Item 1 - Business* - --------------------------------------------------------------------------
THE COMPANY
The Dayton Power and Light Company (the "Company") is a public utility incorporated under the laws of Ohio in 1911. Located in West Central Ohio, it furnishes electric service to 485,000 retail customers in a 24 county service area of approximately 6,000 square miles and furnishes natural gas service to 301,000 customers in 16 counties. The Company serves an estimated population of 1.3 million. Principal industries served include electrical machinery, automotive and other transportation equipment, non-electrical machinery, agriculture, paper, and rubber and plastic products. The Company's sales reflect the general economic conditions and seasonal weather patterns of the area. In 1997, a 3% decline in electric residential sales resulted in slightly lower revenue, which offset a 3% increase in sales to business customers and higher sales to other public utilities. Gas utility revenues increased 2% in 1997. Sales increases of 3% from higher deliveries to business customers offset the effects of milder weather. During 1997, cooling degree days were 23% below the twenty year average and 15% below 1996. Heating degree days in 1997 were 3% above the thirty year average and 4% below 1996. Sales patterns will change in future years as weather and the economy fluctuate. The Company employed 2,592 persons as of December 31, 1997, of which 2,164 are full-time employees and 428 are part-time employees.
All of the outstanding shares of common stock of the Company are held by DPL Inc., which became the Company's corporate parent, effective April 21, 1986. Subsidiaries of the Company include MacGregor Park, Inc., an owner and developer of real estate and Miami Valley Equipment, Inc., which owns retail sales and transportation equipment and provides support services to DPL Inc. and its subsidiaries.
The Company's principal executive and business office is located at Courthouse Plaza Southwest, Dayton, Ohio 45402 - telephone (937) 224-6000.
Information relating to industry segments is contained in Item 8 - Note 12 of Notes to Consolidated Financial Statements on Page II-24 of this document, which Note is incorporated herein by reference.
* Unless otherwise indicated, the information given in "Item 1 - BUSINESS" is current as of March 27, 1998. No representation is made that there have not been subsequent changes to such information.
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COMPETITION
The Company competes with privately and municipally owned electric utilities and rural electric cooperatives, natural gas suppliers and other alternate fuel suppliers. The Company competes on the basis of price and service.
Like other utilities, the Company from time to time may have electric generating capacity available for sale to other utilities. The Company competes with other utilities to sell electricity provided by such capacity. The ability of the Company to sell this electricity will depend on how the Company's price, terms and conditions compare to those of other utilities. In addition, from time to time, the Company makes power purchases from neighboring utilities.
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 purchase 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.
The Company provides transmission and other wholesale electric service to 12 municipal customers which distribute electricity within their corporate limits. In 1994, 11 of these municipal customers signed new 20-year service agreements which were approved by the Federal Energy Regulatory Commission ("FERC"), in June 1995. The twelfth municipal customer signed a 20-year agreement, approved by FERC in February 1995, that allows the Company to supply 97% of its power requirements. In addition to these municipal customers, the Company maintains an interconnection agreement with one municipality which has the capability to generate all or a portion of its energy requirements. Sales to municipalities represented 1.2% of total electricity sales in 1997.
In October 1994, the Public Utilities Commission of Ohio ("PUCO") initiated roundtable discussions on the introduction of competition in the electric industry. The "Electric Competition Series" is a result of the Ohio Energy Strategy issued in April 1994. To date, roundtable discussions have focused largely on short-term initiatives that are possible under the current regulatory framework. 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...
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...faces constraints on its own resources. On April 11, 1996, the PUCO issued an Entry on Rehearing ordering utilities to file interruptible electric service tariffs. On June 14, 1996, the Company filed for approval of a non-firm electric service rate schedule and replacement power rate riders. The Company'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.
On February 27, 1997, after rehearing its earlier order on the subject, the PUCO issued guidelines for the implementation of conjunctive electric service. These guidelines require all electric utilities to file tariffs under which different service locations are aggregated for cost-of-service, rate design, rate negotiation and billing purposes.
In January 1997, plans were announced to create a 12 member Joint Committee of the Ohio Senate and House of Representatives to explore and possibly draft retail wheeling legislation. The Committee has conducted hearings to gather information from energy companies, regulators, customers and industry experts. The Committee co-chairs issued a draft report on January 6, 1998 recommending opening the electric generation market, in the future, to competition for all Ohio consumers. As part of this restructuring effort in 1998 and beyond, legislators are also studying related complex tax issues that must be resolved. Other legislative proposals at the federal level are pending concerning wholesale and retail wheeling which are designed to increase competition.
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. In August 1997, the Company refiled its open-access transmission tariff in compliance with FERC orders. In December 1997, the Company reached an agreement in principle with intervenors in a pending tariff case and filed a subsequent tariff case based on an updated test year.
On September 30, 1996, FERC conditionally accepted the Company's market-based sales tariff which will allow the Company 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., a wholly-owned subsidiary of DPL Inc., to sell and broker wholesale electric power and also charge market-based prices for such power.
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General deregulation of the natural gas industry has continued to prompt the influence of 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 the Company, 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 the Company or purchased elsewhere and transported to the end-use customer by the Company could fluctuate based on the economics of each in comparison with changes in alternate fuel prices. For the Company, price competition and reliability among both natural gas suppliers and interstate pipeline sources are major factors affecting procurement decisions.
CONSTRUCTION AND FINANCING PROGRAM OF THE COMPANY
Construction Program - -------------------- Construction additions were $109 million, $124 million, and $79 million in 1997, 1996 and 1995 respectively. The capital program for 1998 consists of construction costs of approximately $100 million, which includes an 82 MW combustion turbine unit.
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. The Company'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.
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 the Company's operations cannot be estimated at this time.
Financing Program - ----------------- At year-end 1997, cash and temporary cash investments were $12 million, and debt and equity financial assets were $111 million. Cash and financial assets are held with a view towards investing in future opportunities in the industry.
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In December 1997, the Company 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. In December 1996, the Company redeemed a series of first mortgage bonds in the principal amount of $25 million with an interest rate of 6.75%. The bonds had been scheduled to mature in 1998. Sinking fund payments for the five years ended 2002 are $2 million.
In September 1995, a new series of Air Quality Development Revenue Refunding Bonds was issued in principal amount of $110 million with an interest rate of 6.1%. Proceeds from the financing were used to redeem a similar principal amount of First Mortgage Bonds with an interest rate of 9.5%.
In November 1989, DPL Inc. entered into a revolving credit agreement ("the Credit Agreement") with a consortium of banks renewable through 2001 which allows total borrowings by DPL Inc. and its subsidiaries of $200 million. The Company has authority from the PUCO to issue short-term debt up to $200 million with a maximum debt limit of $300 million including loans from DPL Inc. under the terms of the Credit Agreement. At year-end 1997, DPL Inc. had $36 million outstanding under this Credit Agreement. The Company also has $97 million available in short-term lines of credit. At year-end 1997, the Company had $10 million outstanding from these lines of credit and $70 million in commercial paper outstanding.
Under the Company'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, and (ii) 100% of retired First Mortgage Bonds. The Company 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 the Company's Amended Articles of Incorporation.
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ELECTRIC OPERATIONS AND FUEL SUPPLY
The Company's present winter generating capability is 3,264,000 KW. Of this capability, 2,843,000 KW (approximately 87%) is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 88% (2,491,000 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 the Company. The Company's all time net peak load was 2,961,000 KW, which occurred in August 1995. The present summer generating capability is 3,194,000 KW.
GENERATING FACILITIES MW Rating --------------- Operating Company Station Ownership* Company Location Portion Total - ------- ---------- --------- -------- ------- ----- Coal Units - ---------- Hutchings W Company Miamisburg, OH 371 371 Killen C Company Wrightsville, OH 418 624 Stuart C Company Aberdeen, OH 823 2,350 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 Company Miamisburg, OH 32 32 Yankee Street W Company Centerville, OH 144 144 Monument W Company Dayton, OH 12 12 Tait W Company Dayton, OH 10 10 Sidney W Company Sidney, OH 12 12 Tait Gas Turbine 1 W Company Moraine, OH 95 95 Tait Gas Turbine 2 W Company Moraine, OH 97 97
* W = Wholly Owned C = Commonly Owned
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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. The Company has several interconnections with other companies for the purchase, sale and interchange of electricity.
The Company derived over 99% of its electric output from coal-fired units in 1997. The remainder was derived from units burning oil or natural gas which were used to meet peak demands.
The Company estimates that approximately 65-85% of its coal requirements for the period 1998-2002 will be obtained through long-term contracts, with the balance to be obtained by spot market purchases. The Company 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 the Company 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 all fuel burned for electric generation (coal, gas and oil) for the year was 1.31 cents which represents an increase from 1.29 cents in 1996 and a decrease from 1.36 cents in 1995. Through the operation of a fuel cost adjustment clause applicable to electric sales, the increases and decreases in fuel costs are reflected in customer rates on a timely basis. See RATE REGULATION AND GOVERNMENT LEGISLATION and ENVIRONMENTAL CONSIDERATIONS.
GAS OPERATIONS AND GAS SUPPLY
The Company 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 late 2004. Along with firm transportation services, the Company has approximately 16 billion cubic feet of firm storage service with various pipelines. The Company also maintains and operates four propane-air plants with a daily rated capacity of approximately 70,000 thousand cubic feet ("MCF") of natural gas.
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In addition, the Company is interconnected with CNG Transmission Corporation. Interconnections with interstate pipelines provide the Company the opportunity to purchase competitively-priced natural gas supplies and pipeline services. The Company 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 1997, firm agreements provided approximately 50% of total supply, with the remaining supplies purchased on a spot/short-term basis.
In 1997, the Company purchased natural gas at an average price of $3.45 per MCF, compared to $3.45 per MCF in 1996 and $2.79 per MCF in 1995. Through the operation of a natural gas cost adjustment clause applicable to gas sales, increases and decreases in the Company'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. The Company has an approved tariff and provides transportation service to approximately 300 end-use customers, delivering a total quantity of nearly 17,000,000 MCF per year.
