-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EN4YPanQg6dnNa7xpQWhiMaif3VwZ2/V2Kp+wz4DeTAyzWX8xroxiBahKWZbIlek cHbYFpZkO1TMTZ0Hjx6MQw== 0000787250-99-000004.txt : 19990331 0000787250-99-000004.hdr.sgml : 19990331 ACCESSION NUMBER: 0000787250-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DPL INC CENTRAL INDEX KEY: 0000787250 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 311163136 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09052 FILM NUMBER: 99578769 BUSINESS ADDRESS: STREET 1: PO BOX 8825 CITY: DAYTON STATE: OH ZIP: 45401 BUSINESS PHONE: 5132246000 MAIL ADDRESS: STREET 1: PO BOX 8825 CITY: DAYTON STATE: OH ZIP: 45401 10-K 1 1998 SEC FORM 10-K DPL INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------ ------ Commission File Number 1-9052 ------ DPL INC. (Exact name of registrant as specified in its charter) OHIO 31-1163136 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Courthouse Plaza Southwest, Dayton, Ohio 45402 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 937-224-6000 Securities registered pursuant to Section 12(b) of the Act: Outstanding at Name of each exchange on Title of each class February 26, 1999 which registered - ------------------------ ----------------- ------------------------ Common Stock, $0.01 par 161,264,604 New York Stock Exchange value and Preferred Share Purchase Rights Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 26, 1999 was $17-13/16 closing price of $2,872,525,759 on such date. DOCUMENTS INCORPORATED BY REFERENCE Parts I and II incorporate by reference the registrant's 1998 Annual Report to Shareholders. Portions of the definitive Proxy Statement dated March 1, 1999, relating to the 1999 Annual Meeting of Shareholders of the registrant, are incorporated by reference into Part III. PART I Item 1 - Business* - ------------------------------------------------------------------------------ DPL INC. DPL Inc. was organized in 1985 under the laws of the State of Ohio to engage in the acquisition and holding of securities of corporations for investment purposes. The executive offices of DPL Inc. are located at Courthouse Plaza Southwest, Dayton, Ohio 45402 - telephone (937) 224-6000. DPL Inc.'s principal subsidiary is The Dayton Power and Light Company ("DP&L"). DP&L is a public utility incorporated under the laws of Ohio in 1911. DP&L sells electricity and natural gas to residential, commercial and governmental customers in a 6,000 square mile area of West Central Ohio. Electricity for DP&L's 24 county service area is generated at eight power plants and is distributed to 490,000 retail customers. Natural gas is provided to 305,000 customers in 16 counties. Principal industries served include electrical machinery, automotive and other transportation equipment, non-electrical machinery, agriculture, paper, and rubber and plastic products. DP&L's sales reflect the general economic conditions and seasonal weather patterns of the area. In 1998, electric revenues increased 6% due to higher sales to other public utilities and commercial business customers. Gas utility revenues decreased 13% in 1998 due to the effects of milder weather. Gas purchased for resale by the utility decreased 15% primarily due to milder weather. During 1998, cooling degree days were 21% above the twenty year average and 52% above 1997. Heating degree days in 1998 were 18% below the thirty year average and 21% below 1997. Sales patterns will change in future years as weather and the economy fluctuate. Subsidiaries of DP&L include MacGregor Park, Inc., an owner and developer of real estate and MVE, Inc., which provides support services to DPL Inc. and its subsidiaries. Other subsidiaries of DPL Inc. include Miami Valley Resources, Inc. ("MVR"), a natural gas supply management company; Miami Valley Leasing, which leases communications equipment and other miscellaneous equipment, owns real estate and has, for financial investment purposes, acquired limited partnership interests in wholesale electric generation; Miami Valley Lighting, Inc., a street lighting business; Miami Valley CTC, Inc., which provides transportation services; Miami Valley Insurance Company, an insurance company for DPL Inc. and its subsidiaries; Miami Valley Development Company, which has acquired real estate for DP&L and is engaged in the business of technology research and development; and DPL Energy, Inc., which has been granted authority to engage in the business of brokering wholesale electric energy. * Unless otherwise indicated, the information given in "Item 1 - Business" is current as of March 29, 1999. No representation is made that there have not been subsequent changes to such information. I-1 DPL Inc. and its subsidiaries are exempt from registration with the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935 because its utility business operates solely in the State of Ohio. DPL Inc. and its subsidiaries employed 2,482 persons as of December 31, 1998, of which 2,062 are full-time employees and 420 are part-time employees. COMPETITION DPL Inc. competes through its principal subsidiary, DP&L, with privately and municipally owned electric utilities and rural electric cooperatives, natural gas suppliers and other alternate fuel suppliers. DP&L competes on the basis of price and service. Like other utilities, DP&L from time to time may have electric generating capacity available for sale to other utilities. DP&L competes with other utilities to sell electricity provided by such capacity. The ability of DP&L to sell this electricity will depend on how DP&L's price, terms and conditions compare to those of other utilities. In addition, from time to time, DP&L makes power purchases from 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 purchases of excess electric energy from cogeneration and small power production facilities that have obtained qualifying status under PURPA. The National Energy Policy Act of 1992 which reformed the Public Utilities Holding Company Act of 1935, allows the federal government to mandate access by others to a utility's electric transmission system and may accelerate competition in the supply of electricity. DP&L provides transmission and wholesale electric service to twelve municipal customers which distribute electricity within their corporate limits. In 1994, eleven of these municipal customers signed new twenty-year Power Service Agreements ("PSAs") that were approved by the Federal Energy Regulatory Commission ("FERC"), in June 1995. The twelfth municipal customer signed a ten-year agreement, approved by FERC in February 1995, that allows DP&L to supply 97% of its power requirements. In addition to these municipal customers, DP&L maintains an interconnection agreement with one municipality that has the capability to generate a portion of its energy requirements. Sales to municipalities represented 1.2% of total electricity sales in 1998. I-2 The PSAs provide, among other things, for the sale of firm power by DP&L to the municipals on specified terms. However, the parties disagree in their interpretation of those specified terms. After failing to resolve this dispute through non-binding mediation, DP&L filed suit against the eleven municipals on December 28, 1998 seeking, among other things, a declaration that the municipals are not entitled to DP&L's firm power on the terms that they assert. This dispute is not expected to result in a material impact on DP&L's financial position. 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. On February 15, 1996, the PUCO issued guidelines for interruptible service, including services that accommodate the attainment and delivery of replacement electricity during periods when the utility faces constraints on its own resources. On April 11, 1996, the PUCO issued an Entry on Rehearing ordering utilities to file interruptible electric service tariffs. DP&L's interruptible electric service tariffs were approved on May 1, 1997, and tariffs conforming to this order were subsequently filed with the PUCO on May 15, 1997. On December 24, 1996, the PUCO issued a Finding and Order adopting conjunctive electric service ("CES") guidelines and directing utilities to file tariffs regarding CES service. CES programs enable customers to aggregate for cost of service, rate design, rate eligibility and billing purposes. On December 30, 1998, the PUCO approved DP&L's CES tariff, with an effective date of January 4, 1999. Implementation of this program is essentially revenue neutral. On March 26, 1998, a twelve member Joint Committee of the Ohio Senate and House of Representatives, created to explore and possibly draft retail wheeling legislation, introduced an electric deregulation Bill which expired at year end. On September 16, 1998, DP&L and the three other major investor owned utilities in Ohio presented a comprehensive electric utility restructuring Bill to a working group of the Committee. In March 1999, a group of legislators released to the public a draft outline for restructuring. DP&L continues to participate in the Joint Committee's working group to address issues pertaining to restructuring the electric industry, including taxes. Due to the prospects for legislation that would restructure the electric utility industry, DP&L will continue to evaluate its portfolio of assets to prepare for opportunities in the deregulated environment. However, the ultimate outcome for electric restructuring legislation in Ohio is uncertain at this time. 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... I-3 ...service comparable to what the utility provides itself. In its orders, FERC further stated that FERC-jurisdictional stranded costs reasonably incurred and costs of complying with the rules will be recoverable by electric utilities. Both in 1998 and 1997, DP&L reached an agreement in principle with staff and intervenors in pending tariff cases. DP&L's revenues from customers will not be materially impacted by the final resolution of these cases. On September 30, 1996, FERC conditionally accepted DP&L's market-based sales tariff which will allow DP&L to sell wholesale generation supply at prices that reflect current market prices. At the same time, FERC approved the application and authorization of DPL Energy Inc., a wholly-owned subsidiary of DPL Inc., to sell and broker wholesale electric power and also charge market- based prices for such power. On July 22, 1998, the PUCO approved the implementation of Minimum Electric Service Standards for all of Ohio's investor- owned electric utilities. This Order details minimum standards of performance for a variety of service related functions, effective July 1, 1999. DP&L expects to substantially comply with these standards. General deregulation of the natural gas industry has continued to influence market competition as the driving force behind natural gas procurement. The evolution of an efficient natural gas spot market in combination with open-access interstate transportation pipelines has provided DP&L, as well as its end-use customers, with an array of procurement options. Customers with alternate fuel capability can continue to choose between natural gas and their alternate fuel based upon overall performance and economics. Therefore, demand for natural gas purchased from DP&L or purchased elsewhere and transported to the end-use customer by DP&L could fluctuate based on the economics of each in comparison with changes in alternate fuel prices. For DP&L, price competition and reliability among both natural gas suppliers and interstate pipeline sources are major factors affecting procurement decisions. MVR, established in 1986 as a subsidiary of DPL Inc., acts as a broker in arranging and managing natural gas supplies for business and industry. Deliveries of natural gas to MVR customers can be made through DP&L's transportation system, or another transportation system, on the same basis as deliveries to customers of other gas brokerage firms. Customers with alternate fuel capability can continue to choose between natural gas and their alternate fuel based upon overall performance and economics. I-4 CONSTRUCTION AND FINANCING PROGRAM OF DPL INC. Construction Program - -------------------- Construction additions were $111 million in 1998 and 1997 and $116 million in 1996. The capital program for 1999 consists of construction costs of approximately $82 million. Construction plans are subject to continuing review and are expected to be revised in light of changes in financial and economic conditions, load forecasts, legislative and regulatory developments and changing environmental standards, among other factors. DP&L'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 DP&L's operations cannot be estimated at this time. Financing Program - ----------------- DPL Inc. and its subsidiaries will require a total of $32 million during the next five years for sinking fund payments in addition to any funds needed for the construction program. At year-end 1998, DPL Inc. had a cash and temporary investment balance of $14 million, and debt and equity financial assets were $697 million. Cash and financial assets are held with a view towards investing in future opportunities in the industry. Proceeds from temporary cash investments, together with internally generated cash and future outside financings, will provide for the funding of the construction program, sinking funds and general corporate requirements. On March 19, 1999, DP&L published a Notice of Intention to Redeem on April 19, 1999 a series of First Mortgage Bonds in the principal amount of $225 million with an interest rate of 8.40%. In early April, DPL Inc. expects to close on a private placement issuance of $500 million of Senior Notes Due 2004, with an interest rate of 6.32%. The proceeds will be used to redeem the 8.40% Series First Mortgage Bonds, and for general corporate purposes. In May 1998, DPL Inc. issued $100 million of a new series of Senior Notes due 2008 with an interest rate of 6.25%. In December 1997, DP&L redeemed a series of first mortgage bonds in the principal amount of $40 million with an interest rate of 8.0%. The bonds had been scheduled to mature in 2003. Another series of first mortgage... I-5 ...bonds in the principal amount of $40 million matured in 1997. In December 1996, DP&L 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. DPL Inc. and its subsidiaries have $300 million available through revolving credit agreements with a consortium of banks. One agreement, for $200 million, expires in 2002 and the other, for $100 million, expires in 2000. At year-end 1998, DPL Inc. had no outstanding borrowings under these credit