-----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, JOWMzrA83iMcfWI4qkzq5SJDg7tjBVJRTrL/EJH2xnIbmA+in9O+xxOrPWf8Zpai 2ClqdgHH+7oB5uk6e/ARiw== 0000787250-98-000003.txt : 19980331 0000787250-98-000003.hdr.sgml : 19980331 ACCESSION NUMBER: 0000787250-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE 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: 98579059 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 1997 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, 1997 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 27, 1998 which registered ----------------------- ----------------- ------------------------ Common Stock, $0.01 par 160,202,949 New York Stock Exchange 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 27, 1998 was $2,933,716,504 closing price of $18-5/16 on such date. DOCUMENTS INCORPORATED BY REFERENCE Parts I and II incorporate by reference the registrant's 1997 Annual Report to Shareholders. Portions of the definitive Proxy Statement dated March 1, 1998, relating to the 1998 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. Located in West Central Ohio, it furnishes electric service to 485,000 retail customers in a 24 county service area of approximately 6,000 square miles and furnishes natural gas service to 301,000 customers in 16 counties. DP&L serves an estimated population of 1.3 million. Principal industries served include electrical machinery, automotive and other transportation equipment, non-electrical machinery, agriculture, paper, and rubber and plastic products. DP&L's sales reflect the general economic conditions and seasonal weather patterns of the area. In 1997, a 3% decline in electric residential sales resulted in slightly lower revenue, which offset a 3% increase in sales to business customers and higher sales to other public utilities. Gas utility revenues increased 2% in 1997. Sales increases of 3% from higher deliveries to business customers offset the effects of milder weather. During 1997, cooling degree days were 23% below the twenty year average and 15% below 1996. Heating degree days in 1997 were 3% above the thirty year average and 4% below 1996. Sales patterns will change in future years as weather and the economy fluctuate. Subsidiaries of DP&L include MacGregor Park Inc., an owner and developer of real estate and Miami Valley Equipment, Inc., which owns retail sales and transportation equipment and provides support services to DPL Inc. and its subsidiaries. * Unless otherwise indicated, the information given in "Item 1 - BUSINESS" is current as of March 27, 1998. No representation is made that there have not been subsequent changes to such information. I-1 Other subsidiaries of DPL Inc. include Miami Valley CTC, Inc., which provides transportation services; 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 Resources, Inc. ("MVR"), a natural gas supply management company; Miami Valley Lighting, Inc., a street lighting business; 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. 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 2,592 persons as of December 31, 1997, of which 2,164 are full-time employees and 428 are part-time employees. Information relating to industry segments is contained in Note 12 of Notes to Consolidated Financial Statements on page 26 of the registrant's 1997 Annual Report to Shareholders ("1997 Annual Report"), which Note is incorporated herein by reference. 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. I-2 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 12 municipal customers which distribute electricity within their corporate limits. In 1994, 11 of these municipal customers signed new 20-year service agreements which were approved by the Federal Energy Regulatory Commission ("FERC"), in June 1995. The twelfth municipal customer signed a 20-year agreement, approved by FERC in February 1995, that allows DP&L to supply 97% of its power requirements. In addition to these municipal customers, DP&L maintains an interconnection agreement with one municipality which has the capability to generate all or a portion of its energy requirements. Sales to municipalities represented 1.2% of total electricity sales in 1997. In October 1994, the Public Utilities Commission of Ohio ("PUCO") initiated roundtable discussions on the introduction of competition in the electric industry. The "Electric Competition Series" is a result of the Ohio Energy Strategy issued in April 1994. To date, roundtable discussions have focused largely on short-term initiatives that are possible under the current regulatory framework. On February 15, 1996, the PUCO issued guidelines for interruptible service, including services that accommodate the attainment and delivery of replacement electricity during periods when the utility faces constraints on its own resources. On April 11, 1996, the PUCO issued an Entry on Rehearing ordering utilities to file interruptible electric service tariffs. On June 14, 1996, DP&L filed for approval of a non-firm electric service rate schedule and replacement power rate riders. 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 February 27, 1997, after rehearing its earlier order on the subject, the PUCO issued guidelines for the implementation of conjunctive electric service. These guidelines require all electric utilities to file tariffs under which different service locations are aggregated for cost-of-service, rate design, rate negotiation and billing purposes. In January 1997, plans were announced to create a 12 member Joint Committee of the Ohio Senate and House of Representatives to explore and possibly draft retail wheeling legislation. The Committee has conducted hearings to gather information from energy companies, regulators, customers and industry experts. The Committee co-chairs issued a draft report on January 6, 1998 recommending opening the electric... I-3 ...generation market, in the future, to competition for all Ohio consumers. As a part of this restructuring effort in 1998 and beyond, legislators are also studying related complex tax issues that must be resolved. Other legislative proposals at the federal level are pending concerning electric wholesale and retail wheeling which are designed to increase competition. On April 24, 1996, FERC issued orders requiring all electric utilities that own or control transmission facilities to file open-access transmission service tariffs. Open-access transmission tariffs provide third parties with non- discriminatory transmission service comparable to what the utility provides itself. In its orders, FERC further stated that FERC-jurisdictional stranded costs reasonably incurred and costs of complying with the rules will be recoverable by electric utilities. In August 1997, DP&L refiled its open-access transmission tariff in compliance with FERC orders. In December 1997, DP&L reached an agreement in principle with intervenors in a pending tariff case and filed a subsequent tariff case based on an updated test year. On September 30, 1996, FERC conditionally accepted 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. General deregulation of the natural gas industry has continued to prompt the influence of market competition as the driving force behind natural gas procurement. The evolution of an efficient natural gas spot market in combination with open- access interstate transportation pipelines has provided 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, $116 million, and $87 million in 1997, 1996 and 1995, respectively. The capital program for 1998 consists of construction costs of approximately $100 million, which includes an 82 MW combustion turbine generating unit. 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 $27 million during the next five years for sinking fund payments in addition to any funds needed for the construction program. At year-end 1997, DPL Inc. had a cash and temporary investment balance of $26 million, and debt and equity financial assets were $384 million. 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. 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. I-5 In September 1995, a new series of Air Quality Development Revenue Refunding Bonds was issued in principal amount of $110 million with an interest rate of 6.1%. Proceeds from the financing were used to redeem a similar principal amount of DP&L First Mortgage Bonds with an interest rate of 9.5%. In November 1989, DPL Inc. entered into a revolving credit agreement ("the Credit Agreement") with a consortium of banks renewable through 2001 which allows total borrowings by DPL Inc. and its subsidiaries of $200 million. DP&L has authority from the PUCO to issue short-term debt up to $200 million with a maximum debt limit of $300 million including loans from DPL Inc. under the terms of the Credit Agreement. At year-end 1997, DPL Inc. had $36 million outstanding under this Credit Agreement. DP&L also has $97 million available in short-term lines of credit. At year-end 1997, DP&L had $10 million outstanding from these lines of credit and $70 million in commercial paper outstanding. 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, and (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 3,264,000 KW. Of this capability, 2,843,000 KW (approximately 87%) is derived from coal-fired steam generating stations and the balance consists of combustion turbine and diesel-powered peaking units. Approximately 88% (2,491,000 KW) of the existing steam generating capability is provided by certain units owned as tenants in common with The Cincinnati Gas & Electric Company ("CG&E") or with CG&E and Columbus Southern Power Company ("CSP"). Under the agreements among the companies, each company owns a specified undivided share of each facility, is entitled to its share of capacity and energy output, and has a capital and operating cost responsibility proportionate to its ownership share. 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 2,961,000 KW, which occurred in August 1995. The present summer generating capability is 3,194,000 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 418 624 Stuart C DP&L Aberdeen, OH 823 2,350 Conesville-Unit 4 C CSP Conesville, OH 129 780 Beckjord-Unit 6 C CG&E New Richmond, OH 210 420 Miami Fort-Units 7&8 C CG&E North Bend, OH 360 1,000 East Bend-Unit 2 C CG&E Rabbit Hash, KY 186 600 Zimmer C CG&E Moscow, OH 365 1,300 Combustion Turbines or Diesel - ----------------------------- Hutchings W DP&L Miamisburg, OH 32 32 Yankee Street W DP&L Centerville, OH 144 144 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 95 95 Tait Gas Turbine 2 W DP&L Moraine, OH 97 97 * 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 1997. 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 1998-2002 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 1.31 cents which represents an increase from 1.29 cents in 1996 and a decrease from 1.36 cents in 1995. Through the operation of a fuel cost adjustment clause applicable to electric sales, the increases and decreases in fuel costs are reflected in customer rates on a timely basis. See RATE REGULATIONAND 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 16 billion cubic feet of firm storage service with various pipelines. DP&L also maintains and operates four propane- air plants with a daily rated capacity of approximately 70,000 thousand cubic feet ("MCF") of natural gas. 