RATE REGULATION AND GOVERNMENT LEGISLATION
The Company's sales of electricity and natural gas to retail customers are subject to rate regulation by the PUCO and various municipalities. The Company'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.
The Company'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.
On June 18, 1996, 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 natural gas distribution companies. Final rules were issued on March 12, 1997.
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Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL Inc. 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. Additionally, the legislation (i) requires PUCO approval of certain transactions and transfers of assets between public utilities and entities within the same holding company system, and (ii) prohibits investments by a holding company in subsidiaries which are not public utilities in an amount in excess of 15% of the aggregate capitalization of the holding company on a consolidated basis at the time such investments are made.
Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current 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.
A 1992 PUCO-approved settlement agreement and a subsequent stipulation in 1995 allowed accelerated recovery of demand-side management ("DSM") costs and, thereafter, production plant costs to the extent that the Company 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.
Regulatory deferrals on the balance sheet were:
Dec. 31 Dec. 31 1997 1996 ------- ------- --millions--
Phase-in $ 30.6 $ 46.7 DSM 33.6 35.3 Deferred interest - Zimmer 52.5 55.3 Income taxes recoverable through future revenues 208.2 222.4 ------- ------- Total $ 324.9 $ 359.7 ======= =======
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-...
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...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. Ultimate recovery of expenditures is contingent on review and approval of such programs as cost-effective and consistent with the most recent IRP proceeding. The rules also allow utilities to submit alternative proposals for the recovery of DSM programs and related costs.
The Company has in place a percentage of income payment plan ("PIPP") for eligible low-income households as required by the PUCO. This plan prohibits disconnections for nonpayment of customer bills if eligible low-income households pay a specified percentage of their household income toward their utility bill. The PUCO has approved a surcharge by way of a temporary base rate tariff rider which allows companies to recover arrearages accumulated under PIPP.
The Company initiated a competitive bidding process in January 1993 for the construction of electric peaking capacity and energy by 1997. Through an Ohio Power Siting Board ("OPSB") investigative process, the Company's self-built option was evaluated to be the least cost option. On March 7, 1994, the OPSB approved the Company's applications for up to three combustion turbines and two natural gas supply lines for the proposed site.
On June 1, 1997 and September 15, 1997, respectively, the Company filed its natural gas and electric LTFR with the PUCO. An IRP filed as part of the electric LTFR included plans for the construction of a series of 82 MW combustion turbine generating units. The first combustion turbine began operation on June 1, 1995, a second unit began operation on December 23, 1996 and a third unit is currently under construction.
On January 25, 1996, Governor Voinovich reappointed Chairman Craig A. Glazer to the PUCO for a five year term which commenced on April 11, 1996 and will extend until April 10, 2001.
On February 7, 1997, Governor Voinovich appointed Judith A. Jones, a Toledo City Councilwoman, to the PUCO replacing Richard Fanelly. Her five year term commenced April 11, 1997 and will extend until April 10, 2002.
On October 15, 1997 PUCO Commissioner David Johnson announced his resignation effective November 30, 1997. Commissioner Johnson was serving a term that would have expired in April 1998. On January 27, 1998, Governor Voinovich appointed Donald L. Mason, a senior management official with the Ohio Department of Natural Resources, to replace Commissioner Johnson. His five year term will expire on April 10, 2003.
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ENVIRONMENTAL CONSIDERATIONS
The operations of the Company, including the commonly owned facilities operated by the Company, 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 Company expended $5 million for environmental control facilities during 1997. 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 THE COMPANY.
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 will become effective on January 1, 2000. Compliance by the Company has not caused any material changes in the Company's costs or operations.
The Company's environmental compliance plan ("ECP") was approved by the PUCO on May 6, 1993. Phase I requirements are being 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 can be 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 1% to 2% approximate price impact. Costs to comply with the Act are eligible for recovery in fuel hearings and other regulatory proceedings.
Land Use - -------- The Company and numerous other parties have been notified by the United States Environmental Protection Agency ("U.S. EPA") or the Ohio Environmental Protection Agency ("Ohio EPA") that it considers them Potentially Responsible Parties ("PRPs") for clean- up at four superfund sites in Ohio: the Sanitary Landfill Site on Cardington Road in Montgomery County, Ohio; the United Scrap Lead Site in Miami County, Ohio; the Powell Road Landfill in Huber Heights, Montgomery County, Ohio; and the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton, Montgomery County, Ohio.
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The Company received notification from the U.S. EPA in July 1987 for the Cardington Road site. The Company has not joined the PRP group formed at that site because of the absence of any known evidence that the Company 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. This final resolution will not have a material effect on the Company's financial position, earnings or cashflow.
The Company received notification from the U.S. EPA in September 1987 for the United Scrap Lead Site. The Company has joined a PRP group for this site, which is actively conferring with the U.S. EPA. The initial Record of Decision issued by the U.S. EPA estimating clean-up costs at $27.1 million was later amended to reflect an estimate of clean-up costs at $32 million. The Company is one of over 200 parties to this site, and its estimated contribution to the site is less than .01%. Nearly 60 PRPs are actively working to settle the case. The Company participated in the sponsorship of a study to evaluate alternatives to the U.S. EPA's clean-up plan. The U.S. EPA recently approved a proposal for a less expensive clean-up method for the entire site. This new clean-up is anticipated to have a total cost of $5.2 million. The final resolution will not have a material effect on the Company's financial position, earnings or cashflow.
The Company and numerous other parties received notification from the U.S. EPA on May 21, 1993 that it considers them PRPs for clean-up of hazardous substances at the Powell Road Landfill Site in Huber Heights, Ohio. The Company has joined the PRP group for the site. On October 1, 1993, the U.S. EPA issued its Record of Decision identifying a cost estimate of $20.5 million for the chosen remedy. The Company is one of over 200 PRPs to this site, and its estimated contribution is less than 1%. In late January 1998, the U.S. EPA approved a settlement that included the Company. Through the settlement, the Company resolved its potential liability with no resulting material impact.
The Company 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. The Company has not joined the PRP group formed for the site because the available information does not demonstrate that the Company contributed wastes to the site. The final resolution will not have a material effect on the Company's financial position, earnings or cashflow.
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THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS ELECTRIC OPERATIONS
Years Ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Electric Output (millions of kWh) General - Coal-fired units 16,246 16,142 15,679 Other units 52 21 29 Power purchases 1,239 1,098 2,115 Exchanged and transmitted power - (1) 1 Company use and line losses (928) (946) (1,010) ---------- ---------- ---------- Total 16,609 16,314 16,814 ========== ========== ==========
Electric Sales (millions of kWh) Residential 4,788 4,924 4,871 Commercial 3,408 3,407 3,425 Industrial 4,749 4,540 4,401 Public authorities and railroads 1,330 1,392 1,378 Private utilities and wholesale 2,334 2,051 2,739 ---------- ---------- ---------- Total 16,609 16,314 16,814 ========== ========== ==========
Electric Customers at End of Period Residential 433,563 428,973 425,347 Commercial 43,923 43,381 42,582 Industrial 1,881 1,858 2,017 Public authorities and railroads 5,736 5,651 5,573 Other 42 29 17 ---------- ---------- ---------- Total 485,145 479,892 475,536 ========== ========== ==========
Operating Revenues (thousands) Residential $ 409,857 $ 422,876 $ 422,153 Commercial 234,206 236,598 237,799 Industrial 225,775 222,941 224,135 Public authorities and railroads 74,018 78,140 78,225 Private utilities and wholesale 53,598 43,730 57,799 Other 12,523 12,115 9,807 ---------- ---------- ---------- Total $1,009,977 $1,016,400 $1,029,918 ========== ========== ==========
Residential Statistics (per customer-average) Sales - kWh 11,120 11,537 11,518 Revenue $ 951.90 $ 990.89 $ 998.27 Rate per kWh (Month of December) (cents) 8.10 7.91 8.01
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THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS GAS OPERATIONS
Years Ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ----
Gas Output (thousands of MCF) Direct market purchases 43,808 46,696 44,376 Liquefied petroleum gas 66 90 18 Company use and unaccounted for (1,016) (676) (1,594) Transportation gas received 19,182 17,587 16,870 -------- -------- -------- Total 62,040 63,697 59,670 ======== ======== ========
Gas Sales (thousands of MCF) Residential 29,277 31,087 29,397 Commercial 9,567 9,424 8,307 Industrial 2,520 3,404 2,584 Public authorities 2,153 2,829 3,006 Transportation gas delivered 18,523 16,953 16,376 -------- -------- -------- Total 62,040 63,697 59,670 ======== ======== ========
Gas Customers at End of Period Residential 276,189 272,616 269,694 Commercial 22,298 22,085 21,451 Industrial 1,396 1,331 1,574 Public authorities 1,475 1,463 1,423 -------- -------- -------- Total 301,358 297,495 294,142 ======== ======== ========
Operating Revenues (thousands) Residential $160,279 $156,709 $149,006 Commercial 48,302 44,092 39,047 Industrial 11,867 14,110 11,447 Public authorities 10,311 12,013 12,589 Other 12,948 11,660 9,950 -------- -------- -------- Total $243,707 $238,584 $222,039 ======== ======== ========
Residential Statistics (per customer-average) Sales - MCF 107.0 114.8 109.8 Revenue $ 585.63 $ 578.68 $ 556.72 Rate per MCF (month of December) $ 5.20 $ 5.13 $ 4.44
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Item 2 - Properties - ------------------------------------------------------------------------------
Electric - -------- Information relating to the Company's electric properties is contained in Item 1 - BUSINESS, THE COMPANY (page I-1), CONSTRUCTION AND FINANCING PROGRAM OF THE COMPANY (pages I-4 and I-5), ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-6 and I-7) and Item 8 - Notes 2 and 5 of Notes to Consolidated Financial Statements on pages II-15 and II-19, respectively, which pages are incorporated herein by reference.
