UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to         

 

Commission File Number  1-2385

 

THE DAYTON POWER AND LIGHT COMPANY

(Exact name of registrant as specified in its charter)

 

OHIO		31-0258470
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1065 Woodman Drive Dayton, Ohio 45432
(Address of principal executive offices)
(937) 224-6000
(Registrant’s telephone number, including area code)

 

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

 

YES     ý   NO     o

 

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

 

YES     o   NO     ý

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

THE DAYTON POWER AND LIGHT COMPANY

 

INDEX

 

				Page No.
Part I. Financial Information
	Item 1.	Financial Statements
		Consolidated Statement of Results of Operations		3
		Consolidated Statement of Cash Flows		4
		Consolidated Balance Sheet		5
		Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
		Operating Statistics		26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		26
	Item 4.	Controls and Procedures		26
Part II. Other Information
	Item 1.	Legal Proceedings		27
	Item 4.	Submission of Matters to a Vote of Security Holders		27
	Item 5.	Other Information		27
	Item 6.	Exhibits		27
Other
	Signatures			28
	Certifications			28

 

Available Information:

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

 

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

 

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

 

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Part I.  Financial Information

 

Item 1.  Financial Statements

 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS

($ in millions)

 

		Three Months Ended March 31,
		2005			2004
Revenues
Electric revenues		$	305.1		$	300.4
Operating Expenses
Fuel		77.7			62.7
Purchased power		29.3			28.5
Operation and maintenance		48.8			46.8
Depreciation and amortization		30.0			28.3
Amortization of regulatory assets, net		0.5			0.1
General taxes		27.4			27.1
Total operating expenses		213.7			193.5
Operating Income		91.4			106.9
Interest expense		(11.3		)	(11.8		)
Other income		7.8			4.2
Income Before Income Taxes		87.9			99.3
Income tax expense		34.6			37.3
Net Income		53.3			62.0
Preferred dividends		0.2			0.2
Earnings on Common Stock		$	53.1		$	61.8

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

3

 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

($ in millions)

 

		Three Months Ended March 31,
		2005			2004
Operating Activities
Net income		$	53.3		$	62.0
Adjustments:
Depreciation and amortization		30.0			28.3
Amortization of regulatory assets, net		0.5			0.1
Deferred income taxes		11.4			12.4
Changes in working capital:
Accounts receivable		2.8			10.0
Accounts payable		2.8			1.7
Accrued taxes payable		15.8			14.6
Accrued interest payable		4.7			4.3
Prepayments		8.6			7.9
Inventories		(8.0		)	(7.7		)
Deferred compensation assets		3.6			8.8
Deferred compensation obligations		0.7			(6.7		)
Other (Note 2)		(11.2		)	(15.4		)
Net cash provided by operating activities		115.0			120.3
Investing Activities
Capital expenditures		(42.7		)	(25.7		)
Net cash used for investing activities		(42.7		)	(25.7		)
Financing Activities
Dividends paid on common stock		(75.0		)	(75.0		)
Dividends paid on preferred stock		(0.2		)	(0.2		)
Net cash used for financing activities		(75.2		)	(75.2		)
Cash and temporary cash investments
Net change		(2.9		)	19.4
Balance at beginning of period		17.2			17.2
Balance at end of period		$	14.3		$	36.6
Cash Paid During the Period for:
Interest		$	5.8		$	6.0
Income taxes		$	(2.9	)	$	0.4

 

See Notes to Consolidated Financial Statement.

These interim statements are unaudited.

 

4

 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

 

		At March 31, 2005			At December 31, 2004
ASSETS
Property
Property, plants and equipment		$	3,977.6		$	3,944.6
Less: Accumulated depreciation and amortization		(1,890.7		)	(1,864.4		)
Net property		2,086.9			2,080.2
Current Assets
Cash and temporary cash investments		14.3			17.2
Accounts receivable, less provision for uncollectible accounts of $1.0 and $3.6, respectively		151.0			153.8
Inventories, at average cost (Note 2)		77.9			69.8
Prepaid taxes		34.8			46.4
Other (Note 2)		17.2			24.8
Total current assets		295.2			312.0
Other Assets
Income taxes recoverable through future revenues		32.4			32.5
Other regulatory assets		50.9			41.5
Other (Note 2)		169.0			175.2
Total other assets		252.3			249.2
Total Assets		$	2,634.4		$	2,641.4

