<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-9052
DPL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-1163136
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
COURTHOUSE PLAZA SOUTHWEST, DAYTON, OHIO 45402
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: 937-224-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
OUTSTANDING AT NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS FEBRUARY 15, 2000 WHICH REGISTERED
------------------- ----------------- ----------------
<S> <C> <C>
Common Stock, $0.01 par value
and Preferred Share Purchase Rights 157,801,404 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 15, 2000 was $3,333,554,660 based on a closing price
of $21 1/8 on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to the 2000 Annual
Meeting of Shareholders of the registrant, are incorporated by reference into
Part III.
<PAGE>
PART I
Item 1 - BUSINESS*
- -------------------------------------------------------------------------------
DPL INC.
DPL Inc. ("DPL") was organized in 1985 under the laws of the State
of Ohio to engage in the acquisition and holding of securities of
corporations for investment purposes. The executive offices of DPL are
located at Courthouse Plaza Southwest, Dayton, Ohio 45402 - telephone (937)
224-6000.
DPL's principal subsidiary is The Dayton Power and Light Company
("DP&L"). DP&L is a public utility incorporated under the laws of Ohio in
1911. DP&L sells electricity and natural gas to residential, commercial and
governmental customers in a 6,000 square mile area of West Central Ohio.
Electricity for DP&L's 24 county service area is generated at eight power
plants and is distributed to 495,000 retail customers. Natural gas is
provided to 308,000 customers in 16 counties. Principal industries served
include electrical machinery, automotive and other transportation equipment,
non-electrical machinery, agriculture, paper, and rubber and plastic
products. DP&L's sales reflect the general economic conditions and seasonal
weather patterns of the area. In 1999, electric revenues decreased 1% due to
lower sales to other public utilities and residential customers. Utility gas
revenues and gas purchased for resale each increased 2% in 1999 due to the
higher sales to business customers. During 1999, cooling degree days were 13%
above the twenty year average and 3% below 1998. Heating degree days in 1999
were 8% below the thirty year average and 12% above 1998. Sales patterns will
change in future years as weather and the economy fluctuate.
Subsidiaries of DPL include Miami Valley Resources, Inc. ("MVR"), a
natural gas supply management company; Miami Valley Leasing, which leases
communications equipment and other miscellaneous equipment, owns real estate
and has, for financial investment purposes, acquired limited partnership
interests in wholesale electric generation; Miami Valley Lighting, Inc., a
street lighting business; Miami Valley CTC, Inc., which provides
transportation services; Miami Valley Insurance Company, an insurance company
for DPL and its subsidiaries; Miami Valley Development Company, which has
acquired real estate for DP&L; DPL Energy, Inc., which has been granted
authority to engage in the business of brokering wholesale electric energy;
MacGregor Park, Inc., an owner and developer of real estate; and Plaza
Building, Inc., which owns and leases an office building. MVE, Inc. is a
subsidiary of Plaza Building, Inc. that provides financial support services to
DPL and its subsidiaries.
DPL and its subsidiaries are exempt from registration with the
Securities and Exchange Commission under the Public Utility Holding Company
Act of 1935 because its utility business operates solely in the State of Ohio.
DPL and its subsidiaries employed 2,102 persons as of December 31,
1999, of which 1,778 are full-time employees and 324 are part-time employees.
* Unless otherwise indicated, the information given in "Item 1 - Business" is
current as of February 15, 2000. No representation is made that there have
not been subsequent changes to such information.
I-1
<PAGE>
COMPETITION
DPL competes through its principal subsidiary, DP&L, with privately
and municipally owned electric utilities and rural electric cooperatives,
natural gas suppliers and other alternate fuel suppliers. DP&L competes on
the basis of price and service.
Like other utilities, DP&L from time to time may have electric
generating capacity available for sale to other utilities. DP&L competes with
other utilities to sell electricity provided by such capacity. The ability of
DP&L to sell this electricity will depend on how DP&L's price, terms and
conditions compare to those of other utilities. In addition, from time to
time, DP&L makes power purchases from other suppliers.
In an increasingly competitive energy environment, cogenerated power
may be used by customers to meet their own power needs. Cogeneration is the
dual use of a form of energy, typically steam, for an industrial process and
for the generation of electricity. The Public Utilities Regulatory Policies
Act of 1978 ("PURPA") provides regulations that govern the purchases of
excess electric energy from cogeneration and small power production
facilities that have obtained qualifying status under PURPA.
The National Energy Policy Act of 1992 which reformed the Public
Utilities Holding Company Act of 1935, allows the federal government to
mandate access by others to a utility's electric transmission system and may
accelerate competition in the supply of electricity.
DP&L provides transmission and wholesale electric service to twelve
municipal customers which distribute electricity within their corporate
limits. In addition to these municipal customers, DP&L maintains an
interconnection agreement with one municipality that has the capability to
generate a portion of its energy requirements. Sales to municipalities
represented 1.3% of total electricity sales in 1999.
The municipal agreements provide, among other things, for the sale
of firm power by DP&L to the municipals on specified terms. However, the
parties disagreed in their interpretation of this portion of the agreement
and DP&L filed suit against the eleven municipals on December 28, 1998. The
dispute was subsequently settled in 1999. In December 1999, DP&L filed a
second suit against the municipals claiming their failure to pay for certain
services rendered under the contract. The municipals filed a complaint at the
Federal Energy Regulatory Commission ("FERC") claiming violation of a
mediation clause. This dispute is expected to be resolved through the FERC
process, and is not expected to result in a material impact on DP&L's
financial position.
On February 15, 1996, the PUCO issued guidelines for interruptible
service, including services that accommodate the attainment and delivery of
replacement electricity during periods when the utility faces constraints on
its own resources. DP&L's interruptible electric service tariffs were
approved on May 1, 1997, and tariffs conforming to this order were
subsequently filed with the PUCO on May 15, 1997.
I-2
<PAGE>
On December 24, 1996, the PUCO issued a Finding and Order adopting
conjunctive electric service ("CES") guidelines and directing utilities to
file tariffs regarding CES service. CES programs enable customers to
aggregate for cost of service, rate design, rate eligibility and billing
purposes. On December 30, 1998, the PUCO approved DP&L's CES tariff, with an
effective date of January 4, 1999. Implementation of this program is
essentially revenue neutral.
In October 1999, legislation ("the Legislation") became effective in
Ohio giving electric utility customers a choice of energy providers starting
January 1, 2001. Under the Legislation, electric generation, aggregation,
power marketing and power brokerage services supplied to retail customers in
Ohio will be deemed competitive and will not be subject to supervision and
regulation by the PUCO. Existing limitations on an electric public utility's
ownership rights of a non-public utility were eliminated. All earnings
obligations, restrictions or caps imposed on an electric utility in a PUCO
order became void as of the effective date of the Legislation.
As required by the Legislation, DP&L filed its transition plan at
the PUCO on December 20, 1999. As part of the transition plan, DP&L also
filed for the opportunity to receive transition revenues. These transition
revenues, once determined by the PUCO, will be recovered through a transition
charge during the market development period which ends no later than December
31, 2005. Regulatory assets that are part of the total allowable amount of
transition costs will be separately identified as part of the transition
charge, and the PUCO may set the revenue requirements for their recovery to
end no later than December 31, 2010. A shopping incentive may be factored
into the setting of the transition charge to induce 20% load switching by
customer class by December 31, 2003, or halfway through the utility's market
development period.
On April 24, 1996, FERC issued orders requiring all electric
utilities that own or control transmission facilities to file open-access
transmission service tariffs. Open-access transmission tariffs provide third
parties with non-discriminatory transmission service comparable to what the
utility provides itself. In its orders, FERC further stated that
FERC-jurisdictional stranded costs reasonably incurred and costs of complying
with the rules will be recoverable by electric utilities. Both in 1997 and
1998, DP&L reached an agreement in principle with staff and intervenors in
these tariff cases. DP&L's revenues from customers will not be materially
impacted by the final resolution of these cases.
FERC issued an Order accepting the Stipulation between the parties
in DP&L's Open Access Transmission Tariff cases on July 30, 1999 and
September 17, 1999. DP&L was not materially impacted by the Order. FERC
issued a final rule on December 20, 1999 specifying the minimum
characteristics and functions for Regional Transmission Organizations
("RTO"). The rule required that all public utilities that own, operate or
control interstate transmission file a proposal to join a RTO by October 15,
2000 or file a description of efforts taken to participate in an RTO, reasons
for not participating in an RTO, any obstacles to participation in an RTO,
and any plans for further work towards participation.
I-3
<PAGE>
On September 30, 1996, FERC conditionally accepted DP&L's
market-based sales tariff which will allow DP&L to sell wholesale generation
supply at prices that reflect current market prices. At the same time, FERC
approved the application and authorization of DPL Energy Inc. to sell and
broker wholesale electric power and also charge market-based prices for such
power.
On July 22, 1998, the PUCO approved the implementation of Minimum
Electric Service Standards for all of Ohio's investor-owned electric
utilities. This Order details minimum standards of performance for a variety
of service related functions, effective July 1, 1999. On December 21, 1999,
the PUCO issued additional rules proposed by the PUCO Staff which are
designed to guide the electric utility companies as they prepare to enter
into deregulation. These rules include certification of providers of
competitive retail electric services, minimum competitive retail electric
service standards, monitoring the electric utility market, and establishing
procedures for alternative dispute resolution. There were also rules issued
to amend existing rules for noncompetitive electric service and safety
standards and electric companies long-term forecast reporting. DP&L submitted
comments on the proposed rules on January 31, 2000.
General deregulation of the natural gas industry has continued to
influence market competition as the driving force behind natural gas
procurement. The evolution of an efficient natural gas spot market in
combination with open-access interstate transportation pipelines has provided
DP&L, as well as its end-use customers, with an array of procurement options.
Customers with alternate fuel capability can continue to choose between
natural gas and their alternate fuel based upon overall performance and
economics. Therefore, demand for natural gas purchased from DP&L or purchased
elsewhere and transported to the end-use customer by DP&L could fluctuate
based on the economics of each in comparison with changes in alternate fuel
prices. For DP&L, price competition and reliability among both natural gas
suppliers and interstate pipeline sources are major factors affecting
procurement decisions.
MVR, established in 1986 as a subsidiary of DPL, acts as a broker in
arranging and managing natural gas supplies for business and industry.
Deliveries of natural gas to MVR customers can be made through DP&L's
transportation system, or another transportation system, on the same basis as
deliveries to customers of other gas brokerage firms. Customers with
alternate fuel capability can continue to choose between natural gas and
their alternate fuel based upon overall performance and economics.
In November 1999, DPL sold its financial interest in Market Hub
Partners, which owned gas storage facilities, to a subsidiary of NiSource in
an all cash transaction for $29 million.
I-4
<PAGE>
CONSTRUCTION AND FINANCING PROGRAM OF DPL INC.
CONSTRUCTION PROGRAM
Construction additions were $167 million in 1999 and $111 million in
both 1998 and 1997. The capital program for 2000 consists of construction
costs of approximately $333 million.
Construction plans are subject to continuing review and are expected
to be revised in light of changes in financial and economic conditions, load
forecasts, legislative and regulatory developments and changing environmental
standards, among other factors. DPL's ability to complete its capital
projects and the reliability of future service will be affected by its
financial condition, the availability of external funds at reasonable cost
and adequate and timely rate recovery.
In the third quarter of 1999 and the first quarter of 2000, DPL
announced the second and third phases of its peaking generation expansion.
For Phase Two, DPL has contracted with Pratt & Whitney/Turbo Power Marine to
purchase four natural gas fired combustion turbine peaking units. These units
are rated at 56 MW each for a total of 225 MW and represent an investment of
$80 million. These units are expected to be online for the summer of 2000.
In Phase Three, DPL will purchase two General Electric ("GE")
combustion turbine peaking units, representing an investment of $50 million.
Both natural gas fired units are rated at 80 MW each and are expected to be
online for the summer of 2001.
DP&L recently completed its Phase One expansion with the addition of
three GE combustion turbines representing 250 MW. These three phases of
completed and announced additions, representing an investment of $205
million, will increase generation capacity by 635 MW or more than 20% to
3,655 MW.
See ENVIRONMENTAL CONSIDERATIONS for a description of environmental
control projects and regulatory proceedings which may change the level of
future construction additions. The potential impact of these events on DPL's
operations cannot be estimated at this time.
FINANCING PROGRAM
DPL and its subsidiaries will require a total of $538 million during
the next five years for sinking fund and debt maturities in addition to any
funds needed for the construction program.
At year-end 1999, DPL had a cash and temporary investment balance of
$112 million, and debt and equity financial assets were $1,094 million. Cash
and financial assets are held with a view towards investing in future
opportunities in the industry. Proceeds from temporary cash investments,
together with internally generated cash and future outside financings, will
provide for the funding of the construction program, sinking funds and
general corporate requirements.
On February 2, 2000, DPL announced that it had signed a definitive
agreement with affiliates of Kohlberg Kravis Roberts & Co. ("KKR"), an
investment company, under which KKR will make a strategic investment of $550
million in DPL. DPL intends to use the proceeds from this investment,
combined with up to $425 million of new debt capital, to continue its planned
generation strategy, retire short-term debt and purchase up to 31.6 million
common shares. These transactions will result in an increase in the financial
leverage of DPL in its capital structure.