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 1997, firm agreements provided approximately 50% of total supply, with the remaining supplies purchased on a spot/short-term basis. I-8 In 1997, DP&L purchased natural gas at an average price of $3.45 per MCF, compared to $3.45 per MCF in 1996 and $2.79 per MCF in 1995. Through the operation of a natural gas cost adjustment clause applicable to gas sales, increases and decreases in DP&L's natural gas costs are reflected in customer rates on a timely basis. SEE RATE REGULATION AND GOVERNMENT LEGISLATION. The PUCO supports open access, nondiscriminatory transportation of natural gas by the state's local distribution companies for end-use customers. The PUCO has guidelines to provide a standardized structure for end-use transportation programs which requires a tariff providing the prices, terms and conditions for such service. DP&L has an approved tariff and provides transportation service to approximately 300 end-use customers, delivering a total quantity of nearly 17,000,000 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, 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... I-9 ...public utilities and entities within the same holding company system, and (ii) prohibits investments by a holding company in subsidiaries which are not public utilities in an amount in excess of 15% of the aggregate capitalization of the holding company on a consolidated basis at the time such investments are made. Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current rates. In addition, deferred interest charges on the William H. Zimmer Generating Station are being amortized at $2.8 million per year over the projected life of the asset. A 1992 PUCO-approved settlement agreement and a subsequent stipulation in 1995 allowed accelerated recovery of demand-side management ("DSM") costs and, thereafter, production plant costs to the extent that 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. Regulatory deferrals on the balance sheet were: Dec. 31 Dec. 31 1997 1996 ------- ------- --millions-- Phase-in $ 30.6 $ 46.7 DSM 33.6 35.3 Deferred interest - Zimmer 52.5 55.3 Income taxes recoverable through future revenues 208.2 222.4 ------ ------ Total $324.9 $359.7 ====== ====== In 1989 the PUCO approved rules for the implementation of a comprehensive Integrated Resource Planning ("IRP") program for all investor-owned electric utilities in Ohio. Under this program, each utility is required to file an IRP as part of its Long Term Forecast Report ("LTFR"). The IRP requires each utility to evaluate available demand-side resource options in addition to supply-side options to determine the most cost- effective means for satisfying customer requirements. The rules currently allow a utility to apply for deferred recovery of DSM program expenditures and lost revenues between LTFR proceedings. Ultimate recovery of expenditures is contingent on review and approval of such programs as cost-effective and consistent with the most recent IRP proceeding. The rules also allow utilities to submit alternative proposals for the recovery of DSM programs and related costs. I-10 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 by 1997. Through an Ohio Power Siting Board ("OPSB") investigative process, DP&L's self-built option was evaluated to be the least cost option. 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. On June 1, 1997 and September 15, 1997, 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 82 MW combustion turbine generating units. The first combustion turbine began operation on June 1, 1995, a second unit began operation on December 23, 1996 and a third unit is currently under construction. On January 25, 1996, Governor Voinovich reappointed Chairman Craig A. Glazer to the PUCO for a five year term which commenced on April 11, 1996 and will extend until April 10, 2001. On February 7, 1997, Governor Voinovich appointed Judith A. Jones, a Toledo City Councilwoman, to the PUCO replacing Richard Fanelly. Her five year term commenced April 11, 1997 and will extend until April 10, 2002. On October 15, 1997 PUCO Commissioner David Johnson announced his resignation effective November 30, 1997. Commissioner Johnson was serving a term that would have expired in April 1998. On January 27, 1998, Governor Voinovich appointed Donald L. Mason, a senior management official with the Ohio Department of Natural Resources, to replace Commissioner Johnson. His five year term will expire on April 10, 2003. 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 1997. The possibility exists that current environmental regulations could be revised which could change the level of estimated construction expenditures. See CONSTRUCTION AND FINANCING PROGRAM OF 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. Phase I requirements are being met by switching to lower sulfur coal at several commonly owned electric generating facilities and increasing existing scrubber removal efficiency. Total capital expenditures to comply with Phase I of the Act were approximately $5.5 million. Present Phase II requirements can be met primarily by switching to lower sulfur coal at all non-scrubbed coal-fired electric generating units. Overall compliance is projected to have a minimal 1% to 2% approximate price impact. Costs to comply with the Act are eligible for recovery in fuel hearings and other regulatory proceedings. Land Use - -------- DP&L and numerous other parties have been notified by the United States Environmental Protection Agency ("U.S. EPA") or the Ohio Environmental Protection Agency ("Ohio EPA") that it considers them Potentially Responsible Parties ("PRPs") for clean- up at four superfund sites in Ohio: the Sanitary Landfill Site on Cardington Road in Montgomery County, Ohio; the United Scrap Lead Site in Miami County, Ohio; the Powell Road Landfill in Huber Heights, Montgomery County, Ohio; and the North Sanitary (a.k.a. Valleycrest) Landfill in Dayton, Montgomery County, Ohio. 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 cashflow. DP&L received notification from the U.S. EPA in September 1987 for the United Scrap Lead Site. DP&L has joined a PRP group for this site, which is actively conferring with the U.S. EPA. The initial Record of Decision issued by the U.S. EPA estimating clean-up costs at $27.1 million was later amended to reflect an estimate of clean-up costs at $32 million. DP&L is one of over 200 parties to this site, and its estimated contribution to the site is less than .01%. Nearly 60 PRPs are actively working to settle the case. DP&L participated in the sponsorship of a study to evaluate... I-12 ...alternatives to the U.S. EPA's clean-up plan. The U.S. EPA recently approved a proposal for a less expensive clean-up method for the entire site. This new clean-up is anticipated to have a total cost of $5.2 million. The final resolution will not have a material effect on DP&L's financial position, earnings or cashflow. 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 has joined the PRP group for the site. On October 1, 1993, the U.S. EPA issued its Record of Decision identifying a cost estimate of $20.5 million for the chosen remedy. DP&L is one of over 200 PRPs to this site, and its estimated contribution is less than 1%. In late January 1998, the U.S. EPA approved a settlement that included 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 cashflow. I-13 THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS ELECTRIC OPERATIONS Years Ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Electric Output (millions of kWh) General - Coal-fired units 16,246 16,142 15,679 Other units 52 21 29 Power purchases 1,239 1,098 2,115 Exchanged and transmitted power - (1) 1 Company use and line losses (928) (946) (1,010) ---------- ---------- ---------- Total 16,609 16,314 16,814 ========== ========== ========== Electric Sales (millions of kWh) Residential 4,788 4,924 4,871 Commercial 3,408 3,407 3,425 Industrial 4,749 4,540 4,401 Public authorities and railroads 1,330 1,392 1,378 Private utilities and wholesale 2,334 2,051 2,739 ---------- ---------- ---------- Total 16,609 16,314 16,814 ========== ========== ========== Electric Customers at End of Period Residential 433,563 428,973 425,347 Commercial 43,923 43,381 42,582 Industrial 1,881 1,858 2,017 Public authorities and railroads 5,736 5,651 5,573 Other 42 29 17 ---------- ---------- ---------- Total 485,145 479,892 475,536 ========== ========== ========== Operating Revenues (thousands) Residential $ 409,857 $ 422,876 $ 422,153 Commercial 234,206 236,598 237,799 Industrial 225,775 222,941 224,135 Public authorities and railroads 74,018 78,140 78,225 Private utilities and wholesale 53,598 43,730 57,799 Other 12,523 12,115 9,807 ---------- ---------- ---------- Total $1,009,977 $1,016,400 $1,029,918 ========== ========== ========== Residential Statistics (per customer-average) Sales - kWh 11,120 11,537 11,518 Revenue $ 951.90 $ 990.89 $ 998.27 Rate per kWh (Month of December) (cents) 8.10 7.91 8.01 I-14 THE DAYTON POWER AND LIGHT COMPANY OPERATING STATISTICS GAS OPERATIONS Years Ended December 31, ------------------------------ 1997 1996 1995 ---- ---- ---- Gas Output (thousands of MCF) Direct market purchases 43,808 46,696 44,376 Liquefied petroleum gas 66 90 18 Company use and unaccounted for (1,016) (676) (1,594) Transportation gas received 19,182 17,587 16,870 -------- -------- -------- Total 62,040 63,697 59,670 ======== ======== ======== Gas Sales (thousands of MCF) Residential 29,277 31,087 29,397 Commercial 9,567 9,424 8,307 Industrial 2,520 3,404 2,584 Public authorities 2,153 2,829 3,006 Transportation gas delivered 18,523 16,953 16,376 -------- -------- -------- Total 62,040 63,697 59,670 ======== ======== ======== Gas Customers at End of Period Residential 276,189 272,616 269,694 Commercial 22,298 22,085 21,451 Industrial 1,396 1,331 1,574 Public authorities 1,475 1,463 1,423 -------- -------- -------- Total 301,358 297,495 294,142 ======== ======== ======== Operating Revenues (thousands) Residential $160,279 $156,709 $149,006 Commercial 48,302 44,092 39,047 Industrial 11,867 14,110 11,447 Public authorities 10,311 12,013 12,589 Other 12,948 11,660 9,950 -------- -------- -------- Total $243,707 $238,584 $222,039 ======== ======== ======== Residential Statistics (per customer-average) Sales - MCF 107.0 114.8 109.8 Revenue $ 585.63 $ 578.68 $ 556.72 Rate per MCF (month of December) $ 5.20 $ 5.13 $ 4.44 I-15 EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1998) Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - ------------------------------------------------------------------------------ Peter H. Forster 55 Chairman 1/01/97 - 3/01/98 Chairman and Chief 9/26/95 - 1/01/97 Executive Officer Chairman, President and 4/05/88 - 9/26/95 Chief Executive Officer Chairman, DP&L 4/06/92 - 3/01/98 Allen M. Hill 52 President and Chief 1/01/97 - 3/01/98 Executive Officer President and Chief 9/26/95 - 1/01/97 Operating Officer President and Chief 4/06/92 - 3/01/98 Executive Officer, DP&L Paul R. Anderson 55 Controller, DP&L 4/12/81 - 3/01/98 Stephen P. Bramlage 51 Assistant Vice President, 1/01/94 - 3/01/98 DP&L Director, Service 10/29/89 - 1/01/94 Operations, DP&L Jeanne S. Holihan 41 Assistant Vice President, 3/17/93 - 3/01/98 DP&L Treasurer, DP&L 11/06/90 - 3/17/93 Thomas M. Jenkins 46 Group Vice President 5/14/96 - 3/01/98 and Treasurer, DPL Inc. and DP&L Group Vice President 6/27/95 - 5/14/96 and Treasurer Group Vice President, DP&L Group Vice President 5/09/94 - 6/27/95 and Treasurer, DPL Inc. and DP&L Group Vice President 11/06/90 - 5/09/94 and Treasurer Group Vice President, DP&L I-16 EXECUTIVE OFFICERS OF THE REGISTRANT (As of March 1, 1998) Business Experience, Last Five Years (Positions with Registrant Name Age Unless Otherwise Indicated) Dates - ------------------------------------------------------------------------------ Stephen F. Koziar Jr. 53 Group Vice President 1/31/95 - 3/01/98 and Secretary, DPL Inc. and DP&L Group Vice President, 12/10/87 - 1/31/95 DPL Inc. and DP&L Judy W. Lansaw 46 Group Vice President, 1/31/95 - 3/01/98 DPL Inc. and DP&L Group Vice President 12/07/93 - 1/31/95 and Secretary, DPL Inc. and DP&L Vice President and 8/01/89 - 12/07/93 Secretary, DPL Inc. and DP&L Arthur G. Meyer 48 Vice President, Legal and 11/21/97 - 3/01/98 Corporate Affairs, DP&L Director, Corporate 5/14/96 - 11/21/97 Relations, DP&L Treasurer, DP&L 6/27/95 - 5/14/96 Director, Financial 5/09/94 - 6/27/95 Activities Manager, Service Operations 1/31/94 - 5/09/94 Associate General Counsel 7/13/92 - 1/31/94 Bryce W. Nickel 41 Assistant Vice President 1/01/94 - 3/01/98 DP&L Director, Service 10/29/89 - 1/01/94 Operations, DP&L H. Ted Santo 47 Group Vice President, 12/08/92 - 3/01/98 DP&L 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 21 and 23, respectively, of the registrant's 1997 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 of Consolidated Financial Statements on page 21 of the registrant's 1997 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 15, 1997. Three directors of DPL Inc. were elected at the Annual Meeting, each of whom will serve a three year term expiring in 2000. The nominees were elected as follows: Ernie Green, 92,556,140 shares FOR, 1,405,730 shares WITHHELD; David R. Holmes, 92,614,002 shares FOR, 1,347,868 shares WITHHELD; Burnell R. Roberts, 92,559,470 shares FOR, 1,402,400 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 1997 Annual Report, which pages are incorporated herein by reference. As of December 31, 1997, there were 43,689 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. The Credit Agreement requires that the aggregate assets of DP&L and its subsidiaries (if any) constitute not less than 60% of the total consolidated assets of DPL Inc., and that DP&L maintain common shareholder's equity (as defined in the Credit Agreement) at least equal to $550 million. 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 1997 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 21 and on pages 1, 13, 15 and 16 of the registrant's 1997 Annual Report, which pages are incorporated herein by reference. Subsequent to the completion of the 1997 Annual Report, DP&L was notified that the U.S. EPA approved a settlement at one of the superfund sites. The total cost estimate for all of the Potentially Responsible Parties for all of the sites has changed from $34 million to $13 million. 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 1997 Annual Report, which pages are incorporated herein by reference. II-1 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 21, 1998 appearing on page 27 of the 1997 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/Price Waterhouse LLP Price Waterhouse LLP Dayton, Ohio January 21, 1998 II-2 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 2, 1998, relating to the 1998 Annual Meeting of Shareholders ("1998 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 15 of the 1998 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 1998 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 1997 Form 10-K Incorporated by Reference ------------------------- Report of Independent Accountants II-2 (a) Documents filed as part of the Form 10-K 1. Financial Statements Pages of 1997 Annual Report -------------------- Incorporated by Reference --------------------------- Consolidated Statement of Results of Operations For the three years in the period ended December 31, 1997 17 Consolidated Statement of Cash Flows for the three years in the period ended December 31, 1997 18 Consolidated Balance Sheet as of December 31, 1997 and 1996 19 Notes to Consolidated Financial Statements 20 - 26 Report of Independent Accountants 27 2. Financial Statement Schedule ---------------------------- For the three years in the period ended December 31, 1997: Page No. -------- Schedule II - Valuation and qualifying accounts IV-7 The information required to be submitted in schedules I, III, IV and V is omitted as not applicable or not required under rules of Regulation S-X. IV-1 3. Exhibits -------- The following exhibits have been filed with the Securities and Exchange Commission and are incorporated herein by reference. Incorporation by Reference -------------------------- 2 Copy of the Agreement of Merger among Exhibit A to the 1986 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 4(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, Statement No. 33-56162 1992, 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, Statement No. 33-56162 1992, 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, Form 10-K for the year 1993, between DP&L and The Bank of New ended December 31, 1992 York, Trustee (File No. 1-2385) 4(m) Copy of the Credit Agreement dated as Exhibit 4(k) to DPL Inc.'s of November 2, 1989 between DPL Inc., Registration Statement the Bank of New York, as agent, and the on Form S-3 banks named therein (File No. 33-32348) 4(n) Copy of Shareholder Rights Agreement Exhibit 4 to Report on between DPL Inc. and The First National Form 8-K dated Bank of Boston December 13, 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 1997 Annual Report to Shareholders 21 Copy of List of Subsidiaries of DPL Inc. 23 Consent of Price Waterhouse 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, thereun to duly authorized. DPL Inc. Registrant March 30, 1998 /s/Allen M. Hill ------------------------------------- Allen M. Hill President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Director - -------------------- (T. J. Danis) Director - -------------------- (J. F. Dicke, II) /s/Peter H. Forster Director and Chairman March 30, 1998 - -------------------- (P. H. Forster) /s/Ernie Green Director March 30, 1998 - -------------------- (E. Green) /s/Jane G. Haley Director March 30, 1998 - -------------------- (J. G. Haley) /s/Allen M. Hill Director, President and March 30, 1998 - -------------------- Chief Executive Officer (A. M. Hill) IV-5 Director - -------------------- (W A. Hillenbrand) /s/David R. Holmes Director March 30, 1998 - -------------------- (D. R. Holmes) /s/Thomas M. Jenkins Group Vice President and March 30, 1998 - -------------------- Treasurer (principal (T. M. Jenkins) financial and accounting officer) Director - -------------------- (B. R. Roberts) IV-6 Schedule II DPL Inc. VALUATION AND QUALIFYING ACCOUNTS For the years ended December 31, 1997, 1996 and 1995 - ------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------ Additions ---------------- Balance at Charged Balance Beginning to Deductions at End Description of Period Income Other (1) Period - ------------------------------------------------------------------------------ ----------------------thousands--------------------- 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 1995: Deducted from accounts receivable-- Provision for uncollectible accounts $ 7,801 $ 1,096 $ - $ 2,416 $ 6,481 (1) Amounts written off, net of recoveries of accounts previously written off. IV-7 EX-13 2 1997 DPL INC. ANNUAL REPORT 1997 Annual Report Focused and Prepared (see appendix for photograph description) (see appendix for logo description) [cover] CORPORATE PROFILE DPL Inc. was formed in 1986 as a holding company. Its 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 485,000 retail customers. Natural gas is provided to 301,000 customers in 16 counties. The corporate offices of DPL Inc. are located at: Courthouse Plaza Southwest, Dayton, Ohio 45402 (937) 224-6000 ABOUT THE COVERS Focused and Prepared Our efforts and attention at DPL Inc. remain focused on our core electric and natural gas businesses. Top of the industry operating and financial performance and ongoing programs that further improve our competitive position have built a foundation of preparedness for future success. Featured on our 1997 Annual Report is The Dayton Power and Light Energy Resource Center, where unique solutions are designed to meet the energy needs of homes and businesses. Programs include workshops demonstrating new energy products and home energy efficiency improvements, along with state-of-the-art technologies for improved energy control and reliability for industry. These programs and solutions demonstrate DP&L's overall total customer focus and ability to tailor energy services to the individual needs of our customers. STRATEGIC OBJECTIVES Our key strategic objectives have made us successful today and prepared DPL for the more competitive environment of tomorrow. Superior Operations - Corporate wide focus on providing industry- leading levels of operating performance. Customer Focus - Provide competitive prices, ensure high levels of reliability and retain customer satisfaction. Management - Focus on improving competitive position and maximizing opportunities for growth. Cost Control - Maintain and improve industry leading cost control programs. Financial - Develop and maintain financial strength and flexibility. [inside front cover] FINANCIAL & OPERATING HIGHLIGHTS 1997 1996 % change - ------------------------------------------------------------------------------ Financial Performance: - ---------------------- Earnings per share of common stock $ 1.20 1.15 4 Dividends paid per share $ 0.91 0.87 5 Return on shareholders' equity % 14.6 14.7 Return on total capital % 11.8 11.7 Market value per share at December 31 $ 19-3/16 16-3/16 19 Book value per share at December 31 $ 8.45 7.97 6 Total electric and natural gas utility revenues (millions) $ 1,251.5 1,252.7 --- Taxes per share $ 1.58 1.55 2 Number of common shareholders 43,689 46,532 (6) Cash provided by operating activities (millions) $ 339.9 338.1 1 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) $ 110.6 115.5 (4) Construction expenditures paid from internal funds % 100 100 DP&L Operating Performance: - --------------------------- Electric-- Average price per kWh--retail and wholesale customers (calendar year) (cents) 6.01 6.16 (2) Fuel efficiency-- Heat rate - Btu per kWh 9,931 9830 1 Industry average 10,359 10,365 --- Fuel savings (millions) $ 9.2 11.5 (20) System peak load - MW (calendar year) 2,848 2,886 (1) Gas-- Average price per MCF - total (calendar year) $ 3.93 3.75 5 DPL 1997 Annual Report 1 Dear Shareholder: Two issues were successfully dealt with in 1997. They were continued focus on excellent current performance and preparation for the future electric sales market. Earnings for the year rose to $1.20 per share, up more than 4% and better than twice the industry average; dividends were increased to $0.907 per share in February 1997 and again in February 1998 to $0.94 per share; the stock price hit an all-time high of $28.75 and we declared a three-for-two stock split to be effective January 12, 1998. Our total return in 1997 was over 25%. These are all reflections of our strong financial performance and capable management team. We are proud of these accomplishments when compared against the backdrop of the energy industry, which is quite different from our own performance. In 1997, many energy companies did not increase dividends, lost money in related and unrelated new