||
Prepayments |
| $ | 4.6 |
| $ | 13.3 |
|
Deposits and other advances |
| 1.0 |
| 17.8 |
| ||
Other |
| 2.8 |
| 6.6 |
| ||
Total other current assets |
| $ | 8.4 |
| $ | 37.7 |
|
|
|
|
|
|
| ||
Property, plant and equipment: |
|
|
|
|
| ||
Construction work in process |
| $ | 338.5 |
| $ | 376.0 |
|
Property, plant and equipment (a) |
| 4,605.1 |
| 4,626.0 |
| ||
Total property, plant and equipment |
| $ | 4,943.6 |
| $ | 5,002.0 |
|
|
|
|
|
|
| ||
Other assets: |
|
|
|
|
| ||
Unamortized loss on reacquired debt |
| $ | 19.2 |
| $ | 20.4 |
|
Unamortized debt expense |
| 9.8 |
| 10.6 |
| ||
Master Trust assets |
| 9.1 |
| 39.4 |
| ||
Investments |
| 9.0 |
| 7.0 |
| ||
Commercial activities tax benefit |
| 6.8 |
| 6.8 |
| ||
Other |
| 0.3 |
| 0.5 |
| ||
Total other assets |
| $ | 54.2 |
| $ | 84.7 |
|
|
|
|
|
|
| ||
Accounts payable: |
|
|
|
|
| ||
Trade payables |
| $ | 59.1 |
| $ | 75.7 |
|
Fuel accruals |
| 49.3 |
| 37.3 |
| ||
Other |
| 77.6 |
| 56.4 |
| ||
Total accounts payable |
| $ | 186.0 |
| $ | 169.4 |
|
|
|
|
|
|
| ||
Other current liabilities: |
|
|
|
|
| ||
Customer security deposits |
| $ | 18.9 |
| $ | 19.4 |
|
Pension and retiree benefits payable |
| 0.8 |
| 5.8 |
| ||
Financial transmission rights - future proceeds |
| — |
| 2.7 |
| ||
Low income payment plan obligation |
| 3.1 |
| 1.9 |
| ||
Unearned revenue |
| 1.1 |
| — |
| ||
Other |
| 3.5 |
| 8.5 |
| ||
Total other current liabilities |
| $ | 27.4 |
| $ | 38.3 |
|
|
|
|
|
|
| ||
Other deferred credits: |
|
|
|
|
| ||
Asset retirement obligations - regulated property |
| $ | 90.7 |
| $ | 86.3 |
|
Pension liabilities |
| 34.6 |
| 37.7 |
| ||
Retiree health and life benefits |
| 28.2 |
| 28.5 |
| ||
Trust obligations |
| 20.6 |
| 76.2 |
| ||
SECA net revenue subject to refund |
| 20.4 |
| 18.7 |
| ||
Asset retirement obligations - generation property |
| 11.9 |
| 11.7 |
| ||
Deferred gain on sale of portfolio |
| — |
| 8.2 |
| ||
Employee benefit reserves |
| 4.4 |
| 4.1 |
| ||
Litigation and claims reserves |
| 4.5 |
| 3.4 |
| ||
Customer advances in aid of construction |
| 3.4 |
| 3.0 |
| ||
Environmental reserves |
| 0.1 |
| 0.1 |
| ||
Other |
| 3.8 |
| 2.8 |
| ||
Total other deferred credits |
| $ | 222.6 |
| $ | 280.7 |
|
(a)The sale of $283.5 million of assets held for sale at December 31, 2006 was completed on April 25, 2007.
16
Notes to Condensed Consolidated Financial Statements (continued)
DP&L |
| At |
| At |
| ||
|
|
|
|
|
| ||
Accounts receivable, net: |
|
|
|
|
| ||
Retail customers |
| $ | 81.8 |
| $ | 65.0 |
|
Partners in commonly-owned plants |
| 68.9 |
| 51.5 |
| ||
Unbilled revenue |
| 56.6 |
| 61.0 |
| ||
PJM |
| 23.1 |
| 13.9 |
| ||
Wholesale and subsidiary customers |
| 5.3 |
| 8.3 |
| ||
Refundable franchise tax |
| 3.1 |
| 3.1 |
| ||
Other |
| 5.8 |
| 4.2 |
| ||
Provision for uncollectible accounts |
| (1.6 | ) | (1.4 | ) | ||
Total accounts receivable, net |
| $ | 243.0 |
| $ | 205.6 |
|
|
|
|
|
|
| ||
Inventories, at average cost: |
|
|
|
|
| ||
Fuel and emission allowances |
| $ | 69.5 |
| $ | 52.4 |
|
Plant materials and supplies |
| 33.2 |
| 30.2 |
| ||
Other |
| 0.1 |
| 0.4 |
| ||
Total inventories, at average cost |
| $ | 102.8 |
| $ | 83.0 |
|
|
|
|
|
|
| ||
Other current assets: |
|
|
|
|
| ||
Prepayments |
| $ | 6.8 |
| $ | 15.8 |
|
Deposits and other advances |
| 0.8 |
| 17.0 |
| ||
Other |
| 3.2 |
| 5.4 |
| ||
Total other current assets |
| $ | 10.8 |
| $ | 38.2 |
|
|
|
|
|
|
| ||
Property, plant and equipment: |
|
|
|
|
| ||
Construction work in process |
| $ | 337.6 |
| $ | 375.2 |
|
Property, plant and equipment |
| 4,350.7 |
| 4,075.4 |
| ||
Total property, plant and equipment |
| $ | 4,688.3 |
| $ | 4,450.6 |
|
|
|
|
|
|
| ||
Other assets: |
|
|
|
|
| ||
Master Trust assets |
| $ | 74.5 |
| $ | 109.0 |
|
Unamortized loss on reacquired debt |
| 19.2 |
| 20.4 |
| ||
Unamortized debt expense |
| 8.3 |
| 8.6 |
| ||
Investments |
| 0.6 |
| 0.6 |
| ||
Other |
| 0.4 |
| 0.5 |
| ||
Total other assets |
| $ | 103.0 |
| $ | 139.1 |
|
|
|
|
|
|
| ||
Accounts payable: |
|
|
|
|
| ||
Trade payables |
| $ | 58.7 |
| $ | 74.7 |
|
Fuel accruals |
| 46.2 |
| 36.7 |
| ||
Other |
| 77.8 |
| 54.8 |
| ||
Total accounts payable |
| $ | 182.7 |
| $ | 166.2 |
|
|
|
|
|
|
| ||
Other current liabilities: |
|
|
|
|
| ||
Customer security deposits |
| $ | 18.9 |
| $ | 19.4 |
|
Pension and retiree benefits payable |
| 0.8 |
| 5.8 |
| ||
Financial transmission rights - future proceeds |
| — |
| 2.7 |
| ||
Low income payment plan obligation |
| 3.1 |
| 1.9 |
| ||
Unearned revenue |
| 1.1 |
| — |
| ||
Other |
| 3.5 |
| 5.6 |
| ||
Total other current liabilities |
| $ | 27.4 |
| $ | 35.4 |
|
|
|
|
|
|
| ||
Other deferred credits: |
|
|
|
|
| ||
Asset retirement obligations - regulated property |
| $ | 90.7 |
| $ | 86.3 |
|
Pension liabilities |
| 34.6 |
| 37.7 |
| ||
Retiree health and life benefits |
| 28.2 |
| 28.5 |
| ||
Trust obligations |
| 20.6 |
| 76.2 |
| ||
SECA net revenue subject to refund |
| 20.4 |
| 18.7 |
| ||
Asset retirement obligations - generation property |
| 11.9 |
| 11.7 |
| ||
Employee benefit reserves |
| 4.4 |
| 4.1 |
| ||
Litigation and claims reserves |
| 4.5 |
| 3.4 |
| ||
Customer advances in aid of construction |
| 3.4 |
| 3.0 |
| ||
Environmental reserves |
| 0.1 |
| 0.1 |
| ||
Other |
| 3.8 |
| 2.8 |
| ||
Total other deferred credits |
| $ | 222.6 |
| $ | 272.5 |
|
17
Notes to Condensed Consolidated Financial Statements (continued)
DPL Inc. |
| Nine Months Ended September 30, |
| ||||
$ in millions |
| 2007 |
| 2006 |
| ||
Cash flows - other: |
|
|
|
|
| ||
Payroll taxes payable |
| $ | — |
| $ | (1.7 | ) |
Employee/director stock plan |
| 3.7 |
| 3.8 |
| ||
Lump sum retirement payment |
| (4.9 | ) | — |
| ||
Deposits and other advances |
| 16.2 |
| (7.9 | ) | ||
Other |
| 3.3 |
| (1.5 | ) | ||
Total cash flows - other |
| $ | 18.3 |
| $ | (7.3 | ) |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 60.7 |
| $ | 50.8 |
| $ | 175.5 |
| $ | 132.3 |
|
Net change in unrealized gains (losses) on financial instruments |
| 0.2 |
| 0.3 |
| (1.3 | ) | 1.1 |
| ||||
Net change in deferred (losses) gains on cash flow hedges |
| (1.5 | ) | 0.1 |
| (5.9 | ) | 2.9 |
| ||||
Net change in unrealized gains (losses) on pensions and postretirement benefits |
| 0.5 |
| — |
| 1.6 |
| — |
| ||||
Deferred income taxes related to unrealized gains (losses) |
| 0.3 |
| (0.4 | ) | 2.2 |
| (3.5 | ) | ||||
Comprehensive income |
| $ | 60.2 |
| $ | 50.8 |
| $ | 172.1 |
| $ | 132.8 |
|
DP&L |
| Nine Months Ended September 30, |
| ||||
$ in millions |
| 2007 |
| 2006 |
| ||
Cash flows - other: |
|
|
|
|
| ||
Payroll taxes payable |
| $ | — |
| $ | (2.0 | ) |
Deposits and other advances |
| 15.6 |
| (10.5 | ) | ||
Lump sum retirement payment |
| (4.9 | ) | — |
| ||
Other |
| 5.8 |
| 1.0 |
| ||
Total cash flows - other |
| $ | 16.5 |
| $ | (11.5 | ) |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 70.6 |
| $ | 64.0 |
| $ | 199.5 |
| $ | 174.9 |
|
Net change in unrealized (losses) gains on financial instruments |
| (5.0 | ) | 1.2 |
| (5.4 | ) | 1.8 |
| ||||
Net change in deferred (losses) gains on cash flow hedges |
| (1.5 | ) | 0.1 |
| (5.9 | ) | 2.9 |
| ||||
Net change in unrealized gains (losses) on pensions and postretirement benefits |
| 0.6 |
| — |
| 1.7 |
| — |
| ||||
Deferred income taxes related to unrealized gains (losses) |
| 2.2 |
| (0.8 | ) | 4.3 |
| (3.2 | ) | ||||
Comprehensive income |
| $ | 66.9 |
| $ | 64.5 |
| $ | 194.2 |
| $ | 176.4 |
|
There were no discontinued operations recorded during the three months and six months ended June 30, 2008.
18
Notes to the Condensed Consolidated Financial Statements (continued)Table of Contents
5. Asset Sales4. Long-term Debt
Sale of Corporate AircraftDPL Inc.
|
| At |
| At |
| ||
|
| June 30, |
| December 31, |
| ||
$ in millions |
| 2008 |
| 2007 |
| ||
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 2040 - variable rate |
| — |
| 90.0 |
| ||
DP&L - Pollution control series maturing through 2034 - 4.78% (a) |
| 214.4 |
| 214.4 |
| ||
|
| 784.4 |
| 874.4 |
| ||
|
|
|
|
|
| ||
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 8.00% Series due 2009 |
| — |
| 175.0 |
| ||
DP&L - Obligations for capital leases |
| 0.9 |
| 1.3 |
| ||
Unamortized debt discount |
| (1.3 | ) | (1.6 | ) | ||
Total |
| $ | 1,276.4 |
| $ | 1,541.5 |
|
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 sold was 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 during the second quarter ending(a) Weighted average interest rate at June 30, 2008 and December 31, 2007, which is included in DPL’s operation and maintenance expense.respectively.
Sale of Peaking Units
During 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 upon consummation of the sale in 2007.
On April 25, 2007, DPLE completed the sale of its Darby and Greenville electric peaking generation facilities providing DPL with approximately $151.0 million. Darby Station was sold to Columbus Southern Power Company, a utility subsidiary of American Electric Power Company (AEP), for approximately $102.0 million. Greenville Station was sold to Buckeye Power, Inc. for approximately $49.0 million.
6. Pension and Postretirement BenefitsDP&L
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 pertaining to retirement benefits for certain active, terminated and retired key executives that include The DPL Inc. Supplemental Executive Defined Contribution Retirement Plan (SEDCRP). These liabilities totaled approximately $0.9 million and $0.5 million at September 30, 2007 and 2006, respectively.
|
| At |
| At |
| ||
|
| June 30, |
| December 31, |
| ||
$ in millions |
| 2008 |
| 2007 |
| ||
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 2040 - variable rate |
| — |
| 90.0 |
| ||
DP&L - Pollution control series maturing through 2034 - 4.78% (a) |
| 214.4 |
| 214.4 |
| ||
|
| 784.4 |
| 874.4 |
| ||
|
|
|
|
|
| ||
DP&L - Obligations for capital leases |
| 0.9 |
| 1.3 |
| ||
Unamortized debt discount |
| (1.0 | ) | (1.1 | ) | ||
Total |
| $ | 784.3 |
| $ | 874.6 |
|
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.
19
Notes to the Condensed Consolidated Financial Statements (continued)
The net periodic benefit costs of the pension and postretirement benefit plans for the three months ended September 30, 2007 and 2006 were:
Net periodic benefit cost
$ in millions |
| Pension |
| Postretirement |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Service cost |
| $ | 0.2 |
| $ | 1.0 |
| $ | — |
| $ | — |
|
Interest cost |
| 4.0 |
| 4.3 |
| 0.4 |
| 0.5 |
| ||||
Expected return on assets (a) |
| (5.5 | ) | (5.5 | ) | (0.1 | ) | (0.2 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Actuarial (gain) loss |
| 0.8 |
| 0.9 |
| (0.2 | ) | (0.2 | ) | ||||
Prior service cost |
| 0.6 |
| 0.7 |
| — |
| — |
| ||||
Transition obligation |
| — |
| — |
| — |
| 0.1 |
| ||||
Net periodic benefit cost |
| 0.1 |
| 1.4 |
| 0.1 |
| 0.2 |
| ||||
Settlement cost (b) |
| — |
| 2.6 |
| — |
| — |
| ||||
Net periodic benefit cost after adjustments |
| $ | 0.1 |
| $ | 4.0 |
| $ | 0.1 |
| $ | 0.2 |
|
|
|
|
|
The net periodic benefit costs of the pension and postretirement benefit plans for the nine months ended September 30, 2007 and 2006 were:
Net periodic benefit cost
$ in millions |
| Pension |
| Postretirement |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Service cost |
| $ | 2.4 |
| $ | 3.2 |
| $ | — |
| $ | — |
|
Interest cost |
| 12.2 |
| 12.5 |
| 1.1 |
| 1.3 |
| ||||
Expected return on assets (a) |
| (16.4 | ) | (16.3 | ) | (0.3 | ) | (0.4 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Actuarial (gain) loss |
| 2.6 |
| 2.9 |
| (0.7 | ) | (0.6 | ) | ||||
Prior service cost |
| 1.8 |
| 1.9 |
| — |
| — |
| ||||
Transition obligation |
| — |
| — |
| 0.1 |
| 0.2 |
| ||||
Net periodic benefit cost before adjustment |
| 2.6 |
| 4.2 |
| 0.2 |
| 0.5 |
| ||||
Settlement cost (b) |
| — |
| 2.6 |
| — |
| — |
| ||||
Special termination benefit cost (c) |
| — |
| 0.3 |
| — |
| — |
| ||||
Net periodic benefit cost after adjustment |
| $ | 2.6 |
| $ | 7.1 |
| $ | 0.2 |
| $ | 0.5 |
|
|
|
|
|
|
|
20
Notes to the Condensed Consolidated Financial Statements (continued)
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 |
| $ | 4.8 |
| $ | 0.7 |
|
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, 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 |
| Nine Months Ended |
| ||||||||
$ in millions |
| September 30, |
| September 30, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Stock options |
| $ | — |
| $ | — |
| $ | — |
| $ | 1.2 |
|
Restricted stock units |
| (0.2 | ) | 0.7 |
| — |
| 1.8 |
| ||||
Performance shares |
| 0.5 |
| 0.5 |
| 1.3 |
| 1.3 |
| ||||
Restricted shares |
| 0.1 |
| — |
| 0.2 |
| — |
| ||||
Non-employee directors’ RSUs |
| 0.1 |
| — |
| 0.2 |
| — |
| ||||
Share-based compensation included in operations and maintenance expense |
| 0.5 |
| 1.2 |
| 1.7 |
| 4.3 |
| ||||
Income tax expense |
| (0.2 | ) | (0.5 | ) | (0.7 | ) | (1.7 | ) | ||||
Total share-based compensation, net of tax |
| $ | 0.3 |
| $ | 0.7 |
| $ | 1.0 |
| $ | 2.6 |
|
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 — Our expected volatility assumptions are based on the historical volatility of DPL 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(a) Weighted average 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 changesJune 30, 2008 and the 12 month average DPL stock price.
21
Notes to the Condensed Consolidated Financial Statements (continued)
Expected Forfeitures — The forfeiture rate used to calculate compensation expense is based on DPL’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. 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 nine months ended September 30,31, 2007, was as follows:
|
|
|
| Weighted-Average |
| |
|
| 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 nine months 2007 |
| — |
| — |
| |
Vested in first nine months 2007 |
| — |
| — |
| |
Forfeited in first nine months 2007 |
| — |
| — |
| |
Non-vested at September 30, 2007 |
| 10,000 |
| $ | 0.05 |
|
Summarized stock option activity was as follows:
|
| Nine Months Ended |
| ||||
|
| September 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 | ) | (40,000 | ) | ||
Outstanding at period-end |
| 951,500 |
| 5,436,500 |
| ||
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 |
| $ | 15.88 |
|
Outstanding at period-end |
| $ | 24.08 |
| $ | 22.02 |
|
Exercisable at period-end |
| $ | 24.07 |
| $ | 20.98 |
|
|
|
22
Notes to the Condensed Consolidated Financial Statements (continued)
The following table reflects information about stock options outstanding at September 30, 2007:
|
|
|
| Options Outstanding |
| Options Exercisable |
| |||||||
|
|
|
| Weighted- |
| Weighted- |
|
|
| Weighted- |
| |||
|
|
|
| Average |
| Average |
|
|
| Average |
| |||
Range of Exercise |
|
|
| Contractual |
| Exercise |
|
|
| Exercise |
| |||
Prices |
| Outstanding |
| Life |
| Price |
| Exercisable |
| 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 |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 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 |
| $ | — |
| $ | — |
| $ | 2.3 |
| $ | 0.1 |
|
Proceeds from stock options exercised during the period |
| $ | — |
| $ | — |
| $ | 14.5 |
| $ | 0.2 |
|
Excess tax benefit from proceeds of stock options exercised |
| $ | — |
| $ | — |
| $ | 0.5 |
| $ | — |
|
Fair value of shares that vested during the period |
| $ | — |
| $ | — |
| $ | — |
| $ | 1.0 |
|
Unrecognized compensation expense |
| $ | — |
| $ | 0.1 |
| $ | — |
| $ | 0.1 |
|
Weighted-average period to recognize compensation expense (in years) |
| 0.3 |
| 1.3 |
| 0.3 |
| 1.3 |
|
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:
|
| ||
|
| ||
|
|
| |
|
|
| |
|
| ||
|
|
| |
|
|
| |
|
|
|
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 22,976 RSUs outstanding as of September 30, 2007, none of which has vested. The non-vested RSUs will be paid in cash upon vesting and will vest as follows: 11,253 in 2008; 7,878 in 2009 and 3,845 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-Average |
| |
|
| 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 nine months 2007 |
| — |
| — |
| |
Vested in first nine months 2007 |
| (20,097 | ) | (0.4 | ) | |
Forfeited in first nine months 2007 |
| (6,925 | ) | (0.2 | ) | |
Non-vested at September 30, 2007 |
| 22,976 |
| $ | 0.6 |
|
23
Notes to the Condensed Consolidated Financial Statements (continued)
Summarized RSU activity was as follows:
|
| Nine Months Ended |
| ||
|
| September 30, |
| ||
|
| 2007 |
| 2006 |
|
RSUs: |
|
|
|
|
|
Outstanding at beginning of year |
| 1,334,339 |
| 1,319,399 |
|
Granted |
| — |
| — |
|
Dividends |
| 11,656 |
| 35,030 |
|
Exercised |
| (20,097 | ) | (22,516 | ) |
Forfeited |
| (1,302,922 | ) | (8,978 | ) |
Outstanding at period-end |
| 22,976 |
| 1,322,935 |
|
Exercisable at period-end |
| — |
| — |
|
Compensation expense is recognized each quarter based on the change in the market price of DPL common shares.
As of September 30, 2007 and 2006, liabilities recorded for outstanding RSUs were $0.6 million and $35.7 million, respectively, which are included in “Other deferred credits” on the Condensed Consolidated Balance Sheet. The decrease in the liability is due to the executive litigation settlement and the forfeiture of 1.3 million RSUs (see Note 10 of the Notes 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 |
| Nine Months Ending |
| ||||
|
| September 30, |
| September 30, |
| ||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
Expected volatility |
| 13.4-16.7% |
| 10.3-20.3% |
| 10.6-43.5% |
| 7.3-28.6% |
|
Weighted-average expected volatility |
| 14.4% |
| 17.1% |
| 16.2% |
| 22.0% |
|
Expected life (in years) |
| 1.0-3.0 |
| 1.0-4.0 |
| 1.0-3.0 |
| 1.0-4.0 |
|
Expected dividends |
| 3.6% |
| 3.7-3.8% |
| 3.5-3.6% |
| 3.7-3.8% |
|
Weighted-average expected dividends |
| 3.6% |
| 3.8% |
| 3.5% |
| 3.8% |
|
Risk-free interest rate |
| 4.0-4.1% |
| 4.6-4.9% |
| 4.0-5.0% |
| 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.