I-5
<PAGE>
Under the terms of the agreement with KKR, which has been
unanimously approved by DPL's Board of directors, the investment includes a
combination of voting preferred and trust preferred securities and warrants
to purchase DPL common stock. The 31.6 million warrants, with an exercise
price of $21, represent approximately 19.9% of DPL shares currently
outstanding. The voting preferred securities will carry voting rights for up
to 4.9% of DPL's total voting rights. The trust preferred securities will
have a term of 30 years (subject to acceleration to six months after the
exercise of warrants) and carry a dividend rate of 8.5% payable in cash.
On February 4, 2000, DPL initiated an Offer to Purchase for Cash up
to 25 million common shares, or approximately 16% of outstanding shares, at a
price of $20-$23. This tender expires on March 3, 2000. DPL currently intends
to purchase up to an additional 6.6 million shares after this offer is
completed. The method, timing and financing of such purchases have not yet
been decided.
In April 1999, DPL completed a private placement issuance of $500
million of Senior Notes Due 2004, with an interest rate of 6.32%. The
proceeds were used to redeem the 8.40% Series First Mortgage Bonds, the
reduction of short-term debt and for general corporate purposes.
In May 1998, DPL issued $100 million of a series of Senior Notes due
2008 with an interest rate of 6.25%. In December 1997, DP&L redeemed a series
of first mortgage bonds in the principal amount of $40 million with an
interest rate of 8.0%. The bonds had been scheduled to mature in 2003.
Another series of first mortgage bonds in the principal amount of $40 million
matured in 1997.
DPL and its subsidiaries have $300 million available through
revolving credit agreements with a consortium of banks. One agreement, for
$200 million, expires in 2002 and the other, for $100 million, expires in
2000. At year-end 1999, DPL had no outstanding borrowings under these credit
agreements. DPL has $15 million available in a short-term informal line of
credit. At year-end 1999, DPL had no outstanding borrowings from this line.
DP&L also has $75 million available in short-term lines of credit. DP&L had
no outstanding borrowings from these lines of credit at year-end 1999 and $81
million outstanding at year-end 1998.
In 1999, DPL began issuing its own commercial paper and had $171
million outstanding at year-end. DP&L had $123 million and $99 million in
commercial paper outstanding at year-end 1999 and 1998, respectively.
Under DP&L's First and Refunding Mortgage, First Mortgage Bonds may
be issued on the basis of (i) 60% of unfunded property additions, subject to
net earnings, as defined, being at least two times interest on all First
Mortgage Bonds outstanding and to be outstanding, or (ii) 100% of retired
First Mortgage Bonds. DP&L anticipates that it will be able to issue
sufficient First Mortgage Bonds to satisfy its long-term debt requirements in
connection with the financing of its construction and refunding programs
discussed above.
The maximum amount of First Mortgage Bonds which may be issued in
the future will fluctuate depending upon interest rates, the amounts of
bondable property additions, earnings and retired First Mortgage Bonds. There
are no coverage tests for the issuance of preferred stock under DP&L's
Amended Articles of Incorporation.
I-6
<PAGE>
A three-for-two common stock split effected in the form of a stock
dividend was paid on January 12, 1998 to stockholders of record on December
16, 1997.
ELECTRIC OPERATIONS AND FUEL SUPPLY
DP&L's present winter generating capability is 3,371,000 KW. Of this
capability, 2,843,000 KW (approximately 84%) is derived from coal-fired steam
generating stations and the balance consists of combustion turbine and
diesel-powered peaking units. Approximately 87% (2,472,000 KW) of the
existing steam generating capability is provided by certain units owned as
tenants in common with The Cincinnati Gas & Electric Company ("CG&E") or with
CG&E and Columbus Southern Power Company ("CSP"). Under the agreements among
the companies, each company owns a specified undivided share of each
facility, is entitled to its share of capacity and energy output, and has a
capital and operating cost responsibility proportionate to its ownership
share.
The remaining steam generating capability (371,000 KW) is derived
from a generating station owned solely by DP&L. DP&L's all-time net peak load
was 3,130,000 KW, occurring in 1999. The present summer generating capability
is 3,269,000 KW.
GENERATING FACILITIES
<TABLE>
<CAPTION>
MW Rating
Operating -------------------------
Station Ownership* Company Location DP&L Portion Total
- ------------------------- --------------- ---------- -------------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
COAL UNITS
Hutchings W DP&L Miamisburg, OH 371 371
Killen C DP&L Wrightsville, OH 402 600
Stuart C DP&L Aberdeen, OH 820 2,340
Conesville-Unit 4 C CSP Conesville, OH 129 780
Beckjord-Unit 6 C CG&E New Richmond, OH 210 420
Miami Fort-Units 7 & 8 C CG&E North Bend, OH 360 1,000
East Bend-Unit 2 C CG&E Rabbit Hash, KY 186 600
Zimmer C CG&E Moscow, OH 365 1,300
COMBUSTION TURBINES OR DIESEL
Hutchings W DP&L Miamisburg, OH 33 33
Yankee Street W DP&L Centerville, OH 138 138
Monument W DP&L Dayton, OH 12 12
Tait W DP&L Dayton, OH 10 10
Sidney W DP&L Sidney, OH 12 12
Tait Gas Turbine 1 W DP&L Moraine, OH 100 100
Tait Gas Turbine 2 W DP&L Moraine, OH 102 102
Tait Gas Turbine 3 W DP&L Moraine, OH 102 102
Killen C DP&L Wrightsville, OH 16 24
Stuart C DP&L Aberdeen, OH 3 10
</TABLE>
*W = Wholly Owned
C = Commonly Owned
I-7
<PAGE>
In order to transmit energy to their respective systems from their
commonly owned generating units, the companies have constructed and own, as
tenants in common, 847 circuit miles of 345,000-volt transmission lines. DP&L
has several interconnections with other companies for the purchase, sale and
interchange of electricity.
DP&L derived over 99% of its electric output from coal-fired units
in 1999. The remainder was derived from units burning oil or natural gas
which were used to meet peak demands.
DP&L estimates that approximately 65-85% of its coal requirements
for the period 2000-2004 will be obtained through long-term contracts, with
the balance to be obtained by spot market purchases. DP&L has been informed
by CG&E and CSP through the procurement plans for the commonly owned units
operated by them that sufficient coal supplies will be available during the
same planning horizon.
The prices to be paid by DP&L under its long-term coal contracts are
subject to adjustment in accordance with various indices. Each contract has
features that will limit price escalations in any given year.
The average fuel cost per kWh generated of fuel burned for electric
generation (coal, gas and oil) for the year was 1.30(cents) in 1999 and 1998
and 1.31(cents) in 1997. Beginning in February 2000, DP&L's Electric Fuel
Component ("EFC") will be fixed at 1.30(cents) for the remainder of 2000. As
competition begins on January 1, 2001 the EFC will become part of the
Standard Offer Generation Rate. See RATE REGULATION AND GOVERNMENT
LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.
GAS OPERATIONS AND GAS SUPPLY
DP&L reached an agreement to sell its natural gas retail
distribution business unit for $425 million. This all-cash sale of assets
(book value approximating $250 million at December 31, 1999) is subject to
regulatory approvals and is expected to close by the end of the second
quarter, 2000. The after-tax proceeds from the sale will be used in the
expansion of the electric combustion turbine business, to finance in part
other business unit capital needs, to continue the stock buyback program and
to reduce outstanding short-term debt.
DP&L has long-term firm pipeline transportation agreements with ANR
Gas Pipeline Company ("ANR"), Texas Gas Transmission Corporation ("Texas
Gas"), Panhandle Eastern Pipe Line Company ("Panhandle"), Columbia Gas
Transmission Corporation ("Columbia") and Columbia Gulf Transmission
Corporation for varying terms, up to early 2005. Along with firm
transportation services, DP&L has approximately 14 billion cubic feet of firm
storage service with various pipelines.
In addition, DP&L is interconnected with CNG Transmission
Corporation. Interconnections with interstate pipelines provide DP&L the
opportunity to purchase competitively-priced natural gas supplies and
pipeline services. DP&L purchases its natural gas supplies using a portfolio
approach that minimizes price risks and ensures sufficient firm supplies at
peak demand times. The portfolio consists of long-term, short-term and spot
supply agreements. In 1999, firm agreements provided approximately 60% of
total supply, with the remaining supplies purchased on a spot/short-term
basis.
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<PAGE>
In 1999, DP&L purchased natural gas at an average price of $3.68 per
MCF, compared to $3.22 per MCF in 1998 and $3.45 per MCF in 1997. Through the
operation of a natural gas cost adjustment clause applicable to gas sales,
increases and decreases in DP&L's natural gas costs are reflected in customer
rates on a timely basis. SEE RATE REGULATION AND GOVERNMENT LEGISLATION.
The PUCO supports open access, nondiscriminatory transportation of
natural gas by the state's local distribution companies for end-use
customers. The PUCO has guidelines to provide a standardized structure for
end-use transportation programs which requires a tariff providing the prices,
terms and conditions for such service. DP&L has an approved tariff and
provides transportation service to approximately 600 end-use customers,
delivering a total quantity of nearly 20,200,000 MCF per year.
RATE REGULATION AND GOVERNMENT LEGISLATION
DP&L's sales of electricity and natural gas to retail customers are
subject to rate regulation by the PUCO and various municipalities. DP&L's
wholesale electric rates to municipal corporations and other distributors of
electric energy are subject to regulation by FERC under the Federal Power Act.
Ohio law establishes the process for determining rates charged by
public utilities. Regulation of rates encompasses the timing of applications,
the effective date of rate increases, the cost basis upon which the rates are
based and other related matters. Ohio law also establishes the Office of the
Ohio Consumers' Counsel (the "OCC"), which has the authority to represent
residential consumers in state and federal judicial and administrative rate
proceedings.
DP&L's electric and natural gas rate schedules contain certain
recovery and adjustment clauses subject to periodic audits by, and
proceedings before, the PUCO. Electric fuel and gas costs are expensed as
recovered through rates. Beginning in February 2000, DP&L's EFC will be fixed
at 1.30(cents) for the remainder of 2000. As competition begins on January 1,
2001 the EFC will become part of the Standard Offer Generation Rate.
On June 18, 1996, Ohio Governor Voinovich signed into law House Bill
476 which allows for alternate natural gas rate plans and exemption from PUCO
jurisdiction for some gas services, and establishes a code of conduct for
local natural gas distribution companies. Final rules were issued on March
12, 1997.
Ohio Legislation extends the jurisdiction of the PUCO to the records
and accounts of certain public utility holding company systems, including
DPL. The Legislation extends the PUCO's supervisory powers to a holding
company system's general condition and capitalization, among other matters,
to the extent that they relate to the costs associated with the provision of
public utility service.
Regulatory assets recorded during the phase-in of electric rates
were recovered in revenues through 1999. A 1992 PUCO-approved agreement for
the phase-in plan provided that after the end of the deferral period DP&L
would maintain a balance sheet reserve account which shall operate to reduce
the otherwise applicable jurisdictional production plant valuation subject to
recovery in rates. In addition, deferred interest charges on the William H.
Zimmer Generating Station are being amortized at $2.8 million per year over
the projected life of the asset.
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<PAGE>
The 1992 PUCO-approved settlement agreement for the demand-side
management ("DSM") programs, as updated in 1995, provided for accelerated
recovery of DSM costs and, thereafter, production plant costs to the extent
that DP&L's return on equity exceeds a baseline 13% (subject to upward
adjustment). If the return exceeds the baseline return by one to two percent,
one-half of the excess is used to accelerate recovery of these costs. If the
return is greater than two percent over the baseline, the entire excess is
used for such purpose. In 1998, amortization of regulatory assets included an
additional $10.4 million of accelerated cost recovery. In 1999, the
Legislation removed the return on equity cap.
Regulatory deferrals on the balance sheet were:
<TABLE>
<CAPTION>
Dec. 31 Dec. 31
1999 1998
---------------- -----------------
--millions--
<S> <C> <C>
Phase-in $ (6.8) $ 12.9
DSM 13.2 19.6
Deferred interest - Zimmer 46.9 49.7
Income taxes recoverable through
future revenues 168.5 195.5
------- -------
Total $221.8 $277.7
====== ======
</TABLE>
Under the Legislation passed in 1999, the percentage of income
payment plan ("PIPP") for eligible low-income households will be converted to
a universal service fund. The universal service program will be administered
by the Ohio Department of Development. As part of DP&L's Electric Transition
Plan, DP&L has requested to recover PIPP arrearages remaining as of December
31, 2000 as part of a transition charge.
In 1989 the PUCO approved rules for the implementation of a
comprehensive Integrated Resource Planning ("IRP") program for all
investor-owned electric utilities in Ohio. Under this program, each utility
is required to file an IRP as part of its Long Term Forecast Report ("LTFR").
The IRP requires each utility to evaluate available demand-side resource
options in addition to supply-side options to determine the most
cost-effective means for satisfying customer requirements. The rules
currently allow a utility to apply for deferred recovery of DSM program
expenditures and lost revenues between LTFR proceedings. On April 15, 1999
and June 1, 1999, respectively, DP&L filed its electric and natural gas LTFR
with the PUCO. Legislation for competitive retail electric service will
change the scope of the electric LTFR filing requirements in the future.