business ventures, and continuously changed their "vision". Our vision occurred more than fifteen years ago, when we began preparing for a competitive energy environment. Namely, that we sell a commodity and a commodity sells on price. In 1997, the Ohio government began the initial steps toward opening the regulated electricity environment. The issues are tough. They include tax restructuring, reliability of electric service, recovery of invested capital and determining the time frame for deregulation to occur. We believe that many new attributes are necessary to be competitive and that size alone will not determine profitability. Rather, the ability to quickly take advantage of opportunities in the market place and those presented by governmental rules are keys to success. We have been preparing for a change in the market and the rules under which we do business for well over a decade. Our management team has focused on flexibility, both operationally and financially. We experienced first hand in the natural gas business how government can completely change a market. We learned that the ability to adapt quickly to.... EARNINGS PER SHARE Dollars (see appendix for bar graph description) Caption to photograph: Board of Directors Thomas J. Danis, James F. Dicke, II, Peter H. Forster, Ernie Green (see appendix for photograph description) DPL 1997 Annual Report 2 ....change is critical. Streamlined management and operations can become the critical factor in profiting from change. Our productivity and efficiency has historically been among the ten best in the country. Our balance sheet is strong and we have the financial means necessary to move into a new era. We are also a combination electric and natural gas company. This means we provide a complete and competitively priced energy package for any customer. When combined with natural gas and coal costs for electric generation that are near the lowest in the Midwest region, our competitive advantage is really enhanced. We view the coming changes as opportunities. The electricity sales market will be confused for quite some time to come. Basically, the business will be like most others. Each state will have its own rules, making management focus on fundamentals and overall flexibility paramount to success. To remain profitable, you need competitive production costs, a solid distribution base and a positive customer service team. We have these tools. We have the will to change, again and again as the market progresses and the agility to do it quickly. Your Board of Directors and the management team are dedicated to bringing you excellent current returns while focusing on growing into the future. The formula for success that we have and will continue to work on, is financial strength, preparation and focus. Thank you for letting us work for you. 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. DIVIDENDS PER SHARE Dollars (see appendix for bar graph description) 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 1997 Annual Report 3 THE DPL MISSION As the energy industry moves through transition, our goal remains unchanged. We will continue to provide quality gas and electric service to our customers at competitive prices, and earn a fair rate of return for our shareholders. By adhering to this long- time corporate goal, we have established an industry leading operating and financial position. One sign of DPL Inc.'s industry leadership is the ability to deliver solid results. We have the ability, motivation and attitude to make results happen, not just plan for them. In an environment of increasing market and price volatility it is team strength that ultimately prevails. With each state embarking on its own path towards competition, uncertainty and risk in the industry will increase. With our historical focus on strong financial and operating results, we are prepared for the changes in the utility industry. KEY STRATEGIC OBJECTIVES Our blueprint for success and continued improvement combines several key elements. These include maintaining our strong financial position, managing opportunities and risks, keeping a strong customer focus, continuing industry leading operations and controlling costs. Our successful completion of these objectives will translate into solid shareholder returns. The restructuring and changing regulatory environment of the electric utility industry continues. Companies are implementing very diverse strategies to deal with changing regulatory policy. As in the past, there are several pending or proposed mergers that seek to combine resources. In addition, several companies have chosen to sell off assets in response to competition. Clearly, the gas and electric markets are moving toward a commodity-based industry. This action supports one of the foundations of our operations that has been present for many years. Specifically, that we are in the business of selling a commodity, and a.... Total Energy Provider - --------------------- DP&L's ability to provide customers with both natural gas and electricity is a distinct competitive advantage. With fuel and natural gas costs that are among the lowest in the region, we offer a total energy package that is competitively priced and reliable. INFLATION-ADJUSTED PRICE (cents/kWh) (see appendix for line graph description) caption to photograph: Since 1987, DP&L electric prices have declined 23%, adjusted for inflation during that period. Pictured: Scott Kelly, Business Development. (see appendix for photograph description) DPL 1997 Annual Report 4 caption to photograph: F & P America, located in Troy, Ohio, is a supplier of suspension and structural components for the automotive industry. Recent expansion at this facility was assisted by innovative energy efficiency solutions provided by DP&L. (see appendix for photograph description) DPL 1997 Annual Report 5 caption to photograph: Miami Valley Research Park is the home for over forty primarily high-tech companies. Numerous recent corporate additions have resulted in impressive growth for the Park, and represent the dynamic economic environment in West Central Ohio. (see appendix for photograph description) DPL 1997 Annual Report 6 ....commodity sells on price and customer service. With this in mind, the following key factors will play a large part in our future success. SUPERIOR OPERATIONS More than ever before, as we move towards a less regulated and more volatile electricity environment, our ability to continue to achieve top of the industry operational performance enhances our competitive position. The electric generation part of our business is likely to be the first to be changed by new legislative rules. Customers may be provided the opportunity to choose between electric producers. Price, service, and reliability will be important factors in their choice. DP&L has one of the best records in the industry in terms of providing electricity efficiently and reliably. Measures of productivity, such as equivalent forced outage rate and equivalent availability, rank DP&L among the best in the nation and show that our generating units are available to meet customer requirements. Our production efficiency, how well we convert coal to electricity, has always been at the top in the nation and contributes to our low electric fuel costs. The combination of productivity and efficiency, together with low costs, provides for reliable, competitively priced electricity for our customers. CUSTOMER FOCUS Our goal is to exceed customer expectations with each interaction. Our employees seek to understand the needs and opinions of our customers as they relate to our energy service. They monitor and improve customer satisfaction by meeting with customers to get feedback regarding our level of service. Each employee has incentive compensation tied to factors related to the quality of customer service that they personally provide. We have numerous customer service centers located throughout West Central Ohio to ensure our customers.... Industry Leader - --------------- DP&L's long tradition of national leadership in productivity and efficiency are a significant advantage in a competitive market. Achieving top performance helps to reduce costs and ensure a reliable supply of energy for our customers. EQUIVALENT FORCED OUTAGE RATE in percent (see appendix for bar graph description) caption to photograph: Equivalent Forced Outage Rate, or "EFOR," measures the availability of our generating units when they are needed most. High availability, represented by a low EFOR, means that we avoid costly power purchases at times of high demand. Pictured: Kevin Crawford, Energy Production. (see appendix for photograph description) DPL 1997 Annual Report 7 ....receive reliable, quality service quickly and at all times. Throughout the 1990's, our customers have consistently responded in the mid-ninety percent satisfaction level regarding our quality of service. DP&L continues to provide energy solutions for customers through the "Way To Go" programs. "Way To Go" is the umbrella name for all of our gas and electric efficiency programs. We have been able to reach a large segment of our customer base with these programs, providing them with energy and money saving initiatives. These programs are coordinated through our Energy Resource Center which features the latest in energy technologies and solutions for the customer's energy needs. MANAGEMENT Our management focus is on areas that improve our competitive position and maximize opportunities to grow in the changing legislative and regulatory environment. If future legislative actions provide opportunities, DP&L will be in a position to further enhance its competitive position. We have a history of good working relationships with legislators and regulators, and the ability to work towards solutions that are beneficial for both customers and shareholders. Our experience will help us to thoroughly analyze developing legislative issues and to work together with governing officials to provide the benefits of customer choice to customers, employees and shareholders. Leadership will be essential for our future success. Our management team is comprised of young, experienced and motivated people. With an average age in the mid-40's and nearly twenty years of experience in the industry, we are well positioned for the future. Through the years we have kept our belief in keeping management layers streamlined. Employing a limited number of officers and possessing few layers of management ensures quick responses and.... DP&L - The Way to Go - Personally (see appendix for logo description) caption to logo: Way to Go Personally programs provide energy services tailored to the individual needs of customers. One example is "Way to Go Home Essentials", a service that offers energy saving and convenience products for the home or office. QUALITY OF SERVICE percentage positive responses (see appendix for bar graph description) Caption to photograph: Our customers consistently respond in the mid-ninety percent level regarding their satisfaction with the quality of service they receive from Dayton Power & Light. Photo: Judi Blair, Service Operations. (see appendix for photograph description) DPL 1997 Annual Report 8 Caption to photograph: Crysteco Inc., headquartered in Wilmington, Ohio, manufactures silicon wafers for semi-conductor device applications. Exacting and accurate temperatures in the manufacturing process result in the need for DP&L to meet unusually high reliability