24
Notes to the Condensed Consolidated Financial Statements (continued)
The schedule of non-vested performance share activity for the nine months ended September 30, 2007 follows:
|
| Number of |
| Weighted-Average |
| |
|
| Performance |
| Grant Date |
| |
$ in millions (except share amounts) |
| Shares |
| Fair Value |
| |
Non-vested at January 1, 2007 |
| 110,723 |
| $ | 2.7 |
|
Granted in first nine months 2007 |
| 78,559 |
| 2.6 |
| |
Vested in first nine months 2007 |
| — |
| — |
| |
Forfeited in first nine months 2007 |
| (34,243 | ) | (0.9 | ) | |
Non-vested at September 30, 2007 |
| 155,039 |
| $ | 4.4 |
|
|
| Nine Months Ended |
| ||
|
| September 30, |
| ||
|
| 2007 |
| 2006 |
|
Performance Shares: |
|
|
|
|
|
Outstanding at beginning of year |
| 154,768 |
| — |
|
Granted |
| 78,559 |
| 223,289 |
|
Exercised |
| (22,462 | ) | — |
|
Expired |
| (21,583 | ) | — |
|
Forfeited |
| (34,243 | ) | (89,655 | ) |
Outstanding at period-end |
| 155,039 |
| 133,634 |
|
Exercisable at period-end |
| — |
| — |
|
The following table reflects information about performance share activity during the period:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Weighted-average grant date fair value of performance shares granted during the period |
| $ | 0.1 |
| $ | — |
| $ | 2.6 |
| $ | 5.9 |
|
Intrinsic value of performance shares exercised during the period |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
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 |
| $ | 2.3 |
| $ | 1.6 |
| $ | 2.3 |
| $ | 1.6 |
|
Weighted-average period to recognize compensation expense (in years) |
| 1.3 |
| 1.0 |
| 1.3 |
| 1.0 |
|
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 Ended |
| Nine Months Ended |
| ||||
|
| September 30, |
| September 30, |
| ||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
|
|
|
|
|
|
|
|
|
|
Expected volatility |
| 15.8% |
| 0.0% |
| 15.8-17.3% |
| 20.3% |
|
Weighted-average expected volatility |
| 15.8% |
| 0.0% |
| 16.4% |
| 20.3% |
|
Expected life (in years) |
| 3.0 |
| 0.0 |
| 3.0 |
| 3.0 |
|
Expected dividends |
| 3.9% |
| 0.0% |
| 3.3-3.9% |
| 3.7% |
|
Weighted-average expected dividends |
| 3.9% |
| 0.0% |
| 3.3% |
| 3.7% |
|
Risk-free interest rate |
| 4.5-4.6% |
| 0.0% |
| 4.5-4.9% |
| 4.7% |
|
25
Notes to the Condensed Consolidated Financial Statements (continued)
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 three months ended September 30, 2007, 6,800 restricted shares were awarded.
|
| Number of |
| Weighted-Average |
| ||
|
| Restricted |
| Grant Date |
| ||
$ in millions (except share amounts) |
| Shares |
| Fair Value |
| ||
Non-vested at January 1, 2007 |
| 19,000 |
| $ | 0.5 |
| |
Granted in first nine months 2007 |
| 23,200 |
|
| 0.7 |
| |
Vested in first nine months 2007 |
| — |
|
| — |
| |
Forfeited in first nine months 2007 |
| — |
|
| — |
| |
Non-vested at September 30, 2007 |
| 42,200 |
| $ | 1.2 |
| |
|
|
|
|
|
| ||
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2007 |
| 2006 |
| ||
Restricted Shares: |
|
|
|
|
| ||
Outstanding at beginning of year |
| 19,000 |
| — |
| ||
Granted |
| 23,200 |
| — |
| ||
Exercised |
| — |
| — |
| ||
Forfeited |
| — |
| — |
| ||
Outstanding at period-end |
| 42,200 |
| — |
| ||
Exercisable at period-end |
| — |
| — |
| ||
The following table reflects information about restricted share activity during the period:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Weighted-average grant date fair value of restricted shares granted during the period |
| $ | 0.2 |
| $ | — |
| $ | 0.7 |
| $ | — |
|
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 |
| $ | 1.0 |
| $ | — |
| $ | 1.0 |
| $ | — |
|
Weighted-average period to recognize compensation expense (in years) |
| 2.6 |
| — |
| 2.6 |
| — |
|
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 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.
26
Notes to the Condensed Consolidated Financial Statements (continued)
|
| Number of |
| Weighted-Average |
| |
|
| Director |
| Grant Date |
| |
$ in millions (except for share amounts) |
| RSUs |
| Fair Value |
| |
Non-vested at January 1, 2007 |
| — |
| $ | — |
|
Granted in first nine months 2007 |
| 14,920 |
| 0.5 |
| |
Dividends accrued in the first nine months 2007 |
| 231 |
| — |
| |
Vested in first nine months 2007 |
| (6,643 | ) | (0.2 | ) | |
Forfeited in first nine months 2007 |
| (1,553 | ) | — |
| |
Non-vested at September 30, 2007 |
| 6,955 |
| $ | 0.3 |
|
|
| Nine Months Ended |
| ||
|
| September 30, |
| ||
|
| 2007 |
| 2006 |
|
Restricted Stock Units: |
|
|
|
|
|
Outstanding at beginning of year |
| — |
| — |
|
Granted |
| 14,920 |
| — |
|
Dividends accrued |
| 231 |
| — |
|
Exercised |
| (142 | ) | — |
|
Forfeited |
| (1,553 | ) | — |
|
Outstanding at period-end |
| 13,456 |
| — |
|
Exercisable at period-end |
| — |
| — |
|
The following table reflects information about non-employee director RSU activity during the period:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Weighted-average grant date fair value of non-employee director RSUs granted during the period |
| $ | — |
| $ | — |
| $ | 0.5 |
| $ | — |
|
Intrinsic value of non-employee director RSUs exercised during the period |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Proceeds from non-employee director RSUs exercised during the period |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Tax benefit from proceeds of non-employee director RSUs exercised |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Fair value of non-employee director RSUs that vested during the period |
| $ | (0.1 | ) | $ | — |
| $ | (0.2 | ) | $ | — |
|
Unrecognized compensation expense |
| $ | 0.2 |
| $ | — |
| $ | 0.2 |
| $ | — |
|
Weighted-average period to recognize compensation expense (in years) |
| 0.5 |
| — |
| 0.5 |
| — |
|
27
Notes to the Condensed Consolidated Financial Statements (continued)
8. Long-Term Debt and Notes Payable
DPL |
| At |
| At |
| ||
|
| September 30, |
| 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 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 8.00% Series due 2009 |
| 175.0 |
| 175.0 |
| ||
DPL Inc. - Senior Notes 6.25% Series due 2008 |
| — |
| 100.0 |
| ||
DP&L - Obligations for capital leases |
| 1.5 |
| 2.0 |
| ||
Unamortized debt discount (a) |
| (1.7 | ) | (2.0 | ) | ||
Total |
| $ | 1,451.6 |
| $ | 1,551.8 |
|
|
|
DP&L |
| At |
| At |
| ||||
|
| September 30, |
| December 31, |
| ||||
$ in millions |
| 2007 |
| 2006 |
| ||||
DP&L - First mortgage bonds maturing |
| $ | 470.0 |
| $ | 470.0 |
| ||
DP&L - Pollution control series maturing |
| 100.0 |
| 100.0 |
| ||||
DP&L - Pollution control series maturing |
| 137.8 |
| 137.8 |
| ||||
DP&L - Pollution control series maturing |
| 41.3 |
| 41.3 |
| ||||
DP&L - Pollution control series maturing |
| 35.3 |
| 35.3 |
| ||||
|
| 784.4 |
| 784.4 |
| ||||
|
|
|
|
|
| ||||
DP&L - Obligations for capital leases |
| 1.5 |
| 2.0 |
| ||||
Unamortized debt discount |
| (1.1 | ) | (1.2 | ) | ||||
Total |
| $ | 784.8 |
| $ | 785.2 |
| ||
At SeptemberJune 30, 2007,2008, DPL’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $175.7 million through June 30, 2009; $0.7 million from July 1, 2009 through June 30, 2010; $0.2 million for the remainder of 2007, $100.7 million in 2008, $175.8 million in 2009, $0.6 million infrom July 1, 2010 andthrough June 30, 2011; $297.4 million in 2011.from July 1, 2011 through June 30, 2012; and none from July 1, 2012 through June 30, 2013.
At SeptemberJune 30, 2007,2008, DP&L’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $0.7 million through June 30, 2009; $0.7 million from July 1, 2009 through June 30, 2010; $0.2 million for the remainder of 2007, $0.7 million in 2008, $0.8 million in 2009, $0.6 million infrom July 1, 2010 through June 30, 2011; and none in 2011.from July 1, 2011 through June 30, 2013. Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds.
19
At June 30, 2008, the $175 million 8.00% Senior Notes due March 31, 2009 are reflected within the current portion of long-term debt in DPL’s Condensed Consolidated Balance Sheet.
On March 1, 2007, pursuant to our strategy of reducing long-term debt, DPL redeemed the $225 million 8.25% Senior Notes when they became due. On May 15, 2008, DPL redeemed the $100 million 6.25% Senior Notes when they became due.
During the first quarter ofthree months ended March 31, 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. The Public Utilities Commission of Ohio (PUCO) approved DP&L’s application for this additional financing on July 26, 2006.
On September 13, 2006, the Ohio Air Quality
28
Notes to the Condensed Consolidated Financial Statements (continued)
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 trusteeThe payment of principal and as of April 3, 2007,interest on the Bonds, when due, is insured by an insurance policy issued by Financial Guaranty Insurance Company. DP&L has drawn outused the entiretyproceeds from these borrowings to assist in financing its portion of the funds. DP&L is considering issuing in conjunction with the OAQDA another seriescosts of tax-exempt bonds to finance additional qualifyingacquiring, constructing, and installing certain solid waste disposal facility costsand air quality facilities at Miami Fort, Killen, Stuart and ConesvilleStuart generating stations.
On November 15, 2007, the OAQDA issued $90 million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1, 2040. In turn, DP&L borrowed these funds from the OAQDA. The variable interest rate on these bonds had been determined via a Dutch-auction that was reset every 35 days. On April 4, 2008, these OAQDA Revenue bonds were converted from 35-day auction rate securities to 7-day variable rate demand notes (VRDNs). At that time, the trustee, on behalf of DP&L, purchased all of the issued and outstanding bonds from the bondholders at par value and placed them in a custody account. These bonds have not been legally cancelled and can be re-issued at the discretion of DP&L at any time. These VRDNs were purchased using funds provided by DP&L’s revolving line of credit at a borrowing rate of LIBOR plus 0.27% and will be held in trust while we continue to evaluate market conditions and explore suitable long-term financing alternatives. Accordingly, at June 30, 2008, the $90 million variable rate OAQDA Revenue bonds are not treated as being outstanding in the Condensed Consolidated Balance Sheets for both DPL and DP&L.
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 SeptemberJune 30, 2007,2008, DP&L had nothe outstanding borrowings outstanding under this facility.credit facility amounted to $90 million. 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.sub-limit. 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 SeptemberJune 30, 2007,2008, DP&L had no outstanding letters of credit against the facility. As reviewed in the preceding paragraph, on April 4, 2008, $90 million was drawn on this facility to purchase the VRDNs.
During the second quarter endingended June 30, 2007, DPL entered intoprovided a short-term loan to DP&L for $105 million. DP&Lpaid down $15 million of this loan during the third quarter endingended September 30, 2007, leaving a current outstanding loan balance of $90 million.an additional $70 million during the fourth quarter ended December 31, 2007, and the final $20 million during the first quarter ended March 31, 2008. This short-term loan doesdid not affectviolate any covenants in our other debt covenants.instruments. There are no other inter-companyintercompany debt collateralizations or debt guarantees between DPL, DP&L,and their subsidiaries.affiliates. None of the debt obligations of DPL or DP&L are guaranteed or secured by affiliates and no cross-collateralization exists between any subsidiaries.
2920
Notes5. Income Taxes
On June 27, 2008, we entered into a $42.0 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and appeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment will be made to the ODT by July 31, 2008. Due to this settlement agreement, the balance of our unrecognized state tax liabilities recorded at March 31, 2008, in the amount of $56.3 million, was reversed resulting in a recorded income tax benefit of $8.5 million, net of federal tax impact, during the three months ended June 30, 2008.
DPL’s effective income tax rate for the three months ended June 30, 2008 was 22.9% as compared to 37.7% for the three months ended June 30, 2007. DPL’s effective income tax rate for the six months ended June 30, 2008 was 32.3% as compared to 38.5% for the six months ended June 30, 2007.
DP&L’s effective income tax rate for the three months ended June 30, 2008 was 24.3% as compared to 37.6% for the three months ended June 30, 2007. DP&L’s effective income tax rate for the six months ended June 30, 2008 was 32.1% as compared to 37.5% for the six months ended June 30, 2007.
The decreases in the effective tax rates for DPL and DP&L in both periods was primarily the result of the $8.5 million income tax benefit discussed above.
We currently have no uncertain tax positions but will continue to examine tax positions taken in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”
We recognize interest and penalties related to unrecognized tax positions in income taxes. As of June 30, 2008, we do not have any interest accrued related to uncertain tax positions.
6. 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. Wealso have unfunded liabilities related to retirement benefits for certain active, terminated, and retired key executives. These liabilities totaled approximately $1.0 million at June 30, 2008 and $0.9 million at December 31, 2007.
Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits, while qualified employees who retired after 1987 are eligible for life insurance benefits. We have funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust.
21
The net periodic benefit cost of the pension and postretirement benefit plans for the three months ended June 30, 2008 and 2007 was:
Net periodic benefit cost
|
| Pension |
| Postretirement |
| ||||||||
$ in millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Service cost |
| $ | 0.8 |
| $ | 1.1 |
| $ | — |
| $ | — |
|
Interest cost |
| 4.1 |
| 4.1 |
| 0.4 |
| 0.3 |
| ||||
Expected return on assets (a) |
| (6.0 | ) | (5.4 | ) | (0.1 | ) | (0.1 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Actuarial (gain) loss |
| 0.7 |
| 0.9 |
| (0.2 | ) | (0.3 | ) | ||||
Prior service cost |
| 0.6 |
| 0.6 |
| — |
| — |
| ||||
Transition obligation |
| — |
| — |
| — |
| 0.1 |
| ||||
Net periodic benefit cost |
| $ | 0.2 |
| $ | 1.3 |
| $ | 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 cost of the pension and postretirement benefit plans for the six months ended June 30, 2008 and 2007 was:
Net periodic benefit cost
|
| Pension |
| Postretirement |
| ||||||||
$ in millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Service cost |
| $ | 1.6 |
| $ | 2.2 |
| $ | — |
| $ | — |
|
Interest cost |
| 8.2 |
| 8.2 |
| 0.8 |
| 0.7 |
| ||||
Expected return on assets (a) |
| (12.0 | ) | (10.9 | ) | (0.2 | ) | (0.2 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization of unrecognized: |
|
|
|
|
|
|
|
|
| ||||
Actuarial (gain) loss |
| 1.4 |
| 1.8 |
| (0.4 | ) | (0.5 | ) | ||||
Prior service cost |
| 1.2 |
| 1.2 |
| — |
| — |
| ||||
Transition obligation |
| — |
| — |
| — |
| 0.1 |
| ||||
Net periodic benefit cost |
| $ | 0.4 |
| $ | 2.5 |
| $ | 0.2 |
| $ | 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 following estimated benefit payments, which reflect future service, are expected to be paid as follows:
Estimated Future Benefit Payments:
$ in millions |
| Pension |
| Postretirement |
| ||
2008 |
| $ | 9.9 |
| $ | 1.3 |
|
2009 |
| $ | 20.0 |
| $ | 2.6 |
|
2010 |
| $ | 20.3 |
| $ | 2.6 |
|
2011 |
| $ | 20.5 |
| $ | 2.5 |
|
2012 |
| $ | 21.0 |
| $ | 2.4 |
|
2013 – 2017 |
| $ | 110.6 |
| $ | 9.8 |
|
22
7. Share-Based Compensation
The following table summarizes share-based compensation expense:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
$ in millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
Stock options |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Restricted stock units |
| — |
| — |
| (0.1 | ) | 0.1 |
| ||||
Performance shares |
| 0.4 |
| 0.4 |
| 0.6 |
| 0.8 |
| ||||
Restricted shares |
| 0.1 |
| 0.1 |
| 0.2 |
| 0.1 |
| ||||
Non-employee directors’ RSUs |
| 0.1 |
| 0.1 |
| 0.2 |
| 0.1 |
| ||||
Management performance shares |
| 0.1 |
| — |
| 0.1 |
| — |
| ||||
Share-based compensation included in operations and maintenance expense |
| $ | 0.7 |
| $ | 0.6 |
| $ | 1.0 |
| $ | 1.1 |
|
Income tax benefit |
| (0.2 | ) | (0.2 | ) | (0.3 | ) | (0.4 | ) | ||||
Total share-based compensation, net of tax |
| $ | 0.5 |
| $ | 0.4 |
| $ | 0.7 |
| $ | 0.7 |
|
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.
Summarized share-based compensation activity for the six months ended June 30, 2008 and 2007 was as follows:
|
| Options |
| RSUs |
| Performance Shares |
| ||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
|
Outstanding at beginning of year |
| 946,500 |
| 5,091,500 |
| 22,976 |
| 1,345,995 |
| 142,108 |
| 154,768 |
|
Granted |
| — |
| — |
| — |
| — |
| 93,298 |
| 74,714 |
|
Dividends |
| — |
| — |
| — |
| — |
| — |
| — |
|
Exercised |
| (50,000 | ) | (520,000 | ) | (1,605 | ) | — |
| — |
| (22,462 | ) |
Expired |
| — |
| — |
| — |
| — |
| (37,426 | ) | (21,583 | ) |
Forfeited |
| — |
| (3,620,000 | ) | (1,603 | ) | (1,295,997 | ) | (7,253 | ) | (14,172 | ) |
Outstanding at period end |
| 896,500 |
| 951,500 |
| 19,768 |
| 49,998 |
| 190,727 |
| 171,265 |
|
Exercisable at period end |
| 896,500 |
| 941,500 |
| — |
| — |
| — |
| — |
|
|
| Restricted Shares |
| Director RSUs |
| Mgt. Performance Shares |
| ||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
|
Outstanding at beginning of year |
| 42,200 |
| 19,000 |
| 13,573 |
| — |
| — |
| — |
|
Granted |
| 20,000 |
| 16,400 |
| 15,752 |
| 13,552 |
| 39,144 |
| — |
|
Dividends |
| — |
| — |
| 382 |
| 99 |
| — |
| — |
|
Exercised |
| (1,000 | ) | — |
| (13,721 | ) | (142 | ) | — |
| — |
|
Expired |
| — |
| — |
| — |
| — |
| — |
| — |
|
Forfeited |
| — |
| — |
| — |
| (1,553 | ) | — |
| — |
|
Outstanding at period end |
| 61,200 |
| 35,400 |
| 15,986 |
| 11,956 |
| 39,144 |
| — |
|
Exercisable at period end |
| — |
| — |
| — |
| — |
| — |
| — |
|
On May 28, 2008, the Board of Directors granted a compensation award for select management employees. A total of 39,144 shares were granted. The grants have a three year requisite service period from January 1, 2008 to December 31, 2010 and certain performance conditions during the performance period. The Management Performance Shares can only be awarded in DPL common shares.
23
8. Fair Value Measurements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No.157, “Fair Value Measurements” (SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS 157 requires that the impact of this change in accounting for fair valued assets and liabilities be recorded as an adjustment to beginning retained earnings in the period of adoption. We did not have any adjustments to beginning retained earnings at adoption.
FSP SFAS 157-2 allows for a deferral from the SFAS 157 disclosures for non-financial assets or liabilities until fiscal years beginning after November 15, 2008. We did not elect this deferral and have disclosed an additional layer to an asset retirement obligation.
SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Level 1 inputs are defined as quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities include equity securities held in various deferred compensation trusts and futures contracts that are traded in an active exchange market.
Level 2
Level 2 inputs are observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 assets and liabilities include open-ended investment funds and forward contracts with quoted prices from over-the-counter (OTC) markets or direct broker quotes that are traded less frequently than exchange-traded instruments.
Level 3
Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our Level 3 assets and liabilities include asset retirement obligations that are initially recognized at fair value.
Valuations of assets and liabilities reflect the value of the instrument including the values associated with counterparty risk and performance risk. With the issuance of SFAS 157, the accounting industry clarified that these values must also take into account our own credit standing. We incorporate credit risk into valuations by requiring or posting margin as requested by/of counterparties.
The fair value of assets and liabilities measured on a recurring basis was determined as follows:
|
| Assets and Liabilities Measured at Fair Value on a Recurring Basis |
| ||||||||||||||||||||||
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||||||||
|
|
|
|
|
| Based on��Quoted |
|
|
|
|
|
|
|
|
| ||||||||||
|
| Fair Value at |
| Prices in Active |
| Other Observable |
| Unobservable |
| ||||||||||||||||
|
| June 30, 2008 |
| Market |
| Inputs |
| Inputs |
| ||||||||||||||||
$ in millions |
| DPL |
| DP&L (a) |
| DPL |
| DP&L (a) |
| DPL |
| DP&L |
| DPL |
| DP&L |
| ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Master Trust Assets |
| $ | 12.9 |
| $ | 44.2 |
| $ | — |
| $ | 31.3 |
| $ | 12.9 |
| $ | 12.9 |
| $ | — |
| $ | — |
|
Derivative Assets |
| 2.5 |
| 2.5 |
| 2.4 |
| 2.4 |
| 0.1 |
| 0.1 |
| — |
| — |
| ||||||||
Total |
| $ | 15.4 |
| $ | 46.7 |
| $ | 2.4 |
| $ | 33.7 |
| $ | 13.0 |
| $ | 13.0 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Derivative Liabilities |
| $ | 5.1 |
| $ | 5.1 |
| $ | — |
| $ | — |
| $ | 5.1 |
| $ | 5.1 |
| $ | — |
| $ | — |
|
Total |
| $ | 5.1 |
| $ | 5.1 |
| $ | — |
| $ | — |
| $ | 5.1 |
| $ | 5.1 |
| $ | — |
| $ | — |
|
(a)DP&L holds DPL stock in the Master Trust that is eliminated in consolidation.
24
Generally, for financial assets held by the Master Trust and for heating oil futures, fair value is determined by reference to quoted market prices and other relevant information generated by market transactions. Level 2 inputs are used to value derivatives such as financial transmission rights where the quoted prices are from a relatively inactive market; forward power contracts which are valued using prices on the New York Mercantile Exchange (NYMEX) for similar contracts on the OTC market; and open-ended funds that are valued using the end of day Net Asset Value (NAV).
The fair value of assets and liabilities measured on a non-recurring basis was determined as follows:
|
| Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis |
| ||||||||||||||||||||||
|
|
|
|
|
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||||||||
|
|
|
|
|
| Based on Quoted |
| Based on |
|
|
|
|
| ||||||||||||
|
| Fair Value at |
| Prices in Active |
| Other Observable |
| Unobservable |
| ||||||||||||||||
|
| June 30, 2008 |
| Market |
| Inputs |
| Inputs |
| ||||||||||||||||
$ in millions |
| DPL |
| DP&L |
| DPL |
| DP&L |
| DPL |
| DP&L |
| DPL |
| DP&L |
| ||||||||
Asset retirement obligations recorded during period |
| $ | 0.2 |
| $ | 0.2 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 0.2 |
| $ | 0.2 |
|
The fair value of an asset retirement obligation (ARO) is estimated by discounting expected cash outflows to their present value. Cash outflows are based on approximate future disposal cost as determined by market information, historical information, or management judgment. DP&L added an additional layer to the asbestos removal ARO in the amount of $0.2 million during the three months ended June 30, 2008 due to a change in estimate.