agreements. DPL Inc. also has $15 million available in a short-term informal line of credit. At year-end 1998, DPL Inc. had $15 million in borrowings outstanding from this line. DP&L also has $97 million available in short-term lines of credit. DP&L had $81 million and $10 million outstanding from these lines of credit at year-end 1998 and 1997 respectively, and $99 million and $70 million in commercial paper outstanding at year-end 1998 and 1997, respectively. Under DP&L's First and Refunding Mortgage, First Mortgage Bonds may be issued on the basis of (i) 60% of unfunded property additions, subject to net earnings, as defined, being at least two times interest on all First Mortgage Bonds outstanding and to be outstanding, or (ii) 100% of retired First Mortgage Bonds. DP&L anticipates that it will be able to issue sufficient First Mortgage Bonds to satisfy its long-term debt requirements in connection with the financing of its construction and refunding programs discussed above. The maximum amount of First Mortgage Bonds which may be issued in the future will fluctuate depending upon interest rates, the amounts of bondable property additions, earnings and retired First Mortgage Bonds. There are no coverage tests for the issuance of preferred stock under DP&L's Amended Articles of Incorporation. A three-for-two common stock split effected in the form of a stock dividend was paid on January 12, 1998 to stockholders of record on December 16, 1997. ELECTRIC OPERATIONS AND FUEL SUPPLY DP&L's present winter generating capability is 3,371,000 KW. Of this capability, 2,843,000 KW (approximately 84%) is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 87% (2,472,000 KW) of the existing steam generating capability is provided by certain units owned as tenants in common with The Cincinnati Gas & Electric Company ("CG&E") or with CG&E and Columbus Southern Power Company ("CSP"). Under the agreements among the companies, each company owns a specified undivided share of each facility, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share. I-6 The remaining steam generating capability (371,000 KW) is derived from a generating station owned solely by DP&L. DP&L's all-time net peak load was 3,007,000 KW, occurring in July 1998. The present summer generating capability is 3,264,000 KW. GENERATING FACILITIES MW Rating --------------- Operating DP&L Station Ownership* Company Location Portion Total - ------------------------------------------------------------------------------ Coal Units - ---------- Hutchings W DP&L Miamisburg, OH 371 371 Killen C DP&L Wrightsville, OH 402 600 Stuart C DP&L Aberdeen, OH 820 2,340 Conesville-Unit 4 C CSP Conesville, OH 129 780 Beckjord-Unit 6 C CG&E New Richmond, OH 210 420 Miami Fort-Units 7&8 C CG&E North Bend, OH 360 1,000 East Bend-Unit 2 C CG&E Rabbit Hash, KY 186 600 Zimmer C CG&E Moscow, OH 365 1,300 Combustion Turbines or Diesel - ----------------------------- Hutchings W DP&L Miamisburg, OH 33 33 Yankee Street W DP&L Centerville, OH 138 138 Monument W DP&L Dayton, OH 12 12 Tait W DP&L Dayton, OH 10 10 Sidney W DP&L Sidney, OH 12 12 Tait Gas Turbine 1 W DP&L Moraine, OH 100 100 Tait Gas Turbine 2 W DP&L Moraine, OH 102 102 Tait Gas Turbine 3 W DP&L Moraine, OH 102 102 Killen C DP&L Wrightsville, OH 16 24 Stuart C DP&L Aberdeen, OH 3 10 * W = Wholly Owned C = Commonly Owned In order to transmit energy to their respective systems from their commonly owned generating units, the companies have constructed and own, as tenants in common, 847 circuit miles of 345,000-volt transmission lines. DP&L has several interconnections with other companies for the purchase, sale and interchange of electricity. DP&L derived over 99% of its electric output from coal-fired units in 1998. The remainder was derived from units burning oil or natural gas which were used to meet peak demands. I-7 DP&L estimates that approximately 65-85% of its coal requirements for the period 1999-2003 will be obtained through long-term contracts, with the balance to be obtained by spot market purchases. DP&L has been informed by CG&E and CSP through the procurement plans for the commonly owned units operated by them that sufficient coal supplies will be available during the same planning horizon. The prices to be paid by DP&L under its long-term coal contracts are subject to adjustment in accordance with various indices. Each contract has features that will limit price escalations in any given year. The average fuel cost per kWh generated of fuel burned for electric generation (coal, gas and oil) for the year was 1.30 cents in 1998, 1.31 cents in 1997 and 1.29 cents in 1996. 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 DP&L has long-term firm pipeline transportation agreements with ANR Gas Pipeline Company ("ANR"), Texas Gas Transmission Corporation ("Texas Gas"), Panhandle Eastern Pipe Line Company ("Panhandle"), Columbia Gas Transmission Corporation ("Columbia") and Columbia Gulf Transmission Corporation for varying terms, up to late 2004. Along with firm transportation services, DP&L has approximately 14 billion cubic feet of firm storage service with various pipelines. In addition, DP&L is interconnected with CNG Transmission Corporation. Interconnections with interstate pipelines provide DP&L the opportunity to purchase competitively-priced natural gas supplies and pipeline services. DP&L purchases its natural gas supplies using a portfolio approach that minimizes price risks and ensures sufficient firm supplies at peak demand times. The portfolio consists of long-term, short-term and spot supply agreements. In 1998, firm agreements provided approximately 50% of total supply, with the remaining supplies purchased on a spot/short-term basis. In 1998, DP&L purchased natural gas at an average price of $3.22 per MCF, compared to $3.45 per MCF in 1997 and 1996. Through the operation of a natural gas cost adjustment clause applicable to gas sales, increases and decreases in DP&L's natural gas costs are reflected in customer rates on a timely basis. SEE RATE REGULATION AND GOVERNMENT LEGISLATION. I-8 The PUCO supports open access, nondiscriminatory transportation of natural gas by the state's local distribution companies for end-use customers. The PUCO has guidelines to provide a standardized structure for end-use transportation programs which requires a tariff providing the prices, terms and conditions for such service. DP&L has an approved tariff and provides transportation service to approximately 300 end-use customers, delivering a total quantity of nearly 18,000,000 MCF per year. RATE REGULATION AND GOVERNMENT LEGISLATION DP&L's sales of electricity and natural gas to retail customers are subject to rate regulation by the PUCO and various municipalities. DP&L's wholesale electric rates to municipal corporations and other distributors of electric energy are subject to regulation by FERC under the Federal Power Act. Ohio law establishes the process for determining rates charged by public utilities. Regulation of rates encompasses the timing of applications, the effective date of rate increases, the cost basis upon which the rates are based and other related matters. Ohio law also establishes the Office of the Ohio Consumers' Counsel (the "OCC"), which has the authority to represent residential consumers in state and federal judicial and administrative rate proceedings. DP&L's electric and natural gas rate schedules contain certain recovery and adjustment clauses subject to periodic audits by, and proceedings before, the PUCO. Electric fuel and gas costs are expensed as recovered through rates. On June 18, 1996, Ohio Governor Voinovich signed into law House Bill 476 which allows for alternate natural gas rate plans and exemption from PUCO jurisdiction for some gas services, and establishes a code of conduct for local natural gas distribution companies. Final rules were issued on March 12, 1997. Ohio legislation extends the jurisdiction of the PUCO to the records and accounts of certain public utility holding company systems, including DPL 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. I-9 Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current revenues. Once the phase-in balance is fully recovered, the 1992 stipulation provides that revenues will be used for accelerated recovery of production plant costs. 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 for the phase-in plan and demand-side management ("DSM") programs, as updated in 1995, provides for accelerated recovery of DSM costs and, thereafter, production plant costs to the extent that DP&L's return on equity exceeds a baseline 13% (subject to upward adjustment). If the return exceeds the baseline return by one to two percent, one-half of the excess is used to accelerate recovery of these costs. If the return is greater than two percent over the baseline, the entire excess is used for such purpose. In 1998, amortization of regulatory assets included an additional $10.4 million of accelerated cost recovery. Regulatory deferrals on the balance sheet were: Dec. 31 Dec. 31 1998 1997 ------- ------- --millions-- Phase-in $ 12.9 $ 30.6 DSM 19.6 33.6 Deferred interest - Zimmer 49.7 52.5 Income taxes recoverable through future revenues 195.5 208.2 ------ ------ Total $277.7 $324.9 ====== ====== DP&L 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. DP&L initiated a competitive bidding process in January 1993 for the construction of electric peaking capacity and energy. On March 7, 1994, the OPSB approved DP&L's applications for up to three combustion turbines and two natural gas supply lines for the proposed site. The first combustion turbine began operation on June 1, 1995, a second unit began operation on December 23, 1996 and a third unit began operation on December 15, 1998. All three units are available for full operation. I-10 In 1989 the PUCO approved rules for the implementation of a comprehensive Integrated Resource Planning ("IRP") program for all investor-owned electric utilities in Ohio. Under this program, each utility is required to file an IRP as part of its Long Term Forecast Report ("LTFR"). The IRP requires each utility to evaluate available demand-side resource options in addition to supply-side options to determine the most cost- effective means for satisfying customer requirements. The rules currently allow a utility to apply for deferred recovery of DSM program expenditures and lost revenues between LTFR proceedings. On June 1, 1998 and June 15, 1998, respectively, DP&L 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 combustion turbine generating units. On January 25, 1996, Ohio 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. Robert Taft was elected Governor of Ohio in 1998. On February 2, 1999, Governor Taft appointed Alan Schriber to a five-year term with the PUCO that expires April 2004, and designated him PUCO Chairman. Alan Schriber will replace Commissioner Jolynn Butler and is expected to begin serving April 11, 1999. On February 7, 1997, Governor Voinovich appointed Judith A. Jones, a Toledo City Councilwoman, to the PUCO replacing Commissioner 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. ENVIRONMENTAL CONSIDERATIONS The operations of DP&L, including the commonly owned facilities operated by DP&L, CG&E and CSP, are subject to federal, state, and local regulation as to air and water quality, disposal of solid waste and other environmental matters, including the location, construction and initial operation of new electric generating facilities and most electric transmission lines. DP&L expended $5 million for environmental control facilities during 1998. The possibility exists that current environmental regulations could be revised which could change the level of estimated construction expenditures. See CONSTRUCTION AND FINANCING PROGRAM OF DPL INC. I-11 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 DP&L has not caused any material changes in DP&L's costs or operations. DP&L's environmental compliance plan ("ECP") was approved by the PUCO on May 6, 1993 and, on November 9, 1995, the PUCO approved the continued appropriateness of the ECP. Phase I requirements were met by switching to lower sulfur coal at several commonly owned electric generating facilities and increasing existing scrubber removal efficiency. Total capital expenditures to comply with Phase I of the Act were approximately $5.5 million. Phase II requirements are being met primarily by switching to lower sulfur coal at all non-scrubbed coal-fired electric generating units. Overall compliance is projected to have a minimal 1% to 2% approximate price impact. Costs to comply with the Act are eligible for recovery in fuel hearings and other regulatory proceedings. In September 1998, the United States Environmental Protection Agency ("U.S. EPA") issued a final rule requiring states to modify their State Implementation Plans ("SIPs") under the Clean Air Act. The modified SIPs are likely to result in further NOx reduction requirements placed on coal-fired generating units by 2003. DP&L's total capital expenditures in order to meet these NOx requirements are estimated to be approximately $175 million over the next five years. DP&L is part of a utility trade group that has filed a lawsuit against the U.S. EPA challenging this rule. Land Use - -------- DP&L and numerous other parties have been notified by U.S. EPA or the Ohio Environmental Protection Agency ("Ohio EPA") that it considers them Potentially Responsible Parties ("PRPs") for clean-up at 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. DP&L received notification from the U.S. EPA in July 1987 for the Cardington Road site. DP&L has not joined the PRP group formed at that site because of the absence of any known evidence that DP&L contributed hazardous substances to this site. The Record of Decision issued by the U.S. EPA identifies the chosen clean-up alternative at a cost estimate of $8.1 million. The final resolution will not have a material effect on DP&L's financial position, earnings or cash flow. I-12 DP&L received notification from the U.S. EPA in September 1987 for the United Scrap Lead Site. DP&L is one of over 200 parties to this site, and its estimated contribution to the site is less than .01%. In October 1998, the U.S. District Court approved a settlement involving DP&L and issued an Order barring any claims against the settling parties. Through the settlement, DP&L resolved its potential liability with no material impact. DP&L 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. DP&L joined the PRP group for the site. In late January 1998, the U.S. EPA approved a settlement that