Gas - --- Information relating to the Company's gas properties is contained in Item 1 - BUSINESS, THE COMPANY (page I-1), and GAS OPERATIONS AND GAS SUPPLY (pages I-7 and I-8), which pages are incorporated herein by reference.
Other - ----- The Company owns a number of area service buildings located in various operating centers.
Substantially all property and plant of the Company is subject to the lien of the Mortgage securing the Company's First Mortgage Bonds.
Item 3
Item 3 - Legal Proceedings - ------------------------------------------------------------------------------
Information relating to legal proceedings involving the Company is contained in Item 1 - BUSINESS, THE COMPANY (page I- 1), COMPETITION (Pages I-2 through I-4), ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-6 and I-7), GAS OPERATIONS AND GAS SUPPLY (pages I-7 and I-8), RATE REGULATION AND GOVERNMENT LEGISLATION (pages I-8 through I-10), ENVIRONMENTAL CONSIDERATIONS (pages I- 11 and I-12) and Item 8 - Note 2 of Notes to Consolidated Financial Statements on page II-15, which pages are incorporated herein by reference.
Item 4
Item 4 - Submission Of Matters To A Vote Of Security Holders - ------------------------------------------------------------------------------
None.
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PART II
Item 5
Item 5 - Market For Registrant's Common Equity And Related Stockholder Matters - ------------------------------------------------------------------------------
The Company's common stock is held solely by DPL Inc. and as a result is not listed for trading on any stock exchange.
The information required by this item of Form 10-K is set forth in Item 8 - Selected Quarterly Information on page II- 25 and the Financial and Statistical Summary on page II-26, which pages are incorporated herein by reference.
The Company's Mortgage restricts the payment of dividends on the Company's Common Stock under certain conditions. In addition, so long as any Preferred Stock is outstanding, the Company'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 the Company 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 the Company were available for Common Stock dividends.
The Credit Agreement requires that the aggregate assets of the Company and its subsidiaries constitute not less than 60% of the total consolidated assets of DPL Inc., and that the Company maintain common shareholder's equity (as defined in the Credit Agreement) at least equal to $550 million.
Item 6
Item 6 - Selected Financial Data - ------------------------------------------------------------------------------
The information required by this item of Form 10-K is set forth in Item 8 - Financial and Statistical Summary on page II-26, which page is incorporated herein by reference.
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Item 7
Item 7 - Management's Discussion And Analysis Of Financial Condition And Results Of Operations - ------------------------------------------------------------------------------
The Dayton Power and Light Company
Performance Highlights 1997 1996 1995 - ------------------------------------------------------------------
CAPITAL INVESTMENT PERFORMANCE:
Capital Structure (millions) Common shareholder's equity $ 1,280.8 1,217.5 1,190.5 Preferred stock $ 22.9 22.9 22.9 Long-term debt $ 886.0 926.3 991.5 ------- ------- ------- Total $ 2,189.7 2,166.7 2,204.9
OPERATING PERFORMANCE:
Electric-- Sales (millions of kWh) Residential 4,788 4,924 4,871 Commercial 3,408 3,407 3,425 Industrial 4,749 4,540 4,401 Other 3,664 3,443 4,117 ------- ------- ------- Total 16,609 16,314 16,814
Revenues (millions) Residential $ 409.9 422.9 422.2 Commercial $ 234.2 236.6 237.8 Industrial $ 225.8 222.9 224.1 Other $ 140.1 134.0 145.8 ------- ------- ------- Total $ 1,010.0 1,016.4 1,029.9
Average price per kWh-retail and wholesale customers (calendar year) (cents) 6.01 6.16 6.07
Gas-- Sales (thousands of MCF) Residential 29,277 31,087 29,397 Commercial 9,567 9,424 8,307 Industrial 2,520 3,404 2,584 Other 20,676 19,782 19,382 ------- ------- ------- Total 62,040 63,697 59,670
Revenues (millions) Residential $ 160.3 156.7 149.0 Commercial $ 48.3 44.1 39.0 Industrial $ 11.9 14.1 11.4 Other $ 23.2 23.7 22.6 ------- ------- ------- Total $ 243.7 238.6 222.0
Average price per MCF - total (calendar year) $ 3.93 3.75 3.72
II-2
Results of Operations --------------------- The 1997 earnings on common stock are $171 million compared to $164 million in 1996 and $159 million in 1995.
In 1997, a 3% decline in electric residential sales resulted in slightly lower revenue, which offset a 3% increase in sales to business customers and higher sales to other public utilities. Fuel and purchased power expense decreased 3% primarily related to lower fuel costs. In 1996, electric revenues decreased 1% as a result of lower sales to public utilities.
Gas utility revenues increased 2% in 1997. Sales increases of 3% from higher deliveries to business customers offset the effects of milder weather. Gas purchased for resale increased 4% primarily from higher natural gas costs. Gas utility revenues increased 7% resulting in a 9% increase in gas utility purchases in 1996.
Operation and maintenance expense decreased 5% in 1997 from 1996 due to cost containment efforts and lower actuarially-determined benefit expense. Operation and maintenance expense decreased 1% in 1996 from 1995 as a result of reduced electric production and system maintenance, bond redemption costs and lower compensation and benefit expense. These decreases were partially offset by higher insurance and claims costs.
Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current rates. In addition, 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 allowed accelerated recovery of demand-side management costs and, thereafter, production plant costs to the extent that the Company 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.
Depreciation and amortization expense increased $4 million as a result of increased depreciable assets in 1997 and $7 million in 1996 primarily due to increased depreciable assets and rates.
II-3
General taxes increased 3% in 1997 and 4% in 1996 as a result of higher property taxes from additional property.
Interest expense declined $3 million in 1997 primarily due to the redemption of $25 million of first mortgage bonds late in 1996 and two series of first mortgage bonds totaling $80 million in 1997. Interest expense declined $5 million in 1996 primarily from the September 1995 refinancing of $110 million of bonds at a lower interest rate.
Credit Ratings - -------------- The Company's senior debt credit ratings are as follows:
Duff & Phelps AA Moody's Investors Service Aa3 Standard & Poor's AA-
Each rating has been affirmed by its respective rating agency in 1997. Moody's Investors Service upgraded the Company's senior debt credit rating three times from 1992-1995. Duff & Phelps and Standard & Poor's both upgraded the Company's senior debt credit ratings in 1994. The credit ratings are the highest the Company has achieved since 1974, and they are all considered investment grade.
Construction Program and Financing - ---------------------------------- Construction additions were $109 million, $124 million, and $79 million in 1997, 1996 and 1995, respectively. The capital program for 1998 consists of construction costs of approximately $100 million, which includes an 82 MW combustion turbine generating unit.
During 1997, total cash provided by operating activities was $300 million. At year-end 1997, cash and temporary cash investments were $12 million, and debt and equity financial assets were $111 million. Cash and financial assets are held with a view towards investing in future opportunities in the industry.
In December 1997, the Company 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. In December 1996, the Company redeemed a series of first mortgage bonds in the principal amount of $25 million with an interest rate of 6.75%. The bonds had been scheduled to mature in 1998. Sinking fund payments for the five years ending 2002 are $2 million.
II-4
In September 1995, a new series of Air Quality Development Revenue Refunding Bonds was issued in the principal amount of $110 million with an interest rate of 6.1%. Proceeds from the financing were used to redeem a similar principal amount of first mortgage bonds with an interest rate of 9.5%.
Issuance of additional amounts of first mortgage bonds by the Company 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. DPL Inc. anticipates that it has sufficient capacity to issue the Company first mortgage bonds to satisfy its requirements in connection with its capital program.
In addition, DPL Inc. has a revolving credit agreement, renewable through 2001, which allows total borrowings by DPL Inc. and its subsidiaries of $200 million. At year-end 1997, DPL Inc. had $36 million outstanding under this credit agreement.
The Company also has $97 million available in short-term lines of credit. At year-end 1997, the Company had $10 million outstanding from these lines of credit and $70 million in commercial paper outstanding.
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 the Company'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.
Like many companies, DP&L is currently evaluating its computer systems to determine the extent to which modifications are required to prevent problems in the year 2000. Based on this on-going effort, the Company at this time does not anticipate that the year 2000 matter will materially impact its financial position.
The EPA has notified numerous parties, including the Company, that they are considered "Potentially Responsible Parties" for clean-up of four hazardous waste sites in Ohio. The EPA approved a $20,000 settlement at one site in late January, 1998. The EPA has estimated total costs of $13 million for its preferred clean up plans at two other sites, and has not established an estimated cost for the fourth site. The final resolution of these investigations will not have a material effect on the Company's financial position, earnings or cash flow.
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As a public utility, the Company is subject to processes which determine the rates it charges for energy services. Regulators determine which costs are eligible for recovery in the rate setting process and when the recovery will occur. They also establish the rate of return on utility investments which are valued under Ohio law based on historical costs.
The utility industry is subject to inflationary pressures similar to those experienced by other capital-intensive industries. Because rates for regulated services under existing rules are based on historical costs, cash flows may not cover the total future costs of providing services.
Restructuring of the electric utility industry continued to evolve in 1997. Legislative proposals have been introduced in Congress and in Ohio concerning electric wholesale and retail wheeling which are designed to increase competition. These factors increase the risk that the Company's production plant and/or regulatory assets may not be fully recovered in rates.
Ohio continues to take a studied approach to utility industry restructuring. In 1997, the Ohio legislative leadership established a special Joint Committee to study the restructuring issues. The Committee conducted hearings to gather information from energy companies, regulators, customers and industry experts. The Committee co-chairs issued a draft report in early January 1998 recommending opening the electric generation market, in the future, to competition for all Ohio consumers. As a part of this restructuring effort in 1998 and beyond, legislators are also studying related complex tax issues that must be resolved.
In 1996 and 1997, FERC issued orders creating a more competitive wholesale electric power market. These orders required all electric utilities that own or control transmission facilities to file open-access transmission service tariffs. Open-access transmission tariffs provide third parties 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. In December, the Company reached an agreement in principle with intervenors in a pending tariff case and filed a subsequent case based on an updated test year.