The PUCO is composed of five commissioners appointed to staggered
five-year terms. The current Commission is composed of the following members:
<TABLE>
<CAPTION>
Name Beginning of Term End of Term
- ---- ----------------- -----------
<S> <C> <C>
Chairman Alan R. Schriber April 1999 April 2004
Donald L. Mason April 1998 April 2003
Judith A. Jones April 1997 April 2002
Craig A. Glazer April 1996 April 2001
Rhonda H. Fergus April 1995 April 2000
</TABLE>
I-10
<PAGE>
ENVIRONMENTAL CONSIDERATIONS
The operations of DPL and DP&L, including the commonly owned
facilities operated by DP&L, CG&E and CSP, are subject to federal, state, and
local regulation as to air and water quality, disposal of solid waste and
other environmental matters, including the location, construction and initial
operation of new electric generating facilities and most electric
transmission lines. The possibility exists that current environmental
regulations could be revised which could change the level of estimated
construction expenditures. See CONSTRUCTION AND FINANCING PROGRAM OF DPL INC.
AIR QUALITY
The Clean Air Act Amendments of 1990 (the "Act") have limited sulfur
dioxide and nitrogen oxide emissions nationwide. The Act restricts emissions
in two phases. Phase I compliance requirements became effective on January 1,
1995 and Phase II requirements became effective on January 1, 2000.
Compliance by DP&L has not caused any material changes in DP&L's costs or
operations.
DP&L's environmental compliance plan ("ECP") was approved by the
PUCO on May 6, 1993 and, on November 9, 1995, the PUCO approved the continued
appropriateness of the ECP. Phase I requirements were met by switching to
lower sulfur coal at several commonly owned electric generating facilities
and increasing existing scrubber removal efficiency. Total capital
expenditures to comply with Phase I of the Act were approximately $5.5
million. Phase II requirements are being met primarily by switching to lower
sulfur coal at all non-scrubbed coal-fired electric generating units. Overall
compliance is projected to have a minimal price impact.
In November 1999, the United States Environmental Protection Agency
("U.S. EPA") filed civil complaints and Notices of Violations ("NOVs")
against operators and owners of certain generation facilities for alleged
violations of the Clean Air Act ("CAA"). Generation units operated by
partners Cincinnati Gas & Electric (Beckjord 6) and Columbus Southern Power
(Conesville 4) and co-owned by DP&L were referenced in these actions.
Numerous northeast states have filed complaints or have indicated that they
will be joining the EPA's action against the partners. DP&L was not
identified in the NOVs, civil complaints or state actions. The partners will
vigorously challenge the NOVs and complaints in court. At this time, it is
not possible to determine the outcome of these claims or the impact, if any,
on DP&L.
In September 1998, the U.S. EPA issued a final rule requiring states
to modify their State Implementation Plans ("SIPs") under the CAA. The
modified SIPs are likely to result in further nitrogen oxide ("NOx")
reduction requirements placed on coal-fired generating units by 2003. In
order to meet these NOx requirements, DP&L's total capital expenditures are
estimated to be approximately $175 million over the next five years. Industry
groups and others appealed the rules in United States District Court. The
requirement for states to submit revised implementation plans has been stayed
until the outcome of the litigation. In late December 1999, U.S. EPA issued
final rules granting various CAA Section 126 petitions filed by northeast
states. DP&L's facilities were identified, among many others, in the
rulemaking. DP&L's current NOx reduction strategy and associated expenditures
to meet the SIP call should satisfy the rulemaking reduction requirements.
I-11
<PAGE>
LAND USE
DP&L and numerous other parties have been notified by U.S. EPA or
the Ohio Environmental Protection Agency ("Ohio EPA") that it considers them
Potentially Responsible Parties ("PRPs") for clean-up at two superfund sites
in Ohio: the Sanitary Landfill Site on Cardington Road in Montgomery County,
Ohio and the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton,
Montgomery County, Ohio.
DP&L received notification from the U.S. EPA in July 1987 for the
Cardington Road site. DP&L has not joined the PRP group formed at that site
because of the absence of any known evidence that DP&L contributed hazardous
substances to this site. The Record of Decision issued by the U.S. EPA
identifies the chosen clean-up alternative at a cost estimate of $8.1
million. The final resolution is not expected to have a material effect on
DP&L's financial position, earnings or cash flow.
DP&L and numerous other parties received notification from the Ohio
EPA on July 27, 1994 that it considers them PRPs for clean-up of hazardous
substances at the North Sanitary Landfill site in Dayton, Ohio. DP&L has not
joined the PRP group formed for the site because the available information
does not demonstrate that DP&L contributed wastes to the site. The final
resolution is not expected to have a material effect on DP&L's financial
position, earnings or cash flow.
I-12
<PAGE>
THE DAYTON POWER AND LIGHT COMPANY
OPERATING STATISTICS
ELECTRIC OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Electric Output (millions of kWh)
General -
Coal-fired units................................... 16,539 16,854 16,246
Other units........................................ 189 99 52
Power purchases........................................ 1,523 1,475 1,239
Company use and line losses............................ (1,384) (947) (928)
---------- ---------- ----------
Total.............................................. 16,867 17,481 16,609
========== ========== ==========
Electric Sales (millions of kWh)
Residential............................................ 4,725 4,790 4,788
Commercial............................................. 3,390 3,518 3,408
Industrial............................................. 4,876 4,655 4,749
Public authorities and railroads....................... 1,305 1,360 1,330
Private utilities and wholesale........................ 2,571 3,158 2,334
---------- ---------- ----------
Total.............................................. 16,867 17,481 16,609
========== ========== ==========
Electric Customers at End of Period
Residential............................................ 441,468 437,674 433,563
Commercial............................................. 45,470 44,716 43,923
Industrial............................................. 1,917 1,909 1,881
Public authorities and railroads....................... 5,994 5,838 5,736
Other.................................................. 46 43 42
---------- ---------- ----------
Total.............................................. 494,895 490,180 485,145
========== ========== ==========
Operating Revenues (thousands)
Residential............................................ $ 412,808 $ 419,948 $ 409,857
Commercial............................................. 235,309 242,526 234,206
Industrial............................................. 242,410 228,685 225,775
Public authorities and railroads....................... 69,777 76,686 74,018
Private utilities and wholesale........................ 79,196 86,485 53,598
Other.................................................. 18,844 18,651 12,523
---------- ---------- ----------
Total.............................................. $1,058,344 $1,072,981 $1,009,977
========== ========== ==========
Residential Statistics (per customer-average)
Sales - kWh............................................ 10,758 10,999 11,120
Revenue................................................ $ 940.00 $ 964.40 $ 951.90
Rate per kWh........................................... 8.74(cents) 8.77(cents) 8.56(cents)
</TABLE>
* See Note 14 to Consolidated Financial Statements for additional information.
I-13
<PAGE>
THE DAYTON POWER AND LIGHT COMPANY
OPERATING STATISTICS
GAS OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Gas Output (thousands of MCF)
Direct market purchases................................ 37,865 36,497 43,808
Liquefied petroleum gas................................ 2 3 66
Company use and unaccounted for........................ (2,116) (912) (1,016)
Transportation gas received............................ 19,964 18,125 19,182
-------- -------- --------
Total.............................................. 55,715 53,713 62,040
======== ======== ========
Gas Sales (thousands of MCF)
Residential............................................ 24,450 24,877 29,277
Commercial............................................. 7,647 7,433 9,567
Industrial............................................. 2,246 1,916 2,520
Public authorities..................................... 1,182 1,699 2,153
Transportation gas delivered........................... 20,190 17,788 18,523
-------- -------- --------
Total.............................................. 55,715 53,713 62,040
======== ======== ========
Gas Customers at End of Period
Residential............................................ 282,706 279,784 276,189
Commercial............................................. 22,635 22,491 22,298
Industrial............................................. 1,303 1,441 1,396
Public authorities..................................... 1,173 1,509 1,475
-------- -------- --------
Total.............................................. 307,817 305,225 301,358
======== ======== ========
Operating Revenues (thousands)
Residential............................................ $139,545 $138,802 $160,279
Commercial............................................. 40,225 38,243 48,302
Industrial............................................. 11,017 9,291 11,867
Public authorities..................................... 5,908 8,230 10,311
Other.................................................. 18,284 16,640 12,948
-------- -------- --------
Total.............................................. $214,979 $211,206 $243,707
======== ======== ========
Residential Statistics (per customer-average)
Sales - MCF............................................ 87.1 89.6 107.0
Revenue................................................ $ 497.15 $ 499.94 $585.63
Rate per MCF........................................... $ 5.71 $ 5.58 $ 5.47
</TABLE>
* See Note 14 to Consolidated Financial Statements for additional information.
I-14
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF FEBRUARY 15, 2000)
<TABLE>
<CAPTION>
Business Experience,
Last Five Years
(Positions with Registrant
Name Age Unless Otherwise Indicated) Dates
- -------------------- --- -------------------------------- -------------------
<S> <C> <C> <C>
Peter H. Forster 57 Chairman 1/01/97 - 2/01/00
Chairman and Chief Executive 9/26/95 - 1/01/97
Officer
Chairman, President and Chief 4/05/88 - 9/26/95
Executive Officer
Chairman, DP&L 4/06/92 - 3/01/98
Allen M. Hill 54 President and Chief Executive 1/01/97 - 2/01/00
Officer
President and Chief Operating 9/26/95 - 1/01/97
Officer
President and Chief Executive 4/06/92 - 3/01/98
Officer, DP&L
Stephen P. Bramlage 53 Assistant Vice President, DP&L 1/01/94 - 2/01/00
Stephen F. Koziar, Jr. 55 Group Vice President and 1/31/95 - 2/01/00
Secretary, DPL Inc. and
DP&L
Judy W. Lansaw 48 Group Vice President, 1/31/95 - 2/01/00
DPL Inc. and DP&L
</TABLE>
I-15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF FEBRUARY 15, 2000)
<TABLE>
<CAPTION>
Business Experience,
Last Five Years
(Positions with Registrant
Name Age Unless Otherwise Indicated) Dates
- ---------------------------- --------- ---------------------------------- ------------------------------
<S> <S> <S> <S>
Arthur G. Meyer 50 Vice President, Legal and 11/21/97 - 2/01/00
Corporate Affairs, DP&L
Director, Corporate Relations, 5/14/96 - 11/21/97
DP&L
Treasurer, DP&L 6/27/95 - 5/14/96
Director, Financial Activities 5/09/94 - 6/27/95
Bryce W. Nickel 43 Assistant Vice President, DP&L 1/01/94 - 2/01/00
H. Ted Santo 49 Group Vice President, DP&L 12/08/92 - 2/01/00
Patricia K. Swanke 41 Vice President, Operations, DP&L 9/29/99 - 2/01/00
Managing Director, DP&L 9/08/96 - 9/29/99
Operations Director, DP&L 7/27/95 - 9/08/96
Director, Steam Operations, DP&L 5/09/94 - 7/27/95
</TABLE>
I-16
<PAGE>
Item 2 - PROPERTIES
- --------------------------------------------------------------------------------
ELECTRIC
Information relating to DP&L's electric properties is contained in Item
1 - BUSINESS, DPL INC. (page I-1), CONSTRUCTION AND FINANCING PROGRAM
OF DPL INC. (pages I-5 and I-6) and ELECTRIC OPERATIONS AND FUEL SUPPLY (pages
I-7 and I-8) and Notes 4 and 15 of Notes to Consolidated Financial Statements on
pages II-12 and II-18, respectively, which pages are incorporated herein by
reference.
GAS
Information relating to DP&L's gas properties is contained in Item 1 -
BUSINESS, DPL INC. (page I-1) and GAS OPERATIONS AND GAS SUPPLY (pages I-8 and
I-9) and Note 12 of Notes to Consolidated Financial Statements (page II-16),
which pages are incorporated herein by reference.
OTHER
DP&L owns a number of area service buildings located in various
operating centers.
Substantially all property and plant of DP&L is subject to the lien of
the Mortgage securing DP&L's First Mortgage Bonds.
Item 3 - LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Information relating to legal proceedings involving DP&L is contained
in Item 1 - BUSINESS, DPL INC. (page I-1), COMPETITION (pages I-2 through I-4),
ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-7 and I-8), GAS OPERATIONS AND GAS
SUPPLY (pages I-8 and I-9), RATE REGULATION AND GOVERNMENT LEGISLATION (pages
I-9 and I-10), ENVIRONMENTAL CONSIDERATIONS (pages I-11 and I-12) and Note 4 of
Notes to Consolidated Financial Statements on page II-12, which pages are
incorporated herein by reference.
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
There were no submissions to the security holders in the fourth
quarter.
I-17
<PAGE>
PART II
Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
As of December 31, 1999, there were 39,399 holders of record of DPL
common equity, excluding individual participants in security position listings.
As long as any Preferred Stock is outstanding, DP&L's Amended Articles
of Incorporation contain provisions restricting the payment of cash dividends on
any of its Common Stock if, after giving effect to such dividend, the aggregate
of all such dividends distributed subsequent to December 31, 1946 exceeds the
net income of DP&L available for dividends on its Common Stock subsequent to
December 31, 1946, plus $1,200,000. As of year-end, all earnings reinvested in
the business of DP&L were available for Common Stock dividends.
Item 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
F i n a n c i a l a n d S t a t i s t i c a l S u m m a r y DPL Inc.