At June, 30, 2008, DPL had $40.1 million of investments in money market mutual funds classified as cash and cash equivalents in its Condensed Consolidated Financial Statements (continued)Balance Sheet. The money market funds have quoted prices that are generally equivalent to par.
9. Earnings per Share
Basic earnings per share (EPS) is based on the weighted-average number of DPL common shares outstanding during the year. Diluted EPS 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 these weighted-average computations are shares held by DP&L’s Master Trust Plan for deferred compensation and unreleased shares held by DP&L’s Employee Stock Ownership Plan (ESOP).
The following table represents common-equivalent shares excluded from the calculation of diluted EPS because they were anti-dilutive. These shares may be dilutive in the future.
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||
In millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
|
|
|
|
|
|
|
|
|
|
|
Common equivalent shares |
| 0.3 |
| — |
| 0.3 |
| — |
|
The following illustrates the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for income after discontinued operations:
25
|
| Three Months Ended June 30, |
| ||||||||||||||
|
| 2008 |
| 2007 |
| ||||||||||||
$ in millions except per |
| Net |
|
|
| Per |
| Net |
|
|
| Per |
| ||||
share amounts |
| Income |
| Shares |
| Share |
| Income |
| Shares |
| Share |
| ||||
Basic EPS |
| $ | 47.6 |
| 109.4 |
| $ | 0.43 |
| $ | 58.7 |
| 107.9 |
| $ | 0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted stock units |
|
|
| — |
|
|
|
|
| 0.7 |
|
|
| ||||
Warrants |
|
|
| 7.7 |
|
|
|
|
| 9.9 |
|
|
| ||||
Stock options, performance and restricted shares |
|
|
| 0.2 |
|
|
|
|
| 1.0 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
| $ | 47.6 |
| 117.3 |
| $ | 0.41 |
| $ | 58.7 |
| 119.5 |
| $ | 0.49 |
|
|
| Six Months Ended June 30, |
| ||||||||||||||
|
| 2008 |
| 2007 |
| ||||||||||||
$ in millions except per |
| Net |
|
|
| Per |
| Net |
|
|
| Per |
| ||||
share amounts |
| Income |
| Shares |
| Share |
| Income |
| Shares |
| Share |
| ||||
Basic EPS |
| $ | 124.9 |
| 109.4 |
| $ | 1.14 |
| $ | 114.8 |
| 107.7 |
| $ | 1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Restricted stock units |
|
|
| — |
|
|
|
|
| 1.0 |
|
|
| ||||
Warrants |
|
|
| 7.2 |
|
|
|
|
| 9.5 |
|
|
| ||||
Stock options, performance and restricted shares |
|
|
| 0.2 |
|
|
|
|
| 1.2 |
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted EPS |
| $ | 124.9 |
| 116.8 |
| $ | 1.07 |
| $ | 114.8 |
| 119.4 |
| $ | 0.96 |
|
10. 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 September 30, 2007, these include:
|
|
|
| Payment Year |
| |||||||||||
$ in millions |
| Total |
| 2007 |
| 2008-2009 |
| 2010-2011 |
| Thereafter |
| |||||
DPL |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| $ | 1,550.0 |
| $ | — |
| $ | 275.0 |
| $ | 297.4 |
| $ | 977.6 |
|
Interest payments |
| 1,026.4 |
| 23.9 |
| 170.7 |
| 144.0 |
| 687.8 |
| |||||
Pension and postretirement payments |
| 219.1 |
| 5.5 |
| 45.2 |
| 46.5 |
| 121.9 |
| |||||
Capital lease |
| 2.3 |
| 0.2 |
| 1.5 |
| 0.6 |
| — |
| |||||
Operating leases |
| 0.8 |
| 0.4 |
| 0.3 |
| 0.1 |
| — |
| |||||
Coal contracts (a) |
| 925.8 |
| 104.6 |
| 578.8 |
| 242.4 |
| — |
| |||||
Limestone contracts (a) |
| 57.7 |
| 0.6 |
| 9.5 |
| 10.9 |
| 36.7 |
| |||||
Reserve for uncertain tax provisions |
| 41.9 |
| 41.9 |
| — |
| — |
| — |
| |||||
Other contractual obligations |
| 337.2 |
| 232.8 |
| 86.5 |
| 14.5 |
| 3.4 |
| |||||
Total contractual obligations |
| $ | 4,161.2 |
| $ | 409.9 |
| $ | 1,167.5 |
| $ | 756.4 |
| $ | 1,827.4 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
DP&L |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| $ | 783.2 |
| $ | — |
| $ | — |
| $ | — |
| $ | 783.2 |
|
Interest payments |
| 542.6 |
| 9.8 |
| 78.3 |
| 78.3 |
| 376.2 |
| |||||
Pension and postretirement payments |
| 219.1 |
| 5.5 |
| 45.2 |
| 46.5 |
| 121.9 |
| |||||
Capital lease |
| 2.3 |
| 0.2 |
| 1.5 |
| 0.6 |
| — |
| |||||
Operating leases |
| 0.8 |
| 0.4 |
| 0.3 |
| 0.1 |
| — |
| |||||
Coal contracts (a) |
| 925.8 |
| 104.6 |
| 578.8 |
| 242.4 |
| — |
| |||||
Limestone contracts (a) |
| 57.7 |
| 0.6 |
| 9.5 |
| 10.9 |
| 36.7 |
| |||||
Reserve for uncertain tax provisions |
| 41.9 |
| 41.9 |
| — |
| — |
| — |
| |||||
Other contractual obligations |
| 337.2 |
| 232.8 |
| 86.5 |
| 14.5 |
| 3.4 |
| |||||
Total contractual obligations |
| $ | 2,910.6 |
| $ | 395.8 |
| $ | 800.1 |
| $ | 393.3 |
| $ | 1,321.4 |
|
|
|
Long-term debt:
DPL’s long-term debt as of September 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 asThere have been no material changes, outside the ordinary course of September 30,business, to the information disclosed in the contractual obligations table in our Annual Report of Form 10-K for the fiscal year ended December 31, 2007 consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.except those relating to the following transactions:
See· On April 4, 2008, DP&L repurchased all of the issued and outstanding $90 million variable rate OAQDA Revenue bonds from the bondholders and placed them in a custody account. This transaction is further discussed in Note 84 of Notes to Condensed Consolidated Financial Statements.
Interest payments:·
Interest payments associated On June 27, 2008, DPL entered into a $42 million settlement agreement with the long-term debt described above.
PensionODT resolving all outstanding audit issues and postretirement payments:
As of September 30, 2007, DP&L had estimated future benefit payments as outlinedappeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment will be made to the ODT by July 31, 2008. This transaction is further discussed in Note 65 of Notes to Condensed Consolidated Financial Statements. These estimated future benefit payments are projected through 2016.
Capital lease:
As of September 30,· At December 31, 2007, DP&L had a capital leasecontractual obligations relating to the installation of FGD equipment in the amount of $144 million. During the three months ended June 30, 2008, the installation of FGD equipment on Stuart station units 1 and 2 was substantially completed and the equipment put into test operation. The open contractual obligations relating to the installation of FGD equipment was therefore reduced to $32.1 million at June 30, 2008. It is expected that expires in September 2010.these open contractual obligations will be satisfied within the next twelve months.
30Commercial Commitments
With the exception of the transactions discussed in the preceding paragraph, there have been no other material changes, outside the ordinary course of business, to our commercial commitments as disclosed in our Annual Report of Form 10-K for the fiscal year ended December 31, 2007.
26
Notes to the Condensed Consolidated Financial Statements (continued)
Operating leases:
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 contract:
DP&L has entered into a 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 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007. None of the amount of unrecognized tax benefits is due to uncertainty in the timing of deductibility.
Other contractual obligations:
As of September 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 September 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 September 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 September 30, 2007, DP&L could be responsible for the repayment of 4.9%, or $34.1 million, of a $695 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, 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 |
|
31
Notes to the Condensed Consolidated Financial Statements (continued)
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 SeptemberJune 30, 2007,2008, cannot be reasonably determined.
EmployeesCoal Supply Agreement
Approximately 53% of our employees are under a collective bargaining agreement.
In February 2007 we filed a lawsuit against a coal supplier seeking damages incurred due to the supplier’s failure to supply approximately 1.5 million tons of coal to two jointly owned plants under a coal supply agreement, of which approximately 570 thousand tons is our share. The supplier has denied liability and while trial is scheduled for November 2008, we are also attempting to resolve this dispute through mediation. We are unable to determine the ultimate resolution of this matter at this time. In accordance with accounting for gain contingencies, we will not record an amount for this matter until it is resolved.
Environmental Matters
DPL, DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and law.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 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.SFAS 5 (SFAS 5), “Accounting for Contingencies” as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements. 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.
On November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and its various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us). The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs. The consent decree is a comprehensive and complex settlement of issues presented in the case. It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010. Because the co-owners had previously budgeted for such installation, this portion of the settlement does not materially change projected costs. AEP will also be required to operate its power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent decree. It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment. The consent decree also requires the payment by AEP of a $15 million civil penalty and to incur costs of $60 million in environmental damage mitigation projects. The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a co-owner has not been determined but is not expected to be material. The court will provide an opportunity for public comment on the proposed consent decree. After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it. DPLSierra Club cannot predict when the court will issue a ruling or what that ruling may be.
In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Stationgenerating station in the United States District Court for the Southern District of Ohio for alleged violations of the CAAClean Air Act (CAA) and the Station’sstation’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, including depositions, and most expert reports have been submitted. Settlement negotiations are ongoing.
Notices of Violation Involving Wholly-Owned Plants
In 2007, the Ohio EPA and the USEPA issued NOVs to DP&L for alleged violations of the CAA at the O.H. Hutchings station. The NOVs alleged deficiencies relate to stack opacity and particulate emissions. Discussions are under way with the USEPA and Ohio EPA, and DP&L has provided data to those agencies regarding its maintenance expenses and operating results and recommendations that had previously been made by consultants to DP&L. Additional information was provided to the U.S. Department of Justice (US DOJ) in response to a request made on January 28, 2008. DP&L met with the US DOJ and USEPA on July 15, 2008 to discuss a possible resolution of this matter. A settlement of this matter could include a combination of capital projects, future commitments for compliance, and civil penalties of an unspecified amount. At this time, DP&L is unable to determine the timing, costs, or method by which the issues may be resolved.
Notices of Violation Involving Co-Owned Plants
On March 13, 2008, Duke Energy Ohio Inc., the operator of the Zimmer generating station, received a NOV and a Finding of Violation from the USEPA alleging violations of the CAA, the Ohio State Implementation Program (SIP) and permits for the Station in areas including SO2, opacity, and increased heat input. DP&L is a co-owner of the Zimmer generating station and could be affected by the eventual resolution of this matter. Duke Energy Ohio Inc. is expected to act on behalf of itself and the co-owners with respect to this matter. At this time, DP&L is unable to determine whether any additional actions will take place with respect to this matter.
27
Environmental Regulation and Litigation Related to Air Quality
On February 8, 2008, a three-judge panel of the Court of Appeals, D.C. Circuit, struck down the USEPA regulations that were designed to establish a trading program for mercury emissions, finding that the USEPA had not complied with statutory requirements applicable to “de-listing” mercury as a hazardous air pollutant and that a cap-and-trade approach was not authorized by law for “listed” hazardous air pollutants. The USEPA and a group representing utilities filed a request for rehearing en banc (i.e., a rehearing before all the D.C. Circuit judges). That request was denied on May 20, 2008. The parties have a 90-day window to file a petition for certiorari with the U.S. Supreme Court (until August 20, 2008). If the petition is not filed by boththe parties or if it is not accepted by the Supreme Court, or if the Supreme Court grants certiorari and depositions of experts are expectedupholds the D.C. Circuit’s decision, EPA will have to occur inmove forward to set Maximum Available Control Technology (MACT) standards for coal- and oil-fired electric generating units. It is likely the fourth quarter of 2007. Dispositive motions areEPA would take at least three years to be filed in January 2008. No trial date has been set.gather new data to promulgate updated MACT standards and another three years for the regulations to become effective. At this time, DP&L is unable to determine the impact of this lawsuit, if any,promulgation of new MACT standards on its overall results of operations, financial position or cash flows.results of operations.
In February 2007, Ohio’s Regional Air Pollution Control Agency (RAPCA),On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a Notice of Violation (NOV)decision that vacated the USEPA’s Clean Air Interstate Rule (CAIR) and its associated Federal Implementation Plan. This decision remands these issues back to DP&Lthe USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to an allegedly failed performance testexisting trading program for sulfur dioxide (SO2) that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program. In the fourth quarter of one boiler2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and SO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third parties. The overall impact of the court’s decision, and the actions the EPA will take in response to this decision, on DPL and DP&L is not known at this time, however, the court’s decision may impact future sales of excess allowances. We do not expect this decision to have a material effect on our financial position.
Environmental Regulation and Litigation Related to Water Quality
On July 9, 2004, the USEPA issued final rules pursuant to the CAA 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. Several parties petitioned the U.S. Supreme Court for review of the lower court decision. On April 14, 2008, the Supreme Court elected to review the lower court decision on the issue of whether USEPA can compare costs with benefits in determining the best technology available for minimizing adverse environmental impact at cooling water intake structures. Briefs will be submitted to the Court this summer and oral arguments will likely be held in November 2006or December 2008 with a potential decision rendered in 2009.
On February 5, 2008, we received a letter from Ohio EPA indicating that they intend to impose a compliance schedule, as part of the final National Pollutant Discharge Elimination System (NPDES) Permit, that requires us to implement one of two diffuser options for particulate matter at DP&L’s Hutchings Generating Station.the discharge of water from the Stuart station into the Ohio River as identified in the thermal discharge study conducted pursuant to requirements contained in a previous permit. The two diffuser options identified by Ohio EPA could cost approximately $33 million based on preliminary cost estimates, of which our pro-rata ownership share would be approximately $11.5 million. On June 29, 2007, the U.S. Environmental Protection Agency (US EPA) Region V, issued a 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. RepresentativesMarch 6, 2008, representatives from DP&L met with officials from USOhio EPA Region V and RAPCA on July 24, 2007 to discuss the referenced performance tests, subsequent performance tests,issue and pastreiterate the Company’s position that diffusers were not cost-effective. We agreed to explore other potential solutions 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 RAPCAshare findings with respect to these NOVs.Ohio EPA.
3228
Notes to the Condensed Consolidated Financial Statements (continued)Table of Contents
10.11. Executive Litigation
On May 21, 2007, we settled the litigation with three of our former executives. As part of this settlement, the threethese 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, DPLhad accrued obligations of approximately $64.2 million, of which DP&Lhad accrued obligations of approximately $60.3 million. Included in these amounts was 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. The $25 million settlement was funded from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation.
As a result of this settlement, during the second quarter ended June 30, 2007, DPLrealized a net pre-tax gain in continuing and discontinued operations of approximately $31.0 million and $8.2$8.1 million, respectively. The net gain iswas 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.MVE. 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 during the second quarter ended June 30, 2007,Similarly, DP&Lrealized 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&Lsince the obligations were associated with our non-qualified benefit plans. DP&Lhad no ownership of DPL’s discontinued financial asset portfolio business,business; therefore, these liabilities were reversed and DP&L’snet pre-tax gain was recorded within continuing operations. The following table outlines the components of DP&L’s net gain:
| |||
|
| ||
|
|
| |
|
|
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, during the second quarter ended June 30, 2007, DPL and DP&Lrecorded a $3.2 million realized gain which iswas reflected in investment income.
11. Insurance Recovery Claim
On April 30, 2007, DP&L executed a settlement agreement for $14.5 million 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. This was recorded as a reduction to operation and maintenance expense during the second quarterthree months 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 additional legal fees that DPL and DP&L incurred in defending claims made by the three former executives.
33
Notes to the Condensed Consolidated Financial Statements (continued)
12. Regulatory Matters
We apply the provisions of Statement of Financial Accounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulation,” (SFAS 71) to our regulated operations. This accounting standard defines regulatory assets/liabilities as the deferral of incurred costs/benefits expected to be reflected in future customer rates.
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:
$ in millions |
| Type of |
| Amortization |
| At |
| At |
| ||
Regulatory Assets: |
|
|
|
|
|
|
|
|
| ||
Deferred recoverable income taxes |
| C/B |
| Ongoing |
| $ | 51.9 |
| $ | 53.1 |
|
Pension and postretirement benefits |
| C |
| Ongoing |
| 44.5 |
| 47.1 |
| ||
Electric Choice system costs |
| F |
| 2010 |
| 11.0 |
| 13.5 |
| ||
Regional transmission organization costs |
| C |
| 2014 |
| 10.3 |
| 11.4 |
| ||
Deferred storm costs |
| C |
| 2008 |
| 2.7 |
| 5.4 |
| ||
PJM administrative costs |
| F |
| 2009 |
| 3.4 |
| 4.6 |
| ||
Power plant emission fees |
| C |
| Ongoing |
| 4.4 |
| 4.5 |
| ||
Rate case expenses |
| F |
| 2010 |
| 0.8 |
| 1.0 |
| ||
Retail settlement system costs |
|
|
|
|
| 3.1 |
| 3.1 |
| ||
PJM integration costs |
| F |
| 2015 |
| 1.1 |
| 1.4 |
| ||
Other costs |
|
|
|
|
| 3.8 |
| 3.5 |
| ||
Total regulatory assets |
|
|
|
|
| $ | 137.0 |
| $ | 148.6 |
|
|
|
|
|
|
|
|
|
|
| ||
Regulatory Liabilities: |
|
|
|
|
|
|
|
|
| ||
Asset retirement obligations - regulated property |
|
|
|
|
| $ | 90.7 |
| $ | 86.3 |
|
Postretirement benefits |
|
|
|
|
| 7.1 |
| 7.6 |
| ||
SECA net revenue subject to refund |
|
|
|
|
| 20.4 |
| 18.7 |
| ||
Total regulatory liabilities |
|
|
|
|
| $ | 118.2 |
| $ | 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 these costs have been historically recovered through rates. This factor, combined with the historical precedents from the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC), makes future rate recovery of these costs probable.
Electric Choice system 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 our billing system from all customers in our service territory. On March 1, 2006, the PUCO issued an order that allowed us to begin collecting this rider immediately. We 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.
34
Notes to the Condensed Consolidated Financial Statements (continued)
Deferred storm costs include costs incurred by us to repair damage from the 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.
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 three-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 from customers over various periods under a PUCO rate rider.
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.
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.
Other costs primarily include consumer education advertising regarding electric deregulation and 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 an accrual basis and 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 Cost 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/Midwest Independent Transmission System Operator, Inc. (MISO) region. A hearing was held in early 2006 to determine the amount of these transitional payments. A hearing examiner’s recommendation of August 2006 has been appealed by multiple parties including DP&L. To date, no ruling by the FERC has been issued. We received and paid these transitional payments from May 2005 through March 2006.
13.Ownership of Facilities
DP&L and two 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, operating supplies and capital additions, are allocated to the owners in accordance with their respective ownership interests. As of September 30, 2007, DP&L had $334.0 million of construction work in progress at such facilities.
35
Notes to the Condensed Consolidated Financial Statements (continued)
DP&L’s undivided ownership interest in such jointly owned facilities at September 30, 2007 is as follows:
|
| DP&L Share |
| DP&L Investment |
| ||||||||||||||
|
| Ownership |
| Production |
| Gross Plant |
| Accumulated |
| Construction Work |
| ||||||||
Production Units: |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Beckjord Unit 6 |
| 50.0 |
| 207 |
| 63 |
| 53 |
| 7 |
| ||||||||
Conesville Unit 4 |
| 16.5 |
| 129 |
| 34 |
| 27 |
| 24 |
| ||||||||
East Bend Station |
| 31.0 |
| 186 |
| 199 |
| 128 |
| 9 |
| ||||||||
Killen Station |
| 67.0 |
| 424 |
| 568 |
| 249 |
| 12 |
| ||||||||
Miami Fort Units 7&8 |
| 36.0 |
| 360 |
| 270 |
| 103 |
| 70 |
| ||||||||
Stuart Station |
| 35.0 |
| 839 |
| 392 |
| 205 |
| 201 |
| ||||||||
Zimmer Station |
| 28.1 |
| 365 |
| 1,055 |
| 568 |
| 11 |
| ||||||||
Transmission (at varying percentages) |
|
|
| 90 |
| 50 |
| 0 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
DPL’s and DP&L’s share of operating costs associated with the jointly-owned generating facilities are included within the corresponding line on the Condensed Consolidated Statement of Results of Operations and our share of the investment is included in the Condensed Consolidated Balance Sheet. |
|
|
| ||||||||||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 94% 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 this section.
Certain statements contained in this reportdiscussion 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 future economic performance, taking into account the information currently available to management. These statements are not statements of historical fact and are typically identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will”“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 DPL’sour control, including but not limited to: abnormal or severe weather and catastrophic weather-related damage; unusual maintenance or repair requirements; changes in fuel costs and purchased power, coal, environmental emissions, natural gas, oil, and other commodity prices; volatility and changes in markets for electricity and other energy-related commodities; performance of our suppliers and other counterparties; increased 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 and regulations, rate structures or tax laws; changes in federal and/or state environmental laws and regulations to which DPL and its subsidiaries are subject; the development of Regional Transmission Organizations (RTOs), including PJM Interconnection, L.L.C. (PJM) to which DPL’s operating subsidiary (DP&L) has given control of its transmission functions; changes in DPL’sour purchasing processes, pricing, delays, employee, contractor, and supplier performance and availability; significant delays associated with large construction projects;
29
growth in DPL’sour service territory and changes in demand and demographic patterns; changes in accounting 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; and the risks and other factors discussed in DPL’s and DP&L’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. 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.
36The following discussion should be read in conjunction with the accompanying unaudited financial statements and related footnotes included in Part 1 – Financial Information.
BUSINESS OVERVIEW
This report includesDPL is a diversified regional energy company organized in 1985 under the combined filinglaws of DPL Inc. (DPL) and TheOhio. Our executive offices are located at 1065 Woodman Drive, 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 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. DPL and DP&L now file combined SEC reports on an interim and annual basis.Ohio 45432 – telephone (937) 224-6000.
DPLDPL’s principal subsidiary is DP&L. DP&Lis a regional electric energy andpublic utility company and through its principal subsidiary,incorporated in 1911 under the laws of Ohio. DP&L, is primarily engaged sells electricity to residential, commercial, industrial and governmental customers in the generation, transmission and distributiona 6,000 square mile area of electricity in West Central Ohio. DP&L also sells electricity to DPL Energy Resources (DPLER), an affiliate, to satisfy the electric requirements of their retail customers. Electricity for DP&L’s 24 county service area is primarily generated at eight coal-fired power plants and is distributed to more than 514,000 retail customers. 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 withalso purchases retail peak load or customer demand; to maximize profits while effectively managing exposure to movements in energy and fuel prices and to 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 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 andrequirements from DPL Energy LLC (DPLE), one of DPL’s wholly-owned subsidiaries, may sell or purchase electric products onwholly 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 significant subsidiaries (all of which are wholly owned) include DPLE, which engages in the operation of peaking generating facilities; DPLER, which sells retail electric energy under contract to major industrial and commercial customers in West Central Ohio; 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 DPLE compete with other generators, power marketers, privatelyaffiliated companies.