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

5

 

THE DAYTON POWER AND LIGHT COMPANY

CONSOLIDATED BALANCE SHEET

($ in millions)

(continued)

 

		At March 31, 2005			At December 31, 2004
CAPITALIZATION AND LIABILITIES
Capitalization
Common shareholders’ equity
Common stock		$	0.4		$	0.4
Other paid-in capital		782.3			782.9
Accumulated other comprehensive income		41.4			43.1
Earnings reinvested in the business		207.8			229.7
Total common shareholders’ equity		1,031.9			1,056.1
Preferred stock		22.9			22.9
Long-term debt (Note 5)		686.4			686.6
Total capitalization		1,741.2			1,765.6
Current Liabilities
Accounts payable		103.1			107.8
Accrued taxes		129.1			124.8
Accrued interest		15.5			10.7
Other (Note 2)		34.3			22.1
Total current liabilities		282.0			265.4
Deferred Credits and Other
Deferred taxes		365.7			365.8
Unamortized investment tax credit		48.6			49.3
Other (Note 2)		196.9			195.3
Total deferred credits and other		611.2			610.4
Contingencies (Note 6)
Total Capitalization and Liabilities		$	2,634.4		$	2,641.4

 

See Notes to Consolidated Financial Statements.

These interim statements are unaudited.

 

6

 

Notes to Consolidated Financial Statements

 

1.              Basis of Presentation

 

Basis of Consolidation

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

 

DP&L has prepared the unaudited consolidated financial statements in this report, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in DP&L’s 2004 Annual Report on Form 10-K.

 

Estimates, Judgments and Reclassifications

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

 

Recently Issued Accounting Standards

 

Stock-Based Compensation

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion No. 25 (Opinion 25), “Accounting for Stock Issued to Employees”.  SFAS 123R will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123R establishes standards in which to account for transactions where an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or settled by issuance of equity instruments.  This statement focuses primarily on accounting for employee services paid for by share-based transactions.  SFAS 123R requires a public entity to measure the cost of employee services received and paid for by equity instruments to be based on the fair-value of such equity on the grant date.  This cost is recognized in results of operations over the period in which employees are required to provide service.  Liabilities initially incurred will be based on the fair-value of equity instruments and then be re-measured at each subsequent reporting date until the liability is ultimately settled.  The fair-value for employee share options and other similar instruments at the grant date will be estimated using option-pricing models and excess tax benefits will be recognized as an addition to paid-in capital.  Cash retained from the excess tax benefits will be presented in the statement of cash flows as financing cash inflows.  The provisions of this Statement shall be effective for the Company no later than January 1, 2006.  DP&L is currently accounting for such share-based transactions granted after January 1, 2003, using SFAS 123, “Accounting for Stock-Based Compensation.”  DP&L is evaluating the effect of this new standard on the Company’s results of operations, cash flows and financial position.

 

7

 

Inventory Costs

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

 

Exchange of Nonmonetary Assets

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

 

The American Jobs Creation Act of 2004

On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the Act).  On December 21, 2004, the Financial Accounting Standards Board (FASB) issued two FASB Staff Positions (FSP) regarding the accounting implications of the Act related to (1) the deduction for qualified domestic production activities (FSP FAS 109-1) and (2) the one-time tax benefit for the repatriation of foreign earnings (FSP FAS 109-2).  The guidance in the FSPs applies to financial statements for periods ending after the date the Act was enacted.  The Act provides a deduction up to 9 percent (when fully phased-in) of the lesser of (a) qualified production activities income, as defined by the Act, or (b) taxable income (after the deduction for the utilization of any net operating loss carryforwards).  This tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer.  The Act also creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations.   DP&L reduced its tax expense by $0.5 million in the first quarter of 2005 as a result of the deduction for qualified domestic production activities.

 

Discontinued Operations

In November, 2004, the EITF issued EITF 03-13, “Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations.”  This guidance should be applied to a component of an enterprise that is either disposed of or classified as held for sale in fiscal periods beginning after December 15, 2004.  Operating results related to a component that is either disposed of or classified as held for sale within an enterprise’s fiscal year that includes November 30, 2004, may be classified to reflect the consensus. The Company determined that this issue did not have an impact on its results of operations, financial condition or cash flows.