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ------------- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
DPL INC.: Earnings per share of common stock $ 1.35 1.24 1.20 1.15 1.09
Dividends paid per share $ 0.94 0.94 0.91 0.87 0.83
Dividend payout ratio % 69.6 75.8 75.8 75.7 76.1
Net income (millions) $ 204.2 189.1 181.4 172.9 164.7
Utility service revenues (millions) $ 1,271.0 1,281.9 1,252.2 1,256.1 1,255.1
Construction additions (millions) $ 166.5 111.5 110.6 115.5 87.3
Market value per share at December 31 $ 17-5/16 21-5/8 19-3/16 16-3/16 16-1/2
DP&L: Electric sales (millions of kWh) --
Residential 4,725 4,790 4,788 4,924 4,871
Commercial 3,390 3,518 3,408 3,407 3,425
Industrial 4,876 4,655 4,749 4,540 4,401
Other 3,876 4,518 3,664 3,443 4,117
------- ------- ------- ------- -------
Total 16,867 17,481 16,609 16,314 16,814
Gas sales (thousands of MCF) --
Residential 24,450 24,877 29,277 31,087 29,397
Commercial 7,647 7,433 9,567 9,424 8,307
Industrial 2,246 1,916 2,520 3,404 2,584
Other 1,182 1,699 2,153 2,829 3,006
Transported gas 20,190 17,788 18,523 16,953 16,376
------ ------ ------ ------ ------
Total 55,715 53,713 62,040 63,697 59,670
AT DECEMBER 31,
DPL INC.: Book value per share $ 9.65 9.01 8.45 7.97 7.69
Total assets (millions) $ 4,340.4 3,855.9 3,585.2 3,418.7 3,322.8
Long-term debt (millions) $ 1,336.6 1,065.9 971.0 1,014.3 1,081.5
DP&L: First mortgage bond ratings --
Duff & Phelps, Inc. AA AA AA AA AA
Standard & Poor's Corporation AA- AA- AA- AA- AA-
Moody's Investors Service Aa3 Aa3 Aa3 Aa3 Aa3
NUMBER OF SHAREHOLDERS
DPL INC.: Common 39,399 41,791 43,689 46,532 48,919
DP&L: Preferred 509 559 625 684 733
</TABLE>
lI-1
<PAGE>
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
F i n a n c i a l R e v i e w
INCOME STATEMENT HIGHLIGHTS
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------- -------- --------- ----------
$ in millions except per share
amounts 1999 1998 1997
- ----------------------------------- -------- --------- ----------
<S> <C> <C> <C>
ELECTRIC UTILITY:
Revenues $1,056 $1,071 $1,008
Fuel and purchased power 262 257 227
----- ------ ------
Net revenues 794 814 781
GAS UTILITY:
Revenues 215 211 244
Gas purchased for resale (a) 130 128 151
------ ----- ------
Net revenues 85 83 93
Other revenues 68 70 81
Operation and maintenance
Expense 191 230 252
Investment income 55 33 27
Income taxes 128 120 105
Net Income 204 189 181
Earnings Per Share of
Common Stock 1.35 1.24 1.20
</TABLE>
(a) EXCLUDES GAS PURCHASES BY A NON-UTILITY SUBSIDIARY OF $54 MILLION,
$58 MILLION AND $68 MILLION IN 1999, 1998 AND 1997, RESPECTIVELY.
- --------------------------------------------------------------------------------
The 1999 earnings increased to $1.35 per share, compared to earnings per
share of $1.24 in 1998 and $1.20 in 1997.
In 1999, electric revenues decreased 1% due to lower sales to other public
utilities and residential customers. Fuel and purchased power expense increased
2% primarily related to higher purchased power costs. In 1998, electric revenues
increased 6% due to higher sales to other public utilities and commercial
business customers. Fuel and purchased power expense increased 13% primarily
related to the higher sales.
Utility gas revenues and gas purchased for resale each increased 2% in 1999
due to higher sales to business customers. Utility gas revenues and gas
purchased for resale in 1998 decreased 13% and 15%, respectively, due to the
effects of milder weather.
Other revenues primarily consist of revenues from DPL Inc.'s natural gas
supply management subsidiary. The 3% decrease in 1999 was due to lower gas sales
to wholesale customers. The 14% decrease in 1998 resulted from lower gas sales
to retail and wholesale customers.
Operation and maintenance expense decreased 17% in 1999 due to lower costs
for insurance, claims, labor, benefits and line clearance. The 8% decrease in
1998 was due to lower insurance, claims and production maintenance costs, which
were partially offset by increased compensation and benefit expense and higher
electric distribution maintenance costs.
Investment income increased 64% in 1999 and 23% in 1998 due to realized
gains.
Regulatory assets recorded during the phase-in of electric rates have been
fully recovered. The 1992 Public Utilities Commission of Ohio ("PUCO")-approved
agreement for the phase-in plan provided that after the end of the deferral
period, DP&L would maintain a balance sheet reserve account which shall operate
to reduce the otherwise applicable jurisdictional production plant valuation
subject to recovery in rates. Deferred interest charges on the William H. Zimmer
Generating Station are being amortized at $3 million per year over the projected
life of the asset.
A 1992 PUCO-approved settlement agreement and a subsequent stipulation in
1995 provided for accelerated recovery of demand-side management costs and,
thereafter, production plant costs to the extent that DP&L's return on equity
exceeds a baseline 13%. If the return exceeds the baseline return by one to two
percent, one-half of the excess is used to accelerate recovery of these costs.
If the return is greater than two percent over the baseline, the entire excess
is used for such purpose. In 1998, amortization of regulatory assets included an
additional $10 million of accelerated cost recovery. In 1999, the return on
equity cap for electric operations was eliminated pursuant to the restructuring
legislation discussed below.
Depreciation and amortization expense increased 7% in 1999 and 3% in 1998
primarily as a result of increased depreciable assets.
Interest expense increased 17% in 1999 due primarily to increased long-term
debt. Interest expense increased 7% in 1998 primarily due to increased
short-term debt.
Certain risks of DPL Inc. and its subsidiaries are insured through a
wholly-owned captive insurance company. Decreases in insurance and claims cost
balances that were recorded in the fourth quarter of 1999 resulted primarily
from lower actuarially-determined reserve requirements.
CONSTRUCTION PROGRAM AND FINANCING
Construction additions were $167 million in 1999. The capital program for
2000 consists of construction costs of approximately $333 million. A major
component of the capital program is the construction of natural gas-fired
combustion turbine generation peaking units. The first phase of the peaking
capacity expansion was completed in December 1998, with DP&L investing $75
million in three units adding 250 MW of capacity. Phase Two will add four units
and 225 MW of capacity at an investment of $80 million, which is expected to be
immediately accretive to earnings by the summer of 2000. Phase Three includes
two units totaling 160 MW at an investment of $50 million, which is expected to
be online for the summer of 2001.
II-2
<PAGE>
During 1999, total cash provided by operating activities was $397 million. At
year-end, cash and temporary cash investments were $112 million. Financial
assets, a highly diversified portfolio of debt and equity securities in basic
industries ranging from consumer products to manufacturing, were $1,094 million.
These funds are available to be invested in the energy sector when that market
has more favorable investment conditions.
On February 2, 2000, DPL Inc. entered into a series of recapitalization
transactions including the issuance to Kohlberg Kravis and Roberts & Co.
("KKR"), an investment company, of $550 million of a combination of voting
preferred and trust preferred securities and warrants. The trust preferred
securities sold to KKR have an aggregate face amount of $550 million, were
issued at an initial discounted aggregate price of $500 million, have a
maturity of 30 years (subject to acceleration to six months after the
exercise of warrants) and pay distributions at a rate of 8.5% of the
aggregate face amount per year. The 6.8 million shares of mandatorily redeemable
voting preferred securities, par value of $0.01 per share, were issued at an
aggregate purchase price of $68,000 and carry voting rights for up to 4.9% of
DPL Inc.'s total voting rights and the nomination of one Board seat. The 31.6
million warrants, representing approximately 19.9% of DPL Inc. shares
currently outstanding, have a term of 12 years, an exercise price of $21 per
share and were sold for an aggregate purchase price of $50 million. DPL Inc.
intends to recognize the trust preferred securities original issue discount
and issuance costs in 2000.
DPL Inc. intends to use the proceeds from this recapitalization, combined
with $425 million of new debt capital, to continue its planned generation
strategy, retire short-term debt and to repurchase up to 31.6 million shares
of common stock. These transactions will result in an increase in the financial
leverage of DPL Inc. in its capital structure.
On February 4, 2000, DPL Inc. initiated an Offer to Purchase for Cash up to
25 million common shares, or approximately 16% of outstanding shares, at a
price of $20-$23. This tender expires on March 3, 2000. DPL Inc. currently
intends to purchase up to an additional 6.6 million shares after this offer
is completed. The method, timing and financing of such purchases have not yet
been decided.
Issuance of additional amounts of first mortgage bonds by DP&L is limited by
provisions of its mortgage. The amounts and timing of future financings will
depend upon market and other conditions, rate increases, levels of sales and
construction plans. DP&L currently has sufficient capacity to issue first
mortgage bonds to satisfy its requirements in connection with the financing of
its construction and refinancing programs during the five-year period 2000-2004.
At year-end 1999, DPL Inc. and DP&L's senior debt credit ratings were
as follows:
<TABLE>
<CAPTION>
DP&L DPL INC.
---- --------
<S> <C> <C>
Duff & Phelps, Inc. AA N/A
Standard & Poor's Corp. AA- A+
Moody's Investors Service Aa3 A2
</TABLE>
Following DPL Inc.'s recapitalization announcement the rating agencies
confirmed new ratings as follows:
<TABLE>
<CAPTION>
DP&L DPL INC.
---- --------
<S> <C> <C>
Duff & Phelps, Inc. AA A-
Standard & Poor's Corp. BBB+ BBB
Moody's Investors Service A2 Baa1
</TABLE>
The credit ratings for DPL Inc. and DP&L are investment grade.
In 1999, DPL Inc. purchased 3.5 million shares at a cost of $61 million.
MARKET RISK
The carrying value of DPL Inc.'s debt was $1,636 million at December 31,
1999, consisting of DP&L's first mortgage bonds and guaranteed air quality
development obligations, notes, commercial paper and lines of credit. The fair
value of this debt was $1,605 million, based on current market prices or
discounted cash flows using current rates for similar issues with similar terms
and remaining maturities. The following table presents the principal cash
repayments and related weighted average interest rates by maturity date for
long-term, fixed-rate debt at December 31, 1999.
<TABLE>
<CAPTION>
Long-term Debt
-------------------------------------
Expected Maturity Amount
Date ($ in millions) Average Rate
- ----------------------- ---------------- --------------------
<S> <C> <C>
2000 $ 5 7.7%
2001 6 7.7%
2002 7 7.8%
2003 8 7.8%
2004 510 6.3%
Thereafter 806 7.3%
-----
Total $1,342 6.9%
=====
Fair Value $1,311
</TABLE>
Because the long-term debt is at a fixed rate, the primary market risk to DPL
Inc. is short-term interest rate risk. The carrying value and fair value of
short-term debt was $294 million with a weighted average interest rate of 5.94%
at December 31, 1999. The interest expense risk related to short-term debt was
estimated to be approximately an increase/decrease of $1 million if the weighted
average cost for each quarter increased/decreased 10%.
The fair value of available-for-sale securities was $1,113 million at
December 31, 1999. The equity price risk related to these securities was
estimated as the potential increase/decrease in fair value of $111 million at
December 31, 1999, resulting from a hypothetical 10% increase/decrease in the
market prices.
II-3
<PAGE>
ISSUES AND FINANCIAL RISKS
This report contains certain forward-looking statements regarding plans and
expectations for the future. Investors are cautioned that actual outcomes and
results may vary materially from those projected due to various factors beyond
DPL Inc.'s control, including abnormal weather, unusual maintenance or repair
requirements, changes in fuel costs, increased competition, regulatory changes
and decisions, changes in accounting rules and adverse economic conditions.
ELECTRIC RESTRUCTURING LEGISLATION
In October 1999, legislation ("the Legislation") became effective in Ohio
giving electric utility customers a choice of energy providers starting January
1, 2001. Under the Legislation, electric generation, aggregation, power
marketing and power brokerage services supplied to retail customers in Ohio will
be deemed competitive and will not be subject to supervision and regulation by
the PUCO. Existing limitations on an electric public utility's ownership rights
of a non-public utility were eliminated. All earnings obligations, restrictions
or caps imposed on an electric utility in a PUCO order became void as of the
effective date of the Legislation.
The Legislation includes provisions for unbundling of rates into several
service components, a period of transition to competitive pricing for generation
and certain related services (including discontinuance of the fuel cost recovery
clause), the separation of competitive and non-competitive services, the
transfer of control of transmission facilities from the utility owners to
separate qualifying transmission entities, a 5% rate reduction for residential
customers limited to the generation portion of their bill, an employee
assistance plan, consumer education and protection and changes in utility
taxation. Electric prices, including the 5% residential rate cut, are capped
through 2004. The estimated revenue impact of the 5% rate cut for DP&L's
residential customers is approximately $45 million over five years. Also
included is a provision for utilities to request recovery of certain costs
relating to the transition.
As required by the Legislation, DP&L filed its transition plan with the PUCO
in December 1999. DP&L's plan included a request for $441 million in after-tax
transition costs to be recovered through transition charges during the market
development period which ends December 31, 2004. Also included in the filing is
DP&L's plan for corporate separation and for joining a qualified transmission
entity by January 1, 2001.
The PUCO is required to issue a final order not later than 275 days after the
plan is filed, or no later than October 31, 2000. DP&L is unable to predict the
outcome of the regulatory process which could have an impact on DPL Inc.'s
future financial position, earnings or cash flows. Until the outcome is known,
DP&L will continue to account for its generation business according to the
Financial Accounting Standards Board ("FASB") Statement No. 71, "Accounting for
the Effects of Certain Types of Regulation".
In 1996 and 1997, the Federal Energy Regulatory Commission ("FERC") issued
orders requiring all electric utilities to file open-access transmission service
tariffs. DP&L's resulting tariff case proceedings with FERC staff and
intervenors in 1997 and 1998 culminated in 1999 with FERC issuing an Order
approving DP&L's settlement with no material adverse effect to DP&L.