included DP&L. Through the settlement, DP&L resolved its potential liability with no resulting material impact. DP&L and numerous other parties received notification from the Ohio EPA on July 27, 1994 that it considers them PRPs for clean-up of hazardous substances at the North Sanitary Landfill site in Dayton, Ohio. DP&L has not joined the PRP group formed for the site because the available information does not demonstrate that DP&L contributed wastes to the site. The final resolution will not have a material effect on DP&L's financial position, earnings or cash flow. I-13 THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS ELECTRIC OPERATIONS Years Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- Electric Output (millions of kWh) General - Coal-fired units 16,853 16,246 16,142 Other units 101 52 21 Power purchases 1,475 1,239 1,098 Exchanged and transmitted power - - (1) Company use and line losses (947) (928) (946) ---------- ---------- ---------- Total 17,482 16,609 16,314 ========== ========== ========== Electric Sales (millions of kWh) Residential 4,790 4,788 4,924 Commercial 3,518 3,408 3,407 Industrial 4,655 4,749 4,540 Public authorities and railroads 1,360 1,330 1,392 Private utilities and wholesale 3,158 2,334 2,051 ---------- ---------- ---------- Total 17,481 16,609 16,314 ========== ========== ========== Electric Customers at End of Period Residential 437,674 433,563 428,973 Commercial 44,716 43,923 43,381 Industrial 1,909 1,881 1,858 Public authorities and railroads 5,838 5,736 5,651 Other 43 42 29 ---------- ---------- ---------- Total 490,180 485,145 479,892 ========== ========== ========== Operating Revenues (thousands) Residential $ 419,948 $ 409,857 $ 422,876 Commercial 242,526 234,206 236,598 Industrial 228,685 225,775 222,941 Public authorities and railroads 76,686 74,018 78,140 Private utilities and wholesale 86,485 53,598 43,730 Other 18,651 12,523 12,115 ---------- ---------- ---------- Total $1,072,981 $1,009,977 $1,016,400 ========== ========== ========== Residential Statistics (per customer-average) Sales - kWh 10,999 11,120 11,537 Revenue $ 964.40 $ 951.90 $ 990.89 Rate per kWh (month of December) (cents) 8.43 8.10 7.91 I-14 THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS GAS OPERATIONS Years Ended December 31, ---------------------------- 1998 1997 1996 ---- ---- ---- Gas Output (thousands of MCF) Direct market purchases 36,497 43,808 46,696 Liquefied petroleum gas 3 66 90 Company use and unaccounted for (912) (1,016) (676) Transportation gas received 18,125 19,182 17,587 -------- -------- -------- Total 53,713 62,040 63,697 ======== ======== ======== Gas Sales (thousands of MCF) Residential 24,877 29,277 31,087 Commercial 7,433 9,567 9,424 Industrial 1,916 2,520 3,404 Public authorities 1,699 2,153 2,829 Transportation gas delivered 17,788 18,523 16,953 -------- -------- -------- Total 53,713 62,040 63,697 ======== ======== ======== Gas Customers at End of Period Residential 279,784 276,189 272,616 Commercial 22,491 22,298 22,085 Industrial 1,441 1,396 1,331 Public authorities 1,509 1,475 1,463 -------- -------- -------- Total 305,225 301,358 297,495 ======== ======== ======== Operating Revenues (thousands) Residential $138,802 $160,279 $156,709 Commercial 38,243 48,302 44,092 Industrial 9,291 11,867 14,110 Public authorities 8,230 10,311 12,013 Other 16,640 12,948 11,660 -------- -------- -------- Total $211,206 $243,707 $238,584 ======== ======== ======== Residential Statistics (per customer-average) Sales - MCF 89.6 107.0 114.8 Revenue $ 499.94 $ 585.63 $ 578.68 Rate per MCF (month of December) $ 5.31 $ 5.20 $ 5.13 I-15 EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1999) Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - ------------------------------------------------------------------------------ Peter H. Forster 56 Chairman 1/01/97 - 3/01/99 Chairman and Chief Executive 9/26/95 - 1/01/97 Officer Chairman, President and Chief 4/05/88 - 9/26/95 Executive Officer Chairman, DP&L 4/06/92 - 3/01/98 Allen M. Hill 53 President and Chief Executive 1/01/97 - 3/01/99 Officer President and Chief Operating 9/26/95 - 1/01/97 Officer President and Chief Executive 4/06/92 - 3/01/98 Officer, DP&L Beth E. Mooney 44 Executive Vice President and 6/15/98 - 3/01/99 Chief Operating Officer, DPL Inc. and DP&L Regional Executive, 1/01/98 - 6/15/98 Banc One Corporation Chairman and Chief Executive 11/01/95 - 1/01/98 Officer, Bank One, Dayton President and Chief Operating 9/01/94 - 11/01/95 Officer, Bank One, Akron Chief Financial Officer, 3/01/93 - 9/01/94 Banc One, Ohio Corporation Paul R. Anderson 56 Controller, DP&L 4/12/81 - 3/01/99 Stephen P. Bramlage 52 Assistant Vice President, DP&L 1/01/94 - 3/01/99 Jeanne S. Holihan 42 Assistant Vice President, DP&L 3/17/93 - 3/01/99 I-16 EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1999) Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - ------------------------------------------------------------------------------ Stephen F. Koziar Jr. 54 Group Vice President and 1/31/95 - 3/01/99 Secretary, DPL Inc. and DP&L Group Vice President, 12/10/87 - 1/31/95 DPL Inc. and DP&L Judy W. Lansaw 47 Group Vice President, 1/31/95 - 3/01/99 DPL Inc. and DP&L Group Vice President and 12/07/93 - 1/31/95 Secretary, DPL Inc. and DP&L Arthur G. Meyer 49 Vice President, Legal and 11/21/97 - 3/01/99 Corporate Affairs, DP&L Director, Corporate Relations, 5/14/96 - 11/21/97 DP&L Treasurer, DP&L 6/27/95 - 5/14/96 Director, Financial Activities 5/09/94 - 6/27/95 Manager, Service Operations 1/31/94 - 5/09/94 Bryce W. Nickel 42 Assistant Vice President, DP&L 1/01/94 - 3/01/99 H. Ted Santo 48 Group Vice President, DP&L 12/08/92 - 3/01/99 James P. Torgerson 46 Vice President, Chief 7/01/98 - 3/01/99 Financial Officer and Treasurer, DPL Inc. and DP&L Vice President and Chief 2/10/97 - 3/15/98 Financial Officer, Puget Sound Energy, Inc. Executive Vice President 8/01/95 - 2/10/97 Chief Administrative Officer and Chief Financial Officer, Washington Energy Company Senior Vice President 11/01/89 - 8/01/95 Finance, Planning and Development, and Chief Financial Officer, Washington Energy Company I-17 Item 2 - Properties - ------------------------------------------------------------------------------ Electric - -------- Information relating to DP&L's electric properties is contained in Item 1 - BUSINESS, DPL INC. (pages I-1 and I-2), CONSTRUCTION AND FINANCING PROGRAM OF DPL INC. (pages I-5 and I-6) and ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-6 through I-8) - Notes 2 and 5 of Notes to Consolidated Financial Statements on pages 22 and 24, respectively, of the registrant's 1998 Annual Report, which pages are incorporated herein by reference. Gas - --- Information relating to DP&L's gas properties is contained in Item 1 - BUSINESS, DPL INC. (pages I-1 and I-2) and GAS OPERATIONS AND GAS SUPPLY (pages I-8 and I-9), which pages are incorporated herein by reference. Other - ----- DP&L owns a number of area service buildings located in various operating centers. Substantially all property and plant of DP&L is subject to the lien of the Mortgage securing DP&L's First Mortgage Bonds. Item 3 - Legal Proceedings - ------------------------------------------------------------------------------ Information relating to legal proceedings involving DP&L is contained in Item 1 - BUSINESS, DPL INC. (pages I-1 and I-2), COMPETITION (pages I-2 through I-4), ELECTRIC OPERATIONS AND FUEL SUPPLY (pages I-6 through I-8), GAS OPERATIONS AND GAS SUPPLY (pages I-8 and I-9), RATE REGULATION AND GOVERNMENT LEGISLATION (pages I-9 through I-11) and ENVIRONMENTAL CONSIDERATIONS (pages I-11 through I-13) and - Note 2 of Notes to Consolidated Financial Statements on page 22 of the registrant's 1998 Annual Report, which pages are incorporated herein by reference. Item 4 - Submission Of Matters To A Vote Of Security Holders - ------------------------------------------------------------------------------ DPL Inc.'s Annual Meeting of Shareholders was held on April 14, 1998. Three directors of DPL Inc. were elected at the Annual Meeting, each of whom will serve a three year term expiring in 2001. The nominees were elected as follows: Thomas J. Danis, 143,654,309 shares FOR, 1,295,625 shares WITHHELD; Allen M. Hill, 143,829,942 shares FOR, 1,119,992 shares WITHHELD; W August Hillenbrand 143,842,964 shares FOR, 1,116,970 shares WITHHELD. I-18 PART II Item 5 - Market For Registrant's Common Equity And Related Stockholder Matters - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth on pages 14, 27 and 28 of the registrant's 1998 Annual Report, which pages are incorporated herein by reference. As of December 31, 1998, there were 41,791 holders of record of DPL Inc. common equity, excluding individual participants in security position listings. DP&L's Mortgage restricts the payment of dividends on DP&L's Common Stock under certain conditions. In addition, so long as any Preferred Stock is outstanding, DP&L's Amended Articles of Incorporation contain provisions restricting the payment of cash dividends on any of its Common Stock if, after giving effect to such dividend, the aggregate of all such dividends distributed subsequent to December 31, 1946 exceeds the net income of DP&L available for dividends on its Common Stock subsequent to December 31, 1946, plus $1,200,000. As of year end, all earnings reinvested in the business of DP&L were available for Common Stock dividends. Item 6 - Selected Financial Data - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth on page 14 of the registrant's 1998 Annual Report, which page is incorporated herein by reference. Item 7 - Management's Discussion And Analysis Of Financial Condition And Results Of Operations - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth in Note 2 of Notes to Consolidated Financial Statements on page 22 and on pages 1, 13, 15 and 16 of the registrant's 1998 Annual Report, which pages are incorporated herein by reference. 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 DP&L'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. II-1 Item 7A - Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------------------ The carrying value of DPL's debt, which consists of first mortgage bonds, guaranteed air quality development obligations, notes, commercial paper and lines of credit, was $1,265.2 million at December 31, 1998. The fair value of this debt, based mainly on current market prices or discounted cash flows using current rates for similar issues with similar terms and remaining maturities, was $1,366.6 million at December 31, 1998. The carrying value of short-term debt was $194.9 million at December 31, 1998. The interest expense risk related to this debt was estimated to be approximately an increase/decrease of $0.7 million if the weighted average cost for each quarter increased/decreased 10%. The fair value of available for sale securities was $684.1 million at December 31, 1998. The equity price risk related to these securities was estimated as the potential increase/decrease in fair value of $68.4 million at December 31, 1998 that resulted from a hypothetical 10% decrease in the quoted market prices. Item 8 - Financial Statements And Supplementary Data - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth on page 14 and on pages 17 through 27 of the registrant's 1998 Annual Report, which pages are incorporated herein by reference. II-2 Report of Independent Accountants on Financial Statement Schedule --------------------------------- To the Board of Directors of DPL Inc. Our audits of the consolidated financial statements referred to in our report dated January 20, 1999 appearing on page 27 of the 1998 Annual Report to Shareholders of DPL Inc. (which report and consolidated financial statements are incorporated by reference in 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/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dayton, Ohio January 20, 1999 II-3 Item 9 - Changes In And Disagreements With Accountants On Accounting And Financial Disclosure - ------------------------------------------------------------------------------ None. PART III Item 10 - Directors And Executive Officers Of The Registrant - ------------------------------------------------------------------------------ Directors of the Registrant - --------------------------- The information required by this item of Form 10-K is set forth on pages 2 through 5 of DPL Inc.'s definitive Proxy Statement dated March 1, 1999, relating to the 1999 Annual Meeting of Shareholders ("1999 Proxy Statement"), which pages are incorporated herein by reference, and on pages I-16 and I-17 of this Form 10-K. Item 11 - Executive Compensation - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth on pages 9 through 16 of the 1999 Proxy Statement, which pages are incorporated herein by reference. Item 12 - Security Ownership Of Certain Beneficial Owners And Management - ------------------------------------------------------------------------------ The information required by this item of Form 10-K is set forth on pages 3 through 6 and on page 15 of the 1999 Proxy Statement, which pages are incorporated herein by reference. Item 13 - Certain Relationships And Related Transactions - ------------------------------------------------------------------------------ None. III-1 PART IV Item 14 - Exhibits, Financial Statement Schedule And Reports On Form 8-K - ------------------------------------------------------------------------------ Pages of 1998 Form 10-K Incorporated by Reference ------------------------- Report of Independent Accountants II-3 (a) Documents filed as part of the Form 10-K 1. Financial Statements Pages of 1998 Annual Report -------------------- Incorporated by Reference --------------------------- Consolidated Statement of Results of Operations for the three years in the period ended December 31, 1998 17 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1998 18 Consolidated Balance Sheet as of December 31, 1998 and 1997 19 Consolidated Statement of Shareholders' Equity for the three years in the period ended December 31, 1998 20 Notes to Consolidated Financial Statements 21 - 26 Report of Independent Accountants 27 2. Financial Statement Schedule ---------------------------- For the three years in the period ended December 31, 1998: 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 Proxy DPL Inc., Holding Sub Inc. and DP&L Statement (File No. 1-2385) dated January 6, 1986 3(a) Copy of Amended Articles of Incorporation Exhibit 3 to Report on of DPL Inc. dated January 4, 1991, and Form 10-K for the year amendment dated December 3, 1991 ended December 