 

8

 

2.  Supplemental Financial Information

 

9

 

$ in millions		At March 31, 2005			At December 31, 2004
Inventories, at average cost
Plant materials and supplies		$	28.9		$	29.1
Fuel and emission allowances		49.2			40.7
Other		(0.2		)	—
Total inventories, at average cost		$	77.9		$	69.8
Other current assets
Prepayments		$	3.9		$	11.2
Deposits and other advances		1.9			1.6
Current deferred income taxes		7.6			6.8
Miscellaneous work in progress		5.1			4.5
Other		(1.3		)	0.7
Total other current assets		$	17.2		$	24.8
Other deferred assets
Master Trust assets		$	101.6		$	106.4
Prepaid pension		37.4			38.2
Unamortized loss on reacquired debt		23.3			23.8
Unamoritized debt expense		5.5			5.6
Other		1.2			1.2
Total other deferred assets		$	169.0		$	175.2
Other current liabilities
Customer security deposits and other advances		$	18.4		$	17.3
Payroll taxes payable		(0.5		)	—
Current deferred income tax		12.1			—
Unearned revenues		0.2			0.3
Current portion - long-term debt		1.4			1.5
Other		2.7			3.0
Total other current liabilities		$	34.3		$	22.1
Other deferred credits
Asset retirement obligations - regulated property		$	79.2		$	77.5
Trust obligations		69.5			68.2
Retirees’ health and life benefits		32.1			32.4
Environmental reserves		0.1			0.1
Legal reserves		2.8			3.3
Asset retirement obligations - generation		5.2			5.1
Other		8.0			8.7
Total other deferred credits		$	196.9		$	195.3

 

		Three Months Ended March 31,
$ in millions		2005			2004
Cash flows - Other
Payroll taxes payable		$	(1.4	)	$	(11.2	)
Deposits and other advances		0.3			(3.9		)
Deferred storm costs		(9.7		)	—
Other		(0.4		)	(0.3		)
Total cash flows - Other		$	(11.2	)	$	(15.4	)
Comprehensive Income
Net Income		$	53.3		$	62.0
Net change in unrealized gains (losses) on financial instruments, net of reclassification adjustments		(1.3		)	(5.6		)
Net change in deferred gains on cash flow hedges		(1.3		)	(0.7		)
Deferred income taxes related to unrealized gains (losses)		0.9			2.4
Comprehensive income		$	51.6		$	58.1

 

10

 

3.              Pension and Postretirement Benefits

 

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

 

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

 

The net periodic benefit cost of the pension and postretirement benefit plans for the three months ended March 31 were:

 

Net periodic benefit cost

 

$ in millions		Pension						Postretirement
		2005			2004			2005			2004
Service cost		$	1.0		$	0.9		$	—		$	—
Interest cost		3.9			4.0			0.4			0.5
Expected return on assets		(5.4		)	(5.4		)	(0.1		)	(0.2		)
Amortization of unrecognized:
Actuarial (gain) loss		0.9			0.5			(0.3		)	(0.2		)
Prior service cost		0.6			0.6			—			—
Transition obligation		—			—			0.1			—
Net periodic benefit cost		$	1.0		$	0.6		$	0.1		$	0.1

 

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

 

Estimated Future Benefit Payments

 

$ in millions		Pension			Postretirement
2005		$	14.5		$	2.9
2006		$	19.3		$	3.5
2007		$	19.7		$	3.4
2008		$	19.8		$	3.4
2009		$	19.8		$	3.3
2010 - 2014		$	104.1		$	13.8

 

4.              Stock-Based Compensation

 

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

 

11

 

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

 

$ in millions		Three Months Ended March 31,
		2005			2004
Earnings on common stock, as reported		$	53.1		$	61.8
Add: Total stock-based compensation expense determined under APB 25, net of related tax effects		—			—
Deduct: Total stock-based compensation expense determined under FAS 123, net of related tax effects		—			(0.7		)
Pro-forma earnings on common stock		$	53.1		$	61.1

 

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

 

$ in millions		At March 31, 2005			At December 31, 2004
First mortgage bonds maturing:
2013 - 5.125%		$	470.0		$	470.0
Pollution control series maturing through 2027 - 6.43% (a)		104.4			104.4
		574.4			574.4
Guarantee of Air Quality Development Obligations - 6.10% Series due 2030		110.0			110.0
Obligation for capital leases		3.6			3.8
Unamortized debt discount and premium (net)		(1.6		)	(1.6		)
Total		$	686.4		$	686.6

 

(a) Weighted average interest rates for 2005 and 2004.