DPL and municipally-owned electric utilities and rural electric cooperatives when selling electricity. The ability of DP&L conduct their principal business in one business segment - Electric.
As we look forward, there are a number of issues that we believe may have a significant impact on our business and DPLEoperations described above. The following issues mentioned below are not meant to sellbe exhaustive but to provide insight to matters that have or are likely to have an effect on our industry and business:
·Clean Air Interstate Rule (CAIR) decision by the U.S. Court of Appeals for the District of Columbia Circuit
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the United States Environmental Protection Agency’s (USEPA) CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program. The court’s decision may impact future sales of excess allowances, however, we do not expect this electricitydecision to have a material effect on our financial position.
·Ohio Senate Bill 221
On May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, was signed by the Governor and will dependbecome effective July 31, 2008. This bill is further discussed in the Updates/Other Matters section below. We are currently in the process of reviewing the bill and evaluating its ramifications. While the overall financial impact of this new legislation on how DP&L’sDPL and DPLE’s price, termsDP&L will not be known for some time, implementation of the new legislation by DPL and conditions compare to thoseDP&L may materially impact our financial condition.
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Table of other suppliers.Contents
We·Greenhouse Gasesoperate
The rules issued by the USEPA and managetransmissionOhio Environmental Protection Agency (Ohio EPA) that require substantial reductions in sulfur dioxide (SO2), nitrogen oxides (NOX), and distribution assetsmercury emissions may impact our business and operations. We are installing (and have installed) emission control technology and are taking other measures to comply with required reductions.
In addition to the requirements related to emissions of SO2, NOX and mercury noted above, there is a growing concern nationally and internationally about global climate change and the contribution of emissions of greenhouse gases, including most significantly, carbon dioxide (CO2). This concern has led to increased interest in legislation at the federal level and actions at the state level as well as litigation relating to greenhouse gas emissions, including a recent U.S. Supreme Court decision holding that the USEPA has the authority to regulate CO2 emissions from motor vehicles under the Clean Air Act (CAA). Increased pressure for carbon dioxide emissions reduction is also coming from investor organizations and the international community. If legislation or regulations are passed at the federal or state levels imposing mandatory reductions of CO2 and other greenhouse gases on generation facilities, the cost of such reductions could be material.
·Fuel Prices
Recently, the coal market has experienced significant price increases. We are now in a rate-regulated environment. Accordingly, this subjects usglobal market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. Our approach is to regulatoryhedge the fuel for our anticipated electric sales. We have entered into contracts to hedge our exposure to fuel requirements and other energy-related commodities. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent our suppliers do not meet their contractual commitments or we are not hedged against price volatility, our results of operations, financial position, or cash flows could be materially affected.
·Credit Market
The current global credit crisis may adversely affect our business and financial results. During 2007, higher interest rates, falling property prices, and a significant increase in the number of sub-prime mortgages originated in 2005 and 2006 contributed to dramatic increases in mortgage delinquencies and defaults in 2007 and the six months ended June 30, 2008. The anticipated future delinquencies among high-risk, or sub-prime, borrowers in the United States is expected to continue in the foreseeable future. The widespread dispersion of credit risk in termsrelated to mortgage delinquencies and defaults through the securitization of mortgage-backed securities (MBS), sales of collateralized debt obligations (CDOs) and the creation of structured investment vehicles (SIVs), as well as the unclear impact on large banks of MBS, CDOs, and SIVs, caused banks to reduce their loans to each other or make them at higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of debt was negatively impacted. We issue debt to cover the costs that we may recoverof certain of our operations and expenditures and the investment returns that we may collect in customer rates. We are focusedinability to issue such debt on delivering electricityreasonable terms, or at all, could negatively affect our business and maintaining high standardsfinancial results. See Note 4 of customer service and reliability in a cost-effective manner.Notes to Condensed Consolidated Financial Statements which discusses recent actions taken by DP&L associated with its auction rate securities.
We operate in a regulated31
UPDATES / OTHER MATTERS
Competition 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).Regulation Updates
Ohio Matters Updates
Ohio Retail Rates
On May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, was signed by the Governor and will become effective July 31, 2008. This new law states that all Ohio distribution utilities must file either an electric security plan or a market rate option to be in effect January 1, 2009. Under the market rate option, the retail generation price will be set by a periodic competitive bid process after the utility demonstrates that it can meet certain market criteria and bid requirements set out in the bill. Also, under this option, utilities that still own generation in the state are required to phase in the market rate option over a period of not less than five years. An electric security plan which may allow for adjustments to the standard offer for costs associated with environmental compliance; fuel and purchased power; construction of new or investment in specified generating facilities; the provision of standby and default service, operating, maintenance, or other costs including taxes. As part of Ohio’sits electric deregulation law, allsecurity plan, the utility is permitted to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade, or replace its electric distribution system, including cost recovery mechanisms. On July 2, 2008, the Public Utilities Commission of Ohio (PUCO) issued the first set in a series of rules related to implementation of the state’s investor-owned utilities are required to join a RTO. The role of the RTO is to administernew law, including what information must be included in an electric marketplace and ensure reliability of the transmission grid. In October 2004,security plan as well as a market rate option. DP&L successfully integratedis preparing to file its 1,000 miles of high-voltage transmission intocomments on the PJM Interconnection, L.L.C. (PJM) RTO. 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; administers the world’s largest competitive wholesale electricity market; and plans regional transmission expansion improvements to maintain grid reliability and relieve congestion.rules.
37This new law contains annual targets relating to advanced energy portfolio standards, renewable energy, and energy efficiency standards. The standards require that by the year 2025, 25% of the total number of kilowatt hours of electricity sold by the utility to retail electric consumers must come from alternative energy resources, which include “advanced energy resources” such as distributed generation, clean coal, advanced nuclear, energy efficiency, and fuel cell technology; and “renewable energy resources” such as solar, hydro, wind, geothermal, and biomass. At least half of the 25% must be generated from renewable energy resources, including 0.5% from solar energy. In addition, the proposed bill requires annual energy efficiency reductions that reach 22.3% by 2025 and peak demand reduction requirements that reach 7.75% by 2018. The advanced energy portfolio and energy efficiency standards begin to phase in during 2009, with increases in requirement percentages each year. If any targets are not met, compliance penalties will apply. Rules relating to implementation of these targets are expected to be issued later this summer. While the overall financial impact of this bill will not be known for some time, implementation of the bill could have a material impact on our financial condition.
Federal Matters Updates
As a member of PJM, DP&L is subject to charges and costs associated with PJM operations as approved by the Federal Energy Regulatory Commission (FERC). As discussed below,FERC Orders issued in connection with2007, regarding the recoveryallocation of such costs of large transmission facilities within PJM, could result in retail rates,additional costs being allocated to 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 PJM’s members, including DP&L. DP&L and other interested parties have the right to intervene and offer counter-proposals.
UPDATES / OTHER MATTERS
Impact of AEP Settlement
On November 18, 2004, the State of New York and seven other states (the States) filed suit against the American Electric Power Corporation (AEP) and various subsidiaries, alleging various Clean Air Act (CAA) violations at a number of AEP electric generating facilities, including Conesville Unit 4 (co-owned by AEP’s subsidiary Columbus Southern, Duke Energy’s subsidiary Cincinnati Gas & Electric, and us). The case was subsequently consolidated with similar cases brought by the federal EPA and other plaintiffs dating back to 1999, which cases also involved AEP electric generating facilities. On October 9, 2007, AEP filed before the federal district court in Ohio a consent decree executed by AEP, the EPA, the States and the other plaintiffs. The consent decree is a comprehensive and complex settlement of issues presented in the case. It affects us only with respect to Conesville Unit 4, which is made subject to requirements to install Selective Catalytic Reduction (SCR) units and Flue Gas Desulfurization (FGD) units by December 31, 2010. Because the co-owners had previously budgeted for such installation, this portion of the settlement does not materially change projected costs. AEP will also be required to operate its power plants, including Conesville Unit 4, to meet specified annual caps across all of the power plants covered by the consent degree. It is expected that AEP will be able to meet those annual cap requirements without materially affecting Conesville Unit 4’s operations beyond the requirements to install and operate SCR and FGD equipment. The consent decree also requires the payment by AEP of a $15 million civil penalty and to incur costs of $60 million in environmental damage mitigation projects. The share of such costs that may ultimately be assigned to Conesville Unit 4 and any further share assigned to us as a co-owner has not been determined but is not expected to be material. The court will provide an opportunity for public comment on the proposed consent decree. After public comment is received, the court will review the proposed consent decree and has the power to accept or reject it. DPL cannot predict when the court will issue a ruling or what that ruling may be.
Depreciation Expense and Study Update
In July 2007, DPL completed a depreciation rate study for non-regulated generation property based on its property, plant and equipment balances as of December 31, 2005, with adjustments for subsequent scrubber additions. The results of the depreciation study concluded that DPL’s depreciation rates should be reduced due to asset lives being extended beyond previously estimated lives. DPL adjusted the depreciation rates for its non-regulated generation property, effective August 1, 2007, reducing depreciation expense. For the three months ended September 30, 2007, the reduction in depreciation expense increased income from continuing operations by $3.8 million, increased net income by approximately $2.4 million and increased earnings per share (EPS) by approximately $0.02 per share. For the period from August 1, 2007 to December 31, 2007, the reduction in depreciation expense will increase income from continuing operations of approximately $9.5$12 million increase net incomeor more annually by approximately $5.9 million and increase EPS by approximately $0.06 per share.
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.
As of September 30, 2007, four unaffiliated marketers were registered as Competitive Retail Electric Service (CRES) providers in DP&L’s service territory. While there has been some customer switching to date, it represented less than approximately 0.20 percent of sales through the third quarter ending September 30, 2007. 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 and 2007. In addition, several communities in DP&L’s service area have passed ordinances allowing the communities to
38
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. Four rounds of bidding were conducted for the 2007 program resulting in no bids being received. DP&L has completed its obligations under this residential program.
On April 4, 2005,2012. DP&L filed a request atnotice of appeal to the PUCO to implement a new rate stabilization surcharge (RSS) effective January 1, 2006 to recover cost increases associatedU.S. Court of Appeals, D.C. Circuit on March 18, 2008. The appeal has been consolidated 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 and allowed for recoveryother appeals taken by other interested parties of certain fuel and environmental investment costs. The PUCO adopted the settlement, but ruled that the environmental rider will be by-passable by all customers who take service from alternate generation suppliers. Applications for rehearing were deniedsame FERC Orders and the case was appealed to the Ohio Supreme Court by the Ohio Consumers’ Counsel. On September 5, 2007, the Ohio Supreme Court affirmed the PUCO’s approval of the settlement agreement but remanded one aspect of the order, that the RSS tariff should be part of the Company’s generation tariffs instead of distribution tariffs. The Company will file to modify its tariffs accordingly and does not believe this tariff change will impact its future revenues.
On September 25, 2007, Senate Bill 221 was introduced in the Ohio Legislature. The bill codifies, in draft form, the governor’s proposed energy policy. As currently drafted, the bill states that the standard service offer currently in effect will continue until a distribution utility files either an energy security plan or a market-based alternative by which the retail price will be set by a periodic competitive bid process. In order to file a market-based alternative, the utility has the burden of proof to demonstrate that there is effective competition in its service territory. The PUCO will establish rules for filing an energy security plan which may allow for adjustments to the standard offer for environmental compliance costs, cost of fuel and purchased power, construction costs of new generating facilities or an index price. Once a utility’s energy security plan is approved by the PUCO, the utility is required to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade or replace its distribution infrastructure. The proposed bill establishes a goal that by 2025, twenty-five percent of the generation used to supply standard offer generation service in the state will come from advanced energy resources which may include: renewable energy sources, clean coal technology, advanced nuclear generation, fuel cells and co-generation. It creates a federal energy advocate that will evaluate the costs and benefits associated with Regional Transmission Organizations on behalf of the state. It promotes construction of advanced energy projects by providing low interest loans and grants; promotes energy efficiency and advanced metering infrastructure investments and directs the PUCO to develop reliability performance targets. The outcome of this proceeding and its financial impact on the Company cannot be determined at this time.
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 beconsolidated cases have been assigned to the load centers that benefit from7th Circuit. The Company cannot predict the new facilities. The methodology for identifying beneficiaries was set for hearing. On September 14, 2007, DP&L, along withoutcome or timing of a decision in the majority of other stakeholders in PJM, filed a proposed settlement regarding the cost allocation methodology for the new facilities at lower voltages. In addition, on 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. The financial impact of the 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.appeals.
As a member of PJM, the value of DP&L’s&L’s generation capacity will becapacity is affected by changes in and the clearing results of the PJM capacity construct. The new construct introducesutilizes a new Reliability Pricing Model (RPM) that changes the way generation capacity is priced and planned for by PJM. PJM held its first RPM auction during April 2007a series of auctions with the most recent taking place in May 2008 for the 2007/20082011/2012 planning year and held its second RPM auction during July 2007 for the 2008/2009 planning year. A third auction was held in October 2007 for the 2009/2010 planning year. DP&L does. The results of these auctions have not expecthad a material impact on itsour results of operations, financial position or cash flows dueflows. The FERC decisions establishing RPM have been appealed by various entities to a Federal appeals court. RPM remains in effect pending the outcome of these three auctions.the appeal. DP&L has intervened and supports the FERC decisions. On March 19, 2008, a large coalition of consumers filed a motion to request a FERC Technical Conference to evaluate whether the RPM construct is performing as expected, and proposed that the RPM market should be modified or replaced. In a related, but separate action, many of the same group of consumers filed a complaint, on May 30, 2008, alleging that bidding approaches and others actions taken by unspecified market participants have resulted in unjust and unreasonable rates of $26 billion across PJM. The complaint seeks reduced RPM capacity prices beginning June 1, 2008. On July 3, 2008, DP&L filed in opposition to the complaint individually and as part of a coalition of companies. DP&L is unable to predict the eventual outcome of the proceeding.
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On September 28, 2007, the Internal Revenue Service (IRS) published proposed regulations which would change the treatment of transactions involving the provision of insurance between members of a consolidated tax group. If adopted, these regulations would affect the tax position previously held by Miami Valley Insurance Company (MVIC), our captive insurance company, that provides insurance to us and our subsidiaries. The IRS requested comments by December 27, 2007. MVIC filed comments as part of a coalition formed for this purpose which included captive insurance companies and parent companies, captive insurance industry associations and insurance departments of numerous states which have captive insurance regulations. These entities all opposed the IRS’ proposed regulations. After review of all comments received, on February 20, 2008, the IRS withdrew the part of its proposed regulation that would have eliminated the current taxation structure of single-parent captive insurance companies filing a consolidated tax return with their parent. Therefore, there has been no adverse impact on DPL, DP&L, or MVIC.
In April 2008, DPL was notified that the IRS would audit its 2005 federal income tax return. That IRS audit has commenced and DPL cannot determine the outcome of the audit.
ENVIRONMENTAL CONSIDERATIONSEnvironmental Updates
DPL,DP&L and our subsidiaries’ facilities and operations are subject to a wide range of environmental regulations and laws by federal, state and local authorities. The environmental issues that may impact us include:
•The CAA and state laws and regulations (including State Implementation Plans) require compliance, obtaining permits and reporting as to air emissions.
•Litigation with the federal and certain state governments and certain special interest groups regarding whether modifications to or maintenance of certain coal-fired generating plants required additional permitting or pollution control technology, and/or whether emissions from coal-fired generating plants cause or contribute to global climate changes.
•Rules issued by the US and state EPA that require substantial reductions in SO2, mercury and NOx emissions. DPL is installing (and has installed) emission control technology and is taking other measures to comply with required reductions.
•The Federal Clean Water Act, which prohibits the discharge of pollutants into waters of the United States except pursuant to appropriate permits. In July 2004, the US EPA adopted a new Clean Water Act rule to reduce the number of fish and other aquatic organisms killed at once-through cooled power plants.
•Solid and hazardous waste laws and regulations, which govern the management and disposal of certain wastes. The majority of solid waste created from the combustion of coal and fossil fuels is fly ash and other coal combustion byproducts, which the EPA has determined are not hazardous waste subject to Resource Conservation and Recovery Act (RCRA).
As well as imposing continuing compliance obligations, these laws and regulations authorize the imposition of substantial penalties for noncompliance, including fines, injunctive relief and other sanctions. In the normal course of business, we have investigatory and remedial activities underway at these facilities 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”
(SFAS 5), as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements. DPL,through its wholly owned captive insurance subsidiary Miami Valley Insurance Company (MVIC),MVIC, has an actuarialactuarially calculated reserve for environmental matters. Weevaluate 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.
Sierra Club Litigation Update
In additionSeptember 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, including depositions, and most expert reports have been submitted. Settlement negotiations are ongoing.
Notices of Violation Involving Wholly Owned Plants
In 2007, the Ohio EPA and the USEPA issued NOVs to DP&L for alleged violations of the CAA at the O.H. Hutchings station. The NOVs alleged deficiencies relate to stack opacity and particulate emissions. Discussions are under way with the USEPA and Ohio EPA, and DP&L has provided data to those agencies regarding its maintenance expenses and operating results and recommendations that had previously been made by consultants to DP&L. Additional information was provided to the requirements relatedU.S. Department of Justice in response to emissionsa request made on January 28, 2008. DP&L met with the US DOJ and USEPA on July 15, 2008 to discuss a possible resolution of sulfur dioxide, nitrogen oxidesthis matter. A settlement of this matter could include a combination of capital projects, future commitments for compliance and mercury noted above, therecivil penalties of an unspecified amount. At this time, DP&L is unable to determine the timing, costs, or method by which the issues may be resolved.
Notices of Violation Involving Co-Owned Plants
On March 13, 2008, Duke Energy Ohio Inc., the operator of the Zimmer generating station, received a NOV and a Finding of Violation from the USEPA alleging violations of the CAA, the Ohio State Implementation Program (SIP) and permits for the Station in areas including SO2, opacity, and increased heat input. DP&L is a growing concern nationallyco-owner of the Zimmer generating station and internationally about global climate changecould be affected by the eventual resolution of this matter. Duke Energy Ohio Inc. is expected to act on behalf of itself and the contributionco-owners with respect to this matter. At this time, DP&L is unable to determine whether any additional actions will take place with respect to this matter.
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Environmental Regulation and Litigation Related to Air Quality
On February 8, 2008, a three-judge panel of the Court of Appeals, D.C. Circuit, struck down the USEPA regulations that were designed to establish a trading program for mercury emissions, of greenhouse gases, including most significantly, carbon dioxide. This concern has ledfinding that the USEPA had not complied with statutory requirements applicable to increased interest in legislation at“de-listing” mercury as a hazardous air pollutant and that a cap-and-trade approach was not authorized by law for “listed” hazardous air pollutants. The USEPA and a group representing utilities filed a request for rehearing en banc (i.e., a rehearing before all the federal level, actions atD.C. Circuit judges). That request was denied on May 20, 2008. The parties have a 90-day window to file a petition for certiorari with the state level, as well as litigation relating to greenhouse gas emissions, including a recent U.S. Supreme Court (until August 20, 2008). If the petition is not filed by the parties or if it is not accepted by the Supreme Court, or if the Supreme Court grants certiorari and upholds the D.C. Circuit’s decision, holding thatEPA will have to move forward to set Maximum Available Control Technology (MACT) standards for coal- and oil-fired electric generating units. It is likely the EPA haswould take at least three years to gather new data to promulgate updated MACT standards and another three years for the authorityregulations to become effective. At this time, DP&L is unable to determine the impact of promulgation of new MACT standards on itsfinancial position or results of operations.
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the USEPA’s CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate carbon dioxide emissions from motor vehicles undercertain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual NOx emission allowances and made modifications to an existing trading program for SO2 that were to take effect in 2010. The court’s decision, in part, invalidated the CAA. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizationsnew NOx annual emission allowance trading program and the international community. If legislation or regulations are passed atmodifications to the federal or state levels imposing mandatory reductionsSO2 emission trading program. In the fourth quarter of carbon dioxide2007, DP&L began a program for selling excess emission allowances, including annual NOx emission allowances and other greenhouse gasesSO2 emission allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third parties. The overall impact of the court’s decision, and the actions the EPA will take in response to this decision, on generation facilities, the cost to DPL and DP&Lis not known at this time, however, the court’s decision may impact future sales of such reductions could be significant.excess allowances. We do not expect this decision to have a material effect on our financial position.
40Environmental 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. Several parties petitioned the U.S. Supreme Court for review of the lower court decision. On April 14, 2008, the Supreme Court elected to review the lower court decision on the issue of whether USEPA can compare costs with benefits in determining the best technology available for minimizing adverse environmental impact at cooling water intake structures. Briefs will be submitted to the Court this summer and oral argument will likely be held in November or December 2008. A decision may be rendered in 2009.
On February 5, 2008, we received a letter from Ohio EPA indicating that they intend to impose a compliance schedule, as part of the final National Pollutant Discharge Elimination System (NPDES) Permit, that requires us to implement one of two diffuser options for the discharge of water from the Stuart station into the Ohio River as identified in the thermal discharge study conducted pursuant to requirements contained in a previous permit. The two diffuser options identified by Ohio EPA could cost approximately $33 million based on preliminary cost estimates, of which our pro-rata share would be approximately $11.5 million. On March 6, 2008, representatives from DP&L met with Ohio EPA to discuss the issue and reiterate our position that diffusers were not cost-effective. We agreed to explore other potential solutions and share findings with Ohio EPA.
FGD Project Implementation
Installation of the flue gas desulfurization (FGD) equipment on Stuart station units 1 and 2 was completed during the three months ended June 30, 2008. The equipment is currently in physical test operation which is expected to be finalized during the third quarter of 2008.
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FINANCIAL OVERVIEW
As more fully discussed in later sections of this Form 10-Q, the following were the significant themes and events for the three months and ninesix months ended SeptemberJune 30, 2007:2008:
•· During the three months and six months ended June 30, 2008, DP&L sold excess emission allowances to various counterparties realizing total net gains of $4.0 million and $30.5 million, respectively.
·DPL’s revenues for both the three months and six months ended June 30, 2008 increased 10% over the same periods in 2007 mainly due to the effect of the environmental investment rider combined with wholesale and capacity revenue increases. For the three months ended September 30, 2007, DPL’s basic and diluted EPS of $0.56 and $0.53, respectively, increased over the basic and dilutive EPS for the same period of the prior year by $0.09 and $0.10, respectively.
•For the ninesix months ended SeptemberJune 30, 2007,2008, DPL’sbasic and diluted EPS of $1.63 and $1.49, respectively, increased over fuel costs, excluding the basic and dilutive EPS for the same period of the prior year by $0.47 and $0.42, respectively.