demands. DP&L helped to develop a unique technology solution to meet these requirements. (see appendix for photograph description) DPL 1997 Annual Report 9 Caption to photograph: Dayton is the 1996 to 1998 site of the National Folk Festival, which attracts talented performers and thousands of attendees from across the country. DP&L is one of the key sponsors of this event, representing the Company's commitment to the quality of life in West Central Ohio. (see appendix for photograph description) DPL 1997 Annual Report 10 ....flexibility in day-to-day operations. Importantly, each employee is also a shareholder. This personal stake creates a meaningful alignment of employee and shareholder interests. COST CONTROL DP&L is recognized in the industry as being one of the best in terms of controlling costs. This comes from our company-wide focus on knowing and predicting all types of cost. Fuel cost continues to be a competitive advantage for DP&L. Generally,, 25% of the price of electricity is fuel cost. Our fuel costs are among the lowest in the entire Midwestern region. Nearly all of our large generating stations are located on the Ohio River, with ready access to plentiful and varied types of Central Appalachian coal. Coal can be brought to the plants by barge, truck, or rail, which helps to manage transportation costs. Flexible and predictable long-term coal contracts allow us to maintain low costs into the future, and provide the ability to adapt to changes in coal markets. This flexibility has also helped us in meeting the provisions of the Clean Air Act, keeping compliance costs low. Natural gas costs make up about 60% of the price of gas to customers. Our natural gas costs are among the lowest in Ohio and our favorable location near a major natural gas pipeline hub helps to ensure this position for the future. This combination of low cost natural gas and electric fuel effectively positions DP&L as a competitive total energy provider. The ability to provide customers with both natural gas and electricity is a key strategic advantage. FINANCIAL Earnings and dividends that exceed industry averages and a balance sheet that is among the cleanest and strongest in the nation establish a solid base for future financial stability. A conservative capital structure and strong cash flow provide the resources and flexibility for a.... DP&L - Way to Go - Partners in Business Plus (see appendix for logo description) caption to logo: Partners in Business Plus is DP&L's newest and most comprehensive business growth incentive program, offering energy credits to business customers that add jobs or increase capital investment. This program continues DP&L's long record of partnership with area companies to further economic development. CREDIT RATINGS DP&L Moody's Investors Service Average Electric Utility Credit Rating (see appendix for line graph description) caption to photograph: A combination of strong financial performance, low costs and good working relationships with area leaders has helped DP&L to manage risk and maintain solid credit ratings. DP&L's credit ratings were consistently upgraded by all three major rating agencies from 1992-1995, during a time when ratings trended down for the industry. Pictured: Kevin DeWine, Corporate Relations. (see appendix for photograph description) DPL 1997 Annual Report 11 ....sound competitive position. Our long-term debt has a 26-year average maturity and a low 7.7% embedded cost. These attributes have helped to earn the AA level credit ratings that we maintain from all three major rating agencies. Overall, our financial position reflects the preparation necessary to compete and to deliver fair returns to our shareholders. DPL's common stock reached an all-time high of $28.75 per share in 1997. This strong performance, combined with our dividend, resulted in a total return to shareholders of over 25%. Late in the year, the Board of Directors authorized a three-for-two stock split, our third stock split in the last seven years. The split was effective January 12, 1998 to shareholders of record on December 16, 1997. Typically, stock splits result in a broader market and increased liquidity for your shares, and reflect confidence in the financial performance of the Company. In order to provide continued above average current returns for you, the annual dividend rate was increased on February 3, 1998, to $0.94 per share. This 3.7% increase is well above the industry average of less than 2% over the past year, and is the eleventh dividend increase in the last twelve years. DPL has consistently been a strong financial performer. In 1997, earnings were $1.20 per share, an increase of nearly five percent over 1996 earnings. This performance is particularly remarkable in light of the overall industry performance in 1997, with earnings declining at an average of about 5%. Our long-term record of earnings and dividend growth has resulted in a total five year return to shareholders of over 91%. Our strong performance over the past ten years reflects our commitment to the achievement of specific measurable goals. Regardless of the environment in which we operate, we remain focused on our core business while maintaining the flexibility to adapt to change. 1998 will be a year of continued change. We will remain focused, dealing with the changes needed for the future and working to provide you, our Shareholders, with a fair rate of return. Return - ------ DPL's stock price reached an all-time high in 1997, contributing to a total annual return of over 25%. Over the past ten years, DPL has produced an average annual total return to shareholders of 18%. DPL 1997 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 COSTS 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 1997 Annual Report 13
FINANCIAL AND STATISTICAL SUMMARY DPL Inc. 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------- For the years ended December 31, DPL Inc.: Earnings per share of common stock (a) $ 1.20 1.15 1.09 1.03 0.95 Dividends paid per share (a) $ 0.91 0.87 0.83 0.79 0.75 Dividend payout ratio % 75.8 75.7 76.1 76.7 78.9 Net income (millions) $ 181.4 172.9 164.7 154.9 139.0 Utility service revenues (millions) $1,252.2 1,256.1 1,255.1 1,187.9 1,151.3 Construction additions (millions) $ 110.6 115.5 87.3 101.1 88.9 Market value per share at December 31 (a) $19-3/16 16-3/16 16-1/2 13-11/16 13-3/4 DP&L: Electric sales (millions of kWh) -- Residential 4,788 4,924 4,871 4,465 4,558 Commercial 3,408 3,407 3,425 3,068 3,006 Industrial 4,749 4,540 4,401 4,388 4,089 Other 3,664 3,443 4,117 2,298 3,023 ------ ------ ------ ------ ------ Total 16,609 16,314 16,814 14,219 14,676 Gas sales (thousands of MCF) -- Residential 29,277 31,087 29,397 27,911 28,786 Commercial 9,567 9,424 8,307 8,081 8,468 Industrial 2,520 3,404 2,584 3,150 3,056 Other 2,153 2,829 3,006 2,909 3,171 Transported gas 18,523 16,953 16,376 15,147 13,401 ------ ------ ------ ------ ------ Total 62,040 63,697 59,670 57,198 56,882 At December 31, DPL Inc.: Book value per share (a) $ 8.45 7.97 7.69 7.45 7.01 Total assets (millions) $3,585.2 3,418.7 3,322.8 3,232.7 3,302.0 Long-term debt and preferred stock with mandatory redemption provisions (millions) $ 971.0 1,014.3 1,081.5 1,093.7 1,132.9 DP&L: First mortgage bond ratings -- Duff & Phelps, Inc. AA AA AA AA AA- Standard & Poor's Corporation AA- AA- AA- AA- A Moody's Investors Service Aa3 Aa3 Aa3 A1 A2 DPL Number of Shareholders Inc.: Common 43,689 46,532 48,919 51,270 53,275 DP&L: Preferred 625 684 733 795 1,873 (a) Per share amounts have been restated to reflect the three-for-two common stock split paid on January 12, 1998 to stockholders of record on December 16, 1997.
DPL 1997 Annual Report 14 FINANCIAL REVIEW Income Statement Highlights - --------------------------- $ in millions except per share amounts 1997 1996 1995 - ----------------------------------------------------------------- Electric Utility: Revenues $1,008 $1,014 $1,028 Fuel and purchased power 227 234 256 ------ ------ ------ Net revenues 781 780 772 Gas Utility: Revenues 244 239 222 Gas purchased for resale 151 145 133 ------ ------ ------ Net revenues 93 94 89 Other income 104 74 55 Operation and maintenance expense 256 266 272 Amortization of regulatory assets, net 17 15 15 Income taxes 105 104 102 Net income 181 173 165 Earnings per share of common stock 1.20 1.15 1.09 The 1997 earnings increased to $1.20 per share, compared to earnings per share of $1.15 in 1996 and $1.09 in 1995. In 1997, a 3% decline in electric residential sales resulted in slightly lower revenue which offset a 3% increase in sales to business customers and higher sales to other public utilities. Fuel and purchased power expense decreased 3% primarily related to lower fuel costs. In 1996, electric revenues decreased 1% as a result of lower sales to public utilities. Gas utility revenues increased 2% in 1997. Sales increases of 3% from higher deliveries to business customers offset the effects of milder weather. Gas purchased for resale by the utility increased 4% primarily from higher natural gas costs. Gas utility revenues increased 7% resulting in a 9% increase in gas utility purchases in 1996. Other income increased $29 million in 1997 due to higher non-utility revenue and increased investment income. The $19 million increase in 1996 resulted from higher non-utility revenue. Operation and maintenance expense decreased 4% in 1997 from 1996 due to cost containment efforts and lower actuarially-determined benefit expense. Operation and maintenance expense decreased 2% in 1996 from 1995 as a result of reduced electric production and system maintenance, bond redemption costs, lower compensation and benefit expense, offset by higher insurance and claims costs. Regulatory assets recorded during the phase-in of electric rates are being amortized and recovered in current rates. In addition, deferred interest charges on the William H. Zimmer Generating Station are being amortized at $3 million per year over the projected life of the asset. A 1992 Public Utilities Commission of Ohio ("PUCO")-approved settlement agreement and a subsequent stipulation in 1995 allowed accelerated recovery of demand-side management costs and, thereafter, production plant costs to the extent that 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. Depreciation and amortization expense increased $2 million as a result of increased depreciable assets in 1997 and $7 million in 1996 primarily due to increased depreciable assets and rates. General taxes increased 3% in 1997 and 4% in 1996 as a result of higher property taxes from additional property. Interest expense declined $3 million in 1997 primarily due to the redemption of $25 million of first mortgage bonds late in 1996 and two series of first mortgage bonds totaling $80 million in 1997. Interest expense declined $5 million in 1996 primarily from the September 1995 refinancing of $110 million of bonds at a lower interest rate. Certain risks of DPL Inc. and its subsidiaries are insured through a wholly-owned captive insurance company. Increases in insurance and claims cost resulted primarily from additional insurance coverage. Credit Ratings - -------------- DP&L's senior debt credit ratings are as follows: Duff & Phelps AA Moody's Investors Service Aa3 Standard & Poor's AA- Each rating has been affirmed by its respective rating agency in 1997. Moody's Investors Service upgraded 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, $116 million, and $87 million in 1997, 1996 and 1995, respectively. The capital program for 1998 consists of construction costs of approximately $100 million, which includes an 82 MW combustion turbine generating unit. During 1997, total cash provided by operating activities was $340 million. At year-end, cash and temporary cash investments were $26 million, and debt and equity financial assets were $384 million. Cash and financial assets are held with a view towards investing in future opportunities in the industry. 