BUSINESS UNIT EVALUATION
Responding to the new Ohio Legislation, DP&L is separating its various
business units and evaluating each unit on a stand-alone basis. Business units
not complementing DP&L's going-forward strategy may be divested.
DP&L reached an agreement to sell its natural gas retail distribution
business unit for $425 million. This all-cash sale of assets (book value
approximating $250 million at December 31, 1999) is subject to regulatory
approvals and is expected to close by the end of the second quarter, 2000. The
after-tax proceeds from the sale will be used in the expansion of the electric
combustion turbine business, to finance in part other business unit capital
needs, to continue the stock buyback program and to reduce outstanding
short-term debt.
ENVIRONMENTAL
In November 1999, the United States Environmental Protection Agency ("EPA")
filed civil complaints and Notices of Violations ("NOVs") against operators and
owners of certain generation facilities for alleged violations of the Clean Air
Act ("CAA"). Generation units operated by partners Cincinnati Gas & Electric
(Beckjord 6) and Columbus Southern Power (Conesville 4) and co-owned by DP&L
were referenced in these actions. Numerous northeast states have filed
complaints or have indicated that they will be joining the EPA's action against
the partners. DP&L was not identified in the NOVs, civil complaints or state
actions. The partners will vigorously challenge the NOVs and complaints in
court. At this time, it is not possible to determine the outcome of these claims
or the impact, if any, on DP&L.
II-4
<PAGE>
The United States and Ohio EPAs have notified numerous parties, including
DP&L, that they are considered "Potentially Responsible Parties" for clean up of
two hazardous waste sites in Ohio. The United States EPA has estimated total
costs of under $10 million for its preferred clean-up plans at one of these
sites. The Ohio EPA has not provided an estimated cost for the second site.
During 1998, DP&L settled its potential liability for two other sites at a
minimal cost. The final resolution of the remaining investigations is not
expected to have a material effect on DP&L's financial position, earnings or
cash flow.
In September 1998, the United States EPA issued a final rule requiring states
to modify their State Implementation Plans ("SIPs") under the CAA. The modified
SIPs are likely to result in further Nitrogen Oxide ("NOx") reduction
requirements placed on coal-fired generating units by 2003.
In order to meet these NOx requirements, DP&L's total capital expenditures
are estimated to be approximately $175 million over the next five years.
Industry groups and others appealed the rules in the United States District
Court. The requirement for states to submit revised implementation plans has
been stayed until the outcome of the litigation. In late December 1999, the EPA
issued final rules granting various CAA Section 126 petitions filed by northeast
states. DP&L's facilities were identified, among many others, in the rulemaking.
DP&L's current NOx reduction strategy to meet the SIP call is expected to
satisfy the rulemaking reduction requirements.
OTHER ISSUES
The Compact Agreement between DP&L and Local 175, Utility Workers of America,
AFL-CIO expired on October 31, 1999. Management and Union Negotiations'
Committees are discussing provisions of a new agreement that will be responsive
to the changes in business conditions resulting from the Legislation.
DPL Inc. experienced no adverse Y2K effects.
lI-5
<PAGE>
Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Information relating to Market Risk is contained in Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations (page II-2).
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE NO.
<S> <C>
Consolidated Statement of Results of Operations
for the three years in the period ended December 31, 1999..................................... II-7
Consolidated Statement of Cash Flows for the three
years in the period ended December 31, 1999................................................... II-8
Consolidated Balance Sheet as of December 31, 1999 and 1998................................... II-9
Consolidated Statement of Shareholders' Equity for the three years in the period ended
December 31, 1999............................................................................. II-10
Notes to Consolidated Financial Statements.................................................... II-11 - II-18
Reports of Independent Accountants............................................................ II-19
INDEX TO SUPPLEMENTARY DATA
Selected Quarterly Information................................................................ II-20
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
C o n s o l i d a t e d S t a t e m e n t o f R e s u l t s o f O p e r a t i o n s DPL Inc.
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
$ in millions except per share amounts 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Utility service revenues --
Electric $1,056.0 $1,070.7 $1,007.8
Gas 215.0 211.2 244.4
Other revenues 67.9 70.3 81.4
--------- --------- ---------
Total revenues 1,338.9 1,352.2 1,333.6
--------- --------- ---------
EXPENSES
Fuel and purchased power 262.3 257.4 227.9
Gas purchased for resale 184.2 186.4 219.5
Operation and maintenance 190.5 229.8 252.4
Depreciation and amortization (Note 1) 136.5 127.1 123.5
Amortization of regulatory assets, net (Note 4) 25.8 33.0 20.9
General taxes 136.7 136.5 133.8
--------- --------- ---------
Total expenses 936.0 970.2 978.0
--------- -------- ---------
INCOME
Operating Income 402.9 382.0 355.6
Investment income 54.7 33.4 27.2
Interest expense (109.5) (93.8) (87.3)
Other income (deductions) (16.0) (12.1) (8.7)
--------- -------- ---------
INCOME BEFORE INCOME TAXES 332.1 309.5 286.8
Income taxes (Notes 1 and 5) 127.9 120.4 105.4
--------- -------- ---------
NET INCOME $ 204.2 $ 189.1 $ 181.4
========= ======== ========
Average Number of Common Shares
Outstanding (millions) 151.4 152.8 151.4
Earnings Per Share of Common Stock - Basic and Diluted $ 1.35 $ 1.24 $ 1.20
Dividends Paid Per Share of Common Stock $ 0.94 $ 0.94 $ 0.91
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
II-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
C o n s o l i d a t e d S t a t e m e n t o f C a s h F l o w s DPL Inc.
</TABLE>
<TABLE>
<CAPTION>
For the years ended December 31,
$ in millions 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash received from utility customers $1,277.8 $1,255.7 $1,228.1
Other operating cash receipts 98.3 88.3 105.7
Cash paid for
Fuel and purchased power (263.8) (266.5) (235.9)
Purchased gas (190.1) (197.2) (236.1)
Operation and maintenance labor (75.1) (85.4) (83.2)
Nonlabor operating expenditures (106.5) (136.5) (102.3)
Interest (97.4) (89.6) (85.2)
Income taxes (109.0) (135.5) (108.8)
General taxes (137.0) (131.3) (130.8)
------- ------- -------
Net cash provided by operating activities (Note 13) 397.2 302.0 351.5
------- ------- -------
INVESTING ACTIVITIES
Capital expenditures (170.6) (106.7) (113.7)
Purchases of available-for-sale financial assets (479.8) (359.5) (228.2)
Sales of available-for-sale financial assets 200.3 101.4 38.6
------- ------- ------
Net cash used for investing activities (450.1) (364.8) (303.3)
------- -------- -------
FINANCING ACTIVITIES
Issuance of long-term debt 497.4 98.5 -
Issuance of short-term debt 99.2 79.2 105.7
Retirement of long-term debt (241.6) (3.4) (82.9)
Dividends paid on common stock (142.5) (143.6) (137.2)
Purchase of treasury stock (61.4) - -
Issuance of common stock - 19.7 19.5
------ -------- --------
Net cash provided by (used for) financing activities 151.1 50.4 (94.9)
------- -------- --------
CASH AND TEMPORARY CASH INVESTMENTS -
Net change 98.2 (12.4) (46.7)
Balance at beginning of year 13.7 26.1 72.8
-------- --------- --------
Balance at end of year $ 111.9 $ 13.7 $ 26.1
======= ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
II-8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
C o n s o l i d a t e d B a l a n c e S h e e t DPL Inc.
</TABLE>
<TABLE>
<CAPTION>
At December 31,
$ in millions 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Property
Electric property $3,438.6 $3,372.1
Gas property 332.9 324.6
Other property 128.8 46.6
-------- ---------
Total property 3,900.3 3,743.3
Accumulated depreciation and amortization (1,633.5) (1,504.6)
------- -------
Net property 2,266.8 2,238.7
------- -------
CURRENT ASSETS
Cash and temporary cash investments 111.9 13.7
Accounts receivable, less provision for uncollectible accounts
of $4.3 and $4.7, respectively 218.1 227.7
Inventories, at average cost 93.1 112.4
Taxes applicable to subsequent years 94.6 93.4
Other 71.7 46.2
------- ---------
Total current assets 589.4 493.4
-------- --------
Other Assets
Financial assets 1,094.4 698.5
Income taxes recoverable through future revenues (Notes 1 and 4) 168.5 195.5
Other regulatory assets (Note 4) 53.3 82.2
Other 168.0 147.6
-------- --------
Total other assets 1,484.2 1,123.8
------- -------
TOTAL ASSETS $4,340.4 $3,855.9
======= =======
CAPITALIZATION AND LIABILITIES
Capitalization (Note 3)
Common shareholders' equity (Note 7)--
Common stock $ 1.6 $ 1.6
Other paid-in capital 739.0 799.0
Common stock held by employee plans (90.7) (94.4)
Accumulated other comprehensive income 109.8 47.2
Earnings reinvested in the business 691.9 630.3
------- --------
Total common shareholders' equity 1,451.6 1,383.7
Preferred stock (Note 10) 22.9 22.9
Long-term debt (Note 9) 1,336.6 1,065.9
------- -------
Total capitalization 2,811.1 2,472.5
------- -------
Current Liabilities
Accounts payable 130.4 109.0
Accrued taxes 170.6 165.2
Accrued interest 33.1 24.8
Short-term debt (Note 7) 294.1 194.9
Other 66.6 54.9
--------- ---------
Total current liabilities 694.8 548.8
-------- --------
Deferred Credits and Other
Deferred taxes (Note 4) 471.9 460.6
Unamortized investment tax credit 66.4 69.4
Insurance and claims costs 140.0 150.7
Other 156.2 153.9
-------- --------
Total deferred credits and other 834.5 834.6
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $4,340.4 $3,855.9
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
II-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
C o n s o l i d a t e d S t a t e m e n t o f S h a r e h o l d e r s' E q u i t y DPL Inc.
</TABLE>
<TABLE>
<CAPTION>
Common Stock (a) Stock Accumulated
------------------------ Other Held by Other Earnings
Outstanding Paid-in Employee Comprehensive Reinvested in
$ in millions Shares Amount Capital Plans Income the Business Total
- --------------------------------------- -------------- --------- ---------- ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Beginning balance 106,009,923 $1.1 $756.8 $(102.1) $3.6 $541.1 $1,200.5
Comprehensive income:
Net income 181.4
Unrealized gains, net of
reclassification
adjustments,
after tax (b) 16.3
Total comprehensive income 197.7
Common stock dividends (137.2) (137.2)
Three-for-two stock split 53,400,983 0.5 (0.5) -
Dividend reinvestment plan 792,043 - 19.4 19.4
Employee stock plans 1.4 4.1 5.5
Other 0.2 (0.1) 0.1
----------- --- ----- ----- ---- ----- -------
Ending balance 160,202,949 1.6 777.3 (98.0) 19.9 585.2 1,286.0
1998:
Comprehensive income:
Net income 189.1
Unrealized gains, net of
reclassification
adjustments, after tax (b) 27.3
Total comprehensive income 216.4
Common stock dividends (143.6) (143.6)
Dividend reinvestment plan 1,070,430 - 19.8 19.8
Employee stock plans 1.9 3.6 5.5
Other (8,775) - (0.4) (0.4)
----------- --- ----- ----- ---- ----- -------
Ending balance 161,264,604 1.6 799.0 (94.4) 47.2 630.3 1,383.7
1999:
Comprehensive income:
Net income 204.2
Unrealized gains, net of
reclassification
adjustments, after tax (b) 62.6
Total comprehensive income 266.8
Common stock dividends (142.5) (142.5)
Treasury stock (3,463,200) - (61.4) (61.4)
Employee stock plans 1.3 3.7 5.0
Other 0.1 (0.1) -
----------- --- ----- ----- ---- ----- -------
Ending balance 157,801,404 $1.6 $739.0 $(90.7) $109.8 $691.9 $1,451.6
=========== === ===== ==== ===== ===== =======
</TABLE>
(a) $0.01 PAR VALUE, 250,000,000 SHARES AUTHORIZED.
(b) NET OF TAXES OF $8.8 MILLION, $14.7 MILLION AND $33.7 MILLION IN 1997,
1998 AND 1999, RESPECTIVELY.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
II-10
<PAGE>
<TABLE>
<S> <C>
N o t e s t o C o n s o l i d a t a e d F i n a n c i a l S t a t e m e n t s
</TABLE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounts of DPL Inc. and its wholly-owned subsidiaries are included in
the accompanying consolidated financial statements. The Dayton Power and Light
Company ("DP&L") is the principal subsidiary. These statements are presented in
accordance with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions related to future
events. Reclassifications have been made in certain prior years' amounts to
conform to the current reporting presentation.
REVENUES AND FUEL
Revenues include amounts charged to customers through fuel and gas recovery
clauses, which are adjusted periodically for changes in such costs. Related
costs that are recoverable or refundable in future periods are deferred along
with the related income tax effects. Beginning in February 2000, DP&L's Electric
Fuel Component ("EFC") will be fixed at 1.30(cents) for the remainder of 2000.
As competition begins on January 1, 2001 the EFC will become part of the
Standard Offer Generation Rate. Also included in revenues are amounts charged to
customers through a surcharge for recovery of arrearages from certain eligible
low-income households.
DP&L records revenue for services provided but not yet billed to more closely
match revenues with expenses. Accounts receivable on the Consolidated Balance
Sheet includes unbilled revenue of $76.2 million in 1999 and $99.5 million in
1998.