 

The amounts of maturities and mandatory redemptions for first mortgage bonds and the capital leases are $1.2 million for the remainder of 2005, $1.3 million in 2006, $9.5 million in 2007, $0.7 million in 2008 and $0.7 million in 2009.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds.

 

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013.  The net proceeds from the sale of the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date.  The 5.125% Series due 2013 were not registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisions requiring the Company to pay additional interest if (i) DP&L’s registration statement was not declared effective by the SEC within 180 days from the issuance of the new bonds or (ii) the exchange offer was not completed within 210 days from the issuance of the new bonds.  The registration statement was not declared effective and the exchange offer was not timely completed and, as a result, the Company is required to pay additional interest of 0.50% until a registration statement is declared effective at which point the additional interest shall be reduced by 0.25%.  The remaining additional interest of 0.25% will continue until the exchange offer is completed.  The exchange offer registration for these securities was filed April 26, 2005.

 

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

 

12

 

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

 

In June 2004, DP&L obtained a $100 million unsecured revolving credit agreement that extended and replaced the Company’s previous revolving credit agreement of $150 million.  The new agreement, which expires on May 31, 2005, provides credit support for DP&L’s business requirements during this period and may be increased up to $150 million.  The facility contains two financial covenants including maximum debt to total capitalization and minimum earnings before interest and taxes (EBIT) to total interest expense.  These covenants are currently met.  The Company had no outstanding borrowings under this credit facility at March 31, 2005 or at year-end 2004.  Fees associated with this credit facility were approximately $0.6 million per year.  Changes in debt ratings, however, may affect the applicable interest rate for DP&L’s revolving credit agreement.

 

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

 

6.              Commitments and Contingencies

 

Contingencies

In the normal course of business, DP&L is subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations.  DP&L believes the amounts provided in its consolidated financial statements, as prescribed by GAAP, are adequate in light of the probable and estimable contingencies.  However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims, and other matters discussed below, and to comply with applicable laws and regulations, will not exceed the amounts reflected in DP&L’s Consolidated Financial Statements.  As such, costs, if any, that may be incurred in excess of those amounts provided as of March 31, 2005 cannot be reasonably determined.

 

Environmental Matters

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

 

Legal Matters

 

DP&L is a wholly-owned subsidiary of DPL Inc. (DPL) and MVE, Inc. (MVE) is a subsidiary of DPL.

 

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

 

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

 

On March 15, 2005, Mr. Forster and Ms. Muhlenkamp filed a lawsuit in New York state court against the purchasers of the DPL private equity portfolio and against outside counsel to the Company and DPL concerning purported entitlements in connection with the purchase of the portfolio.  The Company, DPL and MVE are not defendants in that case; however, they are parties to an indemnification agreement with respect to the purchaser defendants.  Those defendants have requested that the Company, DPL and MVE indemnify them in connection with that litigation, and the Company, DPL and MVE have acknowledged indemnity obligations.  On March 28, 2005, the Company, DPL and MVE filed a Motion for Preliminary Injunction in the Company’s Ohio case, requesting that the court issue a preliminary injunction against Mr. Forster and Ms. Muhlenkamp regarding the lawsuit.  Since certain key issues raised by Mr. Forster and Ms. Muhlenkamp in their New York lawsuit are identical to the issues raised in the Company’s pending Ohio lawsuit, DPL, MVE and the Company believe that those issues should be heard and resolved in the pending Ohio lawsuit.  Mr. Forster and Ms. Muhlenkamp filed a brief opposing the preliminary injunction on April 15, 2005.  The Company, DPL and MVE filed their reply brief on April 25, 2005.  The motion is pending and has been set for hearing on May 6, 2005.

 

Long-term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations.  At March 31, 2005, these include:

 

		Payment Year
Long Term Obligations
$ in millions		2005			2006 & 2007			2008 & 2009			Thereafter			Total
Long-term debt		$	0.4		$	9.0		$	—		$	673.8		$	683.2
Interest payments		32.4			74.9			74.0			336.4			517.7
Pension and Postretirement payments		17.4			45.9			46.3			117.9			227.5
Capital leases		0.8			1.8			1.4			0.6			4.6
Operating leases		0.8			0.9			—			—			1.7
Coal contracts (a)		265.3			575.3			83.7			85.5			1,009.8
Other long-term obligations		17.1			12.7			0.5			—			30.3
Total long-term obligations		$	334.2		$	720.5		$	205.9		$	1,214.2		$	2,474.8

 

(a) DP&L operated units.