The PUCO is holding roundtable discussions on competition in the electric industry focused on short-term initiatives under the current regulatory framework. Pursuant to a PUCO order implementing one such initiative, all Ohio electric utilities, including the Company, filed tariffs in 1996 for interruptible electric service that accommodates replacement electricity during periods when the utility faces resource constraints. The Company's tariff was approved in 1997.
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As another roundtable initiative, in 1996, the PUCO issued guidelines for conjunctive electric service which required all utilities to file tariffs under which different service locations are aggregated for cost-of-service, rate design, rate eligibility and billing purposes. Although the Company has appealed these guidelines to the Ohio Supreme Court, the Company filed its tariff in 1997.
Ohio legislation in 1996 and PUCO rules in 1997 addressed regulatory reform for the local gas distribution companies. The legislation provides that natural gas commodity services may be exempted from PUCO regulation and that the PUCO may allow alternative ratemaking methodologies in connection with other regulated services.
Income Statement Highlights
$ in Millions 1997 1996 1995 - ---------------------------------------------------------------- Electric utility: Revenues $1,010 $1,016 $1,030 Fuel and purchased power 227 234 256 ------ ------ ------ Net revenues 783 782 774
Gas utility: Revenues 244 239 222 Gas purchased for resale 151 145 133 ------ ------ ------ Net revenues 93 94 89
Interest and other income 14 9 12 Operation and maintenance expense 256 270 271 Amortization of regulatory assets, net 17 15 15 Income taxes 100 98 98 Earnings on common stock 171 164 159
II-7
Item 8
Item 8 - Financial Statements And Supplementary Data - ------------------------------------------------------------------------------
Index to Consolidated Financial Statements Page No. - ------------------------------------------ --------
Consolidated Statement of Results of Operations for the three years in the period ended December 31, 1997 II-9
Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1997 II-10
Consolidated Balance Sheet as of December 31, 1997 and 1996 II-11 - II-12
Notes to Consolidated Financial Statements II-13 - II-24
Reports of Independent Accountants II-27 - II-28
Index to Supplemental Information Page No. - --------------------------------- --------
Selected Quarterly Information II-25
Financial and Statistical Summary II-26
II-8
The Dayton Power and Light Company
CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS - ------------------------------------------------------------------------ For the years ended December 31, $ in millions 1997 1996 1995 - ------------------------------------------------------------------------ INCOME Utility service revenues-- Electric $1,010.0 $1,016.4 $1,029.9 Gas and other 244.4 242.0 227.6 -------- -------- --------
Total utility service revenues 1,254.4 1,258.4 1,257.5
Other income 13.9 9.3 11.8 -------- -------- --------
Total income 1,268.3 1,267.7 1,269.3 -------- -------- --------
EXPENSES Fuel and purchased power 227.9 234.9 257.5 Gas purchased for resale 150.7 144.8 133.2 Operation and maintenance (Note 1) 255.9 269.5 271.3 Depreciation and amortization (Note 1) 125.9 122.3 115.4 Amortization of regulatory assets, net (Note 2) 16.8 15.3 15.4 General taxes 133.5 129.3 124.9 Interest expense 86.0 89.1 94.4 -------- -------- --------
Total expenses 996.7 1,005.2 1,012.1 -------- -------- -------- INCOME BEFORE INCOME TAXES 271.6 262.5 257.2
Income taxes (Notes 1 and 3) 99.6 97.7 97.8 -------- -------- --------
NET INCOME 172.0 164.8 159.4
Preferred dividends (Note 9) 0.9 0.9 0.9 -------- -------- --------
EARNINGS ON COMMON STOCK $ 171.1 $ 163.9 $ 158.5 ======== ======== ========
See Notes to Consolidated Financial Statements.
II-9
The Dayton Power and Light Company
CONSOLIDATED STATEMENT OF CASH FLOWS - --------------------------------------------------------------------------- For the years ended December 31, $ in millions 1997 1996 1995 - --------------------------------------------------------------------------- OPERATING ACTIVITIES Cash received from utility customers $1,230.3 $1,231.2 $1,205.9 Other operating cash receipts 12.0 10.7 11.0 Cash paid for: Fuel and purchased power (235.9) (207.6) (249.8) Purchased gas (167.2) (163.3) (131.7) Operation and maintenance labor (81.4) (85.9) (87.5) Nonlabor operating expenditures (153.5) (194.2) (164.4) Interest (85.2) (87.8) (92.1) Income taxes (89.0) (89.1) (106.4) Property, excise and payroll taxes (130.5) (125.7) (123.9) -------- -------- -------- Net cash provided by operating activities (Note 11) 299.6 288.3 261.1
INVESTING ACTIVITIES Property expenditures (110.9) (116.9) (78.9) Other activities (48.4) (50.3) - -------- -------- --------
Net cash used for investing activities (159.3) (167.2) (78.9) -------- -------- --------
FINANCING ACTIVITIES Dividends paid on common stock (118.5) (138.3) (132.6) Dividends paid on preferred stock (0.9) (0.9) (0.9) Retirement of long-term debt (81.0) (25.4) (126.7) Issuance of short-term debt 69.8 6.5 - Issuance of long-term debt - - 108.8 -------- -------- --------
Net cash used for financing activities (130.6) (158.1) (151.4) -------- -------- --------
Cash and temporary cash investments-- Net change 9.7 (37.0) 30.8 Balance at beginning of period 2.1 39.1 8.3 -------- -------- --------
Balance at end of period $ 11.8 $ 2.1 $ 39.1 ======== ======== ========
See Notes to Consolidated Financial Statements.
II-10
The Dayton Power and Light Company
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------- At December 31, $ in millions 1997 1996 - ------------------------------------------------------------------- ASSETS Property $3,587.8 $3,493.2
Less-- Accumulated depreciation and amortization (1,355.8) (1,249.4) -------- --------
Net property 2,232.0 2,243.8 -------- --------
Current Assets Cash and temporary cash investments 11.8 2.1 Accounts receivable, less provision for uncollectible accounts of $4.7 and $5.1 respectively 205.8 193.4 Inventories, at average cost 87.1 75.2 Taxes applicable to subsequent years 91.9 87.3 Other current assets 61.4 54.3 -------- --------
Total current assets 458.0 412.3 -------- --------
Other Assets Financial assets 111.1 56.0 Income taxes recoverable through future revenues (Notes 1 and 2) 208.2 222.4 Regulatory assets (Note 2) 116.7 137.3 Other 200.8 171.4 -------- --------
Total other assets 636.8 587.1 -------- --------
TOTAL ASSETS $3,326.8 $3,243.2 ======== ========
See Notes to Consolidated Financial Statements.
II-11
The Dayton Power and Light Company
CONSOLIDATED BALANCE SHEET (continued)
- ------------------------------------------------------------------- At December 31, $ in millions 1997 1996 - ------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES - ------------------------------ Capitalization Common shareholder's equity-(Note 8) Common stock $ 0.4 $ 0.4 Other paid-in capital 739.1 738.9 Earnings reinvested in the business 541.3 478.2 -------- --------
Total common shareholder's equity 1,280.8 1,217.5 -------- --------
Preferred stock (Note 9) 22.9 22.9 Long-term debt (Note 7) 886.0 926.3 -------- --------
Total capitalization 2,189.7 2,166.7 -------- --------
Current Liabilities Accounts payable 124.2 109.6 Accrued taxes 157.8 136.6 Accrued interest 20.7 21.6 Current portion of long-term debt 0.4 40.4 Short-term debt (Note 6) 81.0 11.3 Other 41.9 49.1 -------- --------
Total current liabilities 426.0 368.6 -------- --------
Deferred Credits And Other Deferred taxes (Note 3) 500.5 513.2 Unamortized investment tax credit 72.2 75.2 Other 138.4 119.5 -------- --------
Total deferred credits and other 711.1 707.9 -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $3,326.8 $3,243.2 ======== ========
See Notes to Consolidated Financial Statements.
II-12
The Dayton Power and Light Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary Of Significant Accounting Policies
Principles of Consolidation and Nature of Operations - ---------------------------------------------------- The Company is a wholly-owned subsidiary of DPL Inc. The accounts of the Company and its wholly-owned subsidiaries are included in the accompanying consolidated financial statements. The consolidated financial statements principally reflect the results of operations and financial condition of the Company. DPL Inc. and its other wholly-owned subsidiaries provide certain administrative services to the Company including leases, equipment, insurance and other services. These costs (in millions) were $53.5 in 1997, $52.6 in 1996 and $26.7 in 1995. The Company is a public utility primarily engaged in the business of selling electric energy and natural gas to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. The majority of the Company's earnings come from electricity and natural gas sales. Earnings from other operations currently do not have a material financial impact on the consolidated results.
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. Also included in revenues are amounts charged to customers through a surcharge for recovery of arrearages from certain eligible low-income households.
The Company 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 (in millions) $78.3 in 1997 and $58.3 in 1996.
Operation and Maintenance - ------------------------- Operation and maintenance expenses include $0.6 million in 1997 and $4.7 million in 1995 of redemption premiums and other costs relating to the refinancing of bond issues.
II-13
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 3.5% in 1997 and 1996 and 3.4% in 1995.
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.
Reclassifications - ----------------- Reclassifications have been made in certain prior years' amounts to conform to the current reporting presentation.
Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions related to future events.
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2. Regulatory Matters
The Company applies the provisions of Financial Accounting Standard (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting standard provides for the deferral of costs authorized for the future recovery by regulators. These costs would be charged to expense without regulatory authorization. Regulatory assets on the Consolidated Balance Sheet include:
At December 31, 1997 1996 ---- ---- --millions--
Phase-in (a) $ 30.6 $ 46.7 DSM (b) 33.6 35.3 Deferred interest (c) 52.5 55.3 Income taxes recoverable through future revenues 208.2 222.4 ------- ------- Total $ 324.9 $ 359.7 ======= =======
(a) Amounts deferred during a 1992-1994 electric rate increase phase-in (including carrying charges) are being recovered in current rates.