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.... DPL 1997 Annual Report 15 ....rate of 6.75%. The bonds had been scheduled to mature in 1998. Sinking fund payments for the five years ended 2002 are $27 million. In September 1995, a new series of Air Quality Development Revenue Refunding Bonds was issued in the principal amount of $110 million with an interest rate of 6.10%. Proceeds from the financing were used to redeem a similar principal amount of first mortgage bonds with an interest rate of 9.5%. Issuance of additional amounts of first mortgage bonds by 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 a revolving credit agreement, renewable through 2001, which allows total borrowings by DPL Inc. and its subsidiaries of $200 million. At year-end 1997, DPL Inc. had $36 million outstanding under this credit agreement. DP&L also has $97 million available in short-term lines of credit. At year-end, DP&L had $10 million outstanding from these lines of credit and $70 million in commercial paper outstanding. 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. Like many companies, DPL Inc. is currently evaluating its computer systems to determine the extent to which modifications are required to prevent problems in the year 2000. Based on this on-going effort, the Company at this time does not anticipate that the year 2000 matter will materially impact the Company's financial position. The Environmental Protection Agency ("EPA") has notified numerous parties, including DP&L, that they are considered "Potentially Responsible Parties" for clean up of four hazardous waste sites in Ohio. The EPA has estimated total costs of $34 million for its preferred clean-up plans at three of these sites and has not established an estimated cost for the fourth site. The final resolution of these investigations will not have a material effect on DP&L's financial position, earnings or cash flow. 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 1997. Legislative proposals have been introduced in Congress and in Ohio concerning electric wholesale and retail wheeling which are designed to increase competition. These factors increase the risk that the Company's production plant and/or regulatory assets may not be fully recovered in rates. Ohio continues to take a studied approach to utility industry restructuring. In 1997, the Ohio legislative leadership established a special Joint Committee to study the restructuring issues. The Committee conducted hearings to gather information from energy companies, regulators, customers and industry experts. The Committee co-chairs issued a draft report in early January 1998 recommending opening the electric generation market, in the future, to competition for all Ohio consumers. As a part of this restructuring effort in 1998 and beyond, legislators are also studying related complex tax issues that must be resolved. In 1996 and 1997, 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. Open-access transmission tariffs provide third parties non-discriminatory transmission service comparable to what the utility provides itself. In its orders, FERC further stated that FERC- jurisdictional stranded costs reasonably incurred and costs of complying with the rules will be recoverable by electric utilities. In December, DP&L reached an agreement in principle with intervenors in a pending tariff case and filed a subsequent case based on an updated test year. The PUCO is holding roundtable discussions on competition in the electric industry focused on short-term initiatives under the current regulatory framework. Pursuant to a PUCO order implementing one such initiative, all Ohio electric utilities, including DP&L, filed tariffs in 1996 for interruptible electric service that accommodate replacement electricity during periods when the utility faces resource constraints. DP&L's tariff was approved in 1997. As another roundtable initiative, in 1996, the PUCO issued guidelines for conjunctive electric service which required all utilities to file tariffs under which different service locations are aggregated for cost-of-service, rate design, rate eligibility and billing purposes. Although DP&L has appealed these guidelines to the Ohio Supreme Court, DP&L filed its tariff in 1997. Ohio legislation in 1996 and PUCO rules in 1997 addressed regulatory reform for the local gas distribution companies. The legislation provides that natural gas commodity services may be exempted from PUCO regulation and that the PUCO may allow alternative ratemaking methodologies in connection with other regulated services. DPL 1997 Annual Report 16 CONSOLIDATED STATEMENT OF RESULTS OF OPERATIONS DPL Inc. For the years ended December 31, $ in millions except per share amounts 1997 1996 1995 - ------------------------------------------------------------------------------ Income Utility service revenues $1,252.2 $1,256.1 $1,255.1 Other income 103.6 74.2 54.9 -------- -------- -------- Total income 1,355.8 1,330.3 1,310.0 -------- -------- -------- Expenses Fuel and purchased power 227.9 234.9 257.5 Gas purchased for resale 219.5 193.0 158.4 Operation and maintenance (Note 1) 256.1 265.7 272.3 Depreciation and amortization (Note 1) 127.6 125.4 118.9 Amortization of regulatory assets, net (Note 2) 16.8 15.3 15.4 General taxes 133.8 129.7 125.2 Interest expense 87.3 89.9 95.2 -------- -------- -------- Total expenses 1,069.0 1,053.9 1,042.9 -------- -------- -------- Income Before Income Taxes 286.8 276.4 267.1 Income taxes (Note 1 and 3) 105.4 103.5 102.4 -------- -------- -------- Net Income $ 181.4 $ 172.9 $ 164.7 ======== ======== ======== Average Number of Common Shares Outstanding (millions) (Note 8) (a) 151.4 150.9 151.6 Earnings Per Share of Common Stock (a) $ 1.20 $ 1.15 $ 1.09 Dividends Paid Per Share of Common Stock (a) $ 0.91 $ 0.87 $ 0.83 (a) Shares and per share amounts have been restated to reflect the three-for-two common stock split paid on January 12, 1998, to shareholders of record on December 16, 1997. See Note 8. See Notes to Consolidated Financial Statements. DPL 1997 Annual Report 17 CONSOLIDATED STATEMENT OF CASH FLOWS DPL Inc. For the years ended December 31, $ in millions 1997 1996 1995 - ------------------------------------------------------------------------------ Operating Activities Cash received from utility customers $1,228.1 $1,228.9 $1,203.5 Other operating cash receipts 88.2 87.0 53.9 Cash paid for: Fuel and purchased power (235.9) (207.6) (249.8) Purchased gas (236.1) (211.6) (156.9) Operation and maintenance labor (83.2) (87.4) (89.3) Nonlabor operating expenditures (96.4) (149.3) (136.9) Interest (85.2) (87.7) (91.9) Income taxes (108.8) (108.1) (103.1) Property, excise and payroll taxes (130.8) (126.1) (124.2) -------- -------- -------- Net cash provided by operating activities (Note 11) 339.9 338.1 305.3 -------- -------- -------- Investing Activities Property expenditures (113.7) (108.8) (87.3) Other activities (178.0) (144.4) (14.3) -------- -------- -------- Net cash used for investing activities (291.7) (253.2) (101.6) -------- -------- -------- Financing Activities Dividends paid on common stock (137.2) (131.2) (124.9) Issuance of short-term debt 105.7 10.0 - Retirement of long-term debt (82.9) (25.5) (126.7) Issuance of common stock 19.5 - - Purchase of treasury stock - (15.8) (6.1) Issuance of long-term debt - - 108.8 -------- -------- -------- Net cash used for financing activities (94.9) (162.5) (148.9) -------- -------- -------- Cash and temporary cash investments-- Net change (46.7) (77.6) 54.8 Balance at beginning of year 72.8 150.4 95.6 -------- -------- -------- Balance at end of year $ 26.1 $ 72.8 $ 150.4 ======== ======== ======== See Notes to Consolidated Financial Statements. DPL 1997 Annual Report 18 CONSOLIDATED BALANCE SHEET DPL Inc. At December 31, $ in millions 1997 1996 - ------------------------------------------------------------------------------ Assets Property $3,642.8 $3,548.7 Accumulated depreciation and amortization (1,386.6) (1,279.8) -------- -------- Net property 2,256.2 2,268.9 -------- -------- Current Assets Cash and temporary cash investments 26.1 72.8 Accounts receivable, net 211.4 201.9 Inventories, at average cost 87.5 75.9 Taxes applicable to subsequent years 91.9 87.3 Other current assets 54.2 53.6 -------- -------- Total current assets 471.1 491.5 -------- -------- Other Assets Financial assets 384.0 170.3 Income taxes recoverable through future revenues (Note 1 and 2) 208.2 222.4 Regulatory assets (Note 2) 116.7 137.3 Other 149.0 128.3 Total other assets 857.9 658.3 -------- -------- Total Assets $3,585.2 $3,418.7 ======== ======== Capitalization and Liabilities Capitalization Common shareholders' equity (Note 8)-- Common stock $ 1.6 $ 1.1 Other paid-in capital 777.3 756.8 Common stock held by employee plans (98.0) (102.1) Earnings reinvested in the business 605.1 544.7 -------- -------- Total common shareholders' equity 1,286.0 1,200.5 Preferred stock (Note 9) 22.9 22.9 Long-term debt (Note 7) 971.0 1,014.3 -------- -------- Total capitalization 2,279.9 2,237.7 -------- -------- Current Liabilities Accounts payable 129.8 114.4 Accrued taxes 158.5 137.7 Accrued interest 24.2 24.8 Current portion of long-term debt 3.4 42.4 Short-term debt (Note 6) 115.7 10.0 Other 46.3 57.0 -------- -------- Total current liabilities 477.9 386.3 -------- -------- Deferred Credits and Other Deferred taxes (Note 3) 464.9 488.1 Unamortized investment tax credit 72.4 75.4 Insurance and claims costs 151.6 107.9 Other 138.5 123.3 Total deferred credits and other 827.4 794.7 -------- -------- Total Capitalization and Liabilities $3,585.2 $3,418.7 ======== ======== See Notes to Consolidated Financial Statements. DPL 1997 Annual Report 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DPL Inc. 1. Summary of Significant Accounting Policies Principles of Consolidation and Nature of Operations - ---------------------------------------------------- The accounts of DPL Inc. and its wholly-owned subsidiaries are included in the accompanying consolidated financial statements. 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. The majority of DPL Inc.'s earnings come from electricity and natural gas sales. 