•DPL’s revenues for the three months and nine months ended September 30, 2007 increased 8% and 10%, respectively, compared to the same periods in 2006 primarily due to weather driven retail sales volume, increase in average retail rates and the revenue realizedgains from the PJM capacity auctions. DPL’s purchased power costs for the threesale of emission allowances discussed above, increased by 12% and nine months ended September 30, 2007 increased$21.0 million and $94.1 million,4%, respectively, over the same periods in 2006.2007, mainly due to an increase in generation output. For the three months and six months ended June 30, 2008, purchased power costs increased by 3% and 25%, respectively, mainly due to increased capacity charges. Operation and maintenance expense increased 13% for the three months ended June 30, 2008, primarily due to a 2007 $14.5 million insurance recovery, as well as a 2007 net gain of $6.0 million realized from the sale of DPL’s corporate aircraft. Operation and maintenance expense remained relatively flat over the six month periods.
•· DPL’sDP&L’s cash flows from operations were $211.8 million revenues for both the three months and $212.4 million for the ninesix months ended SeptemberJune 30, 2007 and 2006, respectively.
•DP&L’s revenues for the three and nine months ended September 30, 20072008 increased 8% and 10%, respectively, compared to over the same periods in 2006 primarily2007 mainly due to weather driven retail sales volume, increase in average retail ratesthe effect of the environmental investment rider combined with wholesale and capacity revenue increases. For the revenue realizedthree months and six months ended June 30, 2008, DP&L’s fuel costs, excluding the gains from the PJM capacity auctions. DP&L’s purchased power costs for the threesale of emission allowances discussed above, increased by 10% and nine months ended September 30, 2007 increased $21.0 million and $93.5 million,3%, respectively, over the same periods in 2006.2007, mainly due to an increase in generation output. For the three months and six months ended June 30, 2008, purchased power costs increased by 5% and 26%, respectively, mainly due to increased capacity charges. Operation and maintenance expense decreased 9% and 5% for the three months and six months ended June 30, 2008, respectively.
•· DP&L’s cash flows from operationsOn June 27, 2008, we entered into a $42.0 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and appeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment will be made to the nineODT by July 31, 2008. Due to this settlement agreement, the balance of our unrecognized state tax liabilities recorded at March 31, 2008, in the amount of $56.3 million, was reversed resulting in a recorded income tax benefit of $8.5 million, net of federal tax impact, during the three months ended SeptemberJune 30, 2007 of $239.6 million were 11% lower than the cash flows from operations of $270.7 million for the same period in 2006 primarily due to changes in working capital.2008.
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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.
FinancialIncome Statement Highlights —– DPL
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| 39.8 |
| 30.4 |
| 96.9 |
| 87.1 |
| ||||
RTO revenues |
| 28.2 |
| 21.5 |
| 53.1 |
| 37.2 |
| ||||
Capacity revenues |
| 20.7 |
| 4.3 |
| 33.9 |
| 4.3 |
| ||||
Other revenues |
| 3.1 |
| 2.7 |
| 5.9 |
| 5.5 |
| ||||
Total revenues |
| $ | 378.8 |
| $ | 343.1 |
| $ | 794.9 |
| $ | 722.8 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues: |
|
|
|
|
|
|
|
|
| ||||
Fuel |
| $ | 72.4 |
| $ | 64.8 |
| $ | 160.8 |
| $ | 155.0 |
|
Gains from sale of emission allowances (a) |
| (4.0 | ) | (1.3 | ) | (30.5 | ) | (1.2 | ) | ||||
Purchased power |
| 54.4 |
| 66.2 |
| 113.4 |
| 106.0 |
| ||||
RTO charges (b) |
| 12.6 |
| 13.0 |
| 24.5 |
| 25.4 |
| ||||
Capacity charges (b) |
| 19.1 |
| 4.0 |
| 31.2 |
| 4.0 |
| ||||
Gross margins (c) |
| $ | 224.3 |
| $ | 196.4 |
| $ | 495.5 |
| $ | 433.6 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross margin as a percentage of revenues |
| 59 | % | 57 | % | 62 | % | 60 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| $ | 85.6 |
| $ | 69.4 |
| $ | 228.3 |
| $ | 172.9 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
| $ | 0.43 |
| $ | 0.50 |
| $ | 1.14 |
| $ | 0.98 |
|
Discontinued operations |
| $ | — |
| $ | 0.04 |
| $ | — |
| $ | 0.09 |
|
Total basic |
| $ | 0.43 |
| $ | 0.54 |
| $ | 1.14 |
| $ | 1.07 |
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Retail |
| $ | 326.2 |
| $ | 307.2 |
| $ | 915.7 |
| $ | 848.7 |
|
Wholesale |
| 52.9 |
| 61.8 |
| 140.0 |
| 129.7 |
| ||||
RTO ancillary (a) |
| 39.9 |
| 20.6 |
| 81.4 |
| 55.7 |
| ||||
Other revenues, net of fuel costs |
| 3.0 |
| 2.8 |
| 8.5 |
| 8.4 |
| ||||
Total revenues |
| 422.0 |
| 392.4 |
| 1,145.6 |
| 1,042.5 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Less: Fuel |
| 95.9 |
| 99.4 |
| 250.5 |
| 262.2 |
| ||||
Purchased power (a) |
| 82.1 |
| 61.1 |
| 217.5 |
| 123.4 |
| ||||
Gross margins (b) |
| $ | 244.0 |
| $ | 231.9 |
| $ | 677.6 |
| $ | 656.9 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross margins as a percentage of revenues |
| 57.8 | % | 59.1 | % | 59.1 | % | 63.0 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| $ | 110.8 |
| $ | 98.5 |
| $ | 283.7 |
| $ | 257.6 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic Earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
| $ | 0.56 |
| $ | 0.44 |
| $ | 1.54 |
| $ | 1.06 |
|
Discontinued operations |
| — |
| 0.03 |
| 0.09 |
| 0.10 |
| ||||
Net income |
| $ | 0.56 |
| $ | 0.47 |
| $ | 1.63 |
| $ | 1.16 |
|
(a) RTO ancillary revenues include PJM capacity revenuesGains from the sale of $13.3 million and $17.6 million foremission allowances are included in fuel costs in the three and nine months ended September 30, 2007, respectively. Purchased power includes PJM capacity chargesCondensed Consolidated Statements of $12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively. For the same periodsResults of the prior year, PJM capacity revenues and charges were immaterial.Operations.
(b) RTO and capacity charges are included in total purchased power in the Condensed Consolidated Statements of Results of Operations.
(c)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.
36
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. SinceDPL 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 impactingDPL’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.
The following table provides a summary of changes in revenues from the prior period:
42
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended |
| ||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, |
| ||||
$ in millions |
| 2007 vs. 2006 |
| 2007 vs. 2006 |
|
| 2008 vs. 2007 |
| 2008 vs. 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Retail |
|
|
|
|
|
|
|
|
|
| ||||
Rate |
| $ | 13.1 |
| $ | 31.0 |
|
| $ | 16.9 |
| $ | 25.4 |
|
Volume |
| 6.4 |
| 36.9 |
|
| (14.8 | ) | (9.5 | ) | ||||
Other miscellaneous |
| (0.5 | ) | (0.9 | ) | |||||||||
Other |
| 0.7 |
| 0.5 |
| |||||||||
Total retail change |
| $ | 19.0 |
| $ | 67.0 |
|
| $ | 2.8 |
| $ | 16.4 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Wholesale |
|
|
|
|
|
|
|
|
|
| ||||
Rate |
| $ | 0.9 |
| $ | 10.5 |
|
| $ | 11.5 |
| $ | 23.2 |
|
Volume |
| (9.8 | ) | (0.2 | ) |
| (2.1 | ) | (13.4 | ) | ||||
Total wholesale change |
| $ | (8.9 | ) | $ | 10.3 |
|
| $ | 9.4 |
| $ | 9.8 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other |
|
|
|
|
| |||||||||
RTO services |
| $ | 19.3 |
| $ | 25.7 |
| |||||||
Other |
| 0.2 |
| 0.1 |
| |||||||||
Total other change |
| $ | 19.5 |
| $ | 25.8 |
| |||||||
RTO and other |
|
|
|
|
| |||||||||
RTO and other revenues |
| $ | 23.5 |
| $ | 45.9 |
| |||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenues change |
| $ | 29.6 |
| $ | 103.1 |
| |||||||
Total revenues |
| $ | 35.7 |
| $ | 72.1 |
|
For the three months ended SeptemberJune 30, 2007,2008, revenues increased $29.6$35.7 million, or 8%10%, to $422.0$378.8 million from $392.4$343.1 million for the same period in the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales higher retail sales volume and an increase in RTO ancillary revenue.revenue, partially offset by lower retail and wholesale sales volume. Retail revenues increased $19.0$2.8 million or 6%, resulting primarily from a 4%6% increase in average retail rates primarily relatingdue largely to the second phase of the environmental investment rider and a 2% increase in weather driven sales volume as total degree days increased 5%. These increases resulted in a $13.1 million rate variance and a $6.4 million sales volume variance. Wholesale revenues decreased $8.9 million, or 14%(EIR), primarily resulting from a 16% decrease in wholesale sales volume, partially offset by a 2% increase in average market rates. The5% decrease in sales volumevolume. This resulted in a $9.8favorable $16.9 million price variance and an unfavorable $14.8 million sales volume variance andfor retail revenues. Wholesale revenues increased $9.4 million for the three months ended June 30, 2008 primarily as a result of a 41% increase in wholesale average market rates, partially offset by a 7% decrease in sales volume. This resulted in a $0.9favorable $11.5 million favorable ratewholesale price variance and an unfavorable $2.1 million volume variance. For the three months ended SeptemberJune 30, 2007,2008, RTO ancillaryand other revenues, increased $19.3 millionconsisting primarily resulting from $13.3 million realized from the PJM capacity auction and $6.0 million of PJM transmission loss credits. RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the new RPM construct. RTO ancillary revenuesconstruct, increased $23.5 million compared to the same period in the prior year. This increase primarily resulted from additional income of $16.4 million and $6.7 million realized from the PJM capacity auction are substantially offset by RTO ancillary charges forand PJM capacity charges included in purchase power. Other RTO ancillarytransmission and congestion revenues, are partially offset by other RTO ancillary charges in purchased power.respectively.
For the ninesix months ended SeptemberJune 30, 2007,2008, revenues increased $103.1$72.1 million, or 10%, to $1,145.6$794.9 million from $1,042.5$722.8 million for the same period in the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales higher retail sales volume and an increase in RTO ancillary revenue.revenue, partially offset by lower retail and wholesale sales volume. Retail revenues increased $67.0$16.4 million resulting primarily from a 4% increase in weather driven sales volume as total degree days increased 14% and a 4% increase in average retail rates primarily relatingdue largely to the second phase of the environmental investment and storm recovery riders. These increasesrider (EIR), partially offset by a 2% decrease in sales volume. This resulted in a $36.9favorable $25.4 million price variance and an unfavorable
37
$9.5 million sales volume variance and a $31.0 million rate variance.for retail revenues. Wholesale revenues increased $10.3$9.8 million or 8%,for the six months ended June 30, 2008 primarily resulting from an 8%as a result of a 32% increase in wholesale average market rates. The increaserates, partially offset by a 15% decrease in average market ratessales volume. This resulted in a $10.5favorable $23.2 million favorable ratewholesale price variance and an unfavorable $13.4 million volume variance. For the ninesix months ended SeptemberJune 30, 2007,2008, RTO ancillaryand other revenues, increased $25.7 million compared to the same period in 2006consisting primarily resulting from $17.6 million realized from the PJM capacity auction, $8.7 million of PJM transmission losses and congestion credits and $2.3 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, and capacity payments under the new RPM construct. RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power.
43
For the three months ended September 30, 2007, gross margin of $244.0construct, increased $45.9 million increased $12.1 million, or 5%, from $231.9 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 57.8% in the third quarter of 2007 compared to 59.1% in the third quarter of 2006. This result primarily reflects the favorable impact of the increase in retail revenues and lower fuel costs, offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $3.5 million, or 4%, in the third quarter of 2007 compared to the same period in 2006 due to lower average fuel prices, partially offset by a 1%the prior year. This increase in generation output. Purchased powerprimarily resulted from additional income of $29.6 million and $15.9 million realized from the PJM capacity auction and PJM transmission and congestion revenues, respectively.
Fuel costs, which include coal net of sales, gas, oil, and emission allowance sales and costs, increased $21.0$4.9 million, or 8%, in the third quarter of 2007three months ended June 30, 2008 compared to the same period in 20062007, primarily resultingdue to a 15% increase in generation output, partially offset by an increase in net gains of $2.7 million realized from the sale of DP&L’s excess emission allowances. Purchased power increased $2.9 million in the three months ended June 30, 2008 compared to the same period in 2007. The increase in purchased power primarily results from a $19.5$25.3 million increase duerelating to higher average market rates and $12.2a $15.1 million related toincrease in RTO ancillary charges for PJM capacity charges, partially offset by decreased costs of $10.4a $37.1 million decrease relating to a 22% decrease inlower volumes of purchased power. We purchase power volume. The decrease in purchased power volume was primarily the result of increased production at our generating facilities. The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin.
For the nine months ended September 30, 2007, gross margin of $677.6 million increased $20.7 million, or 3%, from $656.9 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 59.1% in 2007 compared to 63.0% in 2006. This result primarily reflects the favorable impact of bothsatisfy retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $11.7 million, or 4%, for the nine months ended September 30, 2007 compared to the same period in 2006. This decrease was primarily due to a 4% decrease in generation output and a decrease in average fuel prices. Purchased power increased $94.1 million for the nine months ended September 30, 2007 compared to the same period in 2006 reflecting $58.8 million of increased charges relating to higher purchased power volume, an $18.2 million increase due to higher average market rates and $16.2 million related to RTO ancillary charges for PJM capacity charges. The increase in purchased power volume was primarily the result of increased sales volume and partner operatedwhen generating facilities being lessare not available compared to the prior year due to planned and unplanned outages. In addition, we purchase powerunanticipated outages, or when market prices are below the marginal costs associated with our higher cost generating facilities.
Fuel costs, which include coal net of sales, gas, oil, and emission allowance sales and costs, decreased $23.5 million, or 15%, in the six months ended June 30, 2008 compared to the same period in 2007, primarily due to an increase in net gains of $29.3 million realized from the sale of DP&L’s excess emission allowances, partially offset by an increase in the usage of fuel due mainly to a 5% increase in generation output. Purchased power increased $33.7 million in the six months ended June 30, 2008 compared to the same period in 2007. The increase in purchased power primarily results from a $47.4 million increase relating to higher average market rates and a $27.2 million increase in RTO ancillary charges for PJM capacity charges, are substantiallypartially offset by RTO ancillary revenues for PJM capacity resulting in minimal impacta $40.0 million decrease relating to gross margin.lower volumes of purchased power. We purchase power to satisfy retail sales volume when generating facilities are not available due to planned and unanticipated outages, or when market prices are below the marginal costs associated with our generating facilities.
DPL Inc. – Gross Margins— Operation and Maintenance
|
| Three Months Ended |
| Nine Months Ended |
| ||
|
| September 30, |
| September 30, |
| ||
$ in millions |
| 2007 vs. 2006 |
| 2007 vs. 2006 |
| ||
Power production costs |
| $ | 6.3 |
| $ | 19.7 |
|
Legal costs |
| (0.8 | ) | 3.2 |
| ||
Mark-to-market adjustments for deferred compensation |
| (0.8 | ) | 2.9 |
| ||
Service operations |
| 0.2 |
| 2.2 |
| ||
Insurance claims reserves |
| — |
| (3.1 | ) | ||
Pension expense |
| (3.8 | ) | (4.5 | ) | ||
Gain on sale of corporate aircraft |
| — |
| (6.0 | ) | ||
Insurance settlement |
| — |
| (14.5 | ) | ||
Other, net |
| 1.8 |
| 0.8 |
| ||
Total operation and maintenance expense |
| $ | 2.9 |
| $ | 0.7 |
|
For the quarterthree months ended SeptemberJune 30, 2007,2008, gross margin of $224.3 million increased $27.9 million, or 14%, from $196.4 million in the same period of the prior year. As a percentage of total revenues, gross margin increased to 59% in 2008 compared to 57% in 2007.
For the six months ended June 30, 2008, gross margin of $495.5 million increased $61.9 million, or 14%, from $433.6 million in the same period of the prior year. As a percentage of total revenues, gross margin increased to 62% in 2008 compared to 60% in 2007.
These gross margin results reflect the impact of revenues and cost of revenues discussed above.
38
DPL Inc. – Operation and Maintenance
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| June 30, |
| June 30, |
| ||
$ in millions |
| 2008 vs. 2007 |
| 2008 vs. 2007 |
| ||
Insurance settlement |
| $ | 14.5 |
| $ | 14.5 |
|
Gain on sale of corporate aircraft |
| 6.0 |
| 6.0 |
| ||
Generating facilities operating expenses |
| 4.7 |
| 4.5 |
| ||
Legal costs |
| (10.1 | ) | (15.9 | ) | ||
Boiler maintenance costs |
| (4.6 | ) | (1.5 | ) | ||
Turbine maintenance costs |
| (1.1 | ) | 0.1 |
| ||
Deferred compensation (mark-to-market adjustments) |
| (0.5 | ) | (6.4 | ) | ||
Other, net |
| (0.6 | ) | 0.1 |
| ||
Total operation and maintenance expense |
| $ | 8.3 |
| $ | 1.4 |
|
For the three months ended June 30, 2008, operation and maintenance expense increased $2.9$8.3 million, or 5%13%, compared to the same period in 2006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating costs of $2.3 million. These increases were offset in part by a $3.8 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer.
For the nine months ended September 30, 2007, operation and maintenance expense remained relatively flat, increasing $0.7 million, compared to the prior year.2007. This variance was primarily comprisedthe result of increased power production maintenance costs of $15.1 million that were mostly related to boiler and turbine maintenance and other power production operating costs of $4.6 million; increased legal costs of $3.2 million primarily related to the litigation with the three former executives; $2.9 million in mark-to-market adjustments related to deferred compensation assets and increased service operations costs of $2.2 million primarily related to overhead line
44
restoration activities. These increases were nearly offset by a $14.5 million insurance settlement in 2007 reimbursing us for legal fees relating to the litigation with the three former executives; aexecutives, the gain on the sale of the corporate aircraft of $6.0 million;million which was also realized in 2007, and an increase of $4.7 million in operating expenses for the generating facilities. These increases were partially offset by a $4.5$10.1 million decrease in pension expense resulting primarily from alegal costs due largely to the litigation settlement with three of our former executives in May 2007, and decreased costs for boiler and turbine maintenance of $4.6 million and $1.1 million, respectively.
For the six months ended June 30, 2008, operation and maintenance expense increased $1.4 million, or 1%, compared to the same period in 2007. This variance was primarily the result of a $14.5 million insurance settlement in 2007 actuarial study adjustmentreimbursing 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 which was also realized in 2007, and the recognitionan increase of $2.6$4.5 million in 2006operating expenses for the generating facilities. These increases were partially offset by a lump sum distribution$15.9 million decrease in legal costs due largely to the litigation settlement with three of our former executives in May 2007, a $6.4 million decrease in deferred compensation costs (mark-to-market adjustments) primarily associated with deferred compensation liabilities for the former officer.executives, and a $1.5 million decrease in boiler maintenance costs.
DPL — Depreciation and AmortizationInc. – General Taxes
For the three months and nine months ended SeptemberJune 30, 2007, depreciation and amortization expense decreased $5.22008, general taxes increased $5.0 million, and $11.3 million, respectively, compared to the same periods in 2006, primarily reflecting the absence of depreciation for the peaking units sold during the first quarter of 2007 and the impact of lower depreciation rates for generation property which were put into effect on August 1, 2007, reducing expense by $3.8 million. This decrease was partially offset by higher costs related to increased plant balances primarily resulting from the installation of pollution control equipment.
DPL — Amortization of Regulatory Assets
For the nine months ended September 30, 2007, amortization of regulatory assets increased $3.1$32.5 million, compared to the same period in 2006,2007. This increase was primarily for the amortizationresult of incremental 2004/2005 severe storm costs that began on August 1, 2006.increased property taxes due mainly to capital improvements which have led to higher assessed property values, combined with increased tax rates.
For the six months ended June 30, 2008, general taxes increased $6.8 million, to $62.3 million, compared to the same period in 2007. This increase was primarily the result of increased property taxes due mainly to capital improvements which have led to higher assessed property values, combined with increased tax rates.
DPL —Inc. – Net Gain on Settlement of Executive Litigation
On May 21, 2007, we settled the litigation with the three former executives. In exchange for aour payment of $25 million, the three former executives relinquished and dismissed all of their claims including those related to deferred compensation, restricted stock units (RSUs), MVE incentives, stock options, and legal fees. As a result of this settlement, during the second quarter ended June 30, 2007, DPL realized a net pre-tax gain in continuing operations of approximately $31.0 million. See Note 10 of Notes to Condensed Consolidated Financial Statements.
For the three months ended SeptemberJune 30, 2007, investment income decreased $1.8 million to $1.2 million from $3.0 million for the same period in 2006. This decrease was primarily due to lower interest income relating to lower cash and short-term investment balances in 2007 compared to 2006.
For the nine months ended September 30, 2007,2008, investment income decreased $4.4 million, to $9.5$0.9 million, from $13.9 million forcompared to the same period in 2006.2007. This decrease was primarily the result of lower interest income relating to lower cash and short-term investment balances$3.2 million gains realized in 2007 compared to 2006, partially offset by $3.2 million in 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.executives, as well as lower cash and short-term investment balances combined with overall lower market yields on investments in 2008 compared to 2007.
39
For the six months ended June 30, 2008, investment income decreased $5.7 million, to $2.6 million, compared to the same periods in 2007. This decrease was primarily the result of $3.2 million gains realized in 2007 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, as well as lower cash and short-term investment balances combined with overall lower market yields on investments in 2008 compared to 2007.
DPL Inc—. – Interest Expense
ForInterest expense for the three months ended SeptemberJune 30, 2007, interest expense decreased $8.02008 increased $5.6 million, or 32%29%, compared to the same period in 20062007 resulting primarily from $4.6 million less interest associated with the redemption of DPL debt ($225 million, 8.25% Senior Notes) and $4.0 million of greaterlower capitalized interest primarily relatedand the write-off of unamortized debt issuance costs relating to increasedDP&L’s $90 million variable rate pollution control capital expenditures. These decreasesbonds following their repurchase from the bondholders on April 4, 2008. The increases were partially offset by $1.0the redemption of the $100 million of6.25% Senior Notes in May 2008.
Interest expense for the six months ended June 30, 2008 increased $3.5 million, or 8%, compared to the same period in 2007 resulting primarily from lower capitalized interest, additional interest expense associated with DP&L’s new $100$90 million 4.8% Seriesvariable rate pollution control bonds issued September 13, 2006.November 15, 2007, and the write-off of unamortized debt issuance costs relating to the above-mentioned pollution control bonds following their repurchase from the bondholders on April 4, 2008. These increases were partially offset by the redemption of the $225 million 8.25% Senior Notes in March 2007 and the $100 million 6.25% Senior Notes in May 2008.