 

Long-term debt:

Long-term debt as of March 31, 2005, consists of first mortgage bonds and guaranteed air quality development obligations and includes current maturities and unamortized debt discount.  (See Note 5 of Notes to Consolidated Financial Statements.)

 

Interest payments:

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

 

Pension and Postretirement payments:

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

 

Capital leases:

As of March 31, 2005, the Company had two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

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

 

Coal contracts:

 

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

 

Other long-term obligations:

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

 

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

 

		Expiring Year
Commercial Commitments
$ in millions		2005			2006 & 2007			2008 & 2009			Thereafter			Total
Credit facilities		$	100.0		$	—		$	—		$	—		$	100.0
Guarantees		—			17.8			—			—			17.8
Total commercial commitments		$	100.0		$	17.8		$	—		$	—		$	117.8

 

Credit facilities:

In June 2004, the Company replaced its previous $150 million revolving credit agreement with a $100 million, 364 day unsecured credit facility that expires on May 31, 2005.  At March 31, 2005, there were no borrowings outstanding under this credit agreement.  The new facility may be increased up to $150 million.

 

Guarantees:

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

 

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

Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Matters discussed in this report which relate to events or developments that are expected to occur in the future, including management’s expectations, strategic objectives, business prospects, anticipated economic performance and financial condition and other similar matters constitute forward-looking statements.  Forward-looking statements are based on management’s beliefs, assumptions and expectations of the Company’s future economic performance, taking into account the information currently available to management.  These statements are not statements of historical fact.  Such forward-looking statements are subject to risks and uncertainties and investors are cautioned that outcomes and results may vary materially from those projected due to various factors beyond the control of The Dayton Power and Light Company (DP&L or the Company), including but not limited to: abnormal or severe weather; unusual maintenance or repair requirements; changes in fuel costs; changes in electricity, coal, environmental emissions, gas and other commodity prices; increased competition; regulatory changes and decisions; changes in accounting rules; financial market conditions; and general economic conditions.

 

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

 

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OTHER MATTERS

 

Updates on Competition and Regulation

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

 

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

 

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

 

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

 

Update on Environmental Considerations

Air and Water Quality

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

 

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

 

Under the CAIR and CAM-R cap and trade programs for SO_2, NOx and mercury, the Company estimates it will spend more than $500 million from 2005 through 2008 to install the necessary pollution controls.  If CAM-R litigation results in plant specific mercury controls, the Company’s costs may be higher.  Due to the ongoing uncertainties associated with the litigation of the CAM-R, the Company cannot project the final costs at this time.

 

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OVERVIEW AND FUTURE EXPECTATIONS

 

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

 

In the first quarter of 2005, DP&L’s operating income decreased $15.5 million or 14% from the first quarter of 2004.  Total revenues of $305.1 million in the first quarter of 2005 exceeded total revenues for the first quarter of 2004 by $4.7 million resulting from an increase in average market rates and ancillary revenues associated with the Company’s participation in PJM.  These increases were largely offset by a decline in electric sales volume.  Operating expenses of $213.7 million in the first quarter of 2005 increased by $20.2 million or 10% compared to the same period in the prior year. This increase was primarily the result of higher fuel and purchased power costs.  DP&L’s earnings on common stock of $53.1 million in the first quarter of 2005 decreased $8.7 million compared to the same period in the prior year.

 

RESULTS OF OPERATIONS

 

Income Statement Highlights

 

		Three Months Ended March 31,
$ in millions		2005			2004
Electric revenues		$	305.1		$	300.4
Less: Fuel		77.7			62.7
Purchased power		29.3			28.5
Net electric margin (a)		$	198.1		$	209.2
Net electric margin as a percentage of Electric revenues		64.9		%	69.6		%
Operating income		$	91.4		$	106.9

 

(a)          For purposes of discussing operating results, DP&L presents and discusses net electric margin.  This format is useful to investors because it allows analysis and comparability of operating trends and includes the same information that is used by management to make decisioins regarding the Company’s financial performance.