(b) DSM costs (including carrying charges) from the Company's cost-effective programs are deferred and are being recovered at approximately $9 million per year.
The 1992 PUCO-approved agreement for the phase-in plan and DSM programs, as updated in 1995, allows accelerated recovery of DSM costs and, thereafter, production plant costs to the extent that the Company 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 will be used to accelerate recovery of these costs. If the return is greater than two percent over the baseline, the entire excess will be used for such purpose.
(c) 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.
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3. Income Taxes
For the years ended December 31, $ in millions 1997 1996 1995 - -------------------------------------------------------------------------- COMPUTATION OF TAX EXPENSE
Federal income tax (a) $ 95.0 $ 91.9 $ 90.0
Increases (decreases) in tax from - Regulatory assets 3.6 3.3 3.3 Depreciation 11.4 10.7 10.8 Investment tax credit amortized (3.0) (3.0) (3.0) Other, net (7.4) (5.2) (3.3) ------ ------ ------
Total tax expense $ 99.6 $ 97.7 $ 97.8 ====== ====== ======
COMPONENTS OF TAX EXPENSE
Taxes currently payable $102.4 $102.1 $ 93.1 Deferred taxes-- Regulatory assets (4.0) (3.5) (1.7) Liberalized depreciation and amortization 5.3 7.2 13.9 Fuel and gas costs 5.5 2.5 (3.1) Other (6.6) ( 6.4) (2.6) Deferred investment tax credit, net (3.0) ( 4.2) (1.8) ------ ------ ------
Total tax expense $ 99.6 $ 97.7 $ 97.8 ====== ====== ======
(a) The statutory rate of 35% applied to pre-tax income.
COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
At December 31, $ in millions 1997 1996 - ------------------------------------------------- NON-CURRENT LIABILITIES
Depreciation/property basis $(443.0) $(447.9) Income taxes recoverable (72.4) (77.4) Regulatory assets (38.6) (45.8) Investment tax credit 25.3 26.3 Other 28.2 31.6 ------- -------
Net non-current liability $(500.5) $(513.2) ======= =======
Net Current Asset (Liability) $ (2.7) $ 1.7 ======= =======
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4. Pensions And Postretirement Benefits
Pensions - -------- Substantially all Company employees participate in pension plans paid for by the Company. Employee benefits are based on their years of service, age at retirement and, for salaried employees, their compensation. The plans are funded in amounts actuarially determined to provide for these benefits.
An interest rate of 6.25% was used in developing the amounts in the following tables. Actual returns on plan assets for 1997, 1996 and 1995 were 11.2%, 12.7% and 25.6%, respectively. Increases in compensation levels approximating 5% were used for all years.
The following table presents the components of pension cost (portions of which were capitalized):
$ in millions 1997 1996 1995 - --------------------------------------------------------------- Service cost - benefits earned $ 6.3 $ 6.2 $ 6.2 Interest cost 15.2 15.0 14.4 Expected return on plan assets of 7.5% in each year (19.6) (18.1) (17.8) Net amortization (3.0) (1.1) (0.9) ----- ----- -----
Net pension cost $(1.1) $ 2.0 $ 1.9 ===== ===== =====
The following table sets forth the plans' funded status and amounts recorded in Other assets on the Consolidated Balance Sheet at December 31:
$ in millions 1997 1996 - --------------------------------------------------------- Plan assets at fair value (a) $330.2 $321.4 Actuarial present value of projected benefit obligation 259.1 255.1 ------ ------ Plan assets in excess of projected benefit obligation 71.1 66.3
Unamortized transition obligation (11.3) (15.5) Prior service cost 13.9 16.0 Changes in plan assumptions and actuarial gains and losses (28.3) (22.5) ------ ------
Net pension assets $ 45.4 $ 44.3 ====== ======
Vested benefit obligation $203.8 $198.6 Accumulated benefit obligation without projected wage increases $ 236.4 $237.4
(a) Invested in fixed income investments, equities and guaranteed investment contracts. In 1996, equities included $26.5 million of DPL Inc. common stock.
II-17
Postretirement Benefits - ----------------------- Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits. The unamortized transition obligation associated with these benefits is being amortized over the approximate average remaining life expectancy of the retired employees. Active employees are eligible for life insurance benefits, and this unamortized transition obligation is being amortized over the average remaining service period.
The Company has funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust. Actual returns on plan assets were 6.0% and 6.7% in 1997 and 1996, respectively.
The following table presents the components of postretirement benefit cost:
$ in millions 1997 1996 1995 - --------------------------------------------------------------- Expected return on plan assets of 5.7% $(0.8) $(0.6) $ - Interest cost 2.2 2.5 3.6 Net amortization (1.1) 2.9 2.9 ----- ----- -----
Postretirement benefit cost $ 0.3 $ 4.8 $ 6.5 ===== ===== =====
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation is 9% for 1997 and decreases to 5% by 2005. A one percentage point increase in each future year's assumed health care trend rate would increase postretirement benefit cost by $0.1 million annually and would increase the accumulated postretirement benefit obligation by $2.3 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.25%.
The following table sets forth the accumulated postretirement benefit amounts recorded in Other Deferred Credits on the Consolidated Balance Sheet at December 31:
$ in millions 1997 1996 - ----------------------------------------------------------- Accumulated postretirement benefit obligation:
-retirees and dependents $35.4 $40.7 -active employees 1.1 1.1 ----- ----- Total 36.5 41.8
Plan assets at fair value (a) 12.1 11.9 ----- -----
Projected benefit obligation in excess of plan assets 24.4 29.9 Unamortized transition obligation (15.9) (18.9) Actuarial gains and losses 25.5 24.6 ----- -----
Accrued postretirement benefit liability $34.0 $35.6 ===== =====
(a) Invested in fixed income government obligations and money market securities.
II-18
5. Commonly Owned Facilities
The Company owns certain electric generating and transmission facilities as tenants in common with other Ohio utilities. Each utility is obligated to pay its ownership share of construction and operation costs of each facility. As of December 31, 1997, the Company had $1.6 million of commonly owned facilities under construction. The Company's share of expenses is included in the Consolidated Statement of Results of Operations.
The following table presents the Company's share of the commonly owned facilities at December 31, 1997:
Company Company Share Investment --------------------- --------------- Production Gross Plant in Ownership Capacity Service (%) (MW) ($ in millions) - ---------------------------------------------------------------------
Production Units: Beckjord Unit 6 50.0 210 55 Conesville Unit 4 16.5 129 30 East Bend Station 31.0 186 150 Killen Station 67.0 418 406 Miami Fort Units 7 & 8 36.0 360 119 Stuart Station 35.0 823 245 Zimmer Station 28.1 365 989 Transmission (at varying percentages) 67
6. Notes Payable And Compensating Balances
DPL Inc., the Company's parent, has $200 million available through a revolving credit agreement. This agreement with a consortium of banks is renewable through 2001. Commitment fees are approximately $170,000 per year, depending upon the aggregate unused balance of the loan. At December 31, 1997, DPL Inc. had $36.0 million in borrowings outstanding under this credit agreement.
The Company also has $96.6 million available in short-term informal lines of credit. To support these lines of credit, the Company is required to maintain average daily compensating balances of approximately $400,000 and also pay $87,550 per year in fees. At December 31, 1997, the Company had $10.0 million in borrowings from these lines of credit.
The Company had $69.7 million and $10.0 million in commercial paper outstanding at a weighted average interest rate of 6.0% and 6.75% at December 31, 1997 and 1996, respectively.
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7. Long-Term Debt
At December 31, $ in millions 1997 1996 - ---------------------------------------------------------------- First mortgage bonds maturing: 2003 8.00% $ - $ 40.0 2022-2026 8.14% (a) 671.0 671.0 Pollution control series maturing through 2027 - 6.43% (a) 107.2 107.6 ------ ------ 778.2 818.6
Guarantee of Air Quality Development Obligations 6.10% Series Due 2030 110.0 110.0 Unamortized debt discount and premium (net) (2.2) (2.3) ------ ------
Total $886.0 $926.3 ====== ======
(a) Weighted average interest rates for 1997 and 1996.
The amounts of maturities and mandatory redemptions for first mortgage bonds and notes are $0.4 million per year in 1998 through 2002. Substantially all property of the Company is subject to the mortgage lien securing the first mortgage bonds.
During 1997, a $40 million series of first mortgage bonds matured, and another $40 million series scheduled to mature in 2003 was redeemed.
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II-21
9. Preferred Stock
$25 par value, 4,000,000 shares authorized, no shares outstanding; and $100 par value, 4,000,000 shares authorized, 228,508 shares without mandatory redemption provisions outstanding.
Current Current Par Value Redemption Shares At December 31, 1997 and 1996 Series Rate Price Outstanding ($ in millions) - -------------------------------------------------------------------------- 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 ======= =====
The shares may be redeemed at the option of the Company at the per share prices indicated, plus cumulative accrued dividends.
10. Fair Value Of Financial Instruments
At December 31, 1997 1996 ------------------ ------------------- $ in millions Fair Value Cost Fair Value Cost - --------------------------------------------------------------------------- $ $ $ $ Assets (a)
Available for sale securities 165.0 133.8 90.1 75.4 Held to maturity securities 57.5 56.7 50.9 50.7
Liabilities (b)
Debt 1,038.7 967.4 1,018.6 976.7
(a) Maturities range from 1998 to 2010. (b) Includes current maturities.
Financial assets with quoted market prices are carried at market; the remaining financial assets are carried at cost.