Other Income (Deductions) for the three months ended June 30, 2008 did not experience any significant fluctuations from the same period of the prior year.
For the ninesix months ended SeptemberJune 30, 2007, interest expense decreased $17.72008, other deductions of $0.5 million or 23%, compared to 2006 primarilychanged from $10.8 million less interest from the redemption of DPL debt ($225 million, 8.25% Senior Notes) and $9.7 million of increased capitalized interest primarily related to increased pollution control capital expenditures. These decreases were partially offset by $3.4 million of interest expense associated with DP&L’s new $100 million, 4.8% Series pollution control bonds issued September 2006 and $1.1 million of interest expense associated with DP&L’s short-term borrowing of $95 million from its unsecured revolving credit agreement of $220 million.
DPL — Other Income (Deductions)
For the three months ended September 30, 2007, other income of $2.0$0.6 million increased from $0.2 million of other deductionsrecorded for the same period of the prior yearyear. This change from other income to other deductions primarily resultingresulted from $0.7 million of gains realized from the recognitionsale of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
For the nine months ended September 30, 2007, other income of $2.6 million increased $2.5 million from $0.1 million forNOx allowances in the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).2007.
45
For the three months and nine months ended September 30, 2007, income taxes increased $7.4 million and $28.7 million, respectively, compared to the same periods in 2006, primarily reflecting an increase in pre-tax book income.
DPL — Discontinued Operations
For the three months ended SeptemberJune 30, 2007, there was no activity relating to discontinued2008, income taxes from continuing operations resulting in a $3.4decreased $18.4 million, decreaseor 57%, compared to the same period in 2006. During2007, primarily reflecting a decrease in pre-tax book income, a decrease in the prior year we recognized $3.4 million of earningseffective tax rate resulting from discontinued operations which was comprised of a pre-tax gain of $5.7 million less associated expenses and taxes relating to the recognition of a deferred gain associated with the financial asset portfolio.
For the nine months ended September 30, 2007, discontinued operations decreased $1.0 million compared to the same period in 2006. During the first nine months we recognized $10.0 million of earnings from discontinued operations which was comprisedphase-out of the net (pre-tax) gain of $8.2 million realized fromOhio Franchise Tax, and a decrease in tax expense due to the settlement of the litigation with the three former executives less associated income taxes and a (pre-tax) gain of $8.2 million relating to the recognition of deferred gains from the financial asset portfolio less associated taxes and expenses. During the prior year we recognized $11.0 million of earnings from discontinued operations which was comprised of a pre-tax gain of $18.9 million less associated expenses and taxes relating to the recognition of a deferred gain associated with the financial asset portfolio.
Ohio Franchise Tax issues. See Note 3 and Note 105 of the Notes to Condensed Consolidated Financial Statements.
For the six months ended June 30, 2008, income taxes from continuing operations decreased $6.0 million, or 9%, compared to the same period in 2007, primarily reflecting a decrease in the effective tax rate resulting from the phase-out of the Ohio Franchise Tax and a decrease in tax expense due to the settlement of the Ohio Franchise Tax issues, which was partially offset by an increase in pre-tax book income. See Note 5 of Notes to Condensed Consolidated Financial Statements.
40
RESULTS OF OPERATIONS —– The Dayton Power and Light Company (DP&L)
FinancialIncome Statement Highlights —– DP&L
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
$ in millions |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Retail |
| $ | 285.7 |
| $ | 272.2 |
| $ | 804.7 |
| $ | 748.9 |
|
Wholesale |
| 94.0 |
| 97.5 |
| 253.0 |
| 231.5 |
| ||||
RTO ancillary (a) |
| 39.9 |
| 20.6 |
| 81.4 |
| 55.7 |
| ||||
Total revenues |
| 419.6 |
| 390.3 |
| 1,139.1 |
| 1,036.1 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Less: Fuel |
| 87.6 |
| 90.9 |
| 240.2 |
| 251.0 |
| ||||
Purchased power (a) |
| 91.7 |
| 70.7 |
| 228.2 |
| 134.7 |
| ||||
Gross margins (b) |
| $ | 240.3 |
| $ | 228.7 |
| $ | 670.7 |
| $ | 650.4 |
|
|
|
|
|
|
|
|
|
|
| ||||
Gross margins as a percentage of revenues |
| 57.3 | % | 58.6 | % | 58.9 | % | 62.8 | % | ||||
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|
|
|
|
|
|
|
|
| ||||
Operating income |
| $ | 113.2 |
| $ | 107.1 |
| $ | 287.6 |
| $ | 295.3 |
|
(a)RTO ancillary revenues include PJM capacity revenues of $13.3 million and $17.6 million for the three and nine months ended September 30, 2007, respectively. Purchased power includes PJM capacity charges of $12.2 million and $16.2 million for the three and nine months ended September 30, 2007, respectively. For the same periods of the prior year, PJM capacity revenues and charges were immaterial.
(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.
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
$ in millions |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
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|
|
|
|
|
|
|
|
| ||||
Revenues: |
|
|
|
|
|
|
|
|
| ||||
Retail |
| $ | 248.7 |
| $ | 246.3 |
| $ | 531.5 |
| $ | 518.1 |
|
Wholesale |
| 78.8 |
| 69.0 |
| 171.8 |
| 159.0 |
| ||||
RTO revenues |
| 28.2 |
| 21.6 |
| 53.1 |
| 37.3 |
| ||||
Capacity revenues |
| 20.7 |
| 4.3 |
| 33.9 |
| 4.3 |
| ||||
Total revenues |
| $ | 376.4 |
| $ | 341.2 |
| $ | 790.3 |
| $ | 718.7 |
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|
|
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|
|
|
|
|
|
| ||||
Cost of revenues: |
|
|
|
|
|
|
|
|
| ||||
Fuel |
| $ | 69.9 |
| $ | 63.6 |
| $ | 157.1 |
| $ | 153.0 |
|
Gains from sale of emission allowances (a) |
| (4.0 | ) | (1.3 | ) | (30.5 | ) | (1.2 | ) | ||||
Purchased power |
| 56.1 |
| 66.8 |
| 116.0 |
| 107.2 |
| ||||
RTO charges (b) |
| 12.6 |
| 13.0 |
| 24.5 |
| 25.3 |
| ||||
Capacity charges (b) |
| 19.1 |
| 4.0 |
| 31.2 |
| 4.0 |
| ||||
Gross margins (c) |
| $ | 222.7 |
| $ | 195.1 |
| $ | 492.0 |
| $ | 430.4 |
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|
|
|
|
|
|
|
|
|
| ||||
Gross margin as a percentage of revenues |
| 59 | % | 57 | % | 62 | % | 60 | % | ||||
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|
|
|
|
| ||||
Operating Income |
| $ | 90.5 |
| $ | 59.7 |
| $ | 236.9 |
| $ | 174.4 |
|
46
(a) | Gains from the sale of emission allowances are included in fuel costs in the Condensed Consolidated Statements of Results of Operations. | |
(b) | RTO and capacity charges are included in total purchased power in the Condensed Consolidated Statements of Results of Operations. | |
(c) | 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
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. SinceDP&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 impactingDP&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&Land 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 that are not being utilized to meet its retail demand.
|
| Three Months Ended |
| Nine Months Ended |
| ||
|
| September 30, |
| September 30, |
| ||
$ in millions |
| 2007 vs. 2006 |
| 2007 vs. 2006 |
| ||
|
|
|
|
|
| ||
Retail |
|
|
|
|
| ||
Rate |
| $ | 8.5 |
| $ | 24.2 |
|
Volume |
| 5.7 |
| 32.5 |
| ||
Other miscellaneous |
| (0.7 | ) | (0.9 | ) | ||
Total retail change |
| $ | 13.5 |
| $ | 55.8 |
|
|
|
|
|
|
| ||
Wholesale |
|
|
|
|
| ||
Rate |
| $ | 12.0 |
| $ | 21.9 |
|
Volume |
| (15.5 | ) | (0.4 | ) | ||
Total wholesale change |
| $ | (3.5 | ) | $ | 21.5 |
|
|
|
|
|
|
| ||
RTO ancillary |
|
|
|
|
| ||
RTO services |
| $ | 19.3 |
| $ | 25.7 |
|
|
|
|
|
|
| ||
Total revenues change |
| $ | 29.3 |
| $ | 103.0 |
|
41
The following table provides a summary of changes in revenues from the prior period:
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| June 30, |
| June 30, |
| ||
$ in millions |
| 2008 vs. 2007 |
| 2008 vs. 2007 |
| ||
|
|
|
|
|
| ||
Retail |
|
|
|
|
| ||
Rate |
| $ | 14.5 |
| $ | 21.3 |
|
Volume |
| (12.8 | ) | (8.3 | ) | ||
Other |
| 0.7 |
| 0.4 |
| ||
Total retail change |
| $ | 2.4 |
| $ | 13.4 |
|
|
|
|
|
|
| ||
Wholesale |
|
|
|
|
| ||
Rate |
| $ | 14.4 |
| $ | 37.3 |
|
Volume |
| (4.6 | ) | (24.5 | ) | ||
Total wholesale change |
| $ | 9.8 |
| $ | 12.8 |
|
|
|
|
|
|
| ||
RTO and capacity |
|
|
|
|
| ||
RTO and capacity revenues |
| $ | 23.0 |
| $ | 45.4 |
|
|
|
|
|
|
| ||
Total revenues |
| $ | 35.2 |
| $ | 71.6 |
|
For the three months ended SeptemberJune 30, 2007,2008, revenues increased $29.3$35.2 million, or 8%10%, to $419.6$376.4 million from $390.3$341.2 million forin the same period inof the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue.revenue, partially offset by lower retail and wholesale sales volume. Retail revenues increased $13.5$2.4 million or 5%, resulting primarily from a 3%6% increase in average retail rates primarily relatingdue largely to the environmental investment rider and a 2% increase in weather driven sales volume as total degree days increased 5%. These increases resulted in an $8.5 million rate variance and a $5.7 million sales volume variance. Wholesale revenues decreased $3.5 million, or 4%, primarily resulting from a 16% decrease in wholesale sales volume,second phase of the EIR, partially offset by a 15% increase in average market rates. The5% decrease in sales volumevolume. This resulted in a $15.5favorable $14.5 million price variance and an unfavorable $12.8 million sales volume variance andfor retail revenues. Wholesale revenues increased $9.8 million, for the three months ended June 30, 2008, primarily as a result of a 22% increase in wholesale average market rates, partially offset by a 7% decrease in sales volume. This resulted in a $12.0favorable $14.4 million favorable ratewholesale price variance and an unfavorable $4.6 million volume variance. For the three months ended SeptemberJune 30, 2007, the2008, RTO ancillaryand other revenues, increased $19.3 millionconsisting primarily resulting from $13.3 million realized from the PJM capacity auction and $6.0 million of PJM transmission loss credits. RTO ancillary revenues primarily consist of compensation for use of DP&L’s transmission assets, regulation services, reactive supply and operating reserves, and capacity payments under the new RPM construct. RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power.
For the nine months ended September 30, 2007, revenuesconstruct, increased $103.0$23.0 million or 10%,compared to $1,139.1 million from $1,036.1 million for the same period in the prior year. This increase primarily resulted from additional income of $16.4 million and $6.6 million realized from the PJM capacity auction and PJM transmission and congestion revenues, respectively.
For the six months ended June 30, 2008, revenues increased $71.6 million, or 10%, to $790.3 million from $718.7 million in the same period of the prior year. This increase was primarily the result of higher average rates for retail and wholesale sales, higher retail sales volume and an increase in RTO ancillary revenue.revenue, partially offset by lower retail and wholesale sales volume. Retail revenues increased $55.8$13.4 million resulting primarily from a 4% increase in weather driven sales volume as total degree days increased 14% and a 3% increase in average retail rates primarily relatingdue largely to the environmental investment and storm cost recovery riders. These increasessecond phase of the EIR, partially offset by a 2% decrease in sales volume. This resulted in a $32.5favorable $21.3 million price variance and an unfavorable $8.3 million sales volume variance and a $24.2 million rate variance.for retail revenues. Wholesale revenues increased $21.5$12.8 million or 9%,for the six months ended June 30, 2008, primarily resulting fromas a 9%result of a 28% increase in wholesale average market rates. The increaserates, partially offset by a 15% decrease in average market ratessales volume. This resulted in a $21.9favorable $37.3 million favorable ratewholesale price variance and an unfavorable $24.5 million volume variance. For the ninesix months ended SeptemberJune 30, 2007, the2008, RTO ancillaryand other revenues, increased $25.7 million compared to the same period in 2006consisting primarily resulting from $17.6 million realized from the PJM capacity auction, $8.7 million of PJM transmission losses and congestion credits and $2.3 million from the sale of financial transmission rights (FTRs), partially offset by an adjustment of $2.8 million for Seams Elimination
47
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, and capacity payments under the new RPM construct. RTO ancillary revenues from the PJM capacity auction are substantially offset by RTO ancillary charges for PJM capacity charges included in purchase power. Other RTO ancillary revenues are partially offset by other RTO ancillary charges in purchased power.
For the three months ended September 30, 2007, gross margin of $240.3construct, increased $45.4 million increased $11.6 million, or 5%, from $228.7 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 57.3% in the third quarter of 2007 compared to 58.6% in the third quarter of 2006. This result primarily reflects the favorable impact of the increase in retail revenues and lower fuel costs, offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $3.3 million, or 4%, in the third quarter of 2007 compared to the same period in 2006 due to lower average fuel prices, partially offset by a 1%the prior year. This increase in generation output. Purchased powerprimarily resulted from additional income of $29.6 million and $15.8 million realized from the PJM capacity auction and PJM transmission and congestion revenues, respectively.
42
Fuel costs, which include coal net of sales, gas, oil, and emission allowance sales and costs, increased $21.0$3.6 million, or 6%, in the third quarter of 2007,three months ended June 30, 2008, compared to the same period in 2006,2007, primarily resultingdue to a 15% increase in generation output, partially offset by an increase in net gains of $2.7 million realized from the sale of DP&L’s excess emission allowances. Purchased power increased $4.0 million in the three months ended June 30, 2008 compared to the same period in 2007. The increase in purchased power primarily results from a $17.2$27.6 million increase duerelating to higher average market rates and $12.2a $15.1 million related toincrease in RTO ancillary charges for PJM capacity charges, partially offset by a $38.3 million decrease relating to lower volumes of $8.2 million relatedpurchased power. We purchase power to a 14% decrease in purchased power volume. The decrease in purchased power volume was primarily the result of increased production at our generating facilities. The RTO ancillary charges for PJM capacity charges are substantially offset by RTO ancillary revenues for PJM capacity resulting in minimal impact to gross margin.
For the nine months ended September 30, 2007, gross margin of $670.7 million increased $20.3 million, or 3%, from $650.4 million during the same period of 2006. As a percentage of total revenues, gross margin decreased to 58.9% in 2007 compared to 62.8% in 2006. This result primarily reflects the favorable impact of bothsatisfy retail and wholesale revenues discussed above and lower fuel costs offset by increased purchased power costs. Fuel costs, which include coal, natural gas, oil and emission allowance costs, decreased by $10.8 million, or 4%, for the nine months ended September 30, 2007, compared to the same period in 2006, primarily due to a 4% decrease in generation output and a decrease in average fuel prices. Purchased power costs increased $93.5 million for the nine months ended September 30, 2007, compared to the same period in 2006, reflecting $62.6 million of increased charges related to higher purchased power volume, a $13.8 million increase due to higher average market rates and $16.2 million related to RTO ancillary charges for PJM capacity charges. The increase in purchased power volume was primarily the result of increased sales volume and partner operatedwhen generating facilities being lessare not available compared to the prior year due to planned and unplanned outages. In addition, we purchase powerunanticipated outages or when market prices are below the marginal costs associated with our higher cost generating facilities.
Fuel costs, which include coal net of sales, gas, oil, and emission allowance sales and costs, decreased $25.2 million, or 17%, in the six months ended June 30, 2008, compared to the same period in 2007, primarily due to an increase in net gains of $29.3 million realized from the sale of DP&L’s excess emission allowances, partially offset by an increase in the usage of fuel due mainly to a 5% increase in generation output. Purchased power increased $35.2 million in the six months ended June 30, 2008 compared to the same period in 2007. The increase in purchased power primarily results from a $50.7 million increase relating to higher average market rates and a $27.1 million increase in RTO ancillary charges for PJM capacity charges, are substantiallypartially offset by RTO ancillarya $41.9 million decrease relating to lower volumes of purchased power. We purchase power to satisfy retail sales volume when generating facilities are not available due to planned and unanticipated outages or when market prices are below the marginal costs associated with our generating facilities.
DP&L – Gross Margins
For the three months ended June 30, 2008, gross margin of $222.7 million increased $27.6 million, or 14%, from $195.1 million in the same period of the prior year. As a percentage of total revenues, for PJM capacity resultinggross margin increased to 59% in minimal2008 compared to 57% in 2007.
For the six months ended June 30, 2008, gross margin of $492.0 million increased $61.6 million, or 14%, from $430.4 million in the same period of the prior year. As a percentage of total revenues, gross margin increased to 62% in 2008 compared to 60% in 2007.
These gross margin results reflect the impact to gross margin.of revenues and cost of revenues discussed above.
DP&L —– Operation and Maintenance
|
| Three Months Ended |
| Nine Months Ended |
| ||
|
| September 30, |
| September 30, |
| ||
$ in millions |
| 2007 vs. 2006 |
| 2007 vs. 2006 |
| ||
Power production costs |
| $ | 6.3 |
| $ | 19.7 |
|
Service operations |
| 0.3 |
| 2.2 |
| ||
Low-income payment program |
| 0.2 |
| 1.7 |
| ||
Mark-to-market adjustments for deferred compensation |
| (0.3 | ) | 1.4 |
| ||
Pension expense |
| (3.7 | ) | (4.3 | ) | ||
Other, net |
| 2.2 |
| 2.3 |
| ||
Total operation and maintenance expense |
| $ | 5.0 |
| $ | 23.0 |
|
|
| Three Months Ended |
| Six Months Ended |
| ||
|
| June 30, |
| June 30, |
| ||
$ in millions |
| 2008 vs. 2007 |
| 2008 vs. 2007 |
| ||
Boiler maintenance costs |
| $ | (4.6 | ) | $ | (1.5 | ) |
Deferred compensation (mark-to-market adjustments) |
| (2.7 | ) | (5.4 | ) | ||
Legal costs |
| (2.4 | ) | (2.4 | ) | ||
Turbine maintenance costs |
| (1.1 | ) | 0.1 |
| ||
Generating facilities operating expenses |
| 3.8 |
| 7.2 |
| ||
Other, net |
| 0.6 |
| (4.2 | ) | ||
Total operation and maintenance expense |
| $ | (6.4 | ) | $ | (6.2 | ) |
For the quarterthree months ended SeptemberJune 30, 2007,2008, operation and maintenance expense increased $5.0 million, or 8%, compared to the same period in 2006 primarily resulting from increased power production maintenance costs of $4.0 million that were largely related to boiler and turbine maintenance and other power production operating costs of $2.3 million. These increases were offset in part by a $3.7 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer.
For the nine months ended September 30, 2007, operation and maintenance expense increased $23.0 million, or 13%, compared to the prior year. This variance was primarily comprised of increased power production maintenance costs of $15.2 million that were mostly related to boiler and turbine maintenance, and other power production operating costs of $4.5 million; increased service operations costs of $2.2 million primarily related to overhead line restoration activities; $1.7 million of increased costs associated with the low-income payment program; and $1.4 million in mark-to-market adjustments related to deferred compensation assets. These
48
increases were partially offset by a $4.3 million decrease in pension expense resulting primarily from a $1.1 million 2007 actuarial study adjustment and the recognition of $2.6 million in 2006 for a lump sum distribution to a former officer.
DP&L — Depreciation and Amortization
DP&L — Amortization of Regulatory Assets
For the nine months ended September 30, 2007, amortization of regulatory assets increased $3.1$6.4 million compared to the same period in 2006,2007. This variance was primarily the result of a $4.6 million decrease related to boiler maintenance costs, a $2.7 million decrease in deferred compensation costs (mark-to-market adjustments) primarily associated with deferred liabilities for three of our former executives, and a $2.4 million decrease in legal. These decreases were partially offset by a $3.8 million increase related to operating expenses for the amortization of incremental 2004/2005 severe storm costs that began on August 1, 2006.generating facilities.
43
For the ninesix months ended SeptemberJune 30, 2007, investment income increased $2.72008, operation and maintenance expense decreased $6.2 million compared to $7.5 million from $4.8 million for the same period in 2006.2007. This variance was primarily the result of a $5.4 million decrease in deferred compensation costs (mark-to-market adjustments) primarily associated with deferred liabilities for three of our former executives, a $2.4 million decrease in legal costs, and a decrease of $1.5 million relating to boiler maintenance costs. These decreases were partially offset by a $7.2 million increase related to operating expenses for the generating facilities.
DP&L – General Taxes
For the three months ended June 30, 2008, general taxes increased $4.9 million, to $32.3 million, compared to the same period in 2007. This increase was primarily the result of $3.2increased property taxes due mainly to capital improvements which have led to higher assessed property values, combined with increased tax rates.
For the six months ended June 30, 2008, general taxes increased $6.8 million, in realized gains from the sale of financial assets held in DP&L’s Master Trust Plan for deferred compensation used for the settlement paymentto $61.8 million, compared to the three former executives.same period in 2007. This increase was primarily the result of increased property taxes due mainly to capital improvements which have led to higher assessed property values, combined with increased tax rates.
DP&L — Other Income (Deductions)
For the three months ended September 30, 2007, other income of $2.1 million increased from $0.2 million of other deductions for the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
For the nine months ended September 30, 2007, other income of $2.7 increased $2.6 million from $0.1 million from the same period of the prior year primarily resulting from the recognition of a $2.1 million deferred credit related to a litigation settlement (which was not part of the executive litigation settlement).
DP&L —– Net Gain on Settlement of Executive Litigation
On May 21, 2007, we settled the litigation with the three of our former executives. In exchange for aour 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, during the second quarter ended June 30, 2007, DP&Lrealized a net pre-tax gain in continuing operations of approximately $35.3 million.
DP&L – Interest Expense
Interest expense for the three months ended June 30, 2008 increased $6.4 million compared to the same period of the prior year primarily as a result of lower capitalized interest and the write-off of unamortized debt issue costs relating to DP&L’s $90 million variable rate pollution control bonds following their repurchase from the bondholders on April 4, 2008.
Interest expense for the six months ended June 30, 2008 increased $7.6 million compared to the same period of the prior year primarily as a result of lower capitalized interest, additional interest expense associated with DP&L’s $90 million variable rate pollution control bonds issued November 15, 2007, and the write-off of unamortized debt issue costs relating to the above-mentioned pollution control bonds following their repurchase from the bondholders on April 4, 2008.
Other Income (Deductions) for the three months ended June 30, 2008 did not experience any significant fluctuations from the same period of the prior year.
For the six months ended June 30, 2008, other deductions of $0.6 million changed from other income of $0.6 million for the same period in the prior year. This change from other income to other deductions primarily resulted from $0.7 million of gains realized from the sale of NOx allowances in the same period of 2007.