31, 1991 (File No. 1-9052) 3(b) Copy of Amendment dated April 20, 1993 Exhibit 3(b) to Report on to DPL Inc.'s Amended Articles of Form 10-K for the year Incorporation ended December 31, 1993 (File No. 1-9052) 4(a) Copy of Composite Indenture dated as of Exhibit 4(a) to Report on October 1, 1935, between DP&L and The Form 10-K for the year Bank of New York, Trustee with all ended December 31, 1985 amendments through the Twenty-Ninth (File No. 1-2385) Supplemental Indenture 4(b) Copy of the Thirtieth Supplemental Exhibit 4(h) to Registration Indenture dated as of March 1, 1982, Statement No. 33-53906 between DP&L and The Bank of New York, Trustee 40(c) Copy of the Thirty-First Supplemental Exhibit 4(h) to Registration Indenture dated as of November 1, 1982, Statement No. 33-56162 between DP&L and The Bank of New York, Trustee 4(d) Copy of the Thirty-Second Supplemental Exhibit 4(i) to Registration Indenture dated as of November 1, 1982, Statement No. 33-56162 between DP&L and The Bank of New York, Trustee 4(e) Copy of the Thirty-Third Supplemental Exhibit 4(e) to Report on Indenture dated as of December 1, 1985, Form 10-K for the year between DP&L and The Bank of New York, ended December 31, 1985 Trustee (File No. 1-2385) 4(f) Copy of the Thirty-Fourth Supplemental Exhibit 4 to Report on Indenture dated as of April 1, 1986, Form 10-Q for the quarter between DP&L and The Bank of New York, ended June 30,1986 Trustee (File No. 1-2385) IV-2 4(g) Copy of the Thirty-Fifth Supplemental Exhibit 4(h) to Report on Indenture dated as of December 1, 1986, Form 10-K for the year between DP&L and The Bank of New York, ended December 31, 1986 Trustee (File No. 1-9052) 4(h) Copy of the Thirty-Sixth Supplemental Exhibit 4(i) to Registration Indenture dated as of August 15, 1992, Statement No. 33-53906 between DP&L and The Bank of New York, Trustee 4(i) Copy of the Thirty-Seventh Supplemental Exhibit 4(j) to Registration Indenture dated as of November 15, 1992, Statement No. 33-56162 between DP&L and The Bank of New York, Trustee 4(j) Copy of the Thirty-Eighth Supplemental Exhibit 4(k) to Registration Indenture dated as of November 15, 1992, Statement No. 33-56162 between DP&L and The Bank of New York, Trustee 4(k) Copy of the Thirty-Ninth Supplemental Exhibit 4(k) to Registration Indenture dated as of January 15, 1993, Statement No. 33-57928 between DP&L and The Bank of New York, Trustee 4(l) Copy of the Fortieth Supplemental Exhibit 4(m) to Report on Indenture dated as of February 15, 1993, Form 10-K for the year between DP&L and The Bank of New York ended December 31, 1992 Trustee (File No. 1-2385) 4(m) Copy of Forty-First Supplemental Exhibit 4(m) to Report on Indenture dated as of February 1, 1999, Form 10-K for the year between DP&L and the Bank of New York, ended December 31, 1998 Trustee (File No. 1-2385) 4(n) Copy of the Credit Agreement dated as Exhibit 4(k) to DPL Inc.'s of November 2, 1989 between DPL Inc., Registration Statement on the Bank of New York, as agent, and the Form S-3 (File No. 33-32348) banks named therein 4(o) Copy of Shareholder Rights Agreement Exhibit 4 to Report on between DPL Inc. and The First National Form 8-K dated December 13, Bank of Boston 1991 (File No. 1-9052) 10(a) Description of Management Incentive Exhibit 10(c) to Report on Compensation Program for Certain 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(f) to Report on Certain Executive Officers Form 10-K for the year ended December 31, 1987 (File No. 1-9052) IV-3 10(c) Copy of Supplemental Executive Exhibit 10(e) to Report on Retirement Plan amended August 6, 1991 Form 10-K for the year ended December 31,1991 (File No. 1-9052) 10(d) Amended description of Directors' Exhibit 10(d) to Report on Deferred Stock Compensation Plan Form 10-K for the year effective January 1, 1993 ended December 31, 1993 (File No. 1-9052) 10(e) Amended description of Deferred Exhibit 10(e) to Report on Compensation Plan for Non-Employee Form 10-K for the year Directors effective January 1, 1993 ended December 31, 1993 (File No. 1-9052) 10(f) Copy of Management Stock Incentive Plan Exhibit 10(f) to Report on amended January 1, 1993 Form 10-K for the year ended December 31, 1993 File No. 1-9052) 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, 1987 (File No. 1-9052) The following exhibits are filed herewith: Page No. -------- 13 Copy of DPL Inc.'s 1998 Annual Report to Shareholders 21 Copy of List of Subsidiaries of DPL Inc. 23 Consent of PricewaterhouseCoopers LLP Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, DPL Inc. has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of DPL Inc. and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments. (b) Reports on Form 8-K ------------------- None. IV-4 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DPL Inc. Registrant March 30, 1999 /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. Director - ---------------------- (T. J. Danis) Director - ---------------------- (J. F. Dicke, II) /s/Peter H. Fortser Director and Chairman March 30, 1999 - ---------------------- (P. H. Forster) Director - ---------------------- (E. Green) /s/Jane G. Haley Director March 30, 1999 - ---------------------- (J. G. Haley) Director, President and /s/Allen M. Hill Chief Executive Officer March 30, 1999 - ---------------------- (A. M. Hill) IV-5 Director - ---------------------- (W A. Hillenbrand) /s/David R. Holmes Director March 30, 1999 - ---------------------- (D. R. Holmes) /s/James P. Torgerson Vice President, CFO and March 30, 1999 - ---------------------- Treasurer (principal (J. P. Torgerson) financial and accounting officer) /s/Burnell R. Roberts Director March 30, 1999 - ---------------------- (B. R. Roberts) IV-6 Schedule II DPL Inc. VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1998, 1997 and 1996 - ------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------ Additions ----------------- Balance at Charged Balance Description Beginning to Deductions at End of of Period Income Other (1) Period - ------------------------------------------------------------------------------ ---------------------thousands----------------------- 1998: Deducted from accounts receivable-- Provision for uncollectible accounts $ 5,007 $ 8,182 $ - $ 8,445 $ 4,744 1997: Deducted from accounts receivable-- Provisions for uncollectible accounts $ 5,083 $ 5,865 $ - $ 5,941 $ 5,007 1996: Deducted from accounts receivable-- Provisions for uncollectible accounts $ 6,481 $ 4,056 $ - $ 5,454 $ 5,083 (1) Amounts written off, net of recoveries of accounts previously written off. IV-7 EX-13 2 1998 DPL INC. ANNUAL REPORT 1998 Annual Report DPL The Holding Company for The Dayton Power and Light Company Among the best --- and working to be even better (see appendix for photograph description) [cover] CORPORATE PROFILE DPL Inc.'s principal subsidiary is The Dayton Power and Light Company ("DP&L"). DP&L sells electricity and natural gas to residential, commercial, industrial and governmental customers in a 6,000 square mile area of West Central Ohio. Electricity for DP&L's 24 county service area is generated at eight power plants and is distributed to 490,000 retail customers. Natural gas is provided to 305,000 customers in 16 counties. The corporate offices of DPL Inc. are located at: Courthouse Plaza Southwest, Dayton, Ohio 45402 (937) 224-6000 ABOUT THE COVER DPL Inc. remains focused on achieving industry leading operational and financial performance. We have built an outstanding record of productivity and efficiency, along with a high level of reliability for our customers. One hallmark of our success is our ability to develop customized and innovative solutions for our customers' energy needs. Achievements and programs such as these have established a strong competitive position for the Company, and have prepared us for future success, as we enter a changing energy environment. (see appendix for photograph description) (see appendix for logo description) [inside front cover] FINANCIAL & OPERATING HIGHLIGHTS 1998 1997 % change - ------------------------------------------------------------------------ Financial Performance: - --------------------- Earnings per share of common stock $ 1.24 1.20 3 Dividends paid per share $ 0.94 0.91 3 Return on shareholders' equity % 14.1 14.6 Return on total capital % 11.8 11.8 Market value per share at December 31 $ 21 5/8 19 3/16 13 Book value per share at December 31 $ 9.01 8.45 7 Total electric and natural gas utility revenues (millions) $ 1,281.9 1,251.5 2 Taxes per share $ 1.68 1.58 6 Average number of common shares outstanding (millions) 152.8 151.4 1 Cash provided by operating activities (millions) $ 309.6 339.9 (9) First Mortgage Bond Ratings: - --------------------------- Duff & Phelps, Inc. AA AA Standard & Poor's Corporation AA- AA- Moody's Investor Service Aa3 Aa3 Capital Investment Performance: - ------------------------------ Construction additions (millions) $ 111.5 110.6 1 Construction expenditures paid from internal funds % 100 100 DP&L Operating Performance: - -------------------------- Electric-- Average price per kWh--retail and wholesale customers (calendar year) (cents) 6.03 6.01 - Fuel efficiency-- Heat rate - Btu per kWh 9,903 9,931 - Industry average 10,324 10,359 - Fuel savings (millions) $ 9.3 9.2 1 System peak load - MW (calendar year) 3,007 2,848 6 Gas-- Average price per MCF - total (calendar year) $ 3.93 3.93 - TOTAL RETURN-FIVE YEAR AVERAGE ANNUAL RETURN Percent - with dividends reinvested (see appendix for bar graph description) EARNINGS PER SHARE Dollars (see appendix for bar graph description) DIVIDENDS PER SHARE Dollars (see appendix for bar graph description) DPL 1998 Annual Report 1 Among the best and working to be even better! Dear Shareholder: Creating shareholder value, regardless of changing market conditions or industry restructuring, is our challenge. We are committed to maximizing the opportunities and overcoming the obstacles that present themselves every year. This past year was no exception. 1998 was a successful year. Earnings increased to $1.24 from $1.20 last year. We split the stock three-for-two in January 1998. And despite major legislative uncertainty, increased dividends to $0.94 per share. DPL Inc. was selected to the S&P 400, an index with about $20 billion in total investment, and our stock achieved an all-time high of $21-5/8. Our total return to you in 1998 was over 18% and has averaged more than 18% for the last ten years. $1,000 invested in DPL in 1988 is worth $5,436 at the end of 1998, an accomplishment we are proud of. Excellent performance by all of our team members, operations in both customer service and power plants, and the dedication to produce results when they count most, get the credit for this outstanding year. Our focus on providing reliable service and efficiently running and maintaining our systems again paid off. You have read about changes in the electric industry as they sweep across the nation - mergers, acquisitions, swaps, asset sales and purchases. Ohio is on the threshold of enacting... Caption to photograph: Board of Directors Thomas J. Danis, James F. Dicke, II, Peter H. Forster, Ernie Green (see appendix for photograph description) DPL 1998 Annual Report 2 ...major legislation which will deregulate the electric industry, dramatically changing the way customers buy energy, and modifying the expected returns in our portfolio of businesses. Accordingly, it will be even more important to match our business strengths with the right business units. We feel confident that like changes in any industry, change in our electric business will bring with it new and exciting opportunities to increase shareholder value. Our focus will be to take advantage quickly of favorable opportunities and minimize the financial risk of new ventures by diversifying capital allocation to investments which have a high near term return. We will continue to shape the Company in a way that takes advantage of our strengths and provides you, our shareholder, with a meaningful return. Best regards, /s/Peter H. Forster Peter H. Forster Chairman, DPL Inc. /s/Allen M. Hill Allen M. Hill President and Chief Executive Officer, DPL Inc. Caption to photograph: Board of Directors Jane G. Haley, Allen M. Hill, W August Hillenbrand, David R. Holmes, Burnell R. Roberts (see appendix for photograph description) DPL 1998 Annual Report 3 SUPERIOR OPERATIONS DPL Inc. continued to focus on fundamentals in 1998 and produced solid results. Superior operating performance in all areas of our business, attention to costs, and a total customer focus all contributed to our strong financial performance. Excellence in these fundamentals is an important component to our continuing success as the electric industry begins its transition towards customer choice. The strong West Central Ohio economy, a quality total energy product and competitive prices for our customers further improve our competitive position. In 1998, customer accounts grew by 9,000 for both our electric and natural gas businesses and our total electric sales were up five percent over 1997 sales. The base of industrial and commercial customers increased and, when coupled with the expansion of existing facilities, resulted in the strong sales growth. Last year, Ohio again ranked among the leaders nationally for economic development, with over 1,200 new and expanded corporate facilities. Ohio was first in the nation in attracting international firms, with 187 projects. Since 1995, Ohio has added over 2,900 corporate facilities and expansions, with over 550 additional manufacturing projects. West Central Ohio was a significant contributor to the state's overall economic performance. Local companies invested nearly $800 million in the regional economy, the highest level in five years. Over 5,000 new jobs were created, and the unemployment rate of 3.7% in the communities we serve continues to be lower than both Ohio and the nation. DP&L was awarded the Grand Prize from the editors of Business Facilities magazine for our Partners in Business Plus program. DP&L - Way to Go - Partners in Business Plus caption to logo: Partners in Business Plus is DP&L's award-winning economic development program. (see appendix for logo description) caption to photograph: New microprocessor-based Distributed Control Systems allow precise monitoring of generating unit performance. (see appendix for photograph description) DPL 1998 Annual Report 4 caption to photograph: Neaton Auto products, located in Eaton, Ohio, manufactures steering wheels and other injection molded parts for several automobile manufactures. DP&L's Partners in Business Plus