Other revenues include sales by DPL Inc.'s natural gas supply management
subsidiary. These revenues are recorded in the period when the gas is sold.
PROPERTY, MAINTENANCE AND DEPRECIATION
Property is shown at its original cost. Cost includes direct labor and
material and allocable overhead costs.
When a unit of property is retired, the original cost of that property plus
the cost of removal less any salvage value is charged to accumulated
depreciation. Maintenance costs and replacements of minor items of
property are charged to expense.
Depreciation expense is calculated using the straight-line method, which
depreciates the cost of property over its estimated useful life, at an average
rate of 3.6%.
INCOME TAXES
Deferred income taxes are provided for all temporary differences between the
financial statement basis and the tax basis of assets and liabilities using the
enacted tax rate. Additional deferred income taxes and offsetting regulatory
assets or liabilities are recorded to recognize that the income taxes will be
recoverable/refundable through future revenues. Investment tax credits,
previously deferred, are being amortized over the lives of the related
properties.
CONSOLIDATED STATEMENT OF CASH FLOWS
The temporary cash investments presented on this Statement consist of liquid
investments with an original maturity of three months or less.
INSURANCE AND CLAIMS COSTS
A wholly-owned captive subsidiary of DPL Inc. provides certain property
and liability insurance coverage to DPL Inc. and its other subsidiaries and
business interruption and specific risk coverage for DP&L. Insurance and
claims costs on the Consolidated Balance Sheet represent insurance reserves
of the captive subsidiary. These reserves are provided based on a
consultant's actuarial methods and loss experience data. Management has
relied on the actuarial methods employed by the consultant to determine the
adequacy of the reserves. Such liabilities are determined, in the aggregate,
based on a reasonable estimation of probable insured events occurring
throughout each period. There is uncertainty associated with the loss
estimates, and actual results could differ from the estimates. Modification
of these loss estimates based on experience and changed circumstances are
then reflected in the period in which the estimate is reevaluated.
FINANCIAL INSTRUMENTS
DPL Inc. accounts for its investments in debt and equity securities by
classifying the securities into different categories (held-to-maturity and
available-for-sale); available-for-sale securities are carried at fair market
value and unrealized gains and losses, net of deferred income taxes, are
presented as a separate component of shareholders' equity for those
investments. Investments classified as held-to-maturity are carried at
amortized cost. The value of equity security investments and fixed maturity
investments is based upon market quotations or investment cost which is
believed to approximate market. The cost basis for equity security and fixed
maturity investments is average cost and amortized cost, respectively.
- --------------------------------------------------------------------------------
2. RECENT ACCOUNTING STANDARD
In 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will be effective in 2001. This standard requires changes
in the fair value of derivative financial instruments to be recognized on the
balance sheet and recognized in net income or other comprehensive income
depending upon the nature of the derivative. Adoption of this statement is
not expected to have a significant effect on DPL Inc.'s financial position or
results of operations.
- --------------------------------------------------------------------------------
II-11
<PAGE>
- --------------------------------------------------------------------------------
3. SUBSEQUENT EVENT
On February 2, 2000, DPL Inc. entered into a series of recapitalization
transactions including the issuance to Kohlberg Kravis and Roberts & Co.
("KKR"), an investment company, of $550 million of a combination of voting
preferred and trust preferred securities and warrants. The trust preferred
securities sold to KKR have an aggregate face amount of $550 million, were
issued at an initial discounted aggregate price of $500 million, have a
maturity of 30 years (subject to acceleration to six months after the
exercise of warrants) and pay distributions at a rate of 8.5% of the
aggregate face amount per year. The 6.8 million shares of mandatorily redeemable
voting preferred securities, par value of $0.01 per share, were issued at an
aggregate purchase price of $68,000 and carry voting rights for up to 4.9% of
DPL Inc.'s total voting rights and the nomination of one Board seat. The 31.6
million warrants, representing approximately 19.9% of DPL Inc. shares
currently outstanding, have a term of 12 years, an exercise price of $21 per
share and were sold for an aggregate purchase price of $50 million. DPL Inc.
intends to recognize the trust preferred securities original issue discount
and issuance costs in 2000.
DPL Inc. intends to use the proceeds from this recapitalization, combined
with $425 million of new debt capital, to continue its planned generation
strategy, retire short-term debt and to repurchase up to 31.6 million shares
of common stock. These transactions will result in an increase in the financial
leverage of DPL Inc. in its capital structure.
On February 4, 2000, DPL Inc. initiated an Offer to Purchase for Cash up
to 25 million common shares, or approximately 16% of outstanding shares, at a
price of $20-$23. This tender expires on March 3, 2000. DPL Inc. currently
intends to purchase an additional 6.6 million shares after this offer is
completed. The method, timing and financing of such purchases have not yet
been decided.
- --------------------------------------------------------------------------------
4. REGULATORY MATTERS
DP&L applies the provisions of the FASB Statement No. 71, "Accounting for
the Effects of Certain Types of Regulation." This accounting standard
provides for the deferral of costs authorized for future recovery by
regulators. Based on existing regulatory authorization, regulatory assets on
the Consolidated Balance Sheet include:
<TABLE>
<CAPTION>
At December 31,
$ in millions 1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Income taxes recoverable
through future revenues $168.5 $195.5
Deferred interest (a) 46.9 49.7
DSM (b) 13.2 19.6
Phase-in (c) (6.8) 12.9
------- ------
Total $221.8 $277.7
====== ======
</TABLE>
During 1999, legislation was enacted in Ohio which will restructure the
electric utility industry (the "Legislation"). Beginning in 2001, electric
generation, aggregation, power marketing and power brokerage services
supplied to Ohio retail customers will not be subject to regulation by the
PUCO. As required by the Legislation, DP&L filed a transition plan with the
PUCO in 1999, which included an application for DP&L to receive transition
revenues to recover regulatory assets and other potentially stranded costs.
The PUCO is required to determine the total allowable amount of DP&L's
transition costs, based on certain criteria, and the recovery period which
may begin no earlier than January 2001 and end no later than 2010. Any
regulatory assets which are not recoverable will be charged to expense.
(a) Interest charges related to the William H. Zimmer Generating Station
which were previously deferred pursuant to PUCO approval are being amortized
at $2.8 million per year over the projected life of the asset.
(b) Demand-side management ("DSM") costs (including carrying charges) from
DP&L's cost-effective programs are deferred and are being recovered at
approximately $9 million per year. A 1992 PUCO-approved agreement for the DSM
programs, as updated in 1995, provided for accelerated recovery of DSM costs
and, thereafter, production plant costs to the extent that DP&L's return on
equity exceeded a baseline 13% (subject to upward adjustment). If the return
exceeded the baseline return by one to two percent, one-half of the excess
was used to accelerate recovery of these costs. If the return was greater
than two percent over the baseline, the entire excess was used for such
purpose. In 1998, amortization of regulatory assets included an additional
$10.4 million of accelerated cost recovery. In 1999, the Legislation removed
the return on equity cap.
(c) Amounts deferred during a 1992 - 1994 electric rate increase phase-in
(including carrying charges) were recovered in revenues through 1999. The
1992 PUCO-approved agreement for the phase-in plan provided that after the
end of the deferral period, DP&L would maintain a balance sheet reserve
account which shall operate to reduce the otherwise applicable jurisdictional
production plant valuation subject to recovery in rates.
II-12
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
5. INCOME TAXES
For the years ended
December 31,
$ in millions 1999 1998 1997
- --------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
COMPUTATION OF TAX EXPENSE
Federal income tax (a) $116.5 $108.6 $100.7
Increases (decreases) in tax from -
Regulatory assets 4.4 4.0 3.6
Depreciation 13.1 12.5 11.4
Investment tax credit amortized (3.0) (3.0) (3.0)
Other, net (3.1) (1.7) (7.3)
------ ------ ------
Total tax expense $127.9 $120.4 $105.4
====== ====== ======
COMPONENTS OF TAX EXPENSE
Taxes currently payable $112.5 $136.1 $121.8
Deferred taxes--
Regulatory assets (5.8) (8.3) (4.0)
Liberalized depreciation and
Amortization 8.6 6.7 6.2
Fuel and gas costs 9.2 (5.8) 5.5
Insurance and claims costs 5.2 (1.1) (14.2)
Other 1.2 (4.2) (6.9)
Deferred investment tax credit, net (3.0) (3.0) (3.0)
------ ------ ------
Total tax expense $127.9 $120.4 $105.4
====== ====== ======
</TABLE>
(a) THE STATUTORY RATE OF 35% WAS APPLIED TO PRE-TAX INCOME BEFORE PREFERRED
DIVIDENDS.
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
At December 31,
$ in millions 1999 1998
- ------------------------------------------------------------------------
<S> <C> <C>
NON-CURRENT LIABILITIES
Depreciation/property basis $(429.7) $(439.2)
Income taxes recoverable (58.9) (68.4)
Regulatory assets (16.3) (28.0)
Investment tax credit 23.2 24.2
Other 9.8 50.8
------- -------
Net non-current liability $(471.9) $(460.6)
======= =======
NET CURRENT ASSET (LIABILITY) $ (10.0) $ 3.7
======= =======
</TABLE>
II-13
<PAGE>
- --------------------------------------------------------------------------------
6. PENSIONS AND POSTRETIREMENT BENEFITS
PENSIONS
Substantially all DP&L employees participate in pension plans paid for by
DP&L. Employee benefits are based on their years of service, age,
compensation and year of retirement. The plans are funded in amounts
actuarially determined to provide for these benefits.
The interest rate for discounting the obligation and expense was 6.25%
and the expected rate of return was 7.5%. Increases in compensation levels
approximating 5.0% were used for all years.
The following table sets forth the components of pension expense
(portions of which were capitalized):
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- --------------------------------- --------- --------- ---------
<S> <C> <C> <C>
EXPENSE FOR YEAR
- ----------------
Service cost $ 5.9 $ 5.9 $ 6.3
Interest cost 16.2 15.9 15.2
Expected return on plan assets (25.3) (23.3) (20.5)
Amortization of unrecognized:
Actuarial (gain) loss (0.5) 1.2 -
Prior service cost 2.1 2.1 2.1
Transition obligation (4.3) (4.2) (4.2)
------- ------ ------
Net pension cost $ (5.9) $ (2.4) $ (1.1)
======= ====== ======
</TABLE>
The following tables set forth the plans' obligations, assets and amounts
recorded in Other assets on the Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ------------------------------------------- --------- ----------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation, January 1 $ 269.2 $259.1
Service cost 5.9 5.9
Interest cost 16.2 15.9
Actuarial (gain) loss (3.8) 0.8
Benefits paid (14.7) (12.5)
------- ------
Benefit obligation, December 31 272.8 269.2
------- ------
CHANGE IN PLAN ASSETS
Fair value of plan assets, January 1 358.9 330.2
Actual return on plan assets 77.0 41.2
Benefits paid (14.6) (12.5)
------- ------
Fair value of plan assets, December 31 421.3 358.9
------- ------
Plan assets in excess of projected benefit
obligation 148.5 89.7
Actuarial gain (101.8) (46.6)
Unamortized prior service cost 9.8 11.8
Unamortized transition obligation (2.8) (7.2)
------- ------
Net pension assets $ 53.7 $ 47.7
======= ======
</TABLE>
POSTRETIREMENT BENEFITS
Qualified employees who retired prior to 1987 and their dependents are
eligible for health care and life insurance benefits. DP&L has funded the
union-eligible health benefit using a Voluntary Employee Beneficiary
Association Trust.
The interest rate for discounting the obligation and expense was 6.25% and
the expected rate of return was 5.7%. The assumed health care cost trend rate
used in measuring the accumulated postretirement benefit obligation was 8.0%
and 8.5% for 1999 and 1998, respectively, and decreases to 5.0% by 2005. A
one percentage point change in the assumed health care trend rate would
affect the service and interest cost by $0.1 million. A one percentage point
increase in the assumed health care trend rate would increase the
postretirement benefit obligation by $2.0 million; and a one percentage point
decrease would decrease the benefit obligation by $1.8 million.
The following table sets forth the components of postretirement benefit
expense:
<TABLE>
<CAPTION>
$ in millions 1999 1998 1997
- ------------------------------- --------- ---------- ---------
<S> <C> <C> <C>
EXPENSE FOR YEAR
- ----------------
Interest cost $ 2.0 $ 2.0 $ 2.2
Expected return on plan assets (0.7) (1.0) (0.8)
Amortization of unrecognized:
Actuarial (gain) loss (2.4) (2.2) (4.1)
Transition obligation 3.0 3.0 3.0
------ ------ ------
Postretirement benefit cost $ 1.9 $ 1.8 $ 0.3
====== ====== ======
</TABLE>
The following tables set forth the accumulated postretirement benefit
obligation ("APBO"), assets and funded status amounts recorded in Other
Deferred Credits on the Consolidated Balance Sheet at December 31:
<TABLE>
<CAPTION>
$ in millions 1999 1998
- ----------------------------------------- ---------- ---------
<S> <C> <C>
CHANGE IN APBO
- --------------
Benefit obligation, January 1 $ 32.9 $ 36.5
Interest cost 2.0 2.0
Actuarial (gain) loss 0.2 (3.4)
Benefits paid (2.7) (2.2)
----- -----
Benefit obligation, December 31 32.4 32.9
----- -----
CHANGE IN PLAN ASSETS
- ---------------------
Fair value of plan assets, January 1 12.4 12.1
Actual return on plan assets (0.3) 1.0
Benefits paid (1.2) (0.6)
----- -----
Fair value of plan assets, December 31 10.9 12.5
----- -----
APBO in excess of plan assets 21.5 20.4
Unamortized transition obligation (10.0) (12.9)
Actuarial gain 22.7 26.4
----- ------
Accrued postretirement benefit liability $ 34.2 $ 33.9
===== =====
</TABLE>
II-14
<PAGE>
- --------------------------------------------------------------------------------
7. COMMON SHAREHOLDERS' EQUITY
A three-for-two common stock split effected in the form of a stock
dividend was paid on January 12, 1998 to stockholders of record on December
16, 1997.