For the three months ended June 30, 2008, income taxes decreased $15.3 million, or 43%, compared to the same period in the prior year, primarily reflecting a decrease in pre-tax book income, a decrease in the effective tax rate resulting from the phase-out of the Ohio Franchise Tax, and a decrease in tax expense due to the settlement of the Ohio Franchise Tax issues. See Note 105 of Notes to Condensed Consolidated Financial Statements.
DP&L — Interest Expense
For the threesix months ended SeptemberJune 30, 2007, interest expense2008, income taxes decreased $1.6$5.5 million, or 7%, compared to the same period of 2006,in the prior year, primarily related to $4.0 million of increased capitalized interestreflecting a decrease in the effective tax rate resulting from pollution control capital expenditures at the generating plants,phase-out of the Ohio Franchise Tax and a decrease in tax expense due to the settlement of the Ohio Franchise issues, which was partially offset by increased interest of $1.0 million related to the $100 million 4.8% Series pollution control bonds issued in September 2006 and $1.6 million in interest to DPL on a short-term loan of $90 million.
For the nine months ended September 30, 2007, interest expense decreased $3.4 million compared to the same period of 2006, primarily related to $9.7 million of increased capitalized interest resulting from pollution control capital expenditures at the generating plants, partially offset by increased interest of $3.4 million related to the $100 million, 4.8% Series pollution control bonds issued in September 2006; $1.6 million in interest to DPL on a short-term loan of $90 million and $1.1 million of interest related to the $95 million draw on our revolving credit facility.
For the three months and nine months ended September 30, 2007, income taxes increased $3.1 million and $11.7 million compared to the same periods in 2006, primarily reflecting an increase in pre-tax book income. See Note 5 of Notes to Condensed Consolidated Financial Statements.
4944
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL REQUIREMENTS
DPL’s financial condition, liquidity, and capital requirements includesinclude 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.
During the fourth quarter ended December 31, 2007, we identified immaterial changes in certain accounts payable balances that had not been correctly presented in our prior period cash flow statements. Changes in accounts payable balances representing capital expenditures had previously been classified with cash flows from operating activities and should have been classified with capital expenditures as part of investing activities. Accordingly, the Condensed Consolidated Statements of Cash Flows for all periods presented have been reclassified to conform to the current presentation. See Note 1 of Notes to Condensed Consolidated Financial Statements.
DPL’s Cash Position
DPL’s cash and cash equivalents totaled $98.7$78.7 million at SeptemberJune 30, 2007,2008, compared to $262.2$134.9 million at December 31, 2006,2007, a decrease of $163.5$56.2 million. In addition,The decrease in cash and cash equivalents is primarily attributed to cash used to retire $100.0 million in long-term debt, $118.4 million in capital expenditures, and $59.9 million in dividends paid on common stock, partially offset by cash provided by operating activities of $200.4 million and $20.5 million restricted funds drawn to fund pollution control capital expenditures. At June 30, 2008, DPL had $16.5 million in restricted funds held in trust at September 30,relating to the 2007 issuance of $0.5$90.0 million in comparisonpollution control bonds. On April 4, 2008, DP&L repurchased the bonds from bondholders, and will hold them in trust while it continues to $10.1evaluate market conditions and explore suitable long-term financing alternatives. See Note 4 of Notes to Condensed Consolidated Financial Statements.
DP&L’s Cash Position
DP&L’s cash and cash equivalents totaled $28.5 million at June 30, 2008, compared to $13.2 million at December 31, 2006.2007, an increase of $15.3 million. The decreaseincrease in cash and cash equivalents was primarily attributed to the retirement of the $225.0 million DPL 8.25% Senior Notes, $250.1$212.9 million in capital expenditures and $83.7 million in dividends paid on common stock. The decrease was partially offset by $211.8 millioncash generated from operating activities; $158.4activities, and $20.5 million from the sale of peaking units and the corporate aircraft; $15.0 million from the exercise of 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 $12.3 million at September 30, 2007, compared to $46.1 million at December 31, 2006, a decrease of $33.8 million. The decrease in cash and cash equivalents was primarily attributed to $247.8expenditures, partially offset by $117.7 million in capital expenditures, and $125.0$80.0 million in dividends paid on common stock to our parent DPL,. These cash outflows were largely offset by $239.6 and a $20.0 million in cash generated from operating activities, $90.0 million in a net short-term loan owedrepayment to our parent DPL, and $10.1. At June 30, 2008, DP&L had $16.5 million in restricted funds drawnheld in trust relating to fundthe 2007 issuance of $90.0 million in pollution control capital expenditures at our generating plants.bonds. On April 4, 2008, DP&L repurchased the bonds from bondholders, and will hold them in trust while it continues to evaluate market conditions and explore suitable long-term financing alternatives. See Note 4 of Notes to Condensed Consolidated Financial Statements.
On or before July 31, 2008, DPL and DP&L will make a $42 million payment to the Ohio Department of Taxation (ODT) in accordance with the settlement agreement reached on June 27, 2008. See Note 5 of Notes to Condensed Consolidated Financial Statements.
Operating Activities
For the ninesix months ended SeptemberJune 30, 20072008 and 2006,2007, cash flows from operations were as follows:
Net Cash provided by Operating Activities
$ in millions |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
DPL |
| $ | 211.8 |
| $ | 212.4 |
|
|
|
|
|
|
| ||
DP&L |
| $ | 239.6 |
| $ | 270.7 |
|
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
$ in millions |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
DPL |
| $ | 200.4 |
| $ | 120.1 |
|
|
|
|
|
|
| ||
DP&L |
| $ | 212.9 |
| $ | 145.6 |
|
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, provideswill provide us with a reasonably predictable gross cash flow from operations.
45
DPL’s Cash provided by Operating Activities
DPL generated net cash from operating activities of $211.8$200.4 million and $212.4$120.1 million forin the nine monthssix month periods ended SeptemberJune 30, 20072008 and 2006,2007, respectively. The net cash provided by operating activities for the nine months ended September 30,2008 and 2007 was primarily the result of operating profitability,cash received from utility customers, partially offset by cash used for working capital.fuel, purchased power, operating expenditures, interest, and taxes. The net cash provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability, partially offset by cash used forfluctuations in working capital specifically taxes.result from the timing of payments made and cash receipts from our utility customers.
DP&L’s Cash provided by Operating Activities
DP&L generated net cash from operating activities of $239.6$212.9 million and $270.7$145.6 million in the nine monthssix month periods ended SeptemberJune 30, 20072008 and 2006,2007, respectively. The net cash provided by operating activities for the nine months ended September 30,2008 and 2007 was primarily the result of operating profitability,cash received from utility customers, partially offset by an increase in cash used for fuel, purchased power, operating expenditures, interest and taxes. The fluctuations in working capital. The netcapital result from the timing of payments made and cash provided by operating activities for the nine months ended September 30, 2006 was primarily the result of operating profitability.receipts from our utility customers.
50
Investing Activities
For the ninesix months ended SeptemberJune 30, 20072008 and 2006,2007, cash flows from investing activities were as follows:
Net Cash used for Investing Activities
$ in millions |
| 2007 |
| 2006 |
| ||
|
|
|
|
|
| ||
DPL |
| $ | (91.7 | ) | $ | (155.9 | ) |
|
|
|
|
|
| ||
DP&L |
| $ | (247.8 | ) | $ | (281.7 | ) |
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
$ in millions |
| 2008 |
| 2007 |
| ||
|
|
|
|
|
| ||
DPL |
| $ | (118.4 | ) | $ | (22.7 | ) |
|
|
|
|
|
| ||
DP&L |
| $ | (117.7 | ) | $ | (177.0 | ) |
DPL’s Cash used for Investing Activities
DPL’s net cash used for investing activities was $91.7$118.4 million and $155.9$22.7 million in the six month periods ended June 30, 2008 and 2007, respectively. For 2008, net cash flows used for the nine months ended September 30, 2007 and 2006, respectively.investing activities were related to capital expenditures. Net cash flows used for investing activities for the ninesix months ended SeptemberJune 30, 2007 waswere related to capital expenditures that were partiallylargely offset by proceeds from the sale of two peaking units and corporatean aircraft. Net cash used for investing activities for the nine months ended September 30, 2006 was related to capital expenditures, partially offset by the net sale of short-term investments and securities.
DP&L’s Cash used for Investing Activities
DP&L’s net cash used for investing activities was $247.8were $117.7 million and $281.7$177.0 million forin the nine monthssix month periods ended SeptemberJune 30, 20072008 and 2006,2007, respectively. Net cash flows used for investing activities forduring both years wasthese periods were related to capital expenditures.
Financing Activities
For the ninesix months ended SeptemberJune 30, 20072008 and 2006,2007, cash flows from financing activities were as follows:
Net Cash (used for)/provided byused for Financing Activities
|
| Six Months Ended |
| |||||||||||
|
| June 30, |
| |||||||||||
$ in millions |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
DPL |
| $ | (283.6 | ) | $ | (462.4 | ) |
| $ | (138.2 | ) | $ | (255.7 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||
DP&L |
| $ | (25.6 | ) | $ | 22.5 |
|
| $ | (79.9 | ) | $ | (10.3 | ) |
46
DPL’s Cash used for Financing Activities
DPL’s Cash (used for)/provided by Financing Activities
DPL’s net cash used for financing activities forin the ninesix months ended SeptemberJune 30, 2007 were $283.62008 was $138.2 million compared to $255.7 million during the same period of 2006 of $462.4 million.the prior year. Net cash flows used for financing activities forin the ninesix months ended SeptemberJune 30, 2008 were primarily the result of cash used to redeem the $100 million 6.25% Senior Notes on May 15, 2008 and to pay dividends of $59.9 million to stockholders, partially offset by withdrawals of $20.5 million from the restricted funds held in trust. Net cash flows used for financing activities in the six months ended June 30, 2007 waswere 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 $83.7 million,$55.8, partially offset by cash received from the exercise of stock options, including tax effect, of $14.5$15.0 million and the $10.1 million of restricted funds held in trust. Net
DP&L’s Cash used for Financing Activities
DP&L’s net cash used for financing activities forin the ninesix months ended SeptemberJune 30, 2006 was2008 were $79.9 million compared to $10.3 million during the same period of the prior year. Net cash flows used for financing activities in the six months ended June 30, 2008 were primarily the result of cash used to repurchase $400.0 million ofpay common stock dividends of $80.0 million to our parent DPLand pay dividendsa short-term loan repayment to common shareholdersDPL of $85.7$20.0 million, partially offset by the receiptwithdrawals of $23$20.5 million offrom restricted funds held in trust.
DP&L’s Cash (used for)/provided by Financing Activities
DP&L’s net Net cash used for financing activities for the nine months ended September 30, 2007 was $25.6 million compared to cash provided from financing activities of $22.5 million for the nine months ended September 30, 2006. Net cashflows used for financing activities for 2007 waswere 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 $0.7$0.4 million, partially offset by $90.0$105.0 million for a netfrom short-term loanborrowings from our parent DPL and $10.1 million of restricted funds held in trust. Net cash provided by financing activities of $22.5 million forwithdrawals from the nine months ended September 30, 2006 was primarily thetrust set up as a result of $23.1issuing the $100 million of draws from funds held by the trustee to finance our solid waste4.8% Series pollution control capital expenditures, partially offset by $0.6 million for dividends on preferred stock.bonds in September 2006.
51
DPL and DP&L have obligations to make future payments for capital expenditures, debt agreements, lease agreements and other long-term purchase obligations. We alsoobligations, 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 2006Annual Report of Form 10-K for the fiscal year ended December 31, 2007 and Part II,supplemented by those described in Item 1a of this Form 10-Q.quarterly report. 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 $275.4$106.5 million and $260.0$193.5 million during the six month periods ended June 30, 2008 and 2007, respectively. DPL is expected to spend approximately $118.5 million for the nine months ended September 30, 2007 and 2006, respectively, and are expected to approximate $360 million in 2007.remainder of 2008.
DP&L’s construction additions were $273.5$105.8 million and $258.2$192.0 million during the six month periods ended June 30, 2008 and 2007, respectively. DP&L isexpected to spend approximately $117.2 million for the nine months ended September 30, 2007 and 2006, respectively, and are expected to approximate $360 million in 2007.
remainder of 2008. Planned construction additions for 20072008 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system.
Capital projects are subject to continuouscontinuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards. For the remainder of 2007, 2008 and 2009,standards, among other factors. DPL, through its subsidiary DP&L, is projecting to spend an estimated $705$510 million in capital projects approximately 40% of which are to meet changing environmental standards.for the period 2008 through 2010. In our Annual Report of Form 10-Q, as of June 30,10-K for the fiscal year ended December 31, 2007, we reported our estimated capital spending to be approximately $675$490 million. This increasechange is primarily due primarily to expected cost increases in capital projectsrelating to the ongoing flue gas desulfurization project at DPL operated generating plants.Stuart station. 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 20072008 with a combination of cash on hand, short-term financing, tax-exemptlong-term debt, and cash flows from operations.
47
Debt and Debt Covenants
During the three months ended March 31, 2006, the Ohio Department of Development (ODOD) awarded DP&L is considering issuing in conjunction with the ability to issue, over 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) another seriesissued $100 million of tax-exempt4.80% fixed interest rate OAQDA Revenue bonds to finance2006 Series A due September 1, 2036. In turn, DP&L borrowed these funds from the remaining solid waste disposal facility costs at Miami Fort, Killen, StuartOAQDA. These funds were placed in escrow with a trustee and, Conesville generating stations.as of April 3, 2007, DP&L had drawn out the entirety of the funds.
On November 21, 2006,15, 2007, the OAQDA issued $90 million of insured, collateralized, variable rate OAQDA Revenue bonds due November 1, 2040. In turn, 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 provides DP&L withborrowed these funds from 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 September 30, 2007,OAQDA. DP&L had no outstanding borrowings under this facility. Fees associated with this credit facility are approximately $0.2 million per year, however, changessubsequently repurchased these bonds from the bondholders on April 4, 2008. This transaction is further discussed in credit ratings may affect fees and the applicable interest rate. This revolving credit agreement also contains a $50 million letterNote 4 of credit sublimit. As of September 30, 2007, DP&L had no outstanding letters of credit against the facility. 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 partiesNotes to seek additional surety under certain conditions.Condensed Consolidated Financial Statements.
Issuance of additional amounts of first mortgage bonds by DP&LDebt Covenants 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 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. DP&L paid down $15 million of this loan during the third quarter, leaving a current outstanding loan balance of $90 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 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.
52
There washave been no changechanges to our debt covenants as describeddisclosed in our Annual Report of Form 10-K as offor the fiscal year ended December 31, 2006.2007. We are in compliance with all our debt covenants.
Credit Ratings
Currently, DPL’s senior unsecured
Our rating agencies upgraded our corporate credit and DP&L’s senior secured debt credit ratings are as follows:ratings. The following table outlines the rating of each company and date of the upgrade:
|
| DPL Inc. |
| DP&L |
| Outlook |
| Effective |
|
|
|
|
|
|
|
|
|
|
|
Fitch Ratings |
| BBB+ |
| A+ |
|
|
|
|
|
Moody’s Investors Service |
|
|
|
|
| Positive |
|
|
|
Standard & Poor’s Corp. |
| BBB- |
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
DPL Inc. - Guarantees
In the normal course of business, DPL enters into various agreements with our wholly owned generating subsidiary DPLE providing financial or performance assurance to third parties. These agreements are entered into primarily to support or enhance the creditworthiness otherwise attributed to DPLE on a stand-alone basis, thereby facilitating the extension of sufficient credit to accomplish DPLE’s intended commercial purposes. Such agreements fall outside the scope of FASB Interpretation No. 45, “Guarantor’s Accounting and DP&L do notDisclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” There have any off-balance sheet arrangements that have or are reasonably likelybeen no material changes to have a current or future effect on our financial condition, revenues or expenses, resultsguarantees as disclosed in our Annual Report of operations, liquidity, capital expenditures or capital resources that are material to investors.Form 10-K for the fiscal year ended December 31, 2007.
Contractual Obligations and Commercial Commitments
We enter into various contractual obligations and other commercial commitments that may affect the liquidity of our operations. At September 30, 2007, these include:
|
|
|
| Payment Year |
| |||||||||||
$ in millions |
| Total |
| 2007 |
| 2008-2009 |
| 2010-2011 |
| Thereafter |
| |||||
DPL |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| $ | 1,550.0 |
| $ | — |
| $ | 275.0 |
| $ | 297.4 |
| $ | 977.6 |
|
Interest payments |
| 1,026.4 |
| 23.9 |
| 170.7 |
| 144.0 |
| 687.8 |
| |||||
Pension and postretirement payments |
| 219.1 |
| 5.5 |
| 45.2 |
| 46.5 |
| 121.9 |
| |||||
Capital lease |
| 2.3 |
| 0.2 |
| 1.5 |
| 0.6 |
| — |
| |||||
Operating leases |
| 0.8 |
| 0.4 |
| 0.3 |
| 0.1 |
| — |
| |||||
Coal contracts (a) |
| 925.8 |
| 104.6 |
| 578.8 |
| 242.4 |
| — |
| |||||
Limestone contracts (a) |
| 57.7 |
| 0.6 |
| 9.5 |
| 10.9 |
| 36.7 |
| |||||
Reserve for uncertain tax provisions |
| 41.9 |
| 41.9 |
| — |
| — |
| — |
| |||||
Other contractual obligations |
| 337.2 |
| 232.8 |
| 86.5 |
| 14.5 |
| 3.4 |
| |||||
Total contractual obligations |
| $ | 4,161.2 |
| $ | 409.9 |
| $ | 1,167.5 |
| $ | 756.4 |
| $ | 1,827.4 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
DP&L |
| �� |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| $ | 783.2 |
| $ | — |
| $ | — |
| $ | — |
| $ | 783.2 |
|
Interest payments |
| 542.6 |
| 9.8 |
| 78.3 |
| 78.3 |
| 376.2 |
| |||||
Pension and postretirement payments |
| 219.1 |
| 5.5 |
| 45.2 |
| 46.5 |
| 121.9 |
| |||||
Capital lease |
| 2.3 |
| 0.2 |
| 1.5 |
| 0.6 |
| — |
| |||||
Operating leases |
| 0.8 |
| 0.4 |
| 0.3 |
| 0.1 |
| — |
| |||||
Coal contracts (a) |
| 925.8 |
| 104.6 |
| 578.8 |
| 242.4 |
| — |
| |||||
Limestone contracts (a) |
| 57.7 |
| 0.6 |
| 9.5 |
| 10.9 |
| 36.7 |
| |||||
Reserve for uncertain tax provisions |
| 41.9 |
| 41.9 |
| — |
| — |
| — |
| |||||
Other contractual obligations |
| 337.2 |
| 232.8 |
| 86.5 |
| 14.5 |
| 3.4 |
| |||||
Total contractual obligations |
| $ | 2,910.6 |
| $ | 395.8 |
| $ | 800.1 |
| $ | 393.3 |
| $ | 1,321.4 |
|
(a) DP&L-operated units
Long-term debt:There have been no material changes, outside the ordinary course of business, to the information disclosed in the contractual obligations table in our Annual Report of Form 10-K for the fiscal year ended December 31, 2007 except those relating to the following transactions:
· | On April 4, 2008, DP&L repurchased all of the issued and outstanding $90 million variable rate OAQDA Revenue bonds from the bondholders and placed them in a custody account. This transaction is further discussed in Note 4 of Notes to Condensed Consolidated Financial Statements. | |
· | On June 27, 2008, DPL entered into a $42 million settlement agreement with the Ohio Department of Taxation (ODT) resolving all outstanding audit issues and appeals, including uncertain tax positions for tax years 1998 through 2006. The $42 million payment will be made to the ODT by July 31, 2008. This transaction is further discussed in Note 5 of Notes to Condensed Consolidated Financial Statements. | |
· | At December 31, 2007, DP&L had contractual obligations relating to the installation of FGD equipment in the amount of $144 million. During the three months ended June 30, 2008, the installation of FGD equipment on Stuart station units 1 and 2 was substantially completed and the equipment put into test operation. The open contractual obligations relating to the installation of FGD equipment was therefore reduced to $32.1 million at June 30, 2008. It is expected that these open contractual obligations will be satisfied within the next twelve months. |
48
DPL’s long-term debt, asTable of September 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.Contents
DP&L’sCommercial Commitments long-term debt, as of September 30, 2007, consists of first mortgage bonds, tax-exempt pollution control bonds and includes an unamortized debt discount.
See Note 8With the exception of Notes to Condensed Consolidated Financial Statements.
53
Interest payments:
Interest payments associated with the long-term debt described above.
Pension and postretirement payments:
Astransactions discussed in the preceding paragraph, there have been no material changes, outside the ordinary course of September 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 lease:
As of September 30, 2007, DP&L had a capital lease that expires in September 2010.
Operating leases:
As of September 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 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 impactbusiness, 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 2007, we recorded an additional $1.6 million in accrued interest resulting in a total reserve for uncertain tax positions of $41.9 million as of September 30, 2007. None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.
Other contractual obligations:
As of September 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 liquidityas disclosed in our Annual Report of our operations. At September 30, 2007, these include:
Credit facilities:
In November 2006, DP&L replaced its $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 September 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 September 30, 2007, DP&L could be responsibleForm 10-K for the repayment of 4.9%, or $34.1 million, of a $695 million debt obligation that matures in 2026.
In two separate transactions in November andfiscal year ended December 2006, DPL agreed to be a guarantor of the obligations of its wholly-owned subsidiary, 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:31, 2007.
$ in millions |
| 2007 |
| 2008 |
| 2009 |
| 2010 |
| ||||
Darby |
| $ | 30.6 |
| $ | 23.0 |
| $ | 15.3 |
| $ | 7.7 |
|
|
|
|
|
|
|
|
|
|
| ||||
Greenville |
| $ | 14.8 |
| $ | 11.1 |
| $ | 7.4 |
| $ | 3.7 |
|
54
MARKET RISK
As a resultIn the normal course of our operating, investing and financing activities,business, we are subject to certain market risks including, but not limited to, changes in commodity prices for electricity, coal, environmental emissions and natural gas, as well asand 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.
Our Risk Management Committee (RMC) is responsible for establishing risk management policies and the monitoring and reporting of risk exposures. The RMC meets on a regular basis with the objective of identifying, assessing, and quantifying material risk issues and developing strategies to manage these risks.
Commodity Pricing Risk
Recently, the coal market has experienced significant price increases. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Exports from the U.S. have increased significantly in recent years. In addition, domestic issues like government-imposed direct costs and permitting issues are affecting mining costs and supply availability. We have responded to increases in the price of coal by entering into contracts to hedge our exposure to fuel requirements and other energy-related commodities. We may not be able to hedge the entire exposure of our operations from commodity price volatility. To the extent we are not hedged against price volatility, our results of operations, financial position, or cash flows could be materially affected.