program, along with expert engineering advice from DP&L's Energy Resource Center, has aided Neaton's steady growth. (see appendix for photograph description) DPL 1998 Annual Report 5 caption to photograph: Packaging Resources, in New Vienna, Ohio, is a plastic injection molding and thermoforming facility that manufactures products for the food industry. DP&L has worked with Packaging Resources in their business expansion, upgrading equipment and analyzing reliability trends. As a large volume food packaging and drink cup supplier, Packaging Resources has developed many partnerships with major customers in the marketplace. (see appendix for photograph description) DPL 1998 Annual Report 6 SUPERIOR OPERATIONS The diversity of programs offered to customers, and the innovation, effectiveness and pro-business climate were among the factors noted by judges. The Partners in Business Plus program has had 400 companies participate since 1997, creating more than 1,600 jobs and more than $72 million in capital investment. We believe the Ohio legislature will introduce legislation in 1999 that will make customer choice a reality. The new rules should be fair for customers, shareholders and all other concerned parties. This change will create opportunities to refine our business portfolio. As we transition to a more competitive environment, customer service satisfaction will be a major advantage. Our service indicators were at record levels in 1998, with 97% of our customers expressing positive satisfaction with the quality of service they receive and 94% satisfied overall with The Dayton Power and Light Company as their energy provider. Our history of delivering high reliability energy at competitive prices goes a long way to enhancing our customer satisfaction. Our electric generating assets have a strong competitive profile from the standpoint of reliability, productivity and efficiency making us one of the lowest cost producers in the region. All of our base-load capacity is coal-fired, with the majority located on the Ohio River with easy access to abundant regular and low sulfur coal reserves in Central Appalachia. Our fuel costs rank among the lowest in the Midwest reflecting the high degree of flexibility in our coal contracts. QUALITY OF SERVICE Percent positive responses (see appendix for bar graph description) caption to bar graph: In frequent surveys, our customers tell us that they are satisfied with the quality of service they receive from DP&L, consistently ranking at the 96% level or higher. caption to photographs: The location of DP&L generating units on the Ohio River allows for choices in the method of transportation of coal to the units. Transportation is a significant component of total fuel cost and this flexibility helps us keep our energy prices competitive. (see appendix for photograph description) DPL 1998 Annual Report 7 SUPERIOR OPERATIONS Productivity measures, such as equivalent forced outage rate and equivalent availability, rank DP&L among the best in the industry. Over the past decade, we have employed a maintenance philosophy founded on the concept of "Plan, Predict and Prevent". Plants are maintained so that they will be ready to deliver when they are needed most. Maintenance is performed during off-peak times and is designed to prevent problems before they happen. As a result, we achieve high reliability while keeping costs down. Our maintenance strategy paid off during a stretch of extreme temperatures in June. At that time, numerous power plants in the Midwest were not available for operation. With the hot weather increasing demand and straining the electrical systems throughout the region, electricity became a scarce commodity and prices soared to as much as 300 times above normal. Many utilities were unable to meet the needs of their customers. Because of the exceptional performance of our employees and the reliability of our system, all of our generating units were available. We met the needs of our customers without purchasing premium priced replacement power. In fact, a report released by the Public Utilities Commission of Ohio recognized The Dayton Power and Light Company as being Ohio's only major electric company that did not have to curtail power to its customers. On July 21, we recorded a peak usage of 3,007,000 kilowatts, exceeding our previous peak set in 1995 by nearly 2%. The economic growth along with hot summer temperatures resulted in this all-time record level of peak electricity usage by our customers. caption to photograph: Sophisticated testing equipment communicates with "smart" transmitters to measure levels of air and water flow for boilers and pumps. (see appendix for photograph description) Caption to photograph: Stuart Station, like most of DP&L's base-load generation, is located on the Ohio River with easy access to plentiful, low cost coal supplies. (see appendix for photograph description) DPL 1998 Annual Report 8 PLAN, PREDICT AND PREVENT Caption to photograph: Our operating philosophy to Plan, Predict and Prevent contributed to our superior operational performance and enhances our competitive position. (see appendix for photograph description) PRODUCTIVITY percent better than industry average Caption to bar graph: Productivity of electric generating units is measured by equivalent forced outage rate (EFOR) and DP&L-operated units perform better than the industry average. (see appendix for bar graph description) DPL 1998 Annual Report 9 Caption to photograph: "At DP&L we're using the latest technologies to deliver reliable, low-cost power." (see appendix for photograph description) DPL 1998 Annual Report 10 SUPERIOR OPERATIONS In order to meet the record-setting demands for electricity by our customers we have added three natural gas-fired peaking units to our system over the past four years. These units are economical to construct and can be brought on-line quickly to meet peak energy requirements. We have sites for further expansion of such units to help meet our peak needs. DP&L has one of the best records of production efficiency, as measured by heat rate, in the industry, ranking second in the Midwest in 1997 and consistently in the top ten nationally. Heat rate shows how efficiently coal is converted to electricity and contributes to our low electric fuel costs. This performance translates into over $9 million of savings for our customers. Efficiency in power production is key to controlling costs and providing competitively priced energy. One of our plants, Killen Station, gained national recognition for its efficient performance from NUS Information Services, a worldwide energy consulting firm. DP&L is recognized as one of the best companies in the industry in cost control. Annually, the operating and maintenance expenses per kilowatt hour produced at our generating units are the lowest in the Midwest and in the lowest quartile nationally. As the generation market will be the first to open to competition, being among the best in the industry in cost, productivity and reliability is a significant platform for our future success. Our natural gas costs in 1998 were the lowest in Ohio. The ability to provide customers with both natural gas and electricity is also a key strategic advantage. Our natural gas business strengthens our position within the region by allowing us to provide a price competitive total energy package to our customers. Access to five major pipelines contributes to adequate supply from several natural gas production... EFFICIENCY-HEAT RATE Total System, Btu per kWh Caption to line graph: Heat rate measures the efficiency of how well coal is converted to electricity, with a lower number representing higher efficiency. DP&L's heat rate ranks among the top ten in the nation and is consistently better than the industry average, helping to keep costs low. (see appendix for line graph description) GENERATION OPERATING AND MAINTENANCE EXPENSE Cents/kWh Caption to bar graph: DP&L operating and maintenance expenses for generation rank as the lowest in the Midwest and in the lowest quartile nationally. (see appendix for bar graph description) DPL 1998 Annual Report 11 SUPERIOR OPERATIONS ...regions and provides us superior procurement capabilities. We also have the ability to offer customers unique solutions for their natural gas needs by managing supply and utilizing storage as weather conditions change. The end result is a service that enhances customer satisfaction and our competitive position. Conservative management of our capital structure provides the foundation to take advantage of opportunities in the changing energy industry. Stable AA credit ratings from all three major rating agencies reflect our strong financial position and lower risk profile. We have consistently achieved superior earnings and dividend growth. In 1998, we grew earnings to $1.24 per share, an increase of more than three percent over 1997 earnings of $1.20 per share. Our ability to control costs and adjust our operations to allow for weather uncertainty was critical this year. All aspects of our business performed at superior levels and all contributed to our financial results. The stock closed the year at a record high of $21 5/8, a 13% increase over the year-end price in 1997. Total return to shareholders was more than 18% in 1998, and has averaged more than 18% annually over the last ten years. We will continue to pursue financial performance objectives that provide you with a return on your investment that places us in the top quartile in the industry. We will continue to focus on the fundamentals that will only increase in importance in a competitive environment. We will concentrate on businesses in our portfolio that, as a result of the deregulation of the electric industry, are the most profitable and achieve the highest returns. Capital will be allocated to projects that generate the highest near-term shareholder value. And, finally, all of us commit to bring you top of the industry results in the exciting future that awaits. DP&L - The Way to Go - Personally caption to logo: Way to Go Personally programs provide energy services tailored to the individual needs of customers. (see appendix for logo description) CREDIT RATINGS (see appendix for line graph description) DPL 1998 Annual Report 12 FINANCIAL REVIEW ELECTRIC UTILITY REVENUES GAS UTILITY REVENUES TOTAL TAXES $ in millions $ in millions $ in millions (see appendix for bar (see appendix for bar (see appendix for bar graph description) graph description) graph description) ELECTRIC UTILITY SALES GAS UTILITY SALES OPERATING EXPENSES Thousand of GWH Millions of MCF $ in millions (see appendix for bar (see appendix for bar (see appendix for bar graph description) graph description) graph description) AVERAGE PRICE-ELECTRIC TOTAL AVERAGE PRICE-GAS CONSTRUCTION EXPENDITURES CALENDAR YEAR CALENDAR YEAR $ in millions cents/kWh $/MCF (see appendix for bar (see appendix for bar (see appendix for bar graph description) graph description) graph description) DPL 1998 Annual Report 13
Financial and Statistical Summary DPL Inc. 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------- For the years ended December 31, DPL Inc.: Earnings per share of common stock $ 1.24 1.20 1.15 1.09 1.03 Dividends paid per share $ 0.94 0.91 0.87 0.83 0.79 Dividend payout ratio % 75.8 75.8 75.7 76.1 76.7 Net income (millions) $ 189.1 181.4 172.9 164.7 154.9 Utility service revenues (millions) $1,281.9 1,252.2 1,256.1 1,255.1 1,187.9 Construction additions (millions) $ 111.5 110.6 115.5 87.3 101.1 Market value per share at December 31 $ 21-5/8 19-3/16 16-3/16 16-1/2 13-11/16 DP&L: Electric sales (millions of kWh) -- Residential 4,790 4,788 4,924 4,871 4,465 Commercial 3,518 3,408 3,407 3,425 3,068 Industrial 4,655 4,749 4,540 4,401 4,388 Other 4,518 3,664 3,443 4,117 2,298 ------ ------ ------ ------ ------ Total 17,481 16,609 16,314 16,814 14,219 Gas sales (thousands of MCF) -- Residential 24,877 29,277 31,087 29,397 27,911 Commercial 7,433 9,567 9,424 8,307 8,081 Industrial 1,916 2,520 3,404 2,584 3,150 Other 1,699 2,153 2,829 3,006 2,909 Transported gas 17,788 18,523 16,953 16,376 15,147 ------ ------ ------ ------ ------ Total 53,713 62,040 63,697 59,670 57,198 At December 31, DPL Inc.: Book value per share $ 9.01 8.45 7.97 7.69 7.45 Total assets (millions) $3,855.9 3,585.2 3,418.7 3,322.8 3,232.7 Long-term debt (millions) $1,065.9 971.0 1,014.3 1,081.5 1,093.7 DP&L: First mortgage bond ratings -- Duff & Phelps, Inc. AA AA AA AA AA Standard & Poor's Corporation AA- AA- AA- AA- AA- Moody's Investors Service Aa3 Aa3 Aa3 Aa3 A1 Number of Shareholders DPL Inc.: Common 41,791 43,689 46,532 48,919 51,270 DP&L: Preferred 559 625 684 733 795