DPL Inc. has a leveraged Employee Stock Ownership Plan ("ESOP") to fund
matching contributions to DP&L's 401(k) retirement savings plan and certain
other payments to full-time employees. Common shareholders' equity is reduced
for the cost of 5,126,172 unallocated shares held by the trust and for
2,303,844 shares related to another employee plan. These shares reduce the
number of common shares used in the calculation of earnings per share.
Dividends received by the ESOP are used to repay the loan to DPL Inc. As
debt service payments are made on the loan, shares are released on a pro-rata
basis. Dividends on the allocated shares are charged to retained earnings,
and dividends on the unallocated shares reduce interest and principal on the
loan.
Cumulative shares allocated to employees and outstanding for the
calculation of earnings per share were 1,933,653 in 1999 and 1,646,780 in
1998. Compensation expense, which is based on the fair value of the shares
allocated, amounted to $3.5 million in 1999, $4.0 million in 1998 and $4.4
million in 1997.
DPL Inc. had 902,490 authorized but unissued shares reserved for the
dividend reinvestment plan at December 31, 1999. The plan provides that
either original issue shares or shares purchased on the open market may be
used to satisfy plan requirements.
DPL Inc. has a Shareholder Rights Plan pursuant to which four-ninths of a
Right is attached to and trades with each outstanding DPL Inc. Common Share.
The Rights would separate from the Common Shares and become exercisable in
the event of certain attempted business combinations.
- --------------------------------------------------------------------------------
8. NOTES PAYABLE AND COMPENSATING BALANCES
DPL Inc. and its subsidiaries have $300 million available through
revolving credit agreements with a consortium of banks. One agreement, for
$200 million, expires in 2002 and the other, for $100 million, expires in
2000. Facility fees are approximately $315,000 per year. The primary purpose
of the revolving credit facilities is to provide back-up liquidity for the
commercial paper program. At December 31, 1999 and 1998, DPL Inc. had no
outstanding borrowings under these credit agreements. DPL Inc. also has $15
million available in a short-term informal line of credit with immaterial
commitment fees. Borrowings outstanding from this line were zero at December
31, 1999 and $15 million at an interest rate of 6.3% at December 31, 1998.
DP&L also has $75.0 million available in short-term informal lines of
credit. The commitment fees are immaterial. Borrowings at December 31, 1999
were zero and at December 31, 1998 were $80.9 million at a weighted average
interest rate of 5.46%.
DPL Inc. had $171.0 million outstanding in commercial paper at
December 31, 1999 at a weighted average interest rate of 6.0%.
DP&L had $123.1 million and $99.0 million in commercial paper outstanding at
a weighted average interest rate of 5.9% and 5.25% at December 31, 1999 and
1998, respectively.
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
<TABLE>
<CAPTION>
At December 31,
$ in millions 1999 1998
- ---------------------------------- -------------- -------------
<S> <C> <C>
First mortgage bonds maturing:
2024-2026 8.01% (a)
8.14% (b) $ 446.0 $ 671.0
Pollution control series
maturing through 2027
6.43% (c) 106.4 106.8
-------- --------
552.4 777.8
Guarantee of Air Quality
Development
Obligations 6.10%
Series due 2030 110.0 110.0
Senior Notes 6.25%
Series due 2008 100.0 100.0
Senior Notes 6.32%
Series due 2004 500.0 -
Notes maturing through
2007 - 7.83% 76.0 81.0
Unamortized debt discount and
premium (net) (1.8) (2.9)
-------- --------
Total $1,336.6 $1,065.9
======== ========
</TABLE>
(a) WEIGHTED AVERAGE INTEREST RATE FOR 1999.
(b) WEIGHTED AVERAGE INTEREST RATE FOR 1998.
(c) WEIGHTED AVERAGE INTEREST RATES FOR 1999 AND 1998.
The amounts of maturities and mandatory redemptions for first mortgage
bonds and notes are (in millions) $5.4 in 2000, $6.4 in 2001, $7.4 in 2002,
$8.4 in 2003 and $510.4 in 2004. Substantially all property of DP&L is
subject to the mortgage lien securing the first mortgage bonds.
During 1998, $100 million of a series of Senior Notes due 2008 were issued
with an interest rate of 6.25%.
During 1999, DPL Inc. completed a private placement issuance of $500
million of Senior Notes due 2004, with an interest rate of 6.32%. The
proceeds were used for the redemption of DP&L's $225 million 8.40% Series of
First Mortgage Bonds, the reduction of short-term debt and for general
corporate purposes.
II-15
<PAGE>
- --------------------------------------------------------------------------------
10. PREFERRED STOCK
DPL Inc.: No par value, 8,000,000 shares authorized, no shares outstanding.
DP&L: $25 par value, 4,000,000 shares authorized, no shares outstanding;
and $100 par value, 4,000,000 shares authorized, 228,508 shares
without mandatory redemption provisions outstanding.
<TABLE>
<CAPTION>
Par Value
At December 31,
Current Current Shares 1999 and 1998
Series/Rate Redemption Price Outstanding ($ in millions)
- --------------------------- ----------------- -------------------- --------------------
<S> <C> <C> <C> <C>
A 3.75% $102.50 93,280 $ 9.3
B 3.75% $103.00 69,398 7.0
C 3.90% $101.00 65,830 6.6
------- ------
Total 228,508 $ 22.9
======= ======
</TABLE>
The shares may be redeemed at the option of DP&L at the per share prices
indicated, plus cumulative accrued dividends.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31,
1999 1998
Gross Unrealized Gross Unrealized
-------------------- -----------------
Fair Fair
$ in millions Value Gains Losses Cost Value Gains Losses Cost
- ---------------------------------------- ----------- ---------- --------- ------------ -- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Available-for-sale equity securities: $1,113.1 $182.1 $(13.2) $ 944.2 $ 685.5 $78.3 $(5.8) $ 613.0
Held-to-maturity securities:
Debt securities (a) $ 45.8 - $(1.1) $ 46.9 51.1 $ 1.2 - 49.9
Temporary cash investments 83.3 - - 83.3 12.0 - - 12.0
--------- ------ ------ -------- --------- ----- ----- -------
Total $ 129.1 - $(1.1) $ 130.2 63.1 $ 1.2 - 61.9
LIABILITIES (b)
Debt $1,605.0 $1,636.0 $1,366.6 $1,265.2
CAPITALIZATION
Unallocated stock in ESOP $ 88.7 $ 65.3 $ 117.1 69.0
</TABLE>
(a) MATURITIES RANGE FROM 2000 TO 2010.
(b) INCLUDES CURRENT MATURITIES.
Gross realized gains (losses) were $31.7 million and $(1.2) million in
1999, $19.5 million and $(1.0) million in 1998 and $12.6 million and $(2.8)
million in 1997, respectively.
- --------------------------------------------------------------------------------
12. SALE OF THE GAS BUSINESS
In December 1999, DP&L reached an agreement to sell its natural gas
retail distribution business for $425 million in cash. Completion of the sale
of assets (book value approximating $250 million at December 31, 1999) is
dependent upon receiving all regulatory approvals.
- --------------------------------------------------------------------------------
13. RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
For the years ended December 31,
$ in millions 1999 1998 1997
- -------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net income $204.2 $189.1 $181.4
Adjustments:
Depreciation and amortization 136.5 127.1 123.5
Deferred income taxes 15.4 (15.7) (16.4)
Other deferred credits 2.3 15.4 15.2
Amortization of regulatory assets, net 25.8 33.0 20.9
Operating expense provisions (21.0) 9.1 28.9
Accounts receivable 9.6 (16.3) (9.5)
Accounts payable 26.5 (24.1) 17.2
Accrued taxes 5.4 6.6 20.8
Inventory 19.3 (24.9) (11.6)
Other (26.8) 2.7 (18.9)
------ ------- ------
Net cash provided by operating activities $397.2 $302.0 $351.5
====== ======= ======
</TABLE>
II-16
<PAGE>
- --------------------------------------------------------------------------------
14. BUSINESS SEGMENT REPORTING
DPL Inc.'s principal subsidiary, DP&L, provides energy services to its
customers within a 6,000 square mile service territory. DP&L sells and
distributes electricity and natural gas to residential, commercial,
industrial and governmental customers. As a result of the Legislation, DP&L
has begun aligning its business units. For purposes of the segment disclosure
required by the FASB Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information," DPL Inc.'s results are classified in two
reportable segments, electric and natural gas. Amounts attributed to segments
below the quantitative thresholds for separate disclosure are primarily for a
natural gas supply management company, insurance, electric peaking generation
and street lighting services.
<TABLE>
<CAPTION>
SEGMENT INFORMATION
For the years ended
December 31,
$ in millions 1999 1998 1997
- --------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
$ $ $
ELECTRIC
Revenues from external customers 1,056.0 1,070.7 1,007.8
Intersegment revenues 4.5 4.8 7.2
Depreciation and amortization 125.9 118.0 114.4
Earnings before interest and
taxes 353.9 336.2 326.3
Segment assets 2,584.0 2,702.1 2,752.0
Expenditures - construction
additions 69.9 101.1 92.8
NATURAL GAS
Revenues from external customers 215.0 211.2 244.4
Intersegment revenues 3.9 2.8 2.0
Depreciation and amortization 8.1 7.5 7.4
Earnings before interest and
taxes 27.2 23.9 21.8
Segment assets 321.7 322.7 306.1
Expenditures - construction
additions 9.6 9.7 16.3
OTHER
Revenues from external customers 67.9 70.3 81.4
Intersegment revenues 12.7 20.9 54.4
Depreciation and amortization 2.5 1.6 1.7
Earnings before interest and
taxes 21.8 21.9 7.5
Segment assets 114.6 25.7 30.8
Expenditures - construction
additions 87.0 0.6 1.5
TOTAL
Revenues from external customers 1,338.9 1,352.2 1,333.6
Intersegment revenues 21.1 28.5 63.6
Depreciation and amortization 136.5 127.1 123.5
Earnings before interest and
taxes 402.9 382.0 355.6
Segment assets 3,020.3 3,050.0 3,088.9
Expenditures - construction
additions 166.5 111.4 110.6
RECONCILIATION (a)
For the years ended
December 31,
$ in millions 1999 1998 1997
- --------------------------------- ---------- --------- ----------
PROFIT OR LOSS
Total earnings before interest $ 402.9 $ 382.0 $ 355.6
and Taxes
Investment income 54.7 33.4 27.2
Other income and deductions (16.0) (12.1) (8.7)
Interest expense (109.5) (93.8) (87.3)
--------- -------- ---------
Income Before Income Taxes $ 332.1 $ 309.5 $ 286.8
========= ======== =========
ASSETS
Total segment assets $ 3,020.3 $3,050.5 $ 3,088.9
Unallocated corporate assets 1,320.1 805.4 496.3
--------- -------- ---------
Total Assets $ 4,340.4 $3,855.9 $ 3,585.2
========= ========= =========
</TABLE>
(a) FOR CATEGORIES NOT RECONCILED ABOVE, SEGMENT TOTALS EQUAL CONSOLIDATED
TOTALS.
II-17
<PAGE>
- --------------------------------------------------------------------------------
15. OWNERSHIP OF FACILITIES
DP&L and other Ohio utilities have undivided ownership interests in seven
electric generating facilities and numerous transmission facilities. Certain
expenses, primarily fuel costs for the generating units, are allocated to the
owners based on their energy usage. The remaining expenses, as well as
investments in fuel inventory, plant materials and operating supplies, and
capital additions, are allocated to the owners in accordance with their
respective ownership interests. As of December 31, 1999, DP&L had $4.8
million of such facilities under construction. DP&L's share of the operating
cost of such facilities is included in the Consolidated Statement of Results
of Operations, and its share of the investment in the facilities is included
in the Consolidated Balance Sheet.
The following table presents DP&L's undivided ownership interest in such
facilities at December 31, 1999:
<TABLE>
<CAPTION>
DP&L Share DP&L INVESTMENT
--------------------------------------------- ---------------
Production Gross Plant
Ownership Capacity in Service
(%) (MW) ($ in millions)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Production Units:
Beckjord Unit 6 50.0 210 57
Conesville Unit 4 16.5 129 31
East Bend Station 31.0 186 152
Killen Station 67.0 418 408
Miami Fort Units 7&8 36.0 360 127
Stuart Station 35.0 823 251
Zimmer Station 28.1 365 994
Transmission (at varying percentages) 70
</TABLE>
II-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of DPL Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page IV-1 present fairly, in all material
respects, the financial position of DPL Inc. and its subsidiaries at December
31, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(2) on page IV-1 presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dayton, Ohio
January 21, 2000, except for Note 3,
as to which the date is February 4, 2000
II-19
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Information (Unaudited)
For the Three Months Ended
March 31, June 30, September 30, December 31,
$ in millions except per share amounts 1999 1998 1999 1998 1999 1998 1999 1998
- -------------------------------------- --------- --------- -------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ $ $ $ $ $ $ $
Utility service revenues 362.4 352.3 276.6 292.6 319.2 318.6 312.8 318.4
Income before income taxes 117.4 111.9 59.3 59.4 90.8 80.4 64.6 57.8
Net income 72.5 70.2 37.4 35.2 53.6 47.5 40.7 36.2
Earnings per share of common stock 0.47 0.46 0.25 0.23 0.36 0.31 0.27 0.24
Dividends paid per share 0.235 0.235 0.235 0.235 0.235 0.235 0.235 0.235
Common stock market price - High 21-11/16 19-9/16 19-7/8 19-7/16 19-5/8 19-5/8 20-5/16 21-5/8
- Low 16-1/2 18 16-3/8 16-15/16 16-15/16 16-15/16 16-5/8 18-11/16
</TABLE>
II-20
<PAGE>
Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
PART III
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
DIRECTORS OF THE REGISTRANT
The information required by this item of Form 10-K is set forth in
DPL Inc.'s definitive Proxy Statement relating to the 2000 Annual Meeting of
Shareholders ("2000 Proxy Statement"), which is incorporated herein by
reference, and on pages I-15 and I-16 of this Form 10-K.