 

Electric Revenues

Electric revenues increased to $305.1 million in the first quarter of 2005 from $300.4 million in the first quarter of 2004 reflecting higher average rates for wholesale and retail revenues and ancillary revenues associated with participation in PJM.  These increases were offset by lower wholesale and retail sales volumes.

 

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

 

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weather as heating degree-days were down 2% to 2,897 for the first quarter of 2005 compared to 2,949 for the same period in 2004.  The higher average rates were primarily the result of a difference in the balance of sales among the various categories of customers.  Wholesale revenue decreased $8.1 million, primarily related to a $23.5 million decline in sales volume that was partially offset by a $15.4 million increase related to higher average market rates.  During the first quarter of 2005, ancillary revenues from PJM were $15.5 million.  The Company did not participate in PJM for the same period for 2004.  PJM ancillary revenues primarily consist of compensation for use of the Company’s transmission assets, reactive supply and regulation services.

 

Electric Margins, Fuel and Purchased Power

Net electric margin of $198.1 million in the first quarter of 2005 decreased by $11.1 million when compared to net electric margin of $209.2 million in the first quarter of 2004.  As a percentage of total electric revenues, net electric margin decreased by 4.7 percentage points to 64.9% from 69.6%.  This decline is primarily the result of increased fuel and purchased power costs, partially offset by a moderate increase in electric revenues.  Fuel costs increased by $15.0 million or 24% for the three months ended March 31, 2005 compared to the same period in 2004 primarily resulting from higher average fuel costs.  Purchased power costs increased by $0.8 million or 3% in the first quarter of 2005 compared to the same period in 2004 primarily resulting from $13.4 million of charges associated with moving power across PJM and $1.8 million related to higher average market rates for power purchases partially offset by a $14.4 million decrease reflecting a lower volume of purchased power.

 

Operation and Maintenance

Operation and maintenance expense experienced a slight increase of $2.0 million or 4% for the three months ended March 31, 2005 compared to the same period in 2004 primarily resulting from $1.8 million of PJM administrative fees incurred in the first quarter of 2005 but not in the same period for 2004.

 

Depreciation and Amortization

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

 

Other Income

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

 

Income Tax Expense

Income tax expense decreased $2.7 million or 7% in the first quarter of 2005 compared to the first quarter of 2004 primarily resulting from lower income.

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

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

 

The Company generated net cash from operating activities of $115.1 million in the first quarter of 2005 compared to $120.3 million in the first quarter of 2004.  The net cash from operating activities for the three months ended March 31, 2005 and 2004 was primarily the result of operating profitability and working capital.  The decline in operating cash flow of $5.2 million in the first quarter of 2005 compared to the first quarter of 2004 is primarily the result of lower operating profitability relating to higher fuel costs.  The tariff-based revenue from DP&L’s business continues to be the principal source of cash from operating activities.  Management believes that the diversified retail customer mix of residential, commercial, and industrial classes provides DP&L with a reasonably predictable gross cash flow.

 

Net cash flows used for investing activities was $42.7 million in the first quarter of 2005 and $25.7 million in the first quarter of 2004 to provide funding for capital expenditures.

 

Net cash flows used for financing activities was $75.2 million in the first quarter of 2005 and $75.2 million in the first quarter of 2004.  Net cash flows used for financing activities for each of these periods were to pay dividends on common stock to the parent company and for dividends paid on preferred stock.

 

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

 

Capital Requirements

Construction additions were $35.2 million and $22.9 million for the first quarter of 2005 and 2004, respectively, and are expected to approximate $193 million in 2005.

 

Planned construction additions for 2005 relate to DP&L’s environmental compliance program, power plant equipment, and its transmission and distribution system.  During the last three years, capital expenditures have been utilized to meet the Company’s state and federal standards for Nitrogen Oxide (NOx) emissions from power plants and to make power plant improvements.

 

Capital projects are subject to continuing review and are revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors.  Over the next four years, DP&L is projecting to spend an estimated $850 million in capital projects, approximately 60% of which is to meet changing environmental standards.  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 internal and external funds at reasonable cost, and adequate and timely return on these capital investments.  DP&L expects to finance its construction additions in 2005 with internally-generated funds.