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) $78.3 in 1997 and $58.3 in 1996. Operation and Maintenance - ------------------------- Operation and maintenance expenses include $0.6 million in 1997 and $4.7 million in 1995 of redemption premiums and other costs relating to the refinancing of bond issues. Property, Maintenance and Depreciation - -------------------------------------- Property is shown at its original cost. Cost includes direct labor and material and allocable overhead costs. When a unit of property is retired, the original cost of that property plus the cost of removal less any salvage value is charged to accumulated depreciation. Maintenance costs and replacements of minor items of property are charged to expense. Depreciation expense is calculated using the straight-line method, which depreciates the cost of property over its estimated useful life, at an average rate of 3.5% in 1997 and 1996 and 3.4% in 1995. Income Taxes - ------------ Deferred income taxes are provided for all temporary differences between the financial statement basis and the tax basis of assets and liabilities using the enacted tax rate. Additional deferred income taxes and offsetting regulatory assets or liabilities are recorded to recognize that the income taxes will be recoverable/refundable through future revenues. Investment tax credits, previously deferred, are being amortized over the lives of the related properties. Consolidated Statement of Cash Flows - ------------------------------------ The temporary cash investments presented on this Statement consist of liquid investments with an original maturity of three months or less. Reclassifications - ----------------- Reclassifications have been made in certain prior years' amounts to conform to the current reporting presentation. Estimates - --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions related to future events. DPL 1997 Annual Report 20 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 1997 1996 - ----------------------------------------- Phase-in (a) $ 30.6 $ 46.7 DSM (b) 33.6 35.3 Deferred interest (c) 52.5 55.3 Income taxes recoverable through future revenues 208.2 222.4 ------ ------ Total $324.9 $359.7 ====== ====== (a) Amounts deferred during a 1992-1994 electric rate increase phase-in (including carrying charges) are being recovered in current rates. (b) 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, allows 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 will be used to accelerate recovery of these costs. If the return is greater than two percent over the baseline, the entire excess will be used for such purpose. (c) Interest charges related to the William H. Zimmer Generating Station which were previously deferred pursuant to PUCO approval are being amortized at $2.8 million per year over the projected life of the asset. 3. Income Taxes For the years ended December 31, $ in millions 1997 1996 1995 - ------------------------------------------------------------- Computation of Tax Expense Federal income tax (a) $100.7 $ 97.0 $ 93.8 Increases (decreases) in tax from - Regulatory assets 3.6 3.3 3.3 Depreciation 11.4 10.7 10.8 Investment tax credit amortized (3.0) (3.0) (3.0) Other, net (7.3) (4.5) (2.5) ------ ------ ------ Total tax expense $105.4 $103.5 $102.4 ====== ====== ====== Components of Tax Expense Taxes currently payable $121.8 $117.4 $ 93.0 Deferred taxes-- Regulatory assets (4.0) (3.5) (1.7) Liberalized depreciation and amortization 6.2 7.9 14.1 Fuel and gas costs 5.5 2.5 (3.1) Insurance and claims costs (14.2) (11.1) 2.7 Other (6.9) (5.5) (0.8) Deferred investment tax credit, net (3.0) (4.2) (1.8) ------ ------ ------ Total tax expense $105.4 $103.5 $102.4 ====== ====== ====== (a) The statutory rate of 35% applied to pre-tax income before preferred dividends. Components of Deferred Tax Assets and Liabilities At December 31, $ in millions 1997 1996 - --------------------------------------------------- Non-Current Liabilities Depreciation/property basis $(443.7) $(448.8) Income taxes recoverable (72.4) (77.4) Regulatory assets (38.6) (45.8) Investment tax credit 25.3 26.3 Other 64.5 57.6 ------- ------- Net non-current liability $(464.9) $(488.1) ------- ------- Net Current Asset (Liability) $ (2.7) $ 1.7 ======= ======= DPL 1997 Annual Report 21 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 at retirement and, for salaried employees, their compensation. The plans are funded in amounts actuarially determined to provide for these benefits. An interest rate of 6.25% was used in developing the amounts in the following tables. Actual returns on plan assets for 1997, 1996 and 1995 were 11.2%, 12.7% and 25.6%, respectively. Increases in compensation levels approximating 5% were used for all years. The following table presents the components of pension cost (portions of which were capitalized): $ in millions 1997 1996 1995 - ------------------------------------------------------ Service cost-benefits earned $ 6.3 $ 6.2 $ 6.2 Interest cost 15.2 15.0 14.4 Expected return on plan assets of 7.5% in each year (19.6) (18.1) (17.8) Net amortization (3.0) (1.1) (0.9) ----- ----- ----- Net pension cost $(1.1) $ 2.0 $ 1.9 ===== ===== ===== The following table sets forth the plans' funded status and amounts recorded in Other assets on the Consolidated Balance Sheet at December 31: $ in millions 1997 1996 - ------------------------------------------------------------ Plan assets at fair value (a) $330.2 $321.4 Actuarial present value of projected benefit obligation 259.1 255.1 ------ ------ Plan assets in excess of projected benefit obligation 71.1 66.3 Unamortized transition obligation (11.3) (15.5) Prior service cost 13.9 16.0 Changes in plan assumptions and and actuarial gains and losses (28.3) (22.5) ------ ------ Net pension assets $ 45.4 $ 44.3 ====== ====== Vested benefit obligation $203.8 $198.6 Accumulated benefit obligation without projected wage increases $236.4 $237.4 (a) Invested in fixed income investments, equities and guaranteed investment contracts. In 1996, equities included $26.5 million of DPL Inc. common stock. Postretirement Benefits - ----------------------- Qualified employees who retired prior to 1987 and their dependents are eligible for health care and life insurance benefits. The unamortized transition obligation associated with these benefits is being amortized over the approximate average remaining life expectancy of the retired employees. Active employees are eligible for life insurance benefits, and this unamortized transition obligation is being amortized over the average remaining service period. DP&L has funded the union-eligible health benefit using a Voluntary Employee Beneficiary Association Trust. Actual returns on plan assets were 6.0% and 6.7% in 1997 and 1996, respectively. The following table presents the components of postretirement benefit cost: $ in millions 1997 1996 1995 - ----------------------------------------------------- Expected return on plan assets of 5.7% $(0.8) $(0.6) $ - Interest cost 2.2 2.5 3.6 Net amortization (1.1) 2.9 2.9 ----- ----- ----- Postretirement benefit cost $ 0.3 $ 4.8 $ 6.5 ===== ===== ===== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation is 9% for 1997 and decreases to 5% by 2005. A one percentage point increase in each future year's assumed health care trend rate would increase postretirement benefit cost by $0.1 million annually and would increase the accumulated postretirement benefit obligation by $2.3 million. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.25%. The following table sets forth the accumulated postretirement benefit amounts recorded in Other Deferred Credits on the Consolidated Balance Sheet at December 31: $ in millions 1997 1996 - -------------------------------------------------- Accumulated postretirement benefit obligation: - retirees and dependents $35.4 $40.7 - active employees 1.1 1.1 ----- ----- Total 36.5 41.8 Plan assets at fair value (a) 12.1 11.9 ----- ----- Projected benefit obligation in excess of plan assets 24.4 29.9 Unamortized transition obligation (15.9) (18.9) Actuarial gains and losses 25.5 24.6 ----- ----- Accrued postretirement benefit liability $34.0 $35.6 ===== ===== (a) Invested in fixed income government obligations and money market securities. DPL 1997 Annual Report 22 5. Commonly Owned Facilities DP&L owns certain electric generating and transmission facilities as tenants in common with other Ohio utilities. Each utility is obligated to pay its ownership share of construction and operation costs of each facility. As of December 31, 1997, DP&L had $1.6 million of commonly owned facilities under construction. DP&L's share of expenses is included in the Consolidated Statement of Results of Operations. The following table presents DP&L's share of the commonly owned facilities at December 31, 1997: DP&L DP&L Share Investment ------------------ ----------- Prod. Gross Plant Ownership Capacity in Service (%) (MW) ($ in mil.) - ------------------------------------------------------------ Production Units: Beckjord Unit 6 50.0 210 55 Conesville Unit 4 16.5 129 30 East Bend Station 31.0 186 150 Killen Station 67.0 418 406 Miami Fort Units 7&8 36.0 360 119 Stuart Station 35.0 823 245 Zimmer Station 28.1 365 989 Transmission (at varying percentages) 67 6. Notes Payable and Compensating Balances DPL Inc. and its subsidiaries have $200 million available through a revolving credit agreement. This agreement with a consortium of banks is renewable through 2001. Commitment fees are approximately $170,000 per year, depending upon the aggregate unused balance of the loan. At December 31, 1997, DPL Inc. had $36.0 million in borrowings outstanding under this credit agreement. 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 and also pay $87,550 per year in fees. At December 31, 1997, DP&L had $10.0 million in borrowings from these lines of credit. DP&L had $69.7 million and $10.0 million in commercial paper outstanding at a weighted average interest rate of 6.0% and 6.75% at December 31, 1997 and 1996, respectively. 7. Long-term Debt At December 31, $ in millions 1997 1996 - ------------------------------------------------------- First mortgage bonds maturing: 2003 8.00% $ - $ 40.0 2022-202 8.14% (a) 671.0 671.0 Pollution control series maturing through 2027 - 6.43% (a) 107.2 107.6 ------ -------- 778.2 818.6 Guarantee of Air Quality Development Obligations 6.10% Series Due 2030 110.0 110.0 Notes maturing through 2007 - 7.83% 85.0 88.0 Unamortized debt discount and premium (net) (2.2) (2.3) ------ -------- Total $971.0 $1,014.3 ====== ======== (a) Weighted average interest rates for 1997 and 1996. The amounts of maturities and mandatory redemptions for first mortgage bonds and notes are (in millions) $3.4 in 1998, $4.4 in 1999, $5.4 in 2000, $6.4 in 2001 and $7.4 in 2002. Substantially all property of DP&L is subject to the mortgage lien securing the first mortgage bonds. During 1997, a $40 million series of first mortgage bonds matured, and another $40 million series scheduled to mature in 2003 was redeemed. DPL 1997 Annual Report 23
8. Common Shareholders' Equity Common Common Stock (a) Stock Earnings ------------------- Other Held By Reinvested Outstanding Paid-in Employee in the $ in millions Shares Amount Capital Plans Business Total - ----------------------------------------------------------------------------------------- 1995: Beginning balance 106,951,623 $1.1 $776.6 $(108.7) $459.3 $1,128.3 Net income 164.7 164.7 Common stock dividends (124.9) (124.9) Treasury stock (254,700) - (6.1) (6.1) Employee stock plans 0.7 1.5 2.2 Other 0.2 0.4 0.6 ------------------------------------------------------------ Ending balance 106,696,923 1.1 771.4 (107.2) 499.5 1,164.8 1996: Net income 172.9 172.9 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 3.5 3.7 ------------------------------------------------------------ Ending balance 106,009,923 1.1 756.8 (102.1) 544.7 1,200.5 1997: Net income 181.4 181.4 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 16.2 16.4 ------------------------------------------------------------ Ending balance 160,202,949 $1.6 $777.3 $ (98.0) $605.1 $1,286.0 ============================================================ (a) $0.01 par value, 250,000,000 shares authorized.