Item 11 - EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
The information required by this item of Form 10-K is set forth in
the 2000 Proxy Statement, which is incorporated herein by reference.
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The information required by this item of Form 10-K is set forth in
the 2000 Proxy Statement, which is incorporated herein by reference.
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
None.
III-1
<PAGE>
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pages of 1999 Form
10-K Incorporated by
Reference
--------------------
<S> <C>
Report of Independent Accountants II-19
(a) Documents filed as part of the Form 10-K
1. FINANCIAL STATEMENTS
See Item 8 - Index to Financial Statements on page II-6, which page is
incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULE
For the three years in the period ended December 31, 1999:
Page No.
---------------------
Schedule II - Valuation and qualifying accounts IV-7
</TABLE>
The information required to be submitted in schedules I, III, IV and
V is omitted as not applicable or not required under rules of Regulation S-X.
IV-1
<PAGE>
<TABLE>
<CAPTION>
3. EXHIBITS
The following exhibits have been filed with the Securities and Exchange
Commission and are incorporated herein by reference.
Incorporation by Reference
----------------------------------
<S> <C>
2 Copy of the Agreement of Merger among DPL Inc., Holding Sub Inc. and Exhibit A to the 1986 Proxy
DP&L dated January 6, 1986........................................... Statement (File No. 1-2385)
3(a) Copy of Amended Articles of Incorporation of DPL Inc. dated January Exhibit 3 to Report on Form 10-K
4, 1991, and amendment dated December 3, 1991........................ for the year ended December 31,
1991 (File No. 1-9052)
3(b) Copy of Amendment dated April 20, 1993 to DPL Inc.'s Amended Articles Exhibit 3(b) to Report on Form
of Incorporation..................................................... 10-K for the year ended
December 31, 1993 (File No.
1-9052)
4(a) Copy of Composite Indenture dated as of October 1, 1935, between Exhibit 4(a) to Report on Form
DP&L 10-K and The Bank of New York, Trustee with for the year ended December 31,
all amendments through the 1985 (File No. 1-2385)
Twenty-Ninth Supplemental Indenture..................................
4(b) Copy of the Thirtieth Supplemental Indenture dated as of March 1, Exhibit 4(h) to Registration
1982, between DP&L and The Bank of New York, Trustee................. Statement No. 33-53906
4(c) Copy of the Thirty-First Supplemental Indenture dated as of Exhibit 4(h) to Registration
November 1, 1982, between DP&L and The Bank of New York, Trustee..... Statement No. 33-56162
Copy of the Thirty-Second Supplemental Indenture dated as of Exhibit 4(i) to Registration
4(d) November 1, 1982, between DP&L and The Bank of New York, Trustee..... Statement No. 33-56162
4(e) Copy of the Thirty-Third Supplemental Indenture dated as of Exhibit 4(e) to Report on Form
December 1, 1985, between DP&L and The Bank of New York, Trustee..... 10-K for the year ended
December 31, 1985 (File No.
1-2385)
4(f) Copy of the Thirty-Fourth Supplemental Indenture dated as of April 1, Exhibit 4 to Report on Form 10-Q
1986, between DP&L and The Bank of New York, Trustee................. for the quarter ended June 30,
1986 (File No. 1-2385)
IV-2
<PAGE>
4(g) Copy of the Thirty-Fifth Supplemental Indenture dated as of December Exhibit 4(h) to Report on Form
1, 1986, between DP&L and The Bank of New York, Trustee.............. 10-K for the year ended December
31, 1986 (File No. 1-9052)
4(h) Copy of the Thirty-Sixth Supplemental Indenture dated as of Exhibit 4(i) to Registration
August 15, 1992, between DP&L and The Bank of New York, Trustee...... Statement No. 33-53906
4(i) Copy of the Thirty-Seventh Supplemental Indenture dated as of Exhibit 4(j) to Registration
November 15, 1992, between DP&L and The Bank of New York, Trustee.... Statement No. 33-56162
4(j) Copy of the Thirty-Eighth Supplemental Indenture dated as of Exhibit 4(k) to Registration
November 15, 1992, between DP&L and The Bank of New York, Trustee.... Statement No. 33-56162
4(k) Copy of the Thirty-Ninth Supplemental Indenture dated as of January Exhibit 4(k) to Registration
15, 1993, between DP&L and The Bank of New York, Trustee............. Statement No. 33-57928
4(l) Copy of the Fortieth Supplemental Indenture dated as of February 15, Exhibit 4(m) to Report on
1993, between DP&L and The Bank of New York, Trustee................. Form 10-K for the year ended
December 31, 1992 (File No.
1-2385)
4(m) Copy of Forty-First Supplemental Indenture dated as of February 1, Exhibit 4(m) to Report on Form
1999, between DP&L and the Bank of New York, Trustee................. 10-K for the year ended December
31, 1998 (File No. 1-2385)
4(n) Copy of the Credit Agreement dated as of November 2, 1989 between Exhibit 4(k) to DPL Inc.'s
DPL Inc., the Bank of New York, as agent, Registration Statement on
and the banks named therein......................................... Form S-3 (File No. 33-32348)
4(o) Copy of the Note Purchase Agreement dated as of April 6, 1999 for Exhibit 4 to Report on Form 10-Q
$500 million of 6.32% Senior Notes due 2004.......................... dated June 30, 1999 (File No.
1-9052)
4(p) Copy of Shareholder Rights Agreement between DPL Inc. and The First Exhibit 4 to Report on Form 8-K
National Bank of Boston.............................................. dated December 13, 1991
(File No. 1-9052)
4(q) Copy of Securities Purchase Agreement dated as of February 1, 2000 Exhibit 99(b) to Schedule TO
by and among DPL Inc. and DPL Capital Trust I, Dayton Ventures LLC dated February 4, 2000 (File No.
and Dayton Ventures Inc. and certain exhibits thereto................ 1-9052)
IV-3
<PAGE>
10(a) Description of Management Incentive Compensation Program for Certain Exhibit 10(c) to Report on Form
Executive Officers................................................... 10-K for the year ended
December 31, 1986 (File
No. 1-9052)
10(b) Copy of Severance Pay Agreement with Certain Executive Officers...... Exhibit 10(f) to Report on Form
10-K for the year ended
December 31, 1987 (File
No. 1-9052)
10(c) Copy of Supplemental Executive Retirement Plan amended August 6, 1991 Exhibit 10(e) to Report on Form
10-K for the year ended December
31, 1991 (File No. 1-9052)
10(d) Amended description of Directors' Deferred Stock Compensation Plan Exhibit 10(d) to Report on Form
effective January 1, 1993............................................ 10-K for the year ended
December 31, 1993 (File No.
1-9052)
10(e) Amended description of Deferred Compensation Plan for Non-Employee Exhibit 10(e) to Report on Form
Directors effective January 1, 1993.................................. 10-K for the year ended December
31, 1993 (File No. 1-9052)
10(f) Copy of Management Stock Incentive Plan amended January 1, 1993...... Exhibit 10(f) to Report on Form
10-K for the year ended
December 31, 1993 File No.
1-9052)
18 Copy of preferability letter relating to change Exhibit 18 to Report on Form
in accounting for unbilled revenues from 10-K for the year ended
Price Waterhouse LLP................................................. December 31, 1987
(File No. 1-9052)
The following exhibits are filed herewith:
Page No.
----------------------------------
21 List of Subsidiaries of DPL Inc......................................
23 Consent of PricewaterhouseCoopers LLP................................
27 Financial Data Schedule..............................................
</TABLE>
Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, DPL Inc.
has not filed as an exhibit to this Form 10-K certain instruments with respect
to long-term debt if the total amount of securities authorized thereunder does
not exceed 10% of the total assets of DPL Inc. and its subsidiaries on a
consolidated basis, but hereby agrees to furnish to the SEC on request any such
instruments.
(b) REPORTS ON FORM 8-K
-------------------
None.
IV-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
DPL Inc.
Registrant
February 16, 2000 /s/ Allen M. Hill
-------------------------------------------
Allen M. Hill
President and Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Director February , 2000
- ----------------------------------------
(T. J. Danis)
Director February , 2000
- ----------------------------------------
(J. F. Dicke, II)
/s/ Peter H. Forster Director and Chairman February 16, 2000
- ----------------------------------------
(P. H. Forster)
/s/ Ernie Green Director February 16, 2000
- ----------------------------------------
(E. Green)
/s/ Jane G. Haley Director February 16, 2000
- ----------------------------------------
(J. G. Haley)
/s/ Allen M. Hill Director, President and Chief February 16, 2000
- ---------------------------------------- Executive Officer (principal financial and
(A. M. Hill) accounting officer)
IV-5
<PAGE>
Director February , 2000
- ----------------------------------------
(W A. Hillenbrand)
/s/ David R. Holmes Director February 16, 2000
- ----------------------------------------
(D. R. Holmes)
Director February , 2000
- ----------------------------------------
(B. R. Roberts)
</TABLE>
IV-6
<PAGE>
SCHEDULE II
DPL INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------- --------------- ------------------------ -------------- ---------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------- --------------- ------------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
Additions
------------------------
Balance at
Beginning of Charged to Deductions Balance at
Description Period Income Other (1) End of Period
- -----------------------------------------------------------------------------------------------------------------------
-----------------------------------thousands-----------------------------
1999:
Deducted from accounts receivable--
Provision for uncollectible accounts... $ 4,744 $ 5,171 $ - $ 5,560 $ 4,355
1998:
Deducted from accounts receivable--
Provisions for uncollectible accounts.. $ 5,007 $ 8,182 $ - $ 8,445 $ 4,744
1997:
Deducted from accounts receivable--
Provisions for uncollectible accounts.. $ 5,083 $ 5,865 $ - $ 5,941 $ 5,007
</TABLE>
(1) Amounts written off, net of recoveries of accounts previously written off.
IV-7
<PAGE>
Exhibit 21
SUBSIDIARIES OF DPL INC.
DPL Inc. had the following wholly owned subsidiaries on February 15, 2000:
<TABLE>
<CAPTION>
State of
Name Incorporation
- ---- -------------
<S> <C>
The Dayton Power and Light Company Ohio
Miami Valley Insurance Company Vermont
Miami Valley Leasing, Inc. Ohio
Miami Valley Resources, Inc. Ohio
Miami Valley Lighting, Inc. Ohio
Miami Valley Development Company Ohio
Miami Valley CTC, Inc. Ohio
DPL Energy, Inc. Ohio
Plaza Building, Inc. Ohio
DPL Capital Trust I Delaware
</TABLE>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statement on Form S-3 (Registration No.
33-34316) of DPL Inc., with respect to its Automatic Dividend Reinvestment
and Stock Purchase Plan, and to DPL Inc.'s Registration Statement on Form S-4
(Registration No. 33-2551), with respect to The Dayton Power and Light
Company's Employees' Stock Plan, of our report dated January 21, 2000, except
for Note 3, as to which the date is February 4, 2000, relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dayton, Ohio
February 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,138,000
<OTHER-PROPERTY-AND-INVEST> 128,800
<TOTAL-CURRENT-ASSETS> 589,400
<TOTAL-DEFERRED-CHARGES> 221,800
<OTHER-ASSETS> 1,262,400
<TOTAL-ASSETS> 4,340,400
<COMMON> 1,600
<CAPITAL-SURPLUS-PAID-IN> 648,300
<RETAINED-EARNINGS> 801,700
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,451,600
0
22,900
<LONG-TERM-DEBT-NET> 1,336,600
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 294,100
<LONG-TERM-DEBT-CURRENT-PORT> 5,400
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,229,800
<TOT-CAPITALIZATION-AND-LIAB> 4,340,400
<GROSS-OPERATING-REVENUE> 1,338,900
<INCOME-TAX-EXPENSE> 127,900
<OTHER-OPERATING-EXPENSES> 936,000
<TOTAL-OPERATING-EXPENSES> 1,063,900
<OPERATING-INCOME-LOSS> 275,000
<OTHER-INCOME-NET> 38,700
<INCOME-BEFORE-INTEREST-EXPEN> 313,700
<TOTAL-INTEREST-EXPENSE> 108,600
<NET-INCOME> 205,100
900
<EARNINGS-AVAILABLE-FOR-COMM> 204,200
<COMMON-STOCK-DIVIDENDS> 142,500
<TOTAL-INTEREST-ON-BONDS> 97,400
<CASH-FLOW-OPERATIONS> 397,200
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
</TABLE>