 

Debt and Debt Covenants

At March 31, 2005, the Company’s scheduled maturities of long-term debt, including capital lease obligations, over the next five years are $1.2 million for the remainder of 2005, $1.3 million in 2006, $9.5 million in 2007, $0.7 million in 2008, and $0.7 million in 2009.  Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds.  Debt maturities in 2005 are expected to be financed with internal funds.  Certain debt agreements contain reporting and financial covenants for which the Company is in compliance as of March 31, 2005 and expects to be in compliance the near term.

 

On September 29, 2003, DP&L issued $470 million principal amount of First Mortgage Bonds, 5.125% Series due 2013.  The net proceeds from the sale of the bonds, after expenses, were used on October 30, 2003, to (i) redeem $226 million principal amount of DP&L’s First Mortgage Bonds, 8.15% Series due 2026, at a redemption price of 104.075% of the principal amount plus accrued interest to the redemption date and (ii) redeem $220 million principal amount of DP&L’s First Mortgage Bonds, 7.875% Series due 2024, at a redemption price of 103.765% of the principal amount plus accrued interest to the redemption date.  The 5.125% Series due 2013 were not registered under the Securities Act of 1933, but were offered and sold through a private placement in compliance with Rule 144A under the Securities Act of 1933.  The bonds include step-up interest provisions requiring the Company to pay additional interest if (i) DP&L’s registration statement was not declared effective by the SEC within 180 days from the issuance of the new bonds or (ii) the exchange offer was not completed within 210 days from the issuance of the new bonds.  The registration statement was not declared effective and the exchange offer was not timely completed and, as a result, the Company is required to pay additional interest of 0.50% until a registration statement is declared effective at which point the additional interest shall be reduced by 0.25%.  The remaining additional interest of 0.25% will continue until the exchange offer is completed.  The exchange offer registration for these securities was filed April 26, 2005.

 

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

 

In June 2004, the Company obtained a $100 million unsecured revolving credit agreement that extended and replaced its previous revolving credit agreement of $150 million.  The new agreement, which expires on May 31,

 

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

 

In February 2004, the Company entered into a $20 million Master Letter of Credit Agreement with a financial lending institution.  This agreement supports performance assurance needs in the ordinary course of business.  DP&L has certain contractual agreements for the sale and purchase of power, fuel, and related energy services that contain credit rating related clauses allowing the counter parties to seek additional surety under certain conditions.  On February 24, 2005, DP&L entered into an amendment to extend the term of this Agreement for one year and reduce the maximum dollar volume of letters of credit to $10 million.  As of March 31, 2005, the Company had three outstanding letters of credit for a total of $3.5 million.

 

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

 

Credit Ratings

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

 

		Rating		Outlook		Effective
Fitch Ratings		BBB		Rating watch positive		February 2005
Moody’s Investors Service		Baa2		Under review for possible upgrade		February 2005
Standard & Poor’s Corp.		BBB-		Positive		April 2005

 

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

 

Off-Balance Sheet Arrangements

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

 

Long-term Obligations and Commercial Commitments

DP&L enters into various contractual and other long-term obligations that may affect the liquidity of its operations.  At March 31, 2005, these include:

 

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		Payment Year
Long Term Obligations
$ in millions		2005			2006 & 2007			2008 & 2009			Thereafter			Total
Long-term debt		$	0.4		$	9.0		$	—		$	673.8		$	683.2
Interest payments		32.4			74.9			74.0			336.4			517.7
Pension and Postretirement payments		17.4			45.9			46.3			117.9			227.5
Capital leases		0.8			1.8			1.4			0.6			4.6
Operating leases		0.8			0.9			—			—			1.7
Coal contracts (a)		265.3			575.3			83.7			85.5			1,009.8
Other long-term obligations		17.1			12.7			0.5			—			30.3
Total long-term obligations		$	334.2		$	720.5		$	205.9		$	1,214.2		$	2,474.8

 

(a) DP&L operated units.

 

Long-term debt:

Long-term debt as of March 31, 2005, consists of first mortgage bonds and guaranteed air quality development obligations and includes current maturities and unamortized debt discount.  (See Note 5 of Notes to Consolidated Financial Statements.)

 

Interest payments:

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

 

Pension and Postretirement payments:

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

 

Capital leases:

As of March 31, 2005, the Company had two capital leases that expire in November 2007 and September 2010.

 

Operating leases:

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

 

Coal contracts:

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

 

Other long-term obligations:

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

 

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

 

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