Approximately 12% of DPL’s and 22% of DP&L’s electric revenues for the ninesix months ended SeptemberJune 30, 20072008 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 onin the wholesale market when we can identify opportunities with positive margins. As of SeptemberJune 30, 2007,2008, a hypothetical increase or decrease of 10% in DPL’s annual wholesale revenues could result in approximately a $12$13.1 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs. As of SeptemberJune 30, 2007,2008, a hypothetical increase or decrease of 10% in DP&L’s annual wholesale revenues could result in approximately a $21$23.3 million increase or decrease to annual net income, assuming no increases or decreases in fuel and purchased power costs.
DPL’s fuel (including coal, natural gas, oil and emission allowances) and purchased power costs as a percent of total operating costs in the ninesix months ended SeptemberJune 30, 2008 and 2007 were 53% and 2006 were 54% and 49%52%, respectively. DP&L’s fuel (including coal, natural gas, oil and emission allowances) and purchased power costs as a percent of total operating costs were 55%54% and 52% in53% for the nine months ended Septembersix month periods ending June 30, 20072008 and 2006,2007, respectively. We have substantially all of the total expected coal volume needed to meet our retail and firm wholesale sales requirements for 20072008 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 SO2allowances should decline in 20072008 due to planned emission control upgrades. We do not expect to purchase SO2allowances for 2007.2008. The exact consumption of SO2allowances 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 NOXx allowances for 2007.2008. 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. FuelBased on higher volume and price (and excluding the effect of emission allowance sales), fuel costs are forecastedforecast to be flat5% to 15% higher in 20072008 compared to 2006.2007.
49
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 SeptemberJune 30, 2007,2008, a hypothetical increase or decrease of 10% in DPL’s annual fuel and purchased power costs could result in approximately a $34$37.1 million increase or decrease or increase to annual net income, assuming no increases or decreases in sales revenues.income. As of SeptemberJune 30, 2007,2008, a hypothetical increase or decrease of 10% in DP&L’s annual fuel and purchased power costs could result in approximately a $35$37.1 million increase or decrease or increase to annual net income, assuming no increases or decreases in sales revenues.income.
Interest Rate Risk
As a result of our normal borrowinginvesting and leasingborrowing activities, our financial 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. OurAt June 30, 2008, we maintained only fixed rate long-term debt represents publicly and privately held secured and unsecured notes and debentures with fixeddebt. As discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, we repurchased $90 million of our OAQDA Revenue bonds on April 4, 2008. This repurchase reduces our exposure to fluctuations in interest rates. At September 30, 2007, we had no outstanding borrowings under our revolving credit facility.
The carrying value of DPL’s debt was $1,552.3$1,542.1 million at SeptemberJune 30, 2007,2008, consisting of DP&L’s first mortgage bonds, DP&L’s tax-exempt pollution control bonds, ourDPL’s unsecured notes,DP&L’s revolving credit facility, and DP&L’s capital lease.leases. The fair value of this debt was $1,564.8$1,508.1 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed-rate debt at September 30, 2007, are as follows:
55
|
| DPL’s Long-term Debt |
| ||
Expected Maturity |
| Amount |
|
|
|
Date |
| ($ in millions) |
| Average Rate |
|
|
|
|
|
|
|
2007 |
| $ 0.2 |
| 6.5% |
|
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 |
| $ 1,552.3 |
| 6.2% |
|
|
|
|
|
|
|
Fair Value |
| $ 1,564.8 |
|
|
|
The carrying value of DP&L’s debt was $785.5$875.0 million at SeptemberJune 30, 2007,2008, consisting of ourDP&L’s first mortgage bonds, our tax-exempt pollution control bonds, revolving credit facility, and our capital lease.leases. The fair value of this debt was $777.0$826.9 million, based on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities. The principal cash repayments and related weighted average interest rates by maturity date for long-term, fixed-rate debt at September 30, 2007, are as follows:
|
| DP&L’s Long-term Debt |
| ||
Expected Maturity |
| Amount |
|
|
|
Date |
| ($ in millions) |
| Average Rate |
|
|
|
|
|
|
|
2007 |
| $ 0.2 |
| 6.5% |
|
2008 |
| 0.7 |
| 6.9% |
|
2009 |
| 0.8 |
| 6.9% |
|
2010 |
| 0.6 |
| 6.9% |
|
2011 |
| — |
| — |
|
2012 |
| — |
| — |
|
Thereafter |
| 783.2 |
| 5.0% |
|
Total |
| $ 785.5 |
| 5.0% |
|
|
|
|
|
|
|
Fair Value |
| $ 777.0 |
|
|
|
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. Historically, however, recorded estimates have not differed materially from actual results. Significant items subject to such judgments include: the carrying value of property, plant and equipment; unbilled revenues; income taxes; valuation of regulatory assets and liabilities; 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.benefits; and the valuation of contingent and other obligations. Actual results may differ from those estimates. Refer to our 2006 Annual Report filed onof Form 10-K for the fiscal year ended December 31, 2007 for a complete listing of our critical accounting policies and estimates. There have been no material changes to these critical accounting policies and estimates.
Recently Issued Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 1 of the Notes to the 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.
5650
OPERATING STATISTICSELECTRIC SALES AND REVENUES
|
| DPL Inc. |
| DP&L (a) |
| |||||||||||||||||||||||||||||||||||||||||||||
|
| DPL Inc. |
| DP&L (a) |
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||||||||||||||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Nine Months Ended |
|
| June 30, |
| June 30, |
| June 30, |
| June 30, |
| ||||||||||||||||||||||||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||||||||||||||
Electric sales (millions in kWh) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Residential |
| 1,505 |
| 1,432 |
| 4,276 |
| 3,939 |
| 1,505 |
| 1,432 |
| 4,276 |
| 3,939 |
|
| 1,089 |
| 1,133 |
| 2,769 |
| 2,771 |
| 1,089 |
| 1,133 |
| 2,769 |
| 2,771 |
| ||||||||||||||||
Commercial |
| 1,101 |
| 1,075 |
| 3,038 |
| 2,906 |
| 1,101 |
| 1,075 |
| 3,038 |
| 2,906 |
|
| 987 |
| 1,005 |
| 1,946 |
| 1,937 |
| 987 |
| 1,005 |
| 1,946 |
| 1,937 |
| ||||||||||||||||
Industrial |
| 1,139 |
| 1,169 |
| 3,233 |
| 3,254 |
| 1,139 |
| 1,169 |
| 3,233 |
| 3,254 |
|
| 996 |
| 1,117 |
| 1,963 |
| 2,094 |
| 996 |
| 1,117 |
| 1,963 |
| 2,094 |
| ||||||||||||||||
Other retail |
| 397 |
| 380 |
| 1,111 |
| 1,069 |
| 397 |
| 380 |
| 1,111 |
| 1,069 |
|
| 369 |
| 376 |
| 716 |
| 714 |
| 369 |
| 376 |
| 716 |
| 714 |
| ||||||||||||||||
Total retail |
| 4,142 |
| 4,056 |
| 11,658 |
| 11,168 |
| 4,142 |
| 4,056 |
| 11,658 |
| 11,168 |
|
| 3,441 |
| 3,631 |
| 7,394 |
| 7,516 |
| 3,441 |
| 3,631 |
| 7,394 |
| 7,516 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Wholesale |
| 967 |
| 1,149 |
| 2,645 |
| 2,649 |
| 967 |
| 1,149 |
| 2,645 |
| 2,649 |
|
| 520 |
| 558 |
| 1,419 |
| 1,678 |
| 520 |
| 558 |
| 1,419 |
| 1,678 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
| 5,109 |
| 5,205 |
| 14,303 |
| 13,817 |
| 5,109 |
| 5,205 |
| 14,303 |
| 13,817 |
|
| 3,961 |
| 4,189 |
| 8,813 |
| 9,194 |
| 3,961 |
| 4,189 |
| 8,813 |
| 9,194 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Operating revenues ($in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
Residential |
| $ | 148,419 |
| $ | 137,317 |
| $ | 410,736 |
| $ | 369,412 |
| $ | 148,419 |
| $ | 137,317 |
| $ | 410,736 |
| $ | 369,412 |
|
| $ | 113,921 |
| $ | 114,340 |
| $ | 269,590 |
| $ | 262,317 |
| $ | 113,921 |
| $ | 114,340 |
| $ | 269,590 |
| $ | 262,317 |
|
Commercial |
| 85,619 |
| 79,651 |
| 241,381 |
| 223,950 |
| 80,085 |
| 73,672 |
| 226,960 |
| 207,192 |
|
| 85,767 |
| 81,064 |
| 164,671 |
| 155,762 |
| 79,137 |
| 75,888 |
| 153,409 |
| 146,875 |
| ||||||||||||||||
Industrial |
| 64,525 |
| 64,147 |
| 185,014 |
| 181,639 |
| 34,720 |
| 35,214 |
| 101,244 |
| 98,586 |
|
| 60,070 |
| 62,993 |
| 118,207 |
| 120,489 |
| 33,301 |
| 34,905 |
| 64,687 |
| 66,524 |
| ||||||||||||||||
Other retail |
| 25,049 |
| 22,927 |
| 70,879 |
| 65,161 |
| 19,907 |
| 22,779 |
| 57,974 |
| 65,074 |
|
| 25,021 |
| 24,304 |
| 47,852 |
| 45,830 |
| 20,183 |
| 19,659 |
| 39,079 |
| 38,067 |
| ||||||||||||||||
Other miscellaneous revenues |
| 2,570 |
| 3,222 |
| 7,701 |
| 8,615 |
| 2,581 |
| 3,235 |
| 7,747 |
| 8,646 |
|
| 2,173 |
| 1,433 |
| 4,749 |
| 4,283 |
| 2,188 |
| 1,453 |
| 4,747 |
| 4,317 |
| ||||||||||||||||
Total retail |
| $ | 326,182 |
| $ | 307,264 |
| $ | 915,711 |
| $ | 848,777 |
| $ | 285,712 |
| $ | 272,217 |
| $ | 804,661 |
| $ | 748,910 |
|
| $ | 286,952 |
| $ | 284,134 |
| $ | 605,069 |
| $ | 588,681 |
| $ | 248,730 |
| $ | 246,245 |
| $ | 531,512 |
| $ | 518,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Wholesale |
| 52,892 |
| 61,762 |
| 139,995 |
| 129,704 |
| 94,025 |
| 97,438 |
| 253,032 |
| 231,469 |
|
| 39,854 |
| 30,418 |
| 96,925 |
| 87,103 |
| 78,755 |
| 68,975 |
| 171,810 |
| 159,007 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
RTO ancillary revenues |
| 39,833 |
| 20,652 |
| 81,389 |
| 55,695 |
| 39,833 |
| 20,652 |
| 81,389 |
| 55,695 |
| |||||||||||||||||||||||||||||||||
RTO and capacity revenues |
| 48,969 |
| 25,894 |
| 87,022 |
| 41,556 |
| 48,968 |
| 25,894 |
| 87,022 |
| 41,556 |
| |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Other revenues, net of fuel costs |
| 3,052 |
| 2,733 |
| 8,545 |
| 8,356 |
| — |
| — |
| — |
| — |
|
| 3,042 |
| 2,694 |
| 5,899 |
| 5,493 |
| — |
| — |
| — |
| — |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
| $ | 421,959 |
| $ | 392,411 |
| $ | 1,145,640 |
| $ | 1,042,532 |
| $ | 419,570 |
| $ | 390,307 |
| $ | 1,139,082 |
| $ | 1,036,074 |
|
| $ | 378,817 |
| $ | 343,140 |
| $ | 794,915 |
| $ | 722,833 |
| $ | 376,453 |
| $ | 341,114 |
| $ | 790,344 |
| $ | 718,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Electric customers at end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Residential |
| 455,801 |
| 456,134 |
| 455,801 |
| 456,134 |
| 455,801 |
| 456,134 |
| 455,801 |
| 456,134 |
|
| 456,308 |
| 456,098 |
| 456,308 |
| 456,098 |
| 456,308 |
| 456,098 |
| 456,308 |
| 456,098 |
| ||||||||||||||||
Commercial |
| 49,665 |
| 49,158 |
| 49,665 |
| 49,158 |
| 49,665 |
| 49,158 |
| 49,665 |
| 49,158 |
|
| 49,961 |
| 49,450 |
| 49,961 |
| 49,450 |
| 49,961 |
| 49,450 |
| 49,961 |
| 49,450 |
| ||||||||||||||||
Industrial |
| 1,813 |
| 1,828 |
| 1,813 |
| 1,828 |
| 1,813 |
| 1,828 |
| 1,813 |
| 1,828 |
|
| 1,800 |
| 1,818 |
| 1,800 |
| 1,818 |
| 1,800 |
| 1,818 |
| 1,800 |
| 1,818 |
| ||||||||||||||||
Other |
| 6,425 |
| 6,349 |
| 6,425 |
| 6,349 |
| 6,425 |
| 6,349 |
| 6,425 |
| 6,349 |
|
| 6,473 |
| 6,377 |
| 6,473 |
| 6,377 |
| 6,473 |
| 6,377 |
| 6,473 |
| 6,377 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Total |
| 513,704 |
| 513,469 |
| 513,704 |
| 513,469 |
| 513,704 |
| 513,469 |
| 513,704 |
| 513,469 |
|
| 514,542 |
| 513,743 |
| 514,542 |
| 513,743 |
| 514,542 |
| 513,743 |
| 514,542 |
| 513,743 |
|
(a)DP&L sells power to DPLER (a subsidiary of DPL)DPL). These sales are classified as wholesale on DP&L’s financial statements and retail sales for DPL.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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the “Market Risk”“MARKET RISK” section in Part I of Item 2.
2 of this report.
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 quarterthree months ended SeptemberJune 30, 20072008 that has materially affected, or is reasonably likely to materially affect, internal control over reporting.
5751
PARTPart II – Other Information
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 SeptemberJune 30, 2007,2008, cannot be reasonably determined.
Certain legal proceedings in which we are involved are discussed in Part I, Item 1—Environmental Considerations, Item 1—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 discussioninformation set forth below is limited to certain recent developments concerning our legal proceedings and should be read in conjunction with our Annual Report of Form 10-K for the earlier report.fiscal year ended December 31, 2007 and our Quarterly Report on Form 10 Q for the three months ended March 31, 2008. Information concerning the legal proceedings discussed in the UPDATES/OTHER MATTERS – Environmental Updates section of Part 1, Item 2 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item.
EnvironmentalState Income Tax Audit
On February 13, 2006, we received correspondence from the Ohio Department of Taxation (ODT) notifying us that ODT had completed its examination and review of our Ohio Corporation Franchise Tax Returns for tax years 2002 through 2004 and that the final proposed audit adjustments resulted in a balance due of $90.8 million before interest and penalties. On March 29, 2006, we filed petitions for reassessment with the ODT to protest each assessment as well as request corrected assessments for each tax year. On October 12, 2006, we signed a Memorandum of Understanding with the ODT that stated if the ODT’s positions are ultimately sustained in judicial proceedings, the total additional tax liability that we would be subject to for tax years 2002 through 2004 would be no more than $50.7 million before interest as opposed to the $90.8 million stated in the ODT’s correspondence of February 13, 2006. We reviewed the proposed audit adjustments and vigorously contested the ODT findings and notice of assessment through administrative processes. On June 27, 2008, we entered into a $42 million settlement agreement with ODT resolving all outstanding audit issues for tax years 1998 through 2006, including the Board of Tax Appeals issue which was discussed in our Annual Report Form 10-K for the fiscal year ended December 31, 2007. This settlement is further discussed in Note 5 of Notes to Condensed Consolidated Financial Statements.
Sierra Club
In September 2004, the Sierra Club filed a lawsuit against DP&L and the other owners of the Stuart Generating Stationgenerating 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’sstation’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, including depositions, and most expert reports have been submitted. Settlement negotiations are ongoing.
Insurance Recovery Claim
On May 16, 2007, DPLfiled by bothan insurance claim with Energy Insurance Mutual (EIM) to recoup legal expenses associated with our litigation against three of our former executives. The litigation against the former executives was settled on May 21, 2007. Mediation with EIM on this claim occurred on May 29, 2008, at which time the parties did not reach agreement. DPLand depositions of expertsEIM are expected to occur in the fourth quarter of 2007. Dispositive motions are to be filed in January 2008. No trial date has been set. DP&L is unable to determine the impactcurrently scheduling arbitration of this lawsuit, if any, on its overall results of operations, financial position or cash flows.insurance claim.
A comprehensive listing ofWe consider the 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 risk factors set forth below to be the most significant in your decision to invest in our stock. The Form 10-K may be obtained as discussed in section, ‘Website Access to Reports.’on Page 4 of this report. If any of the listedthese 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 have been updated as follows:
52
Reliance on Third PartiesClean Air Interstate Rule (CAIR) decision by the U.S. Court of Appeals for the District of Columbia Circuit
On July 11, 2008, the United States Court of Appeals for the District of Columbia Circuit issued a decision that vacated the USEPA’s CAIR and its associated Federal Implementation Plan. This decision remands these issues back to the USEPA. The USEPA issued CAIR on March 10, 2005 to regulate certain upwind states with respect to fine particulate matter and ozone. CAIR created interstate trading programs for annual nitrogen oxide (NOx) emission allowances and made modifications to an existing trading program for sulfur dioxide (SO2) that were to take effect in 2010. The court’s decision, in part, invalidated the new NOx annual emission allowance trading program and the modifications to the SO2 emission trading program.
In the fourth quarter of 2007, DP&L began a program for selling excess emissions allowances, including annual NOx emission allowances and SO2 emissions allowances that were the subject of CAIR trading programs. In subsequent quarters, DP&L recognized gains from the sale of excess emission allowances to third parties. The overall impact of the court’s decision, and the actions the EPA will take in response to this decision, on DPL and DP&L is not known at this time, however, the court’s decision may impact future sales of excess allowances. We relydo not expect this decision to have a material effect 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 and 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.financial position.
EmployeesSenate Bill 221
Approximately 53%
On May 1, 2008, substitute Senate Bill 221, an Ohio electric energy bill, was signed by the Governor and will become effective July 31, 2008. This new law states that all Ohio distribution utilities must file either an electric security plan or a market rate option to be in effect January 1, 2009. Under the market rate option, the retail generation price will be set by a periodic competitive bid process after the utility demonstrates that it can meet certain market criteria and bid requirements set out in the bill. Also, under this option, utilities that still own generation in the state are required to phase in the market rate operation over a period of our employees are under a collective bargaining agreement. If we are unable to negotiate future collective bargaining agreements, we could experience work stoppagesnot less than five years. An electric security plan which may affectallow for adjustments to the standard offer for costs associated with environmental compliance; fuel and purchased power; construction of new or investment in specified generating facilities; the provision of standby and default service, operating, maintenance, or other costs including taxes. As part of its electric security plan, the utility is permitted to file an infrastructure improvement plan that will specify the initiatives the utility will take to rebuild, upgrade, or replace its electric distribution system, including cost recovery mechanisms. On July 2, 2008, the Public Utilities Commission of Ohio (PUCO) issued the first set in a series of rules related to implementation of the new law, including what information must be included in an electric security plan as well as a market rate option. DP&L is preparing to file its comments on the rules.
The new law contains annual targets relating to advanced energy portfolio standards, renewable energy, and energy efficiency standards. The standards require that, by 2025, 12.5% of the generation used to supply standard offer generation service by the utility must come from advanced energy resources, which may include distributed generation, cogeneration, clean coal technology, nuclear technology, or energy efficiency. By 2025, another 12.5% of the generation used to supply standard offer generation service by the utility must come from renewable energy resources, of which 0.5% must come from solar energy resources. In addition, the proposed bill requires annual energy efficiency reductions that reach 22.3% by 2025 and peak demand reduction requirements that reach 7.75% by 2018. The advanced energy portfolio and energy efficiency standards begin to phase in during 2009, with increases in requirement percentages each year. If any targets are not met, compliance penalties will apply. Rules relating to implementation of these targets are expected to be issued later this summer.
While the overall financial impact of this new legislation on DPL and DP&L will not be known for some time, implementation of the new legislation by DPL and DP&L may materially impact our business and operating results.
financial condition.
Item 2 —– Unregistered SaleSales of Equity Securities and Use of Proceeds
None
58
Item 4 —– Submission of Matters to a Vote of Security Holders
NoneDPL held its Annual Meeting of Shareholders on April 23, 2008, at which security holders elected the three directors nominated for three-year terms expiring 2011. The results of the voting were as follows:
|
|
|
|
|
| BROKER |
|
|
| FOR |
| WITHHELD |
| NON-VOTE |
|
Paul M. Barbas |
| 92,095,761 |
| 1,273,802 |
| — |
|
Barbara S. Graham |
| 92,060,151 |
| 1,309,412 |
| — |
|
Glenn E. Harder |
| 92,030,185 |
| 1,339,378 |
| — |
|
The other directors whose terms of office continued after the Annual Meeting are Paul R. Bishop, Frank G. Gallaher, and General Lester L. Lyles (Ret.) (each of the class of 2009) and Robert D. Biggs, W August Hillenbrand, and Ned J. Sifferlen (each of the class of 2010).
Security holders also voted to ratify the selection of KPMG LLP as DPL’s independent auditor for 2008. The results of the voting were as follows:
|
|
|
|
|
| BROKER |
|
FOR |
| AGAINST |
| ABSTAIN |
| NON-VOTE |
|
92,248,030 |
| 597,324 |
| 524,208 |
| — |
|
Security holders also voted on a shareholder proposal to dissolve DPL and our non-utility subsidiaries. The results of the voting were as follows:
|
|
|
|
|
| BROKER |
|
FOR |
| AGAINST |
| ABSTAIN |
| NON-VOTE |
|
2,549,862 |
| 70,588,289 |
| 1,769,898 |
| 18,461,513 |
|
None
54
DPL |
| DP&L |
| Exhibit |
| Exhibit |
| Location | |
X |
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|
|
| 99.1 to Form 8-K filed on May 8, 2008 (File No. 1-9052) |
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| |
X |
|
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|
| Certification of Chief |
| Filed herewith as Exhibit | 31(a) |
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|
| |
X |
|
|
|
|
| Certification of Chief |
| Filed herewith as Exhibit | |
| |||||||||
| X | 31(c) | Certification of Chief Executive Officer | Filed herewith as Exhibit 31(c) | |||||
X | 31(d) | Certification of Chief Financial Officer | Filed herewith as Exhibit 31(d) | ||||||
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|
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|
|
| |
X |
|
|
|
|
| Certification of Chief |
| Filed herewith as Exhibit 32(a) | |
X | 32(b) |
| Certification of Chief Financial Officer | Filed herewith as Exhibit 32(b) | |||||
X | 32(c) | Certification of Chief Executive Officer | Filed herewith as Exhibit 32(c) | ||||||
X | 32(d) | Certification of Chief Financial Officer | Filed herewith as Exhibit 32(d) |
5955
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: |
|
| /s/ Paul M. Barbas |
|
|
| Paul M. Barbas |
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|
|
| |||
July 23, 2008 | /s/ John J. Gillen | ||
John J. Gillen | |||
| |||
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| ||
July 23, 2008 | /s/ Frederick J. Boyle | ||
Frederick J. Boyle Vice President, | |||
(principal accounting officer) | |||
6056