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11. Reconciliation Of Net Income To Net Cash Provided By Operating Activities
For the years ended December 31, $ in millions 1997 1996 1995 - ---------------------------------------------------------------------------- Net income $172.0 $164.8 $159.4 Adjustments: Depreciation and amortization 125.9 122.3 115.4 Deferred income taxes (2.8) (3.3) 4.4 Amortization of regulatory assets, net 16.8 15.3 15.4 Operating expense provisions (26.0) (10.2) (0.4) Accounts receivable (12.4) (48.9) (44.7) Accounts payable 16.4 10.0 21.4 Accrued taxes payable 21.2 20.7 (7.6) Inventory (12.0) 6.5 1.7 Other 0.5 11.1 (3.9) ------ ------ ------
Net cash provided by operating activities $299.6 $288.3 $261.1 ====== ====== ======
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12. Financial Information By Business Segments
For the years ended December 31, $ in millions 1997 1996 1995 - -------------------------------------------------------------------------- Utility service revenues Electric $1,010.0 $1,016.4 $1,029.9 Gas 243.7 238.6 222.0 Other 0.7 3.4 5.6 -------- -------- -------- Total utility service revenues 1,254.4 1,258.4 1,257.5 Interest and other income 13.9 9.3 11.8 -------- -------- -------- Total income $1,268.3 $1,267.7 $1,269.3 ======== ======== ========
Operating profit before tax Electric $ 327.0 $ 326.9 $ 335.8 Gas 24.9 23.7 18.9 Other (3.5) (5.7) (4.4) -------- -------- -------- Total operating profit before tax 348.4 344.9 350.3 Other income, net (a) 9.2 6.7 1.3 Interest expense (86.0) (89.1) (94.4) -------- -------- -------- Income before income taxes $ 271.6 $ 262.5 $ 257.2 ======== ======== ========
Depreciation and amortization Electric $ 118.4 $ 112.8 $ 108.1 Gas 7.1 6.7 6.4 Other 0.4 2.8 0.9 -------- -------- -------- Total depreciation and amortization $ 125.9 $ 122.3 $ 115.4 ======== ======== ========
Construction additions Electric $ 92.8 $ 109.4 $ 66.6 Gas 16.3 14.1 11.7 Other - - 0.6 -------- -------- -------- Total construction additions $ 109.1 $ 123.5 $ 78.9 ======== ======== ========
Assets Electric $2,733.6 $2,754.3 $2,763.1 Gas 277.1 259.9 223.7 Other (b) 316.1 229.0 217.5 -------- -------- -------- Total assets at year-end $3,326.8 $3,243.2 $3,204.3 ======== ======== ========
(a) Includes primarily investment income less bond redemption costs in 1997 and 1995. (b) Includes primarily temporary cash investments, debt and equity financial assets and certain deferred items.
II-24
SELECTED QUARTERLY INFORMATION
March 31, June 30, September 30, December 31, $ in millions 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------ $ $ $ $ $ $ $ $ Utility service revenues 357.3 369.0 269.8 282.0 283.9 278.2 343.4 329.2 Income before income taxes 94.6 101.5 51.6 54.2 73.1 67.3 52.3 39.5 Net income 62.2 62.8 33.2 33.1 44.3 41.7 32.3 27.2 Earnings on common stock 62.0 62.5 33.0 32.9 44.1 41.5 32.0 27.0 Dividends paid 28.9 34.7 29.0 34.7 29.0 34.5 31.6 34.4
II-25
FINANCIAL AND STATISTICAL SUMMARY
II-26
Report of Independent Accountants ---------------------------------
To the Board of Directors of The Dayton Power and Light Company
In our opinion, the consolidated financial statements listed in the index, appearing under Item 8 on page II-8 of this Form 10-K, present fairly, in all material respects, the financial position of The Dayton Power and Light Company (the "Company") and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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/ Price Waterhouse LLP
Price Waterhouse LLP Dayton, Ohio January 21, 1998
II-27
Report of Independent Accountants on Financial Statement Schedule ---------------------------------
To the Board of Directors of The Dayton Power and Light Company
Our audits of the consolidated financial statements of The Dayton Power and Light Company and its subsidiaries referred to in our report dated January 21, 1998 appearing on page II-27 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ Price Waterhouse LLP
Price Waterhouse LLP Dayton, Ohio January 21, 1998
II-28
Item 9
Item 9 - Changes In And Disagreements With Accountants On Accounting And Financial Disclosure - ------------------------------------------------------------------------------
None.
PART III
Item 10
Item 10 - Directors And Executive Officers Of The Registrant - ------------------------------------------------------------------------------
Directors of the Registrant - --------------------------- The Board is presently authorized to consist of nine directors. These nine directors are also directors of DPL Inc., the holding company of the Company. Nine directors are to be elected this year to serve until the Annual Meeting of Shareholders in 1999 or until their successors are duly elected and qualified. Should any nominee become unable to accept nomination or election, the Board will vote for the election of such other person as a director as the present directors may recommend in the place of such nominee.
The following information regarding the nominees is based on information furnished by them:
Director Since -------------- THOMAS J. DANIS, Age 48 1989 Chairman and Chief Executive Officer, The Danis Companies, Dayton, Ohio, construction, real estate and environmental services. Director: CSR America Inc. Trustee: Dayton Foundation, Miami Valley Research Park Foundation.
JAMES F. DICKE, II, Age 52 1990 President, Crown Equipment Corporation, New Bremen, Ohio, international manufacturer and distributor of electric lift trucks and material handling products. Director: Regional Boys and Girls Clubs of America, Dayton Art Institute. Chairman: Trinity University Board of Trustees Secretary: Culver Educational Foundation.
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Director Since -------------- PETER H. FORSTER, Age 55 1979 Chairman, DPL Inc. and The Dayton Power and Light Company. Chairman: Miami Valley Research Foundation. Director: Amcast Industrial Corp., Comair Holdings, Inc. Trustee: F. M. Tait Foundation, Arts Center Foundation.
ERNIE GREEN, Age 59 1991 President and Chief Executive Officer, Ernie Green Industries, Dayton, Ohio, automotive components manufacturer. Director: Pitney Bowes Inc., WPTD-TV, Eaton Corp., Fluor Daniel/GTI, Gradall.
JANE G. HALEY, Age 67 1978 President and Chief Executive Officer, Gosiger, Inc., Dayton, Ohio, national importer and distributor of machine tools. Director: Ultra-Met Company, Urbana, Ohio, ONA, Dayton, Ohio. Trustee: University of Dayton, Chaminade-Julienne High School, Dayton, Ohio, Miami Valley Economic Development Coalition. Member: Area Progress Council.
ALLEN M. HILL, Age 52 1989 President and Chief Executive Officer, DPL Inc. and The Dayton Power and Light Company. Director: Citizens Federal Bank, F.S.B. Trustee: Dayton Business Committee, The University of Dayton, Miami Valley Economic Development Coalition, Air Force Museum Foundation, National Center for Composite Systems Technology.
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Director Since -------------- W AUGUST HILLENBRAND, Age 57 1992 President and Chief Executive Officer, Hillenbrand Industries, Batesville, Indiana, a diversified public holding company with five wholly-owned and autonomously operated subsidiaries manufacturing caskets, hospital furniture, hospital supplies, high-tech security locks and providing funeral planning services. Director: Forecorp, Inc., Forethought Life Insurance Company. Trustee: Denison University, National Committee for Quality Health Care, Batesville Girl Scouts.
DAVID R. HOLMES, Age 57 1994 Chairman, President and Chief Executive Officer, The Reynolds and Reynolds Company, Dayton, Ohio, information management systems. Director: NCR Corporation, Dayton, Ohio, Wright Health/Anthem, Dayton, Ohio. Advisor: J. L. Kellogg Graduate School of Management, Northwestern University. Member: Dayton Business Committee, Area Progress Council, Downtown Dayton Partnership.
BURNELL R. ROBERTS, Age 70 1987 Chairman, Sweetheart Holdings, Inc. Retired Chairman of the Board and Chief Executive Officer, The Mead Corporation, Dayton, Ohio, forest products producer. Director: Armco, Inc., The Perkin-Elmer Corporation, Rayonier, Inc., Universal Protective Plastics, Inc., Day International Group, Inc.
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EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1998)
Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - -----------------------------------------------------------------------------
Peter H. Forster 55 Chairman 4/06/92 - 3/01/98 Chairman, DPL Inc. 1/01/97 - 3/01/98 Chairman and Chief 9/26/95 - 1/01/97 Executive Officer, DPL Inc. Chairman, President and 4/05/88 - 9/26/95 Chief Executive Officer, DPL Inc.
Allen M. Hill 52 President and Chief 4/06/92 - 3/01/98 Executive Officer President and Chief 1/01/97 - 3/01/98 Executive Officer, DPL Inc. President and Chief Operating 9/26/95 - 1/01/97 Officer, DPL Inc.
Paul R. Anderson 55 Controller 4/12/81 - 3/01/98
Stephen P. Bramlage 51 Assistant Vice President 1/01/94 - 3/01/98 Director, Service Operations 10/29/88 - 1/01/94
Jeanne S. Holihan 41 Assistant Vice President 3/17/93 - 3/01/98 Treasurer 11/06/90 - 3/17/93
Thomas M. Jenkins 46 Group Vice President and 5/14/96 - 3/01/98 Treasurer, DPL Inc. and the Company Group Vice President 6/27/95 - 5/14/96 Group Vice President and Treasurer, DPL Inc. Group Vice President and 5/09/94 - 6/27/95 and Treasurer, DPL Inc. and the Company Group Vice President and 11/06/90 - 5/09/94 Treasurer, DPL Inc. Group Vice President
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EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1998)
Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - ------------------------------------------------------------------------------
Stephen F. Koziar Jr. 53 Group Vice President 1/31/95 - 3/01/98 and Secretary, DPL Inc. and the Company Group Vice President, 12/10/87 - 1/31/95 DPL Inc. and the Company
Judy W. Lansaw 46 Group Vice President, 1/31/95 - 3/01/98 DPL Inc. and the Company Group Vice President and 12/07/93 - 1/31/95 Secretary, DPL Inc. and the Company Vice President and Secretary 8/01/89 - 12/07/93 Secretary, DPL Inc. and the Company
Arthur G. Meyer 48 Vice President, Legal and 11/21/97 - 3/01/98 Corporate Affairs Director, Corporate Relations 5/14/96 - 11/21/97 Treasurer 6/27/95 - 5/14/96 Director, Financial Activities 5/09/94 - 6/27/95 Manager, Service Operations 1/31/94 - 5/09/94 Associate General Counsel 7/13/92 - 1/31/94
Bryce W. Nickel 41 Assistant Vice President 1/01/94 - 3/01/98 Director, Service Operations 10/29/89 - 1/01/94
H. Ted Santo 47 Group Vice President 12/08/92 - 3/01/98
III-5
Item 11
Item 11 - Executive Compensation - ------------------------------------------------------------------------------
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees receive $12,000 annually for services as a director, $600 for attendance at a Board meeting, and $500 for attendance at a committee meeting or operating session of DPL Inc. and the Company. Members of the Executive Committee of DPL Inc. receive $2,000 annually for services on that committee. Each committee chairman receives an additional $1,600 annually. Directors who are not employees of the Company also participate in a Directors' Deferred Stock Compensation Plan (the "Stock Plan") under which a number of DPL Inc. common shares are awarded to directors each year. All shares awarded under the Stock Plan are transferred to a grantor trust (the "Master Trust") maintained by DPL Inc. to secure its obligations under various directors' and officers' deferred and incentive compensation plans. Receipt of the shares or cash equal to the value thereof is deferred until the participant retires as a director or until such other time as designated by the participant and approved by the Compensation and Management Review Committee (the "Committee") of DPL Inc. In the event of a change of control (as defined in the Stock Plan), the authority and discretion which is exercisable by the Committee will be exercised by the trustees of the Master Trust. In April 1997, each non-employee director was awarded 1,600 shares.