DPL 1998 Annual Report 14 Financial Review - ---------------- Income Statement Highlights - --------------------------- $ in millions except per share amounts 1998 1997 1996 - ------------------------------------------------------------------- Electric Utility: Revenues $1,071 $1,008 $1,014 Fuel and purchased power 257 227 234 ------ ------ ------ Net revenues 814 781 780 Gas Utility: Revenues 211 244 239 Gas purchased for resale 128 151 145 ------ ------ ------ Net revenues 83 93 94 Other income 98 104 74 Operation and maintenance expense 236 256 266 Income taxes 120 105 104 Net income 189 181 173 Earnings per share of common stock 1.24 1.20 1.15 The 1998 earnings increased to $1.24 per share, compared to earnings per share of $1.20 in 1997 and $1.15 in 1996. In 1998, electric revenues increased 6% due to higher sales to other public utilities and commercial business customers. Fuel and purchased power expense increased 13% primarily related to the higher sales. 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. Utility gas revenues and gas purchased for resale in 1998 decreased 13% and 15%, respectively, due to the effects of milder weather. Gas utility revenues increased 2% in 1997 due to increased sales to business customers. Other income decreased 6% in 1998 due to lower non-utility revenue partially offset by increased investment income. The 40% increase in 1997 resulted from higher non-utility revenues and increased investment income. Operation and maintenance expense decreased 8% in 1998 due to lower insurance, claims and production maintenance costs. These decreases were partially offset by increased compensation and benefit expense and higher electric distribution maintenance. Operation and maintenance expense decreased 4% in 1997 due to cost containment efforts and lower actuarially-determined benefit expense. Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current revenues. Once the phase-in balance is fully recovered, the 1992 stipulation provides that revenues will be used for accelerated recovery of production plant costs. 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 Public Utilities Commission of Ohio ("PUCO")-approved settlement agreement and a subsequent stipulation in 1995 provided for accelerated recovery of demand-side management costs and, thereafter, production plant costs to the extent that DP&L return on equity exceeds a baseline 13%. If the return exceeds the baseline return by one to two percent, one-half of the excess is used to accelerate recovery of these costs. If the return is greater than two percent over the baseline, the entire excess is used for such purpose. In 1998, amortization of regulatory assets included an additional $10 million of accelerated cost recovery. Depreciation and amortization expense increased 3% in 1998 and 2% in 1997 primarily as a result of increased depreciable assets. General taxes increased 2% in 1998 and 3% in 1997 as a result of higher property taxes from additional property. Interest expense increased 7% in 1998 primarily due to higher short-term debt. Interest expense declined 3% in 1997 primarily due to the redemption of first mortgage bonds. Certain risks of DPL Inc. and its subsidiaries are insured through a wholly-owned captive insurance company. Decreases in insurance and claims cost balances resulted primarily from lower actuarially-determined reserve requirements, which were partially offset by additional insurance coverage. Credit Ratings - -------------- DP&L's senior debt credit ratings are as follows: Duff & Phelps, Inc. AA Standard & Poor's Corporation AA- Moody's Investors Service Aa3 Each rating was affirmed in 1998 by its respective rating agency. Moody's Investors Service upgraded DP&L's senior debt credit rating three times from 1992-1995. Duff & Phelps and Standard & Poor's both upgraded DP&L's senior debt credit ratings in 1994. The credit ratings are the highest DP&L has achieved since 1974, and they are all considered investment grade. Construction Program and Financing - ---------------------------------- Construction additions were $111 million in 1998 and 1997 and $116 million in 1996. The capital program for 1999 consists of construction costs of approximately $82 million. During 1998, total cash provided by operating activities was $310 million. At year-end, cash and temporary cash investments were $14 million, and debt and equity financial assets were $697 million. Cash and financial assets are held with a view towards investing in future opportunities in the industry. In May 1998, DPL Inc. issued $100 million of a new series of Senior Notes due 2008 with an interest rate of 6.25%. DPL 1998 Annual Report 15 In December 1997, DP&L redeemed a series of first mortgage bonds in the principal amount of $40 million with an interest rate of 8.0%. The bonds had been scheduled to mature in 2003. Another series of first mortgage bonds in the principal amount of $40 million matured in 1997. In December 1996, DP&L 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 2003 are $32 million. Issuance of additional amounts of first mortgage bonds by DP&L is limited by provisions of its mortgage. The amounts and timing of future financings will depend upon market and other conditions, rate increases, levels of sales and construction plans. DPL Inc. anticipates that it has sufficient capacity to issue DP&L first mortgage bonds to satisfy its requirements in connection with its capital program. In addition, DPL Inc. has revolving credit agreements which allow total borrowings by DPL Inc. and its subsidiaries of $300 million. At year-end 1998, DPL Inc. had no outstanding borrowings under these credit agreements. DPL Inc. also has $15 million available in a short-term informal line of credit. At year-end 1998, DPL Inc. had $15 million in borrowings outstanding from this line. DP&L also has $97 million available in short-term lines of credit. At year-end, DP&L had $81 million and $10 million outstanding from these lines of credit for 1998 and 1997, respectively, and $99 million and $70 million in commercial paper outstanding for 1998 and 1997, respectively. A three-for-two common stock split effected in the form of a stock dividend was paid on January 12, 1998 to stockholders of record on December 16, 1997. 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 DP&L'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. Computer applications of many companies may not properly recognize dates beginning with the year 2000. This "Y2K" issue, if not corrected, could cause disruptions in information technology systems and operating control systems. DP&L has implemented a plan to identify and correct Y2K issues in its computer applications. This plan includes (1) evaluation of applications and systems, (2) assessment of Y2K errors, (3) correction of errors and (4) testing of applications and systems. At year end, the evaluation and assessment phases are substantially complete. The correction and testing phases continue on schedule and are expected to be completed in the third quarter of 1999. The estimated cost of this corrective action is $20 million, and includes modification and replacement of hardware and software. The electric industry relies on computer applications to monitor and control interdependent power systems. These systems are also susceptible to Y2K problems. The utility industry has organized work groups to identify and solve potential problems. DP&L is evaluating the possibility of Y2K disruptions in the industry and is adopting proper contingency plans. The United States and Ohio Environmental Protection Agencies ("EPA") have notified numerous parties, including DP&L, that they are considered "Potentially Responsible Parties" for clean up of two hazardous waste sites in Ohio. The United States EPA has estimated total costs of under $10 million for its preferred clean-up plans at one of these sites. The Ohio EPA has not provided an estimated cost for the second site. During 1998, DP&L settled its potential liability for two other sites at a minimal cost. The final resolution of the remaining investigations will not have a material effect on DP&L's financial position, earnings or cash flow. In September 1998, the United States EPA issued a final rule requiring states to modify their State Implementation Plans ("SIPs") under the Clean Air Act. The modified SIPs are likely to result in further NOx reduction requirements placed on coal-fired generating units by 2003. In order to meet these NOx requirements, DP&L's total capital expenditures are estimated to be approximately $175 million over the next five years. As a public utility, DP&L 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 1998. 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 and that future cash flows and operating results may be adversely impacted. DP&L is part of a legislative work group addressing issues pertaining to restructuring the electric industry, including taxes. In September 1998, the major Ohio electric utilities, including DP&L, offered a comprehensive restructuring proposal. In 1996 and 1997, the Federal Energy Regulatory Commission ("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. In 1997, DP&L reached an agreement in principle with staff and intervenors in its first pending tariff case and filed a subsequent case based on an updated test year. In December 1998, DP&L was able to negotiate terms of settlement in reaching an agreement in principle with staff and intervenors in the second pending tariff case. DPL 1998 Annual Report 16 CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS DPL INC. For the years ended December 31, $ in millions except per share amounts 1998 1997 1996 - ----------------------------------------------------------------------------- Income Utility service revenues -- Electric $1,070.7 $1,007.8 $1,014.1 Gas 211.2 244.4 242.0 Other income 97.7 103.6 74.2 -------- -------- -------- Total income 1,379.6 1,355.8 1,330.3 -------- -------- -------- Expenses Fuel and purchased power 257.4 227.9 234.9 Gas purchased for resale 186.4 219.5 193.0 Operation and maintenance 235.9 256.1 265.7 Depreciation and amortization (Note 1) 127.1 123.5 121.0 Amortization of regulatory assets, net (Note 2) 33.0 20.9 19.7 General taxes 136.5 133.8 129.7 Interest expense 93.8 87.3 89.9 -------- -------- -------- Total expenses 1,070.1 1,069.0 1,053.9 -------- -------- -------- Income Before Income Taxes 309.5 286.8 276.4 Income taxes (Notes 1 and 3) 120.4 105.4 103.5 -------- -------- -------- Net Income $ 189.1 $ 181.4 $ 172.9 ======== ======== ======== Average Number of Common Shares Outstanding (millions) 152.8 151.4 150.9 Earnings Per Share of Common Stock $ 1.24 $ 1.20 $ 1.15 Dividends Paid Per Share of Common Stock $ 0.94 $ 0.91 $ 0.87 See Notes to Consolidated Financial Statements. DPL 1998 Annual Report 17 CONSOLIDATED STATEMENT OF CASH FLOWS DPL INC. For the years ended December 31, $ in millions 1998 1997 1996 - ---------------------------------------------------------------------------- Operating Activities Cash received from utility customers $1,255.7 $1,228.1 $1,228.9 Other operating cash receipts 85.3 88.2 87.0 Cash paid for: Fuel and purchased power (266.5) (235.9) (207.6) Purchased gas (197.2) (236.1) (211.6) Operation and maintenance labor (85.4) (83.2) (87.4) Nonlabor operating expenditures (125.9) (96.4) (149.3) Interest (89.6) (85.2) (87.7) Income taxes (135.5) (108.8) (108.1) Property, excise and payroll taxes (131.3) (130.8) (126.1) -------- -------- -------- Net cash provided by operating activities (Note 11) 309.6 339.9 338.1 -------- -------- -------- Investing Activities Property expenditures (106.7) (113.7) (108.8) Other activities (265.7) (178.0) (144.4) -------- -------- -------- Net cash used for investing activities (372.4) (291.7) (253.2) -------- -------- -------- Financing Activities Dividends paid on common stock (143.6) (137.2) (131.2) Issuance of long-term debt 98.5 - - Issuance of short-term debt 79.2 105.7 10.0 Issuance of common stock 19.7 19.5 - Retirement of long-term debt (3.4) (82.9) (25.5) Purchase of treasury stock - - (15.8) -------- -------- -------- Net cash provided by (used for) financing activities 50.4 (94.9) (162.5) -------- -------- -------- Cash and temporary cash investments - Net change (12.4) (46.7) (77.6) Balance at beginning of year 26.1 72.8 150.4 -------- -------- -------- Balance at end of year $ 13.7 $ 26.1 $ 72.8 ======== ======== ======== See Notes to Consolidated Financial Statements. DPL 1998 Annual Report 18 CONSOLIDATED BALANCE SHEET DPL INC. At December 31, $ in millions 1998 1997 - ------------------------------------------------------------------------ Assets Property $3,743.3 $3,642.8 Accumulated depreciation and amortization (1,504.6) (1,386.6) -------- -------- Net property 2,238.7 2,256.2 -------- -------- Current Assets Cash and temporary cash investments 13.7 26.1 Accounts receivable, net (Note 1) 227.7 211.4 Inventories, at average cost 112.4 87.5 Taxes applicable to subsequent years 93.4 91.9 Other current assets 47.6 54.2 -------- -------- Total current assets 494.8 471.1 -------- -------- Other Assets Financial assets 697.1 384.0 Income taxes recoverable through future revenues (Notes 1 and 2) 195.5 208.2 Other regulatory assets (Note 2) 82.2 116.7 Other 147.6 149.0 -------- -------- Total other assets 1,122.4 857.9 -------- -------- Total Assets $3,855.9 $3,585.2 ======== ======== Capitalization and Liabilities Capitalization Common shareholders' equity (Note 6)-- Common stock $ 1.6 $ 1.6 Other paid-in capital 799.0 777.3 Common stock held by employee plans (94.4) (98.0) Accumulated other comprehensive income 47.2 19.9 Earnings reinvested in the business 630.3 585.2 -------- -------- Total common shareholders' equity 1,383.7 1,286.0 Preferred stock (Note 9) 22.9 22.9 Long-term debt (Note 8) 1,065.9 971.0 -------- -------- Total capitalization 2,472.5 2,279.9 -------- -------- Current Liabilities Accounts payable 109.0 129.8 Accrued taxes 165.2 158.5 Accrued interest 24.8 24.2 Short-term debt (Note 7) 194.9 115.7 Other 54.9 49.7 -------- -------- Total current liabilities 548.8 477.9 -------- -------- Deferred Credits and Other Deferred taxes (Note 3) 460.6 464.9 Unamortized investment tax credit 69.4 72.4 Insurance and claims costs 150.7 151.6 Other 153.9 138.5 Total deferred credits and other 834.6 827.4 -------- -------- Total Capitalization and Liabilities $3,855.9 $3,585.2 ======== ======== See Notes to Consolidated Financial Statements. DPL 1998 Annual Report 19
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY DPL INC. Common Accum. Common Stock (a) Stock Other Earnings ------------------- Other Held by Compre- Reinvested Outstanding Paid-in Employee hensive in the $ in millions Shares Amount Capital Plans Income Business Total - --------------------------------------------------------------------------------------------------------- 1996: Beginning balance 106,696,923 $1.1 $771.4 $(107.2) $(0.1) $499.6 $1,164.8 Comprehensive income: Net income 172.9 172.9 Net unrealized gains on securities after tax (b) 4.2 4.2 Adjustment for net realized gains after tax (c) (0.5) (0.5) -------- Total comprehensive income 176.6 Common stock dividends (131.2) (131.2) Treasury stock (687,000) - (15.8) (15.8) Employee stock plans 1.0 5.1 6.1 Other 0.2 (0.2) - ----------- ---- ------ ------- ----- ------ -------- Ending balance 106,009,923 1.1 756.8 (102.1) 3.6 541.1 1,200.5 1997: Comprehensive income: Net income 181.4 181.4 Net unrealized gains on securities after tax (b) 16.3 16.3 -------- Total comprehensive income 197.7 Common stock dividends (137.2) (137.2) Three-for-two stock split 53,400,983 0.5 (0.5) - Dividend reinvestment plan 792,043 - 19.4 19.4 Employee stock plans 1.4 4.1 5.5 Other 0.2 (0.1) 0.1 ----------- ---- ------ ------- ----- ------ -------- Ending balance 160,202,949 1.6 777.3 (98.0) 19.9 585.2 1,286.0 1998: Comprehensive income: Net Income 189.1 189.1 Net unrealized gains on securities after tax (b) 27.3 27.3 -------- Total comprehensive income 216.4 Common stock dividends (143.6) (143.6) Dividend reinvestment plan 1,070,430 - 19.8 19.8 Employee stock plans 1.9 3.6 5.5 Other (8,775) - - (0.4) (0.4) ----------- ---- ------ ------- ----- ------ -------- Ending balance 161,264,604 $1.6 $799.0 $ (94.4) $47.2 $630.3 $1,383.7 =========== ==== ====== ======= ===== ====== ======== (a) $0.01 par value, 250,000,000 shares authorized. (b) Net of taxes of $2.2 million, $8.8 million and $14.7 million in 1996, 1997 and 1998, respectively. (c) Net of taxes of $(0.2) million in 1996.