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 5,673,237 unallocated shares held by the trust and for 2,309,742 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 1,386,588 in 1997 and 1,071,660 in 1996. Compensation expense, which is based on the fair value of the shares allocated, amounted to $4.4 million in 1997, $4.1 million in 1996 and $4.2 million in 1995. DPL Inc. had 1,972,290 authorized but unissued shares reserved for the dividend reinvestment plan at December 31, 1997. 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 1997 Annual Report 24 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 $100 par value, 4,000,000 shares authorized, 228,508 shares without mandatory redemption provisions outstanding. Current Current Par Value Redemption Shares At December 31, 1997 and 1996 Series/Rate Price Outstanding ($ in millions) - -------------------------------------------------------------------------- A 3.75% $102.50 93,280 $ 9.3 B 3.75% $103.00 69,398 7.0 C 3.90% $101.00 65,830 6.6 ------- ----- Total 228,508 $22.9 ======= ===== The shares may be redeemed at the option of DP&L at the per share prices indicated, plus cumulative accrued dividends. 10. Fair Value of Financial Instruments At December 31, 1997 1996 ------------------ ------------------ $ in millions Fair Value Cost Fair Value Cost - ------------------------------------------------------------------------------ $ $ $ $ Assets (a) Available for sale securities 361.1 330.2 156.5 150.7 Held to maturity securities, including temporary cash investments of $14.2 in 1997 and $70.5 in 1996 72.2 71.2 119.5 119.2 Liabilities (b) Debt 1,168.1 1,090.1 1,112.1 1,066.7 Capitalization Unallocated stock in ESOP 108.7 72.3 96.8 76.3 (a) Maturities range from 1998 to 2010. (b) Includes current maturities. Financial assets with quoted market prices are carried at market; the remaining financial assets are carried at cost. 11. Reconciliation of Net Income to Net Cash Provided by Operating Activities For the years ended December 31, $ in millions 1997 1996 1995 - ------------------------------------------------------------------------------ Net income $181.4 $172.9 $164.7 Adjustments: Depreciation and amortization 127.6 125.4 118.9 Deferred income taxes (16.4) (13.8) 9.2 Amortization of regulatory assets, net 16.8 15.3 15.4 Operating expense provisions 17.8 30.6 19.3 Accounts receivable (9.5) (53.9) (44.6) Accounts payable 17.2 14.7 21.8 Accrued taxes payable 20.8 18.3 (4.5) Inventory (11.6) 6.8 1.9 Other (4.2) 21.8 3.2 ------ ------ ------ Net cash provided by operating activities $339.9 $338.1 $305.3 ====== ====== ====== DPL 1997 Annual Report 25 12. Financial Information by Business Segments For the years ended December 31, $ in millions 1997 1996 1995 - ---------------------------------------------------------------------------- Utility service revenues Electric $1,007.8 $1,014.1 $1,027.5 Gas 243.7 238.6 222.0 Other 0.7 3.4 5.6 -------- -------- -------- Total utility service revenues 1,252.2 1,256.1 1,255.1 Other income 103.6 74.2 54.9 -------- -------- -------- Total income $1,355.8 $1,330.3 $1,310.0 ======== ======== ======== Operating profit before tax Electric $ 327.0 $ 326.9 $ 335.8 Gas 24.9 23.7 18.9 Other 4.5 6.6 3.8 -------- -------- -------- Total operating profit before tax 356.4 357.2 358.5 Other income, net (a) 17.7 9.1 3.8 Interest expense (87.3) (89.9) (95.2) -------- -------- -------- Income before income taxes $ 286.8 $ 276.4 $ 267.1 ======== ======== ======== Depreciation and amortization Electric $ 118.4 $ 112.8 $ 108.1 Gas 7.1 6.7 6.4 Other 2.1 5.9 4.4 -------- -------- -------- Total depreciation and amortization $ 127.6 $ 125.4 $ 118.9 ======== ======== ======== Construction additions Electric $ 92.8 $ 100.0 $ 66.6 Gas 16.3 14.1 11.7 Other 1.5 1.4 9.0 -------- -------- -------- Total construction additions $ 110.6 $ 115.5 $ 87.3 ======== ======== ======== Assets Electric $2,733.6 $2,754.3 $2,763.1 Gas 277.1 259.9 223.7 Other (b) 574.5 404.5 336.0 -------- -------- -------- Total assets at year-end $3,585.2 $3,418.7 $3,322.8 ======== ======== ======== (a) Includes primarily investment income less bond redemption costs in 1997 and 1995. (b) Includes primarily temporary cash investments, debt and equity financial assets and certain deferred items. DPL 1997 Annual Report 26 REPORT OF INDEPENDENT ACCOUNTANTS (see appendix for logo description) Price Waterhouse LLP 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 and of cash flows present fairly, in all material respects, the financial position of DPL Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These 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/Price Waterhouse LLP Dayton, Ohio January 21, 1998 SELECTED QUARTERLY INFORMATION
For the Three Months Ended $ in millions March 31, June 30, September 30, December 31, per share amount 1997 1996 1997 1996 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------- $ $ $ $ $ $ $ $ Utility service revenues 356.7 368.4 269.2 281.4 283.4 277.6 342.9 328.7 Income before income taxes 101.4 103.5 55.4 57.1 73.1 68.2 56.9 47.6 Net income 66.3 63.8 35.0 34.8 44.9 41.8 35.2 32.5 Earnings per share of common stock (a) 0.44 0.42 0.23 0.23 0.30 0.28 0.23 0.22 Dividends paid per share (a) 0.227 0.217 0.227 0.217 0.227 0.217 0.227 0.217 Common stock market price - High (a) 16-3/4 17-5/16 16-1/2 16-1/4 16-9/16 16-1/4 19-3/16 16-9/16 Low (a) 15-15/16 15-7/16 15-5/16 14-3/4 15-1/2 15-1/16 15-13/16 15-1/2 (a) Per share amounts have been restated to reflect the three-for-two common stock split paid on January 12, 1998 to stockholders of record on December 16, 1997.
DPL 1997 Annual Report 27 CORPORATE INFORMATION Transfer Agent and Registrar - Common Stock and DP&L Preferred Stock - -------------------------------------------------------------------- Securities Transfer & Shareholder Inquires: - ------------------------------------------- The First National Bank of Boston c/o Boston EquiServe P.O. Box 8040 Boston, MA 02266-8040 (781) 575-3100 (800 736-3001 Dividend Reinvestment: - ---------------------- The First National Bank of Boston c/o Boston 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 1997 Dividend Payments - --------------------------------------------------- Dividends paid in 1997 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 14, 1998, at Cedarville College, Cedarville, 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 Boston 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 (55/24) Chairman--DPL Inc. and DP&L Allen M. Hill (52/30) President and Chief Executive Officer--DPL Inc. and DP&L Paul R. Anderson (55/19) Controller--DP&L Stephen P. Bramlage (51/29) Assistant Vice President--DP&L Jeanne S. Holihan (41/17) Assistant Vice President--DP&L Thomas M. Jenkins (46/20) Group Vice President and Treasurer--DPL Inc. and DP&L Stephen F. Koziar, Jr. (53/30) Group Vice President and Secretary--DPL Inc. and DP&L Judy W. Lansaw (46/19) Group Vice President--DPL Inc. and DP&L Bryce W. Nickel (41/17) Assistant Vice President--DP&L H. Ted Santo (47/26) Group Vice President--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) (4) President and Chief Executive Officer, DPL Inc. and DP&L, Dayton, Ohio Thomas J. Danis (1) 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. 1997 Committee Assignments: DPL Inc.--Finance and Audit Review (1) Compensation and Management Review (2) Executive (3) DP&L--Community and External Relations (4) DPL 1997 Annual Report 28 DPL INC. Courthouse Plaza Southwest Dayton, Ohio 45402 (see appendix for photograph description) [back cover] As required by Rule 304 of Regulation S-T, the following appendix lists the graphic material contained in the 1997 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 father and his daughter located in the kitchen at the DP&L Energy Resource Center preparing baked goods. Artwork: Corporate logo - DPL Inc. Page 2: Bar Graph: EARNINGS PER SHARE Dollars ------------------ 1995 1.09 1996 1.15 1997 1.20 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: Bar Graph: DIVIDENDS PER SHARE Dollars ------------------- 1995 0.83 1996 0.87 1997 0.91 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: Line Graph: INFLATION-ADJUSTED PRICE (cents/kWh) ------------------------ 1987: 5.6 1992: 4.6 1997: 4.3 Photograph: DP&L employee, Scott Kelly, Business Development, pictured in a work setting. Page 5: Photograph: An employee of F&P America placing a spot weld on a structural component of an automobile. Page 6: Photograph: Aerial view of the campus at Miami Valley Research Park which portrays several office buildings and surrounding landscape. Page 7: Bar Graph: EQUIVALENT FORCED OUTAGE RATE in percent ----------------------------- Industry Average DP&L ---------------- ----- 1995: 6.7 5.8 1996: 5.9 4.1 1997: 8.4 5.8 Photograph: DP&L employee, Kevin Crawford, Energy Production, pictured in a work setting. Page 8: Artwork: "DP&L" corporate logo and "Way To Go" logo, the umbrella name for energy conservation programs of the Company. Logo contains the word, "Personally". Bar Graph: QUALITY OF SERVICE percent positive responses -------------------------- 1995: 97 1996: 96 1997: 96 Photograph: DP&L employee, Judi Blair, Service Operations, pictured in a work setting. Page 9: Photograph: An employee of Crysteco Inc. working on the development of semi-conductor equipment. Page 10: Photograph: An entertainer playing a guitar on stage during the National Folk Festival. Page 11: Artwork: "DP&L" corporate logo and "Way To Go" logo, the umbrella name for energy conservation programs of the Company. Logo contains the phrase, "Partners in Business Plus". Page 11: Line Graph: CREDIT RATINGS Moody's Investor Service Average DP&L Electric Utility Credit Rating ---- -------------------------------- 1995: Aa3 A2 1996: Aa3 A2 1997: Aa3 A3 Page 11: Photograph: DP&L employee, Kevin DeWine, Corporate Relations, pictured in a work setting. Page 13: Bar Graphs: ELECTRIC UTILITY REVENUES $ in millions -------------------------------- 1995 1996 1997 -------------------------------- Residential 422 423 410 Commercial 238 237 234 Industrial 224 223 226 Other 146 133 140 -------------------------------- Total 1,030 1,016 1,010 GAS UTILITY REVENUES $ in millions -------------------------------- 1995 1996 1997 -------------------------------- Residential 149 157 160 Commercial 39 44 48 Industrial 11 14 12 Transportation & Other 23 24 24 -------------------------------- Total 222 239 244 TOTAL TAXES $ in millions ------------------ 1995 1996 1997 ------------------ 228 233 239 ELECTRIC UTILITY SALES Thousands of GWH ------------------------------- 1995 1996 1997 ------------------------------- Residential 4.9 4.9 4.8 Commercial 3.4 3.4 3.4 Industrial 4.4 4.5 4.7 Other 4.1 3.5 3.7 ------------------------------- Total 16.8 16.3 16.6 GAS UTILITY SALES Millions of MCF ------------------------------- 1995 1996 1997 ------------------------------- Residential 29 31 29 Commercial 8 9 10 Industrial 3 4 3 Transportation & Other 20 20 20 ------------------------------- Total 60 64 62 OPERATING EXPENSES $ in millions ---------------------------------- 1995 1996 1997 ---------------------------------- Fuel & Purchased Power 258 235 228 Gas Purchased for Resale 158 193 220 Operating and Maintenance 272 266 256 ---------------------------------- Total 688 694 704 AVERAGE PRICE-ELECTRIC CALENDAR YEAR cents/kWh ----------------------- 1995 1996 1997 ----------------------- 6.07 6.16 6.01 TOTAL AVERAGE PRICE-GAS CALENDAR YEAR $/MCF ----------------------- 1995 1996 1997 ----------------------- 3.72 3.75 3.93 CONSTRUCTION COSTS $ in millions ----------------------- 1995 1996 1997 ----------------------- 87 116 111 Page 27: Artwork: Logo for Price Waterhouse LLP (Independent Auditors). Back Cover: Photograph: Depiction of a husband, wife, and their daughter located in the kitchen at the DP&L Energy Resource Center preparing baked goods. EX-21 3 1997 DPL INC. LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF DPL INC. DPL Inc. had the following wholly owned subsidiaries on March 30, 1998: 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 1997 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 Post-Effective Amendment No. 3 on Form S-8, to DPL Inc.'s Registration Statement on Form S-4 (Registration No. 33-2551), with respect to The Dayton Power and Light Company's Employees' Stock Plan, of our report dated January 21, 1998, 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 Schedules, which appears on page II-2 of this Form 10-K. /s/Price Waterhouse LLP Price Waterhouse LLP Dayton, Ohio March 30, 1998 EX-27 5 1997 DPL INC. FINANCIAL DATA SCHEDULE
UT 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 2256200 0 471100 324900 533000 3585200 1600 679300 605100 1286000 0 22900 971000 46000 0 69700 3400 0 0 0 1186200 3585200 1252200 105400 981700 1087100 165100 103600 268700 86400 182300 900 181400 137200 85200 339900 1.20 1.20
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