DPL Inc. maintains a Deferred Compensation Plan (the "Compensation Plan") for non-employee directors of DPL Inc. and the Company in which payment of directors' fees may be deferred. The Compensation Plan also includes a supplementary deferred income program which provides that DPL Inc. will match $5,000 annually of deferred directors' fees for a maximum of ten years. Under the supplementary program, a $150,000 death benefit is provided until such director ceases to participate in the Compensation Plan. Under the standard deferred income program directors are entitled to receive a lump sum payment or payments in installments over a period up to 20 years. A director may elect payment in either cash or common shares. Participants in the supplementary program are entitled to receive deferred payments over a ten-year period in equal installments. The Compensation Plan provides that in the event of a change in control of DPL Inc., as defined in the Compensation Plan, all benefits provided under the supplementary deferred income program become immediately vested without the need for further contributions by the participants and the discretion which, under the Compensation Plan, is exercisable by the Chief Executive Officer of DPL Inc. will be exercised by the trustees of the Master Trust. If the consent of the Chief Executive Officer of DPL Inc. is obtained, individuals who have attained the age of 55 and who are no longer directors of DPL Inc. or the Company may receive a lump sum payment of amounts credited to them under the supplementary deferred income program.
Mr. Forster has entered into an agreement with DPL Inc. and the Company pursuant to which Mr. Forster will serve as Chairman of the Board of DPL Inc. and the Company and will provide various advisory and consulting services. The term of the agreement expires on December 31, 1999 (which term is automatically extended on December 31, 1999 and each December 31 thereafter for an additional year unless either party gives advance notice of nonrenewal). Under the agreement, Mr. Forster receives an annual consulting fee of $500,000 (as well as such bonuses, if any, as may be determined by the Compensation and
III-6
Management Review Committee in its discretion) and an award opportunity of 35,000 restricted shares under the Stock Plan. Commencing in 2000, Mr. Forster will participate in a bonus program for individuals monitoring and managing DPL Inc.'s financial assets pursuant to which he will have the opportunity to receive an annual bonus if there is a positive cumulative cash return on such financial assets (after recovery of all amounts invested plus expenses). Payments under the bonus program, if and as earned, will continue following termination of the agreement for any reason. Mr. Forster, who retired as Chief Executive Officer of DPL Inc. effective December 31, 1996, continues to actively perform significant duties and functions for DPL Inc. and its subsidiaries under the agreement.
EXECUTIVE OFFICER COMPENSATION
Summary Compensation Table - -------------------------- Set forth below is certain information concerning the compensation of the Chief Executive Officer and each of the other four most highly compensated executive officers of the Company for the last three fiscal years, for services rendered in all capacities to the Company and its subsidiaries, DPL Inc., and the other subsidiaries of DPL Inc.
Long-Term Compensation Annual ------------ Compensation Restricted ----------------- Stock Unit All Other Name and Principal Salary Bonus (1) Awards (2) Compensation (3) Position Year ($) ($) ($) ($) - ------------------------------------------------------------------------------ Allen M. Hill 1997 430,000 258,000 834,000 ('98-00) 1,000 President and Chief 1996 377,000 226,000 717,000 ('97-99) 1,000 Executive Officer 1995 363,000 226,000 319,000 ('96-98) 1,000
Peter H. Forster (4) 1997 500,000 150,000 840,000 ('98-00) 70,400 Chairman 1996 597,000 358,000 984,000 ('97-99) 1,000 1995 572,000 344,000 784,000 ('96-98) 1,000
Judy W. Lansaw 1997 240,000 108,000 411,000 ('98-00) 1,000 Group Vice President 1996 214,000 96,000 393,000 ('97-99) 1,000 1995 197,000 89,000 227,000 ('96-98) 1,000
Stephen F. Koziar Jr. 1997 231,000 104,000 234,000 ('98-00) 1,000 Group Vice President 1996 218,000 98,000 216,000 ('97-99) 1,000 and Secretary 1995 209,000 94,000 141,000 ('96-98) 1,000
H. Ted Santo 1997 226,000 102,000 297,000 ('98-00) 1,000 Group Vice President 1996 205,000 92,000 305,000 ('97-99) 1,000 1995 190,000 86,000 168,000 ('96-98) 1,000
III-7
(1) Amounts in this column represent awards made under the Management Incentive Compensation Program ("MICP"). Awards are based on achievement of specific predetermined operating and management goals in the year indicated and paid in the year earned or in the following year.
(2) Amounts shown in this column have not been paid, but are contingent on performance and represent the dollar value of restricted stock incentive units ("SIU's") awarded to the named executive officer under the Management Stock Incentive Plan ("MSIP") based on the closing price of a DPL Inc. common share on the New York Stock Exchange--Consolidated Transactions Tape on the date of award. The SIU's awarded for 1995, 1996 and 1997 vest only to the extent that the DPL Inc. average return on equity ("ROE") over a three-year performance period is above the Regulatory Research Associates industry median.
Depending on the performance of DPL Inc., these SIU's vest in amounts ranging from 0% to 100% of the target award at an ROE between 0 and 100 basis points above median ROE and from 100% to 150% of target award at an ROE between 100 and 200 basis points above median ROE.
No units vest if the three-year average ROE is below 10%. Amounts shown for 1995, 1996 and 1997 reflect target awards. For each SIU which vests, a participant receives the cash equivalent of one DPL Inc. common share plus dividend equivalents from the date of award. Prior to payout at retirement, an individual may elect to convert a portion of vested SIU's to a cash equivalent and accrue interest thereon. All payouts of vested SIU's under the MSIP are deferred until retirement.
(3) Amounts in this column represent employer matching contributions on behalf of each named executive under the DP&L Employee Savings Plan made to the DPL Inc. Employee Stock Ownership Plan.
(4) Annual compensation shown for Mr. Forster for 1997 was paid pursuant to an agreement with DPL Inc. and the Company. Long term compensation award opportunities shown for 1996 and 1997 represent the dollar value of restricted shares awarded to Mr. Forster under the Directors' Stock Plan which are subject to the same earning and vesting criteria generally applicable to SIU's. All other compensation shown for 1997 represents directors fees of $32,600 and the dollar value of the annual award of 1,600 shares to each non-employee director under the Directors' Stock Plan.
Certain Severance Pay Agreements - -------------------------------- DPL Inc. entered into severance pay agreements with each of Messrs. Hill, Koziar and Santo and Mrs. Lansaw providing for the payment of severance benefits in the event that the individual's employment with DPL Inc. or its subsidiaries is terminated under specified circumstances within three years after a change in control of DPL Inc. or the Company (generally, defined as the acquisition of 15% or more of the voting securities or certain mergers or other business combinations). The agreements entered into between 1987 and 1991 require the individuals to remain with DPL Inc. throughout the period during which any change of control is pending in order to help put in place the best plan for the shareholders. The principal severance benefits under each agreement include payment of the following: (i) the individual's full base salary and accrued benefits through the date of termination and any awards for any completed or partial period under the MICP and the individual's award for the current period under the MICP (or for a completed period if no award for that period has yet been determined) fixed at an amount equal to his average annual award for the preceding three years; (ii) 300%...
III-8
...of the sum of the individual's annual base salary at the rate in effect on the date of termination (or, if higher, at the rate in effect as of the time of the change in control) plus the average amount awarded to the individual under the MICP for the three preceding years; (iii) all awarded or earned but unpaid SIU's; and (iv) continuing medical, life, and disability insurance. In the event any payments under these agreements are subject to an excise tax under the Internal Revenue Code of 1986, the payments will be adjusted so that the total payments received on an after- tax basis will equal the amount the individual would have received without imposition of the excise tax. The severance pay agreements are effective for one year but are automatically renewed each year unless DPL Inc. or the participant notifies the other one year in advance of its or his intent not to renew. DPL Inc. has agreed to secure its obligations under the severance pay agreements by transferring required payments to the Master Trust. Mr. Forster's agreement with DPL Inc. and the Company contains similar severance benefits provisions.
Pension Plans - ------------- The following table sets forth the estimated total annual benefits payable under the Company retirement income plan and the supplemental executive retirement plan to executive officers at normal retirement date (age 65) based upon years of accredited service and final average annual compensation (including base and incentive compensation) for the three highest years during the last ten:
Total Annual Retirement Benefits for Years of Accredited Service at Age 65 Final Average ------------------------------------- Annual Earnings 10 Years 15 Years 20-30 Years --------------- -------- -------- -----------
$ 200,000 $ 52,500 $ 78,500 $ 104,500 400,000 109,500 164,000 218,500 600,000 166,500 249,500 332,500 800,000 223,500 335,000 446,500 1,000,000 280,500 420,500 560,500 1,200,000 337,500 506,000 674,500 1,400,000 394,500 591,500 788,500
The years of accredited service for the named executive officers are Mr. Hill -- 28 yrs.; Mr. Koziar -- 28 yrs.; Mrs. Lansaw -- 18 yrs.; and Mr. Santo -- 22 yrs. Years of service under the retirement income plan are capped at 30 years, however, the retirement and supplemental plans, taken together, can provide full benefits after 20 years of accredited service. Benefits are computed on a straight-life annuity basis, are subject to deduction for Social Security benefits and may be reduced by benefits payable under retirement plans of other employers. For each year an individual retires prior to age 62, benefits under the supplemental plan are reduced by 3% or 21% for early retirement at age 55. Mr. Forster ceased to accrue benefits under the retirement and supplemental plans effective as of December 31, 1996 upon his retirement as an employee of DPL Inc. and the Company.
III-9
Item 12
Item 12 - Security Ownership Of Certain Beneficial Owners And Management - ------------------------------------------------------------------------------
The Company's stock is beneficially owned by DPL Inc.
Set forth below is information concerning the beneficial ownership of shares of Common Stock of DPL Inc. by each director of the Company as of January 31, 1998.
Amount and Nature of Name of Director Beneficial Ownership (1) ---------------- ------------------------
Thomas J. Danis 35,799 shares James F. Dicke, II 92,130 shares Peter H. Forster 37,416 shares Ernie Green 34,023 shares Jane G. Haley 51,672 shares Allen M. Hill 32,733 shares W August Hillenbrand 20,683 shares David R. Holmes 10,888 shares Burnell R. Roberts 35,924 shares
Set forth below is information concerning the beneficial ownership of shares of Common Stock of DPL Inc. by each executive officer of the Company named in the Summary Compensation Table (other than executive officers who are directors of the Company whose security ownership is found above) as of January 31, 1998.
Amount and Nature of Name of Executive Officer Beneficial Ownership (1) ------------------------ ------------------------
Stephen F. Koziar 13,633 shares H. Ted Santo 3,747 shares Judy W. Lansaw 3,519 shares
(1) The number of shares shown represents in each instance less than 1% of the outstanding Common Shares of DPL Inc.
There were 402,572 shares or 0.25% of the total number of Common Shares beneficially owned by all directors and executive officers of DPL Inc. and the Company as a group at January 31, 1998. The number of shares shown for the directors includes Common Shares transferred to the Master Trust for non-employee directors pursuant to the Directors' Deferred Stock Compensation Plan.
Item 13
Item 13 - Certain Relationships And Related Transactions - ------------------------------------------------------------------------------
None.
III-10
PART IV
Item 14
Item 14 - Exhibits, Financial Statement Schedule And Reports On Form 8-K - ------------------------------------------------------------------------------
(a) Documents filed as part of the Form 10-K
1. Financial Statements --------------------
See Item 8 - Index to Financial Statements on page II-8, which page is incorporated herein by reference.
2. Financial Statement Schedule ----------------------------
For the three years in the period ended December 31, 1997:
Page No. --------
Schedule II - Valuation and qualifying accounts IV-7
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
3. Exhibits --------
The following exhibits have been filed with the Securities and Exchange Commission and are incorporated herein by reference.
Incorporation by Reference --------------------------
2 Copy of the Agreement of Merger among Exhibit A to the 1986 DPL Inc., Holding Sub Inc. and the Proxy Statment Company dated January 6, 1986 (File No. 1-2385) January 6, 1986
3(a) Regulations and By-Laws of the Company Exhibit 2(e) to Registration Statement No. 2-68136 to Form S-16
3(b) Copy of Amended Articles of Exhibit 3(b) to Report Incorporation of the Company dated on Form 10-K for the year January 3, 1991 ended December 31, 1991 (File No. 1-2385)
4(a) Copy of Composite Indenture dated as of Exhibit 4(a) to Report October 1, 1935, between the Company on Form 10-K for the year and The Bank of New York, Trustee with ended December 31, 1985 all amendments through the Twenty-Ninth (File No. 1-2385) Supplemental Indenture
4(b) Copy of the Thirtieth Supplemental Exhibit 4(h) to Indenture dated as of March 1, 1982, Registration Statement between the Company and The Bank of New No. 33-53906 York, Trustee
4(c) Copy of the Thirty-First Supplemental Exhibit 4(h) to Indenture dated as of November 1, 1982, Registration Statement between the Company and The Bank of New No. 33-56162 York, Trustee
4(d) Copy of the Thirty-Second Supplemental Exhibit 4(i) to Indenture dated as of November 1, 1982, Registration Statement between the Company and The Bank of New No. 33-56162 York, Trustee
4(e) Copy of the Thirty-Third Supplemental Exhibit 4(e) to Report Indenture dated as of December 1, 1985, on Form 10-K for the year between the Company and The Bank of New ended December 31, 1985 York, Trustee (File No. 1-2385)
IV-2
4(f) Copy of the Thirty-Fourth Supplemental Exhibit 4 to Report Indenture dated as of April 1, 1986, on Form 10-Q for the quarter between the Company and The Bank of New ended June 30, 1986 York, Trustee (File No. 1-2385)
4(g) Copy of the Thirty-Fifth Supplemental Exhibit 4(h) to Report Indenture dated as of December 1, 1986, on Form 10-K for the year between the Company and The Bank of New ended Decmebr 31, 1986 York, Trustee (File No. 1-9052)
4(h) Copy of the Thirty-Sixth Supplemental Exhibit 4(i) to Indenture dated as of August 15, 1992, Registration Statement between the Company and The Bank of New No. 33-53906 York, Trustee
4(i) Copy of the Thirty-Seventh Supplemental Exhibit 4(j) to Indenture dated as of November 15, Registration Statemnt 1992, between the Company and The Bank No. 33-56162 of New York, Trustee
4(j) Copy of the Thirty-Eighth Supplemental Exhibit 4(k) to Indenture dated as of November 15, Registration Statement 1992, between the Company and The Bank No. 33-56162 of New York, Trustee
4(k) Copy of the Thirty-Ninth Supplemental Exhibit 4(k) to Indenture dated as of January 15, 1993, Registration Statemnet between the Company and The Bank of New No. 33-57928 York, Trustee
4(l) Copy of the Fortieth Supplemental Exhibit 4(m) to Report Indenture dated as of February 15, on Form 10-K for the year 1993, between the Company and The Bank ended December 31, 1992 of New York, Trustee (File No. 1-2385)
10(a) Description of Management Incentive Exhibit 10(d) to Report Compensation Program for Certain on Form 10-K for the year Executive Officers ended December 31, 1986 (File No. 1-9052)
10(b) Copy of Severance Pay Agreement with Exhibit 10(g) to Report Certain Executive Officers on Form 10-K for the year ended December 31, 1987 (File No. 1-2385)
IV-3
10(c) Copy of Supplemental Executive Exhibit 10(f) to Report Retirement Plan amended August 6, 1991 on Form 10-K for the year ended December 31, 1991 (File No. 1-2385)
10(d) Amended description of Directors' Exhibit 10(d) to Report Deferred Stock Compensation Plan on Form 10-K for the year effective January 1, 1993 ended December 31, 1993 (File No. 1-2385)
10(e) Amended description of Deferred Exhibit 10(e) to Report Compensation Plan for Non-Employee on Form 10-K for the year Directors effective January 1, 1993 ended December 31, 1993 (File No. 1-2385)
10(f) Copy of Management Stock Incentive Exhibit 10(f) to Report Plan amended January 1, 1993 on Form 10-K for the year ended December 31, 1993 (File No. 1-2385)
18 Copy of preferability letter relating Exhibit 18 to Report on to change in accounting for unbilled Form 10-K for the year revenues from Price Waterhouse LLP ended December 31, 1988 (File No. 1-2385)
The following exhibits are filed herewith:
Page No. --------
21 Copy of List of Subsidiaries of the Company
(b) Reports on Form 8-K -------------------
None.
IV-4
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.
THE DAYTON POWER AND LIGHT COMPANY
Registrant
March 30, 1998 /s/ Allen M. Hill ------------------------------------- Allen M. Hill President and Chief 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.
/s/Paul R. Anderson Controller (principal March 30, 1998 - --------------------- accounting officer) (P. R. Anderson)
Director - --------------------- (T. J. Danis)
Director - --------------------- (J. F. Dicke, II)
/s/Peter H. Forster Director and Chairman March 30, 1998 - --------------------- (P. H. Forster)
/s/Ernie Green Director March 30, 1998 - --------------------- (E. Green)
/s/Jane G. Haley Director March 30, 1998 - --------------------- (J. G. Haley)
IV-5
/s/Allen M. Hill Director, President and March 30, 1998 - --------------------- Chief Executive Officer (A. M. Hill)
Director - --------------------- (W A. Hillenbrand)
/s/David R. Holmes Director March 30, 1998 - --------------------- (D. R. Holmes)
/s/Thomas M. Jenkins Group Vice President and March 30, 1998 - --------------------- Treasurer (principal (Thomas M. Jenkins) financial officer)
Director - --------------------- (B. R. Roberts)
IV-6
Schedule II
THE DAYTON POWER AND LIGHT COMPANY VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, 1996 and 1995
- ------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------ Additions ----------------- Balance at Charged Balance Beginning to Deductions at End Description of Period Income Other (1) of Period - ------------------------------------------------------------------------------ ---------------------thousands-----------------------
1997: Deducted from accounts receivable--
Provisions for uncollectible accounts $5,083 $5,515 $ - $5,941 $4,657
1996: Deducted from accounts receivable--
Provisions for uncollectible accounts $6,481 $4,056 $ - $5,454 $5,083
1995: Deducted from accounts receivable--
Provision for uncollectible accounts $7,801 $1,096 $ - $2,416 $6,481
(1) Amounts written off, net of recoveries of accounts previously written off.
IV-7