DPL 1998 Annual Report 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DPL INC. 1. Summary of Significant Accounting Policies The accounts of DPL Inc. and its wholly-owned subsidiaries are included in the accompanying consolidated financial statements. These statements are presented in accordance with generally accepted accounting principles which require management to make estimates and assumptions related to future events. The Company's results are presented as one segment. Reclassifications have been made in certain prior years' amounts to conform to the current reporting presentation. The consolidated financial statements of DPL Inc. principally reflect the results of operations and financial condition of DPL Inc.'s public utility subsidiary, The Dayton Power and Light Company ("DP&L"). DP&L is 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. 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. DP&L records revenue for services provided but not yet billed to more closely match revenues with expenses. Accounts receivable on the Consolidated Balance Sheet includes unbilled revenue of (in millions) $99.5 in 1998 and $78.3 in 1997. 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%. 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. DPL 1998 Annual Report 21 2. Regulatory Matters DP&L applies the provisions of Statement 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 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, $ in millions 1998 1997 - -------------------------------------------- Phase-in (a) $ 12.9 $ 30.6 DSM (b) 19.6 33.6 Deferred interest (c) 49.7 52.5 Income taxes recoverable through future revenues 195.5 208.2 ------ ------ Total $277.7 $324.9 ====== ====== (a) Amounts deferred during a 1992-1994 electric rate increase phase- in (including carrying charges) are being recovered in current revenues. (b) Demand-side management ("DSM") costs (including carrying charges) from DP&L's cost-effective programs are deferred and are being recovered at approximately $9 million per year. The 1992 PUCO-approved agreement for the phase-in plan and DSM programs, as updated in 1995, provides for accelerated recovery of DSM costs and, thereafter, production plant costs to the extent that DP&L return on equity exceeds a baseline 13% (subject to upward adjustment). If the return exceeds the baseline return by one to two percent, one-half of the excess is used to accelerate recovery of these costs. If the return is greater than two percent over the baseline, the entire excess is used for such purpose. In 1998, amortization of regulatory assets included an additional $10.4 million of accelerated cost recovery. (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. 3. Income Taxes For the years ended December 31, $ in millions 1998 1997 1996 - ------------------------------------------------------------------ Computation of Tax Expense - -------------------------- Federal income tax (a) $108.6 $100.7 $ 97.0 Increases (decreases) in tax from - Regulatory assets 4.0 3.6 3.3 Depreciation 12.5 11.4 10.7 Investment tax credit amortized (3.0) (3.0) (3.0) Other, net (1.7) (7.3) (4.5) ------ ------ ------ Total tax expense $120.4 $105.4 $103.5 ====== ====== ====== Components of Tax Expense - ------------------------- Taxes currently payable $136.1 $121.8 $117.4 Deferred taxes-- Regulatory assets (8.3) (4.0) (3.5) Liberalized depreciation and amortization 6.7 6.2 7.9 Fuel and gas costs (5.8) 5.5 2.5 Insurance and claims costs (1.1) (14.2) (11.1) Other (4.2) (6.9) (5.5) Deferred investment tax credit, net (3.0) (3.0) (4.2) ------ ------ ------ Total tax expense $120.4 $105.4 $103.5 ====== ====== ====== (a) The statutory rate of 35% was applied to pre-tax income before preferred dividends. Components of Deferred Tax Assets and Liabilities At December 31, $ in millions 1998 1997 - ------------------------------------------------- Non-Current Liabilities - ----------------------- Depreciation/property basis $(439.2) $(443.7) Income taxes recoverable (68.4) (72.4) Regulatory assets (28.0) (38.6) Investment tax credit 24.2 25.3 Other 50.8 64.5 ------- ------- Net non-current liability $(460.6) $(464.9) ------- ------- Net Current Asset (Liability) $ 3.7 $ (2.7) ======= ======= DPL 1998 Annual Report 22 4. Pensions and Postretirement Benefits Pensions - -------- Substantially all DP&L employees participate in pension plans paid for by the Company. Employee benefits are based on their years of service, age, compensation and year of retirement. The plans are funded in amounts actuarially determined to provide for these benefits. An interest rate for discounting the obligation and expense of 6.25% and the expected rate of return of 7.5% were used in developing the amounts in the following tables. Increases in compensation levels approximating 5.0% were used for all years. The following table sets forth the components of pension expense (portions of which were capitalized): $ in millions 1998 1997 1996 - --------------------------------------------------------- Expense for Year - ---------------- Service cost $ 5.9 $ 6.3 $ 6.2 Interest cost 15.9 15.2 15.0 Expected return on plan assets (23.3) (20.5) (18.1) Amortization of unrecognized: Actuarial (gain) loss 1.2 - 1.0 Prior service cost 2.1 2.1 2.1 Transition obligation (4.2) (4.2) (4.2) ------ ------ ------ Net pension cost $ (2.4) $ (1.1) $ 2.0 ====== ====== ====== The following tables set forth the plans' obligations, assets and amounts recorded in Other assets on the Consolidated Balance Sheet at December 31: $ in millions 1998 1997 - --------------------------------------------------------- Change in Projected Benefit Obligation - -------------------------------------- Benefit obligation, January 1 $259.1 $255.1 Service cost 5.9 6.3 Interest cost 15.9 15.2 Actuarial (gain) loss 0.8 7.4 Benefits paid (12.5) (24.9) ------ ------ Benefit obligation, December 31 269.2 259.1 ------ ------ Change in Plan Assets - --------------------- Fair value of plan assets, January 1 330.2 321.4 Actual return on plan assets 41.2 33.7 Benefits paid (12.5) (24.9) ------ ------ Fair value of plan assets, December 31 358.9 330.2 ------ ------ Plan assets in excess of projected benefit obligation 89.7 71.1 Actuarial gains and losses (46.6) (28.3) Unamortized prior service cost 11.8 13.9 Unamortized transition obligation (7.2) (11.3) ------ ------ Net pension assets $ 47.7 $ 45.4 ====== ====== Postretirement Benefits - ----------------------- Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits. DP&L has funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust. The tables below have been developed based on the following assumptions. The interest rate for discounting the obligation and expense was 6.25% and the expected rate of return was 5.7%. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.5% and 9.0% for 1998 and 1997, respectively, and decreases to 5.0% by 2005. A one percentage point change in the assumed health care trend rate would affect the service and interest cost by $0.1 million. A one percentage point increase in the assumed health care trend rate would increase the postretirement benefit obligation by $2.1 million; and a one percentage point decrease would decrease the benefit obligation by $1.9 million. The following table sets forth the components of postretirement benefit expense: $ in millions 1998 1997 1996 - -------------------------------------------------------- Expense for Year - ---------------- Interest cost $ 2.0 $ 2.2 $ 2.5 Expected return on plan assets (1.0) (0.8) (0.6) Amortization of unrecognized: Actuarial (gain) loss (2.2) (4.1) - Transition obligation 3.0 3.0 2.9 ----- ----- ----- Postretirement benefit cost $ 1.8 $ 0.3 $ 4.8 ===== ===== ===== The following tables set forth the accumulated postretirement benefit obligation ("APBO"), assets and funded status amounts recorded in Other Deferred Credits on the Consolidated Balance Sheet at December 31: $ in millions 1998 1997 - ---------------------------------------------------------- Change in APBO - -------------- Benefit obligation, January 1 $ 36.5 $ 41.8 Interest cost 2.0 2.2 Actuarial (gain) loss (3.4) (5.3) Benefits paid (2.2) (2.2) ------ ------ Benefit obligation, December 31 32.9 36.5 ------ ------ Change in Plan Assets - --------------------- Fair value of plan assets, January 1 12.1 11.9 Actual return on plan assets 1.0 0.8 Benefits paid (0.6) (0.6) ------ ------ Fair value of plan assets, December 31 12.5 12.1 ------ ------ APBO in excess of plan assets 20.4 24.4 Unamortized transition obligation (12.9) (15.9) Actuarial gains and losses 26.4 25.5 ------ ------ Accrued postretirement benefit liability $ 33.9 $ 34.0 ====== ====== DPL 1998 Annual Report 23 5. Ownership of Facilities DP&L owns an undivided interest in certain electric generating and transmission facilities 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, 1998, DP&L had $4.3 million of such facilities under construction. DP&L's share of expenses is included in the Consolidated Statement of Results of Operations. The following table presents DP&L's undivided interest in such facilities at December 31, 1998: DP&L Share DP&L Investment ----------------------- --------------- Production Gross Plant Ownership Capacity in Service (%) (MW) ($ in millions) - --------------------------------------------------------------------- Production Units: Beckjord Unit 6 50.0 210 56 Conesville Unit 4 16.5 129 31 East Bend Station 31.0 186 151 Killen Station 67.0 418 406 Miami Fort Units 7&8 36.0 360 124 Stuart Station 35.0 823 246 Zimmer Station 28.1 365 992 Transmission (at varying percentages) 69 6. Common Shareholders' Equity A three-for-two common stock split effected in the form of a stock dividend was paid on January 12, 1998 to stockholders of record on December 16, 1997. DPL Inc. has a leveraged Employee Stock Ownership Plan ("ESOP") to fund matching contributions to the Company's 401(k) retirement savings plan and certain other payments to full-time employees. Common shareholders' equity is reduced for the cost of 5,413,045 unallocated shares held by the trust and for 2,306,706 shares related to another employee plan. These shares reduce the number of common shares used in the calculation of earnings per share. Dividends received by the ESOP are used to repay the loan to DPL Inc. As debt service payments are made on the loan, shares are released on a pro-rata basis. Dividends on the allocated shares are charged to retained earnings, and dividends on the unallocated shares reduce interest and principal on the loan. Cumulative shares allocated to employees and outstanding for the calculation of earnings per share were 1,646,780 in 1998 and 1,386,588 in 1997. Compensation expense, which is based on the fair value of the shares allocated, amounted to $4.0 million in 1998, $4.4 million in 1997 and $4.1 million in 1996. DPL Inc. had 902,490 authorized but unissued shares reserved for the dividend reinvestment plan at December 31, 1998. The plan provides that either original issue shares or shares purchased on the open market may be used to satisfy plan requirements. DPL Inc. has a Shareholder Rights Plan pursuant to which four-ninths of a Right is attached to and trades with each outstanding DPL Inc. Common Share. The Rights would separate from the Common Shares and become exercisable in the event of certain attempted business combinations. DPL 1998 Annual Report 24 7. Notes Payable and Compensating Balances DPL Inc. and its subsidiaries have $300 million available through revolving credit agreements with a consortium of banks. One agreement, for $200 million, expires in 2002 and the other, for $100 million, expires in 2000. Facility fees are approximately $315,000 per year. The primary purpose of the revolving credit facilities is to provide back-up liquidity for DP&L's commercial paper program. At December 31, 1998, DPL Inc. had no outstanding borrowings under these credit agreements. At December 31, 1997, there was $36 million outstanding under a previous credit agreement. DPL Inc. also has $15 million available in a short-term informal line of credit with immaterial commitment fees. At December 31, 1998, DPL Inc. had $15 million in borrowings outstanding from this line at an interest rate of 6.3%. DP&L also has $96.6 million available in short-term informal lines of credit. To support these lines of credit, DP&L is required to maintain average daily compensating balances of approximately $400,000. The commitment fees are immaterial. DP&L had $80.9 million and $10.0 million in borrowings from these lines of credit at a weighted average interest rate of 5.46% and 6.0% at December 31, 1998 and 1997, respectively. DP&L had $99.0 million and $69.7 million in commercial paper outstanding at a weighted average interest rate of 5.25% and 6.0% at December 31, 1998 and 1997, respectively. 8. Long-term Debt At December 31, $ in millions 1998 1997 - ------------------------------------------------------- First mortgage bonds maturing: 2022-2026 - 8.14% (a) $ 671.0 $671.0 Pollution control series maturing through 2027 - 6.43% (a) 106.8 107.2 -------- ------ 777.8 778.2 Guarantee of Air Quality Development Obligations 6.10% Series due 2030 110.0 110.0 Senior Notes 6.25% Series due 2008 100.0 - Notes maturing through 2007 - 7.83% 81.0 85.0 Unamortized debt discount and premium (net) (2.9) (2.2) -------- ------ Total $1,065.9 $971.0 ======== ====== (a) Weighted average interest rates for 1998 and 1997. The amounts of maturities and mandatory redemptions for first mortgage bonds and notes are (in millions) $4.4 in 1999, $5.4 in 2000, $6.4 in 2001, $7.4 in 2002 and $8.4 in 2003. Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. During 1998, $100 million of a new series of Senior Notes due 2008 was issued with an interest rate of 6.25%. DPL 1998 Annual Report 25 9. Preferred Stock DPL Inc.: No par value, 8,000,000 shares authorized, no shares outstanding. DP&L: $25 par value, 4,000,000 shares authorized, no shares outstanding; and $100 par value, 4,000,000 shares authorized, 228,508 shares without mandatory redemption provisions outstanding. Current Current Par Value Redemption Shares At December 31, 1998 and 1997 Series/Rate Price Outstanding ($ 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 DP&L at the per share prices indicated, plus cumulative accrued dividends. 10. Fair Value of Financial Instruments At December 31, 1998 1997 ------------------ ------------------- $ in millions Fair Value Cost Fair Value Cost - ---------------------------------------------------------------------------- $ $ $ $ Assets Available for sale securities 684.1 611.6 361.1 330.2 Held to maturity securities, including temporary cash investments of $12.0 in 1998 and $14.2 in 1997 (a) 63.1 61.9 72.2 71.2 Liabilities (b) Debt 1,366.6 1,265.2 1,168.1 1,090.1 Capitalization Unallocated stock in ESOP 117.1 69.0 108.7 72.3 (a) Maturities range from 1999 to 2011. (b) Includes current maturities. Assets with quoted market prices are carried at market; the remaining financial assets are carried at cost. 11. Reconciliation of Net Income to Net Cash Provided by Operating Activities For the years ended December 31, $ in millions 1998 1997 1996 - ---------------------------------------------------------------------------- Net income $189.1 $181.4 $172.9 Adjustments: Depreciation and amortization 127.1 123.5 121.0 Deferred income taxes (15.7) (16.4) (13.8) Other deferred credits 20.4 7.0 7.4 Amortization of regulatory assets, net 33.0 20.9 19.7 Operating expense provisions 1.4 17.8 30.6 Accounts receivable (16.3) (9.5) (53.9) Accounts payable (24.1) 17.2 14.7 Accrued taxes payable 6.6 20.8 18.3 Inventory (24.9) (11.6) 6.8 Other 13.0 (11.2) 14.4 ------ ------ ------ Net cash provided by operating activities $309.6 $339.9 $338.1 ====== ====== ====== DPL 1998 Annual Report 26 Report of Independent Accountants PricewaterhouseCoopers LLP (see appendix for logo description) To the Board of Directors and Shareholders of DPL Inc. In our opinion, the accompanying Consolidated Balance Sheet and the related Consolidated Statements of Results of Operations, of Shareholders' Equity, and of Cash Flows present fairly, in all material respects, the financial position of DPL Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Dayton, Ohio January 20, 1999 Selected Quarterly Information
For the Three Months Ended ------------------------------------------------------------------------ $ in millions except March 31, June 30, September 30, December 31, per share amounts 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------ $ $ $ $ $ $ $ $ Utility service revenues 352.3 356.7 292.6 269.2 318.6 283.4 318.4 342.9 Income before income taxes 111.9 101.4 59.4 55.4 80.4 73.1 57.8 56.9 Net income 70.2 66.3 35.2 35.0 47.5 44.9 36.2 35.2 Earnings per share of common stock 0.46 0.44 0.23 0.23 0.31 0.30 0.24 0.23 Dividends paid per share 0.235 0.227 0.235 0.227 0.235 0.227 0.235 0.227 Common stock market price - High 19-9/16 16-3/4 19-7/16 16-1/2 19-5/8 16-9/16 21-5/8 19-3/16 - Low 18 15-15/16 16-15/16 15-5/16 16-15/16 15-1/2 18-11/16 15-13/16
DPL 1998 Annual Report 27 CORPORATE INFORMATION Transfer Agent and Registrar - Common Stock and DP&L Preferred Stock - -------------------------------------------------------------------- Securities Transfer & Shareholder Inquires: - ------------------------------------------ EquiServe P.O. Box 8040 Boston, MA 02266-8040 (781) 575-3100 (800) 736-3001 Dividend Reinvestment: - --------------------- EquiServe P.O. Box 8040 Boston, MA 02266-8040 Also dividend paying agent (781) 575-3100 (800) 736-3001 Trustee - DP&L First Mortgage Bonds - ----------------------------------- The Bank of New York Corporate Trust Administration 101 Barclay Street New York, NY 10286 Also interest paying agent Securities Listing - ------------------ The New York Stock Exchange is the only national securities exchange on which DPL Inc. Common Stock and DP&L First Mortgage Bonds are listed. The trading symbol of the Common Stock is DPL. Federal Income Tax Status of 1998 Dividend Payments - --------------------------------------------------- Dividends paid in 1998 on Common and Preferred Stock are fully taxable as dividend income. Annual Meeting - -------------- The Annual Meeting of Shareholders will be held at 10:00 a.m., Tuesday, April 20, 1999, at Miami Trace High School, Washington Court House, Ohio. Communications - -------------- DPL Inc. staffs an Investor Relations Department to meet the information needs of shareholders and investors. Inquires are welcomed. Communications relating to shareholder accounts should be directed to the DPL Investor Relations Department (937) 259-7150 or (800) 322-9244 or to EquiServe (781) 575-3100 or (800) 736-3001. Form 10-K Report - ---------------- DPL Inc. reports details concerning its operations and other matters annually to the Securities and Exchange Commission on Form 10-K, which will be supplied upon request. Please direct inquires to the Investor Relations Department. Officers--DPL INC. and DP&L (Age/Years of Service) - --------------------------- Peter H. Forster (56/25) Chairman--DPL Inc. and DP&L Allen M. Hill (53/31) President and Chief Executive Officer--DPL Inc. and DP&L Beth E. Mooney (43/1) Executive Vice President and Chief Operating Officer--DPL Inc. and DP&L Paul R. Anderson (56/20) Controller--DP&L Stephen P. Bramlage (52/30) Assistant Vice President--DP&L Jeanne S. Holihan (42/18) Assistant Vice President--DP&L Stephen F. Koziar, Jr. (54/31) Group Vice President and Secretary--DPL Inc. and DP&L Judy W. Lansaw (47/20) Group Vice President--DPL Inc. and DP&L Arthur G. Meyer (48/6) Vice President--DP&L Bryce W. Nickel (42/18) Assistant Vice President--DP&L H. Ted Santo (48/27) Group Vice President--DP&L James P. Torgerson (46/1) Vice President, Chief Financial Officer and Treasurer--DPL Inc. and DP&L Directors - --------- Burnell R. Roberts (2) (3) Retired Chairman and Chief Executive Officer, The Mead Corporation, Dayton, Ohio David R. Holmes (1) (4) Chairman, President and Chief Executive Officer, The Reynolds and Reynolds Company, Dayton, Ohio James F. Dicke, II (2) (3) President, Crown Equipment Corporation, New Bremen, Ohio Peter H. Forster (1) (3) (4) Chairman, DPL Inc. and DP&L, Dayton, Ohio W August Hillenbrand (2) (3) President and Chief Executive Officer, Hillenbrand Industries, Batesville, Indiana Jane G. Haley (1) (4) President and Chief Executive Officer, Gosiger, Inc., Dayton, Ohio Allen M. Hill (1) (3) (4) President and Chief Executive Officer, DPL Inc. and DP&L, Dayton, Ohio Thomas J. Danis (1) (4) Chairman and Chief Executive Officer, The Danis Companies, Dayton, Ohio Ernie Green (1) (4) President and Chief Executive Officer, Ernie Green Industries, Dayton, Ohio All Directors of DPL Inc. are also Directors of DP&L. 1998 Committee Assignments: DPL Inc. --Finance and Audit Review (1) Compensation and Management Review (2) Executive (3) DP&L --Community and External Relations (4) DPL 1998 Annual Report 28 DPL INC. Courthouse Plaza Southwest Dayton, Ohio 45402 (see appendix for logo description) [back cover] As required by Rule 304 of Regulation S-T, the following appendix lists the graphic material contained in the 1998 Annual Report to Shareholders. This graphic material, which appears in the paper copy of the report, was omitted from the electronically filed copy of the report. APPENDIX - -------- PAGE ITEM DESCRIPTION - ---- ---- ----------- Cover: Photograph: Depiction of a businessman and businesswoman discussing work in an office setting. Inside Front Cover: Photograph: Inset photograph of the front cover of the annual report. Logo: "DPL listed NYSE" Logo for the New York Stock Exchange Page 1: Bar Graph: TOTAL RETURN-FIVE YEAR AVERAGE ANNUAL RETURN Percent (with dividends reinvested) --------------------------- DP&L Industry Average ---- ---------------- 96: 13.2 6.2 97: 13.9 10.0 98: 15.5 10.5 Bar Graph: EARNINGS PER SHARE Dollars ------------------ 96: 1.15 97: 1.20 98: 1.24 Bar Graph: DIVIDENDS PER SHARE Dollars ------------------- 96: 0.87 97: 0.91 98: 0.94 Page 2: Photograph: Board of Directors Members are individually pictured with their names appearing below the photographs as follows: Thomas J. Danis, James F. Dicke, II, Peter H. Forster, Ernie Green Page 3: Photograph: Board of Directors Members are individually pictured with their names appearing below the photographs as follows: Jane G. Haley, Allen M. Hill, W August Hillenbrand, David R. Holmes, Burnell R. Roberts Page 4: Logo: "DP&L" logo and "Way To Go" logo, the umbrella name for energy conservation programs of the Company. Logo contains the phrase, "Partners in Business Plus". Photograph: A DP&L employee pictured in a control room of a power generating station. Page 5: Photograph: An employee located in a manufacturing setting installing steering wheel components at a company named Neaton Auto Products. Page 6: Photograph: An employee monitoring a conveyor line of plastics cups at a company named Packaging Resources. (Inset photograph of a Dannon yogurt cup) Page 7: Bar Graph: QUALITY OF SERVICE Percent positive responses -------------------------- DP&L ---- 96: 96 97: 96 98: 97 Photograph: Three separate photographs of a coal barge, dump truck, and train locomotive. Page 8: Photograph: A DP&L employee using a piece of hand held testing equipment at a power generating station. Photograph: A long range photograph of the exterior of the Stuart Generating Station. Page 9: Photograph: A DP&L employee using a monitoring device on a piece of equipment at a power generating station. Bar Graph: PRODUCTIVITY Percent better than industry average ------------------------------------ DP&L ----- 95: 0.9 96: 1.8 97: 2.6 98: 4.4 Page 10: Photograph: A DP&L employee working at a computer in the control room of a power generating station. Page 11: Line Graph: EFFICIENCY-HEAT RATE Total System, Btu per kWh ------------------------- DP&L Industry Average ---- ---------------- 95: 9,773 10,425 96: 9,830 10,365 97: 9,931 10,359 98: 9,903 10,324 Bar Graph: GENERATION OPERATING AND MAINTENANCE EXPENSE cents/kWh -------------------------------------------- DP&L Regional Average ---- ---------------- 95: .40 .66 96: .36 .68 97: .36 .64 98: .36 .64 (estimate) Page 12: Logo: "DP&L" logo and "Way To Go" logo, the umbrella name for energy conservation programs of the Company. Logo contains the word, "Personally". Line Graph: CREDIT RATINGS -------------- Moody's Investors Service Average DP&L Electric Utility Credit Rating ---- --------------------------------- 96: Aa3 A2 97: Aa3 A2 98: Aa3 A3 Page 13: Bar Graphs: ELECTRIC UTILITY REVENUES $ in millions ------------------------- 96 97 98 ------------------- Residential 423 410 420 Commercial 237 234 243 Industrial 223 226 229 Other 131 138 179 -------------------------------- Total 1,014 1,008 1,071 GAS UTILITY REVENUES $ in millions -------------------- 96 97 98 ----------------- Residential 157 160 139 Commercial 44 48 38 Industrial 14 12 9 Transportation & Other 24 24 25 -------------------------------- Total 239 244 211 TOTAL TAXES $ in millions ------------- 96 97 98 ------------- 233 239 257 ELECTRIC UTILITY SALES Thousands of GWH ---------------------- 96 97 98 ---------------- Residential 4.9 4.8 4.8 Commercial 3.4 3.4 3.5 Industrial 4.5 4.7 4.7 Other 3.5 3.7 4.5 ------------------------------ Total 16.3 16.6 17.5 GAS UTILITY SALES Millions of MCF ----------------- 96 97 98 ---------------- Residential 31 29 25 Commercial 9 10 7 Industrial 4 3 2 Transportation & Other 20 20 20 ------------------------------ Total 64 62 54 OPERATING EXPENSES $ in millions ------------------ 96 97 98 -------------- Fuel & Purchased Power 235 228 257 Gas Purchased for Resale 193 220 186 Operating and Maintenance 266 256 236 ------------------------------ Total 694 704 679 AVERAGE PRICE-ELECTRIC CALENDAR YEAR cents/kWh ---------------------- 96 97 98 ---------------- 6.16 6.01 6.03 TOTAL AVERAGE PRICE-GAS CALENDAR YEAR $/MCF ----------------------- 96 97 98 ----------------------- 3.75 3.93 3.93 CONSTRUCTION EXPENDITURES $ in millions ------------------------- 96 97 98 ------------- 116 111 111 Page 27: Artwork: Logo for PricewaterhouseCoopers LLP (Independent Auditors). Back Cover: Artwork: Logo - DPL Inc. EX-21 3 1998 DPL INC. LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF DPL INC. DPL Inc. had the following wholly owned subsidiaries on March 30, 1999: Name State of Incorporation - ---- ---------------------- The Dayton Power and Light Company Ohio Miami Valley Insurance Company Vermont Miami Valley Leasing, Inc. Ohio Miami Valley Resources, Inc. Ohio Miami Valley Lighting, Inc. Ohio Miami Valley Development Company Ohio Miami Valley CTC, Inc. Ohio DPL Energy, Inc. Ohio EX-23 4 1998 DPL INC. CONSENT OF ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statement on Form S-3 (Registration No. 33-34316) of DPL Inc., with respect to its Automatic Dividend Reinvestment and Stock Purchase Plan, and to DPL Inc.'s Registration Statement on Form S-4 (Registration No. 33-2551), with respect to The Dayton Power and Light Company's Employees' Stock Plan, of our report dated January 20, 1999, appearing on page 27 of the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page II-3 of this Form 10-K. /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Dayton, Ohio March 30, 1999 EX-27 5 1998 DPL INC. FINANCIAL DATA SCHEDULE
UT 1,000 YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 2238700 0 494800 277700 844700 3855900 1600 704600 677500 1383700 0 22900 1065900 96000 0 99000 4400 0 0 0 1184000 3855900 1281900 120400 976300 1096700 185200 97700 282900 92900 190000 900 189100 143600 89600 309